On President Barack Obama’s 50th birthday, the markets handed him a stunning sting. A 500-point decline on the Dow, signalling there will be no celebrations for the President or indeed America. It’s now clear that the party is a long way from starting for the world’s biggest economy. Euro-zone is in a funk alongside. And until America fixes job creation and Europe its debt, which looks increasingly difficult, brace for a plunge.
America’s jobless number remains above 9 per cent and is showing few signs of improvement — rapid or otherwise. The job creation plan hasn’t worked and after two rounds of pumping money into the system — the creature wants more. America’s struggle with job creation is a structural problem that the Obama administration has failed to spot but needs to fix urgently.
The famous Nobel-winning economist Michael Spence in a recent essay talked of the skew in job creation. He says that 98 per cent of the jobs created in the US between 1990 and 2008 were in the non-tradable sector of the economy — in services such as healthcare and the government. The trouble for the US economy then, is evident. In manufacturing, or the tradable sector, it’s somewhat a dud.
These jobs have shifted to emerging economies, be that toy-making in China or garment-making in India. To be sure, the US has claimed it’s looking to scale up in value-added jobs that are hard to carry out in emerging economies. That, however, leaves the US with one big problem — it’s becoming a job market for the highly educated elite, be that a cutting-edge technology engineer or a management guru. Middle America though, where the jobs and the vote bank lies, is struggling to find jobs. The troubles don’t quite end there. With the new deal struck by the Republicans on the spending cuts, no one should hold their breath on the government being a big creator of jobs.
To fix the situation, Obama will have to do more than talk about keeping jobs in Buffalo instead of Bangalore. He will ultimately have to create jobs for the hard-hat worker as well and ensure that enough Americans are going to university for a better education so that they can be absorbed where the jobs are being added, in value-added manufacturing.
Europe, whose problems looked comparably less daunting, is now morphing into an ugly monster. It’s clear that the European Central Bank (ECB) is running out of ideas. Its renewed debt purchase programme this week signals a troubled underbelly. The runaway deficits of governments that have been showing an alarming lack of discipline, has left ECB hapless. A Bloomberg calculation put the outstanding debt of Italy and Spain at euro 2.2 trillion , telling us why the central bank steered clear of buying their debt. If ECB tries to back those up, the markets will tear into what it reads as a signal that the Euro-zone economy is on a parachute full of holes. Add those up and the global economic crisis is on blowout mode.
The danger this time is that the second round of an attempted rescue may sputter. A lot of ammunition has been spent, the troops are tired, and the commanders-in- chief haven’t led well. And rule out the rescue teams — there are none on the horizon. Emerging markets are so busy fighting inflation at home that they don’t really have the ability to help a larger army.
So shove that party hat into the far corner of the closet. It’s time to shake the dust off that boiler suit.
Anjana Menon is Executive Editor, NDTV Profit
