Sunday, October 12, 2008

A Must Read on the American Economic Situation

I haven't had the time to write a solid post on the historic economic events that have unfolded the past couple of weeks. I've been closely monitoring a variety of news sources to pass on insightful articles but have found few I felt worth forwarding - until now.

Fareed Zakaria, writing in Newsweek, has produced a marvelous 10 minute essay that explains - in very straightforward language - the reasons for the crisis and the implications for America's strategic position in the coming years.

I strongly encourage you to read the whole thing, but I want to cite a few key passages here.

We're now living history, suffering one of the greatest financial panics of all time. It compares with the big ones—1907, 1929—and we cannot yet know its full consequences for the financial system, the economy or society as a whole.

Amid all the difficulties and hardship that we are about to undergo, I see one silver lining. This crisis has—dramatically, vengefully—forced the United States to confront the bad habits it has developed over the past few decades. If we can kick those habits, today's pain will translate into gains in the long run.

Since the 1980s, Americans have consumed more than they produced—and they have made up the difference by borrowing. Two decades of easy money and innovative financial products meant that virtually anyone could borrow any amount of money for any purpose. If we wanted a bigger house, a better TV or a faster car, and we didn't actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years. The average household owns 13 credit cards, and 40 percent of them carry a balance, up from 6 percent in 1970.


The whole country has been complicit in a great fraud. As economist Jeffrey Sachs points out, "We've wanted lots of government, but we haven't wanted to pay for it." So we've borrowed our way out of the problem. In 1990, the national debt stood at $3 trillion. By 2000, it had almost doubled, to $5.75 trillion. It is currently $10.2 trillion. The number moved into 11 digits last month, which meant that the National Debt Clock in New York City ran out of space to display the figures.

I've highlighted the most gloomy parts of this article - sections that actually seem to scold the American public. However, the second message of this article, which I believe is equally as valid as the section above, is that with proper leadership, the country is perfectly capable of getting up and coming out stronger on the other end....

Which leads me to a final thought.

The next President of the United States, if he really cares about the long term well-being of this nation, is going to have a miserable job. He is going to have to do more than berate CEOs and Wall Street executives (though some of that is necessary and justified). He is going to have to tell the American people, either directly or implicitly through policy decisions, that their lifestyles must change to some degree. Few American Presidents have had the stomach for this in the past...

We are going to find out very quickly next year if we have elected a true leader or just another politician.


benhood said...

Are you worried that we are going to have a Jimmy Carter situation? Looking back on it now, it's clear that Carter showed real leadership to get us to kick the oil habit, but voters pounded him in 1980 for a guy who basically said we can have our cake and eat it too. Bush, like Reagan, told us to do our part after 9/11 by going shopping (what a sacrifice!), and was rewarded with a second term. Should I worry that Obama will get the presidency (and maybe a great long-term legacy), but get pummeled in 2012?

Jared said...

I think that's a very valid concern, Ben. It's maddening how much credit AND blame Presidents tend to get for things that are beyond their control.

I do indeed think that Obama might be set up to fail politically.

That being said, he has an incredible opportunity to meaningfully address something that could set this country on a fundamentally different and superior course.

What's the big opportunity? Energy.

He's got the chance to grab the nation by the collar and drag us towards a new energy strategy. As you mentioned, Presidents since Carter have dabbled in this (except Bush who has actually obstructed progress) but I think things are different now.

Here's why: the auto industry is on its knees and the oil companies are the most unpopular they've ever been.

Add on the fact that at least 60% of the country is very worried about global warming and even the most uninformed Americans understand that part of the reason we have to keep fighting in Iraq is that we need oil. (Almost as important but less obvious is that our oil addiction is also the main reason Russia is relevant again).

Put another way, almost every American now understands, for one reason or another, that the U.S. would be tremendously better off if we took drastic steps to get rid of oil and they are ready to sacrifice to do something about it. Obama is going to have a lot of capital to address this and, if he does, he is going to simultaneously improve America's economy, national security and environmental well-being. And he will do so in a manner that I believe most American's will understand and appreciate.

If he does this, who knows if history will give him credit... but if he is a truly great leader, he won't let himself worry about that too much.

Unknown said...

Why Obama will actually lose

Jared said...

Steve -

Read the link. Here's my take(hope):

I'd probably agree that we'll see some sort of Bradley effect but I dont think it is going to be decisive this time. A few reasons why:

1. We are a full generation past the actual Bradley election. Racism certainly isnt gone, but it is clearly dramatically less prevalent.

2. Bradley effect aside, I dont think the polls are capturing Obama's full lead. I think that issues such as the impact of polling on cell phones is accounted for, but I think other issues such as pollsters' definition of "likely voters" is probably flawed in a way that understates the actual election day outcome. Specifically, I think that Obama is building a ground game that will have a material impact on the proportion of his favorable voters that actually show up and vote. I actually believe this is his ace in the hole.

The community organizing experience that Palin and Rudy mocked at the convention is going to be the very card that beats them this time.

All that being said, I'm not allowing myself to completely think he is going to be the next President. The letdown would be too great and there is still too much time between now and the election.