People who have lived through the Great Depression are often quite frugal. And after the current “great recession” ends, patterns of frugality are likely to remain. Frugality involves not only spending less, but also buying products which have a longer life span and which are higher quality. Instead of impulsively buying, consumers are expected to more carefully decide how their money is spent. Relatively expensive consumer products such as Apple’s line of notebooks, are still selling well due to perceived and actual quality.
But what does this mean for the economic recovery?
Almost a year ago economist Anna Schwartz, who actually lived through the Great Depression and authored a tomb on economic activity, concluded that the recovery (if it could be called that) would be weak. She said that if consumer spending is weak then the boost needed for a robust recovery won’t be there. She also said that the president’s stimulus plan hasn’t done much to boost consumer spending.
Months later Timothy Geithner, warned countries in the G 20 that they should not count on increased American spending to boost their economies out of the recession. Geithner encouraged countries such as Japan, Germany and China (all major exporters) to boost domestic demand for their products as the United States economy will remain sluggish. As Europe struggles with containing the sovereign debt crisis, the United States has pursued a policy of fiscal stimulus in order to, in theory, generate economic growth. As the United States debt increases, and if consumers remain constrained in their spending practices, then the recovery is expected to be very slow over the next several years. However, economic responsibility in Europe could have a stabilizing effects on the markets, as well as on consumer confidence. The belt tightening is seen as necessary in Euro-block countries such as Germany, even though government spending is seen as one of the few factors encouraging growth in these countries.
But what course will the United States take over the next couple years? There are several big ticket, but socially important, spending measures such as health care reform which are expected to have big prices tags, but which have not yet been enacted. The federal deficit is expected to be equal to the GDP in 2012, and although investors are still buying treasury bonds at a good rate due to the crisis in the Euro-block, several years from now with spiraling debt the picture might change. If investors begin to view treasury bonds as being high risk, then yields will have to climb significantly to make them attractive despite their high risk nature. If that happens, then Uncle Sam may have trouble paying for huge spending programs in addition to servicing the ever growing national debt.
Low bond yields are often linked with financially healthy and stable countries. Several Scandanavian countries which have weather the current financial crisis quite well, including Norway, Finland and Sweden. These countries also have strong social net safety programs, similar to what many hope health care reform will do in the United States. Therefore, it is possible to have a strong economy, minimal national debt, and have expanded access to health care. Indeed, access to health care could make the United States more attractive as a place to do business due to the provision of better health care for its citizens.
As the current recession begins a slow recovery, the United States may have to make some tough budgetary decisions in the coming years as many Euro-block countries are doing this year. Personally, I believe a big place to do some cutting would be military spending, which has been increasing greater than inflation. As the wars in Iraq and Afghanistan wind down, the U.S. military should refocus its mission and learn how to do more with less. There are many big budget airplane programs which in the post-cold war world appear to be unnecessarily expensive.