Monday, March 14, 2011

A Third World U.S. of A.?

Popular Economics Weekly

When we look at the results of the Great Recession, there is one inescapable fact. The U.S. in many ways is looking more like a Third World country than the leading light of the developed world. Not only are Americans’ quality of life worse off than even in 2000, but the rest of the developed world—and some developing countries are rushing past us into this, the 21st Century.

An example is Mauritius, a tiny 1.3 million population tropical archipelago that Nobelist Joseph Stiglitz recently visited. “Suppose someone were to describe a small country that provided free education through university for all of its citizens,” says Professor Stiglitz, “transportation for school children, and free health care – including heart surgery – for all. You might suspect that such a country is either phenomenally rich or on the fast track to fiscal crisis.

But Mauritius isn’t rich with just a $6700 per capital income since breaking away from Great Britain in 1968. It also has no natural resources of its own. “Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net. Many countries, not least the US, could learn from its experience,” says Stiglitz. And, GDP growth has averaged 5 percent over the past 30 years.

Many smaller countries are putting us to shame, in other words, in terms of encouraging growth while caring for their citizens. American’s pay less towards public services that benefit all than any other developed country—except for health care, where health providers manage to extract twice the per capita spending than in other developed countries, with much worse outcomes—20 percent worse in the case of infectious diseases in a recent British Isles study.

At a time when Americans should be enjoying a better standard of living than their parents, for example, this is the first generation where the parents will have done better than their children on the whole. This is not only in the amount of wealth that has disappeared in the Great Recession—more than $4 trillion in lost value of both homes, stocks and bonds—but in health factors such as longevity, our birth death rate, and amount of infectious diseases. And wealth lost by the federal government has created the huge budget deficits that have made it even harder to put economic growth back on track.

Back to more mundane news, retail sales are surging, as working consumers seem to be on track to boost spending. The malls are filling up again, in other words, with Bank of Tokyo-Mitsubishi’s same-store sales survey tracking higher and the U.S. Commerce Department’s monthly retail sales up a huge 1 percent.


“Overall retail sales in February surged 1.0 percent, following a revised 0.7 percent boost in January and a revised 0.6 percent increase in December,” said Econoday in its weekly update, with auto and gasoline sales leading the way. Year over year sales are up a huge 8 percent, with sporting goods, hobby, book & music stores, also up 1.3 percent, and food services & drinking places, up 1.2 percent. This is boom-time spending, folks, so those with jobs seem to have regained some confidence.

Working consumers can spend more because they are borrowing again. Overall consumer credit outstanding rose $5.0 billion in January, following a $4.1 billion gain the prior month. The latest increase was entirely from the nonrevolving component which surged $9.3 billion in January following December's $2.1 billion gain—i.e., mainly from financing for motor vehicles.


This is while the U. of Michigan’s most recent sentiment survey took a dive with the latest gas price hikes. Mid-March weakness was centered in the leading component, the expectations index which plunged 13.3 points to 58.3. The expectation drop will weigh on the Conference Board’s index of leading indicators as it is one component of the index of leading indicators. It was because of the Mideast volatility, and how rising gas-energy prices might weigh on inflation. Though any prolonged price spikes would slow down economic growth, which will depress any inflationary tendencies.

So such sensitivity to energy price shocks is a sign that economic growth hasn’t taken hold for the majority of Americans. Too many are still out of work, and the average worker’s salary hasn’t grown at all after inflation is figured in. The bottom line is that debt loads are still too high for most of us, and government spending to support economic growth will only shrink as deficit reduction becomes Washington’s priority.

Unfortunately, we are looking in the wrong places for deficit reduction at present. Rather than let the Bush tax cuts for those making more than $250,000 per year lapse, which will cost taxpayers $850 billion over 2 years, “The Republicans’ bill hacks away at funding for the Environmental Protection Agency, the Securities and Exchange Commission, the Occupational Safety and Health Administration, the National Labor Relations Board, the Commodity Futures Trading Commission, the USDA’s food inspection unit, and the Food and Drug Administration”’ says Marketwatch’s Rex Nutting.


So unfortunately, do not look to so-called fiscal conservatives to cut budget deficits. Those doing it in the name of reducing the size of government have only succeeded in making those deficits larger. Our deficits were fairly low—until the Reagan/Bush I (1980-92, and Bush II (2000-08) eras. Those were the administrations that advocated tax and government spending cuts as the path to prosperity, as we said last week. So once again, need we say more?

“…the question is not whether we can afford to provide health care or education for all, or ensure widespread homeownership”, said Professor Stiglitz. “If Mauritius can afford these things, America and Europe – which are several orders of magnitude richer – can, too. The question, rather, is how to organize society. Mauritians have chosen a path that leads to higher levels of social cohesion, welfare, and economic growth – and to a lower level of inequality.”

The United States of America is going in the opposite direction at present.

Harlan Green © 2011

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