Economic Predictions for 2012

Predicting the trajectory of the U.S. and global economy in these volatile economic times is an uncertain endeavor. But that’s the time predictions are of most value. Unfortunately, with a handful of exceptions, the mainstream economics profession 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. However, this conservative bias contributes little toward understanding the most likely trajectory of conditions and events as the economic crisis continues to unfold.

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 declared a sustained economic recovery after 2009 would occur, but didn’t. It is also why the same group is 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.

The repeated failure of the profession to predict the three great economic events of the past four years is the result of their adherence to a conceptual apparatus that cannot explain the essential forces behind the crisis. It is the result of theories based on pre-crisis conditions that no longer prevail. Deficient concepts, theories, and models are why Obama’s 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. They are why Congressional Budget Office economists forecast that Obama’s $802 billion tax cuts introduced a year ago would result in a significant increase in GDP growth rates and jobs. Instead they produced GDP growth of less than 1 percent in the first half of 2011 and then no net job creation the rest of the year.

The Broken Liberal 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 economic stimulus was of insufficient magnitude. At the forefront of this view have been 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 joined the liberal chorus, saying that the original stimulus of 2009 should have been $1 trillion or more—not $787 billion.

Contrary to this view, the Obama stimulus programs failed not only because they were of insufficient magnitude, they failed because their composition was exceptionally bad and their timing poor. With regard to composition, the Obama stimulus programs were composed of 70 percent tax cuts—and mostly business tax cuts at that. These tax cuts were then hoarded by corporations, not invested in the U.S. to create jobs. Nearly another half trillion dollars in Obama spending programs were composed of subsidies to states, school districts, and the unemployed. These subsidies were designed to buy time, to put a floor under the collapse of consumption 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 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. 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 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 continued economic stagnation at best.

The remaining $126 billion 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 very long term, scheduled to take effect over a ten-year period. Like the tax cuts, the short term effect of this infrastructure spending resulted in little, if any, job creation or economic recovery.

The Stunted Right Wing: Just Give Business More Income

Republicans 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. The Obama programs failed to generate recovery, they argued, because they produced a “lack of business confidence.” That lack of confidence, they said, was due to business uncertainty about the future of tax cuts, excessive business regulation, stalled free trade agreements with South Korea, Panama, and Columbia, excessive deficit pending and debt, 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 translate into more investment and more jobs. The economy would then rapidly recover.

What’s conveniently ignored by this wing, however, is 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. But this leads to the second problem: namely, with corporations already hoarding $2 trillion in cash and banks hoarding another $1.7 trillion in excess reserves, why should giving corporations and banks even more cash and income result in investment and recovery? Exactly how many more trillions of dollars are needed to get them to invest, lend, create jobs, and ensure recovery?

So, just as the liberal wing of economics has no answer to exactly how much more 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 have had such great difficulty in recent years predicting the emergence and evolution of the current economic crisis. What then are the likely scenario(s) for the U.S. and global economies in the year immediately ahead?

Predictions for 2012

The U.S. will experience a double dip recession in early 2013 or, in the event of another banking crisis in Europe, perhaps 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 percent range or about 25-26 million for the past year.

State and local governments continue to lay off workers in the 20,000 range every month. Little effective stimulus will be forthcoming from the Federal government, despite the 2012 election. The first quarter of 2012 will record a significant slowing of GDP growth once again. Should the Eurozone debt crisis escalate in the second quarter of 2012, the U.S. economy will weaken further. It may even slip into recession if the Euro crisis is 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.

The Federal Reserve will introduce a third version of its “Quantitative Easing” 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 stocks, bonds, commodity speculation, and related price inflation. The timing of QE3 will be driven by the events in Europe. Real deficit-debt reduction will begin 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.

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 or 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, states-cities-schools will continue to lay off 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.

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 percent corporate tax rate for offshore sheltered cash repatriation to the U.S. That tax rate will range between 5.25 percent and 10 percent, reduced from 35 percent. 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 percent from 35 percent 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 percent will be permanently reduced to less than 30 percent 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.

Home prices will continue to fall, foreclosures rise, and negative equity grow. Currently, at more than 11 million, foreclosures will continue to rise past 13 million. Home prices will continue to fall by 5-10 percent in key markets (bringing the decline since 2006 to more than 40 percent 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 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 at around current levels.

U.S. exports and manufacturing will slow in 2012. Exports will not outperform the global trade market and, as exports soften so, in turn, will their positive effect on manufacturing production. Should Eurozone banking implode, one or more major U.S. banks will require further rescue by the Federal Reserve and U.S. 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 that case, the contagion will spread to U.S. banks. Most vulnerable and requiring rescue are Bank of America, Citigroup, and Morgan Stanley.

The Eurozone sovereign debt crisis will stabilize and then worsen again. The Euro debt crisis will temporarily stabilize in early 2012 as the European Central Bank follows the U.S. Federal Reserve and introduces quantitative easing while negotiations among the Euro states on a fiscal union continue and proceed slowly. However, the sovereign crisis will erupt again in the late spring of 2012 as Italy and Greece encounter severe debt refinancing problems and the banking crisis deepens in France, Germany, and elsewhere. Three to four times the approximately $1.5 trillion currently available in various Euro bailout funds—more than $5 trillion—will be needed to resolve the Euro debt crisis.

Two or more 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. German and French 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 by the conservative Cam- eron government, will also lead to another recession in the UK.

China’s economic growth rate will slow. Having grown consistently in the 9 to 10 percent 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 will slow significantly as well. Latin America’s major economy, Brazil, will enter recession in 2012.

Global trade will slow and begin to contract in 2012. 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 will contract. Global manufacturing will follow in turn.

Summing Up

The foregoing predictions are based on a non-mainstream economic analysis. This framework is the consequence of the restructuring of the U.S. and global economy that occurred in the 1980s in response to the earlier economic crisis of the 1970s and has now collapsed with the events of 2007-08. Sometimes called neoliberalism, this earlier restructuring has run its course as capitalist economies are once again in the process of attempting to restructure the global capitalist economy. The result is continuing economic instability and volatility. The economy, U.S. and global, continues to reflect a degree of severe systemic fragility. To date, I have called this uncertain condition a Type I epic recession. But Type I epic recessions have the internal tendency to transition to a Type II as a prelude to a global depression. The coming year will reveal whether this process has begun, as the U.S. 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, the odds of a true global depression will rise significantly. 

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Jack Rasmus is author of Epic Recession: Prelude to Global Depression, Obama’s Economy: Recovery for the Few (forthcoming from Pluto Press/Palgrave-Macmillan, March 2012), as well as a pamphlet produced for the Teamsters Union, “An Alternative Program for Economic Recovery” (available at www.kyklos productions.com.