We are in for a time of austerity. Are we ready for it? The US Department of Commerce has just released its advance third-quarter gross domestic product figures. They do not look good. The economy contracted over the past three months, due to the deepest fall in consumer spending since the Carter administration. Disposable income fell 8.7 per cent. This is an international downturn. Shop sales in the UK fell for the sixth month in a row in September, according to the British Retail Consortium. The European Commission announced that consumer confidence in the eurozone was the lowest in 15 years.
We should worry less about the bigness of our problems than about the smallness of our character. We are out of practice at handling a world of repossessed cars, hand-me-down clothes and cancelled vacations and graduation parties. For many decades, people were steeled against recession by a knowledge that things could be a lot worse. Britain had memories of postwar rationing. In the US, 8m people were unemployed throughout the 1930s. Even people in their mid-40s may remember Edward Heath’s three-day week and Jimmy Carter’s “malaise” speech.
Most people, though, are too young to remember that stuff. Perhaps that is why we are in the mess we are in. The US has not had a deep nationwide recession since at least 1981-82. The present consumer pessimism has not been equalled since December 1974, just after the Nixon resignation, when the US was still reeling from the oil embargo and President Ford was exhorting citizens to wear buttons that said “whip inflation now”. The youngest Americans who can remember the difficulty of paying for their children’s college education under such circumstances are approaching 70.
The US is not the same country it was the last time people had to tighten their belts. It has changed socially, economically and demographically. The range of problems has widened and the range of solutions has narrowed. Back in the 1970s, there were relatively few people with credit cards and hardly any who were “maxed out” on half a dozen. But the US now has $2,600bn (€2,000bn, £1,600bn) in outstanding non-mortgage debt, and The New York Times recently reported that 5.5 per cent of outstanding credit card debt had been written off by card issuers as losses. Indications are that the credit card problem in Britain is considerably worse.
Many of the arrangements and institutions that got Americans through the 1970s are gone. It is not often remembered how socialistic the US was in those days. It was a disguised socialism, administered by huge corporations, but it was socialism. The flabbiness and misrule of American companies was a kind of insulation. No one mentions it now, not even in the heat of an election campaign. Republicans fear telling voters that things of value have indeed been stripped from them in recent decades, just as Democrats warned. Democrats fear telling voters that heavy-handed socialism is indeed their ideal, just as Republicans warned.
Many avenues out of adversity have been closed. This crisis started because people were unable to keep borrowing on their houses – especially in places such as Phoenix and Las Vegas, where home valuations are down by a third. Financial institutions have cleverly lobbied to protect themselves from a predictable headlong rush of unvetted, unsecured borrowers into credit card debt.
The US Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 steered troubled borrowers away from Chapter 11 into Chapter 7 bankruptcies, which are more expensive to file for and carry a longer-lasting stigma. In the UK, the 2007 Tribunals, Courts and Enforcement Act may allow increasing use of “charging orders” – that is, court-imposed post facto attaching of security to loans that were contracted as unsecured.
In many countries it is becoming easier for banks to share information on clients, permitting such practices as “universal default”, whereby a borrower who misses payments on one debt can have his interest rates raised on others. So where is the nest egg of last resort that will get us through this emergency? In the US, it is in the 401(k)s and other private retirement funds set up to replace old corporate pensions.
If people engage in the financial equivalent of burning their furniture for firewood, the politics of western countries will turn invidious and populist. As the first outlines of the Treasury department’s plan to bail out troubled mortgage-holders emerged this week, there was an understandable public anger at payoffs to people who made bad decisions and spent on vacations the money they ought to have spent on their mortgages.
For quite a while, we lived unapologetically as rich people. We even patted ourselves on the back for it. If poverty causes so many social ills, then luxury ought to cure them, right? If you want to cut misery and social unrest you should let people go shopping. If you want to be “tough on the causes of crime”, let me have that flat-screen television.
As E.F. Schumacher wrote in his classic diatribe, Small Is Beautiful, in 1973: “This dominant modern belief has an almost irresistible attraction, as it suggests that the faster you get one desirable thing the more securely do you attain another. It is doubly attractive because it completely bypasses the whole question of ethics.” It turns out you cannot do that. So here we are, stuck in some dismal, minatory, moralistic, pre-information age fable. For a long while, banks lent and people borrowed as if we were living in an era of post-ethical hedonism. Now we face a reckoning as if we never left the era of neither-a-borrower-nor-a-lender-be.
The writer is a senior editor at The Weekly Standard
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