Greenspan And His Wrecking Crew Did This To The US for What Reason?????? We need a new Fed.. all twelve of them need to go.
In the Path of the Perfect Storm: Understanding the New Economic Landscape
Posted Tue Mar 13 12:06:28 2001 by sbaldwin
By Tom Croft, Executive Director, Heartland Labor Capital Network, w/contributions from Bob Value, Steel Valley Authority
Drawing a Bead on the U.S.
The United States economy is now directly in the path of an economic and financial "perfect storm", and we are already receiving the impacts of its outer rings. This storm is man-made and has been conjured up by a confluence of three inter-related trends:
A major credit crunch—for commercial and consumer borrowers, adding to defaults and bankruptcies, and causing banks to pull out of the market.
Rising energy prices—and not just for California. Skyrocketing utility bills are ambushing consumers and businesses across the nation.
Rising trade deficits and major import problems, hammering our nation’s central, core industries, exacerbated by a strong dollar and collapsed third world currencies. An analyst from JP Morgan predicted in the New York Times on Saturday, February 17th, that, if the unemployment rate rises another 2/10 of 1 percent over the next few months, that it could mean a year-long downturn or recession, instead of a two quarter slow down. And this: "We are surely going to experience a pop-up in the unemployment rate," said Dale Jorgenson, a Harvard economist and expert on productivity. "The rise in January, to 4.2 percent from 4 percent in December, was just the beginning."
What is certain is that governmental mass layoff statistics for the 4th quarter are the highest since 1995, when the records started. And this is not just a problem for high tech industries. Analysts were already worried about the plunging consumer confidence numbers in recent weeks.
When asked if the nation is in a recession, most economists and bankers have been answering “No”. Unfortunately, as the Economist Magazine and other publications recently pointed out, most economists have missed predicting the last two recessions. The Federal Reserve, which didn’t realize there was a recession in 1991 until it was over, has been, in the eyes of many, hard at work for the last year slowing the economy down. They have succeeded. It’s also worth noting that the Levy Institute, a public policy think-tank, has been saying since 1998 that there were seven unsustainable processes in the economy that had to give at some point.
As rings of the perfect storm hit, the factors mentioned above will exacerbate parts of the storm. That's why the trade woes are a problem not just for the steel and auto industries, and not just for Michigan, Ohio, Pennsylvania, etc., but for suppliers and customers along the supply chain, etc…as well as other sectors of the economy. And, as rising energy prices beat up small manufacturers, and banks and other investors get more nervous due to stretched credit lines, the ripple effects create a new ring of economic problems.
It’s also a sad fact that rural communities have been suffering from unequal economies throughout the last decade, according to the Kansas City branch of the Federal Reserve. Rural gains were concentrated in one-third of the nation’s rural counties. And for farmers, there are gloomy forecasts—a drop of more than 9 billion in net farm income the next two years-- according to University of Tennessee economist Daryll Ray.
As world restructuring takes its toll and the national economy slides into downturn, the new cycle of plant shutdowns and jobs losses is already having a great impact on working families, especially older workers and minorities. Some of the hemorrhaging is playing out the old-fashioned way…firms are retrenching, declaring Chapter 11, etc. Some of the mass layoffs are being directed by skittish corporate shareholders and a number of popular American firm icons, like the firms that make Converse sneakers, Lionel toy trains, and Zebco fishing gear, are closing plants for lower cost overseas facilities. But no matter the cause, it will not just affect blue-collar workers.
The damage could be more widespread, as it was in the last recession, and as it has been for the last 10 years, and it would cause economic fear and loathing for pony suburbs as well as our older industrial regions and inner cities. Software designers, engineers, nurses, stockbrokers and telephone operators are all joining steelworkers and autoworkers in the unemployment lines.
There are immediate and emergency measures needed to bolster key U.S. industries before the damage is irreversible, and the calls from industries and labor unions to maintain critical industrial capacity and help workers and communities who suffer dislocations, should be heeded, and ignored at our risk. Before we can find solutions to the overall crisis, however, we need to understand how the economic landscape has changed. Only then can we acknowledge the drastic and long-term remedies needed to avoid the full blow of the “perfect storm”, and stay out its path for the future.
Global/National Restructuring and its Effects on Workers
The United States, which has experienced two major recessions in the last twenty years, is in the beginning stages of another industrial downturn. “Job cuts and layoffs are piling up like this season's Midwest snow, further evidence that the end of an unprecedented stretch of economic growth may be heaving into sight…The downsizings come on the heels of thousands of other job eliminations and layoffs in recent weeks, and they extend beyond the smokestack industries that are generally the first to take a hit in a downturn. Cutbacks are hitting health care, services, financial firms--and of course the once-vaunted tech sector.” “Job growth nationwide fell to the slowest pace in eight years with auto plants and other factories shedding thousands of workers in December.
By the beginning of 2001, a “manufacturing recession” had already taken root, a predicament forewarned by months of declines in key production indicators. In the last couple of years, manufacturing employment dropped by nearly half a million jobs, partly due to global over-capacity and particularly hit hard by import/pricing pressures in steel and other basic industries. Now, a new surge of imports in 2000-2001 is hammering many of the “hard” industries. These imports—influenced by the late decade collapse of currencies in the Asia Tigers and elsewhere—are a continuation of an investment effect that has been coined “collateral damages” .
And, while the country had been enjoying a full economic expansion unparalleled in modern times, the story for workers has been a mixed one for many years. Workers and communities have been paying the price for the so-called “new economy”. Some perspective is in order.
A “New Economy”?
By the end of the 1990s, it had become clear that a new technology-driven economic, financial, regulatory and trade paradigm had come into effect, characterized by many as the “New Economy”. As economist Dean Baker, a speaker at a conference on pension investment policies, said, “American workers have seen an unprecedented fall in their standard of living over the last twenty-five years. Through most of American history, workers could count on rising wages and living standards year after year. There are a number of causation factors that are related. Concurrent with the decline of organized labor, and the decline of the manufacturing base, has been the increase in international trade and the mobility of capital.”
While there have been debates about the impacts of global trade, it’s clear that hundreds of thousands of US workers—citizens who used to pay taxes---have seen their lives and livelihoods damaged by NAFTA and other trade rules.
The California energy crisis has its own peculiarities, but the broader factors that have affected California companies and citizens are present across the nation, due to recent moves toward de-regulation. In speaking of New York’s similarities, a recent report in the New York Times stated: “Both have been slow to build new plants and were caught off guard in the last year as demand for electricity jumped. Both depend heavily on natural gas to run their generators, leaving them vulnerable to soaring gas prices. Both states have deregulated their electricity markets, so they no longer control the price of power. In California, those forces have fed a new kind of power failure: rolling blackouts, huge losses for utilities and businesses hobbled by an unreliable electric supply.” And at least some sources have suggested that the severity of the blackouts may have been exacerbated by utility firms’ efforts to recover losses from the effects of de-regulation, legislation they favored.
Permanent Downsizing?
In fact, there have been traumatic job cuts across the board in U.S. industry for most of the 1990s due to unprecedented global, economic and corporate restructuring. An estimated 50-60 million jobs have been permanently cut over the last two decades . And despite record low unemployment rates and an extremely narrow job market in many areas of the country by the first year of the new decade, the level of workers displaced annually matched the scale of layoffs in the last two recessions. It has been, quite simply, a tale of two economies. Boom and bust for millions of Americans. Due to economic recessions, economic restructuring, global trade, and continuing cyclical, regional and sectoral disruptions in the economy, "It seems that downsizing is becoming a permanent aspect of U.S. labor markets ."
These chronic dislocations recently have accelerated as new signs are appearing of a serious tightening of credit markets. First Union Bank released a report, first using the moniker of the "perfect storm" from consumer and corporate debt trends, in the 4th quarter of 2001.
Labor Market Contradictions in the 1990s
With extremely low unemployment and 18 million jobs created since 1993, and the fastest real wage growth in the last two decades, why did job displacement rise so dramatically in the 1990s?
The U.S. Department of Labor reviewed the contradictions caused by the increasing displacement rate, and found that if a broader definition of displacement were used, there would be approximately 3.3 million displaced workers in FY 2000. Similar to the high displacement rate in 1995-1997, it is nearly the same level as 1991-1993. At this level, the displacement rate is significantly higher during 1995-1997 than the rate during 1987-1989, even though unemployment rates during these periods were similar. And, although many displaced workers find new jobs faster than during the recessions, over 60% have unemployment of 10 weeks or longer and need re-employment assistance. (source: Department of Labor, ETA, Office of Adult Workers)
Manufacturing workers have suffered the longest from these recent years of intense job displacement. In the 1995-97 biennial survey of worker displacement by the DOL Bureau of Labor Statistics, some 1.78 million manufacturing workers were displaced. But, non-blue collar displacement has also risen dramatically in the past few years, and retail, service, construction, wholesale trade, agriculture, mining, finance (fire), transportation/public utilities sector jobs were all affected, showing the broadening out of the displacement spectrum.
These recent US DOL reports also point out the continuing problems that face minority, especially African Americans and Hispanic, less educated and other disadvantaged populations in the displacement statistics. And, many of the states with high layoff numbers had modest or low unemployment rates.
Some analysts have predicted the so-called “New Economy” is not going to save us from a new downturn, given the dot-com meltdown, and the growing evidence that the new economy creates a bad jobs mix. According to the author of In Praise of Hard Industries , the “new economy” creates a few good jobs at the top for the intellectually accomplished, but most of the new jobs are at the bottom, contributing to more contingent jobs and inequality (In other words, the new economy may be the “same old story”). The fact that, ten years later, the broadest measure of job layoffs have remained as high as the peak of 3.4 million during the early 1990s recession represents a considerable change in our nation's economic and employment trends. It is a change that should require a major policy review of our nation’s future economic and social goals.
The Widening Impact on/of Capital Markets
There have been glaring problems in the small business sector caused by capital gaps for years. While capital has been more available in the last five years, especially for certain regions (bi-coastal) and sectors (high tech investments), traditional industries, unionized firms, and smaller businesses have had continuing problems accessing capital. There is also evidence that speculation and mis-investments of capital flows that have contributed to the building storm, and that everyday working peoples’ assets—pension funds and savings---contributed to this problem.
Some Causes of the Continuing Damage
Wall Street, up to recently, had been booming, but Main Street’s working conditions continued to erode. Unprecedented capital continues to flow into speculative emerging markets, but small and medium sized U.S. firms cannot find enough investment for growth. Derivative trading, hedge funds, offshore job flight, corporate mergers and currency speculation have become the order of the day for workers’ deferred wages. As workers’ financial assets have swelled, so too has the "collateral damage" of flawed investment assumptions and practices. These damages included investments by pension funds in the flood of “hot money” pouring into East Asia’s ‘Tiger’ economies. Pension fund investments in overseas equities have doubled since 1993, contributing to destabilizing international money flows, as well as the collapse of currencies in the late 1990s.
During this same period, domestic corporate mergers and acquisitions quadrupled, leading to the hollowing-out of large and small companies alike. Pension fund financing, or the continuing raids on pension surpluses, helped fuel that trend. A new book on the problems created by extreme mergers contends that, “between 65 and 75% of the corporate mergers that took place during the 1980s through the mid-1990s were financial failures. [This] group lost 90 billion. But an estimated 20 to 25 billion was paid to investment bankers during that time.”
“The value of mergers and acquisitions (MA) worldwide last year notched up yet another record: 3.5 trillion, up from 3.3 trillion in 1999 (see chart). But this headline number hides the fact that much of 2000’s MA activity came in the first half of the year, and particularly in the first quarter.” Even as it finally slowed at the end of 2000, a new round of MA’s may yet descend as a response to the new corporate crises caused by a downturn.
Tightened Credit Markets
In December, 2000, Stephen Roach, chief economist at Morgan Stanley Dean Witter, flagged the trend toward a rapidly slowing economy, predicting the deceleration in GNP would exceed the sharpest decline --- of about three percentage points---seen in the recession of 1990-91. “The deceleration we’re seeing now was last seen in 1982…This is a recession –style compression in the growth rate. It’s coming with great speed…(that) could be destabilizing in influencing business decisions with respect to capital spending…”. Morgan Stanley, in fact, has since predicted an overall economic recession for the first half of the year, and the expected first quarter results have already exceeded this prediction.
Equity and bond investors, as well as private purveyors of capital from venture capital firms to commercial bankers, were until recently aggressively competing to provide capital to the new economy. With an economic slowdown gaining momentum and securities markets depressed (NASDAQ down some 33 percent year to date), it is becoming evident that there is a move towards managing exposure and positioning for whatever type of landing the economy encounters in 2001. While the reversal in the equity markets and difficulty in executing an IPO are quite visible, less debt capital is available and the cost of this credit has risen considerably. Among the trends:
In its November, 2000 Outlook, First Union’s Economics Group noted that “In our view, the availability of credit for Main Street is the key to avoiding more serious economic trouble.”
The greatest tightening pressures in the credit market have been manifested in high-risk companies and high-risk countries. Regulators’ underlying concerns are likely the vast amount of debt-financed M A and other financial re -engineering activities that have occurred during the expansion.
Household debt-income ratios long ago zoomed past the point of sustainability. Personal bankruptcies are expected to rise a whopping 10-20% next year, according to SMR Research. Recent data for Visa shows a 20.3% increase in consumer bankruptcies from January 1 to March 3, 2001. And, people-at-risk may no longer be able to refinance their debt if credit tightens, or if new anti-bankruptcy rules are passed.
There is a growing fear that continued tightening will occur into the foreseeable future, as the creditworthiness of borrowers continues to decline.
Conclusion
The “Perfect Storm” is now with us. Will the nation continue to close it’s eyes, and hope the brunt of it strikes further up the coast, so to speak, or will we confront it head on? It is clear that economic and financial decline for the next 12-18 months could lead to stagnation for some time to come, if national policy measures are not taken immediately to stem the tide.
Trade policies must recognize and address the damage being wrought to basic industries
Fiscal, monetary and economic policies should be re-geared toward new anti-recessionary strategies
Budget and legislative priorities must address the increased layoffs and dislocations, and community impacts, as a result of the new economic downturn
Energy policies should be re-directed to contain the problems ushered in by de-regulation
States should focus new resources, even as their budgets tighten, to retain key economic sectors, and re-focus efforts to quickly assist dislocated worker populations
For the long run, all of the stakeholders--and not just shareholders--of the economy--including workers’ pensions, which control almost half of all stock--must weigh in on private and public investment (or dis-investment) decisions, to halt negligent strategies that harm working families and communities. As a starting point, “workers’ capital”---and that includes not only the trillions of dollars of family institutional assets and savings (deferred wages), but tax dollars, citizens’ bank deposits, and insurance assets, etc.,---should be re-invested in the communities in which people live, the kinds of workplaces in which they work, and in the infrastructural, social, educational and retraining supports that working families and communities need, in promoting a sustainable economy.
This time, if we are in a recession, we should re-examine our economic monitoring capabilities, so we recognize it is a recession while it is happening. This time, we should re-examine our overall goals for future economic health, so we don’t leave key industries or vast segments of our population out in the wind, once the main storm has passed. |
