America is now not just in recession, but on a long slow decline into a ‘Great Stagnation’, some economists argue. Is this true? Simon Wilson reports.
How’s America doing?
A couple of months ago, President Obama, Vice-President Joe Biden and other officials set off on a tour of the country to trumpet the success of last year’s $862bn stimulus package. On the face of it, there’s a decent story to tell: the global recession is over, corporate balance sheets are looking healthier than they have for years, and factories are stepping up production. Figures out this week showed US industrial production rising surprisingly strongly in July (up 1.1% on June, the fastest rise in nearly a year).
So what’s the problem?
For many ordinary Americans, it feels less like a Summer of Recovery, and (as Newsweek put it recently) much more like a Winter of Discontent – “albeit with 90% humidity”. Take those cheering manufacturing figures. The lift followed a worrying decline in June, the first in more than a year; month-on-month statistics remain volatile. And the housing market now looks perilously close to the dreaded double-dip. The building of family homes – 80% of the market – was down a hefty 4.2% and applications for new building permits dropped 3.1%, suggesting that the fall-off in activity will continue. Even Ben Bernanke, the Fed’s cheerleader for the recovery, admitted last week that the American economy faces an “unusually uncertain” future.
Why are ordinary Americans so downbeat?
The current mood in America, in some quarters, is so dire that it scarcely seems to matter whether the country is technically in recession or not. That’s partly because the housing bust still casts an enormous shadow. Although firms might be producing cash and decent profits (keeping the stockmarket more or less where it started the year, for now), unconvinced consumers are too scared to spend. Last week’s figures showed that Americans are now saving at the highest rate (6.4% of income) since 1993. Why? Because they are anxious about the future, about their homes, and they are worried, above all, about their jobs.
How bad is unemployment?
The headline jobless figure is stubbornly high at 9.5%. This is a ‘jobless recovery’ – for now, at least. But even that headline figure doesn’t capture the true extent of the jobs crisis. That’s because it doesn’t include those who have stopped looking for work.
In the last three months alone, more than a million people have joined the ranks of the 5.9 million who have given up the job hunt. Some of these are the so-called ’99ers’: those who have received benefits for 99 weeks and now no longer qualify, dropping out of the statistics to whatever grim future awaits them. Meanwhile, spending cuts are slicing away at services once taken for granted: schools, street lighting, refuse collection, fire services, the police and public transport have all been scaled back. The result is what Ariana Huffington (in the title of a new book capturing the gloomy zeitgeist) calls Third World America. Or, as economist Paul Krugman put it in a recent column, a “once unthinkable level of economic distress is in the process of becoming the new normal”.
Won’t things pick up soon?
Not necessarily – and not if the scenario that many economists are now predicting proves accurate: the dreaded L-shaped recovery, involving a protracted economic malaise, imperceptible growth and chronic high joblessness. Some commentators, for example Edward Luce in the FT, argue that the crisis of American capitalism is not a temporary, recession-related phenomenon, but part of the “Great Stagnation”, a long-term decline in the fortunes of most Americans. And there are certainly plenty of figures to back up that view. In the last long expansion, from January 2002 to December 2007, the median American household income actually fell by $2,000, the first-ever instance where most Americans’ income fell during such a period.
So Americans really are getting poorer?
The annual incomes of all but the top 10% of Americans have been flat since 1973 – ‘median wage stagnation’ in the jargon – up just 10% in real terms in 37 years. During the same period the incomes of the top 1% have tripled, and social mobility has stalled. As economist Larry Katz puts it, “that broken elevator is what gets people down the most”. Back in the postwar years, the rising tide really did “lift most boats”, in JFK’s memorable phrase: real incomes almost doubled each generation. Now, though, large numbers of middle-class Americans feel that they are never more than a paycheck or two from the streets. And the crippling cost of healthcare means over half of bankruptcies are sparked by a serious illness or accident. So, for the first time, most Americans now expect their children to be poorer than they are.
Is the American Dream in tatters?
Nobel prize-winning economist Michael Spence believes that the Great Stagnation adds up to a profound identity crisis for America. “I have this gnawing feeling about the future of America,” he recently told the FT. “When people lose the sense of optimism, things tend to get more volatile. The future I fear most for America is Latin America: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine. Look at the Tea Party. People think it came from nowhere [but its] members are middle-class Americans who had been suffering silently for years.”
Pessimism might be un-American, but “most people grasp their own situations way better than any economist”.