Beginning in October 2015, many economists warned that the expected decision of Fed Chair Janet Yellen to raise interest rates was premature. A mere eight days into 2016, we are seeing volatility in the Chinese stock market, due to known, nonetheless adverse economic factors.
When thinking about the effects a downturn in China might have on the US economy, one cannot ignore the dependencies between the two economies. In a speculative economy, such as ours is, one cannot ignore the psychological effect of any significant turbulence in China on an already very skittish Wall Street.
On the economic policy side of things, we couldn’t be positioned any worse than we are now, with both houses of Congress under the control of the most rabidly radical elements when it comes to guiding an economy. Under the leadership of Paul Ryan and Mitch McConnell, it is more likely that austerity will be their only response to another downturn, than it is that they would even be willing to consider a round of stimulus.
In, “There’s another recession out there, we’re not ready for it,” Jared Bernstein writes:
“Think of the Fed as a fire truck and the ffr as a tank of water they use to put out a recession. They emptied the tank fighting the Great Recession and may not have time to fill it, constraining their ability to fight the next fire.”
“That leaves fiscal policy, meaning taxes and government spending on “countercyclical” interventions. And that, at least partially, invokes Congress. You see the problem.
That “partially” above is important. A good chunk of anti-recessionary, countercyclical policy is automatic. SNAP, or food stamp, rolls expand with need in recession, as does unemployment insurance. Both programs performed admirably in the last downturn (btw, this point strongly militates against turning SNAP into a block grant, as some conservatives advocate). But as economists Mark Zandi and Alan Blinder point out in this comprehensive overview of the full spate of countercyclical policies we threw at the deep recession of 2008-09, much countercyclical policy, including the Keynesian stimulus known as the Recovery Act, was discretionary. In 2010, for example, they estimate that the Recovery Act saved an estimated 2.6 million jobs and raised real GDP an estimated 3.3 percent above what might have otherwise occurred.”
“Simply put, in a period with very low interest rates, fiscal policy may well pack more punch than monetary policy and thus becomes that much more important, especially in recession.”
And, indeed, many states are now implementing federally-mandated cuts to safety net programs, leaving at-risk and and long-suffering populations, to just wither helplessly. From the Center on Budget and Policy Priorities:
More than 500,000 and as many as 1 million of the nation’s poorest people will be cut off SNAP (formerly known as the Food Stamp Program) over the course of 2016, due to the return in many areas of a three-month limit on SNAP benefits for unemployed adults aged 18-49 who aren’t disabled or raising minor children. These individuals will lose their food assistance benefits after three months regardless of how hard they are looking for work. The impact will be felt in the 23 states that must or are choosing to reimpose the time limit in 2016.
One of the harshest pieces of the 1996 welfare law, this provision limits such individuals to three months of SNAP benefits in any 36-month period when they aren’t employed or in a work or training program for at least 20 hours a week. Even SNAP recipients whose state operates few or no employment programs and fails to offer them a spot in a work or training program — which is the case in most states — have their benefits cut off after three months irrespective of whether they are searching diligently for a job. Because this provision denies basic food assistance to people who want to work and will accept any job or work program slot offered, it is effectively a severe time limit rather than a work requirement, as such requirements are commonly understood. Work requirements in public assistance programs typically require people to look for work and accept any job or employment program slot that is offered but do not cut off people who are willing to work and looking for a job simply because they can’t find one. In fact, SNAP has separate work requirement authority much like this, where states can require individuals to participate in job search or a training program but cannot terminate them if no program is available.
About 40% of these half million to one million SNAP recipients are women, a third of which are over age 40, and in the age and gender cohort most likely to have the most trouble finding employment:
Among those who report their race, about half are white, a third are African American, and a tenth are Hispanic. Half have only a high school diploma or GED, and one-quarter have not completed high school. They live in all areas of the country, and among those for whom data on metropolitan status are available, close to 40 percent live in urban areas, 40 percent in suburban areas, and over 20 percent in rural areas.
We are at the very beginning of the year. Traditionally, that is the period when seasonal jobs end and a new cycle of hiring begins to pick up, typically, around the start of February. But, we are already seeing signs that the weak demand during the holiday season has pushed some retailers to take drastic action:
“The iconic department store Macy’s announced plans Wednesday to lay off about 4,350 employees and close more than 40 stores nationwide, including two in California.
Macy’s said about 3,000 sales associates will be impacted, or about three to four per Macy’s and Bloomingdale’s location. The company expects that about half of the affected store associates will be “placed in other positions.””
Macy’s isn’t the only company to announce layoffs or implement them. Whole Foods laid off about 1500 employees in Southern California last month, and there are others.
Real unemployment rates (using the U6 measures) are still high, especially when one looks at certain sub-categories of workers. Notably, the very young and middle-aged and older workers are most likely to still be unemployed, under-employed, or have given up entirely. Then, there is African American unemployment which gets little to no press coverage. As EPI’s Valerie Wilson writes in “Black unemployment is significantly higher than white unemployment regardless of educational attainment:”
In one of the more balanced and sober analyses prior to the Fed’s rate hike, Larry Summers wrote in “What the Federal Reserve got wrong, and what it should do next:”
“All of the argument about appropriate inflation targeting in recent years has focused not on whether 2 percent is too high, but on whether it is too low a target. I am not yet ready to abandon a 2 percent target, but wage rigidity and zero lower bound on interest rate considerations suggest whatever the right target was a decade ago, a higher target might be appropriate today given the slowdown in productivity and reduction in the neutral rate. Surely the risks of missing the target on the low side over a prolonged interval should be a major policy concern today.
This is a time of considerable financial and geopolitical fragility around the world. There are real risks of serious capital flight and associated dislocation in many emerging markets. Any change in policy and financial conditions carries with it at least some chance of setting off instability which could snowball given the current high degree of illiquidity in many markets. The risks are magnified by the asymmetry between what the Fed is doing and what most other major central banks are doing. While in principle exchange rate movements should not affect the level of global demand, further dollar appreciation is likely to be contractionary for the global economy because of the uncertainty it engenders.”
So, given what we know of the underlying problems in our economy, the entrenched status of the American precariat, and the Federal Reserve having no wiggling room at or near the zero-lower bound, solutions can only come from policy-makers, especially if we are to fall back into recession. But our dysfunctional politics bar any expectations of relief in the form of an emergency stimulus package in the coming year. If anything, we are assured that the Republicans in charge of Congress will redouble their demands to make further budget cuts and award even more tax cuts to the wealthy, in an effort to double down on austerity.
So, what happens if China’s sniffles turn into a full-fledged cold? Nothing good. We just aren’t prepared and we do not have a leadership in place that would be willing to switch gears and do the right thing. In a sudden downturn, it is more likely than not that the outlook would remain grim until after the November 2016 election, and even then, cautious optimism would be in order for as long as the DNC continues to resist calls for an all-out 50-state voter mobilization effort, with special focus being placed on the Deep South.
While our economy has been fundamentally sound, even with the Great Recession, what hasn’t been sound is a political system which has caused the nation to experience undue and artificial hardships by dictating policies that bleed yet more wealth to the top percentiles of the population, at the expense of the 99 percent. Does that mean a voter revolt and a complete change in Congress are all that is required? The short answer is no. The nation is in need of fundamental reforms in virtually every sector, but optimism and the road to recovery begin with each and every voter’s commitment to change. Without a political revolution, the next president will be as hobbled as the current one and the desperation among significant portions of our population will deepen, without much hope of relief for yet another four years.
“This week, Angus Deaton will receive the Nobel Memorial Prize in Economics “for his analysis of consumption, poverty, and welfare.” Deservedly so. Indeed, soon after the award was announced in October, Deaton published some startling work with Ann Case in the “Proceedings of the National Academy of Sciences” — research that is at least as newsworthy as the Nobel ceremony.
Analyzing a vast amount of data about health and deaths among Americans, Case and Deaton showed declining life expectancy and health for middle-aged white Americans, especially those with a high school education or less. Among the causes were suicide, drugs, and alcoholism.”
“The Case-Deaton results show that such theories will no longer do. America is becoming a more divided society — divided not only between whites and African Americans, but also between the 1 percent and the rest, and between the highly educated and the less educated, regardless of race. And the gap can now be measured not just in wages, but also in early deaths. White Americans, too, are dying earlier as their incomes decline.
America is becoming a more divided society — divided not only between whites and African Americans, but also between the 1 percent and the rest, and between the highly educated and the less educated, regardless of race.
This evidence is hardly a shock to those of us studying inequality in America. The median income of a full-time male employee is lower than it was 40 years ago. Wages of male high school graduates have plummeted by some 19 percent in the period studied by Case and Deaton.”
Read the rest of Joseph Stiglitz’ op-ed in HuffingtonPost.com
Bernie Sanders’ speech to Wall Street (video and text)
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