COMMENTARY: MY PRECEDING BLOG POST, ‘ECONOMIC PREDICTIONS 2012-13’, SUMMARIZED THIS WRITER’S ANNUAL PREDICTIONS FOR THE U.S. AND GLOBAL ECONOMIES FOR THE YEAR AHEAD. THE 13 PREDICTIONS ARE PUBLISHED IN THE JANUARY 2012 ISSUE OF ‘Z’ MAGAZINE. THE ‘Z’ PUBLICATION ALSO INCLUDES ADDITIONAL MATERIAL EXPLAINING WHY MAINSTREAM ECONOMISTS HAVE HABITUALLY MISSED THE MAJOR TURNING POINTS OF THE US-GLOBAL ECONOMY IN RECENT YEARS–INCLUDING THEIR FAILURE TO PREDICT THE EPIC RECESSION OF 2008, THEIR ERRONEOUS PREDICTION OF A RAPID, ‘V’-SHAPE RECOVERY IN 2009-10, AND NOW THEIR FAILURE TO FORESEE WHAT’S COMING IN THE EUROZONE, CHINA, AND EMERGING MARKETS. THAT ADDITIONAL MATERIAL IN THE ‘Z’ ARTICLE IS NOW ALSO OFFERED HERE, AS A ‘PREFIX’ TO THE 13 PREDICTIONS PREVIOUSLY POSTED. THE MATERIAL THAT FOLLOWS ALSO INCLUDES A DATA TABLE NOT PUBLISHED IN THE ‘Z’ ARTICLE, SUMMARIZING THE OBAMA ADMINISTRATION’S TOTAL SPENDING AND TAX CUTS SINCE FEBRUARY 2009 THROUGH PROPOSALS OF LATE 2011.
‘Why Mainstream Economists Fail to Predict the Decisive Economic Turning Points’ by Jack Rasmus, copyright 2011
For the past two years this writer has written on the status of the US and global economy in the January issue of Z magazine, with predictions for the year to come and beyond. Past predictions since late 2009 have included: the Euro financial system will be shaken in 2010 by one or more defaults on its periphery; should Democrats lose further seats in the House (in 2010), a highly likely event, federal spending will almost certainly be further reduced in 2011; the Eurozone debt crisis will spread beyond the current four economies (Ireland, Portugal, Spain, Greece) and engulf Italy, Belgium, and potentially France; home prices will fall another 10% to 15% in the US (and)foreclosures will rise past 10 million; states, cities, and school districts will turn to massive layoffs; the job gains this spring (2011) will once again likely disappear in the coming summer-fall 2011; both Japan and the Eurozone economies will weaken faster than the U.S.a restructuring of the EU currency system will result in a kind of two-tier euro currency
Predicting the trajectory of the US and global economy in these volatile economic times is an uncertain endeavor. But that’s the very time predictions are of most value. Unfortunately, with a handful of exceptions, the mainstream economics profession habitually focuses on predicting the present rather than the future. That statement is not as contradictory as it seems. Translated, it means mainstream economics assiduously avoids predicting beyond the next few weeks or, at most, the next monthly release of data. Forecasting fundamental turning points of the economy, and the major events that provoke major crises, are avoided at all costs. It is far safer to find refuge in conservative consensus opinion than to risk stepping outside it. After all, if the consensus is wrong, one cant be individually faulted by ones professional peers if the vast majority of those peers are also in error! However, this conservative bias contributes little toward understanding the most likely trajectory of conditions and events as the economic crisis continues to evolve and unfold.
Mainstream Economics: A Bird Without Wings
Seeking refuge in conservative consensus partly explains why virtually all the 10,000 professional economists in the world failed to predict the onset of the current crisis in 2007. Or why the same crew, in lock-step, declared a sustained economic recovery after 2009 would occur but didn’t. It is also why the same group today are failing, for yet a third time now, to foresee the coming deeper economic crisis that will almost certainly emerge no later than early 2013and potentially even earlier if the Eurozone financial system continues to unravel this spring 2012.
The repeated failure of the profession to predict the three great economic events of the past four years (two having occurred; one emerging) is not simply the consequence of economists myopic fixation on the latest data release or their consistent conservative bias, but more fundamentally is the result of their adherence to a conceptual apparatus that cannot explain the essential forces behind the current crisis. It is the result of theories based on pre-crisis conditions that no longer prevail; and of models that simply no longer work.
Deficient concepts, theories and models are why Obama’s own in-house professional economists–the Council of Economic Advisers–in early January 2009 erroneously assured the public that Obama’s $787 billion initial stimulus package would create 6 million jobs. But it didn’t. They are why the Federal Reserves economists insisted the $2.7 trillion Quantitative Easing (QE) 1, 2, and 2.5 (called operation twist) policies introduced between 2009-11 would resurrect the housing sector, but instead only fed stock, junk bond, and commodities futures speculators worldwide. And they are why Congressional Budget Office economists forecast that Obama’s $802 billion tax cuts introduced a year ago, in December 2010, would result in a significant increase in GDP growth rates and jobs, but instead produced GDP growth of less than 1% in the first half of 2011 and no net job creation the entire past year. Something clearly is wrong with the theories and models, as well as the conceptual apparatus underlying those theories and models.
The Broken Left Wing: Just Give Us More Stimulus
The liberal wing of the flightless bird of mainstream economics continues to maintain that the Obama programs since 2009 have not produced sustained economic recovery because the 2009 economic stimulus was of insufficient magnitude. At the forefront of this view have been noted economists like Paul Krugman and others. Even Larry Summers, former Treasury Secretary under Clinton and chief economic policy adviser for Obama in 2009-10, has recently joined the liberal chorus saying that the original stimulus of 2009 should have been $1 trillion or more–not the $787 billion.
Contrary to this view, however, the Obama stimulus programs introduced 2009-10, which amounting to more than $1.7 trillion in tax cuts and spending, failed not simply because they were of insufficient magnitude. They failed because their composition was also exceptionally bad and their timing poor.
With regard to composition: the Obama stimulus programs were composed 70% of tax cuts–and mostly business tax cuts at that. The tax cuts were then hoarded by corporations and not invested in the US to create jobs. Nearly another half trillion dollars in Obama spending programs were composed of subsidies to states, school districts, and unemployed. Those subsidies were designed to buy time, put a floor under the collapse of consumption that was occurring in 2008-09, until the tax cuts could pick up the slack, translate into real investment, and move the economy to a higher level of recovery. But that didn’t happen. The tax cuts weren’t invested. At least not in the U.S. Some went offshore to create jobs in Asia and elsewhere. Other amounts went into purchasing speculative securities–stocks, derivatives, foreign currencies, etc., that also created no jobs. The remainder was retained, and is still being hoarded today, in anticipation of being spent on corporate stock buybacks, dividend payouts, or eventual mergers and acquisitions that will result in fewernot morejobs. Despite a tax stimulus of trillions of dollars, corporate America continues to sit on a $2 to $2.5 trillion cash hoard as of year end 2011. Multinational corporations continue to hoard another $1.4 trillion in offshore subsidiaries instead of investing and creating jobs in the US. Not to be outdone in the hoarding game, after having been bailed out with $9 trillion in free loans by the Federal Reserve, big banks continue to sit on another $1.7 trillion in excess reserves, doling out loans in eye-drop fashion to small business, resulting in still further under-investment and minimal job creation.
Meanwhile, Obama’s $370 billion dollars of subsidies dissipated after 12-18 months. Like business tax cuts, subsidies do not create jobs. They may temporarily save some. But that’s not economic recovery. Recovery means significant net job creation, typically in the range of 300,000 to 500,000 jobs every month for a year. Saving jobs is a policy of accepting continuing economic stagnation at best.
The remaining $126 billion dollars or so of Obama spending circa 2009-10 was earmarked for long term infrastructure–i.e. upgrading the national electrical grid, alternative energy projects, and so-called shovel-ready construction projects that couldn’t find their shovels. But that spending did not create jobs or generate recovery in the short run since 2009 any more than tax cuts and subsidies created jobs. Composed mostly of capital-intensive projects, most infrastructure spending was structured very long term, taking effect over a ten year period. Like the tax cuts, the short term effect of this infrastructure spending thus also resulted in little if any job creation or economic recovery.
This bad composition of the Obama stimulus programs (i.e. tax cut heavy, subsidies, and capital intensive construction) and their poor timing (i.e. ultra-long term infrastructure projects and one-time short term grants to the states) are represented in the following Table 1.
Economic Recovery Programs
Tax Cuts vs. Spending / Subsidy vs. Infrastructure
(billions, current $)
Program Total Cost Tax Spending Spending Spending (long)
Obama I $862 $417 $445 $319 $126
Obama II $857 $803 $54 $54
Obama III $447 $253 $194 $89 $105
(9/11) ______ _____ _____ ______ ______
TOTALS $2,166 $1,473 $693 $452 $231
Source: Obamas Economy: Recovery for the Few, Pluto Press & Palgrave-Macmillan, March 2012.
Obamas three recovery programs to date failed because they relied on the private market sector to generate a sustained recovery, instead of on the government directly taking the lead to create jobs, rescue homeowners and resurrect housing, and stabilize state-local government finances long run. Obama bailed out banks that didnt lend, rescued corporations that didnt create jobs, and subsidized state and local governments for a brief period and then cut them loose to fend fiscally for themselves.
The Stunted Right Wing: Just Give Business More Profits
Radical Republicans subsequently took charge of the U.S. House of Representatives following the November 2010 midterm elections–and with it took over the economic policy agenda as well. The takeover created an ideal environment for the re-ascendance of the right wing of mainstream economics in the economic policy process. But if the left wing was broken and unable to clearly understand the reasons why the Obama recovery policies have failed, the right wing intellectually was a mere stub without feathers and thus even more incapable of flight.
The Obama programs failed to generate recovery, they argued, because they produced a lack of business confidence. That lack of confidence was due to business uncertainty about the future of tax cuts, to excessive business regulation, to stalled free trade agreements with South Korea, Panama, and Columbia, to excessive deficit pending and debt, to the excessive cost to business in the health care affordability act of 2010, and other such economic nonsense. Conservative economists argued that changing these policies would release more income for corporations and businesses to spend. More income would automatically translate into more investment and more jobs. The economy would then rapidly recover.
Whats conveniently ignored by this wing, however, are two major problems: First, massive government spending cuts and sharply reduced consumer incomes produces a steep decline in GDP and no recovery. Conservative economists argue this slack will be more than offset by a rise in business investment, which leads to the second problem: namely, with corporations already hoarding $2 trillion in cash and banks hoarding another $1.7 trillion in excess reserves today, why should giving corporations and banks even more cash and income result in investment and recovery? If corporations and the banks aren’t spending the $2 trillion or lending the $1.7 trillion they already have and insist on hoarding, why should giving them still more result in anything different? Exactly how many more trillions of dollars are needed to get them to invest, lend, and create jobs and ensure recovery?
This condition of mainstream economics today may be summarized with the following statement:
Just as the liberal wing of economics has no answer to exactly how much more magnitude of deficit spending is necessary to ensure a sustained economic recovery, the conservative wing cannot explain or answer how much more shifting of income to corporations and investors is needed to ensure a return to investment, jobs, and recovery.
Given such fundamental errors by both wings, it is not strange that both liberal or conservative economists today have had such great difficulty in recent years predicting the emergence and evolution of the current economic crisis. The bird simply cannot fly. It can only run around in circles, flightless, squawking as it turns first left and then right and back again.
With neither wing of the economics profession able to offer effective programs for economic recovery, what then are the likely scenario(s) for the U.S. and global economies in the year immediately ahead?