There are sound reasons for this gloom. Consumers have learned a bitter lesson. They understand that increased consumption—private and public—will have to come from income and not borrowing, and income will have to come from employment. This is the new normal, and it is not going away for a long time: We will have unemployment rates of 8 percent or higher for years to come.
A University of Michigan survey of consumers finds that family finances have been deteriorating for more than 13 consecutive months, the longest decline in the survey's 60-year history. With 85 percent still believing we are in serious economic difficulties, mainstream Americans are going on a financial diet. They know now that they cannot spend what they don't have. Household attitudes toward borrowing have made a U-turn as the painful consequences of too much debt have hit home. For years, homeowners borrowed against soaring home values. They can't now. Home prices are down by some 30 percent, on average, and possibly heading for a fall of an additional 5 percent to 10 percent. With 25 percent of home mortgages exceeding the value of the properties, more than 10 million homeowners have negative home equity. Many others have little equity.
Naturally, consumers are increasing their savings when they can. Even the top 20 percent of the nation's households, who account for 40 percent of all spending, no longer trust their home equity or rising stock portfolios (up by almost $5 trillion this past year) as a basis for spending in lieu of saving. All they see ahead are taxes, taxes, taxes. So the dollars have not yet started to flow.
In summary, we have overleveraged households weighed down by debt and worried about layoffs, thus curtailing their spending. We have businesses unwilling to hire until they are certain that the recovery is solid. They are unlikely to invest in new machinery and plants when they are using less of the nation's industrial capacity than they have at any time since the end of World War II.
What this means is that larger-than-typical head winds face two of the three normal engines of recovery: consumption and residential investment. These usually make up about 4.5 percent of the growth in the gross domestic product in the first year of a recovery. This represents a subtraction on the order of three quarters of a trillion dollars annually from consumer spending. Given how high our fiscal deficits are, it is hard to imagine how consumers will be in any position to make up the difference.
Rather than pumping more cash willy-nilly into a fragile economy, the government will have to focus on its next big task: drawing up credible plans for bringing bloated budget deficits under control without triggering another downturn. The public understands this.
The prospect, therefore, is sluggish GDP growth; employment gains that are too slow to prevent further increases in the unemployment rate; slowing and probably falling inflation; a Federal Reserve policy that may be forced to unravel some of the Fed's unconventional monetary stimulus but still will keep the fed funds rate at its current near-zero level; banks more willing to lend, but only gradually; and firms probably still very reluctant to hire vigorously.
How can we accelerate a substantial recovery in job growth that will generate additional labor income? There is no snap answer. If government officials try to pretend that there is, they will undermine what little is left of their credibility. But this is no argument for inertia. We don't need another Andrew Mellon at the Treasury Department advising the president, as Mellon did Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." We must have programs that create some degree of confidence America can be rebuilt, and jobs with it. I have written before of the benefits that would flow from a national infrastructure bank. The unemployed have to be supported, but it would be better if the financial support employed labor in rational, long-term, major infrastructure projects. These wouldn't be entitlement programs but regeneration programs. Infrastructure projects—broadband Internet access across the nation, restoring decaying bridges and canals, building high-speed railways, modern airports, sewage plants, ports—have the highest multiplier for employment. One worker in an infrastructure project leads to almost 1.7 jobs for others. And we will be fulfilling a desperate national need. It is time the obstacles created by the profusion of bureaucracies at the local, state, and national level were cleared away.