Is the Economy Even Fixable?

While it is true that the world is governed by economic cycles, it is equally true that harsh times can last for many years before rolling back into positive territory. It took until 1954 for the stock market to recover from the 1928 crash that initiated the Great Depression. Japan’s economy fell off a cliff in 1991 and has yet to recover. And fortunately or unfortunately for the rest of us, we are so intertwined with each other as trading partners, competitors for global commodities and resources and as cost-efficient manufacturers/providers of goods and services that the whole planet seems to be sliding up and down slippery economic slopes together… with those with more “assets” withstanding the pain better than the rest.

Let’s take a look at what happened in this country. Because of overleveraging, values of companies, real estate and other “assets” were inflated to justify the debt that was applied against them. When folks began, rapidly and sequentially, to recognize that the emperor truly had no clothes, that valuing an asset in order to justify what was loaned against it did not actually mean that was the real value, the house of cards fell quickly. A vast number of Americans lost their net worth as housing prices plunged, and while such real estate prices may move a percentage or two in any direction once and a while, without the jobs and the buying power necessary to create demand in the housing market, the notion of restoring home values in anything like a near term is nothing more than an elusive fantasy.

Further, the older workers who lost jobs and have not been in the work world for a few years are too old to retrain for jobs that pay salaries and wages comparable to what they made, have lost the momentum of learning the “new” that would have occurred had they remained employed, and many have been pushed out because the companies they worked for fell off the obsolescence cliff (and those that survived had to retool with the “new next” productivity methods). Younger educated potential workers, denied access to the fields for which they were trained, have entered the labor market at lower levels… with starting pay upon which future raises will be based sufficiently lower so as to have a material negative impact on lifetime earnings… for those lucky ones who found work. No wonder so many have just given up looking. Exactly how do you put those people to work… under any plan other than the government’s just hiring them directly? What kinds of jobs can they do?

With dwindling consumer demand (it spiked for a moment) and confidence, demand for products and services is insufficient to create any required increase in new jobs. Without a showing of such demand, a tax break for the rich won’t push the wealthy to spend those savings to create new jobs to provide more goods and services that consumers are not willing to buy. Further, with austerity measures in the offing, as Congress wrestles with deficits, a contraction in government spending – that stopgap that sort of covered the reduction in consumer demand – is likely to create a parallel contraction in new jobs.

With China and India in economic crisis as well (as I have blogged in recent days), and Europe still not really solving the debt crisis in its weakest nations under a unitary currency, global demand is contracting, and global inventories of unsold goods is rising, all factors that will further contract job growth. Clearly, American goods and services will not find the solution to weak consumer demand in their traditional export markets, which are slammed even more than our own.

Nothing illustrates the linkage between the U.S. economy and the vagaries in other countries better – proving how the world is irretrievably linked – than checking out the U.S. stock markets immediately after the EU announces any “good news” or a “plan” to ease the debt crisis in its PIGGS European “at risk” economies. On September 6^th, for example, when the EU announced a plan to use bonds to buy out underperforming PIGGS debt, the Dow instantly soared by 244 points. If Europe weren’t linked to the U.S., the markets wouldn’t have budged.

Since there are so many diverse forces pulling at the global economy, and only so much any one nation can do to control anything beyond its borders, we all are at the mercy of each other’s actions, doing the best we can in a sea of hurt. Maybe no political candidate can make enough of a difference to reverse what only a very long absorption of our excess will be able to accomplish.

How do global economists look at this mess? From an annual gathering of experts, sensing that a “perfect storm” of global malaise could further unravel what little economic progress we have made, our bad economic behavior followed by over-reaction that ultimately may have made matters even worse, the word isn’t particularly optimistic: “Many attendees at the annual Ambrosetti Forum at Lake Como on [September 7^th] fretted about mounting U.S. debt and the Europe's inability to balance electorates' apparent insistence on national sovereignty with the need for regional coherence to salvage the teetering euro… But economist Nouriel Roubini predicted years of gloom almost regardless of what is decided.

“That analysis is rooted in the specific nature of this crisis, a downward spiral in which a financial meltdown largely caused by excess credit was defused by a blast of public spending; that 2009 stimulus, widely credited with avoiding a global depression, pushed some governments too far into the red for the markets’ liking – a ‘sovereign debt crisis’; and this is turn was attacked through severe austerity measures that suppressed spending to the point that countries cannot grow their way back to prosperity.

‘History suggests that whenever (there is) a crisis with too much private debt first and public debt second you have a painful process of deleveraging,’ said the famously apocalyptic New York University professor, a glowering fixture at such international talk-shops… ‘That would imply many years, up to a decade, of low economic growth. And guess what? Economic recovery in the U.S. has been unending and in the eurozone and U.K. there's outright economic contraction right now, and that's not going to change unfortunately in the next few years.’” Huffington Post, September 7^th.

Economists speak of a “re-set,” which is nothing more than getting used to the new normal of less. Of course we will adjust. Of course there will be new winners and new losers no matter how slow the recovery. But it is a time to for the government to invest – versus just spend – in what they can. Education, infrastructure and research. If what exists isn’t good enough or strong enough to lift us out of the mire, it’s time to build the next, something Americans, when they aren’t terrified of themselves or their future, have been pretty damned good at inventing. And if we deploy that spirit properly, America can actually lead the rest of the world back to the “next new normal” – reasonable and sustainable growth.

I’m Peter Dekom, and the huge missing factor in so much of what so many American policy wonks are proselytizing is common sense.