Tuesday, May 6, 2008

The World Is Too Much For America

It’s gloomy in the USA

From The Statesman

ND Batra

I asked one of my graduating students if she had received an encouraging response from any prospective employer. Not yet, she said, though she had sent resumés to several and was still waiting. She is not the only one. There are thousands of others who have not even been able to hold on to their jobs due to the slowing economy. In April, another 20,000 Americans lost their jobs.The American political mood is getting gloomier and more unpredictable. There is a profound feeling of loss of control. Most Americans today ~ 73 per cent according to a Wall Street Journal/NBC poll, think that the country is heading in the wrong direction. Democrats say it’s primarily due to President George Bush’s inability to do much about the economy sliding into recession and gasoline and food prices rising.

There is also the fact that in spite of spending billions of dollars, and losing over 4,000 US troops and hundreds of thousands of others, including civilians, there is no end in sight to the Iraqi or Afghan insurgency.Perhaps fixing all that is expecting too much from Mr Bush, who under the dark shadow of the 9/11 terrorist attacks succeeded in engineering a national consensus and ordered the Iraq war, but has had little control over its aftermath. Or over the dynamics of global financial structures, credit markets, the global food crisis and the relentless hunt for oil and other natural resources by growing economies.

This world is too complex, too much for a lone ranger.

In the first quarter of 2008, US’s GDP grew by 0.6 per cent, while the number of unemployed workers swelled, albeit a trifle less than what was expected. Since the price of a barrel of oil is tied to the dollar, its fall has been causing pain and anxiety. Consumer confidence is down. People shrink from spending on consumer durables. The housing market has become an auctioning block.Don’t worry, says Mr Bush. The check is in the mail. Under a multi-billion dollar stimulus plan 130 million households will start getting, beginning next week, $600 to $1,200 from the government. This will encourage consumer spending and hopefully lift the sagging economy. Of course, with gas prices going up, extra money in the pocket will be helpful.Sounding like a cheerleader, Mr Bush said last Thursday in a radio address: “No temporary setbacks can hold back the most powerful force in our economy ~ the ingenuity of the Ameri-can people. Because of your hard work and dedication, I am confident that we will weather this rough period and emerge stronger than ever.”

But let’s see how effective the levers of power in Washington are in reviving Wall Street and main street. Americans’ feelings of prosperity, the collective sense of well-being, is tied to the prices of their homes, which makes one think that economics is about psychology of fear and hope. Falling prices create depression, though experience shows that what goes down, comes up, hmm, most of the time.Due to poor home mortgage lending practices, banks began to give loans on low adjust-able interest rates to less creditworthy people, hoping that since home prices were going up borrowers would re-finance their loans on the basis of increased home equity. But lenders and borrowers began to lose mutual trust. What seemed to be a robust market turned into a bubble that burst.

The American dream begins with owning a home. There’s nothing more painful for a person, say, a single mom, than lo-sing her home to foreclosure; it’s heartbreaking.Falling housing prices create not only negative feelings but also negative equity, which means the mortgage relative to the value of the house is much greater. Some people who bought houses with small or no down payment have simply walked away, because their houses were worth much less than the original price. Foreclosures add to the market glut, so home prices keep sliding down; and Americans feel less wealthy, less worthy. They don’t feel like spending on non-essential goods ~ going to restaurants, buying a new sofa, for example; and they postpone buying a new car for another six months or even a year.

Bedsides, when home prices go down, the homeowners’ ability to borrow money against the equity value of their homes in order to buy expensive commodities or go on vacations also goes down. Banks shrink in fear lest consumers default, so they become too cautious in lending, which further adversely affects economic activity.Mr Bush says the economic stimulus package “will help American families increase their purchasing power and help offset the high prices that we’re seeing at the gas pump and the grocery store”. But it is not only that the market that ignores him. Congress too doesn’t respond to his repeated admonitions to lift the economy by making his first-term tax cuts permanent (they are due to expire in 2010).

(ND Batra is professor of communications at Norwich University)

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