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U.S. Faces Up to a Bleak Economic Future

by Adam Price |
October 1, 2001
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Economist Adam Price answers your questions on the deepening economic crisis.

San Jose, CA - As we go to press, the U.S. economy is in a downward spiral. Every day another corporation (or two or three) announces the layoffs of thousands of workers. The stocks of America's biggest corporations have had their biggest weekly fall in price since 1933. U.S. warships and planes are heading to the Middle East, as people protest against the drive to war. Since it is hard to foresee where the economy will be a few weeks from now, I thought I would try to answer some of the most common questions that I hear.

Did the attack on the World Trade Center cause the recession?


Certainly, this is the most common view in the media. The leveling of the World Trade Center did hurt the economy. Airlines were shut down for days, and air travel is down and unlikely to recover. Insurance companies face huge losses. Hotels were empty. The initial reaction of stock markets around the world was to fall 5% or more the day after the attack. People stopped shopping, as they were glued to their televisions and/or trying to deal with their emotions about the loss of thousands of lives.

But the fact of the matter is that the United States was already in a recession by August. Even before September 11, corporations had announced the layoffs of more than a million workers, and the number of workers filing for unemployment had jumped to the highest levels in eight years. Manufacturing industries continued to cut jobs, and weaknesses spread to service industries and the construction of new homes. Exports were falling as countries around the world cut back on buying U.S. goods because of their own economic problems.

Many economists think that our capitalist economy is basically stable, and see recessions as being caused by outside forces. For example, they blame the 1990-1991 recession on Iraq's invasion of Kuwait. But in fact, that recession officially began before the invasion.

The fundamental problem today is this: the long economic boom of the 1990's led industries around the world - such as steel, auto, computers and telecommunications - to expand their production far beyond what they can profitably sell. Now these corporations are cutting back and laying off thousands of workers.

How bad could the economy get?

U.S. businesses are likely to lay off another million workers by the end of the year, pushing the unemployment rate up to nearly 6%. These job losses and the heavy burden of debt that many families have will squeeze their ability to buy homes, goods, and services. This will cause even more cutbacks in production and more layoffs.

There is also a growing danger of a full-blown financial crisis. The booming stock market of the 1990's gave the banks, insurance and investment companies the confidence to borrow and lend trillions of dollars in complex financial dealings know as derivatives. But now stock markets around the world are being crushed by fears of recession and a U.S. war against Arab and Islamic countries. Investors are refusing to lend money to corporations and to developing countries. This could cause the global financial system to freeze up, bringing about the biggest economic crisis since the 1930's Great Depression.

The globalization of the world economy has spread the economic slowdown that began in the United States to other countries. Unemployment is at a post-World War II high in Japan. Countries who rely on exporting to the United States, such as Mexico and South Korea, saw their economies go into a recession earlier this year. Back here in the United States, the economy faces a possible double whammy from the slowing international economy. U.S. exports to other countries are falling fast, which leads to even more job cuts. About 40% of the money borrowed by the U.S. government and corporations comes from other countries. If foreign investors lose faith in the U.S. economy and stop making loans, the economy could be in even a worse fix.

So far, the government's efforts to prevent a crisis have failed. Alan Greenspan, the chairman of the Federal Reserve and the country's top banker, has cut interest rates again and again, but the economy continues to sink. Greenspan was once regarded as a prophet of everlasting prosperity, but today his attempts to bolster faith in our capitalist system are being ignored.

Will a war help the economy?

Many people that I talk to think that a war will help the economy. But the increase in military spending is more likely to lead to cutbacks in other government programs - which could lead to higher state and local taxes as their federal funding gets cut. It will also bring an end to efforts to expand our safety net to include such things as prescription drugs for the elderly. Given the high-tech nature of the U.S. military, more military spending will help a few companies and their more skilled workers, while the average worker won't see more jobs created.

War spending is already making the government borrow more, and interest rates for longer-term loans have been going up. This will hurt home sales and the growing number of American families and individuals who are up to their necks in debt. George Bush is proposing to give the airline corporations $15 billion in aid. This won't stop the layoffs of airline workers, but it will bail out the banks and investors who could have lost billions if the airlines were forced into bankruptcy. While the government will spend billions to protect corporate executives and investors from the costs of war, we working people will have to pay with our jobs, our taxes, and the lives of our sons and daughters sent to war.

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