Whose recovery is it anyway?

Business Times - 08 Oct 2009

Whose recovery is it anyway?

Most Americans view the current recovery to be more statistical or technical than real


ECONOMISTS have yet to embrace a universal term for the downturn that the American and global economies have been experiencing since December 2007.

At the early stages of the slump when it looked as though the world as we had known it was coming to an end, some pundits were naming it the Great Depression II. The less apocalyptic-sounding names included the Credit Crunch and the Financial Crisis. Now that things seem to be under control - or so everyone hopes - the more common term used by the experts is the Great Recession.

Indeed, a depression usually describes any economic downturn where real gross domestic product declines by more than 10 per cent, while a recession is an economic downturn that is less severe. And given that this has been the worst American economic recession since the end of World War II, including the major recessions of 1973-75 and 1981-82, the Great Recession label seems to be appropriate, according to many economists. They also seem to agree that whatever you want to call it, well, it's over.

Perhaps one indication that the downturn is over is that former Federal Reserve chairman Alan Greenspan, whose lax monetary policies were being blamed for the mess of the economy, is again playing the role of the media's economic oracle.

Against the backdrop of a less bearish stock market, the former - and once again? - Maestro told the ABC news programme 'This Week' that the American economy would grow more than expected in the third quarter, hitting 3 per cent or higher, up from the 2.5 per cent he previously predicted.

But taking a jab at the former Fed chief, Nobel Prize-winning economist Joseph Stiglitz warned this week that investors and policymakers had been 'irrationally exuberant' about the recovery, and suggested that unemployment would probably keep rising.

'There's a lot of risk going ahead of some big bumps,' he said, referring to housing, commercial real estate, and consumers' inability to pay off credit cards because of job losses. 'There's a very big risk that markets have been irrationally exuberant.'

To be fair to Mr Greenspan, the former US central banker did suggest in his comments that US unemployment was 'going to penetrate the 10 per cent barrier before heading down', although he stressed that while we probably would not see a halt to job losses any time soon, policymakers have been successful in reversing the rise in unemployment, which means that the rate of the rise in unemployment was going down.

But while the mood on Wall Street seems to be improving, with banks reporting strong profits and exotic financial instruments returning back to fashion, the mood on Main Street remains very depressed.

Indeed, the official rate of unemployment is expected to continue climbing in the coming months, as the fall in consumer spending forces companies to lay off employees and the rising deficits in the budgets of local governments would mean the laying off of teachers and other workers.

The explosive mix of more unemployment, more job losses and more credit-card delinquencies, which in many cases results in personal bankruptcies and even homelessness and poverty, is going to hold up consumer spending for quite a while.

No less troubling is the growing sense around the country that many of the millions of Americans who have lost their jobs may never be able to find a full-time job in the ever-changing economy where entire industries have been crumbling, and would probably end up joining the ranks of about 8 per cent of American who are now under-employed.

Hence, it's not surprising that from the perspective of most Americans, the current recovery seems to be more statistical or technical than real. Things could actually have been worse if it wasn't for President Barack Obama's US$787 billion in the stimulus package that helped finance extended and increased unemployment benefits for the workers who lost their jobs as well as various tax credits that allowed middle-class Americans to keep their homes and survive the recession.

Many economists have also argued that the stimulus package helped save around 500,000 jobs a month that would otherwise have been lost.

The Obama administration and the Democrats in Congress recognise that the gloomy unemployment picture could hurt them politically during the mid-term Congressional election next year.

The Republicans have not come up with their own plan to fix the economy; they continue to insist that more tax cuts will help revive the economy, create new jobs, etc. But the natural tendency by angry voters during an economic recession is to punish the incumbent party in the White House and on Capitol Hill and vote for the Opposition.

If that happens in November 2010, the Democrats could lose their majorities on Capitol Hill.

Stimulus effect

About 40 per cent of the stimulus package has already been spent but its overall effect on the economy could be diminished unless Congress approves the extension of the unemployment benefits and other existing programmes for those who will lose their jobs in the coming months.

Hence President Obama, who said over the weekend the White House was exploring 'additional options to promote job creation' and who knows that Congress is not going to approve another stimulus package before the 2010 elections, is probably going to ask lawmakers to extend the existing unemployment benefits and provide tax credits to businesses who hire new workers.

That might not cheer up a lot of people on Main Street but would at least create some sense of recovery there.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


Popular posts from this blog

When will Israel attack Iran?

my new op-ed in Haaretz