The NYT’s David Leonhardt is a smart guy, but in his attempts to bind over backwards and give a nod of credence to every lame theory about why the economy cannot lift itself out of this recession is a little maddening, We’re Spent
THERE is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs: The deficit is too big. The stimulus was flawed. China is overtaking us. Businesses are overregulated. Wall Street is underregulated.
But the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.
The housing bubble had several elements to it. One was the deeply irrational belief that real asset would continue to appreciate in value no matter what. From small banks to the too big to fail financial institutions saw real estate values increase by as much as 50%. They created CDOs and derivatives based on the belief this would continue. At the same time those financial institutions and insurers like AIG financial division( in particular) had nowhere near the real reserve assets to pay off if history’s most expensive bet went sour. Average everyday small c conservative Americans saw what was going on and instead of spreading their savings across mutual funds, bonds, certificates of deposit or whatever combination of diversified investment put most if not all their money in a home. That home and the assumption of continued appreciation, made the kinds of other investments I mentioned seem like standing still. In the end we all know what happened. The too big to fail banks got bailed out – some merged – and home owners were left to deal with underwater mortgages. Business is over regulated? There is just about always room to review regulations, but the fact is that if the Bush administration had just enforced the regs on the books it might have prevented or lessened the impact of the financial meltdown. Greenspan could have upped interest rates on loans or required and enforced larger down payments on what had become deceptive and frequently predatory lending. The stimulus of 2009 was too small to accomplish its goals. That is easy to document. On the other hand it did stop the economy from hemorrhaging 750,000 jobs a month. Without the stimulus – The Recovery and Reinvestment Act which included over $280 billion in tax cuts ( a kind of supply-side stimulus. Certainly not the kind of pure Keynesian intervention that would have produced better results) unemployment would be worse and the growth of GDP would be down. If we narrow down Leonhardt’s thesis to just the bust part he is right. people are not buying stuff. Since people are not buying stuff there is little demand. Since there is little demand there is little hiring to make the stuff which people cannot afford to buy. It is an economic death spiral,
The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.
The past week brought more bad news. Retail sales in June were weaker than expected, and consumer confidence fell, causing economists to downgrade their estimates for economic growth yet again. It’s a familiar routine by now. Forecasters in Washington and on Wall Street keep saying the recovery’s problems are temporary — and then they redefine temporary.
If you’re looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future (and many have discovered that they don’t need to buy a new car or stove every few years). Both consumers and executives are easily frightened by the latest economic problem, be it rising gas prices or the debt-ceiling impasse.
This is the part that is making the supply-side pissed off and bring out their usual revisionism of the Great Depression and Hoover,
The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty. The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Mellon said, according to his boss, President Herbert Hoover. “It will purge the rottenness out of the system.”
History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day.
From 1929 to 1933 Hoover did very little. In 1932 he did sign the Emergency Relief and Construction Act, which authorized funds for public works programs. Conservatives claim this spike in spending three years after the Depression started, causing a spike in federal spending and an increase in spending of course as a percentage of GDP just made things worse. he should have stuck with Mellon’s deeply sage advice and let people continue to starve, the economy would have eventually come around on its own. FDR continued Hoover’s public works agenda, but pulled back in 1937, becoming the classic liberal budget hawk. The economy started to lose ground again. Republicans picked up some seats in Congress. FDR reversed course and embarked on a more Keynesian approach. And yes the war helped.
But there is one important difference. In the “Roosevelt Recession” of 1937-38, FDR and his economic advisers were quick to recognize their mistake. Instead of stubbornly holding course, they promptly reversed themselves and went back to Congress in the spring of 1938 to demand a massive increase in government spending. This spending was to put some of the millions who had lost their jobs due to the misguided policies of 1937 back to work. Within a few months, the downward spiral that was initiated by the 1937 pullback was over and the economic recovery — that had been running at an average annual rate of 14 percent between 1933 and 1937 — resumed.
When Paul Krugman or some other pundit says that Obama and Republicans are repeating the mistakes of Hoover they are speaking to the first three years in which he largely did nothing. He caused a ridiculous trade war which no classical liberal of the day would have supported, in a misguided attempt at protectionism.
Chart from here. By the end of 1936 industrial production had returned to pre-Depression levels. Keynesian economics works.
Leonhardt also suggest that maybe a tax incentive for business new hires might help. Pesident Obama and Democrats already passed such a tax incentive – Hiring Incentives to Restore Employment (HIRE) Act
A scaled-down, $17.6 billion jobs bill signed into law by President Obama on Thursday features a handful of benefits for business owners, but falls short of the sweeping hiring incentives President Obama and some lawmakers on Capitol Hill initially pushed for.
The bill offers employers two tax breaks for qualifying new workers hired in 2010. Companies will be exempt from paying their share of Social Security payroll taxes, normally 6.2% of a worker’s wages, for any new worker who was unemployed for the prior 60 days.
Each of those new employees retained for a full year would net the company an additional $1,000 back on its 2011 tax return, or 6.2% of the wages paid to the employee in 2010, whichever is less. Companies of any size can claim the credits, for an unlimited number of workers. The measure’s estimated cost is $13 billion over 10 years.
Democrats and president Obama also passed the The Small Business Health Care Tax Credit? Not directly an incentive to hire but does save small business money on current employees and gives employers an incentive to offer health insurance if they had not previously done so.
While I am honestly not sure that most Republicans do not have a subconscious desire to crash and burn the economy and their party with it, I also think they’re afraid of the consequences of going full on melt down – Top lawmakers target ‘grand bargain’ for debt plan
In public at least, conservatives are maintaining that the answer is to “cut, cap and balance” — passing a balanced-budget amendment that would cap federal spending at 18 percent of the nation’s gross domestic product, down from its current 24 percent.
The House is expected to vote Tuesday on such an amendment, but it has scant odds of getting the needed supermajority in the Senate. Democrats say an 18 percent cap in a country with an aging population and rising health-care costs would lead to ruinous cuts.
[ ]…To get backing from House Republicans, McConnell and Reid are adding $1.5 trillion in spending cuts. And they are drawing up the committee, with six lawmakers from each party, which would report by the end of the year.
The committee would resemble the fiscal commission chaired last year by Alan Simpson and Erskine Bowles, minus presidential appointees. But its path would be easier: The panel will require only a simple majority to report a plan to Congress, it would be protected from Senate filibuster and it would not be subject to amendment, similar to the system used for closing military bases.
The same lawmakers appointed to the fiscal commission may not be appointed to the new committee. Aides said Reid, for one, is likely to make different choices. But Sen. Richard J. Durbin (D-Ill.) said there is little doubt where the committee will start.
“We all keep coming back to the same basic parameters. The Bowles-Simpson plan really laid out how you reach $4 trillion. And there aren’t a lot of things they didn’t consider,” Durbin said. “There are only so many moving parts here.”
The commission recommended saving $3.8 trillion by raising the retirement age for Social Security, slashing spending across government and wiping out more than $100 billion a year in popular tax breaks, including the tax deduction for mortgage interest and the tax-free treatment of employer-provided health insurance. It recommended larger Pentagon cuts and revenue increases than the White House sought this month.
Make no mistake that Republicans are considering such a commission is a clear signal they are deeply afraid of playing more debt ceiling Armageddon, than dealing with the electoral consequences of sending the economy into yet another downward spiral. The balanced budget amendment, which has been floating around since the 1980s is also another form of cowardice. It is simply a way for individual legislators to avoid responsibility for their votes and their spending proposals. Remember the Bush administration and the Republican controlled Congress for six of those years were a lesson in giving a credit card to people with a spending addiction.