Can the USA Recession be overturned?:
Analysis of Causes and Possible Solutions
By Garvin Karunaratne,
Ph.D., Michigan State University
Summary
Current fiscal and monetary measures, as well as the US President’s
Economic Stimulus Package cannot rejuvenate the economy.
The following suggestions are made:
1. Strengthen Microenterprise Development,
2. Rejuvenate the Community Development Corporations
3. Strengthen management education by the use of community development
and non-formal education todevelop the abilities and capacities of entrepreneurs,
community leaders etc.
4. The Universities should attend to develop the local and national
economy in the role of the Land Grant Universities.
A multipronged interdisciplinary effort is needed.
Introduction
It is a well known fact that the USA, the richest country in the world
is mired in a recession for the past several years. The aim of this
Paper is to explore possible solutions to end the recession. Can current
monetary and fiscal measures alone turn the tide? Is it not necessary
to rethink the current monetary and fiscal measures and also explore
additional strategies in order to revive the economy?
Today’s Situation
Of the Developed Superpowers, Japan had been mired in a serious recession
for the last decade and the monetary and fiscal measures taken have
failed to arrest the situation. By 2001 the USA also joined Japan. Since
then the economy of the USA has continued on the downward trend, getting
deeper and deeper into recession. The tax cuts of the U.S. President
has also failed to arrest the downward trend. Gradual increases and
reductions in interest rates too have not succeeded in rejuvenating
the economy. Many blame the expenses involved in the military interventions
in Afghanistan and Iraq as a constraint to development. Actually the
outlay in the military exploits is only a minor dent in the total national
expenditure and one should not get lost in the wood for the trees.
JobLosses, Redundancies,
Not a day passes without information of job losses, redundancies and
prestigious companies folding up. In the initial stages of the recession
the cause for closures and redundancies was said to be the lack of sales
for the manufactures. By the close of 2007 it is reported that City
Group may slash its dividend by 40% and will have to find $ 10 billion
investment to maintain itself.(The Times.UK.Dec28,2007) The latest additional
cause for the recession is offshore-resourcing, where work that was
once done in the USA is being done abroad. Developments in communication
technology- e mail, videoconferencing etc. enable easy and cheap communication
links to get things done abroad. This results in unemployment in the
USA and net payments from the USA to the countries where outsourcing
is being done. In fact I have been told that venture capitalists even
insist that they will provide funds for start up ventures only if work
is outsourced. By offshore outsourcing, companies can save labor costs
up to 75%. They insist because then,with the money that is invested,
more work can be done as the companies stand to benefit from the low
wages in Third World countries.
Looking at the structure of imports and exports of the US one finds
a deficit. In 2003 the US exports of manufactured goods amounted only
to $ 627.1 bn while the imports of goods to the US amounted to as much
as $ 1.03 trillion. This deficit of $ 403 billion increased to $ 666
billion in 2004. By 2006 this deficit increased to $ 764 billion. To
finance this shortfall, the USA is compelled to borrow US $ 1 billion
daily from foreign borrowers. The total public debt of the USA is a
staggering $ 9,128 trillion. Further foreign holdings of US assets has
increased from $ 1.2 trillion in 1994 to as much as $ 6.3 trillion by
June 2005. The US dollar has also lost its value over the past few years.
In the words of The Dines Letter(2007 Annual Forecast Issue): The US
dollar is still the world’s reserve currency, a place where foreign
governments park their surplus capital for safety, not realizing that
the dollar is a hollow shell and increasingly vulnerable to an international
currency calamity. (page 21) The US dollar deserves to be bolstered
up and this has to be done through strengthening the US economy. The
housing market has had to bear the brunt of the downturn in employment,
with sub prime lending causing ripples in financial circles. Federal
Reserve Chair Mr. Bernanke in his testimony to Congress has said that
the potential losses can be estimated at $ 100 billion and this amount
could increase further. Sub prime loans amount to as much as $ 1.3 trillion.
Many attempts are being made today to tackle the problem of sub prime
lending, little knowing that sub prime lending is only one of the results
of the downturn in the economy and not a cause of the downturn of the
economy.. In January 2008 the President of the USA has announced an
Economic Stimulus Package of $145 billion to be spent on tax cuts and
it is hoped that a tax cut of $ 300 to 600 to each tax payer will boost
consumer spending. In my experience a tax cut of $ 600 is unlikely to
create any investment that will lead to investment and increase in productivity.
Consumer spending will only increase imports. Economists should be really
addressing the economy itself. What is really required is incentives
for long term increases in productivity which is the aim of this Research
Paper.
The stockmarket is in the doldrums and investors have lost heavily.
The Nasdaq which once held a high of over 5000 is currently at a low
of around 2000 to 2500. Current attempts to rejuvenate the economy are
limited to monetary and fiscal measures. Japan reduced its interest
rate from 6% to a low of 0.5% by 1995 and down further to zero today.
It has been Japan’s experience that any reduction in interest rates
has had absolutely no effect.
Poverty in the US is on the increase, with increasing unemployment,
loss of people’s earnings due to the recession. Many workers have
had to hold on to their jobs by agreeing to cuts in pay and perks. A
mass of some 37 million were in poverty in 2004. This was an increase
of 1.1 million over the earlier year. As much as 45.8 million people
were without health insurance coverage. This was an increase from the
45.0 million people in 2003.(USDept.of Commerce:2004)
In fact the New York Times(Dec 02 2007) states “You need not be
a Wall Street chieftain to feel the anxiety that has wrapped its arms
around the American economy. The stockmarket seems locked in a downward
spiral as one bank after another suffers its day of reckoning with bad
mortgages. Companies are sharply cutting profit forecasts as the sense
takes hold that American consumers are finally too loaded with debt
to buy the next flat screen television. The dollar has fallen to inglorious
depths. One unpleasant word hovers large: recession” Economist
Nouriel Roubini says that The evidence is now building that an ugly
recession is inevitable.”(Ibid)
It appears necessary to search for a solution where there is employment
and prosperity for all Americans. It is imperative that corrective measures
have to be taken immediately before the USA slumps down further.. To
start with it has to be accepted that the current method of moving-
rachetting rates up and down in itself has proved to be unable to rejuvenate
the economy.
Causes for the recession.
The current impasse is due to a number of causes which are fairly important
in finding a solution.
The Stockmarket ensured that there were ample funds for the various
companies that were floated. This availability of capital enabled development.
However certain weaknesses are evident in the stockmarket mechanism.
As investors poured in and bought stock, there was no mechanism afloat
that could ensure that the funds available to the company could be used
for productive development. In the words of Professor Joseph Stiglitz:Corporate
scandals dethroned the high priests of American capitalism; the CEOs
of some of America’s largest enterprises seem to be enriching themselves
at the expense of their shareholders and workers(Stiglitz:2003). Perhaps
the working of the stockmarket needs to have more regulations to ensure
that the money created when a share price goes up is invested for further
technological advancement and product development. The stockmarket continues
to be the chief method of financing development and the expansion of
industries and every attempt has to be made to develop this method further
and this can be done only by ensuring that investment is ploughed in
to take the company’s manufactures further.
It is my opinion that the East Asian Economic Crisis of 1997 which spread
to include the Asian Giants- Malaysia, Thailand, the Phillipines, South
Korea, Indonesia and then spread to Russia, Argentina and Brazil has
had an adverse effect on the economies of the Developed Countries and
the current recession of the US also comes within this context. It is
important to note in this connection that other than Malaysia all other
countries that were involved in this crisis had to have their economies
rejuvenated by the injection of foreign aid, including a rescheduling
of their debt- in short the countries were given a further lease of
life. Other Asian and African countries also have ailing economies that
have to be annually bolstered with aid from the Developed Countries.
The slump in the sales of manufactured products comes from the lack
of sales and very few countries have funds to buy manufactures. The
economies of the Developed Countries depends on their manufactures and
unless sales can be found, there will be unemployment-loss of jobs and
poverty and deprivation will inevitably creep in. A part of the present
cause for the downturn of the US economy lies in the US depending on
the rest of the world as a source of income ( through investment, sales,
offering services etc) and finding such incomes dry up. It is necessary
to develop resources within the U.S.A. in a self sustaining manner.
The USA is sufficiently large and has a store of undeveloped resources
which can help building up a self sustaining economy.
Earlier Attempts to rejuvenate the US economy
Many attempts have been made to rejuvenate the US economy in the past.
This has been in addition to the monetary and fiscal measures.
Microenterprise Development has been an area of concentrated activity.
The Small Business Administration guided by the high powered Senate
Committee on Small Business has been active.
The Congress finds that small business concerns remain a thriving and
vital part of the economy accounting for the majority of new jobs and
new services created in the USA.(US Congress:1992:102)
By The Small Business Investment Act of 1953, the US Congress established
the Small Business Administration (SBA) primarily to advice, assist,
champion and counsel the country’s small businesses. … The
SBA was designed to assist the capable but under financed and under
funded small entrepreneur seeking to found or strengthen a small business.
…..
At a small cost to the Government the Microloan program offers both
economic opportunity for borrowers with few or no alternatives and an
investment in a brighter economic future. Small Business Development
Centers were established from 1977 to provide managerial assistance
at no charge to small business persons.
Travelling through a large number of States in the USA in the latter
part of 2004 and 2005(clocking 28,000 miles in my RV) I have seen many
microenterprises established in the homes of people. These are small
businesses providing self employment to a single person. Many such small
entrepreneurs have told me that their earnings are meager and insufficient
even to meet the cost of paying their health insurance premium. This
is a core of interested and patriotic entrepreneurs whose prosperity
has to be assured.
Community Development Corporations (CDC) were once mooted to attend
to the social and economic needs of communities. As Stewart Perry states
it was a comprehensive attempt to boost the economy:
Deteriorated housing, impaired health, non-existent low wages, the
welfare assault on self respect, high crime rates, low tax base and
reduced school and police services…. the continuing export of human
and financial capital…. All these feed on each other… nest
together to create impoverished community. Thus the need for a community
based and comprehensive approach to improving the local economy, rather
than trying desperately somehow to rebuild each individual so she or
he can leave the impoverished conditions behind.(Regan:4)
Beginning in 1967, by 1973, 36 CDC were receiving funds. The aims of
the CDC in the words of the National Advisory Council on Economic Opportunities
was to break the cycle of poverty in low income communities by arresting
tendencies toward dependency, chronic unemployment and community deterioration.(NACEO:1973:16)
This was to be done through self help and the mobilization of the community
at large with appropriate Federal assistance (to) improve the quality
of life of their economic and social participation in community life
in such a way as to contribute to the elimination of poverty and the
establishment of permanent economic social benefits. (NACEO:1977:60)
It was a genuine attempt for bringing impoverished communities into
the economic mainstream(NACEO:1978:108) This attempt was designed to
develop entrepreneurial and management skills(NACEO:1977:60)
The CDC Program with a core funding of $ 86.7 million was projected
to have available as much as $ 750 million through various organizations.
The aims were lofty:
Build, rehabilitate and manage housing, day care, neighbourhood shopping
and other community facilities, serve as a catalyst for getting community
residents and businesses to coalesce around common issues and concerns
(and) to work in concert with other neighbourhood organizations to plan
and implement programs to address such issues as crimes, inadequate
child care, health care and youth unemployment (NCDI:March1994:13)
This was a development of the Seventies but unfortunately their activities
have been confined to tasks of attending to the social needs of the
communities. Their main contribution has been in the area of providing
housing.
I was involved in a similar community education program as the Senior
Community Education Worker in the City of Edinburgh, UK. The main thrust
was at social development which we did achieve through strengthening
community organizations to attend to social problems. No attempt was
made to develop community organizations to attend to the tasks of poverty
alleviation through employment creation. Though I requested approval
to extend the program on those lines it was not granted.
Another Program: The Comprehensive Employment and Training Act(CETA)
was established in 1973 .CETA replaces direct Federal funding of categorical
programs with the exception of Job Corps, with the funding of State
and local prime sponsors who have the option of continuing the various
programs or developing their own program thrusts. These programs are
no longer required to adhere to arbitrary and sometimes irrelevant federal
standards and can now be geared to local needs.(NACEO:1974:30)
Priority was given for programs for the unemployed, underemployed and
the disadvantaged. In 1977 the allocation was $ 5.6 billion and this
was increased to $ 9.5 billion by 1978. The CETA shifted the emphasis
from manpower programs to direct public service jobs. By 1980 half a
million people were enrolled in public service jobs.
The achievement of the CETA can be expressed in the words of Campagna:
Despite the problems of the CETA, there were some successes that ameliorate
the negative impressions gained from the abuses and mistakes. Many people
found jobs after participating in the program, welfare roles dropped,
women and minorities gained more than white males, income gains were
substantial for some participants and employment did increase as about
a third participants found permanent jobs. (Campagna:1995:59)
The achievement of the CETA was more in the task of finding jobs for
the disadvantaged rather than in the creation of new enterprises. What
happened was that persons from among the disadvantaged were given preference
for existing jobs through additional training etc and there was no attempt
at increasing the totality of employment that existed. In almost every
country there are many programs that help the unemployed people to become
employed. There is a fine difference between the creation of employment
and helping people who are unemployed to find employment. In the former
employment opportunities are increased, while in the latter there is
no employment creation.
The CETA was replaced by the Job Training Partnership Act of 1982.
What Can be done today?
The downturn in the economy has to be tackled through a multipronged
effort.
The thrust on the development of microenterprises has to be strengthened.
Microenterprise Development is already being done through many voluntary
organizations that avail themselves of funding from the SBA, various
Foundations and certain Universities. This is guided by the Senate Committee
on Small Business Development . The current effort of the Small Business
Administration to help small entrepreneurs has to be strengthened by
the provision of an infrastructure to study local needs and available
resources, find methods of developing enterprises at the local community
levels.
Microenterprises are units that need not incur high overhead costs and
need not have high earnings to provide dividends for non- working investors.
The aim of the entrepreneurs should be to work for one’s self-
an earned income as opposed to providing an unearned income for people
who invest and earn on account of the investment.
Community Development and Community Economic Development
There should be a yeoman attempt at finding the needs of communities,
studying the resources available within communities to solve the needs
of the communities, find additional resources that are required to achieve
such tasks and build up the abilities and capacities of people as well
as the communities as they try to attend to their own development. The
needs of the communities has to be assessed in the context of State
and National needs so that overproduction can be avoided.
In this attempt the thrust has to be on building community expertise
through the concept of community development. In the words of Professor
Murray Ross, community development is the process by which the community
identifies its needs and objectives, develop the will to work at the
needs and the objectives, finds the resources to deal with these needs
and objectives, take action to get them done and in doing so develop
cooperative and collaborative attitudes and practices in the community.(Ross:1967)
In the development of the communities, there has to be a concerted attempt
to build up the abilities and capacities of community leaders. This
has to be done through the utilization of non-formal education techniques.
Non Formal education refers to a number of educational processes- community
development, discussion, deliberation, self help, leadership development,
conscientization, participation, sequences of decision making, etc that
function simultaneously and complementarily to cause experiential learning..
The people should play a positive role in the needs assessment, in the
plan formulation, in finding resources and in contributing their mite
for the program, managing the program with their full responsibility.
This entire continuum of action is the educational process leading to
the development of the initiatives and responsibility in the people.(Karunaratne:1984)
The development in the communities can be attempted in a dual manner-
walking on two legs- firstly through Microenterprise Development and
also by a revival of the defunct Community Development Corporations
and through Cooperatives managed by community members.
My travels in Canada in 2004 amply confirm the necessity for community
controlled enterprises to emerge.
When I entered Canada, I was interested to see the manufacture of Blue
Mountain Pottery, a fine pottery that adorned the shelves of high class
shops like Harrods in London. When I found that the factory was to be
closed down I made it a point to visit the factory. I was interested
as I had established many pottery centers in Sri Lanka and was held
responsible for their success. The Blue Mountain products were very
elegant and marketable and on my visit to the factory I was told that
the decision to close the factory was not that the factory was incurring
a loss. The answers I got to my repeated questions enabled me to figure
out that the profits created were insufficient to find massive profits
for the non-working owners. The decision to close has caused unemployment
to 143 workers and closed a great pottery factory for good, a factory
that once turned out exquisite pottery that were sold in high class
shops all over the world. It was a pottery that could have been developed
to provide employment for thousands of Canadians and bring in incomes
for Canada. Blue Mountain Pottery had the capacity to be developed like
the Lladro figurines of Spain. Then there would have been employment
for thousands of Canadians to produce the figurines and in trading.
This experience confirms that the strategy of community cooperatives
handling production is the alternative strategy that has to be concentrated
on for purposes of finding employment and poverty alleviation in the
rural areas. The current emphasis of individual enterprises- aimed at
persons becoming self employed and developing their enterprises have
to be expanded further with the community members taking charge of the
development of natural resources found in their own areas. Then we can
plan for the development of the rural areas on a firm basis. When individuals
develop their enterprises or establish worker cooperatives, with success
on their hands they can move from their moorings to areas of affluence
leaving behind the poverty stricken areas from where they sprang into
being.
The Community Development Corporations deserve to be rejuvenated in
every County, to study local resources and attend to the development
of microenterprises on a community cooperative basis. The County Councils
have to be helped by the leading Universities to equip them with skills
to assess their economic situation, plan to develop their resources
and to work in such a manner as to develop the abilities and capacities
of the community leaders and the people. It is here that community development
and other non formal education processes come to the forefront.
The Role of Management Education.
The infrastructure for training in management skills for entrepreneurship
development should be undertaken at separately established centers or
at the Universities and Colleges
This could be a task that could be done by the Business Management Faculties
of the various Universities that now train students for the MBA. Today
their thrust is not for the creation of employment, not for productive
development, but at the training of experts- through the MBA Programs
aimed at administrative efficiency, teaching strategies for the creation
of profits- how to make things cheaper, how to get workers to work more.
In this process the rich become richer. Success is judged in terms of
more profits created. Instead the Business Faculties of Universities
should take a national development outlook. The attempt should be for
creating national production resulting in poverty alleviation and how
this task can be apportioned to the various areas and finally to the
people and the communities. This is a task that would behove of the
Universities and the elected administrative institutions- the county
councils in the USA. To my knowledge- what I have gathered in my travels
in the USA in 2004 and 2005, the county councils are eager to embark
on economic development tasks for national development and they have
to be helped. They are eager, enthusiastic but lost.
To enable this take off of Microenterprise Development, the development
of the abilities and capacities of community members in the Community
Development Corporations and in Community controlled enterprises, educational
institutes- the Universities and Colleges have to play a major role.
This is akin to the part that the Land Grant Universities once did in
bringing about the development of America. Today unfortunately the Land
Grant Role is limited to Colleges of Agricultural Economics while the
major Faculties in the Universities are dealing with training graduates
for the world of work. In his connection I can recall the role played
by Michigan State University in the Comilla Program of Rural Development
where the task was to find the best method of bringing about development
in rural Bangladesh. This was a grand success with the program achieving
full employment and doubling the yields of rice.
.
Once the premier Universities in the world concentrated on teaching
strategies for development. This was aimed at equipping administrators
to take charge of the development of the Developing Countries. I happen
to be one of the Sri Lankan administrators trained in Community Development
at the University of Manchester. The University of Manchester in the
UK taught courses in Community Development and MIT and Michigan State
University in the USA concentrated on Non Formal Education. Then the
thinking was that the Developed World was fully developed and did not
require any further development. Things have changed today and sustainable
development is required in both the Developed as well as the Developing
Worlds.
What the Government has to provide is to help the communities by enabling
them to fit their activities into a national grid. In simple terms what
has to be done is to ensure that the production created in any one county
or region will not cause overproduction in another county or on a national
basis, causing unemployment elsewhere.
Conclusion
The current deployment of monetary and fiscal measures to guide and
bring about an upturn of the economy has proved to be insufficient to
address the multifarious problems that beset the American economy. A
multi-pronged approach through the use of various strategies is required.
The development of microenterprises, the rejuvenation of Community Development
Councils as well as the development of the capacities and abilities
of local community leaders through Community Cooperatives could form
this multipronged strategy.. The aim should be to study the local needs
and local resources, finding solutions and work with the local communities
to draft plans for individual microenterprise development as well as
for the establishment of community based cooperatives- all aimed at
tackling the problems of rural decadence and poverty.
I am certain that this proposal is practical and can be successful within
a matter of a few years. I can vouch for this because I was involved
in a similar program in Bangladesh as the Commonwealth Fund Advisor
on Youth to the Ministry of Labor and Manpower of the Government of
Bangladesh. In 1982, I designed the Youth Self Employment Program based
on guiding the trained youths to develop their own self employment projects
and guiding them when they commence self employment activities till
they become commercially viable. No subsidies were offered but in addition
to the vocational training that was given, the youths were motivated
to study local resources and draft a self employment project which they
established with intensive guidance in entrepreneurship from the Department
of Youth Development. The Training Institutes were also charged with
the task of offering a technical extension service. This Program has
been developed over the years and since 1997 guides 160,000 a year to
become commercially viable entrepreneurs. Up to now over a million have
been found self employment on a commercially viable basis without any
subsidies. It is easily the largest program of employment creation today,
a program that has stood the test of time.
There is also the Comilla experience- the Comilla Program of Rural Development,
implemented with help from professionals at Michigan State University
and the Ford Foundation which ushered in full employment and the doubling
of production in the Kotwali Thana of the Comilla District, all done
through the development of cooperatives and individual self employment.
Both the Comilla Program as well as the Youth Self Employment Program
are the contributions of excellence in American academia- the Michigan
State University towards world development. This also proves the fact
that Universities do possess the expertise to pull up the American economy
and can attend to that task in addition to the task of training graduates.
Today the Universities take pride in training graduates for the world
of work. Instead the Universities should work with community organizations
and entrepreneurs to address the economic development of America and
training students should be a part of this effort.
It is my fervent hope that these ideas deserve to be acted upon and
I wish to be associated with any such movement. If called upon, it will
be a privilege to be of service and to see such attempts flower to success.
References
Anthony C. Campagna, Economic Policy in the Carter
Administration, Greenwood Press, 1995
Elliott P Currie & Robert G. Posnor, CETA, The National
Economic Development & Law Center, Oakland, 1980
Ford Foundation, Community Development Corporations: A
Strategy for Depressed Urban and Rural Areas, 1973
Garvin Karunaratne, Non Formal education Theory and Practice
at Comilla, The Bangladesh Academy for Rural
Development, Bangladesh, 1984
NACEO, Annual Reports, 1973, 1977, 1978
National Community Development Initiative, Fact Sheet, March
1994
Fred O Regan & Maureen Conway, From the Bottom Up: Toward
A Strategy for Income Employment Generation among the
Disadvantaged, The Aspen Institute, 1993
Professor Murray Ross, Community Organization: Theory and
Practice, Harper & Row, 1967,
Professor Joseph Stiglitz, The Roaring Nineties: Seeds of
Destruction,Allen Lane, 2003
US Department of Commerce, Income Poverty and Health
Insurance Coverage in the US, 2004., August 2005
Garvin Karunaratne,
Ph.D. Michigan State University.
Center for Global Poverty Alleviation,
2, Broadlands Avenue, London SW16 1NA, The U.K.
Phone 442086772664(UK)
January 16,2008
gamkga@aol.com
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