nor for that matter has anybody else about our current economic crisis. Until that happens things will get much much worse.
The bottom line is that for the last 8 years the United States has been living in a "fools paradise" - a society in which consumption continued to grow despite falling wages, made possible through an orgy debt creation supported by an unsustainable asset bubble. This is not a world that can be recreated -at least not for 80 years (the last time we went through a national delusion)
However, until policy makers are prepared to accept this unpleasant truth no workable policy will be established. It is easy to see why a Republican administration would be reluctant to admit to this unpleasant truth. It would be a complete repudiation of the 8 years of Republican administration and pretty much everything that they stand for. However, why an incoming Democratic administration is unwilling to confront reality is less understandable.
At core of our problem is excessive consumer spending that was artificially boosted by over 1 trillion dollars per year. A combination of 0% savings rate,home equity extraction and reckless lending. Economists heretofore have dismissed the decline in the household savings rate on the grounds that the appreciated value of assets (stocks and real estate) and continued appreciation in the future makes saving unnecessary. In their world hard cash invested in a CD or bond is the equivalent of unrealized appreciation on stocks and real estate. Well we know how well this has worked out! We can expect the savings rate to start moving up. If we are lucky it will stop at around 6% but it could go much higher as consumers try and make up for past short falls.
Add to this lack of savings (over consumption) the approximately $500 billion of home equity extraction (which has now fallen to zero and is unlikely to go much higher) and the total over consumption amounts to about $1.2 trillion. This translates into about 12% of overall consumer spending or about 36% of discretionary spending (assuming that 2/3 of spending is non discretionary)
Since 2000 the median wage has declined in real terms; the statistics probably understate the impact of declining wages since real inflation is running considerably more than the governments statistics.This over consumption was made possible by an orgy of borrowing whose repayment was not predicated on increased wages but rather on increased assets prices. Nobody was expected to repay their loans just refinance based on higher asset prices.
These artificial conditions are unlikely to repeat themselves nor can they be recreated through some government action. Thus any attempt to restore the status quo ante will not only fail but will fail dramatically. It is the equivalent of shooting an exhausted runner full of adrenaline- it might get them back on their feet but the collapse will be even more spectacular later. Regrettably this is exactly what policy makers are currently doing. They seem to operating on the principle that the best cure for a hangover is to drink some more. I am continuously amazed that even those who acknowledge that past behavior was crazy regard a return to normalcy e.g. cut back in credit card lines as a disaster.
The reality is that all industries and services that are geared to discretionary consumer spending are scaled about 36% too high. They will collectively have to shrink by that much. Government policy should not be directed towards avoiding that level of downsizing (auto industry take note) but rather ensuring that the decline is not greater than that and that conditions have been established for a return to balanced sustainable growth after the adjustment process. A 30-40% decline in lending is not irrational nor symptomatic of a non functional financing system but rather something that would be expected of a system adjusting to reality.
Government policies have to simultaneously focus on two elements-increase wages and reduce consumption.
a. Steps that can be taken to reduce the decline in median wages- a combination of supporting new technology and industries, better enforcement of unfair trade, education, cracking down on illegal immigration and restoring the balance between corporate profits and wages (if there was ever a time for corporate America to heed Henry Ford's advice of paying workers a fair wage so they can by the products this is it.).
b.Use government spending to cushion but not halt the decline in consumption e.g. state and local government will have to cut spending to match their decline in sales tax revenue as consumption decline. The challenge is to allow them to make a control descent.
Unfortunately, while lip service has been paid to these goals the actual effort has been directed towards sustaining consumption and lending to support it i.e. a return to status quo ante. Rather than accepting the unavoidable they are running around throwing money at everything and in the process destroying the public finances of the United States- THE ONE INDISPENSABLE THING WE WILL NEED TO GROW AFTER THE ADJUSTMENT IS OVER.