No different, worse this time:
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The US Economy: 1990-1998
According to official figures a recession started in the United States in June 1990 and ended 9 months later in March the following year. The nation’s output fell by a tiny fraction, less than 1%. Thus government figures display only a minor damage to the economy from the slump of 1990. But then you wonder why President George Bush, with an all-time high public approval rating of 84% in March 1991, lost in an electoral college landslide to Bill Clinton barely 20 months later. Our economists view recession as a decline in the nation’s output over two consecutive quarters. In this view, the recession was over in March 1991, the same month that produced the highest approval rating for the president, because the output began to rise. Now this is interesting. The president won accolades from his handling of the Gulf War, and the economy began to recover at the same time, yet he lost to a virtually unknown governor of a small state, Arkansas.
The truth is that the slump of 1990, though not a full fledged depression of the type in the 1930s, was much more serious than revealed by official figures on output. The public said so at the ballot box and threw a once untouchable president out of office.
If we apply the conventional concept of recession to the 1930s, as the output began to rise the depression was over by the end of 1933, a year when the unemployment rate hit 25% of the labor force, compared to just 7.5% in 1992. How ridiculous does that sound? Even in 1939, the jobless rate was over 15%. The point of this discussion is that the state of the economy is not just gauged by output figures alone. You have to examine the trends in many areas including joblessness, real wages and the climate of panic in society.
Take a look at how some others described the 1990 downturn. Harvard Professor Galbraith called it a recession cum depression; economist David Levy characterized it as a "contained depression." Lawrence Hunter, deputy chief economist for the US chamber of commerce, dubbed it as a "never-ending recession." Peter Peterson, Commerce Secretary in the 1970s, called it a "middle class meltdown," and Wallace Peterson , a distinguished professor at the University of Nebraska, titled it the silent depression. Even Massachusetts Senator Ted Kennedy, not a critic of Bill Clinton, described it as "quiet depression" as late as 1996.
According to output figures the US economy started humming in early 1991; then why did so many luminaries take issue with that characterization? Why did some well known economists vehemently disagree with the government’s assertions? In a poignant commentary on the state of the economy, Time magazine openly wondered in January 1992, "Well, why are Americans so gloomy, fearful and even panicked about the current economic slump?" The answer came from
the state of the real family income in America coupled with all the downsizing that had occurred in the early 1990s.
Since 1970, an increasing number of women have joined the labor force, so that the real family income has been rising in spite of stagnant real wages for individuals. According to the Economic Report of the President (ERP), median family income was $43,290 in 1989, just a year before the slump. In 1990, it fell to $42,400, and in 1996 stood at $42,300, not only below the 1989 level but also below the 1990 figure. Even five years after the recovery is supposed to have begun, median family income had not caught up with the pre-slump figure. This is exactly why Pat Buchanan defeated the front runner Bob Dole in the early 1996 Republican primary. Hear what journalist Jason DeParle, a staff writer for the New York Times magazine, said on that occasion: "Call it what you will, but class anger is back. Who could have imagined that a win in New Hampshire would come to a man who called the stock market un-American?" Or that Bob Dole would pose, even fleetingly, as a critic of corporate America."
The output figures told one story, but family income told another. Mark Twain used to say, there are lies, damn lies and statistics. It is clear now that the official spin on the state of the economy has masked its true character, created an impression of growing prosperity and made figures tell damn lies.
This, however, is only a speck of the distorted picture. As a result of the damn lies persisting with clock-work regularity since 1996, the world economy is now perched atop a precipice. Even the seemingly invincible US behemoth is extremely shaky, hanging onto the cliff by one fingernail. Why else would a Time cover page in February 1999 raise the specter of a global meltdown? The magazine brags about its "inside story" of how a global financial calamity was averted in August 1998. Let me give you an inside story of what actually brought about the seemingly unprecedented US prosperity in the 1990s.
After Japan suffered a stock market crash in January 1990, it responded to the crisis by slashing interest rates. The idea was that low borrowing costs would encourage businesses to expand their investments, households to purchase new homes, and cushion the banks from tons of bad debt, so that the effects of the share price debacle would be minimized. However, for a variety of reasons, which we will discuss later, the medicine failed and the country’s economy continued to sink at a slow but unmistakable pace.
Most of the Japanese banks survived as their deposit costs tumbled, but, in a nation shell-shocked by the debacle, there was little business and consumer demand for their loans. So they turned to other countries to expand their lending business or find lucrative investments. Despite a faltering home economy, they had plenty of funds to lend or invest, because the Japanese are among the biggest savers in the world. A part of their money went to the Asian Tigers in the neighborhood, but a substantial part came to the United States, which had a huge appetite for foreign funds to finance its gargantuan budget deficit. In addition to Japan, funds also poured into America from many other nations that had a bulging hoard of dollars acquired from their trade surplus. China alone had a $34 billion surplus in its US trade in 1995.
From 1990 to 1995, the federal red ink amounted to $1.5 trillion, of which about a fourth, some $400 billion, was financed by foreign funds. An equal amount went into other American assets such as stocks, factories and real estate. Thus about $800 billion of foreign money poured into the United States during the first half of the 1990s, and all the country could show for it was a declining median in family income. A median household is in the middle of all the families. A decline in median income meant that half of American households had suffered a loss of earnings. True, stock and bond prices had skyrocketed because of the foreign inflow, but a vast number of Americans had suffered lower incomes.
With Japan continuing to sink into the abyss and the world awash in dollars, the inflow of foreign funds accelerated after 1996. The US trade deficit had already become a blessing in disguise, and now it turned economic recovery into a full-blown boom. Normally, a country with a growing trade shortfall has to raise interest rates to attract foreign funds that in turn finance that shortfall. As a result, the economy and financial markets go into a slump, imports shrivel and foreign commerce moves into balance. This has been the experience of all countries all through recorded history. This was also the case during the 1980s, when high federal deficits sharply raised American interest rates, which in turn attracted funds from abroad and paid for the trade shortfall.
But in the 1990s, the laws of nature turned on their head. The US economy and financial markets actually benefited from the trade deficit. As the deficit zoomed, so did American prosperity. A rising deficit meant an ever increasing hoard of dollars in international hands; people abroad didn’t know what to do with all that foreign currency. Foreign governments or central banks ploughed the dollars right back into American assets, US interest rates fell again, and a virtuous circle, sparked by the 1990 crash in Japan, turned into a gusher. In 1997, Asian currencies went into a tailspin, spurring a big rise in America’s already enduring and large trade deficit. But that only helped the United States, because a larger inflow of external capital meant even lower interest rates.
The Asian crisis affected the US economy in two ways, one positive and the other negative. The negative effect came from surging imports of manufactured goods that generated further downsizing in major industries. The positive impact sprang from falling interest rates that continued to fuel a housing boom, especially as people moved into ever larger homes. When a person buys a residence he also likes to purchase many other things—appliances, furniture, paintings, rugs and so on. Thus a housing boom is the best thing that can happen to an economy. This way the salutary effect of the Asian crisis far outweighed the negative impact, so that the US economy and financial markets kept humming even as other nations took a bath.
On April 1, 1998, the United States orchestrated major financial deregulation in Japan ostensibly to cure the Japanese crisis. But its effect were the same as those of the Asian turmoil. Deregulation permitted the Japanese people and insurance companies to invest money abroad, a privilege heretofore available only to their banking institutions.
Uncle Sam, no longer rich but in desperate need of incoming largesse, has become the largest debtor in the world, but since the debt is not in foreign currency, its ill effects would take time to erupt. Foreign debt has already destroyed seemingly strong economies—Thailand, Malaysia, Indonesia, South Korea, the Philippines, and Brazil among others, whereas obvious laggards such as Mexico and Russia are simply gasping for breath. The United States is still standing tall despite its mountain of debt, but since its liabilities are not in terms of a foreign currency, it will be the last domino to fall. The country doesn’t need to raise interest rates to attract foreign exchange, which is what is killing the other debtors.
This is the inside story of America’s sizzling prosperity in the late 1990s, even as the rest of the world crumbles. As the federal deficit ballooned in 1990 and thereafter, the slump of that year could have turned into a full-fledged depression, but the inflow of Japanese money brought interest rates down and saved the day. In spite of that inflow, there was a good deal of suffering for six long years until 1996. After that, as the foreign inflow accelerated, a tepid recovery turned into a full-blooded boom. Is this a real boom or a mere postponement of the day of reckoning into something worse? With billions of dollars in loans even a pauper can become a tycoon and gloat about his riches. But one day the loans come due with interest, something that has already bedeviled many parts of the world. The US hour of judgement is almost here, and then the great depression, postponed in 1990, could make a ferocious comeback.
'The Crash of the Millennium' - Ravi Batra, Economist |
