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.
Audio: November 20, 2008
Bad news coming from both the financial sphere and the real economy. Treasury Secretary Henry “Hank” Paulson’s decision, announced last week, to abandon the purchase of bad bank assets entirely has sent the credit markets into a tizzy. You may recall that when Paulson first unleashed his proposal in September—the one that would have given him sole discretion to spend $700 billion without even the possibility of Congressional or judicial review—that’s all he wanted to do. A number of critics, including me, pointed out that historical reviews of past financial crises found such asset purchase programs to work not so well; much better was to inject fresh capital into troubled banks.
Congress heard these critiques and wrote the bailout legislation so broadly that it would permit such equity injections. Paulson apparently saw the light himself and did nothing but equity injections—though of a particularly indulgent kind, that gave the government no voice at all in running the institutions it was saving, or even getting a good accounting of where the cash was going. And then, last week he said no asset purchases at all.
Which was quite mystifying. Despite the poor historical record of asset purchases, this time it might have been different, because one of the things that’s crippling the credit markets is that no one really knows how much their partly toxic, partly sound mortgage assets are worth. There’s no market in them at all right now. Had the government bought some, it might have put a floor under prices, and given some guidance about how much they were worth. (Emphasis on mighta, coulda.) Now Paulson won’t be doing that. But his surprise decision, his second 180 in as many months, made it seem like the whole megabillion bailout operation was being done on the fly. It does not inspire confidence, from any perspective, and the credit markets, which had given signs of thawing in recent weeks, went back into deep freeze. No credit markets, no economy.
It’s looking like Paulson’s giving his Wall Street friends a lot of money with no strings attached and no strategy either. Let’s hope the new gang can run a proper bailout, and with more consideration for people in or near foreclosure than Brother Hank is showing.
Speaking of the new gang, how about that Attorney General choice, Eric Holder? A man who defended Chiquita Banana against charges that it was subsidizing death squads in Colombia, and ended up getting them off with just a slap on the wrist.
And now to the real economy. The latest batch of news has been pretty terrible. On Wednesday, the Census Bureau reported that housing starts and permits to build new houses both hit all-time lows. And that’s not in percentage terms, or relative to the size of the economy—it’s in absolute numbers. Numbers that go back almost 50 years, when the U.S. population was about 40% lower than it is now. In other words, the housing market hasn’t been this weak since the 1930s. But still, prices would have to fall another 15% to reach their long-term average ratio to household incomes. Another fall of that magnitude—prices are already down around 20%—would put even more homeowners underwater, owing more on their mortgage than the house is worth, and prompt more defaults and foreclosures. It’s a damn mess.
And the job market is looks to be weakening as well. On Thursday morning, the Labor Department announced that first-time claims for unemployment insurance rose by 27,000 last week to 542,000. While not the highest on record, either in numerical terms or especially as a percentage of the labor force, it’s rising sharply—up 22% since September. This almost certainly means that November’s employment report, to be released on the first Friday of December, will look horrible. For the first half of this year, job losses looked mainly to be a function of a hiring strike by employers—layoffs and firings were relatively modest by the standards of earlier recessions. That’s changed now, and job losses are rising sharply.
Earlier in the week, we learned that prices at both the producer and consumer level fell in October. These declines were driven mainly by falls in energy and other commodity prices. But they did raise the specter of deflation, a generalized fall in prices that is seen only in very tough times, like the U.S. in the 1930s or Japan in the 1990s. My guess is that we’re more likely to see something like Japan in the 1990s here—a long period of high unemployment and economic stagnation without a generalized collapse. The government is spending too much money for a true collapse to take hold. But things are already nasty, and getting nastier.
If there’s a silver lining in all this, it’s that the culture at least might get a little more interesting. John Maynard Keynes once wrote that “by far the greater proportion of the world’s greatest writers and artists have flour- ished in the atmosphere of buoyancy, exhilaration and the freedom from economic cares felt by the governing class, which is engendered by profit inflations.” Evidently the cultural elasticity of profit isn’t what it used to be. Shakespeare died rich, said Keynes, the beneficiary of one of the great bull markets of all time, the greatest the world had seen before the American 1920s. The American 1980s and 1990s were a massive bull move; we got reality TV.
But, as the stock market pundit Robert Prechter likes to point out, bear markets and recessions bring out what he calls nihilistic music—like two of my favorite pop genres, punk and rap. He contrasts this with the upbeat music characteristic of bull markets. As he pointed out, attendance at the Loveparade festival, a kind of outdoor techno rave party held in Berlin, rose from its beginnings in 1989 through the 1990s, peaking in 1999 and 2000 with the economic cycle. But with the recession of 2001, attendance fell, and the festival wasn’t even held for a few years afterwards. Prechter’s theory is that all the good feelings celebrated by the Loveparade were byproducts of a buoyant economic mood; when things turned dark, love moved indoors.
Now this may all be a bit too mechanical, an odd bit of economic determinism applied to pop culture. But there was a great cultural ferment in New York from the mid-1970s though the early 1980s. As Wall Street became more dominant in the city, following the takeoff of the great bull market in August 1982, the environment became lot more difficult for the creative underclass. And while the streets might get dirtier, the subways more crowded, and jobs hard to come by, maybe there will be some fresh and compelling art and music produced.
Audio: November 13, 2008
Further signs of economic weakening piled up over the last week, and not just in the U.S. Some 15 countries have reported declines in GDP in recent quarters—among them big ones like the U.S., Japan, Germany, the UK, Spain, Ireland, Italy, and France, and less big ones like Singapore and Latvia. More of this is likely to come.
China is a long way from joining the negative growth crowd, but its industrial production index declined between September and October, and its yearly growth rate has declined from close to 20% a year ago to 8% now. While most countries would envy an 8% growth rate—even back in the fat days of the 1950s and 1960s, growth in U.S. industrial production averaged around 5%—for China, such a dramatic slowdown harbors great risks. Slower growth could expose the rot hiding in Chinese banks—10% growth can make a lot of bad loans look not so bad—and could heighten political tensions in a country where mass protests have become routine, and where it would take all the fingers on scores of millions of hands to count the unemployed.
On Friday the 7th we learned that the U.S. lost a quarter of a million jobs in October, bringing the total loss since last December’s peak to 1.2 million. Losses in the early part of the year were mild by historical recession standards, but we’ve managed to get back up to those historical standards with the accelerated deterioration since the summer. The unemployment rate rose a sharp 0.4 point to 6.5%, the highest since 1993.
On Thursday morning, we learned that first-time claims for unemployment insurance, a very timely and sensitive indicator of the state of the job market, rose a strong 32,000 last week to 516,000. That rise brings this measure very close to the levels it reached in the 2001 recession, though it’s still well below levels seen in the deep recessions of the mid-1970s and early 1980s. I am expecting, though, that this recession will come to rival its more savage ancestors in the coming months. Ditto the unemployment rate, which is almost certain to approach 8% over the next few months, and could move towards 10% if the economy continues to deteriorate as suggested by the leading indexes.
On Wednesday, Treasury Secretary Henry “Hank” Paulson announced that he was completely abandoning his original strategy of the $700 billion financial bailout, buying up bad assets, mainly toxic mortgage securities, from banks, and moving instead towards direct capital injections. As I’ve been saying for weeks, based on the experience of other countries, this has proven to be a far more effective strategy for resolving a financial crisis than Paulson’s original strategy. The initial reviews from the financial markets were bad, as interest rates on short-term lending between banks ended a three-week decline and the stock market took a steep dive. Reviews from Congress were far more positive. I wouldn’t take the reactions of either very seriously, at least for now.
Why the about-face by Paulson? Market pundits said it made him look uncertain and confused, and policymaking look like a pure seat-of-the-pants operation. It could be that Obama & Co. told him to hang back because they wanted to run the bailout by their own lights. If equity injections are the wave of the future for the bailout program, then let’s hope that the new gang doesn’t follow Paulson’s lead and take nonvoting stock. If the gov is going to rescue this gang, it must do so on harsh terms and with a gun held to their heads. No dividends, no bonuses, no hoarding of cash.
I’ve certainly been plenty critical of Barack Obama, but it does look like his posse is thinking straight on these issues. We can see hints of that in the proposals for an auto-industry bailout they’ve been floating: strings tightely attached to make sure they use the cash to make clean, energy-efficient cars. His designated chief of staff, Rahm Emanuel—generally a market-loving hyperzionist creep—did say something interesting last weekend: “Never allow a crisis to go to waste. They are opportunities to do big things.” While that might sound like something Naomi Klein could use for the paperback edition of The Shock Doctrine, maybe not. The context in which Emanuel said that was the auto industry crisis, and it seems like he meant to force Detroit to invent some cars that won’t wreck the climate. That would be a good use of crisis. More on all this at the bottom of the hour, when we talk green jobs.
So is this what Change looks like? Barack Obama has selected Madeleine Albright, the former Secretary of State who said that 500,000 Iraqi children killed by sanctions was a price worth paying (not that she was paying it), to be one of his emissaries to this weekend’s economic summit. The other is former Republican Congressman Jim Leach, quite a sane person by the standards of his party, but still not the sort of guy you’d confuse with a new broom. Add to that familiar names like Rahm Emanuel, John Podesta, Larry Summers, Tom Daschle, and John Kerry…. On Wednesday, Obama’s transition team published the list of people who will be guiding the process. As Laura Meckler and Jonathan Weisman put it in the Wall Street Journal: “The group is filled with second-tier veterans of the Clinton administration and workers in the technology and financial sectors. It includes four former lobbyists, three top campaign fund-raisers and two former employees of troubled mortgage giant Fannie Mae, with some overlap among them. Four people in the group have ties to the consultant McKinsey & Co. and two have experience leading high-tech start-ups.” ABC’s Jake Tapper adds: “16 out of 19 of these folks worked in some capacity for the administration of President Clinton” Changiness, it’s everywhere.
As is some sort of Depression consciousness. The cover of the next Time will have BHO as FDR. And the Gourmet Garage, a small chain of moderately upscale food stores in New York, is calling its sale items “New Deals,” the signs decorated with a caricature profile of FDR with his cigarette holder. The official NBER-certified bottom of the 1929-33 contraction was March 1933, when FDR was inaugrated. Wonder if that cyclical magic will transfer to Obama come January 20?
Audio: November 6, 2008
In economic news, there’s now little doubt that the U.S. recession that began early this year in fairly mild form is now taking a turn for the worse, and possibly a sharp one. I frequently cite the surveys published by the Institute for Supply Management, the trade association for corporate purchasing managers—the people who buy stuff for their employers. That puts them in close touch with the state of business, and these days, the state of business is not good. The ISM manufacturing survey came in at its lowest level since the deep recession of the early 1980s, when the phrase “Rust Belt” entered the American language. Manufacturing has been in a structural decline for at least the last 10 years, but the slide has accelerated, and the disappearance of the domestic auto industry, which could take up to 3 million jobs with it, is not impossible to imagine. The ISM service sector survey, which only goes back to 1987, is at levels last seen in September 2001, in the midst of the post-9/11 recession, and likely to get worse.
First-time claims for unemployment insurance, a very timely and sensitive indicator of the state of the job market, declined modestly last week, which is reassuring, but they remain at high levels associated with continued job losses. We’ll get the October employment report tomorrow morning, and I’m expecting job losses of 200,000 or more and an uptick in the unemployment rate.
And the weekly leading index produced by the Economic Cycles Research Insititute, or ECRI, which is designed to forecast movements in the U.S. economy six to nine months ahead, is falling rapidly. ECRI’s director, Lakshman Achuthan (who was on this show back in 2004), told me that he’s expecting a recession as severe as that of the mid-1970s or early 1980s. That suggests that the unemployment rate will rise to 8% or more from its current level of 6.1%. 2009 is almost certain to be a terrible year, economically speaking—and not just for the U.S. Most of the world looks to be slipping into recession.
And here’s an update on the October employment report prepared for the KPFA audience. Like I said last month about September’s report, about the only good thing you can say about it is that it could have been worse. Private sector employment is now down to where it was more than two years ago – and the share of the adult population working is the lowest it’s been since 1993. That means that the entire job boom of the second half of the late 1990s has essentially been reversed thanks to two recessions and an anemic expansion. These are signs of serious structural problems, beyond a mere business cycle or two.
Nearly a quarter-million jobs were lost in October. As if that weren’t bad enough, but routine revisions to the previous two months showed an additional 179,000 job losses. Total employment is now down 1.2 million from last December’s peak. Losses were widely distributed through industrial sectors; construction and manufacturing were hit the hardest, but so were retail trade and temp employment. Even the irrepressible health care sector added just 23,000 jobs, well below its recent averages. Losses in private services over the last year now match the worst of the 1982 recession and exceed the worst of 1975. Once upon a time, the service sector wasn’t very cyclical; manufacturing took most of the hit. Now services are taking a hit along with manufacturing. Average hourly earnings were up just a few pennies, and are lagging inflation by more than a percentage point.
The unemployment rate rose 0.4 point to 6.5%, the highest since 1994. That’s a very sharp rise, near the top of the list for the last five decades. Almost all of the rise in unemployment was the result of permanent job losses (as opposed to temporary layoffs). And the ranks of those working part-time for economic reasons—meaning they wanted full-time work but could only find part-time—rose by more than half a million in October—or 2.2 million over the last year. The broadest measure of the unemployment rate, the so-called U-6 rate (which accounts for unwilling part-timers and people who’ve dropped out of the labor force because they think the search is hopeless) rose 0.8 point to 11.8%, matching the highest level since the series began in 1994. It’s up more than three points over the last year.
The urgent question on every mind now is how much more and for how long? In percentage terms, we’re now approaching the job losses in the 1990-1 and 2001 recessions – another month or two at current rates and we’re there. But matching the 1973-5 recession would take another million job losses; matching 1981-2, 3 million. Both those downturns were 16 months long; this one’s probably 10 months old, give or take a couple of months. So my best guess is that we’re halfway through this (if we’re lucky) – though given the massive amounts of stimulus coming from Washington, with more certainly on the way, maybe we’ll be lucky.
But, ah, but, there’s a lot of hope around, isn’t there? I’ll admit that I got a thrill when Barack Obama was pronounced the winner on Tuesday night. It’s a great relief to see the Republicans take a big hit, and not to have to endure a McCain–Palin administration, which would have been a depressingly stupid and violent thing. It’s also lots of fun to see all the McCain people leaking nasty stuff about Palin to the press. She thought Africa was a country! She doesn’t know what countries make up NAFTA! She spent even more than $150,000 on clothes—and not just for her, but for her husband and kids as well! Fox News, of all things, promises an “avalanche” of further revelations, and I can’t wait. I do hope the McCain people acknowledge that their man chose her, though.
Back to hope. We’re now hearing that Barack Obama is busily trying to rachet down expectations. We can expect, any week now, the equivalent of the Jimmy Carter in a cardigan speech, or going back a few years earlier than that, Gov Hugh Carey’s “The days of wine and roses are over” speech. But given who Obama is, you have to guess it’ll be more rhetorically skilled than either.
Now there’s no doubt that the U.S. faces a sustained round of belt-tightening. For decades, especially the last 5-10 years, Americans have been living way beyond our means. Consumption hit a record share of over 70% of GDP, 4-5 points above its long-term average, and the savings rate hit 0%, about 8 points below its long-term average. We borrowed like mad. We’ve been importing far more than we’ve been exporting and borrowing the difference. This has to stop—that’s an economic necessity. Either we stop it or we’ll be cut off and plunge into deep crisis. But how it stops and who pays are deeply political questions. How will President Obama handle this? Will the rich pay, or will we hear that we can’t afford universal health care until some never-to-be-announced future date? We’ll see, but my guess is that center-left orthodoxy will have the upper hand, meaning that the rich will pay some, but not much. The rest of us will be called upon to “pitch in,” since “we’re all in this together.” If you’ve been raking it in for the last 10 years, please raise your hand.
People have been saying the most amazing things. A friend I like and respect said the other day that America appears to be moving towards social democracy. Really? How do you figure that? Because Obama carried Indiana? Because the name of Larry Summers, the man who once said that Africa is vastly underpolluted, is being floated as Treasury Secretary?
It’s going to be something else to watch all the liberal Obama enthusiasts squirm and rationalize in the coming weeks. It’s already started, with the appointment of Rahm Emanuel, the DLC loyalist and son of an Irgun terrorist, as chief of staff. Writing on The Nation’s website, the irrepressible optimist John Nichols said, before the appointment was confirmed, “Picking Emanuel would reassure Wall Street, but it won’t give much comfort to Main Street. It will also cause some head-scratching among Democrats who thought they were making a break not just with the Bush administration but with the compromises of the Clinton era.” Why did Nichols expect anything else? When did Obama ever appear to be otherwise? He was careful during the campaign never to sound like a liberal, much less a social democrat.
People all over the world are celebrating Obama’s victory. I do wonder what they expect. Just what will change, beyond style and tone, from the Bush years? Hasn’t Obama promised to expand our military and increase its presence in Afghanistan? What we can hope for is a return to a “normal” imperialism from a mad-dog variant. That’s all. It’s an improvement, but not a transformative one.
There’s a rich irony here. Bush’s arrogance and bellicosity actually undermined U.S. power abroad. Iraq revealed our military to be something of a paper tiger—it can kill and destroy in huge quantities, but it can’t win a guerrilla war. And that’s what the pundits call “hard power.” Bush did even more damage to our “soft power”—American cultural and political prestige, and all those other things that provoke voluntary consent to what is euphemistically called our “leadership.” Almost overnight, Obama has repaired that. People I know in England, Australia, and South Africa, all smart with good politics, have been caught up in the enthusiasm. An Australian I know, whom I tooked to be a pretty hard-bitten fellow, said “we’re all putty in your hands for the next few months.” Amazing. Who thought the process of imperial repair could be so simple?
Of course, it’s not going to be so simple. As Obama performs up to the demands of his office—meaning the appropriate practice of violence and austerity—there will be slow but sure disillusionment. That disillusionment, as I’ve said before (and Adolph Reed will say in a few minutes), can be rich soil for more radical organizing. But there will be lots of excuses made before we get there. Lots.
Audio: October 30, 2008
We’re starting to see some more real world effects of the credit crisis, with an emphasis on starting. Thursday morning, the Bureau of Economic Analysis reported that GDP contracted by 0.3% in the third quarter (at an annualized rate, adjusted for inflation). That’s a mild contraction, but some of the components beneath that headline number were anything but mild. Personal consumption was down by over 3% (also at an annualized rate, adjusted for inflation, as are all these figures I’ll be citing). That was the first such decline since 1980, and I’m guessing that it won’t be the last, since I think the U.S. is in the middle of a structural shift towards less spending, less borrowing, and more saving—if there’s enough income growth to support it. Residential investment—the building of new housing and the renovation of existing stock—was down by 19%, a steep decline, though not as bad as some recent quarters. The major things keeping the headline number from being even more negative were exports and government spending, both up around 6%. The export number is lower than the second quarter, and with the rest of the world’s economies slowing down, they’re not likely to look very strong in coming quarters. The government number was stronger than in recent quarters, thanks in large part to military spending, which is a pretty debased use of public funds. More on debased uses of government funds in a bit.
In somewhat more reassuring news, we also learned on Thursday morning that first-time claims for unemployment insurance were unchanged last week. The reassuring part of the news is that they didn’t rise, meaning that the job market isn’t deteriorating at an accelerating pace. But it is deteriorating; jobless claims remain high—not at record levels, but still high. This portends continued job losses in the coming months. We’ll get the employment report for October next Friday; though I haven’t crunched the numbers yet, my guess is that we’ll see a quarter of a million jobs lost, and another uptick in the unemployment rate. I’d say it’s pretty close to certain that the jobless rate will move up towards 8%, which would be a rise of nearly 2 percentage points. It’s already up about 2 points from its cycle low, so we’re at best only halfway through the decline.
As I’ve been saying, all the government’s financial rescue operations will probably keep the worst at bay—like a rerun of the early 1930s—but can’t guarantee anything resembling prosperity. And as I’ve also been saying, we’re likely to see several years of a bad economy. I see no reason to change that prognosis. A bright sign is that we are seeing some unsticking of the credit markets. Those too aren’t likely to return to robust health for some time, but at least they’re showing signs of thawing out, as they must if we want to prevent that rerun of the 1930s.
Back to those debased uses of public funds I was talking about earlier. It’s looking like the financial sector is applying the billions it’s getting from the government towards its own preferred ends, and not aiding an economic revival. A report by the excellent Mary Williams Walsh in the Thursday New York Times questions what the hell AIG is doing with the $123 billion it’s gotten from the Federal Reserve; it appears to have burned through most of that cash, and no one knows why. AIG isn’t telling. What kind of nonsense is this? A company auditor has AWOL and is “in seclusion.” The company, long known for funny accounting, apparently hasn’t shaken the habit, and so far as we know, the Fed isn’t twisting its arms to make it change its ways.
And it also looks like many of the banks that have gotten equity infusions from the Treasury are using the money to continue paying dividends rather than rebuilding their balance sheets or making loans. That too is an outrage. A proper government equity infusion would require banks taking the cash to suspend dividends. And the equity should be of the voting kind, meaning that the feds should have a dominant voice in management. But Treasury Secretary Paulson has opted for nonvoting shares because he doesn’t want to step on management’s toes. If toes ever deserved to be stepped on—nay, run over with a steamroller—it’s those of Wall Street CEOs. Not only are these debased uses of public funds, they’re negating any of the good effects of a public bailout.
The IMF, which was off the scene for many years, is, like a vampire salivating at sunset, returning to action. It’s already developed a program for Iceland, which is being put through the austerity wringer; apparently being white and Nordic doesn’t earn you an exemption. It’s likely to lend some money to some countries that it deems virtuous on easy terms—among them Brazil but not Argentina. More on all this in the coming weeks.
Finally, let me repeat the conclusion of a talk I gave at the City University Grad Center, at a panel organized by David Harvey, on Wednesday night.
There’s a lot of talk about how this crisis marks the end of the neoliberal era, which it may be, and also portends the return of the state, which is a little more complicated.
Neoliberalism, a word that’s more popular in the outside world than in the U.S., took hold in the early 1980s. Its most prominent feature is an almost religious faith in the efficiency of unregulated markets. The ideal is—was?—to make the real world resemble the financial markets as much as possible, with continuous trading at constantly updated prices. To do that requires the commodification of everything, including water and air. Needless to say, much of that agenda was successfully accomplished. But this agenda wasn’t just the result of a bad mood the body politic woke up in back in 1979 or 1980. It was a response to some real problems—chronic inflation, and, from the elite’s point of view, a crisis of profitability and labor discipline. They want to turn all that around, and they mostly did.
It was accomplished with an often heavy hand of the state, however, a fact that contradicts neoliberalism’s self-identification as being all about getting the state out. It couldn’t have happened had the Federal Reserve under Paul Volcker not raised interest rates towards 20%, producing a savage recession that scared labor into submission and drove the world’s debtor countries into the arms of the IMF. It couldn’t have happened if the IMF, a body of states, hadn’t forcibly supervised the innumerable rounds of austerity, privatization, and market openings that were the “solution” to the debt crisis. It couldn’t have survived the repeated state bailouts that rescued the financial system whenever it hit a wall.
Now the financial system has hit a giant wall, and while the world’s states will probably succeed in preventing total disaster, there looks to be something historic about this wall, something end-of-the-lineish. Even very conventional people on Wall Street are talking about “the crisis of an economic paradigm,” in the words of ISI’s Andy LaPerriere. (ISI is the consulting firm run by Wall Street’s favorite economist, Ed Hyman; LaPerriere is in his Washington office.) To LaPerriere, this moment is very much like 1980, only instead of Reaganism, we’re seeing the dawn of a “new Democratic era.” These Democrats—who are basically what David Smick (who was on this show several weeks ago) calls “hedge fund Democrats”—don’t have anything matching the transformative agenda that Reagan (a real movement conservative) did.
But, and let me conclude on an uncharacteristically optimistic note, since there is no dominant narrative, and since the ruling class has too much egg on its face to talk clearly (or avoid being laughed at when they try), there’s a tremendous opening right now. With the public sector now so explicitly involved in an economic rescue, there’s room for the public to demand something in return. And while I don’t expect all that much from Obama, assuming he wins, and his fellow hedge fund Democrats on their own, the sense of possibility that he’s awakened is a very dangerous thing. Back in the Gorbachev days, the anticommunist right loved to quote Tocqueville saying that the riskiest time for a bad regime is when it starts to reform itself. That’s where our regime is right now, and it’s a good time for us, whoever we are exactly, to go out and make it riskier.