WASHINGTON – The slow but steady decline of the US economy should be the main theme of this unfolding and contentious presidential election campaign. But it is not. The recent steep Wall Street drop may change all this, (the Dow Jones lost another 530 points on August 21, making it the worst day of a very bad week), but I would not bet on it. In fact, optimistic analysts are on TV telling investors that this huge Wall Street loss is in fact just another temporary glitch, and thus a wonderful opportunity to buy really cheap stocks.
Regarding the presidential campaign, forget about the economy. The most recent headline is about Donald Trump’s proposal to repeal or modify the 14th Amendment to the US Constitutions that grants citizenship to all those who were born in the US. His point is that the Constitution has been abused by armies of pregnant foreign women who slip into the US in order to deliver what are now called “anchor babies” on US soil. As they are now mothers of US citizens, they can try to make a case to stay in America, despite their foreign status.
Millions of babies?
So, there you go. “Anchor babies”. This is the burning issue. And how many “anchor babies” do we have? Millions? Hundreds of thousands? No, we are talking about a few thousand, at most.
Look, there is plenty of evidence of criminal enterprises that provide logistical and medical support to pregnant foreign women, so that they can come here, and give birth in the US. All this needs to be stopped. But, while real, this is hardly a crisis of catastrophic proportions.
Under performing US economy
The real issue that should be discussed by all those who aspire to be President is a consistently under performing US economy. (For a cogent, detailed and rather scary depiction of US economic decline, read the WSJ op-ed by Mortimer Zuckerman, Who Will Get the Dreary Economy Going? August 21, 2015).
Unfortunately, it is very difficult to fight against economic mediocrity, especially since more than half the country, including respected analysts, have gotten used it. In fact many tell us that this mediocrity is after all quite good.
Mediocrity looks OK
In truth, the US economy is not facing imminent disaster. On the contrary, it has been chugging along for a number of years at a slow, but semi-respectable 2% a year rate of growth. Not great, but a lot better than Europe. Unemployment has gone down, and it is now back to about 5%.
Most analysts who speak on Bloomberg TV, CNBC or Fox Business say that things are more or less OK. Not great, perhaps. But alright. You see, more Americans are employed. And this means more disposable income. And this will translate into more sales, and therefore more demand for good and services that will lead to better economic performance. As for the steep Wall Street decline, we are told not to worry. We always have corrections every now and then. The important thing is that the economy is on solid foundations.
Look, the fact is that the US economy if fundamentally fragile, notwithstanding the ZIRP, (zero per cent interest policy) decreed by the US Federal Reserve many years ago. Which is to say that, despite this extraordinarily long period of monetary easing, economic activities have not picked up.
2% growth is well below our 3% historic average. On top of that, we have the lowest level of labor force participation in decades. This means that far fewer adult Americans are employed, compared to our historic averages. Millions of those who now are lucky enough to have a part-time job would rather have full-time employment. And most new jobs are in low pay service industries. Very little new employment is created by wealth-generating manufacturing.
The end of the energy boom
All this indicates an anemic economy. But wait. It gets worse. Much of the (modest) growth that America experienced in the last few years was due to the extraordinary shale oil boom. But now the world is awash in oil. And there is no sign that this glut will go away. This means a real recession in the oil sector that is driving down energy companies and all their suppliers. Translation: depressed energy and energy related stocks, with dramatic loss of what used to be good jobs for all the oil companies and for the vast universe of suppliers and vendors connected to them. Add to this the negative ripple effects on communities that started thriving because of the extra money brought in by the energy business, and you get a rather dark picture.
Last but not least, we have China on the verge of a crisis. The US may not have much direct exposure to the Chinese economy. But the rest of the world does. Japan is affected, and so are Germany, Taiwan, Thailand, and South Korea. And we do business with all of them.
Beyond that, China’s slow down has already had a dramatic impact on the economic performance of all its raw materials suppliers. Brazil, Australia, South Africa and Indonesia are in big trouble. Major mining companies are looking at disastrous numbers, because China does not buy much from them anymore.
Can anybody seriously believe that, while the world is headed towards an economic freeze, America will be miraculously unaffected?
Now, if China’s woes were just a glitch, well, this problem would go away. But we have many indications that China has entered a new slow growth economic era, while it is trying to deal with monumental debt, and massive industrial over capacity. Here is one sobering statistic. The Caixin China Manufacturing Managers’ Index just fell to a 77 month low. As I said, this looks like a new trend.
Therefore, forget about China growing at 7%. Forget about its ability to absorb massive amounts of iron ore, copper or whatever else.
So, here is the picture. The American economy has recovered since 2008, but very slowly, notwithstanding the historically unprecedented monetary stimulus. Consumption is not buoyant because most Americans are still recovering from the over spending of 10 years ago. The US oil industry, a rare bright spot, is now clearly in serious crisis, while world trade is depressed because of China’s slow down.
Are we headed for a recession? Probably. (If nothing else, as we get a recession every 7 or 8 years, we are due for one anyway). Certainly there is nothing out there that inspires great confidence.
Wanted: An economic growth agenda
So, how do we get out of this? It is not difficult to identify the issues that need urgent attention in order to strengthen our foundations. We would need a skilled combination of tax reform, public education reform, targeted training programs, regulatory reform, and a lot more. The problem is that putting all this together in an eye-catching, compelling campaign platform is really difficult.
Sadly, it is a lot easier to listen to Donald Trump and others talking about “anchor babies”. As for Trump’s recipe for fixing the economy, he has one, and it is very simple. “You should elect me president, because I am the only one who has the proven experience to get things done. I know these things. The professional politicians are all talk and no action. I’ll take care of things”. Well, this is the level of detail we are getting, so far.
I hope that someone else can do better than this.