[by Andrew Pollack]
For months mainstream economists and politicians have been reassuring us that a recovery would begin later this year or at worst in 2010. But in February the most commonly-used phrase in economics reporting was “free fall,” as mutually-reinforcing downward trends left observers unable to say either when or how a recovery might take place.
On Friday, February 27th, the government announced that the economy shrank at a 6.2% annualized pace in the last quarter of 2008, the worst in 25 years. Earlier predictions for the fourth quarter had been for only a 3.8% decline.
Estimates now for the first quarter are of a 5% annualized drop, but, says the Associated Press, “given the dismal state of the jobs market, some economists believe an even sharper decline is possible. AP described “a self-perpetuating vicious cycle causing the economy to deteriorate at a rapid pace.”
Said the Washington Post: “Just a few months ago, analysts had been forecasting that the last few months of 2008 would be the worst and the first quarter of the new year would bring a slight improvement. Now the first quarter is shaping up as a contender for the recession’s worst.”
”It doesn’t appear as if the free-fall in the economy has slowed down at all,” said the chief economist at PNC Financial Services. ”There is no net.”
For months economists and politicians refused to use the “D” word, but some are openly speaking of today’s crisis as a depression, if not another “Great Depression,” and others speak at least of a “deep recession” or a “prolonged slump.”
In the last 17 months the Dow has fallen 52%, the largest drop since the Great Depression. This mirrors the 55% drop over a similar time period after the September 1929 pre-Depression peak. And while most commentators balking at calling today’s crisis a depression point to the eventual 90% drop in the 1930s, it took 34 months after the 1929 peak for that to occur – so we are still have 16 months to go to reach an equivalent low.
Orders for durable goods plummeted for the sixth month in a row in January and the number of first-time claims for unemployment benefits shot up at the end of February.
The Labor Department said employers cut nearly 600,000 jobs in January, sending the official unemployment rate to 7.6%. The Times quoted an economist predicting the figure for February will be 785,000, the biggest one-month drop in almost 60 years.
Markets around the world plunged February 17th on news of the global nature of the crisis, despite the signing by Obama on the same day of the $787 billion stimulus bill.
Global markets plunged again March 2nd – this time below 7,000 – on news of the US GDP decline.
Another common thread in economics reporting in February was the absence of any sign of factors that might reverse the economy’s course. All countries, developed or developing, are suffering, so none can serve as an outlet for exports shut off elsewhere by disappearing demand. And there are no signs of new types of investments which would make up for the overcapacity and dwindling profits in existing industries.
Putting the two together, the Washington Post said: “In the face of this global slowdown, alarmed economists see no obvious engine for recovery.”
In the last quarter of 2008, Japan’s economy shrank at an annual rate of 12.7% and Germany’s by 2.1%. Their economies rely heavily on exports, but global demand for such items Japanese and German cars has evaporated.
“Manufacturing, construction, financial services, non-financial, retail — wherever you look, you see a complete collapse in demand,” said an economist at Barclays Capital. “The floor has come out of confidence in global economic demand.”
Another factor in the mid-February stock plunge was panic among Western European banks whose massive investments in Eastern Europe after the collapse of the Soviet Union are now in danger of disappearing, as those countries’ currencies rapidly lose value and factories shut their doors. The blowback will in turn drag down even further countries such as the US and China whose production and finance are interwoven with Western Europe as never before.
“There’s a domino effect,” said Kenneth Rogoff, former chief economist of the International Monetary Fund. “A snowballing credit crisis in Eastern Europe could cause New York municipal bonds to fall.”
Investors hurt by plunging markets in Europe are having to sell American assets to raise money, adding pressure on US stocks.
“It’s one big trans-Atlantic money market out there, and these banks lend money to each other all the time,” said Simon Johnson, another IMF veteran. “Deutsche Bank and UBS and Goldman Sachs and Citi are all intertwined.”
Asked in an interview how he would label the downturn, Monthly Review writer John Bellamy Foster responded: “There is no doubt that we are in another depression. In fact the IMF has just come out with a statement that the ‘advanced economies are already in depression.’ An analyst at Merrill Lynch says: ‘We are likely enduring a great depression today’ that could last as long as seven years.”
In an article on “The collapse of manufacturing,” The Economist reported that “In Germany December’s machine-tool orders were 40% lower than a year earlier. Half of China’s 9,000 toy exporters have gone bust. Taiwan’s shipments of notebook computers fell by a third in January. The number of cars being assembled in America was 60% below January 2008.
“Industrial production fell in the latest three months by 3.6% and 4.4% respectively in America and Britain (equivalent to annual declines of 13.8% and 16.4%). Germany’s industrial production in the fourth quarter fell by 6.8%; Taiwan’s by 21.7%; Japan’s by 12%. Industry is collapsing in eastern Europe, Brazil, Malaysia and Turkey. Thousands of factories in southern China are now abandoned. Workers went home to the countryside for the new year. Millions never came back.”
Yet The Economist argued against government aid to industry. Governments can’t, it claimed, “deal with the varied, constantly changing difficulties of the world’s manufacturing industries.” And: “Sectoral aid does not address the underlying cause of the crisis—a fall in demand, not just for manufactured goods, but for everything. Some firms must close. How can governments know which firms to save or the ‘right’ size of any industry? That is for consumers to decide.”
The Economist’s pleas against government intervention are no doubt motivated by a recognition that workers around the world are seriously listening, for the first time in a long time, to socialist arguments that only public management of the economy – under the democratic control of workers – can end the crisis. It was the anarchy of marketplace decision making (compounded by corporate rigging of the market’s rules) that got us in this mess. And socialists argue also that it is precisely a unified, democratic plan that alone can determine which firms and industries need to survive. To take just the most crucial example, only an economy controlled by workers can decide democratically how to convert auto plants both to preserve jobs, healthcare and pensions for all, while retooling them to produce wind turbines, light rail, and other climate-friendly products.
