Business & Economics

The truth about the economy that Washington and Wall Street won’t admit: We’re heading back toward a double dip

Robert Reich

Why aren’t Americans being told the truth about the economy? We’re heading in the direction of a double dip – but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.

Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It’s weaker today on average than at the lowest point of the Great Recession.

The Reuters/University of Michigan survey shows a 10 point decline in March – the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board’s index of consumer confidence, just released, shows consumer confidence at a five-month low — and a large part is due to expectations of fewer jobs and lower wages in the months ahead.

Pessimistic consumers buy less. And fewer sales spells economic trouble ahead.

What about the 192,000 jobs added in February? (We’ll know more Friday about how many jobs were added in March.) It’s peanuts compared to what’s needed. Remember, 125,000 new jobs are necessary just to keep up with a growing number of Americans eligible for employment. And the nation has lost so many jobs over the last three years that even at a rate of 200,000 a month we wouldn’t get back to 6 percent unemployment until 2016.

But isn’t the economy growing again – by an estimated 2.5 to 2.9 percent this year? Yes, but that’s even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we’d expect growth of 4 to 6 percent.

Consider that back in 1934, when it was emerging from the deepest hole of the Great Depression, the economy grew 7.7 percent. The next year it grew over 8 percent. In 1936 it grew a whopping 14.1 percent.

Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop. Hourly wages are falling because with unemployment so high, most people have no bargaining power and will take whatever they can get. Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes the biggest asset most Americans own, as home prices drop most Americans feel even poorer.

There’s no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year’s budget.

In other words: Watch out. We may avoid a double dip but the economy is slowing ominously, and the booster rockets are disappearing.

So why aren’t we getting the truth about the economy? For one thing, Wall Street is buoyant – and most financial news you hear comes from the Street. Wall Street profits soared to $426.5 billion last quarter, according to the Commerce Department. (That gain more than offset a drop in the profits of non-financial domestic companies.) Anyone who believes the Dodd-Frank financial reform bill put a stop to the Street’s creativity hasn’t been watching.

To the extent non-financial companies are doing well, they’re making most of their money abroad. Since 1992, for example, G.E.’s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes). In fact, the only group that’s optimistic about the future are CEOs of big American companies. The Business Roundtable’s economic outlook index, which surveys 142 CEOs, is now at its highest point since it began in 2002.

Washington, meanwhile, doesn’t want to sound the economic alarm. The White House and most Democrats want Americans to believe the economy is on an upswing.

Republicans, for their part, worry that if they tell it like it is Americans will want government to do more rather than less. They’d rather not talk about jobs and wages, and put the focus instead on deficit reduction (or spread the lie that by reducing the deficit we’ll get more jobs and higher wages).

I’m sorry to have to deliver the bad news, but it’s better you know.

Cross-posted from Robert Reich’s blog.

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Comments to "The truth about the economy that Washington and Wall Street won’t admit: We’re heading back toward a double dip":
    • Chris Pawlik

      Professor Reich,

      You forgot to mention that the largest wall of debt maturities is anticipated to hit in 2012/2013. CRE debt that was maturing was mostly extended and very few properties have been re-capitalized. In addition, the largest leveraged buyouts in the history of the US were completed in 2006-2007 and I’m making an educated guess that they were on 5 year terms with possible 1 or 2 year options to extend.

      That said, I agree with you that we are in the midst of a period of stagflation. I’ve been discussing this with my friends and colleagues since 2008 and, in my spare time, have since been pondering what needs to be done to get our economy back on track. You mention the answer in your blog…jobs.

      However, the more interesting questions to ask are what type of jobs could get people back to work at the rate in which you describe as necessary post-recession/depression and how do we create demand for these jobs without adding additional fiscal pressure on our governments? At the same time, what can we do in the immediate term to address rising food and energy prices? I believe that the answers to these questions lead to nothing short of having to create a Private New Deal that is supported and facilitated by the public sector (basically a public-private partnership.)

      Since the fiscal austerity debate is upon us, it is not prudent to expect this support to be financial…loose monetary policy maybe but fiscal policy will be constrained in the years to come. In this regard, I believe that the private sector is ideally positioned to take advantage of the massive build-up of opportunities (some call them challenges) that currently exist in the US. Particularly because there is excess demand for long-term investments in hard assets that can hedge against future inflation pressure.

      Anyway, I digress, the answer to our predicament is simple: jobs. The easiest way to immediately affect unemployment is to restore lost jobs through increasing demand. The trick is to increase demand in a way that will provide substantial sustainable growth and an investment-grade opportunity for fixed-income investors/funds.

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    • Vic A.

      Very well put Professor Reich! You pretty much hit the nail on the head. The irony is that ultimately the American companies (at least quite a few of them) will end up being the losers if the average American consumer no longer has the spending power to fuel their growth.

      However, the way the system is rigged, the CEOs could care less. They are only interested in SHORT TERM gain so as to boost their own personal ratings with the shareholders!

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    • Fruity pebbles

      A waiver for Democratic Unions means a waiver for all, retarded liars. ;)

      With the refreshing news that O’Bozo’s O’Bamacare has provided public unions, teachers and other highly favored “constituencies” with billions of dollars in health care subsidies why would anyone be surprised that more preferential treatment is meeted out by the thieving “government control the economy and everyone else” Democrat Party. “HHS says the waivers represent less than 2 percent of the private insurance market.” Is that supposed to assuage the sense of outrage that those of us who are not exempted rightly feel? Progressive commies are really trying to turn us all into dependent, grateful serfs. A Pax on their house.
      BY bill on 04/02/2011 at 12:09

      a post of interest.

      [Report abuse]

    • Mubo Huti

      LOLZ,No wonder Obama makes war in Lybia and the economy sucks, because that is where are US tax-dollars went in 2008. I guess he wanted to stimulus or create jobs in Lybia and forget the US worker-people.

      “U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya. ”

      Foreign Banks Tapped Fed’s Secret Lifeline Most at Crisis Peak
      By Bradley Keoun and Craig Torres – Apr 1, 2011 10:53 AM PT

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    • Mubo Huti

      “G.E.’s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes).” [ And G.E. contributes enormously to Obama and the Democratic N. Com. ] I would like to see Obama make hard choices against his avarice=democratic corps, and force them to be taxed whereever they reside in the world. It will be a tough battle, but for decades, off-shore tax-shelters ( something my father did, unfortunately) works well to reap substantial personal ( NOT PUBLIC) profits. For example, Mexico makes POST and most of our other breakfast cereal-brands, something that was not the case 20 years ago. They make our plastic, building supplies, and other stuff too. Don’t be fooled they make most of the profits not our IRS. They have the most billionaires on the planet –as proof ( FORBES). Obama promised and has not acomplished yet to be ‘focusing on the economy.’ This Lybian war is another distraction. Maybe he will get around to it by 2015? He will win again, because he has the Academic narrative — all republicans/conservatives are racist and want to kill all minorities — it works, so most of America I have observed understands Obama will win again — unless the opposition puts-up an intelligent black person –to which there are some out there to be a viable contender.

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