Disingenuous Illusions and Cold Reality

By Karl Reiner

The financial collapse of 2007-08 brought on the deepest recession since the 1930s. As the world of finance unraveled, the banking sector had to be rescued by the government.  Had there been no intervention, the slide would have been much worse, perhaps resulting in a depression. Deregulation and the lack of oversight created the environment which allowed the large financial institutions to get out of control.  An unfettered market proved it could run itself into the ground.  

Although Tea Party adherents were not unduly alarmed when the growing federal deficit was mostly fueled by expenditures for unfunded wars, they became highly incensed by the government’s desperate spending to stave off economic collapse.  Some of the resentment is understandable.  The government saved big firms while smaller ones went under, homeowners saw their home value shrink and unemployment escalated.    

Unfortunately, the magnitude of the economic damage is grossly underestimated.  Consumers, banks and governments are struggling to get out from under a massive load of debt.  Five years after the housing sector buckled and knocked the economy apart, 21.8 million Americans are unemployed or underemployed.  The fact that the U.S. Treasury, Federal Reserve and the central banks of Europe all scrambled to intervene in the crisis doesn’t impress the Tea Party faithful.  They believe the problems that came with the breakdown of the housing sector can be solved by cutting spending and curtailing government.

The recession has pushed firms into becoming more efficient, resulting in a remarkable improvement in American productivity.  U.S. productivity per hour is estimated to be 2.3% higher in 2011 than in 2010.  This should help the business sector revive when the recovery finally gets moving.  The productivity gain was not free, it came at enormous cost.  Unemployment remains above 8% and workers continue to fear job loss.  Those with jobs are getting grumpy; levels of job dissatisfaction are reaching high levels as the squeeze on employment drags on.

As banks and households pay down debts, the Tea Party assemblage in Congress remains at odds with the White House.  The unyielding tightening of fiscal policy demanded by Tea Party conservatives has led to a stalemate, the last thing the ailing economy needs. The gridlock has effectively blocked dealing with the medium-term deficit problem. The political paralysis hinders the recovery.
 
The wide impact of the recession is raising concern that mainstream economic policies may be faltering in the U.S. and Europe. Some economists fear deflation may set in.  Others believe if interest rates remain artificially low for too long, another disastrous bubble will develop.  As the shaky economy struggles, hyperinflation, the nightmare of the depression era Weimar Republic, has been added to the list of unpleasant possibilities.  

In other parts of the world, the crisis is raising doubts about the effectiveness of liberal capitalism.  America and the debt-ridden countries in Europe are seen as having failed to practice what they preach.  The West’s touted brand of democratic welfare capitalism has resulted in economic chaos.  Having permitted the misallocation of resources and the piling up of debt, it may no longer be the model to follow.

As gridlock bedevils the U.S. and financial instability rattles Europe, economic power continues to shift from the developed world to the emerging economies.  For the first time, the emerging markets will account for over half of the world’s imports in 2012.  China is closing in on America’s position as the world’s largest importer.   It could overtake the U.S. by 2014.  China now exports 30% more than the U.S. while it spends 40% more on capital investment.

Unfortunately, Congress will remain divided by uncompromising ideology. The U.S. economy will be lucky to grow between 2% and 3% in 2012, not making much of a dent in the bleak unemployment picture.  The economic frontier appears to have moved west.  Our young men and women may have to start sending resumes to Shanghai.