Quite a spectacle in Congress on Wednesday, wasn’t it? Watching the assembled CEOs of our biggest banks testifying really put all our pathologies on display. On one side of the table, the bankers looked like dim and evasive hacks—it was easy to see how they drove their vehicles into the ditch. But on the other side of the table, many of the Congresspeople looked like preening and devious hacks. Where were they while the bankers were driving the vehicles into the ditch? And what really do they presume to do about all this? Nationalize the banks? Ha. More on that delightful topic in a bit.
On Wednesday night, The Nation’s estimable Washington editor, Christopher Hayes (who is “married to…an attorney in the office of the White House counsel”), was on Keith Olbermann’s show, trying to parse the testimony. Hayes and Olbermann came to the conclusion that the bankers live in a bubble, are tone deaf, and have no sense of PR. While that’s true, I think the story is simpler than that. They just don’t care what the public thinks. The entire ethic of Wall Street can be boiled down to this: make as much money as possible as quickly as possible, and hang the consequences. Step on whomever and whatever you have to, just stuff your pockets, and move on.
Olbermann played an excerpt from a conference call featuring James Gorman, co-president of Morgan Stanley, describing how the firm planned to handle its merger with Smith Barney, the brokerage unit that the deeply troubled Citigroup is unloading. Here’s Gorman (edited by me) describing some big cash payments they’ll be distributing to Morgan Stanley and Smith Barney’s top brokers:
Some decisions we have made. Number one, there will be a retention award. Please do not call it a bonus. It is not a bonus. It is an award. And it recognizes the importance of keeping our team in place as we go through this integration. Decision number two. The award will be based on ’08 full-year production. I think I can hear you clapping from here in New York. You should be clapping because frankly that is a very generous and thoughtful decision that we have made…. ’09 is a very difficult year…we understand that. Clearly it would have been cheaper to do it off ’09, but we think it’s the right thing to do and we’ve made that decision.
The audio, by the way, was obtained by Sam Stein of the Huffington Post, who also got that wonderful clip of Home Depot founder Bernie Marcus railing against unions that I played the other week. Olbermann and Hayes attributed Gorman’s use of “retention award” to that same tone deafness. I think it’s cynicism. I think he was having fun, and it wouldn’t surprise me if his audience chuckled.
As I’ve been saying here, it looks like the Obama administration will do everything they can to avoid nationalizing the banks. In his interview with ABC News, Obama demonstrated that he understands quite well the differences between the Japanese and Swedish approaches. I wish I could play the audio, but ABC edited the interview heavily for broadcast, and most of this passage appears only in the transcript.
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.
And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.
Now it’s admittedly refreshing to have a president who can talk like this after one who couldn’t. But how much of a departure from Bush’s political philosphy is this really? He admits that the Swedish approach worked better, but then explains that we just can’t do it that way here. It’s un-American, you see. And to make that argument, he mobilizes a lot of nonsense.
Yes, Sweden “had like five banks,” but our major, system-threatening problems come from not that many more institutions. The little guys can be taken care of the usual way, like forced mergers with aid from the FDIC or outright takeovers by the same. Which, by the way, is a kind of nationalization, and something entirely routine, even here in the super-special USA.
He really gets to the heart of it, though, when he gets to the “different cultures” claim. Sweden is a social democracy, and the U.S. isn’t. And so we just have to do things the American way. But our way of doing things is the problem. Several decades of letting financiers do their thing and then bailing them out when they got in trouble have finally put us in a serious crisis. Obama simply cannot get his mind around the fact that our whole economic model is in trouble. So the only way he can imagine getting out of that trouble is by applying the same medicine that got us into trouble. There’s something oddly Hegelian about this: “the hand which inflicts the wound is also the hand that heals it.” But Obama isn’t talking about moving to a higher level of consciousness. Quite the contrary: it looks more like he just wants to go back to the old way of doing things.
Let’s think about what needs to be done. The U.S. needs to consume less, borrow less, equalize the distribution of income so that those of modest means aren’t driven to manic borrowing from those with too much money to spare, and invest in things with a long-term economic and social payoff. A serious economic recovery package would embody that. And some of the original plan did that. But in order to get Republican votes, Obama et al added tax cuts, cut clean energy investment, reduced aid to state governments, and cut back on infrastructure spending.
Yes, of course Congressional realities dictated this in part. But these compromises were also a function of the fact that Obama et al didn’t really have a coherent story about what the stimpak was supposed to do. (Larry Summers once did, but he’s been less vocal on such topics since the inauguration.) But to make that argument—and there’s no doubt that Obama could make it effectively if he wanted to—he’d have to challenge a lot of prevailing economic wisdom. The conventional left-liberal explanation for this is weakness or timidity. But the margins of the last election and the approval ratings in the polls right now do not suggest political weakness. George W Bush came out of the 2004 election, which he won by a narrow margin, declaring himself in possession of a lot of political capital, and not shy about using it. No, it’s not really weakness or timidity. I think the Sweden vs. Japan quote from Obama shows that he’s really a market guy at heart, and has no interest in challenging the orthodoxy—and there’s no radical popular or intellectual movement to force him into doing it. And so the American economy will suffer the consequences of his received faith.
There’s an old story about Tony Blair (which I first heard from a commenter on this site), that great apostle of the Third Way. An old-style Labour MP is said to have complained to Blair about all the right-wing things he had to say to get elected. Blair’s response: “It’s much worse than that. I really believe it.” The same for Obama, I’m afraid. The combination of an economy stuck in the mud and an aroused populace could change that. But not yet.
Emily Dickinson once advised: “Tell all the Truth but tell it slant.” Evidently the New York Times’ headline writers are taking advice from the enigmatic poet. The headline on the story on how the Obama administration will be going easy on banks and bankers getting bailout money blamed it all on the Treasury Secretary: “Geithner Said to Have Prevailed on the Bailout.” In internal administration battles, Geithner “successfully fought against” stricter rules on executive pay, and beat back the attempts to replace top maangement.
Of course, to say that Geithner won these battles is to say that Obama agreed with him. Once again, the embodiment of hope and change went with the status quo when he didn’t really have to. There would have been little political price to pay for putting the screws to the banksters.
And it looks like the Treasury and the Fed will pump up some $250-500 billion to help hedge funds buy bad assets – with the FDIC guaranteeing the buyers against losses.
At this point, the only thing that makes any sense is to nationalize the weakest banks, kick out management, wipe out the shareholders, clear the decks, and start over with a tightly regulated system. This isn’t even all that radical a position anymore – and it may be inevitable, if these sick and devious “public-private partnership” schemes don’t work out, which seems likely. There is a radical nationalization position – take the banks over and convert them to public institutions – but I know that’s completely out of the question with this gang. But they’re doing absolutely everything they can to avoid even an orthodox nationalization. This is looking more and more like Japan’s disastrous indulgence of their “zombie banks” in the 1990s than Sweden’s successful bailout, the model for the “nationalize them and clear the decks” approach. Instead of a few rough years, we’re likely to get a miserable decade.
They’ve botched the stimulus, and they’re botching the financial rescue. They’re worse than I expected, and I wasn’t expecting much in the first place (see: Obamamania, a febrile disease).
Tomorrow will bring the unveiling of the Obama administration’s overhaul of the Henry “Hank” Paulson bank bailout, the Troubled Asset Relief Program (TARP). [Apply for funds here.] From the leaks emerging, it looks like a significant portion of the scheme will amount to this: the government will lend money to hedge funds and the like at subsidized rates to buy toxic assets from banks – and the gov will guarantee the investors against losses. Evidently, the administration thinks the toxic assets are being underpriced by the markets. If they’re right, the buyers will make money. If they’re wrong, then we all pay.
From the hedgies point of view, it’s all reward, no risk. Even if the rewards don’t materialize, what have the hedge funds lost? What the public gets out of this is impossible to specify, aside from the risk of massive losses.
I hope this isn’t really what will emerge. But if it is, the Obama administration will have broken new ground in awfulness. The same formula that brought us this mess, an indulgent government encouraging reckless operators playing with other people’s money, will be applied towards solving it. It makes no damned sense.
Well, maybe it does in the most cynical way. Hedge funders like Chicago’s Kenneth Griffin wrote Obama big checks during the campaign season. (For some details, see here and here.) Obama’s top economic advisor, Larry Summers, worked for a hedge fund (D.E. Shaw) after he got fired from Harvard. And no doubt Treasury Secretary Tim Geithner would like a multimillion dollar job on Wall Street after he leaves public service, just like Robert Rubin got at Citigroup after engineering the repeal of Glass-Steagall.
Can things really be this bad? We report; you decide.
[As the introductory sentence says, these comments were the opening to a special fundraising edition of Behind the News in its KPFA avatar. No audio is available because the show consisted mainly of excerpts from David Harvey’s lectures on Capital and pleas for support. If you like reading these commentaries and listening to the audio archives, you can help assure them a future by pledging to support KPFA. You can do that online here: Donate to KPFA. The lectures by Harvey are listed in the right column, “$101 and Up” – search for “Harvey” or scroll down to $250.]
Given the imperative of raising money for KPFA, I’ll keep these comments short.
First a few words on the January employment report (text here), which came out Friday morning. In a word, it was horrible. It wasn’t the worst in history, but it’s not all that far from the worst. Almost 600,000 jobs disappeared last month. About half the losses were in the goods sector—rounding for radio, about 100,000 in construction and 200,000 in manufacturing. But almost 300,000 jobs disappeared in the private service sector, where more than 2/3s of us work. In the recessions of the 1950s through the 1980s, services were largely immune—but that started changing in the downturn of the early 90s. Now, services are really participating in the shrinkage.
This release also came with the regular annual revisions to the employment data, which are based on the near-complete coverage provided by the unemployment insurance system. (The regularly monthly releases are based on a survey of employers—a very large survey, but still less than complete.) The revisions tell us that job losses in 2008 were even worse than we’d thought – almost 400,000 worse.
The BLS also does a monthly survey of households, to match the one of employers. Its most familiar component is the unemployment rate, which rose a sharp 0.4 point to 7.6%, the highest since 1992. Almost all of that rise came from people who’ve lost their jobs forever—as opposed to people on temporary layoff who expect to be recalled, or new job market entrants. The so-called employment/population ratio, the share of the adult population working, fell by 0.5 point to 60.0, its second-worst decline ever, and to the lowest level since 1986.
Unemployment has been higher, and job contractions sharper. But what’s really scary about all this is that in most post-World War II recessions, this is about when we could expect things to start stabilizing, or even turning around. But all indications are that things are still getting worse, and likely to do so for at least several more months. At least. Which is why a giant stimulus package is greatly urgent.
And speaking of that stimulus package, I’m stunned at the Republicans success in blocking passage, and the Obama administration’s equanimity in face of that obstructionism. Ok, the boss is showing some signs of losing patience with the Republicans, but his eagerness to court people who’ve made their stubborn partisanship very clear, has been baffling. Hell, some Republican Congressman said the other day that his party was taking guidance from the Taliban, in their stubbornness and skill at messing things up.
I just said that Obama’s eagerness to court Republicans has been baffling, but maybe it makes good sense. In past weeks, I’ve mentioned Adolph Reed’s idea that Obama aims to peel off some of the non-Taliban Republicans to form a centrist governing block, thereby isolating the left and right. But I suspect something else is at work too. Many commentators have described the 2008 election as the end of Reaganism, which in some senses it was—though, as Pat Buchanan noted, Obama’s inaugural address, with its quote from scripture, its heroicizing of the Vietnam war, and its calls for personal responsibility, was in no small part still under the Gipper’s influence. Which is a hint of how to understand what’s going on.
A lot of people thought they were voting for “change” last November, though the nature of that change was always left vague—you might guess, deliberately so. Contrast that with 1980, when Reagan’s victory represented the culmination of the post-World War II conservative movement’s agitation against statism and the New Deal. But for a long time, movement conservatism was a tiny thing. I speak with some personal knowledge—I was briefly a movement conservative in the early 1970s. Milton Friedman’s Capitalism and Freedom is one of the things that did it to me. (It’s fashionable for a lot of people on the left to dismiss Friedman as a hack, which is deeply unfair. He was a very effective polemicist, both within the economics profession and in the popular realm.) I was a member of the Party of the Right at Yale from 1971-72 (story here here and here), and believe me, there were very few of us. That changed as the decade went on, of course. I recovered from my bout of market libertarianism, but the rest of the body politic contracted the disease.
As Sidney Blumenthal tells it in his excellent book, The Rise of the Counter-Establishment, the American corporate class didn’t originate the rightward shift in politics in the 1970s—conservative intellectuals and thinktankers persuaded them that adopting the movement’s agenda was necessary to end inflation, crush the working class, and restore U.S. power abroad. Walter Wriston, the former chair of Citibank, told Blumenthal that folks like him were initially skeptical of Reagan, but he won them around. Once the CEO class was down with the program, everything changed, of course, and the rest—the right-wing ascendancy of the last 30 years—is familiar history.
But there is nothing comparable now. There’s no vigorous intellectual movement on the left that corresponds with movement conservatism 30-plus years ago. (And, by the way, Sam Tannenhaus has a very interesting article article in The New Republic on the death of movement conservatism; I’m going to try to get him on the show soon to talk about it.) Nor is there any popular movement to give the intellectual movement its juice. The best we can do for an alternative agenda is the tepid stuff coming out of places like the Center for American Progress, which, while not worthless, is mostly mush. Reagan was the very capable figurehead of a movement of intellectuals that was eventually reinforced by elite support. Obama is the very capable figurehead of next to nothing except some fond wishes. Except that Wall Street gave him lots of money for his campaign, and it shows.
It shows in the wretched nature of the financial bailout, for example. But getting into that would run overtime, given today’s tight schedule.
That schedule is dictated by the need to raise some money to keep this corner of popular and intellectual radicalism alive. And today we’re featuring a series of 13 lectures by the great geographer David Harvey on a thinker who could help power a revival of the left: Karl Marx. Yeah, he lived long ago, but that didn’t stop the right wing from turning to the 18th century’s Adam Smith for inspiration. Marx’s Capital, the subject of Harvey’s lectures, is the best analysis ever written of the system that’s gotten itself into serious trouble today, and Harvey offers a tremendous way of approaching this formidable work.
Here’s what I had to say about my interview with James Howard Kunstler after it aired:
I think Kunstler is a very interesting and entertaining fellow to listen to. I still have some serious problems with his perspective. I didn’t edit out the ums and pauses in his answer to my question about a population die-off because I wanted to make clear the anxiety that a lot of people of his persuasion feel on the topic; my guess is that a lot of them just don’t like large agglomerations of people very much, and would be, if not happy, then satisfied to see them culled. He didn’t really answer the question on nativism and the lack of diversity at all. And New York City is, despite his bleepable assertion to the contrary, highly energy efficient. We emit more than 70% less the U.S. average of greenhouse gasses, which are a good proxy for fossil fuel consumption—and almost 40% less than those eco-freaks in San Francisco. My own feeling is that the best approach to maintaining a comfortable material standard of living compatible with avoiding ecological catastrophe is to reurbanize the population and create greenbelts around our cities. I agree with Kunstler that suburbs are alienating and ecocidal, but his small towns are far less energy efficient than more densely populated regions, because density makes walking and mass transit possible. But our visions of the future often do embody our personal preferences, don’t they?
How about that for bipartisanship? All that seduction from our new president, sweetened with tax cuts and lubricated with cocktails at the White House, and still the stimulus package didn’t get a single Republican vote in the House. They won’t play bipartisan. They’re stubborn as hell and stick to their cretinous principles. You’ve got to respect them for that. It may be because they have some principles, as nutty as they can be.
Meanwhile, the infrastructure component of the stimulus bill has shrunk, and is really not up to the task. According to the 2009 report on the nation’s infrastructure from The American Society of Civil Engineers, our infrastructure overall gets a grade of D. Out of 15 components, the highest grade goes to solid waste, which gets a C+. There’s one D+, five Ds, and five D-minuses. They estimate that it would take $2.2 trillion to bring our national infrastructure up to snuff. The bill that passed the House has only about $40–60 billion, depending on whose estimate you believe, for infrastructure. And only about $10 billion is for mass transit. Barely a start, even.
Turning to another disappointing spending program… Yeah, it’s nice to see that the Obama administration forced Citigroup to cancel the order for a $50 million executive jet. But otherwise, life goes on as usual. An Associated Press review of some 200 banks that got TARP money from Washington found that 87% of their top execs are still on the job, even though many of them made disastrous decisions that drove their institutions into the ground. Wells Fargo, a heavy investor in subprime mortgages which announced a $2.6 billion dollar loss for the fourth quarter of 2008 that got $25 billion from the gov, not only kept its CEO on the job, they waived their mandatory retirement age for him. Asked for comment by AP, a Wells Fargo spokesperson praised the bank’s “unchanging vision.” In fact, the comments are some of juiciest parts of the AP story, which ran on Tuesday. A flack for Cleveland-based KeyCorp, another major subprime player, said: “”The on-the-record comment I would make is that we declined to comment even though we’d like to, because we don’t have time.” Many of these banks have shed hundreds, even thousands of workers—but not the guys at the top. We’ll see if the new admin twists some arms to change this, but I have my doubts.
On the nonchanginess of changiness, the new Treasury Secretary Tim Geithner, who presided over several major mistakes while he was president of the Federal Reserve Bank of New York, issued some rules on Tuesday restricting contacts with lobbyists—and then hired a former Goldman Sachs lobbyist as his chief of staff. Goldman’s tentacles continue to extend deep into the government; early in the week, the New York Fed—the most important of the twelve regional banks in the Federal Reserve System, because of its intimate relations with Wall Street, announced that Geithner’s successor as president will by William Dudley, a former Goldman Sachs economist. Dudley’s really not a bad guy at all, but it’s getting harder to tell the difference between Goldman and the government.
Meanwhile, the New York State Comptroller’s office (PDF here) revealed on Wednesday that Wall Street paid out over $18 billion in bonuses for 2008, an average of $112,000 per worker. (That’s almost twice the spending on mass transit in the stimulus bill!) That average is very deceptive, since clerical workers might get as little as $0, while the big guys get in the millions. But these are still big numbers. While the average is down 36% from last year, it’s still the sixth-highest on record, after adjusting for inflation. It’s 15% higher than the 1999 average, which was just before the peak of the dot.com boom. And it’s almost four times the 1987 average, which was the peak of the 1980s boom. Clearly, once you reach a certain level in American society, there’s no price to be paid for failure.
Sam Stein of The Huffington Post got hold of a recording of a conference call among some retailers and Wall Street analysts trying to build corporate opposition to the Employee Free Choice Act, a bill in Congress that would make it a lot easier to organize workers into unions. Instead of having to go through a complex electoral process, which employers can mess with to no end, all you’d need is a majority of workers signing cards saying they’d like to join. As you might imagine, employers hate this. But one of the interesting things about this call is the frustration expressed by participants at the passivity of so many CEOs. It’s clear from this—and many other instances—that capitalists would rather run their businesses and make money than get involved in politics.
As Stein points out, at least two of the participants were from firms that got federal bailout money—Bank of America and AIG. Nice, eh? But the star of the conference call is Bernie Marcus, the co-founder of the anti-union Home Depot. Here are some choice samples from the call (transcript lightly edited for clarity):
“To pay for the programs that they’re going to put in, they’re going to have to get the money somewhere, and the unions will go after anybody who works for a living…there’s no question about it. Joe the Plumber, whatever the hell he does for a living, is going to pay for this in the future along with everybody else. This is the demise of a civilization, this is how a civilization disappears…. If a retailer has not gotten involved in this, if he has not spent money on this election, if he has not sent money to [Minnesota Senator] Norm Coleman and all these other guys, they should be shot…. Trying to get CEOs to understand this, so far, some of them have come out of their deep sleep, but most of them have not come out of their deep sleep. Hopefully, calls like this will stir up the pot. As a shareholder, if I knew the CEO of the company wasn’t doing anything on this, on something that was going to have a dramatic effect on my business, I would sue the son of a bitch.”
In economic news, more bad stuff. On Thursday morning, we learned that housing starts fell by over 15% in December (and these numbers are seasonally adjusted, so don’t blame it on snow) to an all-time low. An all-time low sounds bad enough, but when you reflect that this is a history that goes back almost 50 years, to a time when the U.S. population was more than 40% lower than it is now, setting a fresh low is really an achievement. In fact, in per capita terms, the level of housing starts in December is a third lower than the previous record low, which was set during the bust of 1991. And there’s nothing in this report that suggests we’re anywhere near bottoming. The rate of decline is accelerating, not slowing, and applications for new housing permits fell harder than the number of units started. Usually as the housing market approaches bottom, permits lead the way up, which makes sense, as builders feel the market turning. The gap had been narrowing in recent months, but it widened again in December.
And also on Thursday morning, we learned that first-time claims for unemployment insurance took a sharp rise, matching the highest level for this recession. Compared to the size of the labor force, claims are still well below record levels—only about half as high as in the recessions of the mid-1970s and early 1980s. Paradoxically one reason for this may be that hiring during the 2001–2008 expansion was weaker of any of its ten post-World War II ancestors; fewer people hired means fewer laid off. But that’s not much comfort, given corporate America’s hiring freeze and the steady upward drift of the unemployment rate.
So, bottom line of all this: the housing bust and job market contraction both still have a way to go.
And it’s looking like the Chinese economy may be entering its first real recession since its post-Mao boom began 20 years ago. According to official stats, which are always a little dicey in China, growth in the fourth quarter of last year broke below 7%, very low by Chinese standards. But the slowdown may be more dramatic than that: electricity production in November was off almost 8% from a year earlier, the worst number since China began its boom. And it’s not only China showing signs of sharp slowdown—South Korea’s economy contracted by more than 5% at the end of 2008, quite a big number. And Japan’s economy also looks to be eroding.
This is far from being an American problem now; it’s looking at least like a deep global recession, and quite possibly the crisis of the economic model on which the world has run for the last couple of decades. Before this is all over, we’re likely to see a whole new set of institutional arrangements and ways of thinking. More on that in the coming weeks.
One sign that that kind of renovation in thinking has barely begun is the strong resistance to what may well become inevitable: nationalization of much of the U.S. banking sector. Now gaining traction is the idea of creating a so-called bad bank, or Aggregator (which sounds like something that should be headed by Arnold Schwarzenegger), which would collect all the bad loans that banks are currently holding, leaving them with only the good stuff. The new chair of Citigroup, Richard Parsons—a pal of Obama’s, and probably someone who got his new job on the urging of the new administration, given the failures of the previous chair—explicitly endorses the bad bank idea as an alternative to nationalization. This sounds like what the Brits used to call “lemon socialism”—nationalize the failing firms in dying industries and leave the thriving stuff to the private sector. The hell with that, I say. Let’s nationalize the banks and transform them into public servants.
Here’s the way not to do it: days before the Bank of America’s acquisition of Merrill Lynch closed, Merrill passed out $3–4 billion in bonuses to its top execs. Now B of A is coming back for a second helping of federal cash. Oh, and former Merrill chair John Thain just quit, shortly after it was revealed (by Charles Gasparino in The Daily Beast) that he spent $1.2 million redecorating his office less than a year ago. The likely new Treasury Secretary, Tim Geithner, promises an overhaul of the TARP bailout. Not a moment too soon, though you do have to wonder what the anything-but-nationalization crowd has in mind.
Speaking of the new administration, I was profoundly annoyed by all the facile comparisons of Barack Obama to Martin Luther King that have been floating around in recent days. You’d think that electing a black president solved all our racial problems! You’d almost conclude, from all the vigorous back self-patting, that the whole reason we had slavery and Jim Crow was just to transcend them someday, thereby proving our innate goodness.
I think I’ll use the words of Obama and King themselves to refute the comparison. First, some excerpts from Obama’s inaugural address:
“Our nation is at war against a far-reaching network of violence and hatred…. On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics…. For us, they fought and died in places Concord and Gettysburg; Normandy and Khe Sahn…. Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched…. We will not apologize for our way of life nor will we waver in its defense. And for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that, ‘Our spirit is stronger and cannot be broken. You cannot outlast us, and we will defeat you.’ … [t]he selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours…. As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service: a willingness to find meaning in something greater than themselves.”
There, in 216 words, we hear someone still in the grip of orthodoxy: subscribing to the master narrative of a war on terror, evoking some fanciful post-partisan world where interests and preferences aren’t in conflict, equating the Vietnam War to the struggles against the Confederacy and Nazi Germany, channelling Milton Friedman on the freedom-promoting powers of The Market, placing the burden of job preservation on self-sacrificing workers, echoing George Bush on our way of life, and reproducing the central message of the McCain campaign on the military as our highest calling.
Contrast that with this excerpt from King’s April 1967 speech against the Vietnam War delivered at Riverside Church, a year to the day before his assassination:
“We must rapidly begin the shift from a thing-oriented society to a person-oriented society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered…. True compassion is more than flinging a coin to a beggar. It comes to see that an edifice which produces beggars needs restructuring….. This business of burning human beings with napalm, of filling our nation’s homes with orphans and widows, of injecting poisonous drugs of hate into the veins of peoples normally humane, of sending men home from dark and bloody battlefields physically handicapped and psychologically deranged, cannot be reconciled with wisdom, justice, and love. A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.”
I’m afraid that’s too generous. We’re no longer approaching spiritual death; we’re on our spiritual deathbed.
Steve Perry interviews Doug Henwood on the current mess: No bottom in sight yet
Audio: January 15, 2009
Re: the economic news, not only does the news remain bad, I’m tempted to say that it will continue to get worse.
Some listeners have heard me say this already, but the home audience on WBAI hasn’t yet. The U.S. employment report for December was a horror. Total employment fell by 524,000, with almost every sector showing losses. Almost half the loss came in goods production, mainly construction and manufacturing. But it wasn’t just the goods sector either. Private services got hammered too. The losses in services are among the worst ever—far worse than in the deep recessions of the mid-70s and early-80s. Downturns used to be mainly about manufacturing and construction; now everyone’s joining in. The unemployment rate rose a very sharp 0.4 point to 7.2%, the highest we’ve seen since 1992. The broadest measure of unemployment, which includes people who’ve given up the job search as hopeless as well as those only working part time because they can’t find fulltime work, the so-called U-6 rate, rose almost a full point to 13.5%, the highest since that series began in 1994. A similar predecessor measure broke over 15% in the depths of the 1982 recession, but otherwise never got close to today’s levels. Over the last year, the number of people working part-time who want fulltime work but can’t find it is up almost 75%, a record by a wide margin in more than 30 years of data. The share of the adult population working, the so-called employment/population ratio, fell a very sharp 0.4 point to 61.0%, taking us back to 1986 levels. In other words, as of a few months ago, we’d undone the major employment expansion of the 1990s; we’ve now undone most of the 1980s as well.
As bad as this December figures are, it’s likely that we face at least several more months of the same. The Conference Board’s Employment Trends index, which leads broad employment trends by several months, continues to plumb new depths. A very large fiscal stimulus is more urgently needed than ever.
On Wednesday morning, we learned that retail sales (excluding autos) for the month of December took their biggest spill in a history that goes back to 1967. Including autos, it was close to a record. Over the last year, total retail sales are down almost 10%, the worst since the numbers begin in 1947.
No doubt several things are at work here. One is that incomes have followed employment down. Another is that it’s not easy to borrow money; consumption enjoyed a substantial boost from borrowing against home equity back during the housing bubble, but that tap has been welded shut. In fact, in the third quarter of last year, so-called mortgage equity withdrawal—cash taken out of housing through borrowing or spending the proceeds of a sale—went negative for the first time since unofficial estimates by Fed economist James Kennedy begin in 1991. And 1991 was at the end of a major housing bust, so that’s not a bad place to start for making comparisons. That means that people paid back old loans rather than taking out new ones. And a third thing at work is that even people who have money just aren’t spending it. They’re scared of the future and hoarding cash. Fears like that can, of course, become self-fulfilling—if people don’t spend, the economy contracts. As the economy contracts, people lose jobs and incomes and spend less. That scares folks even more, who react by hoarding more intensely. This is the vicious cycle that a large stimulus package is supposed to reverse. But as I’ve said here before, Americans can’t go back to consuming at the rate they did before this crisis hit. We need some major structural adjustments, and the point of economic policy should be to make those as humane as possible by forcing the brunt of adjustment on the rich.
And some details of the Democrats’ proposed stimulus packaged emerged from Congressional sources on Thursday. It wouldn’t pay to get into too much detail on this, given how it’s likely to evolve in the coming weeks. Still, the proposal starts out not so bad. It’s big: $825 billion. (It also assumes the U.S. Treasury will have no problem borrowing all that money. Some European countries have run into trouble selling their bonds—not yet the U.S. We’ll see if our luck continues.) About two-thirds of the total would go to various spending programs: Major components of that include infrastructure spending, about 10% of the total—roads and highways a large portion of it, three times the size of the rail/mass transit component. About 7% would go to energy projects: modernizing our electricity grid to save energy, weatherization subsidies for poor households. About 10% would go to aid to the poor and unemployed—things like extending unemployment insurance benefits, beefing up the food stamp program, and very tiny additions to home heating subsidies. Education programs would also benefit. And there’s aid to state governments, which are hurting badly. Unfortunately, about a third of the total would go to tax breaks, evenly divided between people and businesses. The major component of the personal tax cuts would be about $500 per worker. While that would be welcome to lots of people, the economic juice gotten from such cuts is minimal. Even more minimal would be the gifts to business, which would do almost nothing to stimulate investment or hiring.
Measuring the bang for the buck in these stimulus programs involves a concept that economists call the multiplier effect. A dollar spent on a good or service usually generates more than a dollar in economic activity—there’s business generated by the makers of parts and materials, by the truck lines or railroads that transport the good, etc. For spending programs, the multiplier is usually around 1.5—meaning that for every dollar the gov spends, $1.50 in economic activity is generated. The multiplier for tax cuts, though, is usually less than 1. People and especially businesses don’t spend every dollar of a tax cut—they may use the money to pay down some debts, or set aside for a rainy day (and that rainy day is already here, you might say). We could get a lot more stimulus if the dollars budgeted for tax cuts were shifted to spending programs. But Obama doesn’t want to scare Republicans, so he’s throwing them the bait of tax cuts. We’ll see if it works.
One slightly cheering bit of news: the weekly leading index compiled by the Economic Cycles Research Institute, which tends to lead activity in the broad economy by several months, has been edging upwards for the last month. It could be a false positive; dunno yet. I’ll keep an eye on it. But even if the economy does bottom sometime towards midyear, it will probably take many more months before the job market turns around.
Audio: January 10, 2009
First some non-economic news. After the election last November, it was widely reported that the black vote contributed heavily to the passage of the anti-gay-marriage Proposition 8. The exit poll reported some 70% of black voters supporting the measure. A new paper by my friend Ken Sherrill of Hunter College (who’s been on this show several times) and Patrick Egan of NYU says this is largely wrong. First of all, the exit poll greatly overstated black support for Prop 8. Their analysis of other polls and precinct-level voting data suggests that the true level of support was around 58%, vs. 48% for whites. And the major reason for the 10-point gap is that black voters as a whole are more religious than whites, and religion was one of the principal keys to support for the measure. For example, among those going to church once a week or more, 70% voted yes. Those going hardly ever, 30%. Once you control for the level of religiosity there was no difference between black and white support—that is, religious blacks were no more likely to vote for Prop 8 than religious whites. Other keys to support: age and ideology. The older a voter was, the more likely he or she was to vote yes. And the more conservative, the more likely.
Looking ahead, Egan and Sherrill find that gay marriage will almost certainly win these sorts of votes sometime in the not so distant future. For example, 61% voted against same-sex marriage in 2000 in a California ballot measure; last November, 52% did, a decline of 9 points. They also find that people born between 1940 and 1960 were more likely to vote for same-sex marriage in 2008 than in 2000. That within-cohort shift, to use the demographers’ language, when combined with the fact that younger voters are far more likely to support marriage equality than older ones, mean that the historical tide is moving strongly in the direction of same-sex marriage.
And now to the economic news, which is a lot less cheering. Let’s start with a longer-term view. Just how long is this misery likely to go on? Judging by the historical record, we’re only in the early stages of this downturn.
In a new paper, economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, have taken the measure of several major banking crises over the last few decades to give us some hint of what lies ahead of us. Not to spoil the dramatic tension, but the road looks pretty rough.
Their conclusions, reduced to the audio equivalent of bullet-point form:
• Declines in asset prices are deep and prolonged: an average of 35% for house prices over six years, and 55% over three-and-a-half years for stocks.
• Declines in GDP and employment are, as they say, “profound.’ The unemployment rate rises an average of 7 points over four years, and per capita GDP declines by 9% over two years.
• Government debt explodes: up an average of 86%, not just because of bailout costs, but also because of recession-inspired declines in tax revenues.
And where are we on each of these possible roadmaps. House prices are off about 30% in inflation-adjusted terms, according to the national averages, so we’re just about 5 points shy of the average. But the decline has been going on for only about 2 1/2 years, less than half the crisis average. The decline in our stock market is also about 5 points shy of the average—about 50%, compared to 55% for the average—but again, we’re well short of the average duration: about a year, rather than over three.
On the other measures, we’ve only begun the slide. For example, we’ve only had one quarter of decline in per capita GDP, and that less than half a percent, about a twentieth of the typical decline. If we experience anything like the crisis average, it will be unlike anything that most grownups have ever lived through. There was an 11% decline in real GDP the year after World War II ended, but aside from that, we’ve only had declines of 2–3% in our worst recessions since then. The historical crisis average would be three or four times that bad.
The story is similar with unemployment. We’re just two years into the rise, half the average duration in Reinhart and Rogoff’s sample, and only about a third of the way along the percentage point increase. The low on the unemployment rate in the recent cycle was 4 1/2%. We’re now approaching 7%. If we see the typical 7-point increase, then the jobless rate should top out at around 11 1/2%, breaking the post-depression record of 10.8% set in 1982. The last time it was above 11% was in 1941, just before the World War II buildup decisively ended the Great Depression.
And we’ve only begun the massive government borrowing that the crisis will require. The other day, Republican House leader John Boehner—the unpurged adolescent in me has a hard time not deliberately mispronouncing that with a long O, followed by a Beavis-like giggle—said that we can’t borrow and spend our way out this mess. But in fact that’s the only way we can. I have no idea what he’s talking about. But more on all that in a moment.
Reinhart and Rogoff ask how relevant these precedents are for divining the future. Mitigating the worst prospects are the aggressive policy responses in the U.S. and elsewhere, which were not present in many other cases (though in many of those early cases, the crises were national or regional, not global, meaning mutually reinforcing). And they warn that we should never flatter ourselves into thinking “that we are smarter than our predecessors. A few years back many people would have said that improvements in financial engineering had done much to tame the business cycle and limit the risk of financial contagion.” And we know how that turned out.
And speaking of that policy response, I have to admit that I’m a little surprised by how quickly Barack Obama caved into Republican preferences on his stimulus program. Regular listeners know that I’ve been a skeptic about the candidate of changiness all along, but I thought he was, despite many other shortcomings, pretty solid on the economic package. His advisor, Larry Summers, a man with many faults, had nonetheless been saying the right things in recent months: the importance of infrastructure spending and of subsidies to clean energy development and other green jobs programs—long-term measures with a perspective well beyond the immediate economic cycle. So far, so good.
But then we learned earlier this week that, in order to appease Congressional Republicans, Obama would give over about 40% of the stimulus program—some $300 billion of a total $775 billion (a number that, by the way, may have to get bigger over time)—to tax cuts. And not just the tax cuts promised for the middle class, but tax breaks for business. This is bad economics and bad politics. Tax cuts are much less stimulative than government spending. People may save their tax cuts, or use them to pay down debt, or spend them on imports. Infrastructure investments are spent here and don’t leak away. They generate a lot more additional economic activity—bulldozers, concrete, solar panels, you name it. Over the longer-term, we need to consume less and invest more, and the people who need to consume less are our rich. They shouldn’t be pampered with tax cuts. And investment tax credits, which Obama is also reportedly considering, are a total waste of money. Businesses invest when they think they’re going to make money and when they’ve got the cash to fund the investments (or can borrow it). Now, prospects are dim, profits are shrinking, and it’s hard to get a loan. Investment tax credits stimulate no investment—they’re just a gift to businesses for money they would have spent anyway.
Aside from the economic points, what is the political point of this? The Dems won big and the Republicans lost. The GOP has been reduced to representing a provincial petty bourgeoisie, confined to the south and mountain West. Obama supposedly wants 80 Senate votes for the bill. Why? Why start out with a compromise, instead of cutting deals as the process unfolds? Why not take advantage of your position of strength? The only thing I can think of that makes any sense is Adolph Reed’s speculation that the Dems would like to peel off some of the saner Republicans and become a totally centrist party. That would leave the Republicans as a kind of rump formation of authoritarian fundamentalists with a fondness for dressing in bedsheets. The left of the Democratic party would presumably have nowhere else to go, or deceive themselves into thinking that all that changiness was about to break their way. Fat chance. Obama looks less like a Roosevelt, Franklin or Teddy, with every passing day.
And now an update just for the KPFA and podcast audiences. Friday morning brought the release of the December employment report and it was a horror. Total employment fell by 524,000, with almost every sector showing losses. Almost half the loss came in goods production, mainly construction and manufacturing. But even within those two sectors, losses were widespread. Within construction, it’s no longer just a housing story; nonresidential was down hard as well. And within manufacturing, it’s not just motor vehicles, it’s nearly everything.
But it wasn’t just the goods sector either. Private services got hammered, off 280,000. Temp employment, which tends to lead broader trends, was down hard. So was retail, another sector with some leading properties. About the only positive was in health care, which is good news if you work in that sector, but a mixed blessing for the rest of us coping with rising medical bills. Government added just 7,000, but I expect it’s going to join the losing sectors as budget constraints really begin to bite.
Total private employment, goods and services was off 2.4% for the year ending in December, the worst reading since 1982. Private services were off 1.5% for the year, its worst reading since 1958 (which was the sector’s worst year). Private services’ lows in the deep recessions of the mid-70s and early-80s were -0.1% and -0.4% respectively. In other words, sectors that in the past were nearly immune to recession are now joining in. Downturns used to be mainly about manufacturing and construction; now everyone’s joining in.
Those numbers all come from the Bureau of Labor Statistics survey of employers. They also do a survey of households, and the news from that side was just as bad. The unemployment rate rose a very sharp 0.4 point to 7.2%, the highest we’ve seen since 1992. The Bureau’s broadest measure of unemployment, which includes people who’ve given up the job search as hopeless as well as those only working part time because they can’t find fulltime work, the so-called U-6 rate, rose almost a full point to 13.5%, the highest since that series began in 1994. Over the last year, the number of people working part-time who want fulltime work but can’t find it is up almost 75%, a record by a wide margin in more than 30 years of data. The share of the adult population working, the so-called employment/population ratio, fell a very sharp 0.4 point to 61.0%, taking us back to 1986 levels. In other words, as of a few months ago, we’d undone the major employment expansion of the 1990s; we’ve now undone most of the 1980s as well.
As bad as this December figures are, it’s likely that we face at least several more months of the same. A very large fiscal stimulus is more urgently needed than ever.
It’s a week late for an end-of-year report, but I do everything late. I didn’t have a kid til I was 53. Let’s think of it as a turn of the year report.
Everyone else has already pointed out that it was quite a year, so I won’t. The contrast between the political and economic moods were starker than I can ever remember. In the political realm, everyone from David Brooks to the Communist Party is giddy over the imminence of the Obama regime. But in the economic realm, well the Intrade depression contract is now trading around 30, which means that the betters on this Irish electronic futures exchange think there’s a 30% chance that the U.S. economy will contract by 10% or more this year. A week or so ago, it was at 15%. My own guess is that 15% is closer to the mark, but the fact that such a thing exists and we’re talking about it is pretty extraordinary.
Since there’s a psychological appeal to taking pain before pleasure, and not only if your name is Severin, let’s talk first about the economy. The financial crisis followed by the sharp fall in the real economy were stunning. There’s no other word for it. It certainly can’t be called a surprise—economies plural, not just the U.S., have been playing with fire for a couple of decades. No one can really be shocked by exploding derivatives, busted hedge funds, or the rottenness of the Christmas retail season. No one except maybe the people who were in charge of these things, who seemed to think that everything was OK.
It’s common, though, to think of all this fire play as a bad decision, produced by bad politics, or bad thinking, or individual greed. It was all of those things of course, but more too. Capitalism, as Gore Vidal concisely put it once, needs low costs and strong markets. Reconciling those conflicting needs is its perpetual task. That’s not the same as saying it’s impossible. There are certain kinds of Marxists who think that problems like this are critical faults that will ultimately bring down the whole pig system.
Some go further and claim that the crisis is already here. Writers like my friend Patrick Bond argues that capitalism has been in crisis for something like the last 30 or 40 years, after the postwar boom began to fray. Since the postwar boom lasted about 25 years, that would mean that capitalism has been in some sort of crisis for something like 50 out of the last 75 years, a period when real GDP grew by almost 1300%. Raising Bond considerably, James O’Connor, a man I admire a great deal for his writing on fiscal politics and political ecology, once told me that capitalism has been in crisis since the 13th century.
I don’t get this. How a system that has transformed the world utterly, for century after century for something like the last seven, can be described as being in a crisis is beyond me. The thing is often brutal and viciously unstable, but that’s not its crisis, that’s its version of health.
And despite the crisis tendencies of so many Marxists, Marx himself wrote this in the Grundrisse: “Those economists who, like Ricardo, conceived production as directly identical with the self-realization of capital — and hence were heedless of the barriers to consumption or of the existing barriers of circulation itself…having in view only the development of the forces of production and the, growth of the industrial population — supply without regard to demand — have therefore grasped the positive essence of capital more correctly and deeply than those who, like Sismondi, emphasized the barriers of consumption…. The former more its universal tendency, the latter its particular restrictedness.” Apologies for the fragmented nature of that—the Grundrisse, though a glory to read, is a set of notebooks, not a polished work of prose. But the point is that capitalism, throughout its history, has always managed to overcome the barriers to its expansion, as impossible as that might have seemed at times. That’s worth remembering now that the system looks to be in a box. And it’s worth remembering when you hear people say that capitalism can’t overcome the environmental crisis. Maybe—nothing is forever. But if capitalists can find a way to make money off solving the environmental crisis, that may be in accord with what Marx called capital’s universal tendency. What capitalism can’t solve are poverty, maldistribution, and alienation; those are also part of its universal tendency. Those can only be solved by politics—by wrestling those universal tendencies to the ground.
Ok, back from that theoretical excursion, though it does provide a framework for what I’m about to say. In the late 19th century, capitalism repeatedly faced serious crises—financial panics and economic depressions. During the last three decades of the 19th century, the U.S. economy spent almost half its time in recession or depression. One of the reasons for that was the deeply constricted purchasing power of the working class: wages were very low, and there was no way that workers could buy what they made. Yet despite that constraint, the economy grew an average of 4% a year, though the ups and downs were wild. The U.S. grew from an agricultural backwater, at least in comparison to Britain, into a major world industrial power. Workers often labored under horrendous conditions, even in good years—though of course the rich lived very very well in that, the First Gilded Age. The relentless pressures of deflation and recurring crises gave rise to the Populist movement in the countryside, and to socialist and radical labor movements in the cities, which were often violently suppressed.
The economic and political volatility of the late 19th century led to the reformist Progressive movement of the early 20th. Though it stole some of the anticorporate rhetoric of the radicals, capital-P Progressivism, embodied by the blustering macho imperialist figure of Teddy Roosevelt, was a largely successful attempt to rationalize capitalism into something more stable and sustainable. It worked, for a while, though in many ways the boom of the 1920s was a return to the reckless, massively unequal style of the First Gilded Age. But despite their rampant excesses, both the Gilded Age and the Roaring Twenties were driven by real technological developments—steel and railroads in the first, and cars and radio in the second. The 20s also saw the early development of consumer credit, on which more in a bit.
But the 1920s boom crashed famously in 1929, ushering in the greatest economic crisis in the history of capitalism. That crisis was both economic and political—the economic part is obvious, but it’s easy to forget how discredited the private ownership of the means of production looked in the 1930s. But that discrediting was greatly aided by the existence of the Soviet Union. I don’t need anyone to tell me that Stalin was a monster and the Soviet system was abominable in many ways, but its existence was evidence that an economy could be organized in a radically different way. And domestically, we had an active Communist Party—and again, I don’t need anyone to remind me of its shortcomings, but such reminders aren’t our most urgent historical task at the moment—which helped organize unions and tenants. We wouldn’t have had rent control in New York had it not been for the Communist Party. And now that the CP is a fading memory, so is rent control.
That joint political and economic crisis led, of course, to the New Deal. The New Deal never spent enough to get the U.S. out of Depression, though there were some years of strong growth in the mid-1930. It took World War II to force the level of government spending necessary to end the slump. But the institutional changes of the New Deal were the foundation of the post-World War II economic order. Broad wage growth and an expanding public sector helped drive a couple of decades of strong growth and a lessening of inequality.
Nothing lasts forever, though. Capitalism doesn’t like broad income gains and a lessening of inequality for too long. Workers gain confidence, and start expecting too much. If the unemployment rate gets too low, work discipline suffers and, as the Polish economist Michal Kalecki once put it in a classic essay on the political impossibility of full employment, the sack loses its sting. (Sack, of course, as in getting the sack, not sack of potatoes.) Sure enough, the profitability of U.S. capital peaked in the mid 1960s and began a long decline. And inflation began an unprecedented uptrend. The situation was untenable from the elite’s point of view.
And so beginning in the late 1970s, the ruling class pushed for a new approach to economic policy, one that would break the confidence of the working class, and restore the sting to the sack. Paul Volcker took the reins at the Federal Reserve in 1979 and promptly drove interest rates up toward 20%, creating the deepest recession since the 1930s. A little over a year later, Ronald Reagan moved into the White House and broke unions and smashed the welfare state. Inflation fell, corporate profitability rose, and the financial markets launched a 25-year orgy.
That strategy of restoring profitability through wage cutting brings us back to a familiar contradiction, the one pungently summarized by Gore Vidal. It’s good for lowering costs, but not strengthening markets. You can’t sustain a mass consumption economy that way. And so borrowing—credit cards and mortgages—made up the shortfall. What wages couldn’t buy, borrowed money could. It worked very well, on its own terms, for a couple of decades. With the collapse of the housing boom, it stopped working, and it doesn’t look like it’s going to be revived.
So where do we go from here? My guess is that we’re about to embark on a major systemic renovation. Though everyone is pointing to FDR as the model, they may be looking at the wrong Roosevelt—there could be a lot of Teddy mixed in. Meaning a corporate-led reconstruction, and not so much social democracy.
But recall that both Rooseveltian reconstructions, Progressive Era and New Deal, were prodded by rebellions from below. We don’t have that this time, though that could change. In fact, I’m hoping that by having the state inject itself so massively and explicitly in the economy, the political terrain will inevitably change, and along with it, popular expectations. And who knows where that will lead.
I said at the beginning of all this that the optimism in the political realm was the opposite of the despair in the political. Much of that optimism is misplaced—Barack Obama is no radical, nor is he even an FDR. (Though it must be said that FDR himself was no FDR when he ran in 1932; circumstances changed him.) Escalating the war in Afghanistan looks like a very bad idea, and I’d be shocked if Obama did anything to rein in Israel’s horrific war on Gaza. People around Obama are talking about creating a domestic intelligence agency—a CIA for the home front. In other words, less of a departure from George W. Bush than many expect. But I have to admit that on the economic stimulus, Obama and his advisors, particularly Larry Summers, have been saying the right things. In an op-ed piece in last Sunday’s Washington Post, Summers—who, in the past, has proven himself a fairly hateful defender of the status quo, whose worst offense was probably his 1991 description of Africa as vastly underpolluted—made several important points. These include:
1) “In this crisis, doing too little poses a greater threat than doing too much.”
2) But any short-term plan to jump-start job growth wouldn’t be enough—we also need to tend to the medium and long term. That means, says Summers, repairing our rotting physical infrastucture, building schools, and developing clan forms of energy. These are forms of investment, oriented towards the future. Merely stimulating consumption wouldn’t do us much good, because we have to rebuild the productive side of our economy, which has been rotting.
Summers doesn’t put it this way, but one of our longer-term economic problems has been the lack of a driving new industry—like steel and railroads in the Gilded Age, or radio and cars in the Roaring Twenties, or auto-driven suburbanization in the 1950s and 1960s. (I’m no fan of the latter, but it did generate a lot of growth.) We don’t have that now. It’s quite possible, though, that clean energy and other environmentally friendly technologies could become the motor of a fresh wave of growth in the coming years. It won’t happen spontaneously, though—it needs the prodding of the state. And whatever their other shortcomings, and they are many, it looks like the gang about to take office understands that. It will be the job of people like us to push it in a more humane, egalitarian direction. But at least we won’t be beating entirely against the current.
WBAI, where this show originates, is fundraising this week, so I was pre-empted. That, plus the holiday spirit, sent me to the archives for some encore material for this week’s show. The intro and commentary are new, though. Same drill for next week, too, I’m sorry to say. But all new material the week after, the first show in 2009.
The major economic news of the past week was the Federal Reserve’s decision to cut the short-term interest rates under its most direct control to 0, or close to it. This is a historic low. Never before in the U.S. have interest rates gone to 0. But it’s not just the Fed doing it—last week, the Treasury sold one-month bills with a yield of 0. The reasons for these twin zeroes are somewhat different. T-bills hit 0 because investors are scared and want to park their money somewhere with minimal risk. Despite our troubles, the U.S. Treasury is still the safest haven in the world, especially for a very short-term loan. The Fed cut interest rates to 0 because it’s afraid the financial system will implode, and take the real economy along with it.
But with interest rates, it’s not easy to go below 0. Yes, T-bills briefly traded below 0 for a while—meaning that if you bought one for, say, $1,000,050 now, you’d get $1 million back when it matured in a few weeks. Banks could also pay negative interest rates, meaning they’d charge you for holding your money. Some monetary reformers over the years have suggested some version of negative interest rates to encourage people to spend money rather than hoard it. But since one of our problems is people having spent too much money that they don’t have, that doesn’t seem like a prescription ideally suited to the moment.
So, for all practical purposes there’s what pundits call a zero bound on interest rates. The Fed is highly aware of the fact that they’ve hit that wall, or floor if you prefer, so they’re also experimenting with some unusual techniques.
Historically, in conducting monetary policy, they’ve dealt only in short-term U.S. Treasury paper. When they want to tighten policy, they sell bills and notes in the market; banks buy them, and cash is drained out of the system. When they want to loosen, they buy bills and notes, using money created out of thin air, and add cash to the system. These moves have a strong influence on short-term interest rates, but not long-term rates. Long-term rates are generally set by bond traders, bsaed on their evaluations of the future course of the economy, interest rates, and inflation. When the Fed is tightening, long-term rates usually rise, and when it’s loosening, they often fall, but not always. Recently, traders have been so nervous about the future that long-term rates didn’t come down anywhere near as much as short-term rates have. And since long-term rates have a profound influence on mortgage markets and corporate investment, that stickiness has hindered financial and economic recovery.
So the Fed is plunging directly into the long end. They’re already buying up mortgage bonds issued by Fannie Mae and Freddie Mac; this has helped bring mortgage rates down. Of course, it’s really hard to get a mortgage, and few people are dying to buy houses, so the effects of lower rates are limited, But they’re pushing things as hard as they can. And it’s also likely that they’re going to buy long-term government bonds too, if rates don’t come down. They have come down in recent weeks, but if they kick back up, the Fed will buy with both hands to push them back down.
In the jargon of the trade, these bond purchases are called “quantitative easing.” The Bank of Japan did a lot of this in the 1990s, when that country was suffering from a long stagnation after their 1980s credit bubble burst. You frequently hear market pundits say that this policy didn’t work for Japan. Didn’t work compared to what? Yes, it didn’t generate prosperity, but let’s look at the record. After a speculative mania of world historic proportions led to a bust of equally impressive magnitude, Japan suffered not a depression, but a decade of stagnation. The unemployment rate, as computed by our Bureau of Labor Statistics to conform to U.S. definitions, maxed out at 5.4% in 2002. The 1992-2007 average was 4.0%. Over that same period, the U.S. jobless rate averaged 5.3%, a hair under Japan’s worst, and hit a high of 7.7% in 1992, more than 2 points above Japan’s worst. Our latest reading is 6.7%, almost a point and a half above Japan’s worst. According to the OECD, Japan had a poverty rate of 15.3% in the late 1990s (in a bust), vs. 17.0% in the U.S. (in a boom). Oh, and its auto industry never teetered on the verge of bankruptcy. If that’s what “didn’t work,” means, we should be so lucky.
In other news, there are some signs of stabilization in the real economy and the markets. Some short-term interest rates are coming down. (I said earlier that short-term rates were very low, but that’s mostly true of low-risk assets like government bonds. Rates for private borrowers remain stubbornly high, but they are showing signs of coming down.) First-time claims for unemployment insurance fell slightly last week, confounding expectations for a rise, but they remain elevated. The Conference Board’s leading index fell in November, but by half as much as October. That suggests the economy is still weakening, but at least not at an accelerating pace. But remember, we probably will still have six or nine more months of recession even after the leading index bottoms. And we’re still not there yet.
It looks like the incoming administration and Congress are going to put together a stimulus package approaching $1 trillion. This is serious money, and it looks like they’re going to use it for good stuff, like infrastructure rebuilding, support to state and local governments, green jobs, and unemployment insurance extensions. That’s some of the most cheering news to come out of the transition so far. It’s almost enough to take your mind off the invitation extended to that revolting creep Rick Warren. Almost.
Audio: December 11, 2008
Economic news continues to look very ugly (even uglier, since I think my car was stolen). This morning, just before I got ensnared in the case of the missing 1989 Buick, the Labor Department reported that 583,000 people filed first-time claims for unemployment insurance last week, up 58,000 from the previous week. Both the level of initial claims and their movement over the last year are at recession levels. They’re not yet at the levels of the mid-1970s and early 1980s recessions, but they’re heading in that direction. A leading index of employment published by the Conference Board and released early this week deteriorated further, suggesting at least six months more bad news for the job market. We probably have to see some serious improvement in these two measures before we can even begin thinking about the economy finding a bottom, much less start to recover.
The housing sector also tends to lead broader economic trends, though it’s usually further ahead when things are turning down than when they’re turning up. In any case, there’s not much sign of stabilization there, either. Energetic optimists are drawing some hope from little upticks here and there, but these look like very thin reeds.
And a new forecast posted to economist James Hamilton’s Econobrowser website offers a very gloomy view of the next couple of years. It comes from Michael Dueker, formerly of the St. Louis Fed, now of Russell Investments, who uses a high-tech statistical technique called vector autoregression to predict economic developments. What gives Dueker some standing is that he correctly forecast both the 2001 and 2007 recessions ahead of time, when many other analysts were singing happy songs. Of course, as they say in the mutual fund ads, past performance is no guarantee of future results, but here we go anyway. Dueker sees the recession not bottoming into July or August of next year, with the job market continuing to shrink for close to a year longer than that. He projects that we have another 4 or 5 million jobs to lose, on top of the nearly 2 million we’ve lost since the peak a year ago. If Dueker is right, this is likely to be the longest and most damaging recession since the 1930s. Since the leading indicators are suggesting no turnaround is in sight, meaning in the next three to six months, Dueker may well be right about duration. And if the economy has technically bottomed but jobs are continuing to disappear, that’s a recovery in name only. Bottom line: the economy stinks, and is likely to get stinkier for some time.
Now there’s a chance that if the new Congress and administration enact a big, quick-acting stimulus program—they’re talking about getting $150 billion in infrastructure spending going at the state level (using federal money) in the early months of the year—well, that might mitigate the glum forecast. We’ll see.
Speaking of the new administration, their novelty and freshness continues to disappoint. I just came across this quote from uber-wiseman Larry Summers, in Creative Capitalism, a new collection of interviews with movers and shakers conducted by Michael Kinsley. Here’s Larry, who’s allegedly been reborn after spending so many years as an insufferably arrogant and orthodox prince of the dismal science: “As for [Milton] Friedman — I’m not so sure he looks bad. What is most screwed up today? GSEs [government-sponsored enterprises, like Fannie Mae], Citibank, regional banks. What is most regulated? Same list. What is least screwed up? Hedge funds and the like. What is least regulated? If regulation means the jihad against short selling that the Securities and Exchange Commission is engaged in, then god help us all.” There’s so much that’s wrong with this. The GSEs and Citibank were supposed to be regulated, but they weren’t. Citibank was encouraged in its recklessness by Summers’ colleague and mentor Robert Rubin. The hedge funds are deeply screwed up—they’re going bust in large numbers, and losing piles of money. So if Summers is arguing against regulation, to quote him against himself, then god help us all. But maybe he gave the interview a year ago, before his ideological rebirth. We’ll see.
Finally, a few words about the sit-in at Republic Doors and Windows in Chicago. As you’ve no doubt heard, the company decided to close the plant without any warning and was refusing to pay the workers money that they owed them. The company blamed its bank, The Bank of America, for having cut them off. The workers occupied the factory. And they’ve won. No they’re not getting their jobs back, and they’re not going to take over the factory, but they are getting the money that was owed them.
There are many interesting things about this incident. Let me list a few. One, the workers didn’t passively accept being screwed, as so many American workers have over the last few decades. A reason for this might be that they were represented by an independent, principled, and democratic (small D) union, the United Electrical Workers, UE. UE was once a pretty radical union but it was hammered during the McCarthy era. Though a relative weakling, this incident does suggest that a good union can make a big difference. Two, one of the reasons the case attracted so much attention is that Bank of America has gotten $25 billion in public bailout funds, which they’re supposed to use to keep the economy going. Instead, they were hoarding the money and calling in loans. This produced very bad PR for the bank, and is no doubt one of the reasons they relented. And three, maybe this is just the beginning of a fightback movement in this politically demobilized country. Yeah, the United Autoworkers, an ossified union if there ever was one, isn’t giving much sign of resisting their likely evisceration, thanks to the auto industry bailout. But maybe there’s hope for other American workers as the recession gathers steam. As the old slogan says, Don’t Tread on Me.
Audio: December 4, 2008
[The first part of this commentary was delivered on WBAI, December 4, 2008. I added an analysis of the November employment report, which was released on December 5, for the KPFA version, broadcast December 6.]
Economies continue to deteriorate, at home and abroad. I often cite the surveys done by the Institute for Supply Management, or ISM, the trade association for purchasing managers, who buy things for large corporations. Their job puts them in close contact with the state of the business, and business is not good. The ISM surveys of both manufacturing companies and service companies, both released over the last week, were very ugly, and consistent with a deep recession.
And speaking of recession, as you’ve probably heard, it’s official. The arbiter of these things, the Business Cycle Dating Committee of the National Bureau of Economic Research, declared earlier this week that the expansion that was born in 2001 died last December. Yes, it took them a year to make up their minds—about twice as long as usual. Hey, guys, I had it figured out in February, when the January employment report was released. But I’m not a high-paid, prestigious economist, so who’s listening?
For the first six or eight months of the recession, it looked pretty mild. There were job losses, but not as bad as in earlier downturns. Other economic indicators headed south, but most not so sharply. But over the last few months, there’s been an acceleration to the downside. Job losses are now averaging close to the 300,000 a month neighborhood that’s characteristic of recessions—and we may see that many Friday morning, when the November report is released.
But I’ve been reviewing some of the major economic indicators, including the ones the Business Cycle Daters (a group whose name almost demands a joke) look at, and several things stand out. While the declines in employment, household incomes, and business investment aren’t out of line with historical averages, their growth going into last December’s cyclical peak was a lot weaker than those averages. In fact, the expansion, which lasted a month longer than six years, was the weakest by a considerable margin of any of the 10 we’ve had since 1948, whether you measure by the economists’ favorite indicator, GDP growth, or by a more humanly relevant indicator like employment growth. GDP growth was a third below historical expansion averages; employment growth, two-thirds below. That suggests to me that there are some real structural problems with the U.S. economy, like low levels of real investment, excessive reliance on borrowed money, and a malignantly lopsided income distribution that are now undermining its performance even by conventional measures. All this suggests that this recession could be long and deep—and, as for length, it’s already a month longer than the post-World War II average downturn. It need only extend into May, which seems quite likely, to become the longest since the 1929-33 affair. Of course, with central banks cutting interest rates and printing lots of money, and with governments around the world plotting huge stimulus spending programs, they probably can avoid the worst. But I’m still guessing that 2009 will be ugly.
Barack Obama’s cabinet choices are getting high praise from all the centrist and right-wing pundits, while his liberal cheerleaders are searching for nice things to say. But let’s leave aside, for a moment, the residence of his cabinet nominees on the political spectrum. Let’s just talk a moment about their alleged experience. Could someone tell me what foreign policy experience Hillary Clinton has? She lived with a president for eight years, though probably on many occasions they slept in separate bedrooms. But why is she greeted as such an experienced hand?
And, more criticisms of the big economic guys are in order. Timothy Geithner, the Treasury nominee, reportedly wants to get Sheila Bair out as head of the FDIC. By most accounts, Bair has done an admirable job in saving some banks on conditions favorable to the government and to homeowners. But Geithner thinks she’s not a team player. More likely is that he sees her as a rival. If he prevails, this will be a signal that not only will the new gang be a political disappointment, they might be lacking in competence as well.
And then there’s the eminence grise Robert Rubin, whom I kicked about last week for having resisted regulation of derivatives when he was Clinton’s Treasury Secretary and having helped drive Citigroup into the ground during his term as a “senior counselor” at the bank. Last weekend, Rubin was quoted in the Wall Street Journal as having said no one could have foreseen this crisis—in fact many people did, including some of Rubin’s colleagues in the Clinton administration—so no one should be held accountable for the failure. Asked if he had any regrets, Rubin said “I guess that I don’t think of it quite that way.”
I think we’ve got a theme song for the new administration: Edith Piaf singing “Non, je ne regrette rien.”
And here’s an update added [December 6] just for the KPFA (and podcast) audience. That commentary was recorded on Thursday evening, before the release of the November employment report on Friday morning. Now we have it, and it was horrid, from top to bottom. About the only bright spot you can find in it is was a small drop in the teen unemployment rate. That’s it. Almost everything else in it was dismal.
Employers shed 533,000 jobs in November. Worse, initial estimates of the job losses in September and October were increased by almost 200,000, bringing the three-month total job loss to 1.3 million. While these aren’t the worst in history, they’re still very very bad. The losses were widely distributed across economic sectors. Construction and manufacturing got hit very hard, losing over 160,000 between them. And it wasn’t just houses and cars; nonresidential construction actually lost more jobs than residential, and almost every line of factory work was down. About the only sectors adding jobs were state and local government and health care. And given the fiscal pressures facing the public sector, expect those to start shrinking soon.
Taking a longer-term perspective, while losses so far since the December 2007 peak are slightly less than recession averages, most previous recessions were drawing to a close a year after their peaks. Not this time.
Those numbers all come from a survey of employers. The Bureau of Labor Statistics also does a monthly survey of households, and its findings were equally dismal. The unemployment rate rose 0.2 point to 6.7%, its highest level in 15 years – and almost all the rise was the result of permanent job loss, as opposed to temporary layoffs or new entrants. The rise over the last several months isn’t record-setting, but it is still very large. The so-called employment/population ratio, the share of the adult population working, fell 0.4 point to 61.4%, its lowest level in 15 years. The employment boom of the late 1990s has been largely undone in a year.
While it’s a common practice in Europe to cite the number of unemployed as a headline indicator, we don’t do that often in the U.S. But it is worth pointing out that the ranks of the officially jobless crossed 10 million in October, and rose by another quarter-million in November. More than 5 million are classed as not in the labor force but wanting a job now. The broadest measure of unemployment, the U-6 rate, which includes both these sets of would-be workers, along with people who want full-time work but can only find part-time, rose to 12.5%. That’s the highest level since the BLS began reporting the number in 1994.
As bad as this report is, it’s still “bad recession” and not “total collapse,” though who’s to say what December and January may bring? The need for a very large fiscal stimulus now looks undebatable, even to highly orthodox sorts.
Audio: November 27, 2008
The housing market lingers in its doldrums. On Monday, the National Association of Realtors reported that sales of existing houses fell by 3% in October. Actually that’s not as bad as it sounds, because the annualized rate in October of just under 5 million houses a year is about where it’s been for the last year. So sales look to be bumping along the bottom. Prices, though, are falling, and at a somewhat accelerating rate, suggesting a lot of distress sales. My guess is that we’ve got another six or nine months of this sort of thing before the housing bust finally runs its course—though it could be a lot longer before we see a true recovery.
I’d say much the same about the economy, adding maybe six months to the estimate—meaning that the real economy may not begin to recover until 2010. But that’s just a guess. The leading indexes are still falling. The one from the Economic Cycles Research Institute is falling hard, suggesting a severe recession; its counterpart from the Conference Board, while also falling, isn’t looking so scary. But in any case, there is no sign anywhere that the economy—and not just the U.S., but globally—is in anything but the early stages of a major downturn.
Next Friday, we’ll get the employment report for November. I’m expecting a worse report than we saw for October, meaning perhaps 300,000 or more lost jobs and a further rise in the unemployment rate. And it may be that job losses earlier this year were harsher than first reported. The details are too geeky for radio, but there are routine revisions made to the national income accounts every three months, based on the near-complete measure of the job market provided by the unemployment system, that offer an early corrective to the preliminary survey data reported every month. (The monthly surveys are based on a very large, but still incomplete, subset of employers; the unemployment insurance system covers 99% of employers.) On Tuesday morning, we got these revisions for the second quarter, and they’re suggesting much steeper job losses than were initially reported last spring. In other words, we’re even worse off than we thought.
In some more encouraging news, it does look like the incoming Obama administration plans a seriously large stimulus program—around $700 billion, possibly spread over two years. It’s likely to be a mix of tax cuts for low and middle-income households and infrastructure spending, including some clean energy and other environmental initiatives. We’ll see what the details look like, but the price tag and the mix are both what we need. Obama’s announced intention to spend enough to create 2.5 million jobs sounds encouraging, but, spread over a couple of years, that’s not really all that big a number by historical standards. Still, it’s a lot better than losing that many.
And over the last several days, Obama has announced the major figures in his economic team. Like the rest of his appointments, there’s not much change visible there. Most are familiar from the Clinton years—though maybe, like good mainstream environmentalists, they believe in recycling. The survival of Robert Rubin as eminence grise is especially mystifying. He’s a guy who blocked regulation of deriviatives and promoted the deregulation of the financial system—and was rewarded for his efforts with a senior position at Citigroup, where he urged the bank to take on more risk. That’s three strikes already, and it’s not a full accounting. The new economic czar, Larry Summers, a deeply obnoxious character, succeeded Rubin as Clinton’s Treasury Secretary, and while he’s not as directly culpable for financial deregulation as Rubin, he was hardly a whistleblower either. And Tim Geithner, who will move from the presidency of the New York Fed to the Treasury, is touted as having lots of crisis experience. Well, yeah, but it’s not clear just how well he’s managed that. We used to think that Geithner went along with the current Treasury Secretary, Henry “Hank” Paulson, in his disastrous decision to let Lehman Bros. go under last September—a decision that helped turn a serious problem into a full-blown panic. Now people are saying that Geithner’s just a quiet sort of guy who didn’t approve of Paulson’s decision but went along with it. Who knows? But it sure looks like not only are there no penalties for failure in this society—there can even be generous rewards. But only at a high level. At more modest levels, the penalties can be foreclosure and homelessness.
And how about that Citigroup bailout? A big cash infusion from the gov on very generous terms, and existing management gets to stick around. I sure hope the new gang runs a better bailout than this, but they’ve probably been participating in these decisions, so maybe that hope is misplaced.
Finally, something I inteneded to mention last week, but forgot. Daewoo, the Korean corporate giant, cut a deal with Madagascar, an island country in the Indian ocean off the southeast coast of Africa, to farm corn and palm oil in an area half the size of Belgium. Daewoo’s rent is zero. Nothing. They’re getting it for free. Daewoo says it’s a good deal for Madagascar, since it will provide jobs. This looks like a return to a 19th century model of colonialism, in which private companies get big chunks of real estate in subaltern countries. None of the complex mediations of neocolonialism—comprador classes, international bodies like the IMF, etc. Just outright land theft. Quite amazing, really.