There continues to be a series of contrasts in the global recovery, and in several dimensions. The fundamentals of consumption and production seem to be moving slowly positive worldwide, though the pace is slower in Europe. In Asia, there’s more worry about things like inflation (China) or deflation (Japan), and in the US the big problem continues to be unemployment, which jumped to the surprise of many in the last week. There are also some undercurrents that could exacerbate some of these larger trends, and I’ll focus on these today.
The sleeper issue in the US is the state of state/local budgets. Reductions in tax collection have hit governments hard, and some (like California) also have political problems that make it much harder to create fiscal stability. The result is that we’re looking at possible shortfalls significant enough to create an uptick in jobless claims in themselves, and at the very least we’d expect the public sector to generate relatively little in the way of new jobs in the near future. In the Federal sector, we’re clearly headed for considerable pressure on both total employment and salaries, and that will have some negative impact on the job market overall.
In Europe, the issue is what some have called “bond vigilantism”, a decades-old concept that essentially says that bond investors will punish governments for policies they don’t like. That’s what’s been happening in Europe, where weak EU economies are being pressured through high interest requirements and credit insurance rates. Objectively neither Spain nor Portugal should have any sovereign debt or banking problems at this point, but both may end up with both problems because of bond speculation.
In Asia the big problem is the combination of inflation risk from economic growth and problems with an export-economy mindset. Virtually all the Asian economies are export-driven and most have taken steps to stem internal growth to sustain labor cost benefits and to control the impact of industrialization. Those steps have, in Japan, created an economy that’s taken frugality to a new level and has actually undermined the domestic economy. As other countries in Asia catch up with Japan (China and even Korea) the result is an economy that may have neither internal nor external stimulation for growth.
A final issue here in the US is politics. Anyone who reads history would have to realize that we’re in a period of political polarization that’s almost unparalleled since the pre-Civil-War era. Fed Chairman Bernanke spoke over the weekend and among his comments was one that we were creating a society too polarized. His view was that education was the polarizer—people with more had half the jobless rate of those with less—but I think the issue is more complicated. Clearly the US could not absorb a large incremental population of highly educated job-seekers even if we had the system and funding to turn them out. The real issue here is that we’ve created a society that’s bordering on masters and servants—a small producer economy largely focused in the financial and high-tech sector and a growing population of service-economy workers who really serve that first group and each other. It’s the ultimate opposite of Asia; instead of creating so much manufacturing goods we have to sell offshore to get rid of them, we produce nothing but things we can’t sell offshore because they’re personal services. We can’t mow the world’s lawn, after all.
The economic downturn we’re recovering from was caused by financial-industry excess, but under it is still a systemic problem with the creation of jobs and wealth. We took the easy path, shifting with capitalistic fervor to a derivative-based financial growth strategy rather than trying to figure out how to build more and better stuff. That both opened the door for the Asian economies and closed some doors here. It’s time to open them again.