A fairy tale? Consider America’s “Goldilocks economy,” neither too hot
(inflation) nor cold (unemployment) of the Clinton era. But that was then.
Today, President Bush is working to keep Goldilocks running and hiding from
the Three Bears, economically speaking.
Economist Jim Devine writes: “The problem (for the American economy), of
course, is the Three Bears: 1. Papa Bear: the steep rise of U.S. external
indebtedness. 2. Mama Bear: the steep rise of U.S. consumer indebtedness.
3. Baby Bear: the increased indebtedness of non-financial corporations.”
Take Papa Bear: America’s nearly $370 billion trade deficit in 2000, the
imbalance between what Americans bought and sold worldwide. Americans have
been borrowing to buy foreign goods on the cheap, Devine adds. From where
does this money originate? During a two-year period ending in December
1998, America’s financial debt to foreign lenders tripled to $1.5 trillion,
according to the Financial Markets Center.
Strikingly, this imbalance in the U.S. economy hasn’t exactly been front
page news. What is now on page one is President Bush’s proposed budget plan
of reductions in federal taxes and the national debt. His policy sounds
spartan. Yet it misdirects the American people’s attention from the
financial fragility of the nation’s economic expansion.
According to Robert Blecker of the Economic Policy Institute, “In fact, the
U.S. economy’s current prosperity rests on the fragile foundations of a
consumer spending boom based on a domestic stock market bubble, combined
with foreign bankrolling of the U.S. trade deficit. If present trends
continue, the growth in the U.S. international debt will not be sustainable
in the long run. No country can continue to borrow so much from abroad
without eventually triggering a depreciation of its currency and a
contraction of its economy. The rising trade deficit and mushrooming foreign
debt are thus warning signals of underlying problems that—if not
corrected—could bring the U.S. economic boom crashing to a halt in the
Could there be a lesson from the remarkable growth of the East Asian “tiger
economies” before they crashed in summer 1997? The nations of East Asia
flourished on foreign debt. In this respect, East Asia’s past prosperity
resembles the U.S. economy of the Clinton era. However, there are important
differences, Devine cautions. Here’s one: America can repay its
international debts with dollars. The East Asian nations couldn’t use their
currencies to pay foreign lenders. The consequences have been dreadful for
the vast majority of the East Asian population.
Which brings us to Mama Bear. “The household sector’s outstanding debt has
nearly doubled since 1990,” Jane D’Arista observes. Workers borrow to make
up for falling or stagnant wages, which have just begun to rise. “The recent
gain in wages is a welcome reversal of long-term wage decline, but most
working families are still playing catch-up,” economist Jared Bernstein
notes. The U.S. minimum wage of $5.15 per hour helps drive the wage gap.
Workers’ lost ground has led to the wealthiest one percent of Americans now
owning more wealth than the bottom 90 percent.
Changing relations between American employers and employees also help fuel
wage inequality. Private and public employers cut the wages and benefits of
employees, especially entry-level workers. Cases in point are their lower
starting benefit packages and salaries.
Public and private employers also cut their employees’ wages with unstable
work. A study at UC San Francisco found that in 1999, “only a third of
California workers have ‘traditional jobs’—that is, single, permanent,
full-time, day-shift work paid for by an employer at the employer’s site.”
Part-time, contract, and other non-full-time workers represent 10% of the
work force nationwide, the Wall Street Journal reports.
Debt-financed spending has another consequence. Over-borrowing causes
under-saving for the working majority. The 1990s was the decade of debt for
many working Americans. As a result, many of them have too little savings
for emergency situations.
What of additional interest-rate cuts by the Fed? All things being equal,
this monetary policy may well encourage more household debt. U.S. consumers
are already at debt’s door.
On to Baby Bear. Corporate America is also caught in the debt trap.
“American firms, for example, have bought back a net $2.7 trillion-worth [of
corporate stock] in the past five years. Many of these purchases are
financed not with retained profits but with debt, thus increasing firms’
leverage and reducing their creditworthiness,” the London Economist reports.
“The reason why corporate debt is the Baby Bear is that compared to consumer
debt and external debt, it’s relatively minor,” Devine explains. “However,
when and if a recession comes it will hurt sales, cash flow, and profits,
making the importance of corporate debt soar. A recession makes Baby Bear
mature quickly. It encourages corporate bankruptcies (or government
bail-outs), much larger lay-offs than even during the last three months,
efforts to cut wages and benefits and to speed up work. It also discourages
any new accumulation of debt—and thus new investment in factories and
equipment. It makes the recession worse.”
The Three Bears are hungry. Plus, they’ve never won a contest for denying
themselves food. Will America’s “Goldilocks economy” be their next meal?
We shall see.