Iwan Morgan: On the Economy
Iwan Morgan is Professor of US Studies and Head of US Programmes at the Institute for the Study of the Americas [ISA]. He was previously Professor of Modern American History and Head of Department of Politics and Modern History at London Guildhall University and Professor of American Governance at London Metropolitan University. He has also taught at Indiana University-Purdue University at Fort Wayne as a Fulbright Educational Exchange Lecturer.
Most recently, Professor Morgan's work The Age of Deficits won the American Politics Group's 2010 Richard Neustadt Book Prize.
China’s anticipated overtaking of the U.S. as the world’s biggest economy has become the focus of much comment of late. Equally important, however, are the changes already happening and likely to accelerate regarding the rising challenge of other BRIC nations in the world economic league. Earlier this month, Brazil replaced the U.K. as the sixth largest economy. This was a moment of some symbolism: Brazil used to be part of what historians have called Britain’s "informal empire," being under the sway of British trade, capital, and inward investment in the nineteenth century.
In the last decade, Brazil has consolidated its status as an agricultural and processed foodstuffs superpower, commodities that now account for a quarter of GDP and 36 percent of exports. It has become the world’s largest producer of sugarcane, coffee, tropical fruits, and commercial cattle (whose number is 50 percent larger than in the United States.). Brazil has also discovered massive oil reserves in the Atlantic, which have helped make it the world’s ninth-largest oil producer and raised the prospect of it eventually becoming the fifth-largest. The country is currently engaged in a massive program of infrastructure improvement to enhance growth, funded by the proceeds of its recent wealth creation.
Brazil’s dash for growth began in the mid-1990s, when a string of privatizations broke up some inefficient state monopolies, China became an increasingly important customer of its commodities -- notably iron ore, soya beans, and foodstuffs, and the U.S. began to invest heavily in the country.
Brazil still lacks a well-educated and well-qualified work force. Testifying to this shortfall, university graduates currently earn on average 3.6 times more than high school graduates, a wider multiple than in any OECD country. The country needs something like twice as many as the 30,000 engineers Brazilian universities currently graduate each year. There are also doubts about the quality of the training that graduates receive at home. At present few Brazilians go abroad to obtain university degrees, but that may be a necessary solution. The U.S. is currently the most popular destination but only 9,000 Brazilians (excluding language students) presently study there, compared with 260,000 Chinese and Indians combined. A government investment program would do much to boost numbers and historical precedent suggests that the payoff will be very beneficial. In the 1960s the Brazilian government paid for PhDs abroad in oil exploration, agricultural research, and aircraft design, three fields in which Brazil is now a world leader.
Although it has overtaken the U.K. in the aggregate, per capita income in Brazil ($11,000) is still only one-third of Britain’s. Moreover, income inequality remains a serious problem -- one of the worst in the world according to the UN -- but it's showing signs of improvement. The GINI coefficient measure of this peaked at 0.61 in 1990 but reached a historic low of 0.53 in 2010. According to the Getulio Vargas Foundation, the poorest 50 percent saw their incomes go up by 68 percent from 2000 to 2010.
Probably the softest spot in its new economic success story concerns Brazil’s current account deficit. Boosted by very high interest rates by international standards (particularly in the era of quantitative easing), the Brazilian real has appreciated 40 percent against a basket of leading currencies since the financial crisis of 2008. The effect is to suck in imports and make finished exports uncompetitive. At present, therefore, Brazil is over-dependent on the commodities boom for its growing national wealth. It still gets many industrialized products from abroad, notably China -- particularly Chinese rail tracks made from Brazilian iron -- to drive forward the country’s massive infrastructure development. If not quite a parallel with the U.S. economic situation, critics of Dilma Rousseff’s government (and of its Lula predecessor) claim that it is trying to achieve growth through consumption and credit to the detriment of its external balances.
Despite such concerns, the Centre for Economics and Business Research [CEBR], a highly regarded economic forecasting group, predicts that Brazil will hold onto sixth place in the global economic league over the second decade of the twenty-first century. However it estimates that India will climb above it to fifth by 2020, thanks to its highly educated workforce and strengths in new technology and engineering. CEBR also predicts that Russia will rise even higher to fourth on the back of its oil and gas exporting power.
The declining powers displaced by the rise of these emergent BRICs will be those of Europe, which is expected to experience a "lost decade." Paying back debts resulting from the financial crisis and over...
The U.K. press is currently full of reports about the visit of China's leader-designate, Xi Jinping, to Washington this week. "The princeling and the professor" was one paper's editorial take on the Xi-Obama get together. Apart from personalities, however, what has consumed British interest is the accompanying debate about whether the U.S. is in decline. We've been there a century before, so we're agog to discuss if this signals a historic moment in the process of principal power succession from the U.S. to China.
This blog is contribution to this debate. It focuses on the issue of America's relative economic decline. I have to say -- with regret -- that I see this as already in process: it's no longer a question of whether -- but of pace and extent.
It may appear contentious to suggest that America's economic pre-eminence is eroding when its has approximately a 25 percent share of nominal global GDP and its own gross domestic product was roughly twice as big as its nearest single-country rival, China, in 2011. However the U.S. GDP was eight times as large as China’s as recently as 2000. In the ensuing decade China’s economy grew on annual average by 10.5 percent in real terms compared to America’s 1.6 percent. On current trends, therefore, China’s GDP will eclipse America’s on a purchasing-power parity basis in 2016 and, far more importantly, in dollar terms converted at market-exchange rates in 2018.
Any one wishing to compare China and America as economic rivals should visit The Economist chinavusa website. That must-read journal for political and intellectual elites is in no doubt that the United States is in relative decline. Signifying this, in a recent edition it began a weekly section devoted entirely to China, the first time it has singled out any nation since it began detailed coverage of the U.S. in 1942 -– symbolically the very year that Henry Luce pronounced the arrival of the American Century.
The chinavusa indices make interesting reading. The U.S. still has 133 firms in the Fortune 500 global list of top companies, twice the number China has, but it has already fallen behind China on a whole set of other economic power indicators –- steel consumption (1999), exports (2007), fixed investment (2009), energy consumption (2010) and patents granted to residents (2011). The U.S. is still ahead -– if only just -– in retail sales, stock-market capitalization, and consumer spending, but current projections suggest the lead will change hands on all these indicators in the next ten years. Finally China will outstrip the U.S. on the ultimate index of hard power –- defense spending -- in 2025.
Of course these predictions might be selective and/or wrong. It is certainly true that Americans will remain richer on a per capita basis than the Chinese for many, many years to come. Moreover, U.S. economic strength was on an upward curve of sustained pre-eminence in the twentieth century. Why should the present century be any different? The Cassandras of economic decline have always been wrong in the past -- why should now be any different? The answer is that the U.S. has to grapple with a problem of economic re-balancing that China and other emergent economic powers do not face.
For the United States, recovery from the Great Recession is not the same as renewing the foundations of its economic pre-eminence. Cyclical bounce-back will not resolve the structural weaknesses that have been slowly eroding the foundations of America’s economic strength for a quarter of a century. In essence, the United States has relied too much on internal consumption and debt, both private and public, to drive its economic growth from the 1980s through the first decade of this century. The real renewal of its economic strength requires a re-balancing of its economy to focus more on saving, investment, and exports, but this will be difficult to pull off.
The U.S. is so far showing at best mixed signs of its capacity to re-balance. Household debt, which grew from $1.4 trillion in 1980 to $13.8 trillion in 2007, is now in decline thanks to the Great Recession, with the result that household saving is at its highest level in twenty years. But recession-swollen public deficits counterbalanced this to produce a negative rate of national saving in 2009-10. Meanwhile the trade gap, having narrowed in 2009 began to grow again in 2010, when America’s bilateral deficit with China reached a historic peak ($273 billion).
The United States still leads in key economic...
As the governments of the European Union countries and (possibly, but less likely) the United States peer ahead to the threat of a new recession in 2012, one common demographic group in these nations is still deeply mired in the effects of the Great Recession that supposedly ended in 2009. Youth unemployment for the 16 to 24-year-old age group averaged 18.3 percent in the U.S. and 21 percent across the 27-member E.U. in 2010-2011. In the E.U., the highest youth unemployment rates have been in Spain, with 45 percent, and Greece, with 42.9 percent, which offer a marked contrast to the relatively low levels in some economies—notably the Netherlands (7 percent), Austria (8.3 percent), and Germany (8.9 percent). Unemployment is also above the E.U. average in Italy (27 percent) and France (23 percent), while in the U.K. it has been around 20 percent. These figures are not far behind the 21.8 percent youth unemployment in the long stagnant MENA (Middle East and North Africa) countries.
Although youth employment has been generally lower in the U.S., some groups in the population have been very hard hit. Among African American youth, for example, the jobless rate for black teens hit 45 percent in 2010. Moreover, unemployment in the 16-24 group had been growing steadily since 2000 before its acceleration in 2008. In terms of unemployment to population ratio, which also takes account of those in full-time education, the majority of young people have not been in work in 2008-2011 for the first time in half a century.
To some analysts, youth unemployment is the driving force behind the upsurge of anti-(finance) capitalist protest in the U.S., U.K., and Western Europe. Others also consider it a critical factor in the Arab Spring. Significantly, youth unemployment across the MENA (Middle East and North Africa) countries, many of which have long-stagnant economies, is not far ahead of Western levels at 21.8 percent.
A forthcoming book by BBC economics editor Paul Mason, Why It's Kicking Off Everywhere: The New Global Revolutions (Verso, 2012), makes a strong case for the central role of economically disillusioned youth in the widespread incidence of protest. In his analysis, the new sociological phenomenon of the graduate with no future is at the heart of this phenomenon. The expectancy that a degree was a passport to a decent job and a middle-class lifestyle has given way in the West to a sense that many of those in the current generation of youth will be poorer than their parents.
In consequence, in Mason's assessment, revolts sparked or led by educated youth, whether in New York, London, or Cairo, have had a number of common traits. The quintessential venue of unrest is the global city, where reside the "three tribes of discontent"—youth, slum-dwellers, and the working class. Second, members of the "graduates with no future" generation see themselves as part of an international sub-class with behaviors that cross borders. The mass, transnational culture of being young and educated that emerged in the boom years has transmitted easily into a transnational culture of disillusionment. Third, the sheer size of the recent and soon-to-be graduate population makes it a transmitter of unrest to a much wider section of the population. It is significant in this regard that, since 2000, global participation rates in higher education has grown from 19 to 26 percent. In contrast to middle-class student activists of the 1960s, who saw themselves as external detonators of the working class, today's generation of protesters are thoroughly entrenched in shared experience with low-income communities. Throw into this mix the availability of social media and new technology, which discontented youth can use to share ideas, raise consciousness, and develop their own hierarchies, and the result, in Mason's view, is a new kind of revolution with massive potential to disrupt the patterns of social and political life.
Whether such an analysis is borne out remains to be seen, but it does suggest that the Great Recession and the jobless...
In the U.S., the failure of the congressional super-committee to reach agreement on deficit reduction looks set to trigger massive automatic spending cuts in both domestic and defense programs from 2013 onwards. While debt reduction is unquestionably necessary in the medium to long-term, placing it ahead of building a strong economic recovery is likely to do more harm than good. The United States should look no further than the United Kingdom for proof of the folly of prioritizing fiscal austerity over laying the foundations for post-recession economic growth.
On taking office in mid 2010 Britain's Conservative-Liberal Democrat (note to American readers -- Liberal Democrat in the UK does not mean the same as in the U.S.!) Coalition government committed to eliminate the huge UK deficit in the course of one five-year parliament. Critics warned that such rapid retrenchment could only undermine recovery from the Great Recession of 2007-09 and make a double-dip recession very likely. Some critics pointed out that Coalition policy flagrantly contradicted Keynes's dictum about recession and post-recession fiscal policy, "Look after unemployment and the budget will look after itself." Most governments presently operate huge deficits mainly because their economies have shrunk, but the cyclical element of these deficits will decline automatically as recovery gains strength.
Deficit reduction does not in itself produce post-recession economic growth. Nor will it eliminate the deficit in a weak recovery. A government is able cut its spending whatever the economic circumstances but it cannot control its revenue. Without a strong recovery in place, retrenchment weakens growth so that government income falls. The United States had clearer proof of this particular pudding in the shape of the 1937-38 depression. FDR's party paid the price for his mistake in the 1938 midterms. Later presidents who ignored this lesson also paid the price at the ballot box -- whether in the defeat of their putative successor as happened to Richard Nixon in 1960 after Dwight Eisenhower insisted on balancing the budget immediately after the sharp recession of 1958, or failure to win re-election, as in Jimmy Carter's case in 1980. Determined to stick to his pledge to balance the budget by the end of his first term, Carter proposed an anti-inflation austerity budget in his final year in office. In doing so, he ignored the warnings of his chief domestic adviser, Stuart Eizenstat, about impending economic downturn: "We are proposing a budget program which is unachievable as well as undesirable in the present recessionary climate."
Britain's leaders would have done well to heed similar warnings about the folly of their fiscal course. They have amply demonstrated that efforts to balance the budget in a weak economy are self-defeating. When presented with proof that his balanced-budget projections were way off course, however, Chancellor of the Exchequer George Osborne came up with an extended version of the discredited Plan A rather than a new plan B.
On November 29, Osborne told Parliament that weaker growth and higher borrowing means that the UK faces an unprecedented six years of austerity. The ax will fall on public sector, which will lose 700,000 jobs, instead of 400,000 as previously projected (with additional austerity in the shape of a public-sector pay freeze for those who hold onto their posts), in order to cope with £111 billion in additional borrowing over the next five years. This begs the question of what will happen to the 700,000 who lose their jobs and the over two million who are currently unemployed. In Plan A, they were to be absorbed into an expanding private sector, but public retrenchment in combination with uncertainty over the euro crisis means that new private-sector jobs have not been created in anything like the number anticipated.
The Coalition has now put back the target for eliminating the deficit to 2017 (originally 2015), but the additional cuts needed to achieve this could well tip the economy into recession next year, which will put back the budget-balancing schedule even further. Osborne covered his embarrassment at missing his deficit target with...
Back in the summer, as US politicians seemed on the verge of failing to agree a debt limit extension to avoid default on America's obligations, Europeans looked on in scornful amazement at an apparent failure of leadership. Now the shoe is very much on the other foot. Speaking on November 16, President Barack Obama accused the Eurozone of suffering from "a problem of political will" that put the future of the single currency at risk. America's leaders succeeded in averting a default crisis when common sense finally prevailed (though the Democrats paid a higher price for reason than the Republicans). Whether Europe's leaders can pull off their own great escape is much more open to doubt because in their case their sovereign debt problem is much graver than America's debt limitation problem and the solution to it is far less readily apparent.
Signifying the sense that there is a problem of political will, the current leaders of the single currency project - Angela Merkel and Nicolas Sarkozy - are widely compared unfavorably in the media with their predecessors who built the foundations of the European project in the 1950s - Konrad Adenauer and Charles de Gaulle. Such yardsticks obscure understanding of the current crisis more than they enlighten. There is really nothing in modern history that allows for appropriate comparison to judge today's leaders with their forbears because the single-currency issue lends a unique dimension to Europe's debt crisis.
That said, the fetters of history still bind the most important actor in the unfolding debt crisis. Germany has to decide whether to drop its visceral opposition to the European Central Bank[ECB] throwing inflationary caution aside to act like a lender of last resort or risk being blamed for the destruction of the Euro. This is a tough call for a nation whose thinking on political economy continues to be shaped by horror of the hyper-inflation it suffered under the Weimar regime in 1923. In private Angela Merkel is said to be in favor of allowing the ECB to print money to buy up enormous quantities of Italian and Spanish debt, but is unprepared to take the political risk of saying so in public. As a result, the unity of Germany and France, which has been at the heart of the European project since its inception and through its evolution into the single currency, is now fraying.
If nothing else, the current crisis shows that unity in the face of economic and financial crisis is far more difficult for a 17-member club of nations than for a union of fifty states under one government. Europe's pre-crisis hubris about its glorious economic future now looks sadly laughable. Back in 1988, Paul Kennedy's The Rise and Decline of the Great Powers predicted that the US was about to enter a period of decline because the fiscal costs of Cold War victory would sap its economic vitality. The best that may be said about that forecast was that it was very premature but best-selling sales at least provided the consolation of profit in doom. Far less well known was another much more fanciful declinist tract by Jacques Attali, a key aide to President Mitterand of France and director of the new multilateral bank established to assist the post-communist economic reconstruction of Eastern Europe. In Lignes d'Horizon (1990), he predicted that global economic predominance would soon pass from the United States to a European bloc and a Japanese-led Pacific bloc!
Such inaccurate forecasts should counsel caution about predicting the outcome of the current crisis, but it is difficult to see the Eurozone surviving in its present form. The problem of...
In early August, The Economist put America's chances of a double-dip recession in the coming year at 50 percent. If anything, things look even bleaker some two months on. The recovery that began in 2009 is in danger of petering out. In the first two quarters of 2011 the United States achieved an annualized growth rate of just 0.8 percent, far below the 2.5 percent annual expansion that economists consider the minimum necessary to make a dent in the present unemployment rate of 9.2 percent. On a per-person basis, inflation-adjusted GDP now stands at virtually the same level as in the second quarter of 2005. If this trend continues the United States is in the sixth year of what could go down in history as its version of Japan's "lost decade" of the 1990s.
Comparing the current situation with other recessions in America's modern history offers little comfort. Recessions punctuated America's postwar history with a regularity that may seem surprising in view of the period's association with the "long boom." From 1949 (the date of the first downturn) through 1982, there were eight recessions: in 1949, 1953-54, 1957-58, 1960-61, 1970, 1974-75, 1980, 1981-82. This made for an average of one downturn every four years or so.
Most of these downturns were policy-induced, with the primary trigger being Federal Reserve monetary tightening to restrict inflation. As a result, it was relatively easy to reverse course, so that these downturns tended to be short-lasting and shallow, with the exceptions of 1974-75 and 1981-82. In most instances, monetary easing and the beneficial effect of automatic fiscal stabilizers produced speedy recovery. Only two recessions turned into double-dip recessions, and again the root cause was public policy. Recovery from the 1957-58 recession was short-lived because of Dwight D. Eisenhower's insistence on balancing the Fiscal Year 1960 budget to reassure foreign dollar-holders that inflation was under control, thereby preempting a threatened run on U.S. gold reserves (a concern in the age of dollar fixed-rate convertibility into gold). However, this denied the recovery its needed fiscal adrenaline, with the result that a new downturn in late 1960 was an instrumental factor in the GOP's loss of the presidency in that year's election. The double-dip recessions of 1980 and 1981-82 were the result of the Federal Reserve's monetarist experiment to choke off double-digit inflation. In the latter downturn unemployment surpassed 10 percent of the workforce for the first time since the Great Depression, but economic recovery was relatively speedy once the Fed reversed course in late 1982. In the second full year of recovery, economic output jumped forward by 5.6 percent compared to its anemic growth of 1.6 percent in the second year of the current recovery cycle.
In comparison, recessions have been much less frequent in recent times—with only three downturns since 1982: 1990-91, 2001, and 2007-2009. Low inflation was one reason for this pattern. The Fed's conquest of runaway price instability through the monetarist experiment of 1979-1982 enabled the central bank to adopt a relatively relaxed stance on interest rates over the next quarter-century. However, inflation concerns did not entirely disappear—interest rate hikes helped to precipitate each of the three post-1982 downturns.
If America is heading for a double-dip recession, this will raise questions as to whether it is now in a depression. A recession is defined as the economy undergoing two quarters or more of negative economic growth (that is decline in output), but it is also characterized by relatively speedy recovery. A depression is marked by the abnormality of its long duration, large increases in unemployment, and steep falls in the availability of credit.
It's far too early to suggest that the US is in a new depression even if there is a double-dip downturn: output loss, jobless growth, and credit scarcity do not match those of America's previous depressions. On the other hand there are pessimistic markers of comparison. The nineteenth-century depressions were set off by financial crisis in 1837, 1873 and 1893, as was the Great Depression of the 1930s by the 1929 Wall Street crash. Downturns precipitated by financial crises historically tend to last much longer than recessionary declines.
In line with this, the IMF's World Economic Outlook, released last week, suggested that recovery in...
Three years ago, the conventional wisdom in Europe was that its economic problems were made in America. This was widely believed true because of the toxic spread of the sub-prime crisis from the U.S. through the agency of debt-financing derivatives. Now, however, Europe's problem with sovereign debt has worrying consequences for the United States. As such, America's prospects of economic recovery continue to be entwined with those of Europe.
Although other euro zone countries have experienced sovereign debt problems, the epicenter of the crisis continues to be Greece. Fear of a Greek default remains the source of considerable agitation in European banking circles. It is now evident that French banks, which were largely immune from the effects of the sub-prime crisis, are particularly vulnerable to such a development because of their holdings in Greek bonds. This is especially the case with BNP Paribas (the biggest French funder), Societe Generale, and Credit Agrocole. To make matters worse, French banks did not build up their reserves in the wake of the sub-prime crisis in the manner of U.S. and UK banks because they did not consider the effects to be so severe for them.
With similar problems already besetting Italian banks, the Greek debt crisis now threatens to affect the core of Europe rather than just its periphery. The future of the Euro zone depends on whether Germany, still the financial and economic power house of the continent, has the political will to rescue the project yet again. However, the unpopularity of further Greek bailouts among German voters constrains Chancellor Angela Merkel's room for maneuver on that score.
More immediately, there are dangers that bank lending in key European economies could freeze up to produce another sharp financial downturn on both sides of the Atlantic. American financial institutions are by no means immune from the effects of the Greek contagion because of their lending to French banks. Reflecting this concern, prime U.S. money funds reduced their holdings in certificates of deposits issued by French banks by about 40 percent in the three months through August 11, 2011. The proportion of the remaining U.S. French bank holdings maturing in less than a month increased to 56 percent on August 11 from 17 percent on June 11.
The inevitable consequence of this is to push up French bank borrowing costs, which is likely to have ripple effects on both sides of the Atlantic because of the necessity of asset sales to reassure nervous investors. One sign of this is the announcement by Societe General on September 12 that it is planning to free up 4 billion euros ($5.44 billion) in capital through such sales by 2013 (it holds about 900 million euros in Greek bonds).
Reducing exposure to the debt of French banks is only part of the story for American money funds, however, because they have increased their holdings of European debt from 38 percent of assets in the second half of 2006 to more than half by June 2011 as a result of European demand for dollar-based holding and the decreased supply of U.S. bank-issued debt.
In this crisis, no nation is an island. The interactions of American and European financial interests mean that problems on one side of the Atlantic will beset the other. The ripple effect of toxicity may have initially spread from the U.S. to Europe, but the reverse effect has now become increasingly problematic.
Iwan Morgan is Professor of U.S. Studies and Head of U.S. Programmes at the Institute for the Study of the Americas [ISA]. He was previously Professor of Modern American History and Head of Department of Politics and Modern History at London Guildhall University and Professor of American Governance at London Metropolitan University. He has also taught at Indiana University-Purdue University at Fort Wayne as a Fulbright Educational Exchange Lecturer.
Most recently, Professor Morgan's work The Age of Deficits won the American Politics Group's 2010 Richard Neustadt Book Prize.
On August 9, the Federal Open Market Committee, the central bank's main monetary policy body, announced that the short-term interest rates under its control would be held at their ultra-low level for a further two years in order to boost U.S. economic recovery. In June, it had committed to only a few months of holding down the federal funds rate, broadly interpreted as meaning to the end of the year at most. At the same time, however, it held back from launching a third installment of quantitative easing so soon after the completion of the last one. Wall Street reaction was generally but not universally positive, with majority opinion holding that the Fed had gone as far as it could without appearing panicky. Nevertheless, the dryly worded central bank statement was an effective admission that it did not expect a real expansion in jobs till mid-2013 and did not possess the magic wand to produce one.
The Fed's limited impact in pursuit of economic recovery contrasts starkly with its reputation as the guarantor of economic growth during the final decade of the twentieth century. Journalist Bob Woodward celebrated its success in this earlier era with a book unblushingly entitled Maestro: Greenspan's Fed and the American Boom, published in 2000. It is unlikely that anyone will write a similar book about Bernanke (or about Greenspan post-2000 for that matter). The problems facing the current chair, however, are of a different order to those confronting any of his recent predecessors.
Bernanke heads an institution more renowned for fighting inflation than boosting jobs. The Fed's reputation had sunk to a low ebb in the seventies because of its efforts to balance price stability and job growth in an era of stagflation. In the eyes of critics, its failure to pursue a consistently tight money policy was instrumental in producing the high inflation of that decade. On becoming chairman in 1979, Paul Volcker set out to restore the central bank's credibility on this score by adopting a tough policy of controlling money stock growth (quantitative tightening in today's lingo). As a consequence of this three-year dose of monetarism, consumer price inflation was brought down from 13.3 percent in 1979 to 3.2 percent in 1983, but at the cost of the worst recession since the 1930s in 1981-82. The Fed withstood the criticism from the White House and Congress that it kept its foot on the monetary brakes too long and too hard because it had the support of Wall Street. A far from enthusiastic Reagan administration therefore had little choice but to appoint Volcker to a second term as chair in 1983. Inflation remained low for the rest of the eighties, but even after monetary easing ended the recession in late 1982 unemployment did not sink to its 1980 level until 1986.
Alan Greenspan continued his successor's strategy of making inflation the Fed's number-one priority and not trading this off against employment concerns. Greenspan's anti-inflation raising of interest rates in 1988-89 helped slow the economy into recession in 1990, to George H.W. Bush's fury, and his restoration of these in 1994, to Bill Clinton's anger, restrained the recovery in the interests of keeping inflation low. Only when he was convinced that productivity gains from high-tech innovations now constrained inflation did Greenspan ease interest rates to produce the great boom of 1996-2000. His foot, however, went back on the monetary brakes when inflation revived in 1999-2000, which was a factor in precipitating a new recession in early 2001. Greenspan eased again in response to this downturn and the 9/11 shock, but moved back to tightening in 2005 to curb house price inflation, a response that created difficulties in the sub-prime mortgage market that led in turn to the toxic consequences of 2007-08.
While Bernanke is committed to the continuation of easy money, the Fed is not united in support of this because the anti-inflation priority is deeply embedded into its institutional culture. In the August 8 Open Market...
There was fictional movie called "Seven Days in May" about the foiling of a military coup in the United States. There's unlikely to be a film called "Five Days in August" because it's difficult to see how the real events of this time can have a happy ending. These were certainly five days that shook America, beginning with the last minute congressional agreement over the debt limit, proceeding to stock market turmoil, and ending with the S&P downgrade of its debt.
The downgrade of the debt was something of a national humiliation - "it's hit the self-esteem of the United States, the psyche" Alan Greenspan pronounced. Some commentators spoke of this as the moment that marked the end of America's global economic hegemony. America's biggest creditor, the People's Republic of China, made angry noises about the US having to mend its indebted ways, rather like parents telling off a teenager off about misuse of the credit card that they were financing. The downgrade will almost certainly lead to higher interest rates not only in the US but also virtually everywhere else (because the markets have long priced all other bonds relative to America's). As such there will be damage to global economic growth. However, the downgrade marks a distant fear about possible American default rather than the imminent threat of one, as exists in Italy and Spain. The likelihood, therefore, is that China and others will still go on lending to America for some time yet.
Arguably, the debt limitation deal was the single most significant event of the momentous first week of August because in economic terms it helped to make a double-dip recession more likely, which did much to roil the financial markets, and in political terms it precipitated the debt downgrade in displaying to S&P (in its words) that "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time on ongoing fiscal and economic challenges."
The debt deal signaled that the US, the country that had stuck longest to expansionary policy in the financial-economic crisis that started in 2007 and is still ongoing, was now shifting to austerity mode. However, the public debt is a medium-to-long term problem, the economy is a here-and-now problem. The most dangerous deficit facing America today is that in jobs not the public finances. Despite 17 consecutive months of private-sector job creation, the US still has 6.8 million jobs fewer and an unemployment rate 4.1 percentage points higher than at the start of the recession.
The outcome of the debt limit imbroglio was driven by political ideology rather than economic common sense. It would have been far better to sustain or expand federal spending in the short term, particularly on infrastructure projects, as well as allowing temporary extension of the tax cuts in return for agreement over large-scale entitlement reform and tax reform (i. e. revenue enhancement) in the medium term. Instead Congress came up with a deal that failed to support the economy or stabilize the debt. The Republicans' new found dedication to fiscal stringency also suggests that they will hold out against other much needed expansionary actions, notably extension of unemployment compensation for workers who have exhausted their benefits and of the payroll tax cut beyond their scheduled expiry at the end of 2011.
In 2009, fiscal actions added some 1.8 percent to GDP; the debt limit deal will cost 0.3 percent GDP in 2012 and the expiry of the aforementioned temporary measures will, more damagingly, cost 1.4 percent GDP growth. An economy already showing signs of slowing down cannot afford that loss of fiscal steam, so the danger of a double-dip recession in 2012 is very real.
If America does suffer another downturn, the likelihood is that this will pull the global economy into another recession with it, a development that will almost certainly put paid to the Euro currency. Without plans for growth rather than austerity, some respected analysts have warned that it could take America and much of Europe twenty years to achieve real economic recovery from the financial crisis of 2007-08.
A recession in 2012 could well spell the end of Barack Obama's presidency. It will make him look like Jimmy Carter did in 1980 rather than Franklin D. Roosevelt, as his supporters hoped in 2008. Of course, FDR won reelection in 1936 when the economy had still not recovered to its 1929 level of output, but things appeared to be getting better - as indeed they were until the policy error of shifting from stimulus to austerity led to new recession in 1937. ...
On August 5, the Dow had its largest single-day fall since December 1, 2008. Things were just as bad across the Atlantic, with the equivalent of nearly $80 billion wiped off the shares of Britain's 100 biggest companies.
The recent debt ceiling crisis in the U.S. produced a very inward-looking perspective among pundits and economist, and the same was true in Europe when the financial crisis hit individual countries over here. However, yesterday's stock market declines show that America and Europe are in the same sinking boat. We are no longer the different planets of Mars and Venus, to use Robert Kagan's terms. We're one and the same planet (and I'd say it was Pluto with its all its gloomy connotations).
Our mutual characteristics are mounting public debt, weak economies, rising social welfare costs in response to demographic trends, fear for the future, and (though not universal throughout Europe) gridlock in government. On the latter point, the economic crisis is polarizing politics and producing populist movements of the right like the Tea Party in the U.S., the Dutch Freedom Party, and the True Finns. If you think the U.S. has gridlock, check out Belgium—it has not been able to form an official government since June 2010 because none of the possible coalition partners can agree terms!
However the current crisis in not like Meltdown 1.0 of 2007-08—it's sparked by sovereign debt rather than private debt. As financial entities, stock markets operate through the anticipation of change. Those in New York, London and elsewhere rise at the bottom of the cycle in expectation that the economy is set to improve, and fall when things are expected to get worse, as now. Gloomy news on unemployment in the U.S., once the engine of the global economy—and even signs that the new powerhouse of China is slowing—makes the markets nervous. What's more worrying for them, however, is the solvency of nation-states. Though finally settled, the debt ceiling controversy raised doubts about the reliability of the U.S. as a borrower and the capacity of its government to deal with economic problems. In Europe, we're not looking up at a debt ceiling but down into a debt chasm in the case of Greece, Ireland, Portugal, Spain, and Italy. In 2007, the markets could draw comfort that the banking crisis did not become a sovereign debt crisis. Now, however, the signs are that it is in process of doing so. This is why investors are looking to gather as much liquidity as possible by selling off shares.
Public policymakers formed the rescue party (post-Lehman Brothers) in the Meltdown 1.0 crash caused by unwise lending by banks. Cheap money and big budget deficits on both sides of the Atlantic averted a second Great Depression, but they have not been sufficient to boost a strong recovery.
This begs the question of what policy shots are left in the locker to avoid a new meltdown. Easy money appears to have reached its limits. The first two installments of Federal Reserve quantitative easing had limited expansionary effect on the U.S. economy, so a third is unlikely to work wonders. In the UK the lowest official interest rate since the Bank of England was created in 1964 has not inspired great armies of consumers back into the nation's stores. The Obama fiscal stimulus of 2009 helped to prevent the recession becoming a slump, but it was not large enough or sufficiently well-focused to generate strong recovery. And now fiscal austerity is the order of the day on both sides of the Atlantic, which does nothing for economic growth and jobs.
In reality, however, fiscal action is needed for expansion and reflation, but the statecraft required to drive this forward is seemingly absent. As Friday's editorial in the Financial Times, hardly a voice of the left, put it, "Only politicians and the Treasuries they control have the tools to turn economic fear into hope. Their recent form is reason enough to stay scared."
Drawing on nearly forty years of teaching and researching US history and politics, I cannot think of a greater victory won by a minority party than the Republican success in forcing a solution to the debt limitation controversy that met GOP preferences.
I would be grateful if anyone could provide me with a better example.
The Democrats know all too well that they have been bested. It's possible to pick out any number of admissions to this effect after the House vote, but two will suffice. Raul Grijalva (Arizona) declared: "We have given much and received nothing in return. The lesson today is that Republicans can hold their breath long enough to get what they want." Congressional Black Caucus chair Emmanuel Cleaver of Missouri , a Methodist pastor, graphically described the House bill as a "sugar-coated Satan sandwich."
Republican success is mainly built on the party's determination to stand by its clearly held beliefs, while the Democrats were always looking for a deal (though not necessarily this one). The impending crisis of default also played to the advantage of the intransigent party in the negotiations. Yet it should be recognized that the GOP's success is further built on its ability to define the debt/deficit problem as a spending problem. This was spelled out clearly in what was effectively John Boehner's victory address after the vote - whatever the issues over his leadership in the crisis, it should be recognized that he ended up on the winning side!
Defining the deficit as a spending issue traces its Republican pedigree from the New Deal through the Eisenhower era to the Reagan presidency and down to the present. Amazingly today's Democrats have let the GOP get away with this, in contrast to their 1980s and 1990s forbears.
A simple history lesson should undermine the contention that the deficit only arises from too much spending rather than insufficient revenue. The US balanced the budget four times in the Clinton second term with tax levels that were higher than when the budget deficit ballooned in the Bush era. In Fiscal Year 2000 the federal government operated a surplus of $236 billion dollars with revenues that equated to 20.9 percent GDP, the highest level since 1944.
Another way of looking at this is to consider spending and revenue levels over the long term. In the half century prior to the economic collapse of 2008, US expenditure averaged just over 20 percent of GDP, a relatively modest level, while tax revenues averaged an even more modest 18.5 percent of GDP. Not insignificantly the US has only balanced its budget 5 times in this period, and the pattern on each occasion was consistent. Spending ranged between 18.4 and 19.4 percent GDP and receipts were never less than 19.7 percent GDP. In other words fiscal balance resulted from spending control and revenue enhancement.
A main reason, admittedly not the only one, that the Clinton-era surpluses vanished in the twenty-first century was the loss of revenue from the Republican tax cuts of 2001, 2003, and 2005. It is remarkable how the GOP has been able to sustain these into the Obama era with an anti-tax campaign that blatantly ignores the distributive benefits of the Bush-era tax cuts in favor of the rich. According to Joseph Stiglitz, the income of the wealthiest 1 percent has risen by 18 percent in the last ten years with the assistance of the skewed tax cuts of 2001, 2003 and 2005; in contrast that of male blue collar workers has fallen by 12 percent over this period. Further benefiting economic elites is the declining significance of corporation income taxes over the last half-century, revenues from which only netted 2.7 percent GDP in Fiscal Year 2006 compared to 4.9 percent GDP in 1956.
Any insistence that the deficit/debt result solely from excess spending is a spurious argument that needs to be countered at every opportunity if the US is to put its fiscal house in order without inflicting most of the pain on those in society least able to bear it.
Perhaps the Republicans would do well to recall the words of Dwight D. Eisenhower from 1953: "Every real American is proud to carry his share of any tax burden... I simply do not believe for one second that anyone privileged to live in this country wants someone else to pay his fair and just share of the cost of his Government." Ike was speaking in opposition to a Democratic proposal to raise the income base...
To the relief of financial markets from the Far East to London and by now Wall Street, the congressional leadership appears to have a debt limit deal to hand. Assuming that it gets approved by both Houses, however, the debt problem is simply moving onto a different level rather than being resolved.
There's still a danger that the current imbroglio over debt limitation will result in a downgrading of the US debt by credit rating agencies. That's less serious than would have happened in the event of a default, but lenders could interpret it as signaling that the US is no longer risk-free in terms of debt repayment.
More significantly for those of us more interested in the impact of the debt issue on ordinary people, there's a lot of politics still left to flesh out the details of the debt limit agreement. There's still room for revenue enhancement and a portion of the spending retrenchment will come from the rundown of US involvement in Iraq and Afghanistan. But that still necessitates a big bite out of federal domestic spending.
Whatever the distribution of the eventual fiscal retrenchment that will follow a debt limit deal, the effect on the economy is likely to be contraction. There is a school of economic thought which argues that fiscal austerity brings expansionary benefits because it persuades financial markets that interest rates can be lowered. However a IMF study of fiscal policy stretching back to the 1930s concludes that fiscal consolidation is much more likely to result in economic contraction than expansion. The lesson from this is that boom times are best for budget retrenchment, as the 1990s showed.
The danger facing the US is that a political concern for debt reduction in the short-term makes it difficult to sustain long term by harming prospects for economic growth. The US needs to cure its public debt habit and its private one, but it has still not made up the economic ground lost in 2007-09. In these circumstances, new IMF head Christine Lagarde has suggested that its best option is to announce the details of a credible fiscal plan but delay its implementation until the economy is fully recovered. That's the sensible solution, but the recent history of budget politics does not encourage optimism that such an approach will be adopted.
In the past Europeans have often been critical of American political parties for being non-ideological coalitions dedicated to election-winning and deal- making. Now these distant days seem like a golden age of common sense and pragmatism!
We hear a lot over here about Republican ideological commitment, currently manifested in intransigence over raising the debt limit. But we're not sure what to make of the Democrats. If American politics is polarized, it's difficult to make out where President Obama's party is situated. They are certainly nowhere near as liberal as the Republicans are conservative - in fact, the partisan battle seems to be right v center-right rather than right v left. Paul Krugman's commentary "The Centrist Cop-Out" in yesterday's New York Times has certainly resonated over here.
President Obama has made so many concessions to the Republican preferences on taxation and spending that it is difficult for us outsiders to make out what the fight is all about. The agenda seems dominated by the party that controls just one chamber of Congress, while the party that controls the other chamber and the White House appears in retreat from power. This was not how it was when the balance was reversed during the first six years of the Reagan presidency.
Whatever happens in 2012, the political prospects seem very bleak for any renewal of progressive politics. As Larry Elliott points out in today's Guardian, a short-term fix over the debt limit and the budget might help Obama get reelected but whoever is in the White House in 2013 looks likely to be faced with having to make massive spending cuts and preserve the Bush tax cuts.
The Age of Reagan pronounced dead by many in 2008 seems very much alive - only more so than when the Gipper was president.
The US needs to put its fiscal house in order, but in a way that spreads the burden to ensure that the well off make a reasonable contribution in the national interest. If the Democrats want to find out what happens when a conservative fiscal retrenchment program is implemented, they can check out the UK; slow to zero economic growth, serious youth unemployment; fundamental weakening of the public services, and the worst hits falling on everybody but the rich!
We foreigners are getting very nervous about the debt limit impasse in the US. Until last week media pundits and financial analysts evinced a "Of course, both sides will compromise in the end" optimism. This seemed a perfectly reasonable assumption since the debt limit had been raised 106 times since 1940, including 18 times under Ronald Reagan and 7 times under George Bush - so the Republicans had form on this one. And it is the GOP that gets the blame overseas for the imbroglio - just this weekend Vince Cable, Business Secretary in the UK Conservative-Liberal Democrat Coalition Government, said on national television that the culprits were a bunch of "right wing nutters" (his phrase, not mine). In the last few days, however, there is a palpable shift over here to confronting the worst-case scenario, even though the betting is still on a last minute deal. Both The Guardian and Financial Times are devoting a lot of coverage to what might happen if there's a default. The fact that UK 10-year government bonds now have a 0.02 percent lower yield than US treasuries is seen as a significant indicator of what Deutsche Bank analysts have called a flight to quality. Contrary to the conservative Republican/Tea Party belief that there will be no severe consequences if the debt limit is not changed, the sense over here is that the adverse effects will be considerable. Many financial analysts are anticipating a credit downgrade for the US that could lead to a sell-off of US treasury bonds that would lead in turn to a general tightening of US credit markets. It's ironic as one of the rationales for the Republican refusal to raise taxes as part of a deficit reduction/debt limitation deal is not to hurt the economy. A debt default would likely have a worse effect in that regard, however. It still seems inconceivable that this will happen, but not impossible. My favourite quote in today's newspapers comes from Nils Pratley in The Guardian. "To European minds, one element of any plan to tackle the US's debt woes seems obvious - higher taxes for the corporate sector and the rich, who have prospered mightily during two decades of debt-financed growth." Maybe - but it's going to take a shift in the political culture of some magnitude to get to that point of rationality.
Home | Free Newsletter | Submissions | Advertising | Donations | Archives | Internships | About Us | Privacy Policy | FAQs | Contact Us | All Articles
Paid Advertisements
Find jobs Millsberry Find jobs Web Design Forums Business Gifts 
DHgate.com
http://www.schoolexpress.com| http://www.sciencereviewgames.com| http://www.JoanneJacobs.com|