Radio commentary, August 15, 2009

On Wednesday, the Federal Reserve completed its regular policy-setting meeting, an event that happens every six weeks or so. The communiqué they issued after this one contained few surprises. They see the economy as leveling out, and the financial markets in an improving trend, but prosperity as anything but around the corner. More precisely, they expect economic activity “to remain weak for a time,” and anticipate that they will continue to engineer a regime of “exceptionally low,” in their phrase, interest rates. They see the risks of inflation as very low too—unlike a lot of Wall Street hawks, who are convinced, wrongly in my view, that all this government largesse will stoke the inflationary fires. (The wrongness of this was brought home by Friday’s report on the consumer price index for July, which showed prices outside energy to be almost flat.) The Fed will continue to buy up mortgage bonds—they’re now the major funder of mortgage lending in the U.S. economy, through such purchases, but they will phase out their purchases of U.S. Treasury bonds by October. That’s a month later than originally expected, but it’s still the beginning of something like the end of their extraordinary interventions in the markets that have gone on for two years now.

As regular listeners know, my view of the state of the U.S. economy is pretty similar to the Fed’s. Economist Ed McKelvey of Goldman Sachs—regular listeners also know that I’ve been pretty critical critical of Goldman’s tightness with the U.S. government, and their ability to use that relationship to make lots and lots of money, but their economists are first rate and always worth listening to—put it nicely the other day when he said that while the economy is stabilizing, it remains “vertically challenged.” Or, it’s stopped falling, but shows no signs yet of getting up.

The once indefatigable American consumer, for example, is still looking pretty tired now. On Thursday, we learned that retail sales excluding autos fell for the fifth straight month in July. The cash-for-clunkers program, that horrendous boondoggle, did stimulate some car sales, but most other categories were down. Most analysts, including me, had been expecting no change or a slight increase. The rate of decline has slowed markedly from last year’s record-breaking collapse, but we’re not seeing anything like a recovery yet.

Whenever I say things like that, I’m caught in a dilemma. Consumer spending is at the heart of our economic set-up, but in a rational world, the economy wouldn’t be so dependent on a frenzied pace of consumption. So on the one hand, I’m hoping for recovery, but on the other, I’m hoping for a long-term transformation. I don’t know how to resolve that contradiction. If you’ve got any ideas, please let me know!

In other news, we learned that bankruptcy filings by individuals rose by over 15% in the second quarter compared to the first, and by businesses, almost 12%. Personal bankruptcies are in a strong uptrend again. Filings soared in the run-up to the tightening of the bankruptcy code in 2006, as people rushed to beat th deadline, and then fell back sharply. But they started rising again almost immediately. Almost 5 out of every 1000 people filed for bankruptcy in the second quarter of 2009. That’s well below the peak of almost 9 per 1000 in the last quarter of 2005, in the last-minute filing rush, but it’s above the level we saw at anytime before 1997. The rise in bankruptcies—which, aside from being a major trauma for the people involved, can also be seen as a symptom of general debt distress and economic strain—over the last few decades is an amazing thing. In 1950, only about 2 people in 10,000 filed for bankruptcy. That rose some as the years went on, but we didn’t see 1 per 1000 until 1973. By 1990, it was almost 3 per 1000. It broke 5 per 1000 in 1997, then fell back some as the economy boomed. It rose again starting after the 2000 stock market bust and 2001 recession, peaking in 2005 just before the barbaric bankruptcy reform took effect. And, now it’s spiking again. Business bankruptcies, which were largely unaffected by the change in the law, are on track to come in at the highest level since the mid-1980s and early 1990s.

Early in the week, the Bureau of Labor Statistics reported that labor productivity—output per workhour—rose at a 6.4% annual rate in the second quarter, an extremely strong performance. Unit labor costs—how much employers have to pay workers per unit of output—fell by an also extraordinary 5.8%. To use the old Marxist language, these figures show that employers are coping with the recession by increasing the rate of exploitation: laying off workers and squeezing the remaining ones harder than ever. Over the long term, productivity can only grow if firms invest in equipment, which they’re not doing now. But in the short term, they can speed up the line and make one person do the job of two. And surviving workers won’t complain because they’re scared of losing their own job.

The level of fear was well measured in a recent Gallup poll, which found 31% of workers worried about being laid off, twice the 2008 level in this yearly poll, and easily the highest share since they started asking the question in 1997. Actually, this isn’t that much of a surprise. What is a surprise in the history of responses to this question is that even in relatively good times, 15–20% of workers are scared of losing their jobs. That state of fear, no doubt, brings a smile to the lips of employers—but it’s a helluva way to run a society.

And, finally, though the U.S. economy is likely to show some positive growth numbers by year-end, in an amazing development, it’s looking like the economies of Europe are doing even better. France and Germany are reporting modest growth for the second quarter, while we’re still contracting. This is a remarkable turnabout from the days when Americans routinely mocked the sluggishness of Europe and celebrated the alleged dynamism of the USA. Maybe, as a friend of mine pointed out, having a financial system that’s regulated to minimize bubbles and a fiscal system that provides generous support to people out of work really does have some economic benefits, aside from being more humane.

7 Comments on “Radio commentary, August 15, 2009

  1. There are many areas of Europe in severe contraction, however. Most notably the former Celtic Tiger and Spain.

  2. Both of which had huge property bubbles, and in Ireland’s case their entire banking sector has collapsed.

    France and Germany are both still pretty fragile, Doug. And in Germany’s case it might partially relate to the stimulus from their cash for clunkers program, so that might not last.

  3. I would add that various East European countries have very severe economic troubles, especially of course the Baltic states but also others. On average, the ordinary European seems to have fewer debts and more savings, and traditionally the ability to run up debts of any size been much more tightly controlled. The still continuing avalanche of job losses in the US owes much to the very generous credit facilities which the US has had, and thus, if you lose (part of) your household income, this very directly has multiple impacts on yourself and others, without many financial buffers being available. The implication of US corporations using less workers to do more work, as Doug notes, has as corollary that they’re going to rehire proportionally fewer workers when trading volumes start to pick up again, which I think is one reason why the unemployment level is going to be durably higher from now on (one other reason is that a chunk of household credit provision, and the income associated with it, it simply going to disappear). And if one in three workers are afraid to lose their job, then it’s much more difficult for any pressure to be exerted in favour of an economic strategy that would create more jobs. I think the Obama administration hasn’t just underestimated the size of the unemployment problem, it also still assumes that market mechanisms will sort out the problem. But it will really sort it out only for those who can pay. What we can observe now is a growing mass of people only marginally attached to the workforce, without much hope for upward mobility. This begins to challenge more profoundly many of the cherished ideals of American society, which prided itself on the ability of anyone to “make it”, not in the least because if real wages stay constant or fall, the only way to improve your position was through job mobility, but if the capacity for job mobility is reduced, as it has been, you are more or less stuck where you are. In Weberian sociology they refer to “life chances” and if your life chances are diminished, this also diminishes the freedoms you think you have. That tends to tilt society in a conservative direction, but it also promotes more critical reflection about society, and out of that may yet come some positive results in the sense of constructive alternatives to the old ways of doing things.

  4. I’ve wanted to comment on your July 9 show for a while but I could not find a place on your blog. So I decided to put my comment here. Sam Gindin seemed to indicate that retiree pensions were a recurring expense impacting the US industry. However, I don’t understand why this would be. I would think that the Auto companies would take out an annuity when an employee retires. This is what companies that offer pensions normally do. Therefore, a retiree pension should be a one time expense. So I don’t see why the demise of the US auto industry should be partially blamed on retirees.

    On a different note, I did buy your book Wall Street long time ago and enjoyed it. I also enjoy your musical interludes, especially the classical music. However, I would like to make a couple of rock musical interlude suggestion – Open Your Eyes by Lords of of the Church. This song is good for just about any story. Satellite by the Hooters which is good for religious stories. All the best.

  5. “So on the one hand, I’m hoping for recovery, but on the other, I’m hoping for a long-term transformation. I don’t know how to resolve that contradiction. If you’ve got any ideas, please let me know!”

    You can’t resolve that contradiction–and my guess is you won’t have to. There is no way consumption can revive the economy, given the load of consumer debt and the disappearance of real estate wealth. The government has pretty much shot its wad in terms of fiscal and monetary policy. The result: long-term stagnation or further, perhaps more gradual, economic deterioration.

    This is likely to create a political crisis of some kind, especially if Obama sticks with his Keynesian mindset and flabby leadership style. There will then be a “transformation” of some kind–but given the pathetic state of the Left in this country, it is not likely to be one you want to see.

    History is full of surprises, and I am not a professional economist. So I could be all wrong. But if I’m not, you needn’t worry about how to “resolve that contradiction”.

    Frankly, I find America in 2009 to be a very scary place–and I don’t scare easily.

  6. “So on the one hand, I’m hoping for recovery, but on the other, I’m hoping for a long-term transformation. I don’t know how to resolve that contradiction. If you’ve got any ideas, please let me know!”

    That is a big dilemma, and I share it. But I think what makes that a dilemma is our implicit conviction that w/o a crisis, we can’t budge a thing. That may be true. But it’s kind of a critically subtle version of crisis-as-messiah thinking. We don’t say the crisis will save it. But we do imply that without it, we’re helpless.

    In the BOOPW, we’d get out of the crisis first and then fix things. So long as speed is of the essence, it kind of forces us not to challenge existing norms too much or to leap too far into the unknown, both of which slow things down considerably.

    But is it really impossible to imagine making major changes in a few years time, after the economy is back to normal? For example, let’s look at the financial aspects. One big way to get the recovery back fast has been to reinflate the securitization markets. As far as speed was concerned, there was probably no way around that — letting them just stop would have meant a depression-level drop in financing.

    However all those markets are still completely Fed dependent. Two days after they said they’d be winding things down (in re purchasing Fannie Mae assets) the Fed had to promise everyone they’d keep TALF going another 3 to 6 months — because people are afraid that without it, the securitization market will collapse. There is no sign that it can sustain it’s own life because nobody, not even the most greedy, has faith in it anymore farther than they can throw it.

    If that continues, that would mean that after the economy recovers (which from the lofty view of economic aggregates might be in a few months — i.e., after the six month extension we’d be there), all we have to do to wither away the securitization markets is turn off the Fed tap. Is that really impossible? And if you wither away the markets financing credit cards et al., won’t that compress consumption? So can’t we at least theoretically have each thing in it’s season without contradiction? First inflate, and then turn off the tap?

    And similarly with Fannie Mae. The private market for new issuance of mortgage-backed securities has basically withered up. Most of them have a maturity of 5 years, so if things keep up like this, the market will be effectively nationalized in a few more years. Since the government has to do something with Fannie and Freddie, is it really impossible to imagine making it a single public agency in 2 or 3 years time — thereby hugely transforming and literally nationalizing mortgage finance? Or to put that differently — is it any harder to imagine it happening in 2 years than happening now?

    The usefulness of crises may be overblown. Maybe a better statement is that sometimes they help you push things through. And sometimes they get in your way.

    Lastly, maybe I’m a Pollyanna, but I really don’t think people are going to forget either their anger or their fear of the financial system in 2 or 3 years. Investors have famously short memories. But I’m not sure that holds for the 95% of us who aren’t investors in that active sense. I think this really got burned in and there’s a lot of anger that was never discharged. If there were an effectively organized political effort in a couple years to overhaul the financial structure, I don’t think it would be hard to rev up public support. You’d face financial industry opposition. But that’s life under capitalism. There is no fundamental change without serious ruling class opposition. The idea that our best chance was the one moment when they couldn’t resist and we missed it was probably a mirage because (a) they never stopped resisting and (b) it was an inherently bad moment to leap into the unknown.

    I’m afraid in the end it always come back to the same refrain: without organization, jackshit. And with it, the world.

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