US Econ Intellectual Policy Void Becoming Painfully Clear

Sept. 16, 2010 - PRLog -- By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Even before coming aboard here at EconomyWatch, we have long argued that one of the major aspects of the American crisis was the intellectual emptiness of those vaunted centers of higher learning and research.

And as the US lurches from one clearly weak or bad “solution” to another in trying to get itself out of its mess,

this intellectual weakness has become painfully clear to almost all informed observers.

To be sure, this lack of ideas is hardly restricted to the US,

as can be seen from the flailing going on in Europe since the explosion of the Greek sovereign debt crisis,

and in Japan since its own real estate and deeply intertwined bank sector collapsed more than twenty years ago.

But no other country claims to be as academically prestigious –

which is, to be sure, something quite different from intellectual rigor –

as the US, so, even by its own standards, the current failure of the US policy intellectual elite to come up with anything more than the standard –

and by now discredited – formulas must be considered meaningful in a larger context.

And so this review of potential economic options is a grim reminder of how badly this supposed “structural strength” of the US is hardly that at all.

The American economy is once again clearly tilting toward danger.

Despite an aggressive regimen of treatments from the conventional to the exotic —

more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve —

fears of a second recession are growing,

along with worries the country will face several more years of lean prospects.

Last month, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move,

acknowledged that the economy was weaker than hoped,

while promising to consider new policies to invigorate it, should conditions worsen.

Yet even as vital signs weaken —

plunging home sales, a bleak job market and confirmation that the quarterly rate of economic growth had slowed to 1.6 percent —

a sense has taken hold that government policy makers cannot deliver meaningful intervention.

The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.

It increasingly seems as if the policy makers attending like physicians to the American economy

are peering into their medical kits and coming up empty,

their arsenal of pharmaceuticals largely exhausted

and the few that remain deemed too experimental or laden with risky side effects.

The patient — who started in critical care — may have been showing

potential signs of improvement in the convalescent ward earlier this year,

but has since deteriorated.

The doctors cannot agree on a diagnosis,

let alone administer an antidote with confidence.

This is where the Great Recession has taken the world’s largest economy,

to a Great Ambiguity over what lies ahead, and what can be done now.

Economists debate the benefits of previous policy prescriptions,

but their sterile debates have an air of irrelevance and unreality.

And this lack of connection to observable realities has had an effect on the dynamics of the political system as well.

The future is now so colored in red ink that running up the debt seems risky in the months before the Congressional elections,

even in the name of creating jobs and generating economic growth.

The result is Democrats and Republicans have both foresworn virtually any course that involves spending serious money.

As we have pointed out countless times, the growing impression of a weakening economy, combined with a dearth of policy options,

has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation

that captured Japan during its so-called Lost Decade in the 1990s.

Then, as now, trouble began when a speculative real estate frenzy ended,

leaving banks awash in debts they preferred not to recognize

and hoping that bad loans would turn good, or at least be forgotten.

The crisis was deepened by indecisive policy,

as the ruling party fruitlessly explored ways around a painful reckoning —

boosting exports, tinkering with accounting standards.

“There are many ways in which you can see us almost surely being in a Japan-style malaise,”

said the Nobel-laureate economist Joseph Stiglitz,

who has accused the Obama administration of underestimating the dangers weighing on the economy.

“It’s just really hard to see what will bring us out.”

Japan’s years of pain were made worse by deflation — falling prices —

an affliction that assailed the United States during the Great Depression

and may be gathering force again.

While falling prices can be good news for people in need of cars, housing and other wares,

a sustained, broad drop discourages businesses from investing and hiring.

Less work and lower wages translates into less spending power,

which reinforces a predilection against hiring and investing — a downward spiral.

Deflation is both symptom and cause of an economy whose basic functioning has stalled.

It reflects too many goods and services in the marketplace with not enough people able to buy them.

For more than a decade, the global economy was fueled by monumental spending power

underwritten by a pair of investment booms in America —

the Internet explosion in the 1990s, then the exuberance over real estate.

As housing prices soared, homeowners borrowed against rising values,

distributing their dollars to furniture dealers in suburban malls,

and furniture factories in coastal China.

But the collapse of American housing prices severed that artery of finance.

Homeowners could not borrow, and they cut spending,

shrinking sales for businesses and prompting layoffs.

Early this year, some economists declared that the cycle was finally righting itself.

Businesses were restocking inventories, yielding modest job growth in factories.

Hopes flowered that these new wages would be spent in ways that led to the hiring of more workers — a virtuous cycle.

But the hopes failed to account for how extensively spending power had dropped in the American economy,

and how uneasy people were made by every snippet of data showing that

houses were not selling, employers were not hiring, and stock prices
were foundering.

Now, a new cause for concern is growing:

the flat trajectory of prices,

which might metastasize into a full-blown case of deflation ...

To read more at http://www.economywatch.com’, go to:

http://www.economywatch.com/economy-business-and-finance-...

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