Green Shoots With Aphids: The Bleak Present As Prologue

Green Shoots With Aphids: The Bleak Present As Prologue

Continued high levels of joblessness are "browning" Ben Bernanke’s "green shoots." No doubt a "recovery" of sorts will begin in the not too distant future. Short term prospects, however, remain bleak. For instance, consumption, the largest component of GDP, will stay weak, since unemployment is high, while the wages of those who hold jobs are barely keeping up with inflation. Previous spending binges were financed by refinanced mortgages, an option virtually non-existent now, and by overuse of credit cards, also less available. People now realize that economic life must be lived more cautiously and thus savings rates have increased. This is a commendable change of behavior, but not now. It is spending that creates jobs, not saving.

Investment, on the other hand, is undermined not only by the dismal situation we are in–lack of orders and unutilized capacity–but banks, having only partially recovered from the financial debacle, are unable or reluctant to loan. In addition, housing construction (part of investment in the GDP accounts) is almost as bad as it can be, with a significant upturn years away. Exports are also weak, since this is a world-wide recession. Our best hope, then, for the near future is government. By all accounts, the impact of the stimulus will be greater in the second half of the year. However, given our economic weakness, it is increasingly clear a booster shot is needed, though whether politics will allow this remains to be seen.

But the present is but prologue. Even after there is a recovery–in all probability, a weak one--the long run is almost as bleak as what we are now experiencing, just different. When John Maynard Keynes wrote--"In the long run we are all dead"-- he was lambasting economists who believed that the market left alone would eventually solve all our problems. He was not suggesting, however, we not look at the long run.

When we do so, we are hit with our most vexing problem--in a word, de-industrialization. Manufacturing is virtually disappearing, the automobile industry an obvious symbol of this. Manufacturing now provides less than 10 percent of our jobs. This reality has two negative repercussions. First, new jobs, when they appear, are typically service jobs which pay much less than what was previously earned in manufacturing, threatening the very existence of a large and healthy middle class. Second, it leads to whopping and unprecedented trade deficits, as we buy from abroad what we no longer produce.

What can we do about de-industrialization? Some suggest: government should pick winners and subsidize alternative energy; rebuild our infrastructure to encourage corporate investment; penalize corporations that relocate their factories abroad; make "Buying America" part of our national psychology, as well as part of our federal purchasing system. On the international front, it means challenging China, the country with which our trade deficit is largest, "forcing" it to devalue its currency. We should be more willing to put barriers on foreign exporters that fudge on environmental standards, child and prison labor and, in general, on unsafe and deplorable working conditions. Other advanced capitalist countries, who are major exporters, like Germany and Japan, as well as many other European countries, make it difficult for foreign countries to undermine their manufacturing sectors. Why not us? (Answer: corporate ideology.)

In the last analysis, the odds are not good that measures like these will do that much good, not only because of our politics, but mainly because Chinese workers earn about one-tenth of what our workers make, if that. It’s hard to produce here what can be produced in China at a fraction of our cost. And other poor countries lurk in the wings, such as Vietnam, India and Bangladesh. In the end, the great disparity in international incomes, built up over centuries, is being reduced–a sign of progress. The best Americans can hope for is that the process of equalization is slow enough to allow the US to make appropriate adjustments.

A second major problem of the future (as well as the present) is the growing disparity in the distribution of personal income. In fact, inequality is higher than it has been since just before the Great Depression, over 80 years ago. Some even believe inequality helped create this disaster and in general is a cause of business cycles. That is, the ability to produce is greater than the ability to consume, given that the upper one or two percent of the income strata have less need to spend. This problem was known as under-consumption. Discussion of under-consumption has largely gone out of fashion, except in the recent writings of Robert Reich, the former Secretary of Labor under President Clinton.

But one reason under-consumption was overcome was that ways were found to increasingly loan the increased incomes of the well-to-do to the middle class and poor. In essence, this is what credit cards do and this is what increased loans on houses do, both (as mentioned) no longer playing key roles. If to this we add a once-in-a-generation attitudinal change about saving, the old bugaboo–under-consumption–might once again rear its ugly head.

It is easy to know what we should do about this–make our taxes more progressive, to reverse what the labor markets are creating. But such legislation is unlikely for political reasons. As the economy limps along in the years to come, dealing with inequality will return to the political and economic arena, not primarily as a moral issue, but as an economic issue involving shortfalls in sales and higher levels of unemployment.

Finally, the third great problem looming ahead concerns the value of the dollar. The vast holdings of dollars, in the form of ownership of treasury bills, notes and bonds–in short, our growing national debt–is in the hands of sovereign wealth funds, central banks, private corporations and others. This is dangerous, since these holders of our dollars are fearful. Not only are we buying more than we sell, in huge amounts, we are spending more than we tax, running huge and growing deficits, borrowing the difference. Holders of this debt fear it is out of control, but they are, at the moment, unable to get rid of their holdings, except at a huge loss.

Before the recession, the dollar was depreciating vis a vis the Euro. Then, worldwide fears led many to put their money back in dollars, but that fear is diminishing and the dollar is again slowly depreciating. Even if we avoid a dollar panic, similar in currency markets to the 1987 stock market crash, in which the Dow dropped about 23 percent in a single day, it is difficult to believe that the money we have been printing, by the trillions, will not lead to a significant decline in the dollar. This means that imports will cost more and this will show up in a higher inflation rate. (It may help our exports some, but with so much of our manufacturing capacity destroyed, the opportunities are limited.)

If, as is likely, unemployment is still high–say, a few years from now--increasing inflation means the Federal Reserve will be between a rock and a hard place–needing to keep interest rates low to promote further recovery and needing to keep them high to prevent inflation. No doubt, the likelihood will be an unsatisfactory compromise. For the near future, however, inflation is unlikely to be a problem and if anything, deflation (lower prices) will be, the precedent being Japan’s lost decade (roughly, the 1990's).

But, in the final analysis, the greatest of all economic problems is cultural: the widespread conviction, best expressed by President Reagan, that "government is the problem." This is assumed by vast numbers, including those who receive government subsidies, like wealthy farmers and corporations, those who receive aid when there is a flood or tornado, and even those who rely on their Social Security. Believing that government is the problem means that we will rarely be able to raise taxes, since after all the money will only go down a sinkhole.

But without an ability to raise taxes, in sufficient amounts, and regulate our economy, we are forever trapped in instability and financial quagmires. The unwillingness to tax in order to pay for what is truly needed–appropriate health and educational systems, infrastructure and more–is not just a Federal problem. Our states, symbolized by California, are in deep financial trouble, with no simple way out.

Our only hope may be that someday this tenet central to our culture can be reversed and we can come to understand government as the primary source of economic stability--in short, the solution, not the problem–bringing forth appropriate oversight programs (and other planning) and spending and taxing levels to keep us employed, competitive and well-paid. Perhaps it will take another Great Depression to change the way we think, but such a disaster will also create opportunities for those whose commitment to democracy is minimal. The more distant future, in short, is likely to be a struggle between the forces that would reform capitalism, and make it workable, and those who would use its shortcomings to undermine democracy as we now know it.