Radio commentary, October 30, 2008
Audio: October 30, 2008
We’re starting to see some more real world effects of the credit crisis, with an emphasis on starting. Thursday morning, the Bureau of Economic Analysis reported that GDP contracted by 0.3% in the third quarter (at an annualized rate, adjusted for inflation). That’s a mild contraction, but some of the components beneath that headline number were anything but mild. Personal consumption was down by over 3% (also at an annualized rate, adjusted for inflation, as are all these figures I’ll be citing). That was the first such decline since 1980, and I’m guessing that it won’t be the last, since I think the U.S. is in the middle of a structural shift towards less spending, less borrowing, and more saving—if there’s enough income growth to support it. Residential investment—the building of new housing and the renovation of existing stock—was down by 19%, a steep decline, though not as bad as some recent quarters. The major things keeping the headline number from being even more negative were exports and government spending, both up around 6%. The export number is lower than the second quarter, and with the rest of the world’s economies slowing down, they’re not likely to look very strong in coming quarters. The government number was stronger than in recent quarters, thanks in large part to military spending, which is a pretty debased use of public funds. More on debased uses of government funds in a bit.
In somewhat more reassuring news, we also learned on Thursday morning that first-time claims for unemployment insurance were unchanged last week. The reassuring part of the news is that they didn’t rise, meaning that the job market isn’t deteriorating at an accelerating pace. But it is deteriorating; jobless claims remain high—not at record levels, but still high. This portends continued job losses in the coming months. We’ll get the employment report for October next Friday; though I haven’t crunched the numbers yet, my guess is that we’ll see a quarter of a million jobs lost, and another uptick in the unemployment rate. I’d say it’s pretty close to certain that the jobless rate will move up towards 8%, which would be a rise of nearly 2 percentage points. It’s already up about 2 points from its cycle low, so we’re at best only halfway through the decline.
As I’ve been saying, all the government’s financial rescue operations will probably keep the worst at bay—like a rerun of the early 1930s—but can’t guarantee anything resembling prosperity. And as I’ve also been saying, we’re likely to see several years of a bad economy. I see no reason to change that prognosis. A bright sign is that we are seeing some unsticking of the credit markets. Those too aren’t likely to return to robust health for some time, but at least they’re showing signs of thawing out, as they must if we want to prevent that rerun of the 1930s.
Back to those debased uses of public funds I was talking about earlier. It’s looking like the financial sector is applying the billions it’s getting from the government towards its own preferred ends, and not aiding an economic revival. A report by the excellent Mary Williams Walsh in the Thursday New York Times questions what the hell AIG is doing with the $123 billion it’s gotten from the Federal Reserve; it appears to have burned through most of that cash, and no one knows why. AIG isn’t telling. What kind of nonsense is this? A company auditor has AWOL and is “in seclusion.” The company, long known for funny accounting, apparently hasn’t shaken the habit, and so far as we know, the Fed isn’t twisting its arms to make it change its ways.
And it also looks like many of the banks that have gotten equity infusions from the Treasury are using the money to continue paying dividends rather than rebuilding their balance sheets or making loans. That too is an outrage. A proper government equity infusion would require banks taking the cash to suspend dividends. And the equity should be of the voting kind, meaning that the feds should have a dominant voice in management. But Treasury Secretary Paulson has opted for nonvoting shares because he doesn’t want to step on management’s toes. If toes ever deserved to be stepped on—nay, run over with a steamroller—it’s those of Wall Street CEOs. Not only are these debased uses of public funds, they’re negating any of the good effects of a public bailout.
The IMF, which was off the scene for many years, is, like a vampire salivating at sunset, returning to action. It’s already developed a program for Iceland, which is being put through the austerity wringer; apparently being white and Nordic doesn’t earn you an exemption. It’s likely to lend some money to some countries that it deems virtuous on easy terms—among them Brazil but not Argentina. More on all this in the coming weeks.
Finally, let me repeat the conclusion of a talk I gave at the City University Grad Center, at a panel organized by David Harvey, on Wednesday night.
There’s a lot of talk about how this crisis marks the end of the neoliberal era, which it may be, and also portends the return of the state, which is a little more complicated.
Neoliberalism, a word that’s more popular in the outside world than in the U.S., took hold in the early 1980s. Its most prominent feature is an almost religious faith in the efficiency of unregulated markets. The ideal is—was?—to make the real world resemble the financial markets as much as possible, with continuous trading at constantly updated prices. To do that requires the commodification of everything, including water and air. Needless to say, much of that agenda was successfully accomplished. But this agenda wasn’t just the result of a bad mood the body politic woke up in back in 1979 or 1980. It was a response to some real problems—chronic inflation, and, from the elite’s point of view, a crisis of profitability and labor discipline. They want to turn all that around, and they mostly did.
It was accomplished with an often heavy hand of the state, however, a fact that contradicts neoliberalism’s self-identification as being all about getting the state out. It couldn’t have happened had the Federal Reserve under Paul Volcker not raised interest rates towards 20%, producing a savage recession that scared labor into submission and drove the world’s debtor countries into the arms of the IMF. It couldn’t have happened if the IMF, a body of states, hadn’t forcibly supervised the innumerable rounds of austerity, privatization, and market openings that were the “solution” to the debt crisis. It couldn’t have survived the repeated state bailouts that rescued the financial system whenever it hit a wall.
Now the financial system has hit a giant wall, and while the world’s states will probably succeed in preventing total disaster, there looks to be something historic about this wall, something end-of-the-lineish. Even very conventional people on Wall Street are talking about “the crisis of an economic paradigm,” in the words of ISI’s Andy LaPerriere. (ISI is the consulting firm run by Wall Street’s favorite economist, Ed Hyman; LaPerriere is in his Washington office.) To LaPerriere, this moment is very much like 1980, only instead of Reaganism, we’re seeing the dawn of a “new Democratic era.” These Democrats—who are basically what David Smick (who was on this show several weeks ago) calls “hedge fund Democrats”—don’t have anything matching the transformative agenda that Reagan (a real movement conservative) did.
But, and let me conclude on an uncharacteristically optimistic note, since there is no dominant narrative, and since the ruling class has too much egg on its face to talk clearly (or avoid being laughed at when they try), there’s a tremendous opening right now. With the public sector now so explicitly involved in an economic rescue, there’s room for the public to demand something in return. And while I don’t expect all that much from Obama, assuming he wins, and his fellow hedge fund Democrats on their own, the sense of possibility that he’s awakened is a very dangerous thing. Back in the Gorbachev days, the anticommunist right loved to quote Tocqueville saying that the riskiest time for a bad regime is when it starts to reform itself. That’s where our regime is right now, and it’s a good time for us, whoever we are exactly, to go out and make it riskier.