I tackled one aspect of Schiff's analysis in a post on my blog, Καθολικός διάκονος, entitled What sacrifice? I tackled another issue in a previous post here on Cahiers back in November, Debt. This is a point that is rarely addressed, it was not even addressed by either economist who participated in the panel discussion that comprised part of the New York Encounter that was, in turn, part of our National Diakonia last weekend, Finance and the Economy at a New Crossroads: Different Models or a Different Vision. This discussion, with the exception of Prof. Freeman's refreshing presentation, was exclusively about new models and who is to blame, but there was no new vision on offer, just as there is no new vision on offer in Washington, despite the change of administrations. What the economists almost completely ignored is the fundamental fact that the economy exists for the human person and not the human person for the economy. Due to the inevitable human factor involved, economies do not follow laws as in physics.
The discussion was also disappointing because not one panelist addressed the crisis wrought by the irresponsibility of financial institutions in light of what we should have learned from the Savings and Loan crisis of the 1980s, which demonstrated both the need for an updated regulatory regime and that de-regulation was a bad idea. In other words, we spent a few hours pretending that nobody could've seen this coming. Well, the truth of the matter is that plenty of people saw this train wreck coming, it's just that their opinions did not matter because they were not part of the revolving door, Ivy League elite. The same elite whose education, as was observed months ago on Paper Clippings, consists almost exclusively of "empirically-oriented knowledge directed at problem solving," to the neglect of "philosophy," which entails "grappling in a systematic fashion with questions of truth and meaning".
Anyway, this quote from Schiff gets to the heart of the matter, which our economic and political elites continue to evade for reasons of personal gain and political expediency:
"The root problem is not that America may have difficulty borrowing enough from abroad to maintain our GDP, but that our economy was too large in the first place. America's GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall."
It should be shocking to us all that 70% of our Gross Domestic Product is consumer spending and not only consumer spending, but spending that depends almost wholly on consumer borrowing, to include draining the equity out of our homes. To use an old observation, the chickens have come home to roost. This state-of-affairs has proven to be unsustainable. Hence, we cannot seek to replicate it moving forward. This seems like a common sense observation, but that is exactly what is on offer, more of the same. At least it will continue to be a bi-partisan effort. I read a book quite a few years ago, the thesis of which strikes me as more relevant now than when it was published, Pete Peterson's Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.
Schiff observes that we will no longer be able, as less than 5% of the world's population, to account for 25%of global GDP. You know what? This contraction, while somewhat painful, is a necessary correction not only for economy, but for our humanity. This is the truth of the matter. Stated simply, hope for a better economic future cannot be realized if we fail to address this truth, this fact, verified by the reality we are experiencing. There is no hope in falsehood. President Obama was correct in his inaugural address, we must put away childish things.