Radio commentary, March 26, 2009

Housing market stabilizing?

In the economic news, more signs of the stabilization I’ve been talking about for the last few weeks, especially in the housing market, following last week’s pickup in housing starts (the term of art for when builders begin constructing new houses). Sales of existing houses, which are the lion’s share of the market, rose by 5% in February, the strongest monthly gain in almost six years. The rate of decline in prices also slowed. But the way that’s phrased is a reminder that the market remains very depressed. Prices are still weak, and January’s performance was revised downward (I should point out that revisions to back numbers are frequent in almost all economic data) to make it the worst performance on record. And despite the strength of the pickup in February sales in percentage terms, the pace of sales remains very close to all time lows. But, as they say, flat is the new up.

Sales of new houses in February also showed a strong pickup, following a string of steep declines. Despite that uptick, the sales pace remains quite low. And the overhang of unsold houses, both existing and new, remains at very high levels. And the price of new houses continues to fall. Still, this latest batch of housing data does suggest that the deep plunge has slowed to a slow crawl, or may even be turning around. Of course, it’s still way too soon to make all that much of this. But since housing is often the first sector to bottom out in a recession, this is encouraging.

Job market getting slightly less stinkier?

As a reminder, though, not to get too carried away with jubliation, first-time claims for unemployment insurance, filed by people who’ve just lost their jobs, rose by 8,000 last week. Since this number bounces around a lot, it’s sound practice to look at a running average of the last four weeks data. That measure fell slightly last week, after rising steadily for two months, so that’s a little encouraging. But it remains very high. And the count of people receiving benefits, which is a function not only of how quickly jobs are lost, but also how quickly the unemployed find new jobs (or run out their benefits), continues to rise. So, as I’ve been saying for a while, the job market still stinks, but it’s not getting radically stinkier from week to week. Isn’t that comforting?

Old Europe complains

Meanwhile, across the Atlantic, the prime minister of the Czech Republic, Mirek Topolanek denounced the U.S. penchant for big-spending stimulus and bailout packages as “the road to hell.” This is pretty funny, since his government just fell, mainly because his electorate isn’t happy with the way he’s handled the way the economic crisis has hit his country. But when under attack at home, it always pays to go on the offensive abroad.

When I hear critiques like Topolanek’s—and you can hear them from our own right wing, as well, including more than a few conservative Democrats—I always wonder what they’d do. Just let the economy go down the drain, with no effort made to counteract the implosion? But he’s got a lot of allies across Europe, even if they’re not given to such blunt language. European governments and central banks have been quite slow to pump up the stimulus engine, leaving much of that work to the U.S. In their defense, it is true that their so-called automatic stabilizers—spending on income support and other social measures that rise as unemployment rises—are a lot more powerful than ours. Just half of our unemployed, for example, are drawing unemployment insurance checks. And once those are gone, it’s either the VISA card or the sidewalk. No so in Europe, where the dole checks are always in the mail. Still, the reputation that the Old World has among many on the American left isn’t entirely earned. The European elite is very much into tight money and tight budgets, and hate the sort of stimulus we’re doing here. Give the EU’s size, a somewhat larger share of the world economy than the U.S.’s, that slowness to stimulate could have unpleasant global effects.

Stimulus withdrawal & austerity

But we stimulators also have a problem. It looks very much like the Obama administration would like to withdraw the stimulus sooner rather than later. If so, what then? Turning back to the 1930s, we find that FDR, who was always uncomfortable with all the deficit spending that the Depression forced him into, was lured by the 1933-36 expansion into thinking that the slump was over, so he contrived a balanced budget for 1937. Unhappily, the economy, already weakening some in early 1937, took this turn back to fiscal orthodoxy very badly. The unemployment rate, which peaked at 25% when Roosevelt took office in 1933, had come down to around 11% by mid-1937. But it shot back up to 20% a year later. This raises an important question or two. Will one round of stimulus be enough? And can we wean ourselves from it? Or are our problems much more deep-seated than that?

I’ve been coming around to the idea that in their heart of hearts, Obama & Co. are planning an eventual austerity program. That is, the only way to pay for all this stimulus, if you don’t want to tax the rich heavily (and it’s looking like neither Obama nor the Congressional Dems want to do that), then there’s only one other way to fund all these trillions of stimuli and bailout: cutting social spending to the bone. More broadly, it would be economically rational, in the harsh orthodox sense, to prolong and even deepen the sharp contraction in consumption that this recession has brought with it. Less consumption means fewer imports, which means less money we need to borrow abroad. This is precisely the structural adjustment strategy that the U.S., via the IMF, has imposed on scores of countries around the world over the last 25 years. Could it be that a candidate elected on high progressive hopes would turn into the agent of a home-grown structural adjustment program? He’d be the ideal agent for such a thing, in fact, because it would disarm the natural opposition to such a strategy. Were I given to cliches, I might say that this could turn into Obama’s Nixon in China moment.

10 Comments on “Radio commentary, March 26, 2009

  1. If indeed the ultimate strategy of Obama is to only temporarily prime the economy through public stimulus, only to return to the usual ConservaDem deficit hawkishness and ultra-strict prudence later on, then he’s absolutely played the liberal Left for suckers…and this will only be the inevitable repeat of the disaster of Democratic rule in 1978-1980 and 2000-2004..both of which resulted in right-wing comeback landslides in the form of Reaganism (in 1980) and the Republican “Contract with America” landslide (in 2004).

    Forget about the current meltdown of the GOP at that point; the resulting meltdown of the Dems will make the current Repub situation look united by comparison. Between the PUMA’s hoping for a Hillary comeback, the disgruntled progressive populists, and the Blue Dog/ConservaDems, there will be enough bloodshed amongst the Dems to entertain the satirists for a lifetime.

    Whether this results in either the formation of an independent Left movement we’ve been waiting for for…you know, ever..or the ultimate victory of right-wing populist fascism, depends on the urgency and effectiveness of developing a Left populist grass roots independent from the Dems and Obama and willing to unceaselessly criticize it from the Left and promote an unabashedly economically populist/social democratic/egalitarian agenda not sponsored by or Wall Street.

    I can only hope and pray thet Obama comes to his senses and nips these thoughts of neo-Volkerism in the bud..but considering his allies and his actions so far, it’s not a pretty hope.


  2. Just let the economy go down the drain, with no effort made to counteract the implosion?

    Not to be the devil’s advocate or anything, but why not? If a vastly inflated market needs to hit bottom, isn’t it most merciful to let it do so as quickly as possible? And if the demon rum of credit has been making the illness worse, aren’t we also better off to get credit-worthless people and institutions out of the system through attrition, then let lending at interest reassert itself organically?

    Especially since, with all the intervention that has been done since the misty water-colored days of Hank Paulson’s June 08 bailout, this is pretty much what the economy has continued to do? Why continue to fight the tape?

    An interesting source of data is the Fed’s Flow of Funds data, which the MSM tend to give short shrift because they have a three-month lag (Q4 2008 came out earlier this month.) FOF data show that U.S. household worth fell by $10 trillion throughout 2008. Given the massive decline in the Dow since the beginning of the year, we could be looking at low-to-mid-teen-trillions in deflation that has already taken place in the American economy.

    That’s not the problem; that’s the solution. It’s also the best evidence that we are near the bottom already.

  3. Why not let it all go down the drain? Because it would disemploy and impoverish scores of millions in the U.S., and god knows how many more around the world. I do know that the Market God like His sacrificial victims, though.

  4. [speaking of the “hangover theory”:]

    The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

    Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston’s real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let’s ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don’t say that it’s obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought—a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes’ realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.

    Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

    Most modern hangover theorists probably don’t even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave “part of the work of depression undone,” since mass unemployment was part of the process of “adapting the structure of production.”) But in that case, why doesn’t the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.

    As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it’s not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?

  5. It’s not true that European states provide their citizens with endless unemployment benefits. Limiting rules and disqualifications are rife, even in those countries thought of as most lavish, like Sweden. I always think people on the US left are a bit deluded about this aspect of Europe.

    Laura Agustín
    Border Thinking

  6. Pingback: Will Obama do an austerity program? |

  7. Umm Shane Taylor’s quote from Krugman has really got me baffled.

    There is something oddly circular going on here: recessions happen cuz the bourgeoisie gets cold feet about investing and hoards cash instead (i.e. Say’s Law doesn’t apply) but all we have to do is pump more cash into the economy (increase liquidity) which will overcome the squeeze and get things rolling again. Yet if the reason for investment drying up and creating a desire for cash, for a safe home for money, is that there is excess capacity in the economy, making not only additional capacity but even existing investments unprofitable, more money (more credit, lower interest rates) won’t necessarily translate into new investment and an end to the slump, but may simply result in a little extra capacity being used at a lower overall rate of profitability. Keep things going like this ad nauseum and eventually you hit a wall when profitability reaches zero and investment grinds to a halt. Total stagnation.

    Yet in the third paragraph, Krugman says in effect no Say’s Law DOES apply, namely that there are no cash hoards and anything that doesn’t go into investment, capitalists will spend on consumption. One can just imagine the thousands of BMWs piled up on the grounds of Bill Gates’s mansion! This is especially weird and polemical, since Keynes was writing largely to refute Say’s Law (and Krugman knows this). So what’s the big idea? Just a way to stick a thumb in the eye of some dead Austrians?

    Krugman at least admits that the bad investments of the boom times are a problem at the end. Yet if the cleansing shakeout of a recession isn’t necessary to get rid of excess capacity and bad loans, then what will under capitalism? Who is doing the junking and writing off in Krugman’s scenario? The government, thereby socializing risk and privatizing profits as they are doing now? If so, then this is a pretty damning indictment of the failure of the entire capitalist system’s investment function, and one can understand why the Austrians were uncomfortable about admitting it.

  8. Paragraph three gives an accounting identity. In other words, a tautology. It holds at full employment, and it holds below full employment. How the economy collapses, falling away from full employment, is a behavioral relationship.

  9. Concerning Old Europe’s reluctance to embrace a big-spending stimulus. I think that much of that reluctance stems from the fact that in comparison with the US, Europe has a much stronger trade union movement and it has actual social democratic parties. Therefore, from the standpoint of European capital, to embrace the kind of big-spending stimulus and bailout packages that Obama has been pushing, would risk pushing up wages in excess of productivity gains. In other words, such policies, pursued under European conditions might lead to a redistribution of income away from capital in favor of labor. Hence, the reluctance on the part of the European business and political establishments to embrace such policies.

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