US economic activity is collapsing so fast that it is hard to keep up with just how bad things are. The various monthly data releases are ancient history by the time they are published, even the most up-to-date ones.
This was scarily underlined by last Friday’s employment report. The headline number – a loss of more than half a million jobs in November, the largest decline in more than 30 years – was frightening enough, but revisions to the previous two months’ numbers added another 200,000 jobs lost to the previously estimated 500,000 combined.
The very rough and rapidly-being-overtaken-by-events estimate on Wall Street is that gross domestic product in this quarter will have declined at an annual rate of about 3 per cent. That would be a much faster rate of shrinkage than anything seen in the two recessions of 1991 and 2001. If there is any silver lining to be found to this misery, it might be the very speed at which the data are imploding.
Some economists are becoming disturbed by the similarities between the United States today and Japan in the 1990s. Having experienced both at first hand, I am struck more by the differences.
The Japanese depression was a slow-motion affair. It went on for the best part of a decade. Over that time, GDP rarely fell in any quarter by more than 1 per cent; unemployment grew very slowly. It was economic stagnation rather than collapse; that’s partly why it went on so long. It was almost oddly tolerable: not too much concentrated hardship, just extended and broadly spread malaise.
America, in a fashion characteristic of a more dynamic, flexible – but also less socially protected – economy, is descending much more rapidly, but perhaps will get over it more quickly.
The US-Japanese difference is reflected in the response by the private and public sectors to the crisis. Japanese banks were notoriously slow to face up to their bad assets and slower still to do the necessary consolidation. US banks, while far from perfect, have been quicker to mark their problems to what looks vaguely like market value.
The policy response in the United States has been swift and aggressive. The Federal Reserve has cut interest rates in a year by more than the Bank of Japan did in five. The hefty injections of cash into the financial system in the past year contrast sharply with the dilatory, policymaking-by-denial approach taken by the Japanese Ministry of Finance.
But here is the bad news. I put all this at the weekend to an esteemed former Fed official, who has made detailed studies of the Japanese and US crises. He was unpersuaded. In fact, he seemed to think that the depth of the US downturn would not necessarily mean that it would be significantly shorter. Sadly, this makes a sort of grim sense if you think about it.
The US today is not just facing a horrendous credit crunch. It seems to be confronted with a miserable confluence of crises, all coming to a head at the same time: the housing collapse, financial market distress, the credit drought, a global economic slump and a final, unwelcome rebalancing of its long domestic savings/investment dysfunction.
On top of all this, the US Government is in its quadrennial state of stasis caused by the long handover between presidents.
Barack Obama seems at least to be under no illusions about how bad things are. Prodded by Larry Summers, who missed out on a second tour at the Treasury but seems very likely to be playing an active, broad-ranging advisory role at the White House, he has wisely decided to go for broke. Mr Summers has been publicly and privately urging a huge fiscal stimulus for some time and the outline announced by the President-elect at the weekend seems to fit the bill. An injection of more than $500 billion (£340 billion) over the next year and a half is probably the minimum needed. Now the debate will focus on the composition of the stimulus.
In the Bush years the various stimulus packages focused on tax cuts, specifically rebates for taxpayers that were thought likely to increase spending. The effect was mixed, at best. In 2001, it looks as though there was some benefit from the rebates as consumers spent part of them, but last year’s rebates were almost completely ineffective. Americans, confronted with huge declines in the value of their household assets, simply used the extra cash to help to rebuild their balance sheets a little.
What is needed now is a direct impulse to spending. The President-elect is proposing an old-fashioned Keynesian public spending plan – with a modern twist. As well as spending on roads and the usual transport projects, he wants Congress to approve money for green and information technology-based infrastructure. Meanwhile, many Democrats want to pour money into the flailing car industry. And some sort of tax relief is also in the works – at least a suspension of the tax increases for the wealthy that Mr Obama proposed during the campaign.
It might be called a kitchen-sink approach – throwing everything you can at the problem. It is not pretty. But nobody has a better plan at the moment.
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