Federal Deficit Must Be Brought Under Control To Avoid Another Bubble Says Industry Group

Feb. 23, 2010
MAPI says that if federal deficits run amok, a 'larger share of the economy will shift to less productive areas, the growth rate will suffer, and the limits of government indebtedness will likely be determined by foreign investors' willingness to hold U.S

The United States embraced a credit-based growth model that required both increasing debt among existing borrowers and ever easing credit standards to attract more new borrowers, two primary factors that led to the "Great Recession" of 2008 and 2009, according to a new Manufacturers Alliance/MAPI report.

The report warns that difficult choices will need to be made to bring long-term federal spending, especially outlays on entitlement spending, and revenue into alignment, or any economic benefits of increased household thrift risk being marginalized.

Government debt is now compensating for the deleveraging of the consumer sector, but is growing so quickly that it may overrun the ability to service the debt load.

"The primary risk going forward is that the debt bubble merely shifts from the private sector to the government sector," said Daniel J. Meckstroth, MAPI Chief Economis. "If the federal deficits run amok, a larger share of the economy will shift to less productive areas, the growth rate will suffer, and the limits of government indebtedness will likely be determined by foreign investors' willingness to hold U.S. government debt."

Meckstroth recounts that consumers went headlong into debt in the 2000s and leveraged their incomes into even higher debt levels. Household debt rose from 92% of disposable income in 2000 to 130% at the cyclical peak in 2007. Household debt, therefore, increased at a 10% annual rate over the seven year period, while disposable income gained only 5% annually.

"Home mortgages and home equity loans drove a very large proportion of households' increased indebtedness," he said. "Consumerism at its worst was driven by plentiful, cheap credit that was both secured and promoted by overinflated housing prices."

The consumer saving rate is expected to increase in the current decade compared to the last, but the major impediment to higher overall savings and investment rates in the United States is the large, and growing, federal deficit.

From the cyclical economic peak in 2000 to the cyclical peak in 2007 (which includes the 2001 recession), gross domestic product (GDP) increased at a 2.4% annual rate. The annual average pace of economic growth from 2007 to 2019 is likely to be only 2%, and if there is another major economic crisis this decade, the economic growth rate will be even lower.

Meckstroth wonders if the next bubble may already be forming.

"'Bubblenomics' is not over," he cautions. "Arising out of the worst recession in over half a century is a potential new bubble -- government debt. Bailouts, stimulus spending, and tax cuts appear free. The perception is that federal deficits do not matter. It is easy, therefore, to believe the story that the government has unlimited resources and that government deficits will not personally be a great cost to taxpayers."

Popular Sponsored Recommendations

Empowering the Modern Workforce: The Power of Connected Worker Technologies

March 1, 2024
Explore real-world strategies to boost worker safety, collaboration, training, and productivity in manufacturing. Emphasizing Industry 4.0, we'll discuss digitalization and automation...

3 Best Practices to Create a Product-Centric Competitive Advantage with PRO.FILE PLM

Jan. 25, 2024
Gain insight on best practices and strategies you need to accelerate engineering change management and reduce time to market. Register now for your opportunity to accelerate your...

Transformative Capabilities for XaaS Models in Manufacturing

Feb. 14, 2024
The manufacturing sector is undergoing a pivotal shift toward "servitization," or enhancing product offerings with services and embracing a subscription model. This transition...

Shifting Your Business from Products to Service-Based Business Models: Generating Predictable Revenues

Oct. 27, 2023
Executive summary on a recent IndustryWeek-hosted webinar sponsored by SAP

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!