America's housing bubble still deflating
As they failed to spot the bubble, most economists seem oblivious of the threat of further market falls to come Dean Baker
If house prices fall by 15% in 2011, the likely cut in consumer spending could cost 1% in GDP. Photograph: Reuters/Shannon Stapleton
How many economists does it take to see an $8tn housing bubble?
The answer to that question has to be many more economists than we have in the United States. Very few economists saw or understood the growth of the $8tn housing bubble, whose collapse wrecked the economy. This involved a degree of inexcusable incompetence from the economists at the Treasury, the Fed and other regulatory institutions who had the responsibility for managing the economy and the financial system.
There really was nothing mysterious about the bubble. Nationwide house prices in the United States had just kept even with the overall rate of inflation for 100 years from the mid 1890s to the mid 1990s. Suddenly, house prices began to hugely outpace the overall rate of inflation. By their peak in 2006, house prices had risen by more than 70%, after adjusting for inflation. Remarkably, virtually no US economists paid any attention to this extraordinary movement in the largest market in the world.
Had they bothered, they would have quickly seen that there was no plausible explanation for this jump in prices in either the supply or demand side of the market....
Therefore, it should have been easy for any competent to economist to recognise the housing bubble. Moreover, the dangers for the economy should also have been apparent. The boom in construction (both residential and non-residential) had raised its share of GDP by more than 3 percentage points above its long-term average. In addition, the creation of $8tn in housing bubble wealth predictably led to a consumption boom, as households spent on the basis of the new equity created by the bubble.
All of this presaged disaster for the time after the bubble burst....
Yet, almost no economists saw what was clearly in front of their eyes. They thought everything was just fine, until the house of cards eventually collapsed in 2007-2008.
Unfortunately, the reign of error is not over.
As with Iraq, the reward for being right is to continue being ignored. Baker continues, to explain the appearance of a new housing slump:
Weekly Audit: Millions of Americans Could Lose Unemployment Benefits
Editor's Note: Happy Thanksgiving from the Media Consortium! This week, we aren't stopping The Audit, The Pulse, The Diaspora, or The Mulch, but we are taking a bit of a break. Expect shorter blog posts, and The Diaspora and The Mulch will be posted on Wednesday afternoon, instead of their usual Thursday and Friday postings. We'll return to our normal schedule next week.
"Their income is our cost" is NOT a very powerful meme
I dare anybody to try it out, on a selection of their friends, family, and acquaintances. If might be a big deal for lefties, but I doubt most people will get excited about it.
What most people can relate to, much more easily, is the impossibility of competing against a foreigner who makes 5 cents on the dollar that you do, other factors being equal.
Before addressing what metamars said here, I want to hasten to add that I know metamars is not being intentionally racist. But intentional racism is not the issue, and hasn't been for quite some time now. And yet, the racist implications to thinking like this are clear. As I explained to fladem, when he echoed metmars:
Chinese Workers Didn't Steal Our Jobs
American CEOs STOLE them, and gave them to Chinese workers at a fraction of the pay.
One narrative is FALSE, and pits workers of different nationalities against one another.
The other narrative is TRUE, and pits workers of all nationalities against the CEOs who exploit them.
I'm not uncomfortable with populism. I'm uncomfortable with RACISM and LIES.
So, with that out of the way, let's return to what metamars wrote. First off, of course, what I'm suggesting here is not a popular meme. We have centuries of elite brainwashing to thank for that. But as times get worse, if work hard enough it could well become a popular meme--because, of course, it's true.
But in one sense, it is surely is not a powerful meme right now, because people are just too beaten down, and it's so much easier to blame someone else who's powerless and preferrably far away, so we can blame some faceless "other", and then feel better in our continuing misery. There's a struggle necessary to get people in touch with their own power before a meme like this can be powerful rather than debilitating.
There's a parallel here to the dynamic discussed in the first diary spin-off from that diary, "Conservatives stoke resentment between worse off & better off workers to prevent solidarity". Like it or not, as Oaktown Girl pointed out, the meme of blaming better-paid workers is a powerful one, because people lack the confidence as well as the imagination to instead think, "That's what we all should have" instead of "Why do they have that? Let's take it away from them!"
Well, blaming worse-paid workers in the Third World isn't a whole lot better, either. They're not the ones in charge. They're not the ones who are doing it to you.
During Netroots Nation, we are running Golden Oldies plus a few surprises. Regularly Scheduled programming will resume on July 26.
A Paul Rosenberg Golden Oldie From Sat Jan 17, 2009. Original here.
Did you know that Obama has a mandate to slash Medicare and Medicaid? Probably not, I'd wager. But it seems that Obama believes he has such a mandate, according to an item at the Washington Posts' website ( h/t Digby ), that reads, in part:
Obama To Hold Fiscal Responsibility Summit
President-elect Barack Obama will convene a "fiscal responsibility summit" in February designed to bring together a variety of voices on solving the long term problems with the economy and with a special focus on entitlements, he said during an interview with Washington Post reporters and editors this afternoon.
"We need to send a signal that we are serious," said Obama of the summit.
Those invited to attend will include Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.), the conservative Democratic Blue Dog coalition and a host of outside groups with ideas on the matter, said the president-elect....
Obama said that he has made clear to his advisers that some of the difficult choices--particularly in regards to entitlement programs like Social Security and Medicare - should be made on his watch. "We've kicked this can down the road and now we are at the end of the road," he said.
This is not just something he didn't run on. It is, in fact, the exact opposite of what he ran on-or at least appeared to, as can be seen from economist Dean Baker's op-ed in The Guardian, a few days earlier, in which he wrote:
Although Social Security is paid for long into the future, Medicare does face problems due to the explosion of private sector health care costs. The way to address Medicare's shortfall is to fix the private health care system, as President Obama has pledged to do.
The truth of Baker's statement is readily apparent from the following chart, which I presented in my diary from last April, "Medicare Myths--Don't Blame The Boomers". Our medical costs are far higher than other countries with a significantly larger share of older citizens:
Not only is Obama's "fiscal responsibility" kick at odds with his actual mandate and his own health care proposals, it reflects a deeply ideological worldview that--far from being bipartisan or "post-partisan"--is strongly opposed by solid majorities across the political spectrum. It is the very essence of Versailles insiderism.
More than two years after the collapse of Bear Stearns, the House and Senate finally ironed out their differences on Wall Street reform in the wee, small hours of Friday morning. The bill now goes back to both the House and Senate for final approval, but it's fate in the Senate is uncertain following the defection of Tea Party Sen. Scott Brown (R-MA).
In the fall of 2008, decades of finance-first, bankers-know-best economic policies coalesced to create one of the worst economic crises in history, one that the banks themselves could not survive without staggering levels of government support.
Yet astonishingly, nearly two years after the crash, Wall Street is still setting the economic agenda in Washington. As Congress begins to examine broader economic policy, lawmakers are under heavy Wall Street pressure to reduce the federal budget deficit-even though that could mean deepening the jobs crisis without any substantive economic benefits.
Small-bore reforms
At the same time, the financial reform bill that Congress is on the verge of passing leaves quite a bit to be desired. As the editors of The Nation emphasize, that legislation includes several small-bore fixes to ease the damage caused by Wall Street excess, but almost nothing to actually curb the excesses themselves. The capital markets casinos will largely be left untouched. Congress still has time to improve the bill over the next month as the House and Senate iron out their differences, and many useful reforms remain in play.
Nevertheless, Wall Street's lobbyists have succeeded in taking the most important reforms off the table. We will not break up the biggest banks this year, nor will we tax reckless financial speculation. We aren't even banning economically essential banks from participating in risky securities businesses.
Et tu, Buffet?
As Annie Lowrey notes for The Washington Independent, the crisis has even discredited Warren Buffett, one the few financial superstars who previously had a reputation as a "straight-shooter" that invested in responsible enterprises.
Buffett was once a harsh critic of credit rating agencies, the firms who slapped top ratings on toxic mortgage-backed securities and derivatives. But Buffett himself is also a top shareholder in Moody's, one of the worst ratings agencies. The Financial Crisis Inquiry Commission had to compel Buffett's testimony at a recent hearing via subpoena after Buffett turned down multiple requests to appear. At the hearing itself, Buffett did everything he could to pass the buck from himself and Moody's to any other possible target.
Slashing the deficit
Wall Street's ugly influence on economic policy extends far beyond the realm of bank regulation itself. Right now, financial elites are pushing hard on a right-wing plan to slash the federal budget deficit, and even many moderate Democrats are coming out in support of reduced government spending.
This strategy is a tremendous political blunder, as Steve Benen emphasizes for The Washington Monthly. It's true that the deficit does not poll very well-but the deficit is only one side of the issue. Cutting the deficit means slashing federal support for jobs-we can help the economy or we can slash the deficit, but we cannot do both at the same time.
Nearly everyone believes that creating jobs should be a top priority for the government, but if politicians only ask questions about the deficit, they won't hear answers about the economy. The political imperative is clear, as Benen notes:
This really shouldn't be complicated: invest in more job creation, help struggling states as they keep laying off workers, and make clear to voters that the economy is more important than the deficit. Do this immediately, without apology.
Replacing Social Security with credit cards?
Wall Street loves cutting social services in the name of deficit reduction. Every public good that can be efficiently provided for by the government can also be inefficiently provided by the private sector-replacing public benefits with corporate profits. The bank lobby would like nothing more than to replace Social Security with credit cards for senior citizens. Wall Street doesn't make a dime on the government's Social Security payments-but they can make a killing on a privatized market.
Weak job growth=Weak private sector
Lest there be any question about whether or not the government needs to take strong action to strengthen the labor market, take a look at Friday's jobs report. As Tim Fernholz notes for The American Prospect, this report was the most disappointing piece of economic news in months. While the economy gained 431,000 new jobs during the month, 411,000 of them were temporary hires by the U.S. Census, meaning the private sector is not able to support much new hiring.
There's a critical lesson there: The only serious engine of job growth in the month of May was the federal government. Absent government hiring, the economy is not improving at all. There is an almost bottomless supply of critical social needs that require work right now, but no private-sector momentum to meet those needs.
The BP oil catastrophe should underscore how important new, green energy is to the U.S. economy-yet U.S. efforts to develop green energy solutions have fallen far behind those of China and other industrial powerhouse nations. Major federal investment into the research and implementation of green energy would be good for our environment and good for our economy.
Don't let social services suffer
But astoundingly, the advice on the world economy currently coming from top policymakers at the Federal Reserve, the International Monetary Fund and European central banks is echoing the bank lobby line: Slash social programs now, and let the job market fend for itself. As Dean Baker emphasizes for AlterNet, these are the exact same policymakers who missed the housing bubble, made the wrong calls on bank regulation and sent the global economy into freefall.
There has been little change in personnel and no acknowledgment of error at the central banks whose incompetence was responsible for the crisis . . . . their agenda seems to be the same everywhere, cut back retirement benefits, reduce public support for health care, weaken unions and make ordinary workers take pay cuts.
In short, Wall Street and the Wall Street policy agenda remain ascendant, despite economic catastrophe. In the Great Depression, the government actually learned its lesson-we regulated the banks, created Social Security and put millions to work through government hiring programs. That same basic agenda is needed today. Failing to meet it could well mean decades of economic decline.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
One year after President Barack Obama secured passage of his critical economic stimulus package, the U.S. Senate is finally taking anther look at how to create jobs and repair the economy. These issues are more important than ever, but absurd Republican obstructionism and timid Democratic negotiation are once again threatening good public policy.
Not really bipartisan, is it?
As Steve Benen notes for The Washington Monthly, the Senate Finance Committee reached a "bipartisan" agreement to supposedly spur job creation last week. Republicans demanded billions in tax cuts for wealthy people, but kept on caterwauling about the federal budget deficit. In exchange for $80 billion to dedicate to jobs-an extremely modest figure given the state of the labor market-Republicans asked for hundreds of billions in giveaways for the rich. And that's just to get the bill through the Finance Committee, much less the full Senate.
In a piece for Working In These Times, Michelle Chen notes that Senate Majority Leader Harry Reid pulled the plug on the Finance Committee "compromise," but stripped out a critical extension of unemployment benefits for laid-off workers in the process.
The Republican uproar over such modest job figures is an economically preposterous political ploy, and Democratic cave-ins to their demands are both bad politics and bad economics. Chen notes that 70% of Americans support a $100 billion jobs bill. And we know what kinds of programs help spur employment-many of them were passed in the stimulus bill last year and have saved millions of jobs.
Stopping the Bleeding
In an interview with Christopher Hayes of The Nation, Economic Policy Institute Fellow Josh Bivens explains that Obama's economic stimulus package has worked well, effectively stopping the job hemorrhaging that the economy was experiencing immediately before Obama took office. Here's Bivens:
"We haven't returned to growth on employment ... but the rate of contraction has slowed radically. Immediately before the Recovery Act is passed, we're losing on the order of 700,000 jobs per month ... In the past three months, we're now down to something like between 50 and 75,000 jobs lost per month, on average ... it really is a stark before and after."
Racial inequality and the recession
The trouble is, the stimulus was only big enough to prevent the economy from getting much worse. It was not large enough to return the economy to serious job growth. And the brutal effects of the recession are not being shouldered equally. As LinkTV's collaboration with ColorLines illustrates (video below), the Great Recession is hitting people of color much harder, but the story of racial inequality is being lost in stories about statistical economic recovery in the financial sector. The special profiles several families of color struggling to make ends meet in the worst recession since the Great Depression, which features Depression-era unemployment rates for African Americans.
"What we don't see on TV are the [people] who never had a home or a good job to lose in the first place. These are the millions of poor people whose chance to cross the line into middle class has always been cut short by another kind of line, the color line," says host Chris Rabb, founder of Afro-Netizen.
Rabb, ColorLines and LinkTV describe a social safety net that has been shredded by opportunistic politicians. Instead of focusing on ways to guarantee good jobs, politicians since the Reagan era have demonized black single mothers by exploiting racist stereotypes in an effort to justify slashing federal supports for the poor and unemployed. The result is a fundamentally unstable economy. Our society has weak demand for goods and services in good times, and that demand completely falls apart when economic conditions deteriorate. And while these socially destructive initiatives have been described as "pro-business," the truth is, businesses don't like societies where millions of people are impoverished. They don't have any customers.
Predatory lending strikes again
The recession hasn't exactly been a picnic for the middle class, either. In an article for Mother Jones, Andy Kroll profiles the mortgage mess that Ocwen Loan Servicing created for borrower Deanna Walters. Unlike millions of other borrowers dealing with mortgage headaches, Walters wasn't actually behind on her payments. She was making payments regularly, but Ocwen was misplacing them, and charging her thousands of dollars in improper fees. Walters even paid the fees, but Ocwen eventually foreclosed on her home and sold it in an auction without even informing Walters.
As Kroll emphasizes, Ocwen's antics aren't unique. There is an entire class of companies known as mortgage servicers that specialize in deceiving and bullying borrowers out of their money. They often use illegal tactics, and as I note for AlterNet, have been systematically exploiting a badly designed foreclosure relief program from the U.S. Treasury Department.
Funding projects that will put people to work
As prominent economist Dean Baker argues for The American Prospect, there are dozens of productive programs that would put millions of people back to work-if they could just get the funding. The government could quickly and easily provide money to improve public transportation, develop open-source software, fund objective clinical drug trials and (my favorite) support writers and artists, whose work would subsequently be available for the public to enjoy for free.
Taxing financial speculation
The federal government can afford these programs right now, especially without any additional tax revenue. But if we're really worried about the budget deficit, we can always turn to reasonable new sources for taxes. As Sarah Anderson details for Yes!, an obvious place to look is financial speculation. Since excessive and risky trading helped bring down the economy in 2008, a tax discouraging this behavior could make the economy stronger and reap as much as $175 billion a year for the public.
Our economy wouldn't face troubles of the same order as those it must overcome today if so-called conservatives had not spend decades pursuing a radical agenda to shred the social safety net. The stimulus package has not spurred job growth to date because of cuts demanded by Congressional Republicans, nearly all of whom refused to vote for the bill anyway. Our economy needs a jobs bill now. It'd be nice if Republicans would show some interest in governing, but if they continue to refuse, Democrats must act on their own.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
We at Open Left are taking the New Year's weekend off. Golden Oldies will run in their place. Regularly Scheduled programming will resume on January 4th--Chris Bowers
A Paul Rosenberg Golden Oldie From Sat Jan 17, 2009. Original here.
Did you know that Obama has a mandate to slash Medicare and Medicaid? Probably not, I'd wager. But it seems that Obama believes he has such a mandate, according to an item at the Washington Posts' website ( h/t Digby ), that reads, in part:
Obama To Hold Fiscal Responsibility Summit
President-elect Barack Obama will convene a "fiscal responsibility summit" in February designed to bring together a variety of voices on solving the long term problems with the economy and with a special focus on entitlements, he said during an interview with Washington Post reporters and editors this afternoon.
"We need to send a signal that we are serious," said Obama of the summit.
Those invited to attend will include Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.), the conservative Democratic Blue Dog coalition and a host of outside groups with ideas on the matter, said the president-elect....
Obama said that he has made clear to his advisers that some of the difficult choices--particularly in regards to entitlement programs like Social Security and Medicare - should be made on his watch. "We've kicked this can down the road and now we are at the end of the road," he said.
This is not just something he didn't run on. It is, in fact, the exact opposite of what he ran on-or at least appeared to, as can be seen from economist Dean Baker's op-ed in The Guardian, a few days earlier, in which he wrote:
Although Social Security is paid for long into the future, Medicare does face problems due to the explosion of private sector health care costs. The way to address Medicare's shortfall is to fix the private health care system, as President Obama has pledged to do.
The truth of Baker's statement is readily apparent from the following chart, which I presented in my diary from last April, "Medicare Myths--Don't Blame The Boomers". Our medical costs are far higher than other countries with a significantly larger share of older citizens:
Not only is Obama's "fiscal responsibility" kick at odds with his actual mandate and his own health care proposals, it reflects a deeply ideological worldview that--far from being bipartisan or "post-partisan"--is strongly opposed by solid majorities across the political spectrum. It is the very essence of Versailles insiderism.
Two key lawmakers on the House Financial Services Committee, Reps. Alan Grayson (D-FL) and Ron Paul (R-TX), are pushing to authorize a full, comprehensive audit of the Federal Reserve. The plan has sparked fury from both the Fed and the corporate banking industry, but the proposal is so appealing that the controversy is almost laughable.
The Federal Reserve is one of the most powerful economic institutions in the world, but most of its operations are conducted in total secrecy. The Fed's rescue activities have dwarfed the $700 billion Troubled Asset Relief Program, but without any public accounting. Some of these efforts may have been entirely appropriate, but we don't even know who the Fed is helping. That fact is a major barrier to establishing effective and fair economic policy.
"The Fed is a typical Washington institution that operates un-democratically and in virtually total secrecy, and a Congressionally-mandated audit that they (and much of the DC establishment) desperately oppose would be a serious step towards changing the dynamic of how things function. At the very least, it would provide an important template for defeating the interests which, in Washington, almost never lose."
Under the Grayson-Paul plan, which is offered as an amendment to the Financial Stability Improvement Act of 2009, the Government Accountability Office would be given the authority to audit all of the Federal Reserve's activities, just as it can audit other public programs and institutions.
Last week, the House Financial Services Committee approved the audit-the-fed bill, despite opposition from panel Chairman Barney Frank (D-MA), who tried to gut the plan. Even on the Financial Services Committee, where the banks concentrate their campaign contributions, Grayson was able to convince 14 other Democrats to stand up to the financial establishment.
The vote of approval scarcely registered on mainstream media's radar, and even then, the Grayson-Paul legislation was portrayed as an assault on the Fed's "political independence." As Dean Baker notes for Talking Points Memo, it's hard to see how a simple, public accounting can be construed as a political hit on the Fed's policy-making.
By setting interest rates, the Fed has enormous power to do almost anything under the economic sun, from fueling quick growth to destroying jobs. All of these powers have useful functions under the right circumstances, and we really don't want Congress to make decisions about the economy based on the interests of powerful lobby groups. The Grayson-Paul bill wouldn't do anything of the sort. As John Nichols explains for The Nation, audits of sensitive economic policy decisions would be subject to a six-month lag before they could be publicly released. If the Fed needs to act fast, Congress won't be able to get in its way. The public will eventually know how its own money is being spent, however, and learn how a public institution is conducting itself.
"In other words, this is about simple transparency, which everyone should favor," Nichols writes.
The White House and the Congressional Democratic leadership need to support a full and comprehensive audit of the Federal Reserve. It's an issue of basic democratic accountability. There is no good reason why economic policy should be conducted in secret.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Unemployment figures in the U.S. are staggering: The official rate stands at 10.2%, the highest in 26 years. A broader measure that includes people who are involuntarily working part-time or who have given up looking for work is at 17.5%. That's a full-blown economic emergency.
But, as Joshua Holland explains for AlterNet, President Barack Obama's response to the unemployment crisis has not matched the urgency of his response to the crisis on Wall Street. This isn't just unfair, it's bad economics.
"It's important to understand that the economic crisis in which we find ourselves is not just a function of a shaky financial system but of a crash in consumption that's come along with the evaporation of $14 trillion worth of the wealth of American families," Holland writes.
Widespread joblessness can be every bit as damaging to the economic structure as a financial crisis. When people are out of work, they buckle down on household expenses. When several million people cut back at the same time, the economic machine grinds to a halt. If people are not buying and selling stuff, the economy isn't working.
As Mary Kane explains for The Washington Independent, about 40% of families don't have enough money to cover expenses through a three-month stretch of unemployment-even if one member of the household is receiving unemployment benefits. Kane highlights a Brandeis University study that reveals the haggard state of the American household and the unfair distribution of wealth along racial lines. A full 66% of African-American and Latino families can't afford three months without work. At a time when 5.6 million workers have been jobless for at least six months, the study highlights just how dire finances have become for many households.
GRITtv's Laura Flanders discusses potential labor market remedies with economist Dean Baker and The Nation's John Nichols. Baker suggests a work-share arrangement, in which employers cut back on their workers' hours to allow more people to work. To prevent losses for households, the government would step in and pay for the shortfall in hours. Employers would have more part-time jobs available, but the government would make sure everyone was paid as if they were working full-time. Baker also endorses a public jobs program, which he says could be especially useful in cities like Detroit and Cleveland that have been hit particularly hard by the economic downturn.
Nichols highlights the political consequences of failing to fix the unemployment mess. Unemployment directly affects the lives of voters. If widespread joblessness persists through November 2010, Democrats will net huge Congressional losses. If Obama thinks it's hard to garner bipartisan support for his legislative priorities now, imagine a few dozen more Republican obstructionists.
It's not that Obama failed to respond to the unemployment crisis. He did. That's what the stimulus package was all about. Today's 10.2% unemployment is a catastrophe, but it would be more like 12% without the stimulus package. But, given the seriousness of the issue, Obama is not giving unemployment enough attention.
In fact, Obama's economic priorities are a mirror-image of his campaign promises, as Robert Scheer argues in both a column for TruthDig and an interview with Amy Goodman on Democracy Now! After talking tough about reining in recklessness on Wall Street and making the financial system more accountable, Obama has hired many of the very policy makers who pushed through the deregulatory agenda back in the 1990s. Top Obama administration officials like Larry Summers, Timothy Geithner, Gary Gensler and Neal Wolin helped make this mess in the first place.
"This is not a minor criticism," Scheer says. "I think the guy is betraying his own presidency."
Obama's timid efforts to rein in Wall Street and heal the ailing job market are setting the stage for a political disaster. If Obama and Congressional Democrats can't take strong action to fix the economy, they will find themselves with much narrower majorities next November. The economy, and the public institutions that support it, are supposed to work for everyone, not just the financial elite.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Obama's economic policy has been justly criticized for the lack of transparency, regulations and accountability in dealing with Wall Street and its accomplices. But the flip side of this has been almost total neglect of the main street side of the equation--inadequate attention to foreclosures, loss of home equity value, and employment deficits that belie the purported "good news" of economic recovery. A couple of recent papers from Dean Baker at the Center for Economic Policy Research (on co-authored, one solo) help to bring the relatively neglected side of the situation into focus. Together, these two papers indicate potentially substantial benefits to be gained from vigorous federal action.
"CBO Projects More Severe Downturn" (pdf) looks at at the August CBO's Update of its Budget and Economic Outlook, and discusses its implications. The 5-page report features the following chart illustrating the magnitude of economic loss we face:
Of course, the lost output is to the whole economy, while the health care cost is restricted to the federal budget. But the federal taxes on the lost income, plus reduced federal costs because of such activity pretty much indicate that if we did not face that magnitude of lost economic activity, that alone would produce enough federal revenue to pay for the $1 trillion in health care spending.
The last paragraph of the report concludes:
These new projections from CBO suggest that the downturn will be far more severe and prolonged than in its projections from January. The projection of a more severe downturn should draw considerable attention from the Obama administration and Congress. It implies a much more dire situation than the one envisioned when the stimulus package was crafted in February. Presumably, the President and Congress will want to adjust their policy in light of the new information in this report.
By comparing home prices to rents, as suggested by basic economic theory, this paper finds that while most of the nation's metropolitan housing bubbles have deflated and many markets never had one to contend with, there is the possibility of a persistent housing slump in the years ahead. An appropriate response to this problem involves:
1) Stimulating the fundamental demand for housing through acting to lower unemployment and raise wages;
2) Recognizing a leading role for rental housing in federal foreclosure mitigation and
neighborhood stabilization policy, including allowing foreclosed homeowners to remain in
their homes as renters; and
3) Adequately funding the National Housing Trust Fund to capitalize on current low prices,
ensure long-term affordability in a recovery, absorb excess housing, and stimulate
employment.
It's bad enough to be jobless for a few weeks; it's much worse being unemployed for months or years. Yet that's exactly what will happen to millions of Americans if the average forecast is right -- which means that many of the unemployed will lose their savings, their homes and more. To head off this outcome -- and remember, this isn't what economic Cassandras are saying; it's the forecasting consensus -- we'd need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act.
Not much about macro-economics is obvious, and even mathematical economists who subscribe to exactly the same sub-division of economic ideology can radically disagree about factors as fundamental as the fiscal multiplier.
Likewise even the definitions of terms like "unemployment" are so complicated and indefinitely qualified that even the most official of all official measures of unemployment by the Bureau of Labor Statistics is immediately fractured into six "alternative measures of labor underutilization," and there wouldn't be much hope for the average person to understand anything about the statistical measures of unemployment if all those different indicators weren't moving in exactly the same direction.
Zoom!
One of many unpleasant aspects of depression and recession economics is what you might call a snowball effect, and as more and more people lose jobs, the salesmen who formerly sold them boats goes under, and then the worker who built the boats, and so on.
Prescriptions for dealing with similar phenomena have been incorporated into the folk-wisdom of all times and places, in the form of nostrums like "an ounce of prevention is worth a pound of cure" and "a stitch in time saves nine," but American political economics possesses a peculiar un-wisdom of its own, and although one or two "stitches in time" could have prevented the whole mess ten years ago when Brooksley Born was ringing alarms all over Washington, and Larry Summers was making sure nobody listened, now the same little snowball which Ms. Born detected in its very beginnings has doubled its snow-mass again and again and again and turned into a regular avalanche.
But not every avalanche is a roaring monster consuming skiers and chalets and tiny Swiss villages on its way to the bottom of the mountain, because mountainsides all over the world are terraced with avalanche-fences to stop little avalanches before they grow, and almost every avalanche-fence in the world is located somewhere between the top of a slope and the middle, because by the time an avalanche gets anywhere near the bottom of a mountain, you need something more like the Great Wall of China than any kind of fence to stop it.
This is a picturesque translation of the arguments Paul Krugman and Joseph Stiglitz and Dean Baker and many other honest economists made for applying a realistic stimulus to the American economy before our current recession/depression developed too much momentum, but instead we got a feeble and slow-motion stimulus full of tax-cuts, like a rickety fence that wouldn't even stop a rabbit, much less an avalanche, and the American economy is still bleeding ten or fifteen or twenty thousand jobs every day.
Two weeks ago, I wrote a diary, "The Recovery Myth", warning about the risks of ignoring longer-term economic prospects for short term upticks. This diary continues that theme (and is fully in tune with Mike's recent diary, "We Need a Jobs Package, Not a Stimulus Package").
A rising tide of voices are warning that optimism over a coming recovery--the promise of "green shoots"--is looking increasingly questionable. Typical of these are Dean Baker's "The Green Shoots Are Dead", hence my diary title. The subhead to his article explains:
The latest jobless figures show America's economy is stuck in the doldrums. The US urgently needs a new stimulus injection
Krugman argues along similar lines in his July 9 column, "The Stimulus Trap"
As soon as the Obama administration-in-waiting announced its stimulus plan - this was before Inauguration Day - some of us worried that the plan would prove inadequate. And we also worried that it might be hard, as a political matter, to come back for another round.
Unfortunately, those worries have proved justified. The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration's economic stewardship. There's now a real risk that President Obama will find himself caught in a political-economic trap.
The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed....
In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery....
This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.
Meanwhile, Bonddad is on a counter-contrarian kick at DKos, writing "The Economic Free Fall is Over", which I believe is instructively mistaken. It's true in one sense, but it misses the point in a larger one (after all, FDR reversed the downward plunge of the GDP within his first two years, but unemployment remained crushing until WWII came along). More on all of these viewpoints--and more viewpoints as well--on the flip.
(Reposted from TPMCafe, where Dean Baker may be answering it right now!)
Wouldn't it be useful if there was something, anything, in the realm of economic jargon that meant the same thing as the everyday meaning of the same words, insofar as those words even have an everyday meaning?
According to Dean Baker, unemployment is either 8.1% or 9.5%, and this means the current recession is almost tied with 1982 for "worst since the Great Depression." Unemployment has an everyday meaning, recession doesn't, and neither word is likely to convey to the average reader what it conveys to Dean Baker, one of the few economists who has actually been right about anything lately.
Even the most excellent economists are constantly having problems with the jargon, and Paul Krugman, another lonely member of the Dean Baker "right about something" school of economics, says "I think quantitative easing (it's really qualitative easing, but I give up on trying to fix the terminology) is the right way to go."
Enough with this jeremiad, and now... a question for Dean Baker, whom I imagine hovering over his keyboard just waiting to answer a query from some economic illiterate on TPMCafe:
Interest rates are so close to zero that the usual neo-Wicksellian games with money supply don't work, for the banks, but...
What about the rest of us?
If you increase my money supply, and lower my interest rates to zero on my mortgage, it would for damn sure have a noticeable effect on me.
So why is Team Obama still trying to get a pulse out of stone-dead banks, and inventing ever more exotic ways to resuscitate those corpses, when the rest of us who are actually still alive continue to pay interest that's way higher than the bank premium, and we could actually use an increase in our money supply and some relief on the interest we still pay the banks?
Forget the dead middlemen! Stimulate us, instead of an economy that nobody can even describe without incomprehensible jargon
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