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.