Headed for a double dip?
looks at the weak state of the economy, despite the much-touted recovery.
IN THE last few weeks, President Barack Obama has been touting the benefits of stimulus spending and a rebound in the auto industry. Treasury Secretary Tim Geithner even wrote an opinion piece in the New York Times headlined, "Welcome to the Recovery."
Then came a terrible employment report--and a statement by the Federal Reserve that the recovery is "more modest" than expected, and the central bank would keep interest rates at near zero percent.
WHAT'S REALLY happening?
The recovery is real--and compared to the abyss of late 2008 and early 2009, it's a good deal better than many people expected. But the U.S. is still on track for its weakest economic expansion since the Second World War. The U.S. grew at annual rate of 2.4 percent in the second quarter of 2010, down from 3.7 percent in the first quarter. And given the recent increase in the trade deficit, those growth figures will likely be revised downward.
The result of this sluggish growth is that the recovery hasn't even begun to replace the 8 million jobs lost during the recession. For example, manufacturing jobs are up 1.6 percent since December 2009, but that hardly makes up for the 16 percent decrease in factory employment in the first two years of the recession. In July, the private sector created just 71,000 jobs. A vigorous recovery would have seen jobs growth at several times that amount.
Job growth isn't even sufficient to keep pace with normal population growth. As a result, long-term unemployment is off the charts, with more than 45 percent of the jobless having been out of work for six months or more. The previous high for long-term unemployed was 26 percent in 1983.
Moreover, the official unemployment rate of 9.5 percent dramatically understates the problem. Besides the 14.6 million people formally counted as unemployed, another 5.9 million want a job but have stopped looking. Then there are the 8.5 million people working part time because they couldn't find full-time work. As New York Times columnist Bob Herbert noted, there are "nearly 30 million Americans who cannot find the work they want and desperately need."
The picture could turn worse in the event of a "double-dip" recession--a shrinking of the economy in the near term, before the recovery even begins to generate large numbers of jobs.
But even if the recovery continues and actually accelerates somewhat, high rates of unemployment are likely to persist for many years--with devastating social consequences. Even the Obama administration predicts that the jobless rate will remain as high as 8.2 percent by 2012--which means the administration is accepting a level of long-term joblessness that would have been considered unthinkable just a few years ago.
In recent weeks, the mainstream media has finally been compelled to acknowledge that mass unemployment has become "the new normal." The recession is over, but workers will nevertheless be told to accept a deep and permanent cut in their standard of living to help U.S. business restore profitability.
CAN THE recovery keep growing without more job growth?
THE EMPLOYERS have partly restored profitability by squeezing more out of workers. According to the Bureau of Labor Statistics, "From the first quarter of 2009 to the first quarter of 2010, output increased 3.0 percent while hours fell 3.0 percent, yielding an increase in productivity of 6.1 percent." In recent months, productivity did decline, but by much less than it increased at the start of the year.
The overall productivity gain for the year is at one of the highest levels since 1962, the heyday of the postwar boom, when productivity spiked 7 percent as a result of big spending on technological advances. But these recent productivity gains took place in a recession, in which there was almost no investment.
In other words, people are simply working harder for less. From the first quarter of 2009 to the first quarter of 2010, wages increased at an annual rate of 0.4 percent--which means the gains go into the bosses' pockets. And with fewer workers being more productive, employers are even more reluctant to create jobs.
WHY WON'T the government do more to boost the economy?
CONGRESS DID finally extend unemployment benefits for those who have reached the maximum 99 weeks allowed, but only after Republicans and conservative Democrats forced a cutoff for two months. And the new extension cuts $25 per week from benefits and removes a subsidy for COBRA health care insurance for the unemployed.
Congress also passed a $26 billion bill to prevent layoffs of teachers across the U.S. But incredibly, this is funded in part by a $16 billion cut in food stamps.
In any case, the $26 billion is far short of what's needed to stop job cuts in the public sector. The public-sector workforce was cut by 48,000 in July alone, excluding the temporary census jobs that came to an end. Those still on the job often face pay cuts as well. So the $26 billion education bill, while significant, appears to be the last gasp of last year's stimulus efforts rather than a harbinger of new programs.
To make a big and lasting dent in unemployment, Congress would need to spend hundreds of billions of dollars in additional stimulus money beyond the $787 billion approved in early 2009. But now that the banks have been pulled back from the brink thanks to the government's $700 billion Troubled Asset Relief Program (TARP), U.S. business wants to reign in government spending.
Congressional Republicans, of course, are mouthpieces for big capital. But Obama himself obliged the bankers and employers by announcing a freeze on discretionary federal spending now and, over the longer term, cutting entitlement programs like Medicare, Medicaid and Social Security. Once the November elections are out of the way, a presidential commission on the budget will announce its findings, likely signaling a bipartisan effort to cut those benefits.
The U.S. turn to austerity, ironically, has so far been more moderate than in Europe, where governments in Greece, Britain and elsewhere are taking aim at major social programs. But given that the U.S. has such a miserly welfare state to begin with, the social consequences of the cuts here will be devastating for working people already worn down by recession.
THE FEDERAL Reserve said the " recovery slowing" and announced that it would buy U.S. Treasury bills to help keep interest rates low. Won't that help spur the economy?
WHAT THE Fed is doing is known in central bankers' jargon as "quantitative easing"--that is, printing money. However, the Fed has kept interest rates around zero since December 2008, and the economy still hasn't responded with strong growth. And the latest injection of cash--around $200 billion--is small potatoes compared to what's come so far.
The Fed's balance sheet has expanded from around $800 billion in 2008 to $2.3 trillion today. That means the Fed's purchase of mortgages and other dubious assets have added around $1.4 trillion in cash to the economy.
The Fed has already pumped money into the system on a scale that dwarfs both the TARP program and the stimulus package. Banks have been able to borrow from the Fed at near-zero interest rates and then buy U.S. Treasury bills paying around 4 percent. In other words, the banks are borrowing from the government for free--and then lending the money back to another arm of the government and collecting interest. Then there's the alphabet soup of special loan programs that prop up the banks and other financial institutions in other ways.
When all this is factored in, the various arms of the U.S. government loaned, invested or guaranteed around $13 trillion in the U.S. economy in the wake of the economic crash of 2008, according to Bloomberg. Neil Barofsky, the inspector general for TARP, last year estimated that the total cost of bailouts could exceed a mind-bending $23.7 trillion if the economy tanks again.
While losses on anything like that scale are highly unlikely, the current numbers are staggering enough. According to Barofsky's recent report to Congress, government funds injected into the economy so far jumped from $3 trillion to $3.7 trillion in spring 2009 over the same period from a year earlier, adding "the equivalent of a fully deployed TARP program, largely without additional Congressional action--even as the banking crisis has, by most measures, abated from its most acute phases."
And for all the Obama administration's hype about early repayment of much of the TARP money, other financial bailouts quietly continue. The bailout of the mortgage companies Fannie Mae and Freddie Mac will--in a best-case scenario--cost $160 billion, but losses could total $1 trillion. Because the companies own or guarantee more than half the country's $10.7 trillion in mortgages, losses will soar if housing prices start falling sharply again.
By throwing trillions into the economy, the U.S. was able to avoid a Great Depression-type collapse. Still, growth remains stagnant. The U.S. finds itself in a position similar to that of the Japanese economy in the 1990s--in what economists call a "liquidity trap," when zero percent interest rates weren't enough to revive the economy.
Today, the flood of money from the Fed and other central banks can't overcome the basic problem of the world economy: the crisis of overproduction on a world scale. The collapse of consumer demand following the credit crunch of 2008 has made this problem all the more acute. As a result, U.S. corporations are reluctant to use their existing capacity to its fullest, let alone invest in new production that could create jobs.
WOULD BOLDER government programs overcome those problems?
THAT'S THE contention of liberals like economist and New York Times columnist Paul Krugman. He argues--correctly--that Washington remains wedded to the ideology of fiscal conservatism and austerity at a moment when the economy needs a massive injection of spending.
Against those who claim that the $1.5 trillion U.S. budget deficit requires austerity, Krugman argues that the deficits could be kept under control over the long term without risking an upward spike in interest rates. In keeping with the framework laid out by the economist John Maynard Keynes in the 1930s, Krugman calls for a new round of stimulus spending.
What Krugman fails to acknowledge is that bankers the world over are increasingly skeptical about making loans to governments that may not be able to pay them back. This is most obvious in the case of Greece, Spain and other smaller European economies.
The U.S., despite its huge economy, is not immune to these pressures. Because the U.S. must continuously go to the banks--including the Chinese central bank--to refinance its budget deficit, even a seemingly modest increase in interest rates can cause a huge increase in the dollar amount of interest that the U.S. government must pay out. That's why the banks are putting so much pressure on Washington to carry out austerity measures.
There are ways to stimulate the economy and bring down the deficit: slash the $800 billion a year military budget by ending the wars in Afghanistan and Iraq, restore tax rates on the wealthy to their 1950s levels, and nationalize the banks to make them tools of economic growth and jobs creation. Such measures could provide the stimulus needed to revive the economy. But these steps are much too radical for liberals like Krugman to propose.
WILL THE world economy provide a boost for the U.S.?
THE STRONG growth in China and other newly industrialized countries have been at the center of the economic recovery worldwide.
Following a stimulus package that was, proportionately, twice the size of the one in the U.S., China posted growth rates of 10 percent or more. As a result, the Chinese economy sucked in imports at a rapid pace, from machine tools from Germany and Japan to raw materials from Latin America, Africa and other parts of Asia.
The problem for China--and the world--is that the stimulus spending aggravated the problem of industrial overcapacity in steel, aluminum and more. As a story in the official China Daily noted in June, this overcapacity "does not just involve questionable infrastructure projects such as roads to nowhere, airports to where no one wants to fly or vacant commercial office blocks--now seen in many of China's cities--but also new factories and industrial plant producing goods that nobody wants to buy."
What's more, China has put the brakes on its economy to curb inflation and a property bubble. As a result, China's demand for imports has been cut sharply. That development, along with weakening demand in Europe, has hit U.S. manufacturing exports. The latest trade figures available, for June, show that the U.S. trade deficit jumped 19 percent as the U.S. imported much more then it shipped overseas. So much for the Obama administration's plan for the U.S. to export its way into growth.
SO WHAT happens next?
WHETHER OR not there's a double-dip recession, it's clear that the limitations of the stimulus policies in the U.S. and worldwide have been reached.
By stepping in to spend whatever it took to keep the financial system afloat, governments in the U.S. and Europe essentially took private debts onto the public books. That effort kept the world economy from imploding, but it also exacerbated the problem of overcapacity. Sooner or later, the value of that capital will be written down in a competitive struggle that will involve tensions over trade, currency and more.
At the same time, the same banks that were bailed out are now acting as the enforcer of big capital, demanding that governments roll back decades of gains in social programs.
So whether we're looking at another recession or slow growth that's insufficient to create jobs, capital will increasingly demand further concessions from workers, whether in the form of wage reductions or cuts in social programs. This will reshape politics for a generation.