Sunday Times (London)
May 9, 2010
by Irwin Stelzer
We are all Greeks now. Or so it would seem if we are guided by the gyrations of share prices. After all, America is running Grecian-style deficits, and its debt-to-GDP ratio is approaching the magic 90% mark that stifles growth and makes it harder to bring budget deficits under control. With taxes already at levels in excess of most of our competitors, and no political will to cut spending, it is not surprising that the Greek tragedy has focused attention on America’s river of red ink, even though the parallels are far from exact.
Worse still, analysts have begun to explore the extent of America’s exposure to Europe’s problems. The Bank for International Settlements says American banks hold more than $1 trillion of European debt, and JP Morgan estimates the eurozone accounts for 14% of US exports. The question now, and one that can’t be answered until the fog lifts over Athens and Brussels, and we have a better grasp on the eurozone’s policy response to its problems, is whether what is going on in Europe will roll out across the world just as the seemingly tiny problem of sub-prime mortgages engulfed the world economy.
The feeling round Wall Street is that the European Central Bank is being too slow to follow the British and American policy of quantitative easing, that the eurocracy is unable to respond quickly to a crisis, and therefore the danger of contagion is very real, with even the American economy at risk of infection. My own view is that we are having a crisis of confidence, which will ease as the reality of the recovery trumps the fear of Greeks bearing dicey IOUs.
It is a pity that this new nervousness about Europe — to which add concern that the Chinese regime is engineering an economic slowdown to head off the bursting of a credit bubble — is taking some of the shine off the recovery now clearly under way in the US. The jobs situation has turned round. Last month some 290,000 new jobs were created, about 230,000 of them in the private sector. The job-creation data for February and March were re-estimated: the initial report that 148,000 jobs were created in those months has been upgraded to 269,000. The improved outlook for jobs has attracted an additional 805,000 people into the labour market, which explains the uptick in the unemployment rate from 9.7% in March to 9.9% in April. That is typical of an economic recovery.
President Barack Obama rushed to the television cameras to announce these gains, as always pointing out that “there is more work [read, spending] to be done”. Since some 17.1% of all workers are either looking for jobs or too discouraged to continue doing so, he is in the nice position of taking credit for the progress, while leaving the door open to further stimulus measures.
The jobs market, of course, reflects the breadth of the current recovery. The Institute for Supply Management reports sharp increases in manufacturing output and new orders, and public-sector outlays drove the construction index up a bit — good news for a troubled sector, bad news for taxpayers who will have to foot the bill for many projects that don’t add very much to the nation’s wealth.
The recovery in the motor industry — Ford is leading the way after refusing government aid — is rolling out into other industries, most obviously makers of parts such as emission-control devices. Don’t celebrate just yet: Chrysler is still losing money, and GM has to repay $50 billion of the funds received from the government last year. Toyota has its much-publicised quality and safety problems. Still, the outlook is infinitely better than it has been for years, good news for media companies that have missed the heavy advertising programmes of the car makers.
Car showrooms are not the only places enjoying greater traffic. Consumers are snapping up appliances, the iPad’s sales of 1m units being the most publicised.
A survey by the National Association of Business Economists found that 57% of respondents are experiencing an increase in demand, while only 6% say demand is falling.
That’s enough good news to make a one-handed economist smile happily. Unfortunately, there are few such, so there is the inevitable “on the other hand”. The housing market has been benefiting from tax breaks for new home buyers and Federal Reserve support of the mortgage market and Freddie Mac and Fannie Mae — aptly called GSEs, government supported enterprises. The tax break has expired, the Fed is reducing its support, and Freddie Mac, the nation’s second-largest provider of residential mortgage funds, is asking Congress for an additional $10.6 billion in aid after losing $6.7 billion in the first quarter of this year. Just how much all of this will affect the tentative recovery in the housing market only a braver man than this writer would predict.
Then there are the problems created by a wildly expansive fiscal policy. The current recovery would be threatened if interest rates were to rise significantly. That is not outside the realm of possibility, given the Grecian style deficits, investors’ worries about sovereign debt, and the rating agencies’ warnings that America had better get its house in order or face a downgrade.
Add to this the virtual certainty that when the president’s debt reduction commission reports in December — not coincidentally after the November elections — it will recommend tax increases that will be piled on top of the added costs that small and medium-size businesses face from the healthcare “reform”. Not a recipe for rapid growth.
Still, economists at Goldman Sachs are predicting that the current 3% growth rate, after falling to 1.5% in the second half of this year, will re-accelerate to the 2.5%-3.5% range in 2011 as “Fed policy remains easy and the multiplier effects from earlier fiscal policies are still rippling through the economy”. Which doesn’t speak too well for prospects after the Fed tightens monetary policy and Obama is forced to reduce deficit spending. But that’s for later. For now, spring is sprung, the economy is on the move, and Greece remains far away.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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