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Consequences of a Prolonged Downturn?

November 18, 2008

Couldn't help but notice that the normally upbeat David Brooks was unusually somber in his column this morning ("The Formerly Middle Class," New York Times):

...This recession will probably have its own social profile. In particular, it's likely to produce a new social group: the formerly middle class. These are people who achieved middle-class status at the tail end of the long boom, and then lost it. To them, the gap between where they are and where they used to be will seem wide and daunting.

The phenomenon is noticeable in developing nations. Over the past decade, millions of people in these societies have climbed out of poverty. But the global recession is pushing them back down. Many seem furious with democracy and capitalism, which they believed led to their shattered dreams. It's possible that the downturn will produce a profusion of Hugo Chavezes. It's possible that the Obama administration will spend much of its time battling a global protest movement that doesn't yet exist....

In this country, we've already seen the populist backlash Brooks alludes to in the outraged public response to Hank Paulsen's original Wall Street bailout proposal and widespread anger over sky-is-the-limit executive compensation packages. Expect more outrage as the recession drags on and unemployment rises.

Brooks isn't the only pundit who has peered into a crystal ball and seen a gathering storm. Doug Kass, a generally bearish trader and market commentator for The Street.com, weighed in with a similar dystopian view earlier this month. Kass argues that the next three to five years will be a period of economic uncertainty, rising populism, and muted expectations, and makes the following predictions:

We will see a behavioral revolution and changes to the social fabric. The financial meltdown and attendant wealth destruction is not just a financial event; it will contribute to cultural and social change. New trends, most of them centered around downsizing, will emerge. Young adults will be living with their parents for longer periods of time, and consumers will be trading down from well-known (and more expensive) branded products to cheaper generics. Generally speaking, future expectations of all sorts will be reduced, and learning to live within one's means will become increasingly commonplace. 

Our educational system faces upheaval. Expensive private institutions will face a sharp falloff in admissions, while state institutions will flourish and admissions will grow more competitive. Losses in university endowments will result in larger classrooms and layoffs in personnel.

Municipalities will offer fewer services, and our military will be downsized. Sanitation, post office, fire, police departments, and our armed forces will contract in size, and less will be expected of them.

Populism will rise. It is said that when the individual feels, the community reels. An understandable distrust toward government and economic institutions (especially of a financial industry kind) will create a fundamental backlash that favors the consumer over the corporation. This will have a significant impact on corporate tax rates (higher) and middle-class tax rates (lower).

Isolationism will make a comeback. Our economic woes are simply too large and most pundits too optimistic about the U.S. rejoining the world community. The need to turn inward and deal with our domestic financial problems will trump other priorities over the next few years.

In addition to the above, Kass has interesting things to say about regulation, credit, home prices, and changes in investor psychology.

What do you think? Are we on the cusp of the kind of economic event that changes behavior and reshapes expectations? How bad could it get? And what will it mean for philanthropy and the nonprofit sector? We want to hear your thoughts....

-- Mitch Nauffts

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Posted by Matt  |   November 19, 2008 at 08:37 AM

Perhaps it's because this financial meltdown is still in its infancy, but I hope that the result will be something more along the lines of bringing people together -- both in terms of developing a greater sense of community among the often disparate populations (black, white, Hispanic, Asian...) and in the sense that if we don't help each other then all of us will suffer national consequences. I'll continue to be optimistic. I'm looking forward to a national move to the center after eight years of prevailing conservative thought. But if we move too far to the left the pendulum effect will keep us swinging back and forth and society will become as unstable as the financial markets.

Posted by DJ  |   November 19, 2008 at 01:26 PM

Isolationism will make a comeback?

Quite possible given the current makeup of Congress.

That would also be a bit of a mistake. You can discuss levels of involvement if you want, but the days where we could just turn inward are long gone. More to the point, if we're not out there exerting and engaging, someone else will fill that gap. I don't relish the idea of that someone being a Russia or a China.

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