High Unemployment and High Inflation
"Why is this recession different from almost all other recessions?" asked Herbert Barchoff. The economist, a former president of the Council of Economic Advisers, answered his own question: "This is not only the usual cyclical recession, but also a structural recession."
Barchoff's dark assessment appeared in a letter to the editor of The New York Times--in June 1992. Then, like now, Americans were suffering through a long, grinding recession following a boom (under Reagan) that had primarily benefited the wealthy. There were mass layoffs. The real estate market had collapsed. Foreclosures were rampant.
George H.W. Bush, who had expected to coast to reelection on the strength of his near 90 percent post-Gulf War approval ratings, projected a Herbert Hoover-like resolve to not lift a finger to alleviate the misery. The Federal Reserve cut interest rates, but it didn't help. Six months later, angry voters fired an out-of-touch president who seemed unwilling to fix an economy he didn't think was broken in favor of a guy who claimed to feel our pain.
Barchoff, it would turn out, was too pessimistic. "To reverse the excesses of the 1980's," he wrote, "restructuring has been going on in massive proportions at every level. It is a rare day that newspapers do not report layoffs, often in the thousands in the industrial sector." What Barchoff didn't know--few people did--was that the U.S. was about to begin the longest, broadest and biggest period of economic expansion experienced by any civilization in human history.
Downsizing continued in traditional sectors like manufacturing and newspapers. Even during the Clinton boom, millions of people were ruined, forced to declare bankruptcy. Midwestern cities were reduced to rusted-out shells. But none of that mattered to Wall Street. The Internet revolution prompted so much capital investment, and generated so many new jobs--freshly minted college grads thought it perfectly normal to earn $85,000 moving around lines of HTML--that otherwise sane people began talking about a "new paradigm" in which "the old rules no longer apply."
In other respects, however, Barchoff was prescient. "[The then-new European Community] will substantially hurt our ability to be competitive," he correctly predicted. "The drop in interest rates is no solution. During the Great Depression the prime rate went to one percent, with no cure. When you are out of work or afraid of losing your job, you do not take on debt. Nor will entrepreneurs borrow even very cheap money unless there is a market."
The Bush Sr. recession was a grim affair. When I graduated from Columbia in 1991, the university canceled its annual jobs fair due to employers' lack of interest. But it was a picnic compared to what we're facing now. Bush Jr. could finally realize Barchoff's nightmare of a structural recession--the kind of no-way-out shock experienced by Russia after the collapse of the Soviet Union.
"Normal" cyclical recessions feature increased unemployment, which puts downward pressure on prices. You rarely see high unemployment and high inflation at the same time. Conservative economists point to rising inflation during the late 1970s as an exception, but that wasn't even a downturn, much less a recession. Inflation was high but unemployment was low. Anyway, the inflation didn't hurt workers; during the Carter years mean wages rose faster than inflation. The opposite is true now. Real income is falling.
The economy has bled 3.1 million jobs since George W. Bush assumed the presidency in 2001, the worst record since the Depression. The official unemployment rate, constantly re-jiggered to make the economy appear more robust, has risen to 5.1 percent. The long-term unemployment rate, which includes people who have had such bad luck looking for work that they've given up entirely, has doubled, to over 13 percent.
Meanwhile, inflation is approaching seven percent. Again, that's the official inflation rate. Your mileage as an average American--who spends a third of your pay on housing and more and more on gas--will vary. But let's not dwell on the irony of $4-a-gallon gas resulting from a war fought to steal oil.
But wait. There's even more bad news.
Two-thirds of economic activity is generated by consumer spending. Most people are broke. So much for that two-thirds. "In 2000," reports David Leonhardt in The Times, "at the end of the last economic expansion, the median family made about $61,000, according to the Census Bureau's inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less--about $60,500."
This, says, Leonhardt, is a big deal. "This has never happened before, at least not for as long as the government has been keeping records." RBC Capital Markets reports that consumer confidence has fallen below 30 percent, an all-time record low. T.J. Marta, a fixed-income strategist at RBC, said: "What confidence? There is no confidence. It's like 1929."
If Barchoff had picked up a copy of the San Jose Mercury-News in 1992, he would have read about the birth of the Web revolution, then touted as the "information superhighway." But there's nothing like that coming down the pike today. To paraphrase the ever-quotable Donald Rumsfeld, we're going to have to make do with the economy we have, not the one we wish we had.
Liberal economists like Paul Krugman suggest a rerun of the 1930s, when FDR's New Deal employed millions to build new infrastructure like dams and bridges. But none of the three remaining presidential contenders is likely to undertake such a thing. "The worst-case scenario" about the 1991 war against Iraq, Barchoff said in 1992, would have been if it had lasted two years and cost an extra $200 billion. Iraq War II, now in its sixth year, is currently pegged at an estimated $3 trillion. Republican John McCain is committed to pouring more trillions into Iraq War II until victory is achieved, i.e., forever. As Democrats wary of being tarnished with the label of "big spender," both Obama and Clinton will likely place fiscal discipline ahead of expansive new government programs.
There is no short-term fix. In the long term, we must put more money into more people's pockets. That means higher wages and lower taxes for the poor and middle class. Some of what is needed is easy to see: a more progressive tax code, repealing laws that allow employers to harass and fire those who try to organize unions, nationalizing industries run by vampire capitalists--health insurers, private hospitals, colleges and universities. Banks encourage predatory lending while stifling saving. They ought to be re-regulated. What madness permits them to charge 30 percent on credit cards while paying one percent on passbook savings accounts?
More--much more--is necessary to prevent the wholesale collapse of the U.S. economic system. A maximum wage should be imposed--the highest paid American should earn no more than ten times the lowest paid. I know, I know--none of this will happen. There will be nothing but Band-Aids and lazy rhetoric as we plummet into the abyss. It cannot be otherwise, for our politics are ossified, the media is corporatized, and we the people are dull and apathetic.