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The Insiders
Posted at 07:06 AM ET, 04/11/2012

Can our political system fix the economy?

Several years ago, at the height of the financial crisis I heard an economist predict the following depressing scenario: The economies of the Western world would go through a massive deleveraging, beginning with the financial sector and wending its way to households.  There would be massive wreckage along the way of stock portfolios, home values, job security and personal income. And then what, he was asked.  Oh, then our economy will eventually reset but at a lower standard of living, he replied. Most of what he predicted has come true. Whether it all comes true will affect our politics for many years.

By all of it, I mean the part about the reset. Lower standards of living are an anathema to Americans, unheard of since the post-World War II boom. All recessions since then have seen the economy emerge stronger than before. But not this current one, as this jobs chart makes clear. And now there is evidence that Americans’ appetite for debt may be changing fundamentally.

Some economists now speculate that Americans have fundamentally changed their spending and saving habits in reaction to the economic trauma of the past few years. The two bubbles that fueled borrowing and spending for families — the stock market and home values — popped. The stock market has come back somewhat, but many individual investors have stayed away, and housing prices are still depressed.

If personal spending remains hesitant, it raises a version of the theory of the commons, where rational individual actions end up hurting the common welfare. Consumer spending has long been the economy's engine. If it doesn't recover, the economy stalls again, resulting in a vicious cycle of more layoffs and less spending.

So far, neither candidate for president is talking about an economy that can be driven by a new catalyst. Mitt Romney still harps on tax cuts as the answer for stimulus, which is another way of asking the consumer to spend us out of this mess. President Obama comes closer, calling for investment tax credits for manufacturing, investments in scientific research and other competitive differentiators as well as renewed support for education. 

It's not just Romney and Obama who aren't ready to deal with a lower standard of living for Americans; it's our entire political system.

By  |  07:06 AM ET, 04/11/2012

 
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