James Srodes A thankless task

JAMESSRODES | Veteran commentator on Washington & Wall Street

A thankless task

Does it really matter who wins the US Presidential election of 2012?

Of course it does, in the sense that it will matter how Washington responds over the next four years to whatever crises suddenly pop up on the world stage – Iran’s nuclear threat, the implosion of the eurozone, the faltering Chinese economy, another earthquake somewhere.

But over the longer term one has to ask whether the structural cracks that are developing in the world economic and social order are not so fundamental that no American President will be able to accelerate the US back to robust prosperity let alone forestall the slide into global recession that appears headed this way.

While it is clear that there is a very anaemic sort of US recovery underway – some revival in homebuilding, motor car sales on the uptick, a speculator’s bull market on Wall Street – there is little prospect that the pace of growth will rise and many signals that it could lapse back into the stagnant decline of 2009–2011.

Despite the fact that the Federal Reserve is now in this third round of pumping liquidity into the financial sector – this time targeting mortgage lending – it does not appear to be working. While US corporations have increased bond issues because of the historically low yields enforced by the Fed, the growth in actual business investment has slowed. Bank mortgage lending increased by just half a percent during the year ended in July but bank consumer credit declined by 1.8 per cent over the period.

In short, Americans are neither spending nor borrowing and instead are playing down their heavy debt burdens accumulated over the last twenty years. This is a natural human response to the current financial crisis but it also reflects a broader and more ominous force – demographics – that has a threatening implication for all industrial nations.

Americans are getting older as a nation. Also there are going to be fewer young workers entering the workforce as time goes on, and greater numbers of retirees living to older ages and becoming even more dependent on government social safety net programmes such as pensions and affordable health care.

The US Congressional Budget office forecasts average labour force growth of just 0.5 per cent per year from now on, a third of its average pace during the 1950s boom period. That is critical because the healthy 3.3 per cent average annual growth rate that the US economy enjoyed from 1950 to 2011 was sparked by a 1.5 per cent growth in the labour force plus a 1.8 per cent annual average gain in productivity. All other things being equal, the Congressional budget economists predict that the best America will be able to do in the future under these circumstances is grow by a paltry 2.3 per cent per year. But all things will not be equal.

Poverty gap

There is another critical factor. The latest data counts 46.2 million Americans as officially poor – the largest number of persons counted as living in poverty since the government’s records began 53 years ago. Worse, the government’s economists predict that levels of poverty will likely remain above the prerecessionary levels for a decade or more.

Adding to the broader political instability is the fact that the gap between wealthy Americans and the poor continues to widen. In part this is due to the fact that much of the family wealth of middle and lower income citizens was tied up in the values of their homes which have plummeted to a greater degree than upper income families.

The most recent poverty reports do not really capture the harsh reality of the US economic malaise. To be counted as officially poor in America a family of four can have no more than $23,000 in pre-tax income – an impossibly low figure.

Nor is poverty equally shared among lower income Americans. African Americans who make up 12.8 per cent of the total population make up nearly 24 per cent of the poor. Hispanic citizens, who account for 16.5 per cent of the population, represent nearly another one third of the poor. That these two segments also are most heavily concentrated in large American urban areas only adds to the threat.

Of course there are things a President can do in the immediate future that can have critical impact on how and whether the American economy can weather the storms roiling the global markets.

He can, if he wants, dissuade the Federal Reserve from continuing to pump liquidity into a banking system already awash with unused capital and thereby lessen the prospect of an inflationary debacle when and if the demand does revive.

More immediately, he can work with the new Congress when it convenes in January to avoid the notorious “fiscal cliff” that will occur when a set of automatic tax increases and spending cuts will take effect and contract gross domestic product by four per cent with a resulting loss of two million jobs and a rebound in the unemployment rate to 9.1 per cent.

Beyond that there are pressing and thorny issues of trade policy that need addressing, especially the growing estrangement in relations between the United States and China. Questions of financial market regulation and oversight need to be settled finally as do the confused policies on development of domestic energy development.

So while it does matter who wins the US Presidency, it may prove a thankless task for the victor. n