posted December 23, 2011
Economic Predictions 2012

For the past two years this writer has written on the status of the US and global economy in the January issue of ‘Z’ magazine, with predictions for the year to come and beyond. Past predictions since late 2009 have included: “the Euro financial system will be shaken in 2010 by one or more defaults on its periphery?…?should Democrats lose further seats in the House (in 2010), a highly likely event, federal spending will almost certainly be further reduced in 2011?…’The Eurozone debt crisis will spread beyond the current four economies (Ireland, Portugal, Spain, Greece) and engulf Italy, Belgium, and potentially France?…?Home prices will fall another 10% to 15% in the US… (and)…foreclosures will rise past 10 million?…?States, cities, and school districts will turn to massive layoffs?…?the job gains this spring (2011) will once again likely disappear in the coming summer-fall 2011?…?Both Japan and the Eurozone economies will weaken faster than the U.S.?…?a restructuring of the EU currency system will result in a kind of two-tier euro currency?…

Predicting the trajectory of the US and global economy in these volatile economic times is an uncertain endeavor. But that’s the very time predictions are of most value. Unfortunately, with a handful of exceptions, the mainstream economics profession habitually focuses on predicting the present rather than the future. That statement is not as contradictory as it seems. Translated, it means mainstream economics assiduously avoids predicting beyond the next few weeks or, at most, the next monthly release of data. Forecasting fundamental turning points of the economy, and the major events that provoke major crises, are avoided at all costs. It is far safer to find refuge in conservative consensus opinion than to risk stepping outside it. After all, if the consensus is wrong, one can’t be individually faulted by one’s professional peers if the vast majority of those peers are also in error! However, this conservative bias contributes little toward understanding the most likely trajectory of conditions and events as the economic crisis continues to evolve and unfold.

Mainstream Economics: A Bird Without Wings

Seeking refuge in conservative consensus partly explains why virtually all the 10,000 professional economists in the world failed to predict the onset of the current crisis in 2007. Or why the same crew, in lock-step, declared a sustained economic recovery after 2009 would occur but didn’t. It is also why the same group today are failing, for yet a third time now, to foresee the coming deeper economic crisis that will almost certainly emerge no later than early 2013—and potentially even earlier if the Eurozone financial system continues to unravel this spring 2012.

The repeated failure of the profession to predict the three great economic events of the past four years (two having occurred; one emerging) is not simply the consequence of economists’ myopic fixation on the latest data release or their consistent conservative bias, but more fundamentally is the result of their adherence to a conceptual apparatus that cannot explain the essential forces behind the current crisis. It is the result of theories based on pre-crisis conditions that no longer prevail; and of models that simply no longer work.

Deficient concepts, theories and models are why Obama’s own in-house professional economists—the Council of Economic Advisers—in early January 2009 erroneously assured the public that Obama’s $787 billion initial stimulus package would create 6 million jobs. But it didn’t. They are why the Federal Reserve’s economists insisted the $2.7 trillion Quantitative Easing (QE) 1, 2, and 2.5 (called ‘operation twist’) policies introduced between 2009-11 would resurrect the housing sector, but instead only fed stock, junk bond, and commodities futures speculators worldwide. And they are why Congressional Budget Office economists forecast that Obama’s $802 billion tax cuts introduced a year ago, in December 2010, would result in a significant increase in GDP growth rates and jobs, but instead produced GDP growth of less than 1% in the first half of 2011 and no net job creation the entire past year. Something clearly is wrong with the theories and models, as well as the conceptual apparatus underlying those theories and models.

The Broken Left Wing: Just Give Us More Stimulus

The liberal wing of the flightless bird of mainstream economics continues to maintain that the Obama programs since 2009 have not produced sustained economic recovery because the 2009 economic stimulus was of insufficient magnitude. At the forefront of this view have been noted economists like Paul Krugman and others. Even Larry Summers, former Treasury Secretary under Clinton and chief economic policy adviser for Obama in 2009-10, has recently joined the liberal chorus saying that the original stimulus of 2009 should have been $1 trillion or more—not the $787 billion.

Contrary to this view, however, the Obama stimulus programs introduced 2009-10, which amounting to more than $1.7 trillion in tax cuts and spending, failed not simply because they were of insufficient magnitude. They failed because their composition was also exceptionally bad and their timing poor.

With regard to composition: the Obama stimulus programs were composed 70% of tax cuts—and mostly business tax cuts at that. The tax cuts were then hoarded by corporations and not invested in the US to create jobs. Nearly another half trillion dollars in Obama spending programs were composed of subsidies to states, school districts, and unemployed. Those subsidies were designed to buy time, put a floor under the collapse of consumption that was occurring in 2008-09, until the tax cuts could pick up the slack, translate into real investment, and move the economy to a higher level of recovery. But that didn’t happen. The tax cuts weren’t invested. At least not in the U.S. Some went offshore to create jobs in Asia and elsewhere. Other amounts went into purchasing speculative securities—stocks, derivatives, foreign currencies, etc., that also created no jobs. The remainder was retained, and is still being hoarded today, in anticipation of being spent on corporate stock buybacks, dividend payouts, or eventual mergers and acquisitions that will result in fewer—not more—jobs. Despite a tax stimulus of trillions of dollars, corporate America continues to sit on a $2 to $2.5 trillion cash hoard as of year end 2011. Multinational corporations continue to hoard another $1.4 trillion in offshore subsidiaries instead of investing and creating jobs in the US. Not to be outdone in the hoarding game, after having been bailed out with $9 trillion in free loans by the Federal Reserve, big banks continue to sit on another $1.7 trillion in excess reserves, doling out loans in eye-drop fashion to small business, resulting in still further under-investment and minimal job creation.

Meanwhile, Obama’s $370 billion dollars of subsidies dissipated after 12-18 months. Like business tax cuts, subsidies do not create jobs. They may temporarily save some. But that’s not economic recovery. Recovery means significant net job creation, typically in the range of 300,000 to 500,000 jobs every month for a year. ‘Saving’ jobs is a policy of accepting continuing economic stagnation at best.

The remaining $126 billion dollars or so of Obama spending circa 2009-10 was earmarked for long term infrastructure—i.e. upgrading the national electrical grid, alternative energy projects, and so-called ‘shovel-ready’ construction projects that couldn’t find their shovels. But that spending did not create jobs or generate recovery in the short run since 2009 any more than tax cuts and subsidies created jobs. Composed mostly of capital-intensive projects, most infrastructure spending was structured very long term, taking effect over a ten year period. Like the tax cuts, the short term effect of this infrastructure spending thus also resulted in little if any job creation or economic recovery.

This bad composition of the Obama stimulus programs (i.e. tax cut heavy, subsidies, and capital intensive construction) and their poor timing (i.e. ultra-long term infrastructure projects and one-time short term grants to the states) are represented in the following Table 1.

TABLE 1
Economic Recovery Programs
Tax Cuts vs. Spending / Subsidy vs. Infrastructure
2009-2011
(billions, current $)
Subsidy Infrastructure
Program Total Cost Tax Spending Spending Spending (long)

Obama I $862 $417 $445 $319 $126
(2/09 +
supplements)

Obama II $857 $803 $54 $54
(12/10)

Obama III $447 $253 $194 $89 $105
(9/11) ______ _____ _____ ______ ______

TOTALS $2,166 $1,473 $693 $452 $231

Source: ‘Obama’s Economy: Recovery for the Few’, Pluto Press & Palgrave-Macmillan, March 2012.

Obama’s three recovery programs to date failed because they relied on the private market sector to generate a sustained recovery, instead of on the government directly taking the lead to create jobs, rescue homeowners and resurrect housing, and stabilize state-local government finances long run. Obama bailed out banks that didn’t lend, rescued corporations that didn’t create jobs, and subsidized state and local governments for a brief period and then cut them loose to fend fiscally for themselves.

The Stunted Right Wing: Just Give Business More Profits

Radical Republicans subsequently took charge of the U.S. House of Representatives following the November 2010 midterm elections—and with it took over the economic policy agenda as well. The takeover created an ideal environment for the re-ascendance of the ‘right’ wing of mainstream economics in the economic policy process. But if the ‘left’ wing was broken and unable to clearly understand the reasons why the Obama recovery policies have failed, the ‘right’ wing intellectually was a mere stub without feathers and thus even more incapable of flight.

The Obama programs failed to generate recovery, they argued, because they produced a ‘lack of business confidence’. That lack of confidence was due to business uncertainty about the future of tax cuts, to excessive business regulation, to stalled free trade agreements with South Korea, Panama, and Columbia, to excessive deficit pending and debt, to the excessive cost to business in the health care affordability act of 2010, and other such economic nonsense. Conservative economists argued that changing these policies would release more income for corporations and businesses to spend. More income would automatically translate into more investment and more jobs. The economy would then rapidly recover.

What’s conveniently ignored by this wing, however, are two major problems: First, massive government spending cuts and sharply reduced consumer incomes produces a steep decline in GDP and no recovery. Conservative economists argue this slack will be more than offset by a rise in business investment—which leads to the second problem: namely, with corporations already hoarding $2 trillion in cash and banks’ hoarding another $1.7 trillion in excess reserves today, why should giving corporations and banks even more cash and income result in investment and recovery? If corporations and the banks aren’t spending the $2 trillion or lending the $1.7 trillion they already have and insist on hoarding, why should giving them still more result in anything different? Exactly how many more trillions of dollars are needed to get them to invest, lend, and create jobs and ensure recovery?

This condition of mainstream economics today may be summarized with the following statement:

Just as the liberal wing of economics has no answer to exactly how much more magnitude of deficit spending is necessary to ensure a sustained economic recovery, the conservative wing cannot explain or answer how much more shifting of income to corporations and investors is needed to ensure a return to investment, jobs, and recovery.

Given such fundamental errors by both wings, it is not strange that both liberal or conservative economists today have had such great difficulty in recent years predicting the emergence and evolution of the current economic crisis. The bird simply cannot fly. It can only run around in circles, flightless, squawking as it turns first left and then right and back again.

With neither wing of the economics profession able to offer effective programs for economic recovery, what then are the likely scenario(s) for the U.S. and global economies in the year immediately ahead?

Economic Predictions 2012-13

The United States Economy

1. The US will experience a double dip recession in early 2013 or, in the event of another banking crisis in Europe, perhaps—though less likely—earlier in 2012.

Despite a continual hyping of economic reports by the media and business press in recent months, there is no recovery underway for jobs, housing, or state-local government finances. Job growth has been stuck throughout 2011 at around 80-100,000 a month per the Labor Department’s monthly data. The broader measure of unemployment, the U-6 rate, has been consistently in the 16% range, or about 25-26 million for the past year. State-Local governments continue to lay off workers in the 20,000 range every month. Little effective stimulus will be forthcoming from the Federal government in 2012 despite the election year, and further deficit cutting is even possible in 2012. The first quarter of 2012 will record a significant slowing of GDP growth once again. Should the Eurozone debt crisis escalate once more in the second quarter of 2012, the US economy will weaken further in the second quarter, 2012. It may even slip into recession if the Euro crisis is particularly severe. More likely, however, is the scenario of an emerging double dip recession in early 2013, when deficit cutting by Congress and the administration intensifies.

2. The Federal Reserve will introduce a third version of its ‘Quantitative Easing’ QE3 program in 2012.

QE is when the Fed prints money to directly purchase bonds from the private sector at above-market inflated prices, thus pumping up the money supply. As in the past two versions of QE in 2009 and 2010, the result will have little effect on the housing markets, jobs, or general recovery but will once again result in a boost to stock, bonds, and commodity speculation and related price inflation. The timing of QE3 will be driven by the events in Europe.

3. Real deficit-debt reduction will begin with great earnest immediately following the November 2012 general elections, or no later than February 2013.

The deficit cutting yet to come will dwarf the recent $2.2 trillion August 2011 deal. It will result in another $2-$4 trillion in cuts, mostly spending on social programs and entitlements like Medicare, Medicaid, and Social Security, as well as food stamps, unemployment insurance benefits, education and the 2010 Health Care Affordability Act. Tax hikes directly impacting the middle class will also occur, including heretofore untouchable measures like mortgage deductions.

4. Job growth will continue to stagnate and remain in the 24-25 million range throughout 2012, with a number of ‘false starts’ in jobs recovery determined by seasonal and other statistical factors.

There are no effective programs in place today to fundamentally increase net jobs in the U.S. Further tax cuts in 2011-12 will not stimulate investment of jobs. Corporations will continue to refuse to commit their massive $2 trillion cash hoard to investment or jobs as they await the outcome of the Bush tax extensions in late 2012 and maintain a large cash cushion in anticipation of events in Europe and the possibility of another global credit crunch. Bank lending to small-medium business will also change little, with consequent investment and job creation by small business remaining largely on hold in 2012 as well. Simultaneously, State-Cities-Schools will continue to layoff at the recent 20,000 a month rate—bringing the total of such public worker job loss to nearly 1 million during Obama’s first term. Post office employment will add to the layoff numbers, and federal government layoffs will commence in significant numbers in 2013.

5. Congress and the administration will pass two major tax bills in 2012

The first bill will bow to multinational corporations’ blackmail (and campaign contributions), and reduce the standard 35% corporate tax rate for offshore sheltered cash repatriation to the U.S. That tax rate will range between 5.25% and 10%, reduced from 35%. Multinational corporations will return about half of their current $1.4 trillion offshore profits hoard to take advantage of the lower rate—in a repeat of the same blackmail that occurred in 2004-05, when a similar bill reduced their rate to 5.25% from 35% to return about half of their then $700 billion offshore sheltered profits.

The second bill will be some kind of extension of the Bush tax cuts that will take place before the November 2012 elections; or, immediately after before year end. In the Bush tax extension deal, the top corporate and personal income tax rate of 35% will be permanently reduced to less than 30% in exchange for unverifiable tax loophole closings. The middle class will also pay higher taxes and the earned income credit for low pay workers will be reduced.

6. Home prices will continue to fall; foreclosures rise; and negative equity grow

Now at more than 11 million, foreclosures will continue to rise past 13 million. Home prices will continue to fall by 5-10% more in key markets (bringing the decline since 2006 to more than 40% on average). At least 17 million mortgaged homeowners (out of 54 million total) will experience negative equity. The Obama administration and Congress will force States’ attorneys general to accept the federal plan to let banks and lenders off the hook for ‘robo-signing’ and illegal foreclosures, in exchange for a token fine. Housing and commercial property construction will continue to stagnate in 2012 at around current levels.

7. U.S. Exports and thus US manufacturing will slow in 2012

US exports will not outperform the global trade market and will slow, as will exports in general globally and including China and the Eurozone. As US exports soften, so in turn will their positive effect on US manufacturing production.

8. Should Eurozone banking implode, one or more major US banks will require further rescue by the Federal Reserve and US Treasury

In the event of a default by one or more sovereign economies in the Eurozone, major banks in France, Austria, Belgium and even Germany will become technically insolvent. In such case, the contagion will spread to US banks. Most vulnerable and requiring rescue are: Bank of America, Citigroup, Morgan Stanley.

The Global Economy

9. The Eurozone Sovereign Debt Crisis Will Stabilize then Worsen Again

The Euro sovereign debt crisis will temporarily stabilize in early 2012 as the European Central Bank follows the US Federal Reserve and introduces quantitative easing while negotiations among the Euro states on a fiscal union begins. However, the sovereign crisis will erupt again in late spring 2012 as Italy and Greece encounter severe debt refinancing problems. Three to four times the currently available $1.5 trillion Euro bailout fund—more than $5 trillion—will be eventually needed to resolve the Euro debt crisis.

10. Two or More Euro Banks will ‘Fail’

Several Euro banks will become technically insolvent and will be nationalized by their governments and bailed out. Major candidates include: the French banks, Societe General and BNP Paribas; the German ‘Commerzbank; the Italian ‘Unicredit’, and possibly one or more Austrian and Finnish banks.

11. Both Germany and France will experience modest recession in 2012; the United Kingdom will experience a more severe double dip.

Germany and France economies slowed to virtually no growth at year end 2011 and both will slip into recession in 2012. A second round of severe austerity programs in the UK, introduced at year end by the conservative Cameron government, will produce a further economic contraction in the UK.

12. China’s Economic Growth Rate Will Slow

Havig grown consistently in the 9%-10% range in recent years, China’s GDP will slow dramatically in 2012, potentially to half the rate of previous years. Chinese manufacturing exports will contract. India and Brazilian economies will slow significantly as well.

13. Global Trade Will Slow and Begin to Contract in 2012

Already heading in the direction of contraction, given China’s slowing economy, continuing Eurozone instability, and slowing growth in the U.S. economy, the pace of declining world trade will quicken and global trade in general contract. Global manufacturing will follow in turn.

The foregoing ‘bakers dozen’ of predictions about the US and global economy in the coming year are based upon a non-mainstream economic analysis this writer has developed in his 2010 book, Epic Recession: Prelude to Global Depression, and its forthcoming sequel this March 2012, Obama’s Economy: Recovery for the Few, both published and distributed by Pluto Books and Palgrave-Macmillan. Both works represent a new theoretical framework for analysis of the continuing economic crisis. This framework is the consequence of the recognition that the restructuring of the US and global economy that occurred in the 1980s in response to the earlier economic crisis of the 1970s has now collapsed with the events of 2007-08. Sometimes called ‘neoliberalism’ this earlier 1980s restructuring has today run its course as capitalist economies are once again in the process of attempting to restructure the global capitalist economy anew once again. However, they have yet to do so. The result is continuing economic instability and volatility. The economy, U.S. and global, therefore continues in turn to reflect a degree of severe systemic fragility. To date this uncertain condition has been called by this writer a ‘type I’ Epic Recession. But Epic Recessions have the internal tendency to transition from ‘Type I’ to ‘Type II’, the latter a condition that is immediately preliminary to a global depression. In the book, Epic Recession: Prelude to Global Depression, written in late 2009, it was predicted the US and global economies would reach a juncture point to a potential transition circa 2012-14, during which time it would be settled whether today’s Type I epic recession would indeed transition to a Type II and a possible depression. The coming year, 2012, will reveal whether this process has begun, as the US and other economies weaken and the ‘wild card’ of Euro banking instability runs its course. Should a bona fide banking crisis erupt in the Eurozone, it is all but certain that transition to a ‘Type II’ epic recession will occur. The odds of a true global depression in turn will rise significantly.

Jack Rasmus, copyright November 2011

Jack is the author of the forthcoming, Obama’s Economy: Recovery for the Few, by Pluto Press and Palgrave-Macmillan, March 2012, as well as the pamphlet produced for the Teamsters Union, ‘An Alternative Program for Economic Recovery’. The latter is available for purchase on the front webpage of this website for $5 plus $2 s/h.

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