“The American dream in reverse.” That is how U.S. President Barack Obama responded to news about the sinking American economy. His remarks are no exaggeration. One major U.S. company after another has announced job cuts and layoffs. And the evidence is more than anecdotal: According to the Commerce Department, the U.S. economy has registered its worst performance in 25 years. The need for action is clear. While there are understandable concerns about ensuring that stimulus measures are used effectively, this is not the time to be overly focused on deficits. Delay will only compound the current pain and increase the burden to be borne by future generations.
The U.S. economy shrank at a 3.8 percent annual rate in the last three months of 2008. The decline — an initial estimate that may change as more data come in — comes on the heels of a 0.5 percent drop in gross domestic product in the previous quarter. For all of 2008, the U.S. economy grew just 1.3 percent. That is the weakest performance since 2001, when the terror attacks of Sept. 11 and the collapse of the technology-industry stock bubble contributed to anemic 0.8 percent growth.
The 3.8 percent contraction is the worst quarterly performance since 1982; and, sad though it was, the figure was better than most economists expected. If inventory buildup is excluded, the fall exceeded 5 percent.
No sector of the economy escaped the whirlwind. Consumer demand, which usually accounts for two-thirds of economic growth, fell 3.5 percent in the quarter, the second consecutive quarter of decline (consumer demand dropped 3.8 percent in the third quarter). Orders for big-ticket durable items such as cars and washing machines fell 2.6 percent in December, the fifth straight monthly decline. As consumers stopped buying, imports fell 15.7 percent; the drop in exports was even greater, hitting 19.7 percent. Not surprisingly, businesses reduced their investment by 19.1 percent.
This vicious circle led to record layoffs and job cuts. The Labor Department announced that the number of people claiming unemployment insurance reached 4.8 million, the highest level since 1967 when such records began being kept. Unemployment is now 7.2 percent and could hit double digits. Concern about their future means consumers spend still less, triggering more layoffs . . . and the cycle continues. Economic conditions worsened in every single state.
The U.S. pain is being felt elsewhere. A year ago, some argued that Asia was “decoupling” from the U.S. economy, that this region’s fortunes were no longer dependent on developments elsewhere. That notion has been buried. Japan is being hammered by the downturn. The International Monetary Fund forecasts Japan’s economy will shrink 2.6 percent in 2009, the worst showing of any G7 economy and Japan’s worst performance since World War II. With production plunging, unemployment reaching levels last seen four decades ago and the Nikkei losing more than 40 percent of its value, the economy is, reports one analyst, “falling off a cliff.”
Elsewhere in the region, China’s growth fell from 13 percent in 2007 to an annualized 6.8 percent in the fourth quarter, and registered 9 percent for all of 2008. Experts anticipate that China may register growth of less than 8 percent this year. South Korea has had a miserable year, with its economy shrinking 3.4 percent in the fourth quarter compared with a year earlier. The Asian Development Bank forecasts growth in 2009 for developing nations in East Asia will drop to 6.7 percent from 8.5 percent in 2008.
With demand dropping off the charts, stimulus is badly needed. Mr. Obama had hoped to have such a bill on his desk when he took office, but Congress has not delivered. Congressional Democrats have two stimulus packages working through Congress, the one in the Senate worth some $885 billion and the one in the House about $819 billion. In Japan, Prime Minister Taro Aso has come up with spending packages of about ¥11 trillion. China’s leaders have their own 4 trillion yuan ($585 billion) proposal.
Each effort is faltering. In the U.S., Republicans refuse to back either measure, demanding greater tax cuts to stimulate the economy and insisting that the spending plans are wasteful. Mr. Aso’s plan is held hostage to political uncertainties in Tokyo as the opposition tries to make the government look ineffectual and force an election. In China, it is unclear how much of the proposal is new spending or where the funds will come from.
Politicians do not seem to grasp the depth of the problem they face. Posturing is taking the place of policymaking as opposition parties position themselves for future elections rather than face current challenges. Meanwhile, individual economies continue to contract and recessionary pressures are slowly spreading worldwide. As that process accelerates, it will compound domestic pressures . . . and the cycle will intensify.
Responsible policymakers must not pass on to future generations the cost of decisions we make today. These are exceptional times, however. A failure to staunch the economic crisis soon — even if that means taking on additional debt — will mean that the burdens on tomorrow’s taxpayers will only be that much greater. Without quick action, the American dream — which is in reality everyone’s dream — will slip away.