Grim and getting uglier
looks at the U.S. economy one year after the financial crisis erupted.
THE GOVERNMENT'S economic stimulus package has failed to revive an economy suffocating under the housing-induced credit squeeze--and for working people, things are rapidly getting worse as prices rise, work hours decline and jobs get harder to find.
Statistics released in early August showed that the Bush administration's $168 billion in tax rebates helped the economy achieve a 1.9 percent growth rate in the second quarter of 2008. But that wasn't enough to prevent an increase in the unemployment rate from 5.5 percent in June to 5.7 percent in July, as the number of jobs in the U.S. economy declined by 51,000--the seventh month in a row in which employers have cut payrolls.
In the year since the world financial crisis began, some 1.6 million people have been added to the number of those officially counted in the U.S. government's unemployment figures. However, a more accurate gauge of the job market is the statistic for underemployment--10.3 percent--which measures those who are involuntarily working short hours or part-time. It's the worst such figure since 2003.
What's more, higher food and fuel prices negated much of the government stimulus package, as working people spent their tax rebates on essential products rather than big-ticket items that policymakers hoped would give the economy a boost. Workers had little choice in the matter: prices of nondurable goods, which include food, energy and items like clothing, registered the biggest one-year increase since 1981.
"While spending rose 0.6 percent last month, the 0.8 percent rise in consumer prices was even quicker," the Wall Street Journal noted. "Adjusting for inflation, personal consumption actually dropped 0.2 percent in June from the month before." As economist Jared Bernstein of the Economic Policy Institute put it, "This is a kind of 'Honey, inflation ate my rebate check' story."
DON’T EXPECT the stimulus-based uptick in GDP to last. "Call it the 'W' economy--but that doesn't stand for 'winning,'" wrote Chicago Tribune columnist Carol Marks Jarvis. "Imagine writing the letter 'W.' Your first stroke down is the route the economy was on until tax rebates stimulated consumer spending and provided an upswing. The next move, however, is expected to be an unpleasant slope downward."
In fact, revised economic statistics show that the economy actually contracted 0.2 percent in the final three months of 2007 before recovering to a pathetic 0.9 percent in the first quarter of 2008.
A key factor in the choking off of U.S. economic growth is the credit crunch that followed the bursting of the housing bubble a year ago. Having already written off $400 billion in bad housing-related loans, loss-riddled banks are scrambling to raise capital and are therefore reluctant to lower interest rates for loans to either businesses or consumers. For example, mortgage rates are about as high as they were a year ago, even though the Federal Reserve Bank has cut rates from 5 percent last September to 2 percent today.
In the meantime, the resetting of adjustable rate mortgages to higher interest rates will soon add to the rising tide of foreclosures. According to Moody's Economy.com, some 3 million people will default on their mortgages this year. "The big problem is that 9 million U.S. homeowners owe more than their houses are worth," wrote Justin Fox of Time. "They're upside down, in the parlance, meaning that if foreclosures are to be slowed, the mortgages themselves must shrink."
The housing bill recently passed by Congress does create a program through the Federal Housing Administration in which homeowners can "shrink" their mortgages--but only if lenders agree to do so. Moreover, according the Center for Responsible Lending, only about 500,000 families will be able to take advantage of the plan, even though economists expect up to 6.5 million foreclosures in coming years.
For Wall Street, it's a different story. The Housing and Economic Recovery Act of 2008 should have been named the "Great Giveaway to Wall Street Act of 2008," as it enshrines into law a blank check from the U.S. Treasury to buy shares of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that own or guarantee half of all U.S. mortgages. And a bailout for Fannie and Freddie is a rescue for Wall Street, by placating investors and ensuring that the investment banks' practice of reselling mortgages won't dry up completely.
The Fannie-Freddie bailout comes on top of the Federal Reserve Bank's emergency lending programs to both commercial and investment banks. In return, the Fed has accepted as collateral many billions of dollars in toxic mortgage-backed securities that any other lender would shun.
"Washington can act with breathtaking urgency when the right people want something done," wrote William Grieder in the Nation. "In this case, the people are Wall Street's titans, who are scared witless at the prospect of their historic implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven't seen 'bipartisan cooperation' like this since Washington decided to invade Iraq."
EVEN THE relative bright spots in the U.S. economy--a surge in manufacturing exports and a drop in oil prices--aren't likely to last. Oil prices are falling because demand is expected to drop along with a fall in growth rates elsewhere in the world.
"Japan, Britain and the United States produced yet more evidence [July 31] that the fortunes of the world's wealthiest economies are fading fast, and in parts furiously," Reuters reported, noting a decline in Japanese manufacturing for the fifth month in a row and a spike in inflation in the 15 countries that use the euro.
China, seen by some economists as a possible alternative engine for the world economy as the U.S. falters, has seen its own growth decline as export markets dry up. In the "factory of the world," the manufacturing heartland of Southern China, they are also feeling the effects of weakening global demand, with plant closures and layoffs," the BBC reported.
India, often touted as another rising economic power, is grappling with high rates of inflation even as previously rapid growth begins to slow. Furthermore, the slowdown in Asia will soon hit Latin America, which has benefited from Chinese industry's enormous demand for raw materials.
As the situation deteriorates, the only response so far from the U.S. government is to do whatever it takes to shore up finance capital--while standing pat as workers' consumption is cut and their standard of living declines.