Page 1 of 2 Obama's unending jobs nightmare
By Hossein Askari and Noureddine Krichene
The Barack Obama administration is slowly waking up to reality, faced with an
unemployment rate in the United States that has already exceeded 10% and is now
firmly entrenched at around that level (or more than 17% using a more
encompassing measure) and an ever increasing number of Americans impoverished
and living on food stamps.
What matters most to the American electorate is jobs and their livelihood. For
Democrats in congress, especially senators up for re-election in 2010, the same
reality may mean deserting their president when it comes to key issues that are
important to their constituencies back home.
Instead of jobs, Obama's advisors have focused their effort in restoring
financial stability, and in doing so predicted a maximum
unemployment rate of about 8%. In the process, they have lost much of their
credibility. So late in 2009, Obama first turned to the private sector for
advice, and in early 2010 he started considering more stimuli to get the
unemployment rate down. Now, in late January, he has even put his drive for
healthcare reform aside to get Americans back to work.
In short, employment is now job one for Obama and his team and for the US
Congress. Voters at the November elections will dump incumbents who do not
respond to this simple demand.
Unemployment is more than demoralizing for the unemployed, representing a
considerable loss of output and creating social distress. It is a huge cost for
any society. Seeing his approval rating falling below 50% ahead of the 2010
mid-term elections, Obama seems to be disappointed by his key policymakers -
National Economic Council Director Larry Summers, Chairwoman of the president's
Council of Economic Advisers Christina Romer, and Chairman of the Federal
Reserve Ben Bernanke - and is turning to businessmen for fresh practical ideas.
Summers comes across as arrogant and Bernanke is increasingly blamed for the
financial crisis and as too cozy with Wall Street.
A year ago, Obama launched the most expansionary fiscal and monetary policy in
US history: a stimulus program of close to $800 billion on the heels of the
$160 billion stimulus program associated with House Speaker Nancy Pelosi; a
record deficit at 13% of gross domestic product (GDP); near-zero interest
rates; and unlimited money creation by the Fed. The Obama team confidently
promised the creation of 6 million jobs in 2009. Hence, it is rather
disquieting to see unemployment rising to 10% from 4% when fiscal deficits are
at record levels and Fed is injecting unlimited liquidity at near-zero interest
rates.
The Obama team and its supporters among academics and politicians, however,
claim success: without these policies the consequences would have been even
more disastrous, that is, unemployment would be much higher than 10%. They keep
looking into the future and predict economic recovery and strong economic
growth in 2010. All this while, millions of American families are without jobs
and fighting for their survival.
It is not clear what averted more disastrous conditions: Fed policies that
pushed oil prices to $147 per barrel and the price of rice to $1,300 a tonne,
or the collapse of the commodity price bubble that pushed oil prices to as low
as $35 per barrel and rice prices to $300. Data on real consumer spending
clearly shows that the drop in the price of gasoline from $5 a gallon to less
than $2 a gallon and the moderation of food-price inflation following the
collapse of the commodity bubble have had a positive effect on consumer real
spending in the context of deep recession, credit squeeze, and rising
unemployment.
Similarly, relief in the housing market could be attributed to waves of
foreclosures and a sizeable downward adjustment of home prices to more
realistic levels.
The objective of the Obama administration was to re-inflate the US economy out
of debt and prevent deflation, that is, prevent a market adjustment and the
fall of housing and other asset prices. These same policies had led to
financial and economic mayhem by the end of the George W Bush era. The external
deficits had widened to 5-7%, US national savings became negative, the dollar
lost significant value, speculation intensified in asset and commodity markets,
and credit was showered to subprime markets.
There were dramatic price increases in energy and food. General bankruptcies
and economic dislocation followed.
It would be rather miraculous that an intensification of failed policies would
secure full employment and economic prosperity. John Maynard Keynes (1936)
prescribed these policies as a way to turn stones into bread. Until one
believes that stone can indeed become bread, it would be hard to believe how
the policies that left devastation and despair in so many countries and brought
economic crisis in the US and massive losses and bailouts can now turn
everything around. These policies have turned bread into stones. They have
destroyed a number of established banking institutions and disrupted key
sectors such as the auto-industry, segments of manufacturing, construction, and
commerce.
To obviate any loss of support to these policies, Federal Reserve chairman
Bernanke has flatly rejected that idea that Japan's experience of a lost decade
caused by near-zero interest rates and record fiscal deficits could be
applicable to the US. He has also rejected any link between cheap money policy
and the falling dollar and asset and commodity price inflation.
Politicians and academicians have been strong supporters of Obama's record
fiscal deficits; cheap money is forced as a way to finance these deficits. The
Obama administration is running large public deficits and would object to any
rise in the interest rate, as it would increase the carrying cost of public
debt. The administration has, therefore, relied heavily on the role of the
government to restore economic growth and return to full employment. It has
disregarded the role of the private sector and the price mechanism for
restoring economic growth and full employment. Demand is artificially created,
not through income generation.
In view of the large external trade deficits, expansionary fiscal and monetary
policies would only aggravate these deficits and would have a small impact on
economic growth and employment. In spite of the economic recession, the US
trade deficit was $840 billion in 2008 (6% of GDP). Although narrowing in 2009,
it remained large and kept the dollar under pressure.
Large current account deficits mean that domestic aggregate demand exceeds
gross domestic product; they are also called the savings gap. No country can
sustain large external deficits indefinitely. However, because of the role of
dollar as a reserve currency, the US was able to run deficits over decades and
just print more and more dollars for foreigners to hold.
Today, it is business as usual. As under Bush, current policies are propitious
for speculation and wealth redistribution. Even though the US economy has been
in recession, stock indices have appreciated by about 40% since February 2009.
Gold and other commodities have also risen sharply. At first glance, such
appreciation would indicate exceptional economic growth and high profits in the
economy. However, the disconnect between the real economy and financial sector
is clear.
The private sector continued to shred jobs, meanwhile stock and commodity
prices kept running ahead in a pure inflationary manner. Near-zero interest
rates and abundant liquidity found their way into speculation. Speculative
gains constitute free appropriation of real wealth. The gainers draw real
wealth at the expense of workers and fixed-income earners. They absorb real
savings and diminish investment capacity.
As in previous episodes of financial crises, including the Great Depression,
speculative increases in asset prices are regarded as a sign of healthy growth;
they remain supported by low interest rates and massive liquidity injection
until they collapse on their own, causing massive losses and economic
chaos.
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