I have heard arguments, which I want to be persuaded by, that bottoming out this recession is less a matter of government brilliance than simple market capitulation. Once people really believe the worst, and prices adjust accordingly, we'll be ready for growth again.
I find this attractive in part because there's reason to believe that we are getting closer to capitulation--for all that a trader of my acquaintance used to pull on his hair and shriek "If you think the market has capitulated, it hasn't capitulated, by definition!" whenever anyone suggested such a daft thing. Housing prices in DC are falling off a cliff, and while the homeowners I know regard this as rank injustice and a horrible economic sign, to me it's a signal that maybe I could actually buy a home of my own in a couple of years.
(No, I'm not looking to make a killing in real estate; I'm looking for a place to live that I can have just as I please. Yes, dodgy water heaters and leaky roofs and all.)
But I can't quite convince myself that it works this way. There's a genuine overhang of homes, and a housing market that seems to have frozen up (which is why prices are tumbling over those cliffs--the desperate have to keep on lowering their prices to lure buyers). Americans genuinely, desperately, need to pay down debt, which means buying fewer goods and services that other Americans make their living off of. And I think that Arnold Kling is right when he identifies a massive structural unemployment problem. The financial and housing sectors were grossly bloated, and being a mortgage broker or a structured finance associate does not actually prepare you for much in the fields that are still growing, like health care and bankruptcy law.
No, though I think that people are finally ready to believe the worst, we have not yet seen it. This recession or depression or whatever we're now calling it is not ready to let its teeth out of us yet.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
I have friends who just made an offer on a house. The place sold in 2003 for $310,000 the seller just accepted an offer for $245,000. That's down 25% from 2003 and probably down 50% from the tip tip tippy top of the bubble.
Americans genuinely, desperately, need to pay down debt, which means buying fewer goods and services that other Americans make their living off of.
For an individual, that is sound advice. But from a macro standpoint, the opposite is true.
To get out of this, we need growth. To have growth, consumers need to go spend money, which will causes businesses to invest and hire people, which in turn generates tax revenues.
In an ideal world, consumers, businesses and government would start spending until growth is created, at which point all of them would begin to pay off their debts and clean up their balance sheets once they have the means to do so.
In the real world, we should be finding ways to getting them to spend right now. We should later change the policies to encourage savings and debt reduction once the economy has produce enough surplus to slow things down and get our houses in order.
I would not confuse stock market capitulation with the overall economic recovery. Assuming that the world hasn't turned completely upside down, the stock market recovery will precede the end of the recession, given that investors are forward looking and try to buy low before prices and values go up.
Housing values may lag that, and employment almost certain will be one of the last pieces to come into play. Consumers will need to start parting with their cash and using their credit before businesses find reasons to add to their payrolls. That requires that consumers have credit, hence the need for the infusions into the banking system.
Definition of schadenfreude:
The feeling that you get when the same corporate associates who ridiculed you when you left the big city megafirm and took a 70% pay cut call and ask if the state attorney general's office is looking to hire, and they'd be more than happy to learn health care law if that would get them a job.
I have yet to say "a $180,000 pay cut sure is better than a $260,000 pay cut, huh?" But perhaps that's because I'm in a bit of a rush to leave the office by 4:45.
"Americans genuinely, desperately, need to pay down debt, which means buying fewer goods and services that other Americans make their living off of."
How much of American consumer debt was a result of high housing prices. If my friends had bought in 2006 their house might have been 400k @ 7% or $2600 a month. With a deflated bubble they will now be paying $1300. I'd have to think it's a lot easier to avoid going too deep into debt if you have an extra 1300 a month rolling around.
Seriously, can you quantify "falling off a cliff"? I'm interested. What's a rough entry point for something sort of desirable in DC right now?
You know what the difference in spending is versus the last few years? People are no longer able to extract $800B per year in home equity withdrawls. It was easy for people to justify $50K SUVs, when they felt like they weren't paying for it with their own money. Remove $800B in spending per year and you have a recession. We're spending less money because we have less money to spend, not because people are trying to save.
Jordan,
If you look at the savings rate I think you will find that it has risen sharply - through from a very low level. A great many people were lead to believe that since a mortgage is a form of forced savings they should buy the most expensive house they could afford, therefor maximising their savings.
Now, people are realizing that it may be best to buy less house and save actual cash, rather than put every spare nickel into a mortgage payment.
The house next to me was just relisted at $350,000 down from over $500,000. It's 3 bedroom, two bath, with a decent little yard out back.
Megan, those prices don't mean much without more data on the pricing history of the neighborhood. Six or seven years ago, you could have bought a studio or one-bedroom condo in upper Northwest for $60,000 to $175,000 (now starting at $225,000) or houses in various conditions throughout the up-and-coming Columbia Heights area for $140,000 to $250,000 (now $250,000 to $1,000,000).
Those of us who are as eager to buy as you are but who've lived here for longer see a decline from $500K to $350K and think, "Nah, still too damn high." I don't think a drop to 2001-2002 prices is likely, but I also still don't see very much evidence that agents or sellers--at least some of whom are upside-down, leveraged to the hilt and in many cases desperate to move--understand that it takes much lower prices to entice those of us who'd like to buy. After all, their desperation to sell just reminds us that an expensive house can quickly become a terrible burden. It's a burden I'm not prepared to take off anyone's hands until the price drops to $200,000 or lower.
"To get out of this, we need growth. To have growth, consumers need to go spend money, which will causes businesses to invest and hire people, which in turn generates tax revenues."
I'd say that consumers spending money is the largest component of how we got here. Individuals with 401(k) accounts who were unsophisticated about risk/reward created a steadily growing market for high risk investments. Money taken out of equity and spent on extravagence in the expectation of perpetual real estate growth. Wealth flowing out of the country as goods purchased from China flowed in.
How about we recognize that what is and has been inflated for the last 40 years is the dollar, in that GDP is based on "financial services" which generate paper value, not wealth. Let's stop plowing good money after bad into 401(k) and people, who are different than consumers, will begin either intelligently saving or intelligentlhy spending their money while paying taxes on it. The econonomy will then be based on goods, which are measurable, rather than money shuffling which is manipulatable.
I'd say that consumers spending money is the largest component of how we got here.
That's true, at least to a point. But ironically enough, the cause of the problem is also the solution to the problem.
If the US reaction to this crisis is to save money and avoid equities, then we're going to end up with a repeat of Japan's lost decade. That is exactly how the Japanese consumer responded, which left government spending as the only component of GDP that kept things afloat. Without blowing out the currency, government spending in the absence of other growth can only get you so far.
Consumption is, by far, the largest component of GDP. A 5% increase in consumption does far more than a corresponding increase in investment or government spending, because the denominator is much larger.
It's premature to fix the systemic problems, we currently lack the ability to address these with all of the other leaks in the hull. The first order of business is to make sure that we still have a system to fix. Once we've done that, that's when we should be taming consumerism and finding a way to live with slower growth. That itself will present its own challenges, this time of a more European nature.
"The financial and housing sectors were grossly bloated, and being a mortgage broker or a structured finance associate does not actually prepare you for much in the fields that are still growing, like health care and bankruptcy law."
Megan,
How many of the mortgage brokers were doing something else ten years ago, and were attracted to the field by the credit bubble? How many of the structured finance associates were similarly drawn to that field by the credit bubble? Surely, some of these driven folks will find their way to greener pastures now, no?
Perhaps some faith in the drive of ambitious Americans, and the dynamism of our economy is in order.
If you look at the savings rate I think you will find that it has risen sharply - through from a very low level.
I wonder if anybody has changed their habits, or that the people who spent more than they earned the last few years now have more debt than they can service and no home equity to borrow against. If less people can now spend more than they earn, and everyone who was saving continues to do it then the US savings rate goes up without anybody willfully changing their behavior.
Meagan's not the only one who feels this way.
Peter Morici agrees with her.
“The economy contracted at about a 5 percent annual rate in the fourth quarter. This looks worse than a recession to me,” he said.
Morici said President-elect Barack Obama has clear economic challenges before him when he takes office this month.
“The economy will not recover without fundamental changes in banking and trade policy. A large stimulus package, though necessary, will only give the economy a temporary lift,” he said. “The economy is in a depression, not a recession.”
Rosy predictions are of no more use in 2009 than they were in 2008. We have to face up to what we're in the midst of and begin digging ourselves out.
Not to be too gloomy but Robert Shiller agrees.
“We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.
“To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness.
“This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven’t seen previously.”
Call me crazy but I tend to listen when Yale economists start calling this thing a depression. Particularly when they effectively predicted that the internet bubble would burst around 2001 four years prior to it, as Shiller did.
This is what I would do if I were in charge of local government:
Significantly raise property taxes on unoccupied homes (might have to disguise it as a general tax increase with a primary residence exemption). Take any homes that are behind in taxes and sell them at well publicized auctions with no minimum bid. If that doesn't force lenders to sell foreclosed properties (or renegotiate current occupant loans to be sustainable) then nothing will.
2X4 knows that if she puts enough adjectives in her posts they sound... oddly profound.
On the other hand, there was a substantive piece on the topic of economics in today's Washington Post, the remaining paper in the town she now calls home. Funny that the leggy blogger of such subjects hired by this "magazine" can't be bothered to talk about it, even if Sully has. But then she is merely a security-state libertarian.
The structured finance types are very easily employable. Most of them have at least one grad degree, if not a few, and they almost invariably have one outside of finance. They can go into computational biology, rocket science... Lots of people from high energy physics got repurposed into finance and software and could go back to physics if a move to nuclear energy is truly in the cards.
Finance is a notoriously up-or-out business with a high burnout rate. What will cause a slowing in people changing careers is that the savings used to enable a transition or entrepreneurship have all gone poof (some spectacularly). Bloomberg is one of the biggest examples of what happens to finance types involuntarily out of a job, and an example of why there will be a short term problem, since it relied on Mike's 20M severance check.
Health care is the next bubble to pop.
Ah, Megan the pressimist.
Well, if you haven't already, pick up Ray Kurzweil's The Singularity Is Near and consider the economic implications.
If you'd described to Americans in 1809 the luxury the average U.S. citizen now enjoys, they'd wonder why the hell anyone complained when even the poor were obese and could travel thousands of miles in a week.
No bottom in the recession until housing bottoms, and the earliest possible date for that is late 2010.
The famous Credit Suisse mortgage reset charts floating around show we're in a lull right now on resets, in between the subprime mortgages and the option ARMs. The option ARMs peak in late 2009/early 2010, and assume a few months for them to work their way through the foreclosure process. That puts us into late 2010/early 2011 as the earliest possible date for housing to bottom.
And it could be later than that.
@RW
We need to spend our way of this huh? Thank you Mr. Keynes.
For people to spend they need money. Where do you propose they get this money? If you say government - keep in mind that government creates nothing. They can only acquire money via collecting taxes or selling debt - You can't tax what isn't there so that's out of the question meaning debt is the only way. If they go further in debt that means they'll have to crank up the printing press - again.
But if spending is the real way out of this problem, why bother with the middle man? Let's make it easy.
All we need to do is make .PDF files of twenty dollar bills available online. Everyone can print their own money and congress can pass a law that says everyone everywhere must accept it as legal tender.
I can guarantee you that spending would ensue - and then some.
Everyone everywhere who doesn't remember the seventies is about to get an object lesson in what happens when you let government control your money supply.
keep in mind that government creates nothing
If that's your premise, then you're already on the wrong foot. Government does create. It's not always the most efficient producer or ideal for the job, and its customer service often sucks, but it certainly does produce. Government wages are just as useful for buying lattes and hammers at Home Depot as is money earned in the private sector.
For people to spend they need money. Where do you propose they get this money?
Obviously, they will have to earn or borrow it, as has always been the case. Nothing has changed.
Government does create. It's not always the most efficient producer or ideal for the job, and its customer service often sucks, but it certainly does produce.
No, gov't seizes and redistributes.
Government wages are just as useful for buying lattes and hammers at Home Depot as is money earned in the private sector.
Yes, but so is money taken from you at gunpoint in a dark alley.
RW wrote: "Government does create. It's not always the most efficient producer or ideal for the job, and its customer service often sucks, but it certainly does produce. Government wages are just as useful for buying lattes and hammers at Home Depot as is money earned in the private sector."
I don't follow the logic. You're saying Government "creates" because its workers are paid?
I don't think you quite answered Nick's contention, but I do admire your ability to parrot the conventional wisdom with such certitude.
You're saying Government "creates" because its workers are paid?
Some government spending works, some doesn't. All of it is not created equal, any more than all private sector spending is created equal.
At the very least, government wages contribute to the multiplier effect. If the government is creating other benefits with a given type of work, is there some sound, logical reason that you would oppose it, or do you just prefer to oppose it for the sake of opposing it?
This recession or depression or whatever we're now calling it is not ready to let its teeth out of us yet. (That's Megan--sorry, I don't know HTML!)
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What is this, Short Attention Span Theatre? The durned recession just started a quarter or two ago.
Government creates valuable knowledge (medical and other research). Government creates valuable technology (particularly military). Government creates roads, bridges, and other infrastructure. Think. Don't just parrot the libertarian line.
Z is correct regarding the creative capacity of government, but that doesn't mean that RW is at all right.
Any money which becomes government wages/salaries comes from one of two sources: taxes or borrowing.
That part of government payroll which comes from taxes comes from reducing the wages and salaries of non-government workers, and thus contributes nothing to the so-called multiplier effect - a government employee earning and spending $50,000 is doing so only because about 5 other people's earnings and spending have been reduced by $10,000 each. So on net, government payroll has the same macro effects as welfare checks.
That part of the government payroll which comes form borrowing is worse. Money which the government borrows reduces the amount which is borrowed by the private sector. Much of what the private sector borrows finances consumption (especially houses and cars), and is effectively just another form of redistribution (with no net effect on macro spending) but some part of what the private sector borrows finances investment in productive capacity, which makes possible future production and spending; by crowding out this amount of private-sector borrowing, government borrowing reduces economic growth.
So on net, government payroll has the same macro effects as welfare checks.
And that, too, can have positive effects.
Growth comes from money velocity, money changing hands. Economies grow when the actors within swap money for products or services with one another, and when they invest.
Government spending is a component of GDP. To the extent that it funnels money through various sectors of the economy and spurs others to spend and invest it, it can be quite useful, particularly during periods like this when consumers and businesses are fearful of leading the way. When the government worker buys a meal in a restaurant that allows it to pay workers and suppliers who in turn move money through the system, that contributes to growth in much the way that any private sector worker spending his wages contributes to growth.
The question of government spending is one of whether the government will deploy the funds effectively. Some uses are more useful than others, and there is a limit to what that spending can accomplish, but it is utterly false to claim that government spending accomplishes nothing at all.
RW,
I don't think Nick, or anyone else, has argued or would argue that Government *doesn't* pay people to build and do things ("create", in the sense you're using the word). Of course it does.
Anthony's point is that this Government spending, by definition, comes at someone else's expense. To believe it is "useful", "productive", or "stimulative" *on net* requires the presumption or evidence that Government is spending it more efficiently than those from whom it was appropriated otherwise would have, and to such a degree that it more than makes up for frictional costs of collecting and redistributing it, in addition to the second-hand effects of changes in incentive structures that result from taxation and/or inflation.
I fail to see how growth results simply from "money changing hands." Growth comes from people investing time and resources productively. Nick was referring to net creation, which he clearly doesn't think Government is capable of. I don't think you've demonstrated that it is--a task far more difficult than saying "Government can spend money to get stuff," or "people who get Government funds buy stuff." That's all.
To believe it is "useful", "productive", or "stimulative" *on net* requires the presumption or evidence that Government is spending it more efficiently than those from whom it was appropriated otherwise would have
Right. And sometimes, government does do a better job with resource allocation. The private sector is not always the best arbiter of resource. Behind every business failure is a poor deployment of capital.
The "on net" point is a subterfuge meant to avoid dealing with the real issues. To anyone who isn't a dogmatic monolithic libertarian, the question becomes one of whether there is a defensible case for a given program, not whether there should be no programs at all.
Let's say for the sake of example that 2/3rd's of government programs do no good. Your response is to scrap the whole thing out of some ideological drive to disparage government for the sake of it. My approach is to improve upon the 1/3rd that does work and to scrap or remedy the 2/3rd's that don't, a process that requires taking the trouble to determine which programs work and which ones don't.
Libertarianism offers a religion, not a workable plan. It is that sort of ideology-regardless-of-results worldview that got us into this mess in the first place. If ideology produces bad results, then the problem is ultimately with the ideology.
I appreciate your opinion as to what my response to certain hypothetical situations would be, along with the motivations for said response, but I'm not entirely sure why you're expressing it.
I'm attempting only to address specific arguments that have been made. Please do correct me if I'm oversimplifying, but I believe you stated that we need growth, and Government spending is required to achieve it. Nick and others retorted that Government spending will not achieve it, and gave some abstract reasons why. I just don't think your subsequent posts brought you any closer to proving that it will. They've amounted to, more or less, the repeated assertion that Government spending will lead to increased consumption that will lead to growth.
The "on net" point wasn't intended to be tricky or avoid the real issues--in fact, just the opposite. We certainly do need growth to get us out of the recession/depression (again, by definition, but thanks for that profound observation nonetheless). The kind of growth we're talking about is measured in net, I think, unless there's some better way?
My approach is to improve upon the 1/3rd that does work and to scrap or remedy the 2/3rd's that don't
In other words, you live in a fantasy world where it is both possible to identify what works (tricky but not implausible) and to convince politicians to eliminate the stuff that doesn't (unicorns and fairies territory).