Downs: Americans Must be More Realistic for Economic Recovery

Tony Downs’ reputation precedes him. Having authored An Economic Theory of Democracy at age 27, 23 books and over 500 articles, and being an active economist at the Brookings Institution since 1977, he has seen the rise and fall of the US economy many times over. At the 2011 Minnesota Real Estate Hall of Fame induction ceremony, the University of St. Thomas presented Downs with a Certificate of Professional Distinction. Downs presented the audience with an assortment of colorful jokes and a foreboding economic forecast.

Downs projects another 3-5 years of depressed economic conditions, due to the myriad of issues that he believes stem from Americans’ unwillingness to accept the reality of the economic situation, to make sacrifices, and to encourage realistic solutions from politicians.

“Short run focus is a big weakness in American democracy,” states Downs, who undoubtedly sympathizes with the current situation and believes that “what we really need is a miracle of some kind.”

Downs elaborates, highlighting the factors that have added up to produce the current Great Recession. “Long run federal spending must be greatly reduced,” advocates Downs, but he recognizes that now is not the time to reduce the federal workforce and put more Americans out of a job. Interestingly, Downs notes that the Clinton administration observed the largest increase in American employment of any president, even though taxes were raised on the wealthy twice during those eight years. The economic disparity between classes has become greater with the lowest 20% of workers earning just 3.4% of total income and the highest 20% bringing in one half of the country’s total income. Downs believes it is in part the wealthier Americans’ responsibility to make the country more equitable; otherwise, uprisings will continue to spread, similar to what’s been happening in Greece.

The discrepancy in incomes has resulted in the middle class borrowing too much to consume imported foreign goods, with consumption becoming too large a portion of the overall GDP (consumption had risen to 70% by 2009, a historically high level); this level of consumption was not sustainable and must remain at previous levels for the health of our overall economy.

America should be investing in “production, education, and new energy sources” to protect its future.

To avoid a future financial crisis, Downs recommends breaking up the largest banks to spread the wealth amongst the nation’s 8,195 financial institutions so that none are ever too big to require bailing out. With 80% of US capital held by only 10 banks, history is bound to repeat itself if we do not act to break up financial monopolies.

On a positive note, Downs feels that the Minnesota economy, including the real estate market, is poised for rebound in the near future. With only 6.7% unemployment, and non-foreclosure home prices down just 9.5%, the North Star state is ahead of its peers. The University of St. Thomas real estate index, which separates distressed home sales from traditional sales in its reporting, is much more accurate, according to Downs, than the Case-Shiller index. Since 30% of home sales nationwide are foreclosures, the data has been driving down overall home sale prices; therefore, the Case-Shiller index paints a darker picture than what is actually occurring in the market. Downs reports that multifamily properties are excelling nationwide, after single family housing starts dropped from a peak of 2 million annually in 2004-2005 to a meager 604,000 in 2010.

As for entitlements, the current social security system is sustainable, Downs believes, if spending on Medicare and Medicaid can be reduced significantly. “Americans want benefits but are not willing to pay for them,” acknowledges Downs. This attitude results in a political rhetoric on both sides of “vague generalizations.” In order to make progress, we the people must accept the current situation and search for realistic solutions that will involve shouldering the actual costs of our lifestyle; otherwise, we will continue to find ourselves “still stuck in traffic,” both physically and economically.

Caryn Brooks is a student in the Master of Science in Real Estate program