European Crisis Comes as Doubts Cast on US “Recovery”

by Andrew Pollack
The fears of bankers and investors over the shakiness of European public debts and deficits (see related article on this blog) were mirrored in dire predictions in May about the fiscal health of the US, as well as worries over the performance of the underlying real economy.
Spiegel Online warned that “the US budget deficit has now reached $1.6 trillion, or 10% of GDP [far higher than the Greek ratio]. The national debt is now over $12 trillion and is forecast to expand to more than $20 trillion by the end of the decade. At that point, Americans will be paying $900 billion a year in interest alone.”
Fred Bergsten, director of the Peterson Institute, claimed: “If we don’t correct the situation in the next five years, our worldwide position will be in jeopardy.” (The Peterson Institute is the creation of billionaire Peter Peterson, whose campaign to eliminate Social Security and other government programs has a sympathetic ear in Barack Obama’s White House, which has set up its own commission to propose drastic cuts.)
In March, rating agencies S&P’s and Moody’s warned that even the US’s perfect triple-A rating could be jeopardized if the country’s financial situation didn’t change drastically, and soon. While no agency has yet downgraded the US’s credit rating, said Spiegel, “Economists suspect, however, that the fear of the incalculable consequences for the economy might have prevented them from doing so.”
Several commentators expressed fears that one single incident could set an economic landslide going in the US, a sure sign of the self-deluding nature of previous months’ cockiness about an alleged recovery. Typical of such predictions were those of Niall Ferguson who, said Spiegel, “warn[s] that confidence in the US could be lost at some point, and that this could come as a complete surprise, with a single piece of bad news serving as a spark and potentially triggering a global conflagration.”
Joining these calls for US austerity was Times business columnist David Leonhardt: “It’s easy to look at the protesters and the politicians in Greece… and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford.
“Yet in the back of your mind comes a nagging question: how different, really, is the US?
“The debt is projected to equal 140% of GDP within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115% of its G.D.P. today.
“Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.
“We, the people, are.”
Leonhardt called on Americans to accept less spending and higher taxes, predicting that a failure to deal with the “disconnect” between high spending and lower taxes would be “the central economic issue of the next decade.”
In contrast, fellow Times columnist Paul Krugman has been warning for over a year –since Obama’s stimulus package was being crafted – that a bigger rather than smaller deficit was needed as a traditional Keynesian pump-priming measure.
In response to those claiming the money for continued social services just isn’t there, Krugman noted that “the drive to cut taxes largely benefited a small minority of Americans: 39% of the benefits of making the Bush tax cuts permanent would go to the richest 1% of the population.
“And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy… conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.”
His colleague Leonhardt however noted that “Obama and today’s Democrats have accepted, and are even furthering, the Reagan project. They are not trying to raise tax rates on the affluent to anywhere near their pre-1981 levels.”
The Times’ news editors chose the Greek crisis as a good time to jump on the bandwagon of those attacking supposedly spendthrift state governments for promising “excessive” pensions for public workers without funding them, and for allegedly turning a blind eye to “unnecessary” overtime for the same workers.
In the same vein, in the May 16th Washington Post, Laura Cohn cited studies claiming that state and local pension plans are operating under a deficit of at least $1 trillion. Cohn applauded the response of state officials, who are scaling back retirement plans by curbing benefits to new workers, raising employee contributions, increasing the retirement age, and/or making workers contribute more to their retirement health-care plans.
The harshest cuts and threats of more have so far occurred in the education sector – the same sector which was the source of massive protests in California this spring.
A survey of school administrators showed that a total of 275,000 education jobs are expected to be cut in 2011 – cuts that, said the administrators’ association, “would negatively impact economic recovery and deal a devastating blow to public education.”
The superintendent of Los Angeles schools said he had never seen cuts so devastating, but added that there was “no end in sight.”
Secretary of Education Arne Duncan said the nation was “flirting with education catastrophe,” and urged Congress to approve additional stimulus funds to save school jobs.” But much dearer to Duncan’s heart than saving jobs are the manic testing regimens and charter schools being used to try to bust teachers’ unions and thus drastically reduce their pay and benefits, eliminating tenure rights, while forcing them to teach ever more students.
But every type of social service is in jeopardy. One of the most heartrending incidents – and the clearest sign of the diseased nature of our system – is the case described in the Times of a 67-year old woman with cerebral palsy in South Carolina who, because of state budget cuts, had her 50 hours a week of personal-care help cut to 28 hours. “That meant Ms. Hickey would get help for two hours in the morning and two hours at night. If she needed to use the bathroom in between, she would sit in a soiled diaper.”
The coming federal cuts to Medicaid and other social services described by the Times will mean many more such tragic stories in the near future.
Such cuts are justified with reference to a supposedly inescapable economic logic of the kind used in describing Europe’s dilemma. Rarely mentioned are the trillions wasted on war or bank bailouts – and never mentioned in the bourgeois press is the systemic inevitably of capitalist crisis (except in the literary pages when a book reviewer finds it so cute that people are once again buying copies of Marx’s “Capital”).
Justifying his latest cuts, California Governor Arnold Schwarzenegger compared the situation to Europe, saying, “You see what is happening in Greece, you see what is happening in Ireland, you see what is happening now in Spain. We are left with nothing but tough choices.”
The bourgeois press and political commentators are mounting an ever more virulent campaign around the theme that overpaid, underworked state workers should give up their perks during a period of crisis.
Such demands will gain increasing force – and be implemented with growing ferocity – as the global economic crisis enters the “double dip” of the Great Recession. Signs of that dip have proliferated in recent weeks.
The rescue package, agreed to after markets closed in New York on Friday, May 7th, led to a revival in global stock markets – for one day, Monday, May 10th. By Tuesday, as awareness sank in that the package would solve few of the country’s longer standing problems, much less those of Europe as a whole, the markets began a steady decline. “People are learning to think the unthinkable,” the chief economist of Citigroup said. Many worry that Greece and even other economically vulnerable nations like Spain or Portugal will be unable to pay their debts, despite the sweeping rescue efforts.
The Wall Street Journal on May 21st reported that “The deterioration in market sentiment… comes despite the massive European bailout package unveiled earlier this month. While that plan soothed short-term fears about the Greek debt crisis spreading, it didn’t convince investors that longer-term fiscal problems would be addressed.”
A 376-point (3.6%) drop for the Dow Jones industrial average on May 20th was only the climax of a steady decline beginning in late April. Since then the Dow has declined more than 1,000 points, or over 10% — a rate known as a market “correction,” a milepost which sets off collective angst among investors. The Dow fell another 1.2% on May 24th, bringing the index to its lowest level in three months.
The May 20th sell-off went beyond stocks to commodities like copper and oil, which are significant because, as the Times put it, they are “considered bellwethers of the industrial economy.”
Adding to Wall Street’s worries were predictions that new financial regulation “reform” measures would eat into their profits. A Goldman Sachs research report said the proposed legislation could reduce earnings at 28 of the biggest banks by more than 20%. However, once the Senate passed their version of the “reform,” bankers and their supporters in Congress breathed a collective sigh of relief at the weakness of the proposed bills. But short term relief will soon be replaced by recognition that the “reform” package, by not dealing seriously with even the surface phenomena behind the financial implosion of 2008-9, will do little to prevent a similar eruption – a recognition that will eventually weigh down on all stock indices.
One big factor in the plunge of May 20th – a factor attesting to the continued parasitic role of hedge funds in financial markets – was the collapse in “pro-growth” stocks, i.e. derivatives that represent not money invested in economies but rather bets on which way such investments will turn. The huge amounts invested in “pro-growth” stocks helped magnify the size of the May 20th plunge. Yet the “reform” will only impose a thin veneer of tighter regulation on these and all other derivatives.
In explaining growth stocks’ decline, stock analysts revealed anxieties about the supposed global recovery which punctured months of claims that the economy was going to avoid a “double-dip” recession. The “anti-growth” developments listed included attempts by China to tap the brakes on its booming growth, mounting sovereign-debt worries, concerns about US retail sale weakness, disappointing jobless claims, looming financial reform and a short-selling ban in Germany.
These market swings come on the heels of the “flash crash” of May 6th, in which the Dow dropped almost a thousand points in less than half an hour, with some stocks briefly losing as much as 99% of their value. There has still been no official admission of whether the steep drop was a technical “glitch” or overt manipulation or – most likely – a combination of the two. The number of automated exchanges with different rules and little coordination is growing. Some shut down all or part of their trading when certain triggers are reached, others don’t, and the discrepancy magnifies plunges on the markets remaining open. Even if the plunge turns out to have been purely technical, the possibility of another such event occurring in the midst of a market already terrified by real-world events is giving investors nightmares.
Even gold, a safe-haven asset, has been declining. Gold also acts as a hedge against inflation, and its decline indicates that investors may be less worried about growth fuelling a rise in prices (i.e. that economies are recovering).
Meanwhile indicators of the real economy parallel in their gloominess the stock exchange plunges.
Paul Krugman noted that employment gains of the past few months have brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis.
The number of people filing new claims for unemployment benefits unexpectedly rose in the second week of May by the largest amount in three months.
Applications for unemployment benefits rose to 471,000, up by 25,000 from the previous week, the first increase in five weeks and the biggest jump since a gain of 40,000 in February.
The extended benefits have added as many as 73 weeks of unemployment on top of the 26 weeks customarily provided. But jobs have been scarce for so long that many of those out of work will soon run out of the extended benefits.
Meanwhile the Conference Board’s index of leading economic indicators dipped slightly in April, the first drop in more than a year. Among the indicators painting a gloomier picture were new homebuilding filings, pace of intercorporate supply delivery, new claims for unemployment benefits, and consumer confidence.
The Washington Post reported on May 14th that “More people lost their homes to foreclosure in April as banks worked through a backlog of troubled borrowers, according to data released Thursday.
The number of homes repossessed reached 92,432 in April. That is up just 1% from March but is a jump of 45% from April 2009.
Efforts to keep people in their homes, said the Post, “have largely faltered, leaving millions of distressed borrowers facing foreclosure. Now more people are expected to lose their homes as lenders work through a backlog of delinquent borrowers.”
Home repossessions this year are up 27% compared with the first four months of last year. One housing analyst said “we’re adding foreclosures at a pace that foreclosure-prevention programs can’t keep up with. If anything, we’ve pushed the problem into the future… foreclosures will continue to be a drag on the economy for at least five years.”
Financial Regulation “Reform”
Meanwhile Obama and Congressional Democrats are heading toward agreement on a financial regulation “reform” package which is every bit as pro-business as their recent healthcare “reform” bill.
Differences between Senate and House versions include how tightly derivatives should be regulated, and whether banks should be allowed to trade on their own account on such financial instruments. Not a word, though, about banning such purely speculative types of investments.
And mainstream commentators agree that even the light regulation likely to eventually pass will just inspire banks to find ways around limitations on derivative trading, such as creating brand new financial instruments, setting up new dummy front corporations or divisions, new tax dodges, etc.
The bills propose various means of supposedly shifting the cost of closing bankrupt financial companies to shareholders and creditors rather than taxpayers, but the weakness of the proposed financing mechanisms led many commentators to predict taxpayers would still pick up the tab.
Obama declared the Senate bill a “victory over the financial industry” in the face of “hordes of lobbyists.” In fact it was an entirely predictable victory FOR that industry.
Even those like the Times who exaggerated its impact quoted experts who “warned that the bill, by focusing too much on the causes of a past crisis, still leaves the financial system vulnerable to a major collapse.”
Can Labor Fight Back?
With Democrats in Washington united in their determination to make workers pay for the real economic crisis, as well as the phony one supposedly facing Social Security and other government programs, what’s a labor movement to do?
To start with we can learn from our sisters and brothers in Greece, and take inspiration from the unity and militancy they’ve displayed over and over again. One step toward learning from the Greek example would be calling actions in the US when Europe-wide demonstrations in solidarity with Greece are called.
One promising sign of possible new militancy, which builds on the mobilizations in California this spring, was the 35,000-strong May 22nd rally by public workers in Trenton against cuts in New Jersey.
At the recent Labor Notes conference, public sector workers met together repeatedly in workshops to pool experiences. More such networking will occur at June’s US Social Forum, as well as at the United National Antiwar Conference in Albany, where unionists will discuss a nationwide campaign of teach-ins and advocacy for city council resolutions calling for less war spending and more money for jobs and benefits.
Clearly the time has come for more formal collaboration among public sector workers to plan joint resistance to attacks on them – and on the communities which they serve.