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Editor's Letter

Once Again, the American People Get It Right

Why can't our government do the same?

Almost always, the American people get it right. They're proving it once again.

The costs of the nation's economic collapse are now being tallied, and you won't be surprised that it's even worse than we thought. On the other hand, the first solid evidence of the people's response is better than anyone could have expected.

See also: Everything you need to know about the national debt.

First, the numbers. Since 2007, as the housing bubble crested, the net value of our homes (market value minus outstanding mortgages) has fallen by more than half. Recent Federal Reserve statistics document the decline in net home equity — from $12.9 trillion to $6.2 trillion in 2011. That's a stunning decline. The $6.7 trillion that has been lost exceeds the size of the entire Chinese economy or the size of the German and French economies combined. That loss doesn't take into account the human consequences of almost 4 million homes that have been foreclosed and the 27 percent of homes that are "underwater," or worth less than their outstanding mortgages.

For families, that vanishing wealth would have been retirement savings, a college tuition account or a safety net against job loss — or all three. Today, it's all but gone.

So how have Americans responded? They're saving as though they'd rediscovered a long-forgotten taste. In the current recovery, sluggish as it is, people have divided into two groups — those who have lost a little of their wealth and those who have lost a lot. For context, Fed economists measured the devastating impact of the economic crash and found that the loss of wealth experienced by four of every 10 U.S. families was equal to or more than six months of their annual income.

But the same Fed statistics highlight the public response.

People have stopped spending. Now they're saving. Between 2004 and 2008, investments in CDs averaged $250 billion; that figure more than doubled to $600 billion last year. The national savings rate, which was 1 percent six years ago, was 5 percent last year. Instead of spending at fancy restaurants or buying the latest digital gadgets, Americans are paying down old debts and opening savings accounts.

What's the lesson?

While Congress and the rest of Washington have been paralyzed by conflicting pressures, history and party ideologues, the people have changed gears. Official Washington should take a page from the people. Look at the situation they're in. It may not be where they were or want to be. But it is where they are. So they adjusted. The people recognized that they had to toss the credit card and open a savings account. Our leaders should do the same. It's a three-step recipe: Common sense. Compromise. Simple math.

You may also like: Don't spend what you don't have. >>

Jim Toedtman is editor and vice president of AARP Bulletin.

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