LBO News from Doug Henwood

Radio commentary, November 6, 2008

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.

Radio commentary, October 30, 2008

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.

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