Economic Worries - ASK THE EXPERT - CAP's Christian Weller

Click to Play

Since the beginning of the current business cycle in early 2001, family incomes in the United States have not risen, yet the costs for important consumer items such as housing, health care, transportation, energy, and food all climbed at often breathtaking speeds. To afford these necessities, families piled on record amounts of debt relative to their incomeat a rate more than four times faster than that in the 1990s. Families, though, were not the only ones going deeper into debt. The federal government ran up large budget deficits due to massive tax cuts for the rich and a spending spree for an ill-designed Medicare prescription drug benefit and two wars in Afghanistan and Iraq. Since March 2001, foreign investors financed close to 80 percent of the federal budget deficit. More importantly, these large capital inflows financed a massive U.S. trade deficit that still remains at an unsustainable 5 percent of gross domestic product. To finance this deficit, the U.S. economy borrowed heavily overseas, selling everything to foreign investors, including home mortgages. The result: a vicious cycle of debt, with foreign investors fueling a housing market boom that required households to borrow money that foreigners were willing to borrow. This process is now going into reverse. Stock market investors are selling off shares tied however tenuously to the U.S. housing market, thus fueling the financial markets downturn. This sell off is also increasing worries about a broader credit crunch that could lead to further deterioration in the U.S. housing market. The largest drawback of the debt boom was that it let U.S. policymakers get away with not addressing the country's underlying economic problems. The fundamental weaknesses of the U.S. economya weak labor market, large budget deficits, and massive trade deficits, and an unsustainable housing boomwere masked by record amounts of debt, allowing the federal government to continuously ignore these problems. Center for American Progress Senior Fellow Christian Weller explains the underlying issues and the way forward in ASK THE EXPERT, the new video feature from CAP. www.AMERICANPROGRESS.org