Business writers are looking with some pleasure at the sales data for the 2010 holiday season, which are up significantly compared to last year. Business sentiment seems to suggest that we are clawing our way out of the recession, albeit slowly. But others suggest that the real economy may not be as rosy as the statistics suggest, looking at the joblessness situation and its consequences on families.
What worries me about the current situation is that we seem to be wishing on a star that things will naturally get better, without doing some of the obvious things that would make it better. Economists generally agree on eight causes of the Great Recession; and the truth that no one wants to confront is that we have not made enough progress, or in some cases any progress, on these to make the difference.
These problems are:
- The risk of inflation
- The large trade deficit
- The low savings rate
- Productivity increases that are too low
- Government deficits
- Weak consumer spending
- Too few jobs
- The mortgage meltdown
Perhaps the most troublesome two are the first and last. Let’s start with inflation. Every bout of inflation America has faced in the last 40 years came about when oil prices increased. As I write this, oil prices have risen to over $90 a barrel. This is driven in part by global forces beyond our control—many countries’ economies are growing quickly and this exacerbates high demand for oil that results in high prices.
But U.S. oil consumption accounts for about one fourth of global demand, and almost three times that of the next biggest consumer—China. There are immense unexploited opportunities to save oil both in the short term and in the long term. In the short term, transit agencies across the country are being forced by budget problems to cut service and raise fares, both of which force would-be customers to drive cars. Worse, cutbacks in transit service cause disproportionate increases in driving compared to just substituting one car trip for one bus trip. Second, some million and a half barrels of oil per day are used in buildings. Widely supported legislative programs to provide incentives for deep retrofits that could cut oil use almost in half have languished in Congress for two years.
The popular impression on the mortgage crisis is that we are coming out of the woods—that the risky lending practices that led to the default crisis have been stopped. But this is incorrect. It is wrong in terms of data—new defaults are not much lower than they were at the peak of the crisis. And it is wrong in terms of policy: while some of the abuses and errors that led to defaults have been corrected, lenders considering a loan of $140,000on a median priced house are STILL considering the borrower’s ability to pay $140,000 in direct costs while ignoring the $75,000 of obligations for utilities and the $300,000 of obligations for driving costs (if the house is located in sprawl), even in the face of solid statistical evidence that poor location efficiency is a major explanatory factor in defaults.
As we enter the New Year, NRDC will be working with the Administration, Congress, and the business community to enact real solutions to these seven problems, so that America can get back to prosperity following a green and sustainable pathway.