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POLITICAL ECONOMY
Outside View: The coming economic collapse
by Peter Morici
College Park, Md. (UPI) Jul 24, 2012


disclaimer: image is for illustration purposes only

The U.S. economy is teetering on the brink of another recession. The bad news is that if it goes down again, there won't be much we can do to save ourselves. Like a weary heavyweight, if the economy hits the mat again, it's down for good.

The expansion has been terribly disappointing -- growth is hardly 2 percent and jobs creation barely keeps unemployment steady at 8.2.

Manufacturing and exports powered the recovery but are now weakening. Consumer spending and existing home sales are flagging because policymakers failed to aid underwater homeowners as generously as the banks.

U.S. President Barack Obama is doubling down on slow-growth policies -- new restrictions on offshore oil and carbon dioxide emissions and pushing forward with financial regulations that haven't stopped Wall Street banks from trading recklessly and rigging markets as indicated by the Libor scandal.

Former Massachusetts Gov. Mitt Romney has reverted to shop-worn Republican prescriptions -- tax cuts, free trade and deregulation.

With the federal government spending 50 percent more than it takes in, no sane economist could endorse big rate cuts beyond renewing the Bush tax cuts.

China, by manipulating its currency and shutting out Western products, helped cause the Great Recession and is now constraining recovery in the United States and Europe. More free trade agreements won't fix that.

Dodd-Frank may be bureaucratic and ineffective but no sane person could claim banks can regulate themselves -- smarter solutions, like breaking up unmanageable and unsuperviserable institutions, are needed.

Many analysts ask if another big innovation -- like the automobile or computer -- is coming and could save the economy. The problems are many new products are creating more jobs in Asia than in the West, and many technology companies are consolidating or facing extinction -- consider the smartphone, Hewlett Packard and Yahoo!.

A lot of U.S. innovation is starting to look more like French art than American commerce. Icons like Yahoo!, Facebook and Twitter have made great contributions to the economy and culture but simply don't have business models that generate enough revenue and sustainable jobs growth.

Google has succeeded by cannibalizing newspapers -- the net effect has been to destroy more -- and branching into software and media, which merely displaces workers elsewhere.

Meanwhile, the profitable core of finance -- investment banking -- is shrinking. Burdensome regulations are a problem but many clients -- ranging from municipalities to wealth managers to foreign governments burnt by Wall Street schemes and securities -- are now less interested in what the likes of Goldman Sachs and JP Morgan have to sell.

To save European governments, several trillion dollars in sovereign debt must be written down. Beyond lacking a plan to equitably distribute the loss, Germany and other stronger states haven't come to terms with the fact that market reforms aren't enough. They cannot continue to pursue export-oriented growth strategies and trade surpluses if southern Europe is to create jobs and grow without running up trillions in new debt.

China holds the West and its own future hostage -- export-driven growth runs to ground when customers can no longer finance their purchases and trade deficits. Borrowing and printing money in the United States and Europe on the scale necessary to keep the Middle Kingdom producing and exporting is no longer possible.

China must slow down because it is too late to reorient its economy toward domestic consumption without wrenching dislocations.

When the United States entered the recent crisis, its budget deficit was $161 billion. Now it $1.3 trillion, and the Federal Reserve is already maintaining rock bottom interest rates.

Even if Congress and the president manage to extend the Bush tax cuts, any hiccup in Europe or China could easily throw the U.S. economy into a recession -- and the world's biggest economy could hit the skids on its own.

Capital markets simply won't be able to absorb a $2.5 trillion-$3 trillion federal deficit to further stimulate the U.S. economy, without sucking badly needed capital out of struggling European and developing country economies. The Fed could only print money to finance it and set off hyperinflation but it can't really lower interest rates much further.

Having failed to adequately address what caused the Great Recession -- China's trade surplus and the imbalance in demand between the Middle Kingdom and the United States, the cowboy culture on Wall Street and the plight of underwater homeowners -- not much can be done, having squandered the grace created by stimulus spending and easy money. Get ready for a bad ride.

(Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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