Of the five, what is contributing the most to the current slowness in the economy?

1) It’s the collapse of U.S. consumer wealth.

U.S. housing values have collapsed back to 2002 levels. That decline has wiped out $6.5-trillion in household wealth. When wealth declines, people spend less. (Precisely how much less is a matter of controversy but if the denominator is $6.5-trillion, even a very conservative estimate produces a nasty shock.)

2) It’s the de-leveraging, stupid.

Back in the 1990s and 2000s, U.S. consumers spent almost 100% of their incomes. Today they save over 6%. Good for them. They are paying down debt: At the peak of the boom, U.S. households spent $18.85 of every $100 of income to service debt. By the end of 2010, they were spending only $16.64 on debt service. Again, good for them. But as they save, they reduce demand for goods and services and for the labour of those who produce and sell those goods and services.

3) It’s gas prices.

The rule of thumb used by economic forecasters is that a one-cent increase in gasoline prices takes a billion dollars out of the pockets of U.S. consumers. A gallon of gas in the United States costs on average about $3.85, up more than $1 from a year ago.

4) It’s the crisis in local government.

U.S. states and localities raised spending dramatically in the first decade of the 21st century, largely to pay for Medicaid, the health program for the poor whose costs are divided between states and the federal government. State and local governments rely heavily on sales taxes (vulnerable to recessions) and property taxes (vulnerable to housing-price declines). Finally, unlike Canadian provinces, 49 of the 50 states are constitutionally obliged to balance their budgets. They can and do finagle that requirement a little, but only up to a point. About one-third of the 2009 Obama economic stimulus was forwarded to the states to help them through the crisis, but that money has been used. Result: States and localities are now raising taxes and laying off workers some 467,000 workers over the past two years. Forecasters project another 250,000 or so additional local-government layoffs in the next 12 months. And it is estimated that each government job lost costs another 1.3 private sector jobs as that worker’s pay ceases to circulate through the economy.

5) It’s Washington, too.

Blame both Democrats and Republicans. The Obama health plan will raise the cost of each worker effective 2014. Fear of those additional costs surely deters some hiring now. Meanwhile, Republicans are threatening to force a default on U.S. federal contracts, debts and other obligations unless they get their way on the federal budget plan. Fear that the Republicans may not be bluffing or that they may inadvertently trigger a crisis even if they are bluffing must also weigh on markets and hiring.

http://www.frumforum.com/no-quick-cure-for-america...