Posted by | July 30, 2011 11:53 | Filed under: Top Stories

By Yashwanth Manjunath

The Commerce Department just announced yesterday that GDP growth between April and June of this year was only 1.3 percent, when economists had been expecting 1.8 percent. In addition to less then stellar GDP growth, consumer confidence has fallen to a two-year low. Economic growth is clearly stagnant to the point of virtual nonexistence as we are failing to produce enough jobs to reduce the unemployment rate. The question is why this is happening, and what can be done to address the economic crisis.

The answer as to why we are still in this mess is not complicated, but it is also an extremely difficult problem to solve given the current political climate. The financial crisis brought on by the bursting of the massive speculative housing bubble destroyed about $7 trillion dollars of middle class wealth and led to a massive credit crunch, leaving households with significantly less discretionary income. So, as the federal stimulus money dried up, there was nothing to support the anemic levels of consumer demand. Consumer spending was not ready to replace the lack of government spending because wages have remained stagnant over the past couple of years, home values continue to drop, and gas prices continue to rise. Consumer spending accounts for 70% of economic activity, so if consumers are not spending, and government is not filling the gap, it should come as no surprise that the economic recovery has stalled.

In the short-term we need more targeted fiscal stimulus specifically designed to increase consumer spending, whether through tax cuts for the middle class or aid to state governments. In the long-term we need fairer and more equitable wage growth, after 30 years of Reaganomics. The reason the economy still grew at a solid rate during the past three decades is because even though incomes remained stagnant for average Americans, they were able to spend as if their incomes were growing by simply increasing their household debt through easy credit. That “growth” was always unsustainable and unhealthy. Without a long-term plan to revitalize the middle class, (as former Labor Secretary Robert Reich points out in the this handy 2-minute video), we will never truly recover from this disaster because the foundation of our economy has become rotten and decayed.

Unfortunately, with Washington slavishly devoted to cutting short-term spending and “reforming” (cutting) entitlement spending, to pay for a fresh round of tax cuts for the rich and corporations under the guise of this fake debt limit crisis, politicians will only exacerbate our short-term andlong-term economic problems.

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