Archive for November 3, 2009

Conversation with Seat 11B or what’s going on with the US economy

November 3, 2009 6 comments

I usually have a good book to read on a long flight home but this time I found myself without any reading materials. My trusted ThinkPad X31 is a perfect laptop for working on the plane. Its ¬†12″ screen is small enough to survive an attempt by the passenger in front of me to abruptly recline the seat. But this time, without a spare battery and no book to read it was going to be a long flight.

The passenger next to me in Seat 11B turned out to be an economist. After short introductions, he asked me, “What do you think is going with the US economy?”. Although I mentioned that I was not an economist, he was still interested in my perspective.

I paused and quickly realized that even a long flight was not enough to give this conversation its due.  Starting at the very beginning seemed to be a good approach.

– It is widely reported that US consumer spending is about 70% of GDP. However, this number includes about half of the $2.5 trillion healthcare spending, or how much US government spends on Medicare. Still, consumer spending is a huge economic driver.

– Bubble #1: The financial crisis began to plant its seeds many years ago. The US economy was being artificially stimulated to encourage more home ownership than the market could create on its own. When the housing bubble burst, billions of dollars were spent on – to put it simply – on unproductive assets. In 2003, former CFO of Washington Mutual predicted this crisis but very few listened.

– Bubble #2: Four jobs paying $25K / per year are not equal to one job that paid $100K / per year but was eliminated in the US and recreated in an another country. Personal incomes are still dropping. Globalization can and does lead to transfer of wealth across borders and this process always produces those who benefit and those who don’t. The middle class in the US is not a beneficiary of this process. It is shrinking.

– Bubble #3: Healthcare. Anywhere between 25% and 50% (there is an ongoing debate about this statistic) of all personal bankruptcies in the US are attributed to personal health emergencies. Approximately 40 million Americans do not have health insurance (again – this number is also subject to an ingoing debate). But one fact is true. There is an urgent need to separate employment from ability to obtain basic and emergency healthcare services. Moreover, there is also a need to guarantee basic healthcare services. Imagine a recently divorced mother who chose not to work while she was raising the kids trying to get healthcare on an individual market …

Seat 11B asked me why I started my conversation by mentioning the US consumer.

The US consumer is not spending because of unprecedented, structural changes in the US economy.

Yet, I believe the US economy will recover a lot faster when all of us exercise our right to vote.

The conversation with Seat 11B turned out to be very interesting.

Categories: Side conversations