From today's Daily Telegraph:
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 <http://www.telegraph.co.uk/finance/comment/jeremy-warner/>Jeremy
Warner, Assistant Editor, Daily Telegraph
Published: 7:40PM BST 11 Oct 2010
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.
Keith Hudson, Saltford, England
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