Close to 60% of the half-trillion drop in household debt since the depth of recession has been the result of defaults on mortgages rather than the result of repayments (i.e. paying off ones mortgage debt). The problem here is that too many defaults makes it harder for people who'd like to enter the housing market to get new mortgage loans. It also makes it difficult for anyone to refinance. Meanwhile, other consumer debt burdens are rising. On Tuesday the Fed reported consumer credit outstanding (i.e. debt) rose in April -- mostly from record-high levels of student-loan debt and an up-tick in credit-card borrowing due to food and gas price increases outpacing wage gains.
All this translates into a continuing crisis on the demand side
In other words, consumers can't, and therefore won't, buy more. Between January and March, sales grew just 0.15 percent nationally -- perilously close to no growth at all. May sales look even worse. Chain stores are reporting weaker sales. Consumer confidence has dropped sharply.
How to get jobs back, then? Obvious answer: By re-igniting demand, which has only one practical meaning: Put more money in consumers' pockets and help them renegotiate their mortgage loans.
How to put more money in consumers' pockets?
- Enlarge the payroll tax break for workers -- not just for employers.
- Exempt the first $20,000 of income from payroll taxes for a year.
- Create a WPA for the long-term unemployed.
- Allow distressed homeowners to declare bankruptcy on their primary residences, thereby giving them more bargaining power with lenders, to "reorganize' their mortgage loans.
- Lend federal money to states and cities that are now firing platoons of teachers, fire fighters, and other workers because state and local coffers are empty.
But we're not hearing any of these sorts of demand-side solutions from the White House
Instead, by way of seeking Republican votes, compromizer-and-middle-of-the-roader Obama is meekly putting forth Republican supply-side ideas:
- lowering the employer costs of hiring,
- cutting corporate taxes.
Problem is, these proposals have nothing to do with the demand-side crisis facing us. Obama may attract some Republican votes for these proposals, but what's the point if the proposals are irrelevant to the real problem?!
The President's putative embrace of the false notion that businesses need more financial incentives in order to hire . . also risks giving legitimacy to other Republican supply-side nostrums being pushed by House Republicans and GOP presidential aspirants. On Tuesday, supply-sider Tim Pawlenty called for lower taxes on corporations (down to 15% from the current 35%), and lower taxes on the rich (to 25% from the current 35%). Equally insane, supply-sider Newt Gingrich wants to lower corporate income taxes to 12.5% and eliminate the estate tax altogether. And so on, as we edge our way up to the financial abyss and the next Great Depression.
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