Winners and Losers

Too big to fail gets fixed first. Reason: impact on overall economy has rippling effect (“ripple down” theory?), need to apply bandages to the core of America’s circulatory system. So we prioritize supporting insurance companies behind other insurance companies (AIG), recapitalize large financial institutions with federal money (Bank of America, CitiGroup, etc.), brace large job producing industries (automakers). Negative impact: government deficits rise to unprecedented levels, other hemorrhaging issues ignored (state defaults, small businesses ignored, overall job creation on second burner), “bad structures” allowed to continue rather than shut down, financial sector restructured to financial advantage of the rest of the business world (we are now at their mercy).

The World Bank revised their view of global contraction on June 22nd. They revised downward the shrinkage in global domestic product – from 1.7% to 2.9%. Since those nations at the bottom of the economic spectrum had lower to fall, they helped moderate the worldwide number, but the rate of decline is much higher in high income nations – 4.2%. Europe (4.5% which is a lot higher than the 2.7% they predicted earlier this year) falls behind the U.S. (3%, up from the earlier 2.4%) much farther. Numbers.

But for those of us on the ground, leading lives predicated on having a job and maybe owning a house, there’s a sense of failure, even though governmental jawboning occasionally produces an increase in consumer confidence measurements, a mild spurt at the retail level (sales from companies dumping inventory to generate capital?) and a “fools gold” stock market reacting to any “good sign” with a rally – almost always unsustainable in these times. Whoever called the markets “rationale” most certainly would be at a loss to explain a gyrating mass of money in search of a plausible story. If you missed the last bear rally spike, you’ll note the market dropped back down on the 22nd - significantly! Take heart!

What kind of job-creation do you think you’ll see in California or Michigan with huge state deficits, where the governments themselves have to slash payrolls, reduce services, increase fees and taxes and reduce preparing the next generations for a productive future by destroying educational budgets at every level? What is the long-term damage to the overall economy of such drastic actions?

The federal government has rebuffed California several times now. The June 22nd Washington Post: “With an economy larger than Canada's or Brazil's, the state is too big to fail, California officials urge… ‘This matters for the U.S., not just for California,’ said U.S. Rep. Zoe Lofgren, who chairs the state's Democratic congressional delegation. ‘I can't speak for the president, but when you've got the 8th biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not.’ … The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy.”

But the government is also worried that other states would pound the federal government for money if they favored any one state, so even after California cut $11 billion off its deficit and will run out of money by sometime in July, the feds said “no” to a federal loan guarantee of $5.5 billion additional dollars. Yes, California needs to amend its constitution to create a budgeting-tax structure necessary to repave its fiscal year, but it literally cannot survive without federal intervention.

With mid-term Congressional elections not that far off (2010), the lingering unemployment rates across the nation are likely to create a great deal of displaced anger – not just from those who have lost jobs, but from those who are underemployed, worried about losing their work or whose hours and wages have significantly contracted – which no politician can ignore for long. Since people hire new workers only when they are sure that they can support them, new jobs are always a “trailing economic indicator” – unemployment often lingers even after a recession has passed. The housing market tends to need jobs to support its growth as well.

In an article unrelated to the one referenced above, the June 22nd Washington Post notes this harsh reality: “With many forecasters projecting unemployment to remain above 10 percent next year and not return to pre-recession levels of roughly 5 percent for years after that, Obama is likely to be confronted with defending the effectiveness of his economic policies as the nation endures its worst employment situation in a generation.”

With overall U.S. numbers looking better than our European and Japanese counterparts (mature high income economies), it does appear that the proactive policies of the government are indeed producing a positive step. But Americans do not compare their lives and measure their prosperity by looking at the negative numbers in other nations; we compare what we had to what we had to give up within our own lives to come into the current circumstances. The political yellow light is flashing.

I’m Peter Dekom, and I approve this message.