This Recession is Going To Be a Long One
Why do we think we’re in a recovery? What makes us think that the economic crisis has passed? Why don’t we see that it’s getting worse, and now threatens, more than ever, to become a replica of the Great Depression?
Is it because we want Obama to succeed? Is it because we can’t believe that the fabled “safety net” can fail us, no matter what the Republicans have done to “starve the beast” we call the welfare state? Is it because we must believe that the ignorance and barbarism of the radical Right represent nothing more than the spastic, dying gestures of a species that knows it’s endangered?
Or is it because we’ve bought into the two big lies of our time? The first lie is that capitalism is sound. Yes, of course, we say, along with the happy monetarists and the chastened Keynesians, the financial sector got a little carried away there with those securitized investment vehicles and credit default swaps, but the system itself is beyond reproach; like democracy, we tell ourselves, it’s messy, but it’s better than the alternatives.
The second lie is that every company and every individual needs to “deleverage”—that means shed debt, stop spending, and start saving—so that the groundwork for robust growth in the future can be laid. Yes, of course, we say, along with the new Puritans and Hoovers of our time, we consumers went too deep into debt, and now we can change ourselves and the economy for the better; our children will thank us, we tell ourselves, for getting thrifty, balancing budgets, trimming all excess.
We’re in denial on all counts. Maybe worse, maybe we’re just deluded, and by our very own selves.
Go to the videotape—consider the numbers.
Consumer spending is still dropping (as of January, by about $120 billion, a 3 percent decline since July 2008) in keeping with a precipitous decline in consumer confidence from January to February; consumer debt contracted in 2009 for the first time since 1945. The Wall Street Journal’s front page of March 12 hails this contraction as an obvious boost for hopes of recovery even as—in the same article—it cites its own survey of economists to the effect that a retrenchment by consumers is the single biggest threat to recovery.
Meanwhile unemployment has become almost normal. 44 percent of families experienced a job loss, a reduction in hours, or a pay cut in the past year. The unemployment rate among men aged 25 to 55 is 19.4 percent. The real unemployment rates in California and Michigan—which counts people who’ve stopped looking for work and who’ve unwillingly accepted part-time employment—is over 20 percent. Nationwide it’s about 16 percent. The “official” unemployment rate among black men aged 20 and older is almost 17 percent, which puts the real rate at about 23 percent.
My prediction in the fall of 2008 was that overall unemployment would exceed 10 percent by the end of 2009; my guess now is that it will reach 12 percent by the end of 2010, and will get worse by 2011. These numbers are causally connected, of course, you don’t spend when you’re out of work, or, more pertinently, when you’re worried about keeping the job you have.
Now consider commercial real estate. I just read the Congressional Oversight Panel’s Report on this impending disaster, and it’s much worse than you think. Between 2010 and 2014, $1.4 trillion in loans will come due—but nearly half of all these mortgages are already “underwater” (the borrower owes more than the property is worth) because commercial property values have fallen more than 40 percent since 2007. You read that right—more than 40 percent, which exceeds even the unprecedented fall in residential property values. Rents are down 40 percent for office space (where vacancy rates are at 18 percent) and 33 percent for retail space.
So the construction business is doomed to a lost decade. I don’t see how it recovers before I’m dead. The local and regional banks that serve this industry—they hold the paper that’s worth half of what they expected—will remain paralyzed as a result. Not that they’ve been loaning to anybody, anyway. Welcome to Dubai.
But what about those improvements in the “housing market,” as the economists like to call the apparent cause and effect of our current predicament? Prices are rising, aren’t they, at least in certain markets? Well, no, they’ve just stopped falling. Or have they? The National Association of Realtors index of house prices in 20 metropolitan areas rose 0.3 percent in December, then fell 3.4 percent in January.
Existing home sales declined 16.2 percent in December, and another 7.2 percent in January. New home sales dropped 9.5 percent in November, 3.9 percent in December, and 11.2 percent in January—to the lowest level since 1963. Inventory of new homes increased to 9.1 months in January, from 6.7 months in December. Big surprise, mortgage applications are down again. And these declines are occurring in the context of a tax credit for home buyers and mortgage rates that are ridiculously low.
The truly scary part of this sorry catalog is the plight of state budgets and their impending impact on employment. California laid off 30,000 teachers last year because of a $9 billion cut to K-12 budgets imposed by the state legislature; it rehired some of these teachers on one-year contracts after the educational stimulus from Washington arrived, but the state’s school system now faces a $113 million shortfall. San Francisco now plans to fire 10 percent of its teachers and staff.
New Jersey’s deficit exceeds $45 billion, and so its school system—including my employer, the State University—will take a similarly catastrophic hit in the absence of a renewed stimulus plan targeted at education. The president of Rutgers just announced a buyout program for senior faculty to save money on salaries, but the new budget cuts there will reduce hiring until 2012. And in Illinois, the state has already announced that it can’t pay its “categoricals” such as Special Education mandates, so that younger teachers will be laid off; 13,000 Reduction in Force memos have already been delivered. The governor announced last week that the $613 million budget shortfall for education can be closed only by means of an increase in the state income tax. Meanwhile the Chicago public schools face a deficit of $1 billion. You read that right. And because the consumer price index has increased only slightly, wage increases for all teachers have been effectively nullified.
In a recent column for the Financial Times (2/24/10), my favorite economist, Martin Wolf, shows that a capital strike is underway—he doesn’t call it that, of course, but he does complain that “the private sector is now spending far less than its aggregate income.” In the US, this surplus profit is already 7.3 percent of GDP. But if neither consumers nor investors are spending, if every company and individual is “deleveraging,” there can be no recovery, because aggregate demand will keep falling unless government spending makes up the difference. But in that case, a “sovereign debt crisis” may well be the outcome—when government deficits become so large that borrowing more becomes impossible.
Wolf’s formula for a successful exit from the lingering economic crisis is that “private sector spending surges anew,” and by this he means investment—“China alone needs higher consumption.” And yet both he and Alan Greenspan noted back in 2007 that retained corporate earnings had already exceeded investment for six years; the surplus profits of the past two years are nothing new. Both men also noted that consumer credit made up the shortfall of aggregate demand and kept the economy afloat.
In the absence of increased consumer spending, in short, recovery is out of the question; for capital will remain on strike until “de-leveraging” is complete and the balance sheets look plausible again. But the only thing that can generate such consumer spending is a substantial reduction in unemployment, simply because consumer credit of every kind is now harder to come by and wages remain stagnant.
You may recall that the winter of despair—the depth of the Great Depression—came in 1932-33, not in 1929 or even 1931, when Herbert Hoover was still convening meetings of businessmen at the White House, hoping to talk them into maintaining their payrolls or enlarging their portfolios, and drafting the daring financial fix that would become the Reconstruction Finance Corporation (which, practically speaking, replaced the banking system over the next eight years). The real descent came as the budgets of private charities as well as state and local governments were busted in 1931 and 1932, two or three years after the Crash.
So batten down the hatches, folks, it’s not going to get any better any time soon. The so-called recovery is a big lie because it is impossible in the absence of significantly increased employment and consumer spending.
But perhaps there is a silver lining in this dark cloud coming down. As late as October 1932, Roosevelt was accusing Hoover of fiscal profligacy, and saying “I regard reduction in federal spending as one of the most important issues of this campaign. In my opinion, it is the most direct and effective contribution that Government can make to business.” Four years later, having promoted real recovery without any help from the shattered banking system—between 1933 and 1937, the economy grew at the fastest annual rates of the twentieth century—by deficit spending, by supporting the Wagner Act and Social Security, and by using the Temporary National Economic Committee to discipline an unruly capitalist class, FDR won a realigning election that, among other things, brought black voters into the Democratic Party. Maybe Obama can pull off a comparable miracle between now and the election of 2012.