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
Monday 23 August 2010
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
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