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Double-dip recession? The economic template is no longer working

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

The present economic circumstances in Canada, the United States, Europe and indeed around the world may be unique. Previously, in good times and bad, one had some idea what to expect. Economies would continue along a certain path until matters progressed in a well-defined and largely predictable way to cause an alteration in course. This time, the template isn/'t working.

The present economic circumstances in Canada, the United States, Europe and indeed around the world may be unique. Previously, in good times and bad, one had some idea what to expect. Economies would continue along a certain path until matters progressed in a well-defined and largely predictable way to cause an alteration in course. Cycles displayed specific patterns. In their simplest form, good times would sow the seeds for worse times ahead through encouraging higher prices and wages that resulted in interest rate hikes, dampening enthusiasm. Bad times would be reversed once overcapacity lowered prices and wages, interest rates were brought down to stimulate housing and other investments and governments ran larger deficits to take up some of the slack. This time, the template isn’t working. There is no further action to be taken on interest rates. In most nations, they are as low as they can go, or near enough as to make little difference. Prodigious “quantitative easing” (i.e., adding to the money supply) has been tried. The Federal Reserve has cranked up the printing presses on two occasions in the past several years, having little effect except to raise some prices. The biggest inflation impact has been through commodity cost up-ticks, and even those are now easing in light of the slowing world economy. Running ever larger fiscal deficits has become a “no go”. Rightly or wrongly (e.g., in WWII, nations ran up proportionally more debt, to be tackled later when peace was restored), the decision has been made in most jurisdictions to tackle deficits now A key reason is worrisome unfunded liabilities in connection with social programs and aging populations that guarantee bigger fiscal catastrophes if they’re not dealt with relatively soon. The U.S. has already received its first debt downgrade in history. In Europe, intractable problems in some undisciplined nations are pushing the Euro-zone to the brink of dissolution. Greece’s social structure, with so many people employed by the state and jobs guaranteed for life, has taken away the capacity to deal with the problem. Civil unrest expressed through general strikes makes truly effective restraint almost impossible to impose. If Greece falls, speculators will strive for a domino effect with Italy’s economy and France’s banks to be toppled next. The ultimate result is anybody’s guess. Japan’s politics are a perfect match for its stagnant economy. It’s a closed economy run by an elite with close ties to the business and banking communities. A sixth Prime Minister in the past five years is about to take office. The U.S. is suffering from political gridlock caused by a two-party system defined by intransigence, non-stop electioneering and a genuine lack of certainty about what to do. To paraphrase an earlier Presidential campaign, “it’s jobs, stupid”, and the lack thereof that is causing the U.S. such grief. In this matter, the U.S. has fallen victim to other global forces. The irony is that in a profit- and consumer-oriented economy, many jobs have been outsourced to where production can be achieved and services delivered more cheaply. The developed world isn’t running the show any more. China, South Korea, Taiwan, India, Brazil and some other nations are growing their economies and creating employment through export sales and domestic purchases. Furthermore, at least in China’s case, the currency isn’t being allowed to act as a safety valve. A rise in the value of the Yuan would increase the price of Chinese exports, lower the cost of imported consumer goods and help redistribute some work back to developed economies. What’s to be done? Some suggest China and Japan, as holders of the world’s largest foreign currency reserves, should do more to prop up Europe. However, they’ve already made huge commitments to U.S. debt and why should they be in the business of losing money? No, the greatest hope for the future may lie at ground level. There are some first indications that main street America – your average man and woman – is starting to adjust his or her perceptions. Bloomberg News recently conducted a survey that notes an increasing willingness to think outside the box. Certain deeply-held beliefs are undergoing re-appraisal. Long-standing policies may be open for makeovers. Speeding up the process may be the shock arising from the Census Bureau’s conclusion that 46.2 million Americans are now living in poverty. The Census Bureau has also calculated that real median incomes for U.S. households in 2010 dropped to their lowest level since 1996. That defies the American dream of progress. According to the Bloomberg survey, 72% of respondents felt the U.S. is on the wrong economic track. To fix Washington’s fiscal problems, a slight majority of Americans would now like to see higher taxes on top-tier wage earners before any cuts to Medicare and Social Security. Only 34% currently support repeal of President Obama’s health-care package. That’s down from 41% six months ago. Opinion is just about split concerning a gradual extension of the Social Security retirement age to 69. Six months ago, opposition stood at 60%. Perhaps most surprising, a larger share of Americans is now in favor of tax changes to eliminate some deductions, including for home mortgage payments, if gains can be made in other areas. The foundations of our economic world are being shaken. It remains to be seen whether the seismic event will be gentle and quick, with little damage evident in the aftermath; or brutal and extended, leaving large cracks in the super-structure; or, ultimately, capable of bringing the whole temple down. Where are the modern-day Samsons and Delilahs we can turn to for advice? Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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