We Are In a Modern-Day Depression

The crash in consumer confidence reflects the ineffectiveness of the president's policies.


This was the beginning of a yawning credibility gap between the Obama administration and business. It has been aggravated by the administration's tendency to lay blame on the so-called fat cats of the business and financial communities and to pillory the president's favorite villains: "millionaires and billionaires," by his definition any family or business with an income of more than $250,000 gross. The resort to divisive populism is exactly the wrong approach. It seeds the suspicion that the administration is more interested in campaigning than in rallying the national will. It undermines the confidence that business needs if it is to invest in the face of a costly new generation of regulations, healthcare costs, and an increased bureaucracy.

[Read Peter Roff: Blame Obama and Durbin for New Bank Fees]

The chief economist of the National Federation of Independent Business recently wrote that business owners do not trust existing or proposed economic policies. They sense that the administration does not understand how perceived hostility saps the "animal spirits" required for taking risks on expansions and start-ups. It further fails to understand the needs and aspirations of small businesses, the creators of two thirds of the new jobs in the growing economy.

Unemployment is reason of itself for depression. It is true the president has "pivoted" belatedly to job creation, but more and more people are out of full-time work. Typically in the third year of a post-recession recovery something like 170,000 jobs are added every month. Our score is zero. The real unemployment rate is reflected more in the U-6 analysis of the rate, now at 16.1 percent, a number which makes more sense than the U-3 number. That number, considered the official unemployment rate, measures only people who applied for a job in the last four weeks; U-6 includes all those who have applied for a job within the last six months and those who are involuntary part-time workers. U-6 is more relevant, given that the mean period of unemployment is roughly 40 weeks. Add to that the lower labor participation rate—caused by people who have given up looking for a job—and the 16.1 percent grows to 19 percent or some 25 million people. And six million of the unemployed have been out of work for more than six months. Such long unemployment spells can lower lifetime earnings and increase the risk of structural unemployment or employment at lower lifetime pay because skills developed on the previous job are lost. Those who lose stable jobs often suffer a 20 percent earnings loss for 15 years or more. As Barron's Alan Abelson wrote recently, "If things keep going this way, come the first Monday of September next year, we'll be commemorating Layoff Day instead of Labor Day."

[Check out our editorial cartoons on President Obama.]

Consumers are clearly not going to generate sales growth if we take measure of consumer confidence from the Conference Board. Their confidence level conventionally comes in at 102 during periods of prosperity, and at 73 during recessions. Now it has plunged to 56. The University of Michigan consumer confidence numbers also have fallen to levels that are 20 percent or more below the previously low levels of earlier recessions. These numbers match the drop in confidence seen after the Iran hostage crisis, Iraq's invasion of Kuwait, and the collapse of Lehman Brothers.

No wonder that in the 14 quarters since the beginning of 2008, inflation-adjusted growth in consumption averaged just 0.5 percent, the longest period that consumption has been this weak since the end of World War II. Discretionary spending indeed may be altered for years or at least until the scars from the traumatic experience of unemployment and defaults fade away.

When governments are shown to be powerless or incompetent, ordinary people suddenly realize that their elected officials have neither the understanding, the political power, and sometimes not even the will to do what is necessary. In part this is because they are scared of voter backlash in their constituencies. At that point, despair and alienation takes control of public opinion, and people concentrate on preserving what little of their long-term prospects and savings they can.