Radio commentary, January 10, 2009
Audio: January 10, 2009
First some non-economic news. After the election last November, it was widely reported that the black vote contributed heavily to the passage of the anti-gay-marriage Proposition 8. The exit poll reported some 70% of black voters supporting the measure. A new paper by my friend Ken Sherrill of Hunter College (who’s been on this show several times) and Patrick Egan of NYU says this is largely wrong. First of all, the exit poll greatly overstated black support for Prop 8. Their analysis of other polls and precinct-level voting data suggests that the true level of support was around 58%, vs. 48% for whites. And the major reason for the 10-point gap is that black voters as a whole are more religious than whites, and religion was one of the principal keys to support for the measure. For example, among those going to church once a week or more, 70% voted yes. Those going hardly ever, 30%. Once you control for the level of religiosity there was no difference between black and white support—that is, religious blacks were no more likely to vote for Prop 8 than religious whites. Other keys to support: age and ideology. The older a voter was, the more likely he or she was to vote yes. And the more conservative, the more likely.
Looking ahead, Egan and Sherrill find that gay marriage will almost certainly win these sorts of votes sometime in the not so distant future. For example, 61% voted against same-sex marriage in 2000 in a California ballot measure; last November, 52% did, a decline of 9 points. They also find that people born between 1940 and 1960 were more likely to vote for same-sex marriage in 2008 than in 2000. That within-cohort shift, to use the demographers’ language, when combined with the fact that younger voters are far more likely to support marriage equality than older ones, mean that the historical tide is moving strongly in the direction of same-sex marriage.
And now to the economic news, which is a lot less cheering. Let’s start with a longer-term view. Just how long is this misery likely to go on? Judging by the historical record, we’re only in the early stages of this downturn.
In a new paper, economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, have taken the measure of several major banking crises over the last few decades to give us some hint of what lies ahead of us. Not to spoil the dramatic tension, but the road looks pretty rough.
Their conclusions, reduced to the audio equivalent of bullet-point form:
• Declines in asset prices are deep and prolonged: an average of 35% for house prices over six years, and 55% over three-and-a-half years for stocks.
• Declines in GDP and employment are, as they say, “profound.’ The unemployment rate rises an average of 7 points over four years, and per capita GDP declines by 9% over two years.
• Government debt explodes: up an average of 86%, not just because of bailout costs, but also because of recession-inspired declines in tax revenues.
And where are we on each of these possible roadmaps. House prices are off about 30% in inflation-adjusted terms, according to the national averages, so we’re just about 5 points shy of the average. But the decline has been going on for only about 2 1/2 years, less than half the crisis average. The decline in our stock market is also about 5 points shy of the average—about 50%, compared to 55% for the average—but again, we’re well short of the average duration: about a year, rather than over three.
On the other measures, we’ve only begun the slide. For example, we’ve only had one quarter of decline in per capita GDP, and that less than half a percent, about a twentieth of the typical decline. If we experience anything like the crisis average, it will be unlike anything that most grownups have ever lived through. There was an 11% decline in real GDP the year after World War II ended, but aside from that, we’ve only had declines of 2–3% in our worst recessions since then. The historical crisis average would be three or four times that bad.
The story is similar with unemployment. We’re just two years into the rise, half the average duration in Reinhart and Rogoff’s sample, and only about a third of the way along the percentage point increase. The low on the unemployment rate in the recent cycle was 4 1/2%. We’re now approaching 7%. If we see the typical 7-point increase, then the jobless rate should top out at around 11 1/2%, breaking the post-depression record of 10.8% set in 1982. The last time it was above 11% was in 1941, just before the World War II buildup decisively ended the Great Depression.
And we’ve only begun the massive government borrowing that the crisis will require. The other day, Republican House leader John Boehner—the unpurged adolescent in me has a hard time not deliberately mispronouncing that with a long O, followed by a Beavis-like giggle—said that we can’t borrow and spend our way out this mess. But in fact that’s the only way we can. I have no idea what he’s talking about. But more on all that in a moment.
Reinhart and Rogoff ask how relevant these precedents are for divining the future. Mitigating the worst prospects are the aggressive policy responses in the U.S. and elsewhere, which were not present in many other cases (though in many of those early cases, the crises were national or regional, not global, meaning mutually reinforcing). And they warn that we should never flatter ourselves into thinking “that we are smarter than our predecessors. A few years back many people would have said that improvements in financial engineering had done much to tame the business cycle and limit the risk of financial contagion.” And we know how that turned out.
And speaking of that policy response, I have to admit that I’m a little surprised by how quickly Barack Obama caved into Republican preferences on his stimulus program. Regular listeners know that I’ve been a skeptic about the candidate of changiness all along, but I thought he was, despite many other shortcomings, pretty solid on the economic package. His advisor, Larry Summers, a man with many faults, had nonetheless been saying the right things in recent months: the importance of infrastructure spending and of subsidies to clean energy development and other green jobs programs—long-term measures with a perspective well beyond the immediate economic cycle. So far, so good.
But then we learned earlier this week that, in order to appease Congressional Republicans, Obama would give over about 40% of the stimulus program—some $300 billion of a total $775 billion (a number that, by the way, may have to get bigger over time)—to tax cuts. And not just the tax cuts promised for the middle class, but tax breaks for business. This is bad economics and bad politics. Tax cuts are much less stimulative than government spending. People may save their tax cuts, or use them to pay down debt, or spend them on imports. Infrastructure investments are spent here and don’t leak away. They generate a lot more additional economic activity—bulldozers, concrete, solar panels, you name it. Over the longer-term, we need to consume less and invest more, and the people who need to consume less are our rich. They shouldn’t be pampered with tax cuts. And investment tax credits, which Obama is also reportedly considering, are a total waste of money. Businesses invest when they think they’re going to make money and when they’ve got the cash to fund the investments (or can borrow it). Now, prospects are dim, profits are shrinking, and it’s hard to get a loan. Investment tax credits stimulate no investment—they’re just a gift to businesses for money they would have spent anyway.
Aside from the economic points, what is the political point of this? The Dems won big and the Republicans lost. The GOP has been reduced to representing a provincial petty bourgeoisie, confined to the south and mountain West. Obama supposedly wants 80 Senate votes for the bill. Why? Why start out with a compromise, instead of cutting deals as the process unfolds? Why not take advantage of your position of strength? The only thing I can think of that makes any sense is Adolph Reed’s speculation that the Dems would like to peel off some of the saner Republicans and become a totally centrist party. That would leave the Republicans as a kind of rump formation of authoritarian fundamentalists with a fondness for dressing in bedsheets. The left of the Democratic party would presumably have nowhere else to go, or deceive themselves into thinking that all that changiness was about to break their way. Fat chance. Obama looks less like a Roosevelt, Franklin or Teddy, with every passing day.
And now an update just for the KPFA and podcast audiences. Friday morning brought the release of the December employment report and it was a horror. Total employment fell by 524,000, with almost every sector showing losses. Almost half the loss came in goods production, mainly construction and manufacturing. But even within those two sectors, losses were widespread. Within construction, it’s no longer just a housing story; nonresidential was down hard as well. And within manufacturing, it’s not just motor vehicles, it’s nearly everything.
But it wasn’t just the goods sector either. Private services got hammered, off 280,000. Temp employment, which tends to lead broader trends, was down hard. So was retail, another sector with some leading properties. About the only positive was in health care, which is good news if you work in that sector, but a mixed blessing for the rest of us coping with rising medical bills. Government added just 7,000, but I expect it’s going to join the losing sectors as budget constraints really begin to bite.
Total private employment, goods and services was off 2.4% for the year ending in December, the worst reading since 1982. Private services were off 1.5% for the year, its worst reading since 1958 (which was the sector’s worst year). Private services’ lows in the deep recessions of the mid-70s and early-80s were -0.1% and -0.4% respectively. In other words, sectors that in the past were nearly immune to recession are now joining in. Downturns used to be mainly about manufacturing and construction; now everyone’s joining in.
Those numbers all come from the Bureau of Labor Statistics survey of employers. They also do a survey of households, and the news from that side was just as bad. The unemployment rate rose a very sharp 0.4 point to 7.2%, the highest we’ve seen since 1992. The Bureau’s broadest measure of unemployment, which includes people who’ve given up the job search as hopeless as well as those only working part time because they can’t find fulltime work, the so-called U-6 rate, rose almost a full point to 13.5%, the highest since that series began in 1994. Over the last year, the number of people working part-time who want fulltime work but can’t find it is up almost 75%, a record by a wide margin in more than 30 years of data. The share of the adult population working, the so-called employment/population ratio, fell a very sharp 0.4 point to 61.0%, taking us back to 1986 levels. In other words, as of a few months ago, we’d undone the major employment expansion of the 1990s; we’ve now undone most of the 1980s as well.
As bad as this December figures are, it’s likely that we face at least several more months of the same. A very large fiscal stimulus is more urgently needed than ever.