The US economy is teetering on the brink
of another recession. The bad news is, if it goes
down again, policymakers won't have many options,
and like a weary heavyweight, if it hits the mat
again, it's down for good. The recovery has been
terribly disappointing - growth is hardly 2%, and
unemployment hangs above 8%.
Manufacturing
and exports powered the expansion but are now
weakening. Consumer spending and existing home
sales are flagging, because policymakers failed to
aid underwater homeowners as generously as the
banks.
President Barack Obama is doubling
down on slow growth policies - new restrictions on
offshore oil and carbon dioxide emissions, and
financial regulations that haven't stopped Wall
Street banks from trading
recklessly and rigging markets.
Presidential candidate Mitt Romney has
reverted to shopworn Republican prescriptions -
tax cuts, free trade and deregulation. With the
federal government spending 50% more than it takes
in, no competent economist could endorse big
tax-rate cuts, beyond renewing the Bush tax cuts.
China, by manipulating its currency and
shutting out Western products, helped cause the
Great Recession and is now constraining recovery
in the United States and Europe. More free trade
agreements won't fix that.
Dodd-Frank may
be bureaucratic and ineffective, but no sane
person could claim banks can regulate themselves -
smarter solutions, like breaking up unmanageable
and unsuperviseable institutions, is needed.
Many analysts ask if another big
innovation - like the automobile or computer -
could save the economy. The problems are many new
products are creating more jobs in Asia than in
the West, and many technology companies are
consolidating or facing extinction - consider the
smart phone, Hewlett Packard and Yahoo.
A
lot of US innovation is starting to look more like
French art than American commerce. Yahoo, Facebook
and Twitter made great contributions to the
economy and culture but simply don't have business
models that generate enough revenue and jobs.
Google succeeded by cannibalizing
newspapers - the net effect has been to destroy
more - and branching into software and media -
which displaces workers elsewhere.
The
profitable core of finance - investment banking -
is shrinking. Burdensome regulations are a
problem, but many clients - ranging from
municipalities to wealth managers to foreign
governments burned by Wall Street schemes - are
less interested in what Goldman Sachs and others
peddle.
To save European governments,
several trillions of dollars in sovereign debt
must be written down.
Beyond lacking a
plan to equitably distribute the loss, Germany and
other stronger states have not accepted that they
cannot continue to pursue export-driven growth
strategies and import more if southern Europe is
to recover.
China's policies hold itself
and the West hostage. Europe and the United States
can't keep printing and borrowing ever more money
to sustain its export-driven growth strategy.
China must slow down because it is too
late to reorient its economy toward domestic
consumption without wrenching dislocations
When the United States entered the recent
crisis, its budget deficit was $161 billion. Now
it is $1.3 trillion, and the Federal Reserve is
already maintaining rock bottom interest rates.
Even if congress and the president extend
the George W Bush tax cuts, any hiccup in Europe
or China could throw the US economy into a
recession. And the world's biggest economy could
hit the skids on its own.
Capital markets
simply won't be able to absorb a $2.5 trillion to
$3 trillion federal deficit to further stimulate
the US economy, without sucking badly needed funds
from struggling European and developing-country
economies. The Fed could only print money to
finance it and set off hyperinflation, but it
can't lower interest rates much further.
Having failed to adequately address what
caused the Great Recession - China's trade surplus
and the imbalance in demand between the Middle
Kingdom and the United States, the cowboy culture
on Wall Street and the plight of underwater
homeowners - not much can be done.
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