The media has
headlined good economic news: fourth quarter GDP growth
of 5.7 percent
("the recession is over"), Jan. retail sales up,
productivity up in 4th quarter, the dollar is gaining
strength. Is any of it true? What does it mean?
The 5.7 percent growth
figure is a guesstimate made in advance of the release
of the U.S. trade deficit statistic. It assumed that the
U.S. trade deficit would show an improvement. When the
trade deficit was released a few days later, it showed a
deterioration, knocking the 5.7 percent growth figure
down to 4.6 percent. Much of the remaining GDP growth
consists of inventory accumulation.
More than a fourth of
the reported gain in Jan. retail sales is due to higher
gasoline and food prices. Questionable seasonal
adjustments account for the rest.
Productivity was up,
because labor costs fell 4.4 percent in the fourth
quarter, the fourth successive decline. Initial claims
for jobless benefits rose. Productivity increases that
do not translate into wage gains cannot drive the
Housing is still under
pressure, and commercial real estate is about to become
a big problem.
The dollar`s gains are
not due to inherent strengths. The dollar is gaining
because government deficits in Greece and other EU
countries are causing the dollar carry trade to unwind.
America`s low interest rates made it profitable for
investors and speculators to borrow dollars and use them
to buy overseas bonds paying higher interest, such as
Greek, Spanish and Portuguese bonds denominated in
euros. The deficit troubles in these countries have
caused investors and speculators to sell the bonds and
convert the euros back into dollars in order to pay off
their dollar loans. This unwinding temporarily raises
the demand for dollars and boosts the dollar`s exchange
The problems of the
American economy are too great to be reached by
traditional policies. Large numbers of middle class
American jobs have been moved offshore: manufacturing,
industrial and professional service jobs. When the jobs
are moved offshore, consumer incomes and U.S. GDP go
with them. So many jobs have been moved abroad that
there has been no growth in U.S. real incomes in the
21st century, except for the incomes of the super rich
who collect multi-million dollar bonuses for moving U.S.
Without growth in
consumer incomes, the economy can go nowhere. Washington
policymakers substituted debt growth for income growth.
Instead of growing richer, consumers grew more indebted.
Federal Reserve chairman Alan Greenspan accomplished
this with his low interest rate policy, which drove up
housing prices, producing home equity that consumers
could tap and spend by refinancing their homes.
Unable to maintain
their accustomed living standards with income alone,
Americans spent their equity in their homes and ran up
credit card debts, maxing out credit cards in
anticipation that rising asset prices would cover the
debts. When the bubble burst, the debts strangled
consumer demand, and the economy died.
As I write about the
economic hardships created for Americans by
corporate greed and by indifferent and
bribed political representatives, I get many letters
from former middle class families who are being driven
into penury. Here is one recently arrived:
"Thank you for
truthful commentary on the `New Economy.`
My husband and I could be its poster children. Nine
years ago when we married, we were both working good
paying, secure jobs in the semiconductor manufacturing
sector. Our combined income topped $100,000 a year. We
were living the dream. Then the nightmare began. I lost
my job in the great tech bubble of 2003, and decided to
leave the labor force to care for our infant son. Fine,
we tightened the belt. Then we started getting squeezed.
Expenses rose, we downsized, yet my husband`s job
stagnated. After several years of no pay raises, he
finally lost his job a year and a half ago. But he
didn`t just lose a job, he lost a career. The
semiconductor industry is virtually gone here in
Arizona. Three months later, my husband, with a
technical degree and 20-plus years of solid work
experience, received one job offer for an entry level
corrections officer. He had to take it, at an almost 40
percent reduction in pay. Bankruptcy followed when our
savings were depleted. We lost our house, a car, and any
assets we had left. His salary last year, less than
$40,000, to support a family of four. A year and a half
later, we are still struggling to get by. I can`t find a
job that would cover the cost of daycare. We are
stuck. Every jump in gas and food prices hits us hard.
Without help from my family, we wouldn`t have made it.
So, I could tell you just how that `New Economy` has
worked for us, but I`d really rather not use that kind
Policymakers who are
banking on stimulus programs are thinking in terms of an
economy that no longer exists. Post-war U.S. recessions
and recoveries followed Federal Reserve policy. When the
economy heated up and inflation became a problem, the
Federal Reserve would raise interest rates and reduce
the growth of money and credit. Sales would fall.
Inventories would build up. Companies would lay off
Inflation cooled, and
unemployment became the problem. Then the Federal
Reserve would reverse course. Interest rates would fall,
and money and credit would expand. As the jobs were
still there, the work force would be called back, and
the process would continue.
It is a different
situation today. Layoffs result from the jobs being
moved offshore and from corporations replacing their
domestic work forces with foreigners brought in on H-1B,
L-1 and other work visas. The U.S. labor force is being
separated from the incomes associated with the goods and
services that it consumes. With the rise of offshoring,
layoffs are not only due to restrictive monetary policy
and inventory buildup. They are also the result of the
substitution of cheaper foreign labor for U.S. labor by
American corporations. Americans cannot be called back
to work to jobs that have been moved abroad. In the New
Economy, layoffs can continue despite low interest rates
and government stimulus programs.
To the extent that
monetary and fiscal policy can stimulate U.S. consumer
demand, much of the demand flows to the goods and
services that are produced offshore for U.S. markets.
China, for example, benefits from the stimulation of
U.S. consumer demand. The rise in China`s GDP is
financed by a rise in the U.S. public debt burden.
Another barrier to the
success of stimulus programs is the high debt levels of
Americans. The banks are being criticized for a failure
to lend, but much of the problem is that there are no
consumers to whom to lend. Most Americans already have
more debt than they can handle.
unrepresented and betrayed, are in store for a greater
crisis to come. President Bush`s war deficits were
financed by America`s trade deficit. China, Japan, and
OPEC, with whom the U.S. runs trade deficits, used their
trade surpluses to purchase U.S. Treasury debt, thus
financing the U.S. government budget deficit.
The problem now is
that the U.S. budget deficits have suddenly grown
immensely from wars, bankster bailouts, jobs stimulus
programs, and lower tax revenues as a result of the
serious recession. Budget deficits are now three times
the size of the trade deficit. Thus, the surpluses of
China, Japan, and OPEC are insufficient to take the
newly issued U.S. government debt off the market.
If the Treasury`s
bonds can`t be sold to investors, pension funds, banks,
and foreign governments, the Federal Reserve will have
to purchase them by creating new money. When the rest of
the world realizes the inflationary implications, the US
dollar will lose its reserve currency role. When
that happens Americans will experience a large economic
shock as their living standards take another big hit.
America is on its way
to becoming a country of serfs ruled by oligarchs.
Paul Craig Roberts [email
him] was Assistant
Secretary of the Treasury during President Reagan`s
first term. He was Associate Editor of the Wall
Street Journal. He has held numerous academic
appointments, including the William E. Simon Chair,
Center for Strategic and International Studies,
Georgetown University, and Senior Research Fellow,
Hoover Institution, Stanford University. He was awarded
the Legion of Honor by French President Francois
Mitterrand. He is the author of
Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington;
and the Soviet Economy and
Meltdown: Inside the Soviet Economy,
and is the co-author
with Lawrence M. Stratton of
The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice. Click
here for Peter
Brimelow`s Forbes Magazine interview with Roberts
about the epidemic of prosecutorial misconduct.
His latest book, How The Economy Was Lost,
has just been published by CounterPunch/AK Press.