The Great Recession

The biggest economic challenge most of us will face in our lifetimes is having sufficient funds in retirement to last the rest of our lives. Many who intended to retire are now forced to continue working as their nest eggs have dwindled to the point where they can not continue on their planned course. Recommendations abound to continue working and not retire early. I retired as the economic downturn was just rearing its ugly head so I've had to face what many suggested people of my age should avoid. This has put me in the position of trying to figure out what went wrong primarily so I can plan for my family's future.

The economic downturn that began in 2007 and will certainly continue through 2010 and beyond brings to the surface a range of economic mistakes developed over decades in the United States. I see a number of individual, government, and business practices that contributed to this situation. In my opinion not one of these can solely be blamed for the downturn but in unison, and in hindsight, the actions of many led to a reset in the American economy, and it won't be over for a very long time.

There may be more than I list here but I think these are largely the cause of the strife we are now facing:

1) Social Security
2) Medicare and Medicaid
2) Unions
3) Lack of delayed gratification
4) Greed
5) Tax and Spend governments


1) Social Security
I am on Social Security (SS). I depend on it. So why do I list it as the first cause of this downturn? The intentions for Social Security were good; the final outcome is not so good. At the time SS was implemented the need was great and the plan was reasonable, with some exceptions. An unintended consequence of SS is it taught the American people not to save for retirement.

Nobody ever told the American people Social Security was their retirement plan. The idea was to keep the poorest from being destitute in their later years. In other words if you didn't, our couldn't, save up enough to retire then the government would help out. Unfortunately a near total lack of effort was put into teaching the people about saving for retirement. Quite the opposite the government in recent decades has been loud and clear that consumer spending drives the economy, so much so that during this downturn the federal government has even supplied cash to the people to spend. The general mentality was spend even if it meant going into debt to do so.

This short term thinking was bolstered by the federal government by neglecting to continuously teach people that their retirement was their responsibility and they should put away some percentage of their paycheck. That knowledge abounds in the financial community, but not in the government. Oh you can find it on government web sites if you seek it out. But you really have to look for it. Normally if I Google something I will find an answer in the first or second Google'd response. Not so when I Google "Federal Government Advice on Personal Spending and Saving." What you will see is lots of sites by private industry.

The end result is many people haven't saved enough for retirement. The other half of this equation is many people have developed an unhealthy spending habit which has contributed to this consumer driven economy. The U.S. savings rate has recently toggled from negative to about 4% which is an improvement. The more people save the more money is made available for development. Investing in the stock market is putting money into the hands of businesses to expand, hire people, and make products to sell overseas. Lack of saving and investing squelches growth.

SS also drains paychecks making it even harder to save. Throughout much of my working life the hit my paycheck took from SS usually exceeded my Federal or State taxes. In other words I was paying more "taxes" to Social Security than I was in what the government calls income tax. This inhibited my ability to save for my future. Don't even think that my SS money was paying for my own SS income in retirement. Not even close. SS is a Ponzi scheme of the worst kind - government forced.

This year Social Security outlay exceeds payroll deductions, and the baby boomers haven't reached full retirement age yet. This thing is rapidly falling apart. Oh everybody loves a handout, but nobody is paying attention when the government is putting money in your front pocket they are taking a larger amount out of your back pocket. Overall Social Security is a very large experiential that has failed.

2) Medicare and Medicaid are such great topics at this time when President Obama recently signed the new sweeping Health Care law. If you examine Medicare and Medicaid you can already see the disaster that is coming. These programs are even worse than Social Security for how much money they are draining from our economy. The government has done nothing to reduce costs. The only approach they have taken is to simply pay less for services. This is slowly killing the medical services community and it will accelerate as the baby boomers (me) reach age 65 and start availing ourselves of these programs. Good luck paying for this all you working age folks. It is already bankrupt and either you are going to be personally taxed into oblivion or I am going to lack the heath care promised to me. All the things I said about Social Security pale in comparison to these programs. Add to this the new health care law and you have a recipe for economic collapse which is sure to come.

Once again everybody likes a hand out, nobody likes to pay the taxes to support the bureaucracy to provide the hand-outs, and nobody can afford these failing programs.

2) Unions
Like Social Security there was once a time when unions were sorely needed in this country. There is a time and a place for unions so the companies don't take advantage of the individual worker. Workers, through unions, can band together and make demands so there is a proper balance between the needs of the company and the needs of the workers. All is well and good at this point. The problem is unions have to justify themselves and they don't know when enough is enough. Unions are widely responsible for increasing wages and benefits beyond reasonable and out of balance. In my opinion unions are single handidly responsible for the demise of the American auto industry.

As wages were pushed up by union demands (oh sure anyone working for the union was happy about that) the industry had to make choices. In a world economy, with foreign companies making competitive products with lower salaries, something had to give as salaries and benefits increased. The only thing that remained a variable was quality. The industry had to cut corners on design, testing, materials, and in some cases features to keep the cars competitive. Quality and price for Toyota and Honda cars simply could not be maintained by the American industry. Unions killed the industry. You can apply the same story across the board for any major industry that has a union today. They simply don't know how to balance their demands against the needs of the industry they serve. Greed has no limits. Over time U.S. manufacturers are priced out of the markets.

It is easy to find overseas companies that could use unions today. Examples abound of companies that exploit their workers. I sincerely hope those people do form unions and strive for a proper balance. I also hope they have the wisdom to put the unions to sleep when they have achieved the balance and not drive their own economies into the ground.

4) Lack of delayed gratification
A 50" flat screen. I'd like to have that to watch football. No problem, "just charge it." Sound familiar. There are a couple of items that are very hard to buy without a loan today. Buying a home is pretty much out of the reach of most of us to pay cash. Beyond that much of what we purchase could be delayed until we have saved enough to buy them cash and save huge amounts in interest. There are exceptions but many don't consider things like buying a used car to get by while they save for the car they want. They just charge it. During times of high inflation this often seems to make sense. The thinking is if I don't buy this $1,000 item now it will be $2,000 by the time I save for it. While that may or may not be true the question remains do you really need this thing in the first place. If it is a truck for your business that is a different story. We are talking about wants vs needs here.

The amazing thing is that single switch of mind from spending to saving is one of the biggest wealth builders that could save the economy, and your personal financial situation. Often what happens when people begin to save for something rather than charge it is they lose that immediate sense of "I have to have this thing," and many times they don't end up buying it. In other words a lot of buying is impulse buying, sometimes as a way to soothe life.

I'm not immune from this problem. I've done my fair share of impulse buying on credit cards. Fortunately I figured out what I was doing wrong many years ago and flipped my spend and save habits.

Consider this. If you purchase a $3,000 flat screen on a credit card with a 12% interest rate and pay it off in 3 years you'll pay a total of $3,587. If you save the same amount of money per month ($99.64) at the end of 3 years even with only a 4% annual interest rate you'll have $3805.54 in your bank account. That means instead of having that flat screen today and paying $587 more than the price tag shows, you'll have gained $805.54 but you won't have the flat screen. Could you live for three more years without that "want?" It might change your financial life. The flat screen is an interesting example because if you've paid any attention at all the prices have been dropping like a rock. So somewhere during that 3 year period you could buy the flat screen, and have cash left over to purchase something else. Along the way you'd have no debt. Should you lose your job you might be very happy you have money instead of a flat screen.

This problem is spread all across America and as said earlier consumer spending drives this economy. It could still drive the economy if only most people would put a delay in their purchase plans and save to buy rather than charging. The American economy would benefit in a number of ways.

5) Greed
No question that greed has become a news item lately. As banks have failed, credit default swaps have become front page news, and wall street bonuses are exposed it is clear that a lot of the money that changes hands in America is not being poured into manufacturing or other beneficial economic uses. Oh eventually those that pull in these huge sums of money will spend it and that will in itself stimulate the economy, but too much of this isn't healthy for the economy. Fortunately this has surfaced and there will be some changes. My only hope is regulation, that seems to be needed at this time, won't go overboard and stifle creativity and productivity.

6) Tax and spend governments.

Take all the comments I listed above under Lack of Delayed Gratification and apply them to the government and you end up right were we are today. There seems to be no sense of putting money away for a rainy day in this country when you examine the books of both the Federal budget nor the local governments.

We little guys have no choice but to work hard for our money so we can pay off those credit cards. The State and Federal governments can overspend with impunity. All they have to do is raise our taxes to pay for their extravagant spending habits.

If I ran my house the way the government runs the country I'd be millions of dollars in debt. The good news is I'd be lacking or nothing. All I'd have to do is go to my neighbors and demand they give me money to pay for all my purchases - or I'd throw them in jail. What a farce.

Talk of a balanced budget scares me. For me to balance my budget means less spending. For the government to balance the budget either means spending less or raising taxes. What do you think they are going to do? The federal and state governments are out of control when it comes to spending. There is no other way to look at it. Its like giving an open ended credit card to a teen-ager. What other outcome would we expect.