G
Gandalf Grey
Guest
The Cavalry Isn't Coming: High Unemployment and High Inflation Make This
Recession Different
By Ted Rall
Created Apr 16 2008 - 8:08pm
"Why is this recession different from almost all other recessions?" asked
Herbert Barchoff. The economist, a former president of the Council of
Economic Advisers, answered his own question: "This is not only the usual
cyclical recession, but also a structural recession."
Barchoff's dark assessment appeared in a letter to the editor of The New
York Times---in June 1992. Then, like now, Americans were suffering through
a long, grinding recession following a boom (under Reagan) that had
primarily benefited the wealthy. There were mass layoffs. The real estate
market had collapsed. Foreclosures were rampant.
George H.W. Bush, who had expected to coast to reelection on the strength of
his near 90 percent post-Gulf War approval ratings, projected a Herbert
Hoover-like resolve to not lift a finger to alleviate the misery. The
Federal Reserve cut interest rates, but it didn't help. Six months later,
angry voters fired an out-of-touch president who seemed unwilling to fix an
economy he didn't think was broken in favor of a guy who claimed to feel our
pain.
Barchoff, it would turn out, was too pessimistic. "To reverse the excesses
of the 1980's," he wrote, "restructuring has been going on in massive
proportions at every level. It is a rare day that newspapers do not report
layoffs, often in the thousands in the industrial sector." What Barchoff
didn't know--few people did--was that the U.S. was about to begin the
longest, broadest and biggest period of economic expansion experienced by
any civilization in human history.
Downsizing continued in traditional sectors like manufacturing and
newspapers. Even during the Clinton boom, millions of people were ruined,
forced to declare bankruptcy. Midwestern cities were reduced to rusted-out
shells. But none of that mattered to Wall Street. The Internet revolution
prompted so much capital investment, and generated so many new jobs--freshly
minted college grads thought it perfectly normal to earn $85,000 moving
around lines of HTML--that otherwise sane people began talking about a "new
paradigm" in which "the old rules no longer apply."
In other respects, however, Barchoff was prescient. "[The then-new European
Community] will substantially hurt our ability to be competitive," he
correctly predicted. "The drop in interest rates is no solution. During the
Great Depression the prime rate went to one percent, with no cure. When you
are out of work or afraid of losing your job, you do not take on debt. Nor
will entrepreneurs borrow even very cheap money unless there is a market."
The Bush Sr. recession was a grim affair. When I graduated from Columbia in
1991, the university canceled its annual jobs fair due to employers' lack of
interest. But it was a picnic compared to what we're facing now. Bush Jr.
could finally realize Barchoff's nightmare of a structural recession--the
kind of no-way-out shock experienced by Russia after the collapse of the
Soviet Union.
"Normal" cyclical recessions feature increased unemployment, which puts
downward pressure on prices. You rarely see high unemployment and high
inflation at the same time. Conservative economists point to rising
inflation during the late 1970s as an exception, but that wasn't even a
downturn, much less a recession. Inflation was high but unemployment was
low. Anyway, the inflation didn't hurt workers; during the Carter years mean
wages rose faster than inflation. The opposite is true now. Real income is
falling.
The economy has bled 3.1 million jobs since George W. Bush assumed the
presidency in 2001, the worst record since the Depression. The official
unemployment rate, constantly re-jiggered to make the economy appear more
robust, has risen to 5.1 percent. The long-term unemployment rate, which
includes people who have had such bad luck looking for work that they've
given up entirely, has doubled, to over 13 percent.
Meanwhile, inflation is approaching seven percent. Again, that's the
official inflation rate. Your mileage as an average American--who spends a
third of your pay on housing and more and more on gas--will vary. But let's
not dwell on the irony of $4-a-gallon gas resulting from a war fought to
steal oil.
But wait. There's even more bad news.
Two-thirds of economic activity is generated by consumer spending. Most
people are broke. So much for that two-thirds. "In 2000," reports David
Leonhardt in The Times, "at the end of the last economic expansion, the
median family made about $61,000, according to the Census Bureau's
inflation-adjusted numbers. In 2007, in what looks to have been the final
year of the most recent expansion, the median family, amazingly, seems to
have made less--about $60,500."
This, says, Leonhardt, is a big deal. "This has never happened before, at
least not for as long as the government has been keeping records." RBC
Capital Markets reports that consumer confidence has fallen below 30
percent, an all-time record low. T.J. Marta, a fixed-income strategist at
RBC, said: "What confidence? There is no confidence. It's like 1929."
If Barchoff had picked up a copy of the San Jose Mercury-News in 1992, he
would have read about the birth of the Web revolution, then touted as the
"information superhighway." But there's nothing like that coming down the
pike today. To paraphrase the ever-quotable Donald Rumsfeld, we're going to
have to make do with the economy we have, not the one we wish we had.
Liberal economists like Paul Krugman suggest a rerun of the 1930s, when
FDR's New Deal employed millions to build new infrastructure like dams and
bridges. But none of the three remaining presidential contenders is likely
to undertake such a thing. "The worst-case scenario" about the 1991 war
against Iraq, Barchoff said in 1992, would have been if it had lasted two
years and cost an extra $200 billion. Iraq War II, now in its sixth year, is
currently pegged at an estimated $3 trillion. Republican John McCain is
committed to pouring more trillions into Iraq War II until victory is
achieved, i.e., forever. As Democrats wary of being tarnished with the label
of "big spender," both Obama and Clinton will likely place fiscal discipline
ahead of expansive new government programs.
There is no short-term fix. In the long term, we must put more money into
more people's pockets. That means higher wages and lower taxes for the poor
and middle class. Some of what is needed is easy to see: a more progressive
tax code, repealing laws that allow employers to harass and fire those who
try to organize unions, nationalizing industries run by vampire
capitalists--health insurers, private hospitals, colleges and universities.
Banks encourage predatory lending while stifling saving. They ought to be
re-regulated. What madness permits them to charge 30 percent on credit cards
while paying one percent on passbook savings accounts?
More--much more--is necessary to prevent the wholesale collapse of the U.S.
economic system. A maximum wage should be imposed--the highest paid American
should earn no more than ten times the lowest paid. I know, I know--none of
this will happen. There will be nothing but Band-Aids and lazy rhetoric as
we plummet into the abyss. It cannot be otherwise, for our politics are
ossified, the media is corporatized, and we the people are dull and
apathetic.
_______
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
Recession Different
By Ted Rall
Created Apr 16 2008 - 8:08pm
"Why is this recession different from almost all other recessions?" asked
Herbert Barchoff. The economist, a former president of the Council of
Economic Advisers, answered his own question: "This is not only the usual
cyclical recession, but also a structural recession."
Barchoff's dark assessment appeared in a letter to the editor of The New
York Times---in June 1992. Then, like now, Americans were suffering through
a long, grinding recession following a boom (under Reagan) that had
primarily benefited the wealthy. There were mass layoffs. The real estate
market had collapsed. Foreclosures were rampant.
George H.W. Bush, who had expected to coast to reelection on the strength of
his near 90 percent post-Gulf War approval ratings, projected a Herbert
Hoover-like resolve to not lift a finger to alleviate the misery. The
Federal Reserve cut interest rates, but it didn't help. Six months later,
angry voters fired an out-of-touch president who seemed unwilling to fix an
economy he didn't think was broken in favor of a guy who claimed to feel our
pain.
Barchoff, it would turn out, was too pessimistic. "To reverse the excesses
of the 1980's," he wrote, "restructuring has been going on in massive
proportions at every level. It is a rare day that newspapers do not report
layoffs, often in the thousands in the industrial sector." What Barchoff
didn't know--few people did--was that the U.S. was about to begin the
longest, broadest and biggest period of economic expansion experienced by
any civilization in human history.
Downsizing continued in traditional sectors like manufacturing and
newspapers. Even during the Clinton boom, millions of people were ruined,
forced to declare bankruptcy. Midwestern cities were reduced to rusted-out
shells. But none of that mattered to Wall Street. The Internet revolution
prompted so much capital investment, and generated so many new jobs--freshly
minted college grads thought it perfectly normal to earn $85,000 moving
around lines of HTML--that otherwise sane people began talking about a "new
paradigm" in which "the old rules no longer apply."
In other respects, however, Barchoff was prescient. "[The then-new European
Community] will substantially hurt our ability to be competitive," he
correctly predicted. "The drop in interest rates is no solution. During the
Great Depression the prime rate went to one percent, with no cure. When you
are out of work or afraid of losing your job, you do not take on debt. Nor
will entrepreneurs borrow even very cheap money unless there is a market."
The Bush Sr. recession was a grim affair. When I graduated from Columbia in
1991, the university canceled its annual jobs fair due to employers' lack of
interest. But it was a picnic compared to what we're facing now. Bush Jr.
could finally realize Barchoff's nightmare of a structural recession--the
kind of no-way-out shock experienced by Russia after the collapse of the
Soviet Union.
"Normal" cyclical recessions feature increased unemployment, which puts
downward pressure on prices. You rarely see high unemployment and high
inflation at the same time. Conservative economists point to rising
inflation during the late 1970s as an exception, but that wasn't even a
downturn, much less a recession. Inflation was high but unemployment was
low. Anyway, the inflation didn't hurt workers; during the Carter years mean
wages rose faster than inflation. The opposite is true now. Real income is
falling.
The economy has bled 3.1 million jobs since George W. Bush assumed the
presidency in 2001, the worst record since the Depression. The official
unemployment rate, constantly re-jiggered to make the economy appear more
robust, has risen to 5.1 percent. The long-term unemployment rate, which
includes people who have had such bad luck looking for work that they've
given up entirely, has doubled, to over 13 percent.
Meanwhile, inflation is approaching seven percent. Again, that's the
official inflation rate. Your mileage as an average American--who spends a
third of your pay on housing and more and more on gas--will vary. But let's
not dwell on the irony of $4-a-gallon gas resulting from a war fought to
steal oil.
But wait. There's even more bad news.
Two-thirds of economic activity is generated by consumer spending. Most
people are broke. So much for that two-thirds. "In 2000," reports David
Leonhardt in The Times, "at the end of the last economic expansion, the
median family made about $61,000, according to the Census Bureau's
inflation-adjusted numbers. In 2007, in what looks to have been the final
year of the most recent expansion, the median family, amazingly, seems to
have made less--about $60,500."
This, says, Leonhardt, is a big deal. "This has never happened before, at
least not for as long as the government has been keeping records." RBC
Capital Markets reports that consumer confidence has fallen below 30
percent, an all-time record low. T.J. Marta, a fixed-income strategist at
RBC, said: "What confidence? There is no confidence. It's like 1929."
If Barchoff had picked up a copy of the San Jose Mercury-News in 1992, he
would have read about the birth of the Web revolution, then touted as the
"information superhighway." But there's nothing like that coming down the
pike today. To paraphrase the ever-quotable Donald Rumsfeld, we're going to
have to make do with the economy we have, not the one we wish we had.
Liberal economists like Paul Krugman suggest a rerun of the 1930s, when
FDR's New Deal employed millions to build new infrastructure like dams and
bridges. But none of the three remaining presidential contenders is likely
to undertake such a thing. "The worst-case scenario" about the 1991 war
against Iraq, Barchoff said in 1992, would have been if it had lasted two
years and cost an extra $200 billion. Iraq War II, now in its sixth year, is
currently pegged at an estimated $3 trillion. Republican John McCain is
committed to pouring more trillions into Iraq War II until victory is
achieved, i.e., forever. As Democrats wary of being tarnished with the label
of "big spender," both Obama and Clinton will likely place fiscal discipline
ahead of expansive new government programs.
There is no short-term fix. In the long term, we must put more money into
more people's pockets. That means higher wages and lower taxes for the poor
and middle class. Some of what is needed is easy to see: a more progressive
tax code, repealing laws that allow employers to harass and fire those who
try to organize unions, nationalizing industries run by vampire
capitalists--health insurers, private hospitals, colleges and universities.
Banks encourage predatory lending while stifling saving. They ought to be
re-regulated. What madness permits them to charge 30 percent on credit cards
while paying one percent on passbook savings accounts?
More--much more--is necessary to prevent the wholesale collapse of the U.S.
economic system. A maximum wage should be imposed--the highest paid American
should earn no more than ten times the lowest paid. I know, I know--none of
this will happen. There will be nothing but Band-Aids and lazy rhetoric as
we plummet into the abyss. It cannot be otherwise, for our politics are
ossified, the media is corporatized, and we the people are dull and
apathetic.
_______
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson