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End of Saturday mail service is only the beginning

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By Steven Pearlstein
Wednesday, March 31, 2010

Confronting the prospect of ever-increasing operating losses, the U.S. Postal Service this week officially proposed terminating Saturday home deliveries and pickups from street corner mail boxes.

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As postal executives see it, that's the fairest and least painful way to avoid another round of rate increases that would inevitably lead to further volume declines and even deeper service cuts. Recent polls find that a solid majority of Americans is willing to live without Saturday mail service, but the idea still faces stiff opposition in Congress, which has nixed it in the past.

In the context of a $15 trillion U.S. economy, this is a relatively small, $5 billion item. But in many ways it is a preview of things to come. Because if we don't have the will to accept even this modest and relatively painless reduction in our collective standard of living, then we are never going to make the hundreds of billions of dollars in cuts to annual consumption, both public and private, required to bring our over-indebted economy back into balance.

In recent weeks, a wave of relief and optimism has washed over the economy. The corporate sector is closing out another quarter of solid profitability. Business and consumer confidence is on the rise. The Dow Jones industrial average is flirting with 11,000. The Treasury secretary and the chairman of the Federal Reserve have declared that the economy is on a path of sustained recovery. State tax revenue is finally picking up. And on Friday, the Labor Department may even report that the number of jobs actually increased in March, ending two years of nearly uninterrupted declines.

Getting to this point has been no small accomplishment, requiring massive government intervention to quell a financial crisis and put a floor under the global economy. Things are certainly better than almost anyone, including me, would have expected a year ago. But to use a medical analogy, although the patient has been stabilized and is out of intensive care, the underlying disease has not been dealt with.

"We've shifted from a position of having too much private debt to a position of having too much government debt," says Ken Rogoff, the Harvard economist who last year co-wrote the definitive book on financial crises, "This Time Is Different." "We still are facing the prospect of having to make huge adjustments in a way that we haven't done in generations, and the country doesn't appear to be even remotely ready to confront this."

Rogoff's co-author, Carmen Reinhart of the University of Maryland, says it's not the near-term aftermath of the financial crisis she's worried about but the "aftermath of the aftermath," as fear gives way to complacency and people begin to think that they can return to the way things were. The urgent challenge, she said, is not just to stop taking on new government and household debt, but to whittle down the debt we already have -- a level of debt that leaves us vulnerable to that inevitable but hard-to-predict moment when creditors lose faith, interest rates rise and debtor countries get sucked into a vicious downward spiral in which increasing debt payments, slower growth and currency devaluations all feed off one another until the economy collapses.

Government debt is certainly the biggest part of the problem. At the end of last year, total outstanding federal debt equaled 84 percent of GDP, and by the end of this year it should be close to 90, which according to Rogoff's and Reinhart's analysis puts us dangerously close to that unknown tipping point. And that figure doesn't include the hundreds of billions of dollars in unfunded pension and retiree health liabilities of state and local governments that weigh heavily on the nation's balance sheet.

Household balance sheets aren't in much better shape. Because of excessive debt from credit cards and home-equity loans, consumers are vulnerable to any significant increase in interest rates, while tens of millions of homeowners are trapped in homes that are worth less than what they owe. And although the immediate instinct from the financial crisis was to shift from borrowing to saving, the household saving rate has already begun to decline again, from a peak of 5.4 percent last spring to slightly more than 3 percent today. That's well below what is needed to pay down debt and rebuild retirement accounts that were under-funded before the crisis and have been badly depleted since.

Despite two years of financial and economic turmoil, at some fundamental level, not much has changed: The United States continues to live well beyond its means, with the rest of the world only too eager to lend us the money to continue doing so. Low interest rates, an overvalued currency, large trade deficits, an inadequate savings rate, unsustainable budget deficits -- all of these speak to the persistence of a fundamental imbalance and our willingness to sacrifice long-term health for short-term comfort and stability.

Most of the painful adjustments to our standard of living are ahead -- and trust me, loss of Saturday mail service is the least of it. Inevitably we're talking about higher taxes, higher interest rates, reduced government benefits and services, delayed retirements, higher prices for imported goods and slower growth, all of it lasting several years until things are brought back into balance. The only question is whether we will begin to make these adjustments voluntarily, gradually and fairly, or wait until they are imposed on us, harshly and unfairly, during the inevitable crisis that follows.


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