Treasury Secretary Paulson, meeting with the G-7 Finance Ministers in Washington, tried to reassure them that the U.S. economic slump was only temporary.
He said he told his counterparts that checks from the stimulus package would go out in May and June and that they would add 500,000 to 600,000 jobs to the economy. He said that the federal government was helping more than a million homeowners keep their homes.
I worry that Paulson is engaging in reckless speculation about the future of the American job market. That somehow a flood of $600 checks next month from the government is going to lead to the creation of 600,000 new jobs is pure fantasy. That money is going to be used to pay down maxed out credit cards or keep cars from being repossessed. As Floyd Norris points out, the real jobless number (chart above) number for working-age men in America is not 4% but 13%. When someone gives up looking for work, the government no longer considers them unemployed–thus the huge discrepancy in the two figures.
What was even more curious about the G-7 meeting was the lack of outcry from our trading partners about the weak dollar.
There was no reference to any country’s intervening in the currency markets to stabilize the fluctuations, however, and no reference to whether the dollar’s recent slide against the euro had been too large, a trend that has worried many in Europe because it has made their exports more expensive and imports cheaper.
That’s because the Europeans and Asians are not worried about a flood of cheap American manufactured goods competing with their local producers. We have managed to so hollow-out our industrial plant in the last 30 years that they have little to fear. And as oil is priced in dollars, they have suffered far less in the recent price rises. With the dollar at an all time low against most major currencies, one would expect that the U.S. Trade deficit would shrink. But that’s not happening.
The gap between what Americans import and export unexpectedly widened in February as domestic demand rose for automobiles and fell back for crude oil. The trade deficit grew 5.7 percent, to $62.3 billion, its highest reading since November and the second consecutive month of increase.
Starting in the early 80’s the notion that the U.S. could become a service economy, dominated by the financial sector was promoted by everyone from Alan Greenspan to Jack Welch. Welch’s eagerness to move our greatest manufacturer, GE, into the financial services field, essentially commoditized half the firms revenue base. The disastrous results were revealed yesterday for all to see. Today, the financial sector makes up more than 20% of the S & P 500. Whereas the rise of the American economy since GE was founded by Edison in 1876, has been built on innovation, that differentiator is hard to apply in the financial services business. Beyond the credit card and the ATM, the innovations of late have been in the creation of $500 trillion of exotic derivative securities, so complex that regulators and rating agencies have no idea what they are looking at. And as any holder of the $43 trillion of Credit Default Swaps can tell you, these innovations can quickly turn into valueless commodities.
In March of 2005, Warren Buffet wrote some prophetic lines to his shareholders. He was trying to be dramatic, but it turns out his estimate of our future problems was mild compared to our present reality.
Mr Buffett said in the last 10 years foreign powers and their citizens had accrued about $3 trillion worth of US debt and assets such as equities and real estate. At current rates, he predicted that in another 10 years’ time the net ownership of the US by outsiders would amount to $11 trillion.
“This annual royalty paid [to] the world would undoubtedly produce significant political unrest in the US. Americans … would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an ‘ownership society’ will not find happiness in – and I’ll use hyperbole here for emphasis – a ‘sharecropper’s society’.”
The task of setting our country on a new course will have to be borne by both a new occupant of the White House and a new realization by the business leaders of our country that the dreams of an all service economy are as cruel to the future of their children as they are to the millions of jobless men throughout our country. Obama is not wrong that many of them are “bitter” and will look for scapegoats in the immigration debate. The fact that the Clinton’s have so harshly criticized him for stating the obvious shows how frozen our political climate has become. In the same way that GE’s Jeff Immelt must surely know that the future of his firm lies in making innovative manufactured goods for an energy efficient infrastructure, our whole economic and politcal conversation has to pivot towards a vision of rebuilding America’s hollow-out plant.