The New Economic Year in the U.S.

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The basic fact of the current economic situation is simple: what made the U.S. economy boom before the crisis was an unsustainable real estate bubble, which fed the consumption “boom.” In effect, if the savings rate of U.S. homes fell to zero, these same homes could ride out the situation because they had an asset – a house – whose value could grow almost limitlessly. In bursting the bubble, the value of their assets – their houses – dropped drastically, if it was not completely destroyed.

It would be wrong to not admit that there was a bubble or to encourage consumption as if the value of people’s houses and their assets could return to the levels they were at when the “bubble” was swelling. That’s why private consumption, close to 70% of U.S. GDP, will be inevitably weaker than it was before the crisis.

Added to this is the fact that the February economic stimulus packet, if it is working properly, was not designed to maximize the creation of employment. If measures are not taken, we could enter a vicious cycle: unemployment could contribute to a weak reactivation of consumption and of the economy; there will be a larger quantity of unpaid mortgages and and increase in bad debts, which will diminish demand, which will possibly culminate in more – certainly not less – unemployment.

In the next two years the perspectives of the U.S. economy will be marked by the complexity of the current crisis, which is a mix of economic and financial crises. The economic crisis has at least 3 components: (1) a settlement of inventories, in that businesses had high inventories that had been sold, which has diminished production; (2) a “settlement” in the housing sector; and (3) a long term restructuration, in which we are going from a manufacturing economy to a services economy.

Long before the crisis it was known that there were global economic imbalances, a major one of which was the U.S. living beyond its means, with enormous deficits in the balance of payments. There also existed the preoccupation with a “disordered solution.” This did not take place and was not the cause of the current crisis. But it could be the cause of the next one.

To solve this “imbalance,” much pressure has been put on China to revaluate the yuan and augment internal consumption to diminish exports and increase their imports. We need to be conscious, nevertheless, that this is going to have a limited effect on our commercial balance because a good portion of Chinese consumption will be dedicated to improving their internal education and health conditions. Therefore, the central preoccupation should be to put our own house in order and not think about a “magical solution” that corrects global imbalances.

The economic recovery of these recent months is, in large measure, the result of the enormous reduction in business inventories, mixed with the impact of the Stimulus Plan. But the real estate sector has not recuperated, and some time will pass before this occurs; additionally, many think that this sector’s problems are just beginning. Additionally, many of the workers laid off from the manufacturing sector are not going to return (this is the case for the 41,000 employees lost in that sector in November). In short, the economic crisis is far from being over.

All these numbers are from the testimonial of Joseph Stiglitz before the US Congress Joint Economic Committee on December 10, 2009, available at http://jec.senate.gov.