Economic Spurt Appears Unlikely
by Stephen Stamos, professor of economics and international relations
Published in the Harrisburg Patriot-News, June 15, 2003
I was in the waiting room of a local automobile service firm with an unemployed manufacturing worker who was about to exhaust his unemployment benefits, a financial adviser who confessed to be at a loss as to what to say to his clients, a recent Bucknell graduate without a job, and an upbeat construction worker in the local home-building sector.
When this diverse group discovered that I was an economist, it asked me about the economy. It wanted to know, what was really going on with the economy?
The recession, which began in March 2001, is not finished. The recovery does not want to come. Economic growth is anemic and a second-half recovery is wishful thinking. Stagnation is a new reality.
The Bush tax cut is too little, too late, misdirected, and returns us to the years of deficit spending.
Growth in productivity is greater than economic growth, which sounds good, but allows companies to produce more output with fewer people. So, productivity gains are keeping unemployment high and allowing firms to cut costs to survive in this weak economy.
Productivity growth, fierce global competition, global excess supply of goods and services, and declining demand for goods and services have given us an inflation rate of 1 percent. A fear of deflation has shocked the Federal Reserve into talking about drastic measures if conditions worsen.
The anemic recovery is jobless and, more important, more than 75 percent of the economy is experiencing an unprecedented structural transformation of the U.S. labor market.
Capacity utilization is at 72 percent and capital spending has been frozen for the last three years. Federal tax cuts are being offset by tax increases at the state and local government level as their deficits approach $100 billion this year. Also, at the state and local levels, drastic cutbacks in services and programs are affecting more each day.
Post-Iraq has given consumers false hope about the economy. Oil prices remain high and the constant threat of terrorism and the fragile Middle East hang like a dark cloud above the global economy.
Realities in Iran and North Korea offer little solace. Japan and Europe are on the brink of recession with growth slowing and unemployment rising along with the peril of deflation.
The perceived bright spot for the United States is the falling dollar, which is a mixed blessing. Econ 101 teaches a weak dollar makes our exports cheaper and more competitive, which encourages increased manufacturing output and job creation.
This is why Treasury Secretary John Snow, a former industrialist, voiced his approval for the declining dollar. Yet, with a weak global economy, even at more competitive prices, there is little demand for U.S. exports to make any difference in manufacturing output or employment.
The weak dollar ought to make imports more expensive and add to inflationary pressures, if there were any. The weak dollar, theoretically, results over time in a lower trade deficit and a lower current account deficit, both of which are at record levels these days.
The only good news about the falling dollar is that it has improved overseas profits of U.S. multinational firms and, in some cases, increased investment in these companies' stocks and bonds.
The weak dollar, however, runs the risk of discouraging foreign investors from seeking investments in the U.S. Treasury and corporate bond markets, as well as the U.S. stock market. This makes the dollar decline further and less possible for the U.S. to finance the current account deficit, which is more than five percent of the gross domestic product. And, it could result in a further collapse of the U.S. financial markets. Not a good forecast.
At this point in my mini-lecture, I am called to the counter to pay my bill. After charging my credit card for $280 (tune-up and oil change?), I say adios to my new friends.
I apologize for leaving them totally depressed and making the two unemployed folks feel even worse. The financial adviser did not want to return to work, but the new graduate took some comfort in my advice to more aggressively seek employment in the health-care sector, one of the few bright spots in this otherwise lackluster economy. (Had she taken my economics class she might have known this.)
The homebuilder realized how fortunate he was and praised Sir Greenspan for cutting interest rates, keeping them low, and pledging to go lower if necessary. The combination of low interest rates and the refinancing boom have insulated him from the realities of our other friends. Yet, his bubble world might be the next to pop.
And, people wonder why economics is called the Dismal Science. To add insult to injury, it started to rain again.
Steve Stamos may be reached at firstname.lastname@example.org