Economic realities

WASHINGTON -- THE LATEST news about the sagging American economy confirms two important trends:

The alleged recovery from the recession more than three years ago is sputtering, and the big shots in the financial and political world have neither seen the slowdown coming nor been able to explain it to worried Americans.

Instead, they have been caught with their Pollyanna pants down. The spike in the economy's total output that occurred a year ago has been decelerating ever since, and the spike in private sector job creation that occurred in March has also been decelerating ever since. It was equally alarming on Friday that the government lowered its estimates of job creation in May and June even as it was reporting that barely 40,000 new jobs had been created in July.

During the 32 months that total output has been rising since a plunge in business investment in technology triggered the very brief recession, there has not been a worse record of job creation since the Great Depression itself; the average, monthly new job figure since growth resumed is a puny 6,000. President Bush, desperate for obvious reasons to pretend otherwise, likes to put all statistics in the narrow perspective of just the last year.

It's bad enough that the Bush administration is oblivious to what is going on. A matter of greater concern is that Federal Reserve chairman Alan Greenspan appears also to have been caught by surprise. He has insisted that the economy had become so robust that the time had come to tighten monetary policy in order to ward off inflation; then he acknowledge that since June the economy had hit a "soft patch" that would be very brief.

It actually makes sense for the Federal Reserve to continue on this path for a while longer. It's not just that interest rates are absurdly low; it's also that there is a great deal of loose money -- what the banking crowd calls excess liquidity -- lying around that probably should be soaked up. However, it is going to seem weird to many Americans that Greenspan's Federal Reserve is tightening policy in the face of what many economists are now calling not a soft patch, but a slowdown.

The irony is that this unacceptable performance is occurring after an unprecedented amount of governmental stimulation -- three monumental tax cuts, federal spending surges for both military and domestic programs, and an unprecedented degree of monetary moves via Greenspan as well.

The other irony is that Americans have been telling the big shots that something was wrong. Their wages have not come close to keeping pace with the sharply higher cost of necessities. Moreover, they have been correctly complaining about the job market; roughly half of the new jobs are in very low-paying service industries. Now they have cause to wonder if there will be any new jobs at all.

One fact is that the period of unprecedented stimulation is at an end. More credit card debt is not an option for the vast majority of Americans; neither is another round of home mortgage refinancings. And the tax cuts have stopped.

On the other hand, corporate profits have soared, and businesses are flush with cash. The trouble is their balance sheets may reflect what is wrong. The recent news that Microsoft had decided to send some $80 billion to its shareholders instead of invest it in new products or facilities was not a sign of an early Christmas; it was an indication that there was no productive alternative.

In a different era, there would have been a more robust recovery that included new jobs. In this era, too many of the really good jobs are going abroad. This has nothing to do with protectionism, a red herring, merely reality.

In the last year or so, the export of new jobs has reached critical mass. In the economics and financial world, they have a term for what is going on -- global labor arbitrage -- that is worth attempting to understand. What is involved is impersonal corporations taking advantage of a different price for something (workers) in one market as opposed to another.

As one student of the trend -- Morgan Stanley's Stephen Roach -- notes, the job exporting is occurring in an environment where manufacturing costs per worker in China are 2.5 percent of what they are in the United States and Japan (4 percent in India). The trend is accelerating, because businesses are moving beyond low-value products like call services to high-value ones like programming and financial analysis.

Clearly the United States needs to stimulate consumer demand to grow more robustly. It also needs to innovate faster and to get its ruined public finances in order. John Kerry has the raw material, but communicating clearly is a task still ahead of him.

Meanwhile, President Bush deserves the hit he is courting by failing to understand the forces at work in the country and world he is supposed to lead.

Thomas Oliphant's e-mail address is oliphant@globe.com.