04.29.2013 0

The lost generation is already here

By Robert Romano

When history revisits the contemporary economic era, it might include a footnote that there is no such thing as a free lunch. That, in fact, you cannot borrow your way to back to prosperity. And we’ll know that because after the financial crisis, in the U.S., we tried.

To return to historical trend growth in the post-World War II period, the economy needs to expand nominally by 6.5 percent. We’re nowhere near that right now. Despite trillions of dollars of fiscal and monetary stimulus, the economy only grew by a nominal 3.7 percent annualized rate in the first quarter before adjusting for inflation.

That means the economy is only growing half as fast as it needs to in order to expand robustly again.

Overall, the White House never foresees that the nation will return to the growth seen prior to the financial crisis, only projecting an average 4.8 percent nominal growth rate every year this decade. But why has the stimulus been such a failure?

Despite promising policies that would restore the nation’s economy to its former glory, the stimulus, which was designed to expand borrowing, has thus far failed to keep that promise. Overall credit, that is all debts public and private, expanded at just 3.3 percent last year, well below its historic 7.9 percent annual rate.

This has a lot of people scratching their heads over why it hasn’t worked yet, but it shouldn’t.

The problem is that the economy has become so overleveraged and indebted that governments, individuals and businesses can no longer afford to borrow at the rapid rate they once did.

That’s bad because growth is measured as consumption and investment, and previous high rates of growth were based on credit expansion that we’re no longer seeing. Thus, now the economy is not performing as one would hope.

Which means, the economic model of the past generation had a fatal flaw. That there was in fact a limit to how much debt everyone could take on. And because it was overlooked by the not-so-smart central planners in Washington, D.C. that insisted on lax lending standards for college and housing, now we have an even bigger problem.

A lost generation.

Specifically, the population of those with some college or a college degree 25 years old and older has increased by nearly 11 million since 2009, but only 4.7 million have entered the labor force. In the process, the participation rate has declined from 74.9 percent to 72.02 percent, according to data compiled by the Bureau of Labor Statistics.

If the participation rate had just held steady, there would be an additional 3.4 million college-educated young people in the labor force. That’s a problem because of those with college debt, the average debt total is $20,326. And unless those people work, they will have no way of paying it back. This is already leading to higher rates of delinquency.

That’s bad, but it gets worse. Because they cannot afford to do so, they are also not continuing to participate in our credit-driven economy, making them less likely to take out a mortgage or auto loan than they were ten years ago, according to a recent New York Federal Reserve study.

These are precisely the people that would need to take out more debt in order for credit-driven consumption and investment to be restored to its historically high rate. But they cannot, because, like the rest of the nation, they’re stuck in a debt trap not easily escaped from.

The only way out is real economic growth leading to real jobs, not more debt. If young people continue to fail to enter the workforce, they will be piling up by the millions. In the end, this national tragedy will make Spain or Greece, with high youth unemployment, seem like a sideshow to the main event.

For, this is the unraveling of an entire generation’s hopes and dreams. The fallout is not going to be pretty, but suffice to say, young Americans are not going to be crazy about politicians’ promises of more debt and borrowing that got us into this mess in the first place.

Robert Romano is the Senior Editor of Americans for Limited Government.

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