Deepening crisis traps America’s have-nots
The US is drifting from a financial crisis to a deeper and more insidious social crisis. Self-congratulation by the US authorities that they have this time avoided a repeat of the 1930s is premature.
A tale of two shoppers – Louis Vuitton has helped boost the luxury goods stock index by almost 50pc since October, yet Walmart has languished.
THERE is a telling detail in the US retail chain store data for December. Stephen Lewis from Monument Securities points out that luxury outlets saw an 8.1 per cent rise from a year ago, but discount stores catering to America’s poorer half rose just 1.2 per cent.
Tiffany & Co, Nordstrom and Saks Fifth Avenue are booming. Sales of Cadillac cars have jumped 35 per cent, and Porsche’s US sales are up 29 per cent.
Cartier and Louis Vuitton have helped boost the luxury goods stock index by almost 50 per cent since October. Yet Best Buy, Target and Walmart have languished.
Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs.
Yet surely Ben Bernanke’s trickle-down strategy risks corroding America’s ethic of solidarity long before it does much to help America’s poor.
The retail data can be quirky but it fits in with everything else we know. The number of people on food stamps has reached 43.2 million, an all time-high of 14 per cent of the population. Recipients receive debit cards – not stamps – at present worth about $US140 a month under Barack Obama’s stimulus package.
The US Conference of Mayors said visits to soup kitchens are up 24 per cent. There are 643,000 people needing shelter each night.
Jobs data released on Friday was again shocking. The only reason that headline unemployment fell from 9.7 per cent to 9.4 per cent was that so many people dropped out of the system altogether.
The actual number of jobs contracted by 260,000 to 153,690,000. The “labour participation rate” for working-age men over 20 dropped to 73.6 per cent, the lowest since the data series began in 1948. My guess is that this figure exceeds the average for the Great Depression (minus the cruellest year, 1932).
“Corporate America is in a V-shaped recovery,” said Robert Reich, a former labour secretary. “That’s great news for investors whose savings are mainly in stocks and bonds, and for executives and Wall Street traders. But most American workers are trapped in an L-shaped recovery.”
The long-term unemployed (more than six months) have reached 42 per cent of the total, twice the peak of the early 1990s. Nothing like this has been seen since World War II.
The Gini Coefficient used to measure income inequality has risen from the mid-30s to 46.8 over the past 25 years, touching the same extremes reached in the Roaring Twenties just before the slump. It has also been ratcheting up in Britain and Europe.
Raghuram Rajan, the International Monetary Fund’s former chief economist, argues that the subprime debt build-up was an attempt – “whether carefully planned or the path of least resistance” – to disguise stagnating incomes and to buy off the poor.
“The inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly,” he said.
Bank failures in the Depression were in part caused by expansion of credit to struggling farmers in response to the US Populist movement.
Extreme inequalities are toxic for societies, but there is also a body of scholarship suggesting that they cause depressions as well by upsetting the economic balance. They create a bias towards asset bubbles and over-investment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.
The switch from brawn to brain in the internet age has obviously pushed up the Gini count, but so has globalisation. Multinationals are exploiting “labour arbitrage” by moving plant to low-wage countries, playing off workers in China and the West against each other. The profit share of corporations is at record highs across in America and Europe.
More subtly, Asia’s mercantilist powers have flooded the world with excess capacity, holding down their currencies to lock in trade surpluses. The effect is to create a black hole in the global system.
Yes, we can still hope that this is a passing phase until rising wages in Asia restore balance to East and West, but what if it proves to be permanent, a structural incompatibility of the Confucian model with our own Ricardian trade doctrine?
There is no easy solution to creeping depression in America and swathes of the Old World. A Keynesian ”New Deal” of borrowing on the bond markets to build roads, bridges, solar farms or nuclear power stations to soak up the army of unemployed is not a credible option in our new age of sovereign debt jitters. The fiscal card is played out.
So we limp on, with very large numbers of people in the West trapped on the wrong side of globalisation, and nobody doing much about it. Would Franklin Roosevelt have tolerated such a lamentable state of affairs, or would he have ripped up and reshaped the global system until it answered the needs of his citizens?