The Economy: Another Page Out Of The Worst Case Scenario Handbook

Robert Zoellick, the head of the World Bank, recently said that the current efforts to right the world’s economy are wholly inadequate. It is a position in which he has been joined intermittently by economists, outspoken billionaires, Chinese leaders, and officials from the IMF. His position is that no effort which does not markedly increase global employment is futile and misguided. He told Bloomberg, “While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working.”

If Zoellick wants a test tube to watch whether his thesis about the economy will be proven to be correct, he need look no further than the American stimulus package, credit markets, and unemployment rate. The litmus test in the United States is turning the wrong color. The pressing issue about joblessness  — which economists expect to top 10 percent in Q3 — is how long the figure will stay that high.  From September 1982 to June 1983, unemployment was in the double digits. By January 1984, the number improved to 8%. The economy is likely to lose 500,000 jobs a month for the next several months and may even keep that pace into next year. The dismantling of the car, car dealer, and auto parts industries will make a significant contribution to these levels. Firms in other sectors of the economy are also still firing workers. HP (HPQ), American Express (AXP), and DuPont (DD)  all announced large cuts last month.

The next and perhaps equally severe concern about the American economy is the availability of credit, or “getting the credit system working.” New limitations set on credit card companies by Congress may be critical to protecting the interests of the American consumer but they will not encourage banks to increase lending. Credit scores are getting worse as people lose jobs and income growth stagnates at the same time that people are trying to pay off debt from a period of only two years ago when individual credit leverage was being encouraged by financial firms. Most banks are reducing the number of cards they have issued to protect themselves from defaults.

The access that businesses have to credit is no better than it is for individuals. The value of corporate assets often used to secure loans has been flattened by the economy and many businesses have lost the cash flow necessary to entice financial firms to supply them new capital.

The mostrealistic way of looking at the American economy is that there is no reason to believe that the jobs market will turn around. Consumer spending has been the engine of the US economy since WW II. The consumer’s capacity and the consumer’s desire to spend money has rarely been lower. It is ironic that on his current trip to China, Secretary Geithner is encouraging the Chinese government to stimulate consumer spending within the borders of the world’s most populous country to improve the level of imports from the US and its allies. He must explain simultaneously why America does not seem to be able to use the money it is borrowing from China to shake loose consumer spending in the US.

The head of The World Bank has not offered any significant solution to the Rubik’s Cube he has shown the American government. There are only two likely paths out of the disaster zone. One is that the government can increase its commitment to spending on programs that will create jobs at a rate faster than they are being lost. To do that, federal spending would have to create or save more than three million jobs between now and the end of the year.

The other option is to assume that the economy will heal itself without any assistance beyond what the federal government has offered to date. That healing would have to occur without the benefit of tax cuts, if they are of any benefit at all, or significant incentives from the government for businesses to spend more money and hire more workers. The economy might rise from its sick bed and walk on its own, but the only record we have of a miracle like this involved divine intervention.

Douglas A. McIntyre