Stephen King: Never mind the Jet Blue flight attendant, what about the economy, stupid?

Outlook: The US is showing signs of traumatic economic weakness, not seen in the post-war period. Avoiding the doubledip would not be a sign that the trauma is over

I could be wrong but, having returned from a holiday in the United States, I've concluded that Americans for the most part are focused on only three things: (i) the proposals for a mosque near Ground Zero; (ii) whether Steven Slater, the Jet Blue flight attendant who quit his job in a fit of rage by escaping from a passenger jet via the emergency slide, is a hero or villain; and (iii) whether the US economy, having shown signs of recovery earlier in the year, is now back on its knees, perilously close to a double dip.

I won't comment on the first two issues for the simple reason that, ultimately, "it's the economy, stupid", as Bill Clinton reminded us in the 1990s. The double-dip debate is, however, a sideshow. It implies that the US economy has only two settings: recession or recovery. Sadly, that is no longer true. The US economy is showing signs of traumatic economic weakness unprecedented in the post-war era. Mere avoidance of a double-dip would be in no way a sign that America's economic trauma is over.

Traditionally, the US economy bounces back. In 2002, another time of economic difficulty following the 2000 stock market crash and 9/11 a year later, Ben Bernanke, now the chairman of the Federal Reserve, offered these thoughts: "The US economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labour and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system."

Given the events of recent years, these musings are worrisome. While it may have been true eight years ago that the US financial system was strong, that can no longer be said with a straight face. Back then, kick-starting the US economy was a relatively easy affair. While companies were none too keen on borrowing, households were. Banks, meanwhile, were particularly enthusiastic about lending. These conditions no longer hold. The credit crunch has restricted the availability of funds while persistently-depressed consumer confidence has limited the demand for funds. Interest rates may be very low but low interest rates no longer offer the potency of old.

It is not just the financial system which looks sick. The US labour market is misfiring. The unemployment rate is incredibly high. More disturbing, perhaps, is the off-the-scale rise in long-term unemployment. The US is supposed to be a "hire and fire" economy but, for many of its citizens, it has turned into a "you're fired" economy. Increasing numbers of people are unemployed – and have been unable to find new jobs.

Some argue that this rise in long-term unemployment is merely a consequence of a recent extension in the duration of unemployment benefit from to 18 months, reducing the incentive for people to look particularly hard for new jobs. It's a convenient rationalisation but, according to Kevin Logan, HSBC's chief US economist, it probably accounts for no more than 20 per cent of the overall increase in the number of people who have been out of work for six months or more.

More likely explanations include the permanent loss of jobs in previously-bloated construction and real estate sectors, the outsourcing of manufacturing jobs to other, lower cost, parts of the world and the impact of the financial crisis on the housing market.

An increasing number of US households are suffering from negative equity, where the value of their property has dropped below the outstanding mortgage. While many sub-prime customers have simply walked away from their houses, content to accept their newly-bankrupt status, many prime customers have stayed put, fearing the stigma of financial insolvency. A likely consequence is that the much-vaunted geographical mobility of American labour has declined, leading to a pick-up in long-term unemployment.

These difficulties have left the US economy without its "bounceback-ability". The absence of recovery, not the onset of another recession, is the real problem. Even with just the one recession, the overall output drop in this crisis has already been bigger than the losses accrued on a cumulative basis during the horrendous double-dip recessions of the early 1980s.

If there is no meaningful recovery in the second half of the year – unfortunately, an increasingly likely prospect given the softness of recent data – this latest crisis will raise deep questions not just about the cyclical problems facing the US economy but, also, about unforeseen structural challenges. The US will be faced with the same kinds of existential questions which the UK had to address at the end of the 1970s and which Japan continues to address even now. Despite the talk about additional stimulus, it may dawn on US policymakers that the macroeconomic magic wands of times past are no longer working.

It might get worse. Most of the time, economists tend to think in "real" terms, removing the effects of inflation from macroeconomic data. Sometimes, however, it makes more sense to think in nominal terms – what's happening to the value, rather than the volume, of economic activity. For countries in massive debt, with interest rates down to zero, it's ultimately the nominal world that matters. If nominal activity is weak – if, for example, wages are rising only very slowly or, even worse, falling – the ability to repay debt, even if interest rates are at zero, becomes increasingly problematic.

In nominal terms, recent economic developments look absolutely terrible. A combination of weak recovery and falling inflation has left the value of economic activity unusually depressed relative to both previous economic recoveries and the eye-popping amount of debt hanging around the American economy's neck today. This is not a good place to be. The stimulus measures were designed to put the US economy back on a recovery path, allowing the debt burden slowly to fade over time. In the absence of recovery, the debt burden is, if anything, getting bigger. In place of the usual virtuous circle, the US increasingly is in danger of becoming trapped in a vicious circle of debt, deleverage and deflation.

No doubt the Federal Reserve is examining with ever-greater scrutiny the various unconventional options to be found in its monetary toolkit to deal with this unpleasant situation, perhaps taking its cue from the Bank of England's earlier purchases of gilts. But, as Mr Bernanke noted in 2002, it would have been far better not to have got into such a dismal position in the first place. Back then, Mr Bernanke noted that the US had a far greater chance of dealing with deflation problems than had been true of Japan because "Japan's economy face[d] some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt." In hindsight, it's an unfortunate conclusion: whether Americans like it or not, their economy is increasingly looking like Japan's. Perhaps that's ultimately why Steven Slater, Jet Blue's anti-hero, tried to escape.



Stephen King is managing director of economics at HSBC

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
Sport
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
PROMOTED VIDEO
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
people
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
Voices
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Sport
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
sport
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little