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Which way for the economy

Recovery or Crisis?

by Adam Price |
February 1, 2002
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San Jose, CA - While layoffs mount and cities report more hunger and homelessness, Wall Street is expecting the economy to boom in 2002. This has sent stocks soaring since late September. Wall Street expects the Federal Reserve Bank's eleven interest rate cuts this year, along with more tax cuts for corporations and the wealthy being pushed by Republicans in Congress, to spark a recovery in corporate profits.

But the reality is, 2002 is more likely to bring more hardships for working families than a return to the boom year of 1999 that Wall Street dreams of. There is a basic problem: 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 hundreds of thousands of workers.

The Federal Reserve's effort to jump-start the economy with lower interest rates just hasn't done the job. While short-term interest rates have fallen from 6.5% to only 1.75% over the last year, home mortgage interest rates ended 2001 almost the same as the beginning of the year. Many businesses, large and small, are finding it harder to borrow, no matter what the interest rate.

The government has not been able to stimulate the economy by changes in spending and taxes either. The first installment of Bush's tax cut did almost nothing to increase spending, because the middle and upper-income households that received tax rebate checks just put them into savings. The President and Congress were not able to agree on a stimulus package before the Christmas break because of major opposition to the Republicans' proposals to give big corporations huge tax breaks and the Republicans' plans to speed up the planned tax cuts for well-to-do households.

Worldwide Recession

In most previous recessions, strong economic growth in other countries helped the U.S. economy recover, because those countries bought more U.S. goods and services. The current recession is worldwide, with both Japan and Germany - the world's second and third largest capitalist economies - in recession. The fall in U.S. exports is a further drag on the economy.

A continuing recession in 2002 ups the chance of a major economic crisis happening. Argentina is already in the middle of an economic crisis. For the last ten years, it has followed conservative economic policies, pushed by the United States, of free markets and a strong currency. Argentina linked their peso to the U.S. dollar and dismantled trade barriers. The result? Argentina's industry was crushed, unemployment rose to 20%, and companies and the government piled up a huge debt in dollars. Then, the government cut wages and salaries, froze bank accounts, and finally seized retirement benefits in a vain attempt to pay their debts. Mass protests against these policies forced the government to resign.

Japan is rapidly moving towards an economic crisis. In the 1980's, Japan's industrial strength sparked an economic boom. Stock and real estate prices soared in Japan as corporations went deep into debt to speculate in these markets. When this economic bubble popped in the 1990's, Japan's economy had to be propped up by increasing government spending. Now, with the government reaching the limits of their ability to borrow and spend, and exports falling with the global recession, the Japanese economy is going from bad to worse.

Unemployment is at a post-World War II high, corporate bankruptcies are rising, and Japan's banks are piling up huge loan losses. The Japanese yen is losing value, which in turn is threatening other Asian economies that would be hurt from the competition of cheaper Japanese goods.

There are more and more signs that the U.S. economy could meet the same fate as Japan. Our economic boom in the 1990's, while led by hi-tech companies, was also built on record borrowing by corporations who wanted to grow faster. Now that the United States is in a recession, this debt is coming back to haunt the economy.

The collapse of Enron under a mountain of debt could be the first sign of a coming catastrophe. Enron embodied both hi-tech, with its web-based energy trading which did billions of dollars of business each day, and the deregulation of utilities championed by conservative economic policy. Based in Texas, Enron was the largest corporate supporter of George W. Bush and has been a major lobbyist for the deregulation of utilities.

But Enron was not alone in piling up debt. In the wake of Enron's bankruptcy, we are learning that other energy companies, and even some hi-tech firms like Solectron, are in a precarious state from the double whammy of recession and debt. U.S. banks that loaned Enron billions of dollars will suffer big losses, and are likely to cut back on their lending, further slowing the economy. If the U.S. economy does stumble badly in 2002, it is likely that ground zero for the economic crisis will neither be here in Silicon Valley, nor in the ruins of the World Trade Center, but in Texas.