The Economic Reality of Today's Uncertainty

This article was just about to be posted when the Lehman Brothers and AIG fiascos were announced. After rereading, even with the major troubles on Wall Street, I still believe that uncertainty is the main driver behind today's economic problems.

In 1992, President George H.W. Bush kept insisting the economy of the United States was fundamentally fine and was actually poised for a huge spurt. Well, in hindsight he was right: the 1990s offered quite a nice economic bonanza. But, at that time, the economy was sputtering in places, including some very visible places like Wall Street, legal services, and the arts. When President Bush (41) refused to acknowledge the dynamic behind the economy at the time, he was labeled as out of touch and in the end may have cost himself the election.

Recently, former Senator Phil Gramm basically implied that the U.S. economy is fundamentally fine and that America is made up with a bunch of "whiners" when it comes to economic issues. In some ways (I admit uncomfortably) Senator Gramm is accurate. There are several industries and areas of the economy where life is good. Rail, export-focused industries, certain service arenas, oil workers, and political consultants are all doing quite well, thank you. While the typical American scratches his/her head, tightens the ol' wallet, or cuts back on a family trip, my friends in the oil industry in Midland, Texas, or on an oil rig off the Louisiana coast are doing just fine. Don't think so? Go to Midland or Exxon, or ask NBC about selling 85% of its available SuperBowl advertising being sold five months before the game.

The reality is, just like in 1992, a large and visible part of the economy is hurting. Obviously the auto (i.e., truck) and construction industries are struggling. For others there is an uncertainty - an economic future that is unknown. An economic uncertainty that affects what is so near and dear (our homes, our money, our desire to plan for the future, and our general understanding of things). This economic uncertainty is a real and tangible issue.

I have argued that seeing gas prices climb and drop and climb and climb again and then drop again has left Americans uneasy and unsure. Out of nowhere families have been forced to increase a single budget item (gasoline and home-heating costs) by 25%. Further complicating the matter is the fact many blame speculators for the price jump, which simply confuses the average American. Heck, I'm still not quite sure how the whole pricing thing works--it sure isn't a result of pure supply and demand. If the price is based solely on supply and demand, how the heck did demand jump so far so fast without anyone noticing it?

As we have recently seen, the housing crisis is even more complicated. Anyone with a brain should have seen this coming. Zero-percent down mortgages with three-year ballooning interest rates? Please - there's no recipe for disaster here! Anyone who sold or knowingly took out and understood the dynamics around a creative mortgage or participated in the repackaging of these high-risk loans gets no sympathy and should get no bailout. BUT that does not change the fact that many people were bamboozled into one of these loans (and sorry to say many in the minority community were targeted). Or that a smart friend (who thought he could outflank the system) lost his home. Or how in some communities foreclosed homes have become a blight. What about the couple being transferred for work who cannot buy a new or even sell an old home? It's real. Just ask Lehman Brothers.

When I think about today's economy, for some reason I am always drawn to the "Gas Tax Holiday" presented this spring by Senators Hillary Clinton and John McCain. As an economist, I at first thought this was folly. But upon reflection and analysis, I have come to the conclusion that not only was the idea an inspired one at the time, but it might have set a positive tone. Yes, it is likely we would never have seen anything close to the full savings in our gas prices. However what we would have gained (besides a few bucks) is a knowing that our government was/is looking out for all of us with something we can understand and see. Some uncertainty would have been diminished.

Similar direct across-the-board assistance could be implemented as well. Instead of a low-interest loan to car manufacturers, why not a credit to each municipality or school district that buys a new truck. Instead of a new stimulus check to an anointed few, why not put the construction industry to work and refurbish and rebuild federally owned homes and hospitals or offer to build 51 new state-of-the-art schools? Instead of pointing fingers at who has a new focus on regulation, why not help individual homeowners pay any fees keeping them from restructuring or selling a home they should never have purchased in the first place? While, yes, long-term retraining and technological shifts are required, short-term across-the-board tangible stimuli are needed now.

Academically speaking: the American economy is doing OK. But the average American cutting back on travel, seeing friends lose their homes, watching neighborhoods deteriorate in value, reading headlines about 158-year-old businesses collapsing, freaking out every time a barrel of oil goes up a dime isn't whining--he or she is worried and unsure what the future might hold. Today's economic reality is uncertainty. A focus on anything that would reduce that uncertainty and calm our fears is the prescription for economic recovery.

BFT's Sequal - Economic Reality 2 - Quicker Action by Congress???