What politicians say can hurt the economy
The election may be over, but the politicos still have the potential to cause more economic harm than anything the President does. Make no doubt about it, consumers are the cornerstone of this country's prosperity. Elected officials should be mindful that browbeating and whining does affect consumer behavior.
Both political parties already have their sights set on increasing their respective power in 2002. If consumer s are convinced that elected officials will make decisions based on their own political goals rather than what's good for the country, then consumer confidence is likely to take a substantial hit. And as consumer sentiment shows growing concern over the future, buying patterns will slow down.
However, it's naive to think that sentiment alone will cause consumer withdrawal. More likely, a confluence of issues will lead to a decrease in spending. In fact, there are four major issues in place right now that in and of themselves would probably not have this effect. But coupled with a national malaise engendered by elected officials' backbiting and finger-pointing, these four circumstances may contribute to a decline in economic activity.
The first issue is fuel. While the cost of fuel will certainly divert consumer dollars from other goods, fuel availability will be the real problem in the coming months. A shortage of fuel could mean plant shutdowns in northern parts of the country, leading to decreases in output, employee income and the value of a company itself.
The second issue involves equity markets, which have reduced the number of dot-com millionaires recently and will continue to treat unprofitable firms harshly in the months ahead. This will lead to a reduction in the “wealth effect” that has provided so much support for recent exuberance on the part of consumers.
A third issue is the likelihood that there will be further layoffs and cutbacks in investment as the economy loses steam. It's fairly well documented that people consider layoffs to signal a recession if it happens to their neighbors — but a depression if it happens to them.
With consumer debt at record high levels, consumers will have to scramble to stay afloat if there's a significant change in the economy. Demand for goods and services will no doubt drop off as consumers cut back on their spending.
Finally, financial institutions will be forced to change their lending patterns as some of the companies in their portfolios begin decreasing in value. When banks restrict access to capital — either through more stringent loan requirements or higher interest rates — consumers will be forced to rely more on disposable income than on bank loans. This could be another signal to consumers that times are changing. And when people start feeling that way, they spend less.
These factors have now moved from the “what is” to the “what if” column. But how much they will impact consumer spending is somewhat dependent on the confidence people have in elected officials.
Right now, the expectation is that these officials will continue their self-serving ways. Their 30-second sound bites, fed to the ever-hungry talking heads, will be geared to a constant harangue on the other side's lack of cooperation.
If ever there was a time for the economic well being of the country to be foremost in the minds of our elected officials, it's now. I regretfully submit that the current leadership of both the Republican and the Democratic parties is not up to the task.