Reich: Stalled Recovery Pushing US Economy Into Double Dip

Reich: Stalled Recovery Pushing US Economy Into Double Dip

Thursday, 02 Jun 2011 11:22 AM


Economist Robert Reich says the U.S. economy is moving toward a double dip as it grapples with high unemployment, weak housing and a stalled recovery.

"Under normal circumstances, this would be the time for the federal government to take bold action to ward off a double dip," Reich writes in The Financial Times.

"But these are not normal circumstances. America has been through a devastating recession that poked a giant hole in the federal budget," wrote Reich, now a professor of public policy at the University of California at Berkeley.

The economy was supposed to be in bloom by late spring, but it is hardly growing at all, Reich notes. Expectations for second-quarter growth aren't much better than the anemic 1.8 percent annualized rate of the first quarter, and that’s not nearly enough to reduce the ferociously high level of U.S. unemployment.

“The recovery has stalled,” Reich says. “It is unlikely that America will find itself back in recession but the possibility of a double dip cannot be dismissed.”

According to Reich, the problem is on the demand side of the ledger.

“Corporate profits are still healthy,” wrote Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton. “Big companies continue to sit on a cash hoard. Large and middle-sized companies can easily borrow more, at low rates.”

Yet American consumers, who constitute 70 percent of the total economy, cannot easily borrow. As a result, they won't buy enough to get the economy moving again.

“They justifiably worry that they will not be able to pay their bills, or afford to send their children to college, or to retire,” says Reich. “Banks, with equal justification, are reluctant to lend to them.”

“But as long as consumers hold back, companies remain reluctant to hire new workers or raise the wages of current ones, feeding the vicious cycle.”

Reich points to the fact that the average hourly earnings of production and non-supervisory employees – who make up 80 per cent of non-government workers – dropped to $8.76 in April. “Adjusted for inflation, that’s lower than they were in the depths of the recession,” he says, adding that foreign consumers won’t help much even if the dollar continues to slide.

“Europe’s debt crisis and embrace of austerity, Japan’s tragedy and China’s fiscal tightening have reduced global demand,” Reich points out — and the U.S. federal stimulus has almost run its course.

“Worse yet, state governments – starved for revenue and constitutionally barred from running deficits – continue to cut programs. Local governments are now in worse shape, laying off platoons of teachers and firefighters.”

State budgets are recovering, but haven't returned to pre-recession levels of 2008, according to The Fiscal Survey of States, a biannual report from the National Governors Association and the National Association of State Budget Officers.

Twenty-three states cut their enacted fiscal 2011 budgets by $7.8 billion. Total balances are estimated to be $32.6 billion, or 4.9 percent of expenditures (2.5 percent without Alaska and Texas), based on fiscal 2012 recommended budgets.

Others agree with Reich's warning.

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved, Bloomberg reported.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said Monday at the Foreign Correspondents’ Club of Japan in Tokyo in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”


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