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.