The economic news mucks around in an attempt to explain short-term share-price movements, ignoring the longer-term phenomena that will dictate the future course of the American and, because of linkage, European and world economies.
I don’t mean to imply it is trivial when a plunge in share prices wipes out some $3 trillion in assets in a few days. Businesses and households get hurt. But there is little that policymakers can do about quick shifts in investor sentiment, and much they can do to affect the underlying trends that the discerning eye can find.
In the problems of the labor market, all eyes are focused on the 9.1 percent unemployment rate. The longer-term problem is revealed in the fact that over 6.5 million workers, 44 percent of those counted as unemployed, have been out of work for more than 27 weeks. At the end of the last recession in November 2001 that figure was 13.9 percent.
Even if the economy starts to grow at an acceptable rate, many of those long-term unemployed will not find work or, if they do, only at jobs paying far less than the ones that disappeared. Skills atrophy or become obsolete in the face of technological change. Traditional American jobs migrate overseas; increased efficiencies discovered in the recession-induced hiring clampdown enable manufacturers to produce more with smaller staffs. A large pool of unemployed available workers permits subtle discrimination against older workers, reducing their chance of being rehired.
A second long-term problem left unattended is the massive debt burden that sooner or later will have to be addressed. No, not the mere $14 trillion-and-rising debt recorded on the books of the U.S. Treasury. Trillions more are not reflected on the nation’s ledgers. Public obligations are often “hidden” and significantly larger than official figures suggest.
For many companies, this debt mountain is no abstraction, and the conversion of Uncle Sugar into Uncle Scrooge is a harsh reality. The government is a key customer of defense firms such as Lockheed Martin, health care firms such as Humana, equipment suppliers such as Dell — to mention a few. They and their shareholders will have to look elsewhere for growth.
Fed chairman Ben Bernanke’s decision to keep interest rates low is putting pressure on bank profits, pressure they can do without as they confront the new risk of dealing with European banks whose books are loaded with IOUs from Greece, Spain, Italy, Portugal and other not-so-solid borrowers, and whose reluctance to lend to each other is causing scary talk of a 2008-style freeze-up in interbank lending. Even if that fear proves unfounded, shrinking profits and new regulations will reduce the banks’ ability to lend — the words “credit crunch” are again heard in the land, especially from small businesses.
Meanwhile, consumers no longer can be counted on to borrow and spend as they did in past decades. A new report that consumer sentiment is at its lowest level since May 1980 is a warning shot across the bow of retailers counting on a big back-to-school season, and wondering how much to spend on inventory in advance of Christmas shopping. Combine that pessimism with consumers’ need to restore their balance sheets to something approaching pre-binge levels, and it is not unreasonable to assume that when the recovery comes it will not be consumer-led.
These are only a few of the underlying trends that will in the end matter more than share price gyrations: a mismatch of the unemployed and available jobs, the withdrawal of government purchasing power as a source of growth, and banks less able to lend and consumers less willing and able to borrow. These will be with us long after calm replaces panic on the world’s stock markets.
Irwin M. Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Policy Studies. This article is adapted from The Weekly Standard.