US economic recovery needs shot in the arm

An extremely poor US job growth report for the month of June, which came out last Friday, is the latest piece of evidence that the economic recovery in America is faltering, while that nation's political system is gripped by ideological polarisation. The latest report follows an equally dismal outturn in May and shows a picture of rising unemployment, with the rate now at 9.2 per cent, a historically high number. The prospect is that Americans could well be in for a prolonged period of weak economic recovery characterised by measly job growth - an ominous situation for Jamaica that is so heavily dependent on ties with the US market.

At a time when it is crystal clear that the recovery cannot be sustained without further stimulation by government spending, Republican ideological purists are fixated on spending cuts as the formula for creating jobs. According to their prescription, the American economic recovery is being held back because there is a lack of confidence in government policies by businesses. The simple fact is businesses are not expanding because there is a lack of demand for their goods and services, i.e., there are not enough customers ready to spend.

As economists across the spectrum have advised, short-term spending cuts by the US government would make the problem of unemployment worse. Reduced government spending would mean lower demand and fewer customers, leading to job cuts by employers. Indeed, spending cuts at the state and local levels that have already led to job losses are one of the factors that have contributed to the continuing high unemployment rate nationally. And there is all the research on the policy failures that shows how cutbacks of public spending in an economic slump drove the United States into the Great Depression.

Initiatives for job recovery

Republican control of the legislative arm of the US government, with their ideological fixation on spending cuts at a time when the economy needs stimulation, brings into sharp focus the danger posed by the political-economic conundrum to which I have referred in recent articles. In a recent Newsweek article, former President Bill Clinton pointed to a number of initiatives, some of them being advocated by the Obama administration, through which targeted government activity could accelerate recovery in the job market. These include investment in green energy involving retrofitting of public buildings, which alone could put a million people to work while cutting electricity usage.

But this and other energy initiatives to speed up development of solar and wind power would require government sponsorship through loan guarantees and incentives. Republicans have opposed a wide range of such proposals under energy legislation put forward by the Obama administration. Their ideological purity does not allow for active government intervention of this nature, even though competing nations are moving aggressively to stimulate investment in green energy.

Similar opposition has been raised to expanding job-training programmes in a context where posted job vacancies in the US are running in the millions, partly because potential employees need specialist training that could be partially financed by government subsidies. Yet the opposition by the ideological purists is implacable, even as unemployment has remained stubbornly high. Americans have also let slip the opportunity to undertake essential investment to modernise their deteriorating infrastructure at a propitious moment.

Infrastructure investment

Interest rates are at the lowest levels since the early 1950s, and so financing of infrastructure investment can be done on attractive terms. Construction costs are also attractive, as contractors have cut their rates in order to secure contracts. With the housing sector in the doldrums and unlikely to emerge soon because of the overbuilding that took place in the bubble, infrastructure investment is the activity that can breathe new life into the construction industry - one of the key drivers of job growth in the US in the past two decades.

The rise in unemployment is bound to fuel public anxiety and could cause a backlash. This would bring pressure on political leaders, which could be exploited by the Obama administration to get movement on investment initiatives to provide the needed economic stimulus. Or Republican ideologues could try to use the frustration of the unemployed to further their radical conservative reform agenda, at the top of which is the dismantling of the welfare state that had its birth in the Great Depression.

Barack Obama's mettle as a political strategist is going to be tested in the coming months as frustration about America's economic woes rises. So far, the Republicans have been more skilful in blocking his policy agenda while blaming his administration for the tough economic conditions. In the next few months, his re-election prospects will turn on whether he is able to force through action to spur the economy, or if not, to convince independent voters that Republican obstruction has scuttled the recovery.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.