Misery on the march

THE NEWS was bad all last week. A frustrated President Bush complained that it had been 'a weird, strange year'. United States factory managers reported that new orders had suddenly dried up in May. General Dynamics, a big defence contractor, announced another round of redundancies. Finally, the really bad news was that US unemployment had jumped to an eight-year high of 7.8 per cent in June. Can this really be called a recovery?

More than a year after the recession reportedly ended, 15 months to be exact, the US economy remains sluggish. Small wonder that the politics of discontent has taken hold, as witnessed by the rise of non-traditional presidential candidates such as Pat Buchanan and Ross Perot.

By the traditional yardstick, more than 2.2 million new jobs are created in the first year of a recovery. During this recovery, only 160,000 new jobs have materialised. What has gone wrong?

The rise of misery may be the answer, not only in the US but in many industrialised countries. The OECD's 'misery' index - the sum of unemployment and inflation rates - has climbed recently and is expected to keep on rising. In many respects, it tracks one of the unhappy characteristics of the 1980s: a sharp disparity in income equality in Anglo-Saxon countries, which is rapidly spreading to others. Confidence is low not only in the US but also in Japan and most of Europe.

Charles Taylor, executive director of the Group of Thirty in Washington, believes that tepid growth, when coupled with joblessness and rising income inequality, is fuelling a new form of political discontent across the industrialised world. It is surfacing not in challenges from traditional opposition parties but in the rise of new parties and candidates who are espousing often exclusionary, special-interest causes targeted against immigrants, other domestic regions and foreigners.

According to Mr Taylor, the rise of political turbulence in response to the end of the Cold War and these 'misery' factors can be tracked not just nationally (the usual pattern) but internationally in the US, Canada, Germany, Australia, Italy and France.

Less clear are the pictures in the UK, where he sees the April election as an endorsement of incumbent politics, and Japan, where falling confidence related to the stock market crash and a spate of scandals is only beginning to have an effect.

Mr Taylor's message is clear: governments in industrial countries have become unpopular because they are not perceived by the electorates to be delivering the goods. In a break with the experience of most of the last 40 years, their opponents are not traditional challengers but dissidents and newcomers, who often have particularly nasty axes to grind.

Mr Taylor includes worldwide changes in labour markets as one of the new factors greatly affecting the 'misery' index. In the US, at least, it is possible to support his assertion that the 1980s saw a sea- change in income distribution trends. However, this indisputable fact is still not recognised in official Washington, where 'business as usual' policy prevails.

The latest jobless data also indicates why last week's cut in the US discount rate to a near 30-year low of 3 per cent is unlikely to give Mr Bush the buoyant economy on which he hoped to be re-elected. Not only will it take time for the fresh round of interest rate cuts to percolate through the economy but it is also becoming clear that short-term interest rate stimulus cannot do the job alone. Long-term interest rates, as measured by 30-year Treasury bonds and others, have stayed persistently high, in the 7.6 to 8 per cent range, despite the huge drop in short-term rates. These are the key rates that affect home mortgages, public works projects and business.

That they have remained so high reflects a lack of confidence in the basics. Businesses and consumers are not convinced, with the federal deficit approaching dollars 400bn and their own debt levels remaining high, that the future is going to be better.

There is too little national saving. This has become clear to the man in the street. Everyone is aware that there is very little cushion against the bad times. As a result, businesses are not hiring, consumers are not spending and banks are still not lending.

It is apparent that the US economy is suffering a prolonged hangover from the excesses of the 1980s which will almost certainly require prolonged belt-tightening in addition to new measures to address the structural changes. Presidential candidates who think they are in tune with the heartbeat of America would do well to speak to the elusive middle class. In the US during the 1980s many of its members saw their real incomes decline, but in their midst, inexplicably, arose a new group of occupational 'stars', who were better able to sell themselves and raise their incomes at the expense of others.