Radio commentary, March 19, 2009
Several new bits of economic news, most of them a little better than the recent run has been. First-time claims for unemployment insurance filed by people who’ve just lost their jobs fell by 12,000 last week. The four-week moving average, which smooths out this volatile series, rose slightly to make a new high for this recession. But it’s possible that the rate of deterioration is now slowing. In other words, the job market is terrible, but at least it’s not getting rapidly worse. At least over the last few weeks.
The big surprise of the week, however, was a rise in housing starts. Most of the rise came in multifamily dwellings; the rise in single-family starts was just a few thousand. More promising, applications for permits to build new houses rose, with permits to build single-family units leading the way. As I’ve been pointing out here for the last few months, permits tend to lead the way on housing, and housing tends to lead the way on the broad economy, so this is a sign that things might be turning. Or if not turning, at least stabilizing. For now.
But the Conference Board’s leading economic indicator, which leads developments in the broad economy by three to six months, fell in February, led down by falls in consumer attitudes and the stock market. The decline was fairly modest, however, less than half the rate we saw last October and November. Chalk this up as another possible sign of stabilization. Possible. For now.
I’ve been expecting that the economy would take a sharp fall and then stabilize at a crappy level for quite a while. There’s a chance that we’re in that transitional phase, from freefall to the routinization of crappy. But this crisis has surprised us by coming back for repeated visits, so the last thing to do right now would be to sound the all clear.
Here’s an insight into the capitalist mind, provided by Financial Times columnist Stefan Wagstyl (“Glint of hope in eastern Europe“). In a review of the state of the Eastern European economies, a state that is pretty terrible, Wagstyl points to several advantages these economies have over their Western counterparts. Employers in the East have been quick to cut wages and fire workers. This is what’s known as “flexibility.” And family ties are closer in the East than in the West, meaning that the unemployed have something to fall back on. Isn’t that comforting? You could get fired so quick you won’t know what hit you, or have your pay cut by a third—but at least you can crash on your uncle’s couch.
Screw the environment!
The economic crisis is looking like bad news for the environment. As the 1980s boom turned into the early 1990s bust, I recall that The Economist, the magazine that mysteriously calls itself a newspaper, editorialized that green consciousness always rises late in an economic expansion as a byproduct of guilt over material indulgence, and dissipates in the subsequent contraction, as attention turns instead to survival. I was skeptical of the thesis, but there may be something to it. Thursday morning, Gallup reported that for the first time in the 25 years they’ve been asking the question, more Americans want to give economic growth priority over protecting the environment.
The exact question: “With which one of these statements about the environment and the economy do you most agree—protection of the environment should be given priority, even at the risk of curbing economic growth or economic growth should be given priority, even if the environment suffers to some extent?” To guard against stacking the answers, the order of the two statements is reversed for half of the respondents; given a choice between two options, people tend to favor the first offered, and a scruplous pollster tries to compensate for that.
From 1985, when they first asked the question, through 2000, the environment was given priority by a wide margin, typically 30 to 50 percentage points. The environment’s advantage began narrowing with the recession of 2001 and the subsequent weak recovery, with the environment’s advantage almost disappearing in 2003. But as the expansion continued, the environment’s lead widened to 18 points in 2007. But that gap followed the economy down; now, economic growth has the advantage by 9 points. That’s a massive swing—about 60 percentage points from the environment’s widest lead to its current lag. Just a week ago, Gallup reported a record high 41% of Americans expressing the belief that fears of global warming are exaggerated. Since the economy is likely to stink for some time, this is extremely bad news for anyone who cares about transforming the human relationship with our natural environment.
Wow, how about those AIG bonuses!?! Normally, I’d consider this a peripheral issue, since the sums involved are just 0.1% of the total that the company has gotten in bailout funds—a symbolic distraction from the real issues. I’m not going to say that this time. Because this symbol represents and crystallizes a couple of deeply real things: one, the chutzpah of Wall Street, which still wants to take all the money it can get without any other consideration, and the weakness and/or complicity of the Obama administration, which refuses to step on toes and twist arms. Their strategy continues Bush’s: write big checks but make no demands.
That’s a stark contrast with the Swedish strategy during their bank bailout of the early 1990s, a precedent that I’ve mentioned often here. An article on Sweden’s bailout in Wednesday’s Financial Times quoted the finance ministry official in charge of the bank restructuring as saying: “We were a no-bullshit investor – we were very brutal…. You take command. If you put in equity, you have to get into the management of the business, [otherwise] management is focused on saving the skins of the shareholders.” The Obama administration is clearly a pro-bullshit investor, refusing to take command. We now learn that the worthless Treasury Secretary, Tim Geithner, pressed Senator Chris Dodd to insert language into the stimulus legislation, which otherwise purported to be cracking down on Wall Street compensation, that specifically protected the AIG payments. You have to wonder how hard Dodd had to be pressed on this; over the years, he’s gotten over $280,000 in campaign contributions from AIG execs.
Despite the protestations to the contrary, it’s clear that the admin could have blocked the payments. A friend who works on Wall Street told me that it’s hardly unknown for firms to renege on bonus payments. They can just refuse, and wait for the employees to sue, which they often don’t, because it would cost a lot of money and trouble for an individual to go against a huge corporation (or, in this case, the U.S. government). Or they could have just fired the employees for cause—like doing a really bad job, which they did. Failing that, you can almost always find something to fire people for—just read their email, there’s almost always something smelly lurking there. The federal government owns 80% of AIG. It owns big chunks of big Wall Street names. Start acting like owners.
Speaking of AIG, the Wall Street Journal reported on Wednesday that some of the AIG bailout money is likely to go to hedge funds who speculated on a rise in mortgage defaults. The details are complex, but boil down to this. AIG sold insurance to investors in subprime mortgages that would pay off in case the underlying mortgages went into foreclosure. They did go into foreclosure, and AIG didn’t have the money to pay off. So the government is stepping up to the plate. Isn’t that lovely? Washington is supposedly trying to prevent foreclosures, and here it is making good on speculative positions that are profitable because foreclosures are on the rise. Ah, the contradictions.
And the latest news from the department of wretched excess: Citigroup is planning to spend $10 million on a new set of offices for its CEO, Vikram Pandit, and his lieutenants. Citi says this is all part of a cost-cutting strategy, which under different circumstances might be totally hilarious. I swear, it looks like these guys are trying to provoke a class war. Well, there’s been a class war from above on for the last 30 years—but I mean a real class war from below, one that might even disturb the sleep of the overprivileged. Maybe I’m being too romantic.