The Impossible Recovery

Vivan Sharan

Over the last few years, there have been many ways to look at the post financial crisis of the United States economy, and not all perspectives suggest a continuing recessionary environment. This has especially been true given the sovereign debt crisis inEurope, which has in recent times taken attention away from the epicentre of the financial markets. However, it can now be argued that all perspectives are closer to converging.

On last Friday, the U.S unemployment numbers for the month of June were released, and this indicated that a very dismal 18000 jobs were created, and unemployment has climbed up to 9.2%. While the private sector added 57,000 jobs, government workers dropped by 39,000. On analysing the way the recovery has shaped up so far, there seems to be a deeply entrenched duality in the way the American economy has responded to repeated fiscal stimuli.

The American Recovery and Reinvestment Act, which was formulated as a response to the financial crisis, was signed into law on February 2009. Obama’s optimistic team of economists, led by Christina Romer, produced a report which suggested that without the envisioned $288 billion in Federal tax cuts and $499 billion in Federal government spending, unemployment rate would approach 9%, whereas, with the stimulus, it would not exceed 8%. Since economics is not an exact science, the authors of the report can be forgiven for making incorrect forecasts. However at the same time, the right questions must be asked about where the money went.

In a recent study by eminent economists Timothy Conley and Bill Dupor, benchmark point estimates suggest that the aforementioned Act added/saved approximately 450,000 state and local government jobs, simultaneously destroying close to one million private sector jobs. Since funds from the Act were primarily used to offset state revenue shortfalls and increasing Medicaid entitlements, there was little in the way of encouragement or actual fiscal support for the private sector. Upon receipt of funds from the Act, states could legitimately use the money to offset expenditure and therefore use the funds as revenue – making the two mutually substitutable. In the study, it is also argued that without the Act, government employees would have been forced to look for private sector jobs.

The White House had suggested that the Act has created 3 million jobs, and this works out to $266,000 per job. Whether or not it has been “worth it” is a subjective call, but it is clear that the debt incurred from job creation of this sort cannot possibly be repaid. Borrowing heavily from the private sector to create jobs, at the outset, seems counterintuitive and un-American. Given the size and contribution of the private sector to the U.S economy, especially from smaller businesses, the Obama administration seems to be playing a dangerous and unsustainable game. If there is to be a palpable recovery, there is almost unanimous consensus amongst economists and commentators that it has to be driven by the private sector.

The Bureau of Labour Statistics claims that the number of unemployed persons is touching 14.1 million, while the total labour force of 153.4 million has remained closed to unchanged over the month of June. The most worrying statistic hidden below all the headline numbers is the number of long term unemployed – those who have not found jobs for over 27 weeks, accounted for 44.4% of the total unemployed. Any arguments about “just in time” employment patterns are discredited because of this number. It no doubt follows that the number of people falling out of the workforce due to complete discouragement from not being able to find a job is going to exacerbate the entire employment situation in the country.

The problems in the job market are herculean, and there seems to be no Hercules in the current administration who has the gumption to publically admit that all solutions devised so far are merely just playing for time.  The pervasive duality behind the ever increasing fiscal burdens in the real economy, while easy credit, is fuelling pre-crisis level price to equity ratios (23.75 last) in the stock markets, is creating the perfect storm. The SP 500 index, which lists the top 500 companies (by market cap), closed at 1344 last week, at levels similar to those before the unravelling of the full effects of the crisis. Equities are expensive and money is cheap.

If ever there were a case for a double dip recession after the financial crisis, it is now. It can be argued that summer is usually a bad time for the job market or that a higher rate of structural unemployment is the new normal – but there is no hiding from the fact that things have panned out quite contrary to the originally outlined recovery plan. Given that filibustering in the U.S Congress is going to continue unabated until the elections next year, unemployed workers have little in the form of real hope.

In the President’s Budget this year, it was assumed that the U.S economy would grow at 3.1% this year and 4% next year whereas evidence so far suggests that there is no reason to expect a growth rate above 2% this year. Now, more than ever the disconnect between the political economy and the real economy is going to be highlighted. The incoherence in policy making, and the complete disregard of long term timelines, makes the entire situation seem similar to that of the climate change debate. It seems like the stakeholders in the U.S economic debate are tired with all the “economic pornography” – with all the apocalyptic warnings about debt ceilings, trade deficits, faltering housing recoveries and stubborn unemployment, and are waiting for externally created solutions.

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