The stuttering growth of the once almighty US economy, especially the sluggish creation of new jobs, is having a profoundly depressing impact worldwide, dragging querulous Europe and even high-flying Asian economies down to earth.
Arguments rage over what is causing the continuing economic sluggishness, and how to tackle the growing poisonous spider's web of related problems it is spinning, including debts and deficits, a global trade slowdown, widespread unemployment and growing inequality. Should already deeply indebted governments pump in money in a desperate bid to revive economies or should they cut spending and get their own finances in order?
Some young US economists have come forward with a challenging theory - that President Barack Obama bailed out the wrong people. Instead of saving the big banks and their highly paid executives, he should have paid more attention to ordinary Americans whose lives were turned upside down when the financial crash sent house prices plummeting and pushed them into debts they could not afford to repay, especially if they had also lost their job.
In a research paper, economists Atif Mian of the University of California, Berkeley, Kamalesh Rao of MasterCard Advisors, and Amir Sufi of the University of Chicago Booth School, assert that "high levels of household debt in combination with the collapse in house prices was a primary factor in the onset and severity of consumption collapse from 2006 to 2009."
They used a novel approach by examining US retail sales data on a county-by-county basis. These showed that people in those areas with heavy debts because the value of their homes had dropped sharply cut their spending dramatically on everything from cars to furniture and even weekly groceries.
Their research suggests that 65 per cent of American job losses from 2007 to 2009 came from the drop in household spending that was provoked by the collapse in home prices and the impact on families with high leverage.
In work done for The Washington Post, Sufi calculated that overall consumer spending in the US was flat between 2006 and 2009. But among the quarter of counties with the highest debt levels, spending fell by 5.5 per cent. Without that hit, spending nationwide would have increased by 2.4 per cent, which would have made a massive difference to prospects for jobs and growth.
The economists are giving a respectable voice to the claim of a number of bloggers that Obama and, especially, his treasury secretary Timothy Geithner are too close to what the critics call banksters, a play on "bankers" and "gangsters", whom they accuse of holding the country to ransom.
The assertions of the economists have a practical value that goes beyond the United States. In the US itself, almost 11 million Americans, or more than 20 per cent of homeowners, are still deeply in debt and owe more than the depressed value of their homes. This means that there is a continuing drag on the economy - and the American economy is exerting a continuing drag on the rest of the world.
In a recent interview, Sufi suggested that the government should try debt forgiveness for homeowners. "We've tried a ridiculous number of things in terms of government policy during this downturn: fiscal stimulus, homebuyer tax rebates, cash for clunkers, etc," he said. "Can't we at least give principal forgiveness a chance, even if it is on a very small scale?"
The economists also point out that the US economic crisis has been exacerbated by the growing inequality. If there is US$100 of wealth in a country equally distributed with everyone having US$1, then recession would hit everyone equally and not be so severe. But, Sufi notes, "it's because the five guys at the top have all of the US$100 and are just lending to the other 95, that's why the recession has been so severe when house prices collapse."
The situation is worse because many of the middle class have their assets locked up in their houses, unlike the wealthy, whose riches are widely dispersed among various asset classes.
Income inequality in the US has been rising and has reached the highest levels since the Great Depression. In the first year of recovery from the recent recession, the top one per cent of US earners took 93 per cent of the income gains.
But yawning income inequality is not limited to the United States. Rapidly growing countries, including China, seem to be in a race in which the already rich become super-rich and the poorer people get squeezed out.