The threat of economic crisis, real or perceived, is always at the edge of thought. Stock markets, after all, have a history of crashing from time to time, and economies have been known to trip over bubbles of nearly every size and shape. In the United States, it was housing and credit in the late 2000s; in the early 2000s, it was tech; and once upon a time in Holland, it was tulips.
Equities may be the asset that is most sensitive to bubbles and their subsequent collapse, and there’s always a headline somewhere warning that the next great market upheaval is on the horizon, but crises can come in any color of the rainbow — crises of debt, long-term unemployment, and bad policy all populate today’s economic landscape.
Here’s a look at some of the chronic crises that plague the U.S. economy.
There’s no hiding the fact that the U.S. fiscal house is being held together by a thread. In October, partisan bickering catalyzed an entirely unproductive partial shutdown of the government, and policymakers — unwilling to bend to public sentiment — once again flirted with the debt limit.
The snafu drove economic sentiment into the ground and troubled financial markets around the world. If anything, the country emerged from the showdown worse for the wear, and there doesn’t appear to be any guarantee that we won’t experience a similar tantrum at the beginning of 2014, when the stopgap measures are set to expire. America has a deeply divided fiscal house, and at this point, the ongoing trench warfare in Washington over the future of fiscal policy has become toxic.
Brinkmanship, damaging even in moderation, has become an art of crisis hopping. As long as this is the case — as long as political firepower continues to be greater than political mobility — the U.S. economy will be subject to fits of destructive political impasse.
2. Student debt
According to the American Institute of CPAs, there were nearly 39 million adults in the United States with student loan debt at the end of 2012, a 70 percent increase from 2004. At an average of $24,803 per loan, the total amount of outstanding student debt was more than $950 billion, greater than the total of all credit card debt and second only to mortgages as a contributor to overall household debt.
The total amount of student debt has since increased, climbing to $1.2 trillion as of May, according to the Consumer Financial Protection Bureau. The Project on Student Debt, an initiative backed by the Institute for College Access & Success, calculates that nearly two-thirds of graduating students have an average debt load of $26,600.
The true cost of this debt to those who hold it and to the economy at large is difficult to calculate, but it is widely believed to be enormous. Servicing student debt also eats into discretionary spending, which right now is a much-needed fuel for the U.S. economy. Recent graduates often have relatively low incomes, meaning that on a good day they will struggle to set money aside for retirement or to save for a downpayment on a home.
Factor in debt payments, and recent graduates are effectively destined to be trapped behind the curve in terms of saving for retirement and establishing a household.
There is no way to hide the fact that the financial collapse of the late 2000s was catastrophic for millions of Americans. The U.S. Treasury has estimated that 8.8 million jobs and $19.2 trillion in household wealth were lost. From the pre-recession peak to its trough, real gross domestic product contracted more than 5 percent, and many economists believe that the crisis has forever altered the growth potential of the U.S. economy.
Beyond broad strokes, the impact of the crisis on Main Street has been hard to quantify, but one area where the crisis struck particularly hard was the capacity of Americans to prepare for retirement. Equities collapsed by as much as 40 percent just as the oldest baby boomers were gearing up to retire, obliterating the retirement savings of millions. Older workers are also often the first to go when layoffs begin, and layoffs were all the rage heading through the turn of the decade.
Without work, with stagnant wages, and with less trust in financial markets, millions of Americans are now facing what some have classified a crisis when it comes to preparing for retirement. A report prepared by Sen. Tom Harkin (D-Iowa) indicates that Americans are running a collective retirement income deficit of $6.6 trillion and that half of the country has less than $10,000 in savings.
“The retirement crisis is directly attributable to the breakdown of the traditional ‘three-legged stool’ of retirement security — pensions, savings, and Social Security,” Harkin wrote in the report. “Defined benefit pension plans used to play an enormous role in providing a reliable source of retirement income, but the pension system has been in decline for decades. At the same time, stagnant wages and rising costs are making it harder and harder to build up a nest egg through a retirement savings plan (e.g., a 401(k) or IRA) or otherwise. Fortunately, Social Security is still strong, but it was always intended to be supplemented by other sources of retirement income.”
4. Long-term unemployment
The U.S. Bureau of Labor Statistics defines long-term unemployment as labor force participants who have been out of work for 27 weeks or more. As of September, 4.1 million people, or 36.9 percent of the 11.3 million total without work in the U.S., fell under the umbrella of long-term unemployed, a near-record rate that is down only slightly from post-crisis highs of more than 40 percent in 2012.
This high rate of long-term unemployment is agitated by the fact that at 37.6 weeks, the average duration of unemployment in September was greater than the threshold for long-term unemployment. The median duration was 16.6 weeks. Both the mean and median duration of unemployment have increased since August but are below year-ago levels (40.2 weeks and 18.9 weeks, respectively).
These figures, as ugly as they are, may also cloud the full picture. Headline unemployment data do not include would-be workers who have given up searching for a job entirely and have dropped out of the labor force. Most of these people are bound to qualify as long-term unemployed under the Bureau of Labor Statistics definition. The labor force participation rate was 63.2 percent in September, down substantially from its pre-crisis level of about 66 percent.
The BLS reports that as of September, the number of long-term unemployed has declined by 725,000 on the year. Still, with at least 4.1 million people (and probably more) out of work for 27 weeks or more, the U.S. labor market can hardly be considered healthy.
Here’s how the major U.S. equity indexes traded on Thursday: