Monday, June 14, 2010

Americans in search of new economics

Business Times - 15 Jun 2010

Americans in search of new economics


ASK a Republican politician or a free-market pundit whether the Keynesian oriented approach of Obamanomics - using fiscal policy to boost the economy during a downturn - was working and he or she would probably respond with a resounding 'No'.

The revival of conventional Keynesianism to fight the Great Recession reflects short-term political considerations by providing quick fixes to the crisis and creates the illusion of economic growth and declining unemployment, they argue.

They say that the government's efforts to stimulate aggregate demand and reduce unemployment by manipulating spending has not - and will not - work and that it will end-up producing negative side effects, including rising debt and higher inflation.

The recent jobs numbers, suggesting that most of the job created last month were the temporary jobs of workers conducting the census, seemed to be playing into the hands of the Obamanomics sceptics.

They contend that jobs created under Obamanomics turn out to be temporary make-work or 'bubble' jobs 'created' from taking taxpayer money and mandating a politically desired programme. It thus fails to produce real economic growth and may involve the opportunity cost of shifting resources from productive to uneconomic uses.

In fact, some critics of the economic policies pursued by the Obama administration have been warning that a recent drop in the stock market is a sign that the American economy may be entering into a double dip recession. Instead of an economic downturn followed by an upward swing (in the shape of a 'V'), the economy after falling down and then going up, will supposedly experience another downturn before going up again (the shape of a 'W').

And the critics blame Obamanomics and the failure of the huge stimulus spending package to help create general private-sector growth for what they predict will be a second dip.

The second downturn in the economy 'will be accompanied by inflation, making it worse than the first recession', forecasts Republican pundit Dick Morris. 'With interest rates set to rise (because the Fed is no longer massively purchasing securities to keep them down), taxes set to go up (because of Obama's ideology) and global energy use about to increase, sending prices higher (because the rest of the world is recovering), prices have to go up,' Mr Morris explains.

'But with no growth in real personal income and household credit close to all-time highs, there is not enough demand to pay the higher prices, so a deeper slump will ensue,' he concludes.

Asked to assess such dire predictions, US Federal Reserve chairman Ben Bernanke tried to be reassuring about the outlook for the American economy during testimony to the House of Representative's Budget Committee on Wednesday, stressing that he did not think that a double-dip recession was likely. Instead, the Fed was forecasting moderate growth in the 3.5 per cent range coupled with a modest decline in unemployment.

That was nothing to cheer about, but certainly it was not in line with the worst-case scenarios drawn-up by many Republicans and conservatives.

Unfortunately for Mr Obama, the American public does not share even that kind of muted optimism expressed by Mr Bernanke, with most opinion polls suggesting that American believe that their economic condition is actually getting worse under the current administration.

The fact that the view from the corporate world and the financial sector is quite different and much more bullish - investors and executives acknowledge that the financial markets were melting down and the economy was on the verge of a Great Depression on the eve of Mr Obama's inauguration - only seems to highlight the growing gap between Wall Street (corporate profits are 30.6 per cent higher than a year ago) and Main Street (where wages are up only by 1.6 per cent).

In fact, there have been a lot of items of good economic news: the GDP has been growing - 2.2 per cent, 5.6 per cent and 3.2 per cent for each of the last three quarters, employment is rising, and according to the Consumer Confidence Index, the confidence of the American consumer is growing, and he or she is spending a little more (which explains some of the gains in car sales). Moreover, anecdotal and statistical evidence suggest that Americans are finally starting to take control of their personal finance as they pay off their debts and start saving.

But thrifty American consumers also means that Americans are using less credit and are not spending enough, which is lowering the momentum of the recovery. At the same time, the housing market has not recovered and the crisis in the eurozone could undermine the recovery of the financial sector - although it could also strengthen the US dollar.

While Obama backers admit that the huge US$800-billion stimulus package - the so-called Recovery Act - has not created the four million jobs that they had promised, it did - together with the loose monetary policy pursued by the Fed - provide a 'booster shot' for the economy.

What the American economy needs now, the Obama backers say, is more of the same Obamanomics - new economic stimulus packages - especially at a time when interest rates are close to zero and the central bank cannot continue printing money. That may be the reason that while Mr Bernanke did express some concerns about the rising budget deficit, he also cautioned against terminating the economic stimulus programmes before the private sector starts hiring workers in large numbers.

The problem is that just as the stimulus package is starting to dry up, the political environment has become less supportive of new government spending schemes. The rise of the anti-government Tea Party with its candidates making gains in Republican primary contests in Kentucky, Nevada and Florida and the expectation that the Republicans will win more seats after the mid-term election in November - and could take control of the House of Representatives - reflects the mood of a public worried over the spectre of a rising deficit.

They demand that the government cut its spending. So while economists will continue to debate over the benefits of Obamanomics, it seems that most Americans are not impressed and are searching for a new kind of economics.

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