Debt Is Our National Curse

04/13/2011 3:04 pm EST


John Mauldin

Chairman, Mauldin Economics

The middle-class squeeze is a product of unsustainable borrowing, and any effective cure will be painful, warns John Mauldin in Thoughts from the Frontline.  

I recently got an impassioned letter from very-long-time reader who asks some very pointed questions about austerity and spending cuts:

"...I would like to know why you seem to side with those analysts who keep telling us that the only way we can sort out Western economies is by making the average guy suffer through austerity programs...

“You are a very intelligent guy—you can see through the greed and excesses of Wall Street, and you can read the economic data which clearly shows that the wealthy continue to get more wealthy in America, while the average Joe continues to see his standard of living going in the opposite direction. Capitalism today only works for the 'have gots.' It's been going in that direction for more than 30 years now.

"In the aftermath of all this, politicians in DC, you, and your guest pundits warn us that the world as we know it will end if we don't somehow reduce the average Joe's Social Security, pension, Medicare, and Medicaid benefits. Oh, and let’s not forget the budget, which is being argued in Washington as I type this.

“The line is that we have to make drastic reductions to spending on domestic programs, on our schools, on our infrastructure, on unemployment entitlements, on all the things that serve to give working people a chance at a dignified life.

“When the nation is as troubled as it is today and yet the wealthy are living even better than they did 30 years ago, what does that say about America? I wonder if we really care about our neighbors anymore. We're a nation constantly at war, spending trillions on defense, while at home we enrich the already wealthy and tell the average Joe that he has to pay for it."

There is not a simple black and white answer, but I am going to try and address your concerns.

Let’s start with the latest employment numbers. We got a decent non-farm payroll number of 216,000, and 240,000 new jobs in the private sector (governments everywhere are still shedding jobs).

That means over the last two months, the private sector has added almost 500,000 jobs. If you take the household survey, that number looks even better. So why did all the consumer-sentiment numbers in March come out so awful?

Looking deeper into the data, we find that wages were once again flat, for the fourth time in the last five months. We are certainly not keeping up with inflation.

The chart below shows real median household income since 1967. It is published in May of each year by the Census Bureau, so we don’t have the data for 2010, but it will not be good. Real median income, when the new data comes out—if I read the chart right—will not have grown for almost 14 years.

Click to Enlarge

But all this has led to what Canadian economist David Rosenberg calls the “Wageless Recovery.” Wage growth just continues to fall.

Mauldin Chart 2

And given the rise in food and fuel costs (now about 23% of the average person’s income), the recent lack of wage growth is even more frustrating.

Although the economy in the US is now producing more “stuff” than it did at its peak in 2007, we are doing it with 6.8 million fewer people. That means the productivity of the workforce is much better, which is good for corporate profits—but this has not yet translated into higher wages, although in past cycles higher profits have given way to higher wages (eventually, at least).

NEXT: Can You Say 'Jobless Recovery?'


Can You Say ‘Jobless Recovery?’
The following chart is from the St. Louis Fed. It shows the spectacular fall in jobs in the last recession and the painfully slow recovery.

Click to Enlarge

And note that we have gained 30 million people in the US over the last decade, while job growth has been negative.

Last month’s survey from the National Federation of Independent Business shows that small businesses are indeed once again hiring. [The latest survey from the NFIB was decidedly gloomier—Editor.]

Mauldin Chart 4

But that still begs the question of why wage growth has been so poor. And why do we now have such structural unemployment?

Although the headline unemployment number went down to 8.8%, the only way you can get to that number is by not counting the millions who have dropped out of the employment pool—too discouraged to look, but who will take a job if they can get one. GDP has recovered, but jobs haven’t.

I get it. The average guy is getting squeezed. For a while, it was masked by growing credit. We grew debt in this country, in all forms, by over 100% of GDP in the last decade. $14 trillion.

And what did we get for it? No real job increases, no increase in wages. It was an illusion.

Click to Enlarge

We have become a credit-addicted, credit-fueled economy, which works just fine until you have too much credit driving too little real growth. Without government spending, “real” GDP would be at levels it was over ten years ago. And it is real growth that drives wages and creates jobs.

I’m in favor of a large increase in funded infrastructure spending through a fuels tax. I am not against unemployment insurance, but at some point it needs to become job training and a path to employment.

I am a huge proponent of education. But does the current system really work? We have double the educational workers per student we had only a few decades ago, but no improvement in outcomes.

Yes, we have to make cuts to government programs. A 33% growth in federal discretionary spending (not including stimulus money) over the last three years alone is not reasonable, given the size of the deficit. The last recession was not caused by too little government.

I am worried about the survival of the country economically. Another crisis caused by the bond market driving up interest rates, because they become concerned about the size of the debt and deficits, will seriously reduce the choices we have—with none of them being good.

Ask Ireland or Greece how it feels. They are in what can only be called a depression, and likely to stay there for some time.

You think we have it bad now? Avoid dealing with the debt, and see what happens.

NEXT: Writing Our Own Greek Tragedy


Writing Our Own Greek Tragedy
I think that limit will come before the middle of this decade—perhaps as early as 2013, if the incoming president and Congress do not deal with the deficit in a realistic manner.

Then, bang! We have our own Greek moment. I want to avoid that.

And that means entitlement spending has to be on the table, as well as tax increases. The polls clearly show that people want to keep Medicare, and also are against tax increases (close to 70% in both cases). Those are not compatible objectives.

It is no less than economic survival we are talking about. We will survive as a nation, but the pain we will endure is simply more than most people can comprehend. Whole generations of savings and investment will be wiped out.

Think the cuts I am talking about are serious? Wait until interest payments are eating up 25% to 30% of revenues in a 12%-plus unemployment world.

Think the underfunded pension problems are bad now? Let’s have a real bear market, with inflation.

I have some friends who think that is what it will take to get government smaller. They relish the thought, as they also think their gold portfolios will go through the roof.

I am not in that camp. That is not a world I want for my kids and grandkids.

I want us to find that middle path, to cure the cancer of debt. Yes, I want smaller government and lower taxes, but survival is now my fixation. The cure for too much debt is not more debt. We can get it under control, but it is going to mean compromises.

Cutting government spending will mean lower GDP numbers in the short term, but survival in the longer term. This is not a typical business cycle. We cannot simply grow out of our problem. We haven’t really grown, except for government spending, for ten years.

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