Friday, February 22, 2008

A Recession Election?

Walker's World: A Recession Election?

By Martin Walker, UPI Editor Emeritus | 4 February 2008

WASHINGTON, Feb. 4 (UPI)— Is this a recession or not? Is the United States about to be plunged into an election campaign dominated by unemployment figures, home foreclosures and demagogic attacks on globalization and the loss of American jobs to low-wage economies?

In a sense, it barely matters whether the U.S. plunges into what economists formally call a recession, which is when the gross domestic product turns negative (that means when the total economy actually shrinks) for two successive quarters. Whether the country does dip into recession or remains stuck throughout the year at stagnant or very low growth, the political fallout will remain. We will hear the tired old phrase from the 1992 campaign— "It's the economy, stupid"— until we are sick of it.

There will be endless calls to protect American jobs, constant complaints about China's food and product safety and its currency manipulation. There will be speeches about the loss of white-collar jobs to India, or about oil-rich sheiks soaking American drivers while depending on U.S. military protection. And whatever happens on Wall Street or Main Street or in Europe or China, there will be hundreds of thousands of families losing their homes through foreclosures.

So it will feel like bad economic times. Oil prices may drop a bit as global demand slows. But food prices are set to continue rising, as China and India demand more meat protein and arable land is foolishly turned over to biofuel crops. The U.S. economy is going to feel squeezed. Construction normally accounts for about $600 billion of the $13 trillion U.S. GDP, or close to 5 percent of the economy. But new housing starts are down by half, and commercial construction is slowing fast— and real estate, rental and leasing accounts for $1.5 trillion a year. The troubles in this sector are going to knock at least 2 percentage points off GDP growth this year, along with the slowing sales of carpets and curtains and kitchens and bathrooms and all the other goods the construction sector needs.

Can the export boom from the falling dollar make up for this? It will not be easy. Exports account for about $1.3 trillion a year, and imports about $2 trillion. Exports would have to increase by $300 billion this year to make up for the shortfall in construction. Part of the problem is the monstrous U.S. trade deficit of around $700 billion. To bring imports and exports back into balance would mean raising exports by 50 percent. This is not going to happen, particularly since China has now overtaken the United States and jumped into second place behind Germany as the world's top exporter. It might be easier to try raising exports and cutting imports by 25 percent each— which would probably send China's economy into a tailspin.

All of these sums in the hundreds of billions put into perspective the relatively modest "stimulus package" of $150 billion now before Congress. It is not going to make a great deal of difference, even if the deal is reached fast and the checks are mailed out in time to make a difference to consumer spending in the first half of this year. What the package will do is increase the federal budget deficit, which had come down to a relatively manageable $164 billion. It will now be heading north of $300 billion, and still higher when the slowing economy cuts tax revenues.

The price to be paid for this is two-fold; first in the increased inflation, and second in the higher costs of paying interest on the federal debt, which is already $8 trillion. The interest payments are over $300 billion a year. Combined with the defense budget and the extra costs of the Iraq and Afghan wars, the higher interest payments mean that about $1 trillion is coming right off the top of the federal budget for essentially negative/waste items.

The tragedy here is that the American Society of Civil Engineers calculates that there is a backlog of $1.6 trillion in essential and urgent infrastructure projects like road and bridge repair, clean water provision and port expansion. That is the kind of federal spending that would translate directly into American jobs, American products, American earnings and American quality of life. And it is being crowded out by the ballooning deficit.

The current economic slowdown is not going to be the only problem on the minds of the presidential candidates and the American voter this year. Whoever becomes the next president either knows now or will find out soon that the baby-boom generation starts to retire in massive numbers during the next four years. The costs in Social Security and Medicare are going to rise and keep on rising.

If a Democrat, the next president is going to have to find a way to finance all this while trying to keep the promise to introduce a universal healthcare program, which will not be cheap. If a Republican, president John McCain will be trying to tackle all this while keeping the tax cuts of his predecessor, and also introducing new ones. He has pledged to cut corporate taxes and institute (read my lips) "no new taxes".

The economic prospects are not inviting, whether the country formally slips into recession this year or not. It will feel like hard times and economic crisis, and in the heat of campaigning the politicians will react and overreact. This makes it all the more likely that they will do the worst possible thing— listen to the protectionist voices and promise measures to undermine the liberal world trading regime of which the U.S. economy has been the greatest beneficiary!



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