Radio commentary, January 15, 2009
Audio: January 15, 2009
Re: the economic news, not only does the news remain bad, I’m tempted to say that it will continue to get worse.
Some listeners have heard me say this already, but the home audience on WBAI hasn’t yet. The U.S. employment report for December 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 it wasn’t just the goods sector either. Private services got hammered too. The losses in services are among the worst ever—far worse than in the deep recessions of the mid-70s and early-80s. Downturns used to be mainly about manufacturing and construction; now everyone’s joining in. The unemployment rate rose a very sharp 0.4 point to 7.2%, the highest we’ve seen since 1992. The 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. A similar predecessor measure broke over 15% in the depths of the 1982 recession, but otherwise never got close to today’s levels. 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. The Conference Board’s Employment Trends index, which leads broad employment trends by several months, continues to plumb new depths. A very large fiscal stimulus is more urgently needed than ever.
On Wednesday morning, we learned that retail sales (excluding autos) for the month of December took their biggest spill in a history that goes back to 1967. Including autos, it was close to a record. Over the last year, total retail sales are down almost 10%, the worst since the numbers begin in 1947.
No doubt several things are at work here. One is that incomes have followed employment down. Another is that it’s not easy to borrow money; consumption enjoyed a substantial boost from borrowing against home equity back during the housing bubble, but that tap has been welded shut. In fact, in the third quarter of last year, so-called mortgage equity withdrawal—cash taken out of housing through borrowing or spending the proceeds of a sale—went negative for the first time since unofficial estimates by Fed economist James Kennedy begin in 1991. And 1991 was at the end of a major housing bust, so that’s not a bad place to start for making comparisons. That means that people paid back old loans rather than taking out new ones. And a third thing at work is that even people who have money just aren’t spending it. They’re scared of the future and hoarding cash. Fears like that can, of course, become self-fulfilling—if people don’t spend, the economy contracts. As the economy contracts, people lose jobs and incomes and spend less. That scares folks even more, who react by hoarding more intensely. This is the vicious cycle that a large stimulus package is supposed to reverse. But as I’ve said here before, Americans can’t go back to consuming at the rate they did before this crisis hit. We need some major structural adjustments, and the point of economic policy should be to make those as humane as possible by forcing the brunt of adjustment on the rich.
And some details of the Democrats’ proposed stimulus packaged emerged from Congressional sources on Thursday. It wouldn’t pay to get into too much detail on this, given how it’s likely to evolve in the coming weeks. Still, the proposal starts out not so bad. It’s big: $825 billion. (It also assumes the U.S. Treasury will have no problem borrowing all that money. Some European countries have run into trouble selling their bonds—not yet the U.S. We’ll see if our luck continues.) About two-thirds of the total would go to various spending programs: Major components of that include infrastructure spending, about 10% of the total—roads and highways a large portion of it, three times the size of the rail/mass transit component. About 7% would go to energy projects: modernizing our electricity grid to save energy, weatherization subsidies for poor households. About 10% would go to aid to the poor and unemployed—things like extending unemployment insurance benefits, beefing up the food stamp program, and very tiny additions to home heating subsidies. Education programs would also benefit. And there’s aid to state governments, which are hurting badly. Unfortunately, about a third of the total would go to tax breaks, evenly divided between people and businesses. The major component of the personal tax cuts would be about $500 per worker. While that would be welcome to lots of people, the economic juice gotten from such cuts is minimal. Even more minimal would be the gifts to business, which would do almost nothing to stimulate investment or hiring.
Measuring the bang for the buck in these stimulus programs involves a concept that economists call the multiplier effect. A dollar spent on a good or service usually generates more than a dollar in economic activity—there’s business generated by the makers of parts and materials, by the truck lines or railroads that transport the good, etc. For spending programs, the multiplier is usually around 1.5—meaning that for every dollar the gov spends, $1.50 in economic activity is generated. The multiplier for tax cuts, though, is usually less than 1. People and especially businesses don’t spend every dollar of a tax cut—they may use the money to pay down some debts, or set aside for a rainy day (and that rainy day is already here, you might say). We could get a lot more stimulus if the dollars budgeted for tax cuts were shifted to spending programs. But Obama doesn’t want to scare Republicans, so he’s throwing them the bait of tax cuts. We’ll see if it works.
One slightly cheering bit of news: the weekly leading index compiled by the Economic Cycles Research Institute, which tends to lead activity in the broad economy by several months, has been edging upwards for the last month. It could be a false positive; dunno yet. I’ll keep an eye on it. But even if the economy does bottom sometime towards midyear, it will probably take many more months before the job market turns around.