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The Sham Recovery

Friday, 12 March 2010 19:00
Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)

Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)

re we finally in a recovery? Who's "we," kemosabe? Big global companies, Wall Street, and high-income Americans who hold their savings in financial instruments are clearly doing better. As to the rest of us - small businesses along Main Streets, and middle and lower-income Americans - forget it.

Business cheerleaders naturally want to emphasize the positive. They assume the economy runs on optimism and that if average consumers think the economy is getting better, they'll empty their wallets more readily and - presto! - the economy will get better. The cheerleaders fail to understand that regardless of how people feel, they won't spend if they don't have the money.

The US economy grew at a 5.9 percent annual rate in the fourth quarter of 2009. That sounds good until you realize GDP figures are badly distorted by structural changes in the economy. For example, part of the increase is due to rising health care costs. When WellPoint ratchets up premiums, that enlarges the GDP. But you'd have to be out of your mind to consider this evidence of a recovery.

Part of the perceived growth in GDP is due to rising government expenditures. But this is smoke and mirrors. The stimulus is reaching its peak and will be smaller in months to come. And a bigger federal debt eventually has to be repaid.

So when you hear some economists say the current recovery is following the traditional path, don't believe a word. The path itself is being used to construct the GDP data.

Look more closely and the only ones doing better are the people and private-sector institutions at the top. Many of America's biggest companies are sitting on huge amounts of cash right now, but that says nothing about the health of the U.S. economy. Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they're global, and selling into fast-growing markets in places like India, China, and Brazil.

America's biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs - 32 percent of workforce - and slashed capital expenditures 43 percent.

Firms in S&P 500 are now holding a whopping $932 billion in cash and short-term investments. And they can borrow money cheaply. Corporate bond sales are brisk. So far in 2010, big U.S. corporations have issued $195.2 billion of debt, excluding government-guaranteed bonds. Does this spell a recovery? It all depends on what the big companies are doing with all this cash. In fact, they're doing two things that don't help at all.

First, they're buying other companies. (Walgreen last month spent $618 million for New York drugstore chain Duane Reade; Bank of New York Mellon, $2.3 billion for PNC Financial Services; Monster, $225 million for; Diamond Foods, $615 million for Kettle Foods.) This buying doesn't create new jobs. One of the first things companies do when they buy other companies is fire lots of people who are considered "redundant." That's where the so-called merger efficiencies and synergies come from, after all.

The second thing big companies are doing with all their cash is buying back their own stock, in order to boost their share prices. There were 62 such share buy-backs in February, valued at $40.1 billion. We're witnessing the biggest share buyback spree since Sept 2008. The major beneficiaries are current shareholders, including top executives, whose pay is linked to share prices. The buy-backs do absolutely nothing for most Americans.

(None of this, by the way, is stopping supply-side fanatics from arguing government needs to cut taxes on big corporations in order to spur the recovery. Their argument is absurd on its face. Big companies don't know what to do with all their cash they have as it is. They aren't investing it in new plant and equipment and new jobs. So why should the government cut their taxes and enlarge their cash hoards even more?)

The picture on Main Street is quite the opposite. Small businesses aren't selling much because they have to rely on American - rather than foreign - consumers, and Americans still aren't buying much.

Small businesses are also finding it difficult to get credit. In the credit survey conducted in February by the National Federation of Independent Businesses, only 34 percent of small businesses reported normal and adequate access to credit. Not incidentally, the NFIB's "Small Business Optimism Index" fell 1.3 points last month, just about where it's been since April.

That's a problem for most Americans. Small businesses are where the jobs are. In fact, small businesses are responsible for almost all job growth in a typical recovery. So if small businesses are hurting, we're not going to see much job growth any time soon.

The Federal Reserve reported Thursday that American consumers are shedding their debts like mad. Total US household debt, including mortgages and credit card balances, fell 1.7 percent last year - the first drop since the government began recording consumer debt in 1945. Much of the debt-shedding has been through default - consumers simply not repaying and walking away from homes and big-ticket purchases.

This is hardly good news. But here's the Wall Street Journal's take on it: "the defaults are leaving many people with more cash to spend and save, jump-starting the financial rehabilitation" of the economy.

Baloney. As of end of 2009, debt averaged $43, 874 per American, or about 122 percent of annual disposable income. Most economic analysts think a sustainable debt load is around 100 percent of disposable income - assuming a normal level of employment and normal access to credit. But unemployment is still sky-high and it's becoming harder for most people to get new mortgages and credit cards. And with housing prices still in the doldrums, they can't refinance their homes or take out new loans on them. The days of homes as ATMs are over.

Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The "wealth effect" is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds. The top 10 percent accounted for about half of total national income in 2007. But they were only about 40 percent of total spending, and a sustainable recovery can't be based on the top ten percent.

Add to all this the joblessness or fear of it that continues to haunt a large portion of the American population. Add in the trauma of what most of us have been through over the past year and a half. Consider also the extra need to save as tens of millions of boomers see retirement on the horizon. Bottom line: Thrifty consumers are doing the right and sensible thing by holding back from the malls. They saved a little over 4 percent of their disposable income in fourth quarter of 2009. In the months or years ahead they may save more.

Right and sensible for each household but a disaster for the economy as a whole. American consumers accounted for 70 percent of the total demand for goods and services in the American economy before the Great Recession, and a sizable chunk of world demand.

So what happens when the stimulus is over and the Fed begins to tighten again? Where will demand come from to get Main Street back, create jobs, raise middle class wages? Not from big businesses. Certainly not from Wall Street. Not from exports. Not from government.

So, where? That question is the big unknown hanging over the U.S. economy. Until there's an answer, an economic "recovery" for anyone other than big corporations, Wall Street, and the wealthy is a mirage.

Open Article On Originating Site

Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written twelve books, including "The Work of Nations," "Locked in the Cabinet," and his most recent book, "Supercapitalism." His "Marketplace" commentaries can be found on and iTunes. your social media marketing partner


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+7 # Guest 2010-03-12 23:44
In Cambridge MA the only construction is amongst the high end The projects are unending a cost millions. Some are even on pure speculation Reich tells it like it is but
I don't see Obama or Congress doing anything in a real way. The little guy gets squeezed and the rich still go to
+4 # Guest 2010-03-13 01:00
Great detail, thanks. Where will US jobs come from? That's easy - they won't. Instead there will be more war, to distract. Maybe even the draft, reinstated. Gets the kids off the street so they can't get doped up. Or why not legalize da weed, let 'em get doped up so they don't get restless and wonder why they have no jobs. Does that sound dysfunctional all around? Yes. So then why not have a REAL tea party and dissolve the Union? Pete Edler, Stockholm.
+9 # Guest 2010-03-13 01:42
Remember NAFTA and all those other trade agreements? Those who wanted American jobs were called "protectionists ," so small businesses were left with the only American jobs. Our only money left in America was in real-estate, which was a false bubble. Big businesses took all our resources with them. Downtown Detroit turned into chemical or mineral-rich apple orchards? Business in Detroit is forcing Americans to move into cell-block neighborhoods that are not their own, and schools closing all over America. Japanese-style robots in the garage? Does anybody have any ideas? I'm at least glad for the analysis from Robert Reich, from UC Berkeley. Where is the IV League on this... playing football - the only real meaning of the IVth league - all suffering from brain damage? When we say "green jobs" we should include people-based business. This is serious folks: the trouble isn't just in Washington D.C., but in most of the big businesses in America.
+14 # jlohman 2010-03-13 02:49
When you already have 60 votes in the senate, demanding bipartisanship is a lame excuse for doing what your corporate funders wanted in the first place. It’s just more of the game the Dems have been playing.

Neither party wants real fixes, because then the corporate money will cease to flow. Quit the wars and defense money dries up. Fix health care and insurance money dries up. Our congress will remain owned by corporations until Obama keeps his promise to fix campaign funding.

The voters learned that even after installing their favored party and giving them an unbreakable majority, they still lose out to the moneyed interests.

The voters didn’t seek bipartisanship, they voted the Republicans out and the Democrats in.

Jack Lohman ...
+4 # Guest 2010-03-13 05:03
Great article,

?Would you think this is also the case for Australia ?Banks and big Corps are doing great,the little guy at the coal face
is really suffering,low sales,low margins,bad debts.

derek Collins
+8 # Guest 2010-03-13 06:43
The only positive I can take from this is a true patriot, pointing to the truth!

Apox on the Republocrats head.

"we can not solve the serius problems at hand with the same thinking that got us here." A einstien
+9 # Guest 2010-03-13 06:50
Everytime I read Robert Reich, I think how smart he is. And then I think of how depressing every article is I've read of his lately. And then I wish President Obama and every member of Congress was reading it.
+4 # Guest 2010-03-13 07:51
I always enjoy your articles, Mr. Reich. Thanks for having the courage to speak the truth. I fear we are headed for the financial mileau of the 1920's and 30's. This president can't seem to get us there fast enough. I can't help but wonder when the American public, and the rest of the world, will finally wake up and realize the rat trap we are caught in. We aren't the rats; the owners of the trap are. And what will people do when they do finally break denial? If the Nazi camps have taught us anything it is the incredible tolerance for abuse people are willing to accept. I hope this won't be the case now but so far I haven't seen much to the contrary as we sink deeper and deeper into a Neo-feudal system that echos back to a not so merry Old England.
+4 # Guest 2010-03-13 08:51
Reich sees the bigger picture. The rich can survive only by spending more and more on personal security. As the populace loses homes, credit, jobs, they will have nothing to more to lose. And these are the conditions for revolution. 12-30 years more, and then the necessary changes will come. prepare now. and give up all your illusions about Dems and Reps: there is only one party, the Party of Incumbancy.
+3 # Guest 2010-03-13 09:07
I wonder if Robert Reich has watched a 48-minute video available free online called "Money As Debt" and if so, what he thinks of it.

"Money As Debt" explains the Ponzi scheme that is the fractional reserve system followed by private banks. "Money As Debt II" suggests what we can do about it. Check 'em out.
0 # Guest 2010-03-17 22:25
Carla -- how can one find the video you mention?

Quoting Carla:
I wonder if Robert Reich has watched a 48-minute video available free online called "Money As Debt" and if so, what he thinks of it.

"Money As Debt" explains the Ponzi scheme that is the fractional reserve system followed by private banks. "Money As Debt II" suggests what we can do about it. Check 'em out.
+6 # Guest 2010-03-13 09:17
The utter absence of this kind of perspective from the Obama Administration and the hacks in Congress is exactly why I sat out the senatorial election in Massachusetts a couple of months ago. Until this perspective becomes the Democratic Party leadership's perspective, I have no intention of voting 'Democrat' again. No amount of fearmongering or whackadoodle Republican candidates can persuade me to vote for a party that continually sells me, my family and my social class out.

I'm sick to death of inbred privileged, private school fakes posing as my ally while they knife me in the back. All these clowns in Washington can do is pile on the corporate welfare and try to BS us that this is about 'jobs'. Yeah, right. Jobs for their private school chums maybe, but not for the rest of us.
+6 # Marty 2010-03-13 11:06
Why are we having a difficult time with jobs?

It's not simple but a couple of reasons jump out, 1) free trade treaties and 2) mergers. Both good for business.

#1, free trade, is a word masking so we cannot see how business is done since free trade agreements were first written some 30 years ago. We sent job to where wages were lower. It's estimated that about some 5 million or more jobs in the US were moved overseas. So smaller businesses did not move over seas.

However, #2 mergers came into play. Again some 30 years ago the antitrust arm of the Dept of Justice was silenced. Let the mergers happen. Smaller business were absorbed by larger business and nothing was done. Since the larger your business is the economics say profit improvement comes with lower pays. Profits should be a benefit to shareholders but the "dividends" are given to the management in the form of higher pay.

Who losses in this? The middle class, where recovery starts.
+6 # Guest 2010-03-13 11:28
The truth is that the US has been a declining power for quite some time. And like all failing empires, it is hollowing out at home, bleeding the vast majority of its people in order to further fatten the coffers of the parasite class. It is also typical that the US is now war mad, for this keeps the masses distracted while they are being fleeced.
A century back, the great British Empire was going down the same path. Hopefully it won't take WW III to resolve our mess.
+6 # Guest 2010-03-13 11:48
This has been a sham economy from get-go. It was initially built on slave-labor, then, indentured servitude, and for many an economic season, people of color continued experiencing high rates of unemployment; in good times 10-15%; and in bad times, such as now-- 40-50%. I remember that in my 1st year on macro economics, I learned that who "an unemployed person" was/is: "a white male, 21 years of age, having been out of work for 21 days, and looking for work." Under the Johnson and Carter presidencies, there was some sensitivity to black unemployment. Then came the Reagan years, that went back to the original definition of how the federal government counted the unemployed, "a white male etc.-----". Its sad to say but--- We (black folk) ain't it--- unemployed in the eyes of traditional labor statistics. What I mean by this-- we aren't counted among the unemployed. Maybe 3/5ths are counted, as how we are counted when we vote?

This is still the case, ya'll.
+7 # Guest 2010-03-13 13:21
"Firms in S&P 500 are now holding a whopping $932 billion in cash and short-term investments."

This $932 billion is known as retained earnings and, unless the tax code has changed, is subject to a Federal Excise Tax of 50%. So Uncle Sugar could lay its hands on $466 billion just by enforcing its own tax code. This is more than enough to pay for universal health care. The problem is that government only enforces laws against the weak. Working stiffs pay tax fines and penalties but tax evading corporations get federal subsidies. The answer is to criminalize politics. If the head of a Federal department such as the IRS fails to uniformly enforce the laws he should get 20 years with zero tolerance. The head of the Department of Justice should also get 20 years minimum if he fails to uniformly prosecute those who break the law including corporations and public officials. Again, with zero tolerance.
+7 # Guest 2010-03-13 18:09
Reich is absolutely correct- Our economy will NEVER recover & we ara 2nd rate power because NEITHER party has courage to do what needs to be done- raise taxes & curb entitlements, & put a tax on outsourcing jobs, & credit for creating USA jobs. We're a nation of consumers. our best & brightest will leave for greener pastures far sooner than later. That leaves the old, the sick, & the stupid. Do all the flag waving you want & place the blame on the "other" party, but blame US, when WE elect spineless twits who tell us what we WANT to hear instead of the TRUTH look at countries who are successful & let's learn something instead of demonizing them as socialist nations. MANY so-called socialist nations are fact, constitutional or Parliamentary Republics with perhaps 1 or 2 socialists elements like healthcare or education- Are they ALL Failures?
-1 # Guest 2010-03-13 18:44
A government big enough to give you everything you want, is strong enough to take everything you have.
Thomas Jefferson.
+3 # Guest 2010-03-13 20:30
Quoting Stanley King:
A government big enough to give you everything you want, is strong enough to take everything you have.
Thomas Jefferson.

Okay then...and let's not forget that corporations big enough to sell you anything you want can ultimately charge you whatever they want and take everything you have.
So what is your point? That a government big enough to truly represent the masses, you know, a government of, by and for the people coexisting with the currently inadequately checked power of corporate America, would be a bad thing? Just what do you think our government would be if, as the right wants, it became something small enough to drown in a bath tub?
I am sceptical that big government is the problem when the real issue isn't bigness, but rather who it is supposed to serve and will it become big enough to serve that purpose. For some things, size does matter after all.
+4 # Guest 2010-03-13 20:33
...and again, a point I try to make that is constantly censored is that perhaps we can no longer afford the luxury and the cost of the upper class that we have. There is nothing that the parisitic class can do that can't be done just as well by the middle class that they are presently destroying.
+1 # Guest 2010-03-14 13:49
Along with "Money as Debt", please chk-out "the Web of Debt". An excellent book by Ellen H. Brown (author, lawyer, research journalist). She's equally as brave as Mr. Reich in speaking the truth. In a time of universal deceit, telling the truth is a revolutionary act.
0 # Guest 2010-03-18 05:32 This is my blog where I discuss economy, chart it and try to enlighten on issues like this. Sundays 60 minutes program also shed light on GS and others, when the lights go on the INSIDER bed bugs scatter under their Ocean front 2nd homes.
What GOOD is a recovery if it doesn't go to the CORE and fix the problems? NOT ONE single theif has been brought to justice....not one crime committed here during this crisis?
The only recovery has been in the BS machine.


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