Jobless America threatens to bring us all down with it
A depression may have been averted, but nothing has been fixed. This is the depressingly downbeat message that came across loud and clear from last weekend’s annual meeting of the International Monetary Fund.
By Jeremy Warner
The destructive trade and capital imbalances of the pre-crisis era are back, banking reform appears stuck in paralysing discord, public debt in many advanced economies remains firmly set on the road to ruin, and the spirit of international co-operation that saw nations come together to fight the crisis has largely disappeared.
This was not where we were meant to be in tackling the underlying causes of the crisis and returning the world to sustainable growth. Yet beneath this sense of frustration at lack of progress – and at international organisations such as the IMF and the G20 to bring it about – there is an underlying truth that’s often left unspoken; many of the problems in the world economy right now are not international at all, but US specific and can only really be solved by America itself.
I don’t want to belittle the difficulties faced by some of the peripheral eurozone nations, but in the scale of things they are a sideshow alongside the malaise which has settled on the world’s largest economy.
Ignoring the troubled fringe, Europe as a whole is to almost universal surprise starting to look in reasonable shape again, and for reasons that I will come to, Europeans are in any case not nearly as fixated by high unemployment as their American peers.
What applies to the eurozone is also true of the UK. As in Europe, the dominant issue in UK policy is not joblessness, but unsustainable public debt. There’s a real, and growing, trans-Atlantic divide in perceptions and rhetoric. And with good reason.
Europe had a much deeper economic contraction than the US – oddly, perhaps, given that the crisis originated in the US – but joblessness didn’t climb nearly as steeply, and in the main eurozone economies is now falling again. In Germany, unemployment is already below pre-crisis levels.
Even in the UK, this has so far been a relatively jobs rich recovery, backed by a reasonably robust pick up in manufacturing and investment. For us, things are not as bad as the doomsayers of America suggest.
Heathrow experienced record levels of cargo and passenger traffic last month, according to new figures from BAA, and in a key marker of returning business confidence, premium traffic is also well up again. This chimes with what UK bankers were saying on the fringes of the IMF meeting in Washington last week.
A year ago at the same event, they were still trying to convince each other that they were still solvent. This year, new mandates are being thrown around like confetti, and many of the inter-bank disputes of the crisis period are now being resolved.
Why America has failed to respond as positively is still not entirely clear, though continued deep recession in house building and other forms of private construction is obviously some part of it. These sectors have historically been a larger proportion of employment than in Britain and Europe, and won’t begin to recover until prices stabilise and unsold stock is cleared.
The house price collapse means people can’t sell and move to economically stronger parts of the country, as they’ve tended to in past downturns. High US unemployment – already at 9.7pc and getting on for double that on some wider measures – is becoming entrenched.
If there is one thing the crisis has reminded politicians of it is that they really must be running surpluses during the good times. Going into the downturn, Germany was better prepared than the US, and has therefore proved more resilient.
Whatever the explanation, realisation that there may be a structural problem of unemployment in the US on top of the cyclical one has come as a rude awakening for a country raised on the merits of hard work and enterprise.
US Treasury forecasts, both for growth and the public finances, continue to be based on delusionally optimistic use of “the Zarnowitz rule”, which posits that deep recessions are followed by steep recoveries. Regrettably, it’s not happening this time around.
These harsh economic realities have combined with the relentlessness of the US political cycle to produce a tsunami of demands for job creative policy. It’s not just experience of the Great Depression which instructs American terror of unemployment. Very limited jobless entitlements make the pain of mass and prolonged unemployment very real indeed, another key difference with Europe.
Serious losses for the Democrats in the mid-terms are already pre-cooked. If there aren’t solutions over the next year, the Administration may in desperation turn to more populist measures.
Retaliatory action against China and other “currency manipulators” is unlikely to help US employment much, but that’s not going to deter a president who sees his chances of a second term going down the pan. It would on the other hand create chaos in China by depriving millions of their jobs.
The Chinese economy is only a fifth of the size of the US, and its consumption less than an eighth. Even assuming other Asian exporters are punished equally, currency devaluation and import tariffs are not going to solve the problem of US joblessness.
So what’s left? The Fed can act, by pouring more money into the economy (QE2), but the Hill is paralysed. A second fiscal stimulus of any size is blocked by political division. More monetary stimulus is all very well, but it’s a blunt instrument which struggles to get through to the job creative bit of the economy – small and medium sized enterprises – and threatens new bubbles in emerging markets as abundent liquidity chases yield.
There’s no political appetite or will in the US for the long term entitlement reform and tax increases necessary to bring the deficit under control. Nobody believes US Treasury forecasts that public debt will be stabilised by 2014. Much more believable are IMF estimates which see gross US debt rising to well in excess of 110pc of GDP by 2015.
The US has no strategy for the jobless and no strategy for rolling back debt. Little wonder that a renewed sense of gloom has settled on international policy makers.