Predicting the trajectory of the
Seeking refuge in conservative consensus partly explains why virtually all the 10,000 professional economists in the world failed to predict the onset of the current crisis in 2007. Or why the same crew declared a sustained economic recovery after 2009 would occur, but didn’t. It is also why the same group is failing, for yet a third time now, to foresee the coming deeper economic crisis that will almost certainly emerge no later than early 2013—and potentially even earlier if the Eurozone financial system continues to unravel.
The repeated failure of the profession to predict the three great economic events of the past four years is the result of their adherence to a conceptual apparatus that cannot explain the essential forces behind the crisis. It is the result of theories based on pre-crisis conditions that no longer prevail. Deficient concepts, theories, and models are why Obama’s in-house professional economists—the Council of Economic Advisers—in early January 2009 erroneously assured the public that Obama’s $787 billion initial stimulus package would create 6 million jobs, but it didn’t. They are why the Federal Reserve’s economists insisted the $2.7 trillion Quantitative Easing (QE) 1, 2, and 2.5 (called “operation twist”) policies introduced between 2009-11 would resurrect the housing sector, but instead only fed stock, junk bond, and commodities futures speculators worldwide. They are why Congressional Budget Office economists forecast that Obama’s $802 billion tax cuts introduced a year ago would result in a significant increase in GDP growth rates and jobs. Instead they produced GDP growth of less than 1 percent in the first half of 2011 and then no net job creation the rest of the year.
The Broken Liberal Wing: Just Give Us More Stimulus
The liberal wing of the flightless bird of mainstream economics continues to maintain that the Obama programs since 2009 have not produced sustained economic recovery because the economic stimulus was of insufficient magnitude. At the forefront of this view have been economists like Paul Krugman and others. Even Larry Summers, former Treasury Secretary under Clinton and chief economic policy adviser for Obama in 2009-10, has joined the liberal chorus, saying that the original stimulus of 2009 should have been $1 trillion or more—not $787 billion.
Contrary to this view, the Obama stimulus programs failed not only because they were of insufficient magnitude, they failed because their composition was exceptionally bad and their timing poor. With regard to composition, the Obama stimulus programs were composed of 70 percent tax cuts—and mostly business tax cuts at that. These tax cuts were then hoarded by corporations, not invested in the
Despite a tax stimulus of trillions of dollars, corporate
Meanwhile, Obama’s $370 billion of subsidies dissipated after 12-18 months. Like business tax cuts, subsidies do not create jobs. They may temporarily save some. But that’s not economic recovery. Recovery means significant net job creation, typically in the range of 300,000 to 500,000 jobs every month for a year. Saving jobs is a policy of accepting continued economic stagnation at best.
The remaining $126 billion or so of Obama spending circa 2009-10 was earmarked for long term infrastructure—i.e., upgrading the national electrical grid, alternative energy projects, and so-called “shovel-ready” construction projects that couldn’t find their shovels. But that spending did not create jobs or generate recovery in the short run since 2009 any more than tax cuts and subsidies created jobs. Composed mostly of capital-intensive projects, most infrastructure spending was very long term, scheduled to take effect over a ten-year period. Like the tax cuts, the short term effect of this infrastructure spending resulted in little, if any, job creation or economic recovery.
The Stunted Right Wing: Just Give Business More Income
Republicans took charge of the U.S. House of Representatives following the November 2010 midterm elections and with it took over the economic policy agenda as well. The takeover created an ideal environment for the re-ascendance of the right wing of mainstream economics. The Obama programs failed to generate recovery, they argued, because they produced a “lack of business confidence.” That lack of confidence, they said, was due to business uncertainty about the future of tax cuts, excessive business regulation, stalled free trade agreements with
What’s conveniently ignored by this wing, however, is first, massive government spending cuts and sharply reduced consumer incomes produces a steep decline in GDP and no recovery. Conservative economists argue this slack will be more than offset by a rise in business investment. But this leads to the second problem: namely, with corporations already hoarding $2 trillion in cash and banks hoarding another $1.7 trillion in excess reserves, why should giving corporations and banks even more cash and income result in investment and recovery? Exactly how many more trillions of dollars are needed to get them to invest, lend, create jobs, and ensure recovery?
So, just as the liberal wing of economics has no answer to exactly how much more deficit spending is necessary to ensure a sustained economic recovery, the conservative wing cannot explain or answer how much more shifting of income to corporations and investors is needed to ensure a return to investment, jobs, and recovery. Given such fundamental errors by both wings, it is not strange that both liberal or conservative economists have had such great difficulty in recent years predicting the emergence and evolution of the current economic crisis. What then are the likely scenario(s) for the
Predictions for 2012
State and local governments continue to lay off workers in the 20,000 range every month. Little effective stimulus will be forthcoming from the Federal government, despite the 2012 election. The first quarter of 2012 will record a significant slowing of GDP growth once again. Should the Eurozone debt crisis escalate in the second quarter of 2012, the
The Federal Reserve will introduce a third version of its “Quantitative Easing” program in 2012. QE is when the Fed prints money to directly purchase bonds from the private sector at above-market inflated prices, thus pumping up the money supply. As in the past two versions of QE in 2009 and 2010, the result will have little effect on the housing markets, jobs, or general recovery, but will once again result in a boost to stocks, bonds, commodity speculation, and related price inflation. The timing of QE3 will be driven by the events in
The deficit cutting yet to come will dwarf the recent $2.2 trillion August 2011 deal. It will result in another $2-$4 trillion in cuts, mostly spending on social programs and entitlements like Medicare, Medicaid, and Social Security, as well as food stamps, unemployment insurance benefits, education, and the 2010 Health Care Affordability Act. Tax hikes directly impacting the middle class will also occur, including heretofore untouchable measures like mortgage deductions.
Job growth will continue to stagnate and remain in the 24-25 million range throughout 2012, with a number of false starts in jobs recovery determined by seasonal and other statistical factors. There are no effective programs in place today to fundamentally increase net jobs in the
Congress and the Administration will pass two major tax bills in 2012. The first bill will bow to multinational corporations’ blackmail (and campaign contributions) and reduce the standard 35 percent corporate tax rate for offshore sheltered cash repatriation to the
The second bill will be some kind of extension of the Bush tax cuts that will take place before the November 2012 elections; or, immediately after, before year end. In the Bush tax extension deal, the top corporate and personal income tax rate of 35 percent will be permanently reduced to less than 30 percent in exchange for unverifiable tax loophole closings. The middle class will also pay higher taxes and the earned income credit for low pay workers will be reduced.
Home prices will continue to fall, foreclosures rise, and negative equity grow. Currently, at more than 11 million, foreclosures will continue to rise past 13 million. Home prices will continue to fall by 5-10 percent in key markets (bringing the decline since 2006 to more than 40 percent on average). At least 17 million mortgaged homeowners (out of 54 million total) will experience negative equity. The Obama administration and Congress will force States to accept the federal plan to let banks and lenders off the hook for “robo-signing” and illegal foreclosures, in exchange for a token fine. Housing and commercial property construction will continue to stagnate at around current levels.
The Eurozone sovereign debt crisis will stabilize and then worsen again. The Euro debt crisis will temporarily stabilize in early 2012 as the European Central Bank follows the U.S. Federal Reserve and introduces quantitative easing while negotiations among the Euro states on a fiscal union continue and proceed slowly. However, the sovereign crisis will erupt again in the late spring of 2012 as
Two or more banks will fail. Several Euro banks will become technically insolvent and will be nationalized by their governments and bailed out. Major candidates include the French banks, Societe General, and BNP Paribas; the German Commerzbank; the Italian Unicredit; and possibly one or more Austrian and Finnish banks. German and French economies slowed to virtually no growth at year end 2011 and both will slip into recession in 2012. A second round of severe austerity programs in the
Global trade will slow and begin to contract in 2012. Given
The foregoing predictions are based on a non-mainstream economic analysis. This framework is the consequence of the restructuring of the
Jack Rasmus is author of Epic Recession: Prelude to Global Depression, Obama’s Economy: Recovery for the Few (forthcoming from Pluto Press/Palgrave-Macmillan, March 2012), as well as a pamphlet produced for the Teamsters