June 10, 2011
Is Permanent Recession the New Normal?By James G. Wiles
It really is a Great Recession now.
You have to be around 90 to even remember an economy like this. The United States has not experienced two straight years of 9% unemployment since before the Second World War.
As Amity Shales wrote in The Forgotten Man, it was the duration of the economic collapse which began in 1929, not its severity, which created the Great Depression. According to the Bureau of Labor Statistics, the United States has now had unemployment of 9%, give or take a couple tenths of a point, since May, 2009.
The most recent figure, for May, 2011, is 9.1%.
In a speech on Tuesday, Fed chairman Ben Bernanke essentially threw up his hands. He's right. The Keynesian economic toolbox is empty. So is monetary policy -- unless you want to radically inflate the economy and depreciate the dollar.
China and other nations are already challenging the dollar's status as the world's sole reserve currency. Revving up the printing presses at the Bureau of Currency will only make that result inevitable.
More government stimulus -- which is what Democratic economists like Paul Krugman are advocating -- is also politically impossible. It's also not clear it would work. Yet Professor Krugman is correct when he says that the Great Recession is caused by a lack of demand. He's also absolutely correct to point out -- as he did on Charlie Rose last Friday night -- that the current situation is unacceptable.
Continuation of these levels of unemployment will cause us to lose an entire generation. The Great Recession is creating a fundamental change in the nature of unemployment, careers, family life, and economic prospects in this country. In the last two years, Bob Herbert of the New York Times and Don Peck of the Atlantic Monthly have both written powerfully on this topic.
Mr. Peck's piece, which appeared in March, 2010, has turned out to be especially prophetic. Fifteen months ago, he wrote: "[t]he economy now sits in a hole more than 10 million jobs deep -- that's the number required to get back to 5% unemployment, the rate we had before the recession started, and the one that's been more or less typical for a generation."
That hole is still there. And we need to create about 1.5 million new jobs every year -- about 125,000 new jobs every month -- just to keep the unemployment rate from climbing farther.
Those of us who have children and grandchildren now entering the employment market are rightly concerned.
Can anything be done?
President Obama's only defense -- it's Bush's fault! -- is ludicrous. And its rejection by most voters is reflected in the latest polls. With this week's sudden resignation of the President's top economic advisor Austun Goolsbee, most senior members of the Obama economic team -- except Secretary of the Treasury Tim Geithner and chairman Bernanke -- have left government. So have Mr. Obama's Secretary of Commerce and his first White House chief of staff, Rahm Emanuel.
They know a bad thing when they see it. But to repeat: can anything be done?
No. The problem with the economy is one of politics, not economics. The economic solution is known, but it cannot be implemented until there's a Republican president and a Republican Congress. The reason is the ideology of the Man in the White House.
The stimulus which will turn this economy around has to come from the private sector, not the government. President Obama and the Democrats who control the Senate will never agree to take the actions necessary to jump-start private business investment. And that's even though the private-sector money for such a turn-around is readily available.
According to Standard & Poor's, at December 31, 2010, the 500 big American companies in its S & P 500 Index were sitting on $2.4 trillion in cash and short-term investments.
Five months on, there's probably a lot more of it.
This $2.4 trillion cash hoard has steadily accumulated since Barack Obama became president. At the end of 2008, it already stood at a record $811 billion. A year later, it was $ 1.18 trillion. In 2010, it more than doubled.
The existence of this huge accumulation of corporate capital in cash and marketable securities over the last three years means that the United States is experiencing a classic "capital strike." A capital strike occurs under a system of democratic capitalism where unacceptable political risk discourages private investment from taking place. The result is economic stagnation and a steady build-up of uninvested capital.
That's exactly what we have at the present time. Consider:
That $2.4 trillion represents 16% of total U.S. GDP last year of $14.7 trillion. It's also three times the size of the failed stimulus of 2009. Its injection into the American economy -- without any need for either a tax increase, an increase in the federal deficit, the hiring of a single federal bureaucrat, or an Act of Congress -- would be like firing the afterburner on an F-18.
Okay, you say: what might a package of actions by the federal government to unleash that $2.4 trillion (more likely, today, over $3 trillion) gusher of private investment capital look like? It's not rocket science. Consider the following:
CONGRESS IS ADJOURNED. THE LIBERTIES OF THE PEOPLE ARE SECURE.
Furlough all non-essential federal civilian employees for the month of August, without pay but with benefits. In effect: have a one-month government shut-down.
Would this program work, by driving GDP growth and creating millions of private-sector jobs in a turbo-charged economy? Sure. Is there any change President Obama and the Democrats who control the Senate support even one of these items? No.
Here's the point: the problem is not a lack of economic knowledge of what to do. The problem is ideology -- and the need for regime change in Washington. That won't happen until January, 2013, at the earliest.
The Capital Strike will end when the Obama Administration ends. Until then, our unemployed children and grandchildren will have to wait...and wait...and wait.
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