Uchitelle on jobless recovery

["Devine, James" <jdevine@xxxxxxx>]

July 20, 2003/New York TIMES. 
New Reality Is Leaving Growth in the Mire
By LOUIS UCHITELLE

FOR nearly 29 months, the nation has struggled through a recession and a
weak recovery. That is a long struggle, a new form of hardship for many
Americans, who are tantalized with incessant forecasts that a decisive
upturn is about to happen. But as the months wear on, the dogged
optimism detaches from reality.

For starters, the forecasters seem not to grasp how much the American
economy has deviated from the standard business cycle and the standard
cures. A major reason for the deviation is the mobility of American
companies, particularly the ease with which they now shift operations to
China and India. "The wholesale movement of jobs and production overseas
is handcuffing the recovery," said Mark M. Zandi, chief economist at
Economy.com.

In other downturns since World War II, the economy moved from healthy
growth to contraction and back to healthy growth, all in less than two
years. The downward swings were relatively easy to fix. The swings began
when companies found themselves producing more goods and services than
people bought. Inventories built up, particularly in manufacturing, and
companies responded by cutting output until it was below demand. Rather
than produce more, companies filled orders from stockpiles. As output
declined, unemployment rose and wages stopped increasing. Capital
spending also suffered. After all, why expand when the capacity to
produce already exceeds demand?

But the damage did not last long. The Federal Reserve stepped in,
cutting interest rates to encourage spending. Unemployment insurance,
public spending, and sometimes tax cuts, helped resurrect demand. As
spending picked up and inventories disappeared, prices began to rise,
which encouraged more production. Hiring resumed, as did capital
spending.

These various remedies are being used now, and there is some strength in
spending. Yet inventories have failed to diminish, so prices,
production, hiring and capital spending do not rise. 

The difficulty is that companies have a choice that was not as available
in the last downturn 12 years ago. Rather than halt production at home,
they shift it abroad to cut costs, particularly labor costs. They feel
compelled to do this. If they did not, their competitors would upstage
them with their own lower-cost, overseas production that takes away
sales back home.

In the process, the mechanism for restoring our economy to healthy
growth - by reducing inventories and excess capacity - fails to function
properly. Inventories may seem to diminish when only is counted. But in
the new global economy, what's made in America and what's made abroad
both contribute to inventories and capacity. The total does not shrink,
and the economy flounders month after month. 

Still, there is some relief. Super-low interest rates, mortgage
refinancing, stepped-up military spending and some of the Bush tax cuts
augur a temporary pop in economic growth. But temporary is the operative
word. The more enduring pressure on the economy is downward, not upward.

 
THE biggest beneficiary appears to be China. Abundant transportation has
made China an ever-easier place for American companies to shift
production of goods and services for sale in the market back home.

The nation's trade deficit, the excess of our imports over exports, has
risen by 31 percent since the recession began in March 2001. The
increase, totaling $114 billion, would add one percentage point to
American economic growth - enough to turn a weak recovery into a strong
one - if the rise in output were at home, not abroad. One-third of the
total increase represents imports from China, Mr. Zandi says. Honing the
figures, Steven S. Roach, chief economist at Morgan Stanley, finds that
China's total exports have tripled since 1994, and that 65 percent of
the $244 billion increase comes from foreign companies in China.
"We are criticizing the Chinese as if they were cleaning our clock and
the only part of China that is cleaning our clock is the part that we
put there," Mr. Roach said.

What is to be done? If we do anything, we are likely to pressure the
Chinese to float their currency. A floating yuan would rise against the
dollar, making Chinese exports more costly in the United States.
Pressure is already coming from Congress for the Bush administration to
negotiate the float.

We could also force American companies, through regulations, to stay out
of countries that fail to observe minimal labor and environmental
standards. Regulation is not popular in America. But it could regain its
popularity, if the alternative is a continual loss of jobs in every
state. 

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine