A second Great Depression is still possible

by Dollars and Sense

From occasional D&S author Thomas Palley, in the Financial Times' Economists' Forum.

October 11, 2009 4:37pm
by FT

By Thomas Palley

Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of "green shoots" of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is "very likely over".

The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the "cash-for-clunkers" programme.

That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street's genetic propensity to pump the economy.

As for mainstream economists, their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the models. According to mainstream theory, it is assumed that full employment is a gravity point to which the economy is pulled back.

Empirical econometric models are equally questionable. They too predict gradual recovery but that is driven by patterns of reversion to trends found in past data. The problem, as investment professionals say, is that "past performance is no guide to future performance". The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fuelled by indebtedness and asset price inflation, and it is done.

There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.

Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car's trunk is now weighed down by accumulated debt so economic activity slows below its initial level.

With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.

Unfortunately, the car metaphor only partially captures current conditions as it assumes the braking process is smooth. Yet, there has already been a financial crisis and the real economy is now infected by a multiplier process causing lower spending, massive job loss, and business failures. That plus deleveraging creates the possibility of a downward spiral, which would constitute a depression.

Such a spiral is captured by the metaphor of the Titanic, which was thought to be unsinkable owing to its sequentially structured bulkheads. However, those bulkheads had no ceilings, and when the Titanic hit an iceberg that gashed its side, the front bulkheads filled with water and pulled down the bow. Water then rippled into the aft bulkheads, causing the ship to sink.

The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy's stabilising mechanisms, which the economist Hyman Minsky termed "thwarting institutions".

Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate the foreclosure problem.

States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector in contraction.

The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit.

Lastly, the US continues to bleed through the triple haemorrhage of the trade deficit that drains spending via imports, off-shoring of jobs, and off-shoring of new investment. This haemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign brands. Consequently, even enormous fiscal stimulus will be of diminished effect.

The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real possibility.

Thomas Palley is former chief economist of the US-China Economic and Security Review Commission and is currently Schwartz Economic Growth Fellow at the New America Foundation

Labels: deleveraging, economic crisis, recession, Thomas Palley

 

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10/13/2009 11:43:00 AM 0 comments

 

The G20 Must Wake America Up

by Dollars and Sense

A column from today's Guardian by Kevin Gallagher, a research fellow at the Global Development and Environment Institute at Tufts University.

We haven't done enough to fix the global financial crisis – or prevent the next one. The US has been asleep at the wheel

Kevin Gallagher
guardian.co.uk,
Thursday 24 September 2009 18.00 BST

When President Barack Obama hosts the G20 summit in Pittsburgh today, world leaders should send the United States a wake-up call to re-invigorate its stimulus efforts, get serious about financial reform and pass climate change legislation.

In London in April the G20 agreed to co-ordinate fiscal stimulus packages, support the world's poorest economies, reform global finance and avoid depression-style protectionism. On top of all that, they promised not to be diverted by such tasks when it came to putting together a serious global climate change treaty by year's end.

On many of these fronts the US is asleep at the wheel.

On the bright side, the US did pass a significant fiscal stimulus package. Despite lots of fear mongering to the contrary, the US also avoided anything close to Smoot-Hawley era trade protections. For all the commotion over tires and "Buy America" provisions, such measures are miniscule relative to the 50% increase on thousands of tariff lines during the depression. And for the most part these moves have been within the bounds set by our trade treaties.

Such efforts by the US and other G20 nations seem to be working. The IMF estimates that fiscal stimulus from the G20 is close to 2% of global GDP in 2009 and will be 1.6% in 2010. And despite minor and necessary deviations from "free" trade, the IMF saysglobal growth will contract by 1.4% in 2009 but expand by 2.5% in 2010 if the world doesn't begin exiting from their stimulus packages.

That's the good news. Alarming is that most stimulus packages don't include provisions that will benefit the world's poor. A new report by the International Labour Organisation estimates that approximately 222 million workers across the globe could slide into extreme poverty (living on less than $1.25 per day) if poorer nations aren't included in the global response to the crisis.

The G20 did commit to granting the IMF $500bn in capital for lending to those in need. However, the IMF's draconian conditions have kept all but the most desperate nations from opting for the funds. The World Bank pledged $100bn but has delivered less than one-third of those commitments, says a G20 scorecard by Jubilee USA, a development group.

The UN commission of experts on the financial crisis called for 1% of stimulus funds to be earmarked toward poorer countries this June. This goal should be enshrined in Pittsburgh.

Just as important is seeing to it that a crisis like this doesn't happen again. It has now become clear that unregulated financial markets are inherently unstable. When the economy seems to be in good shape, market participants and regulators tend to enter a dream world where they take on ever more risk – more risk than underlying assets can cover. That leaves us prone to panics that can quickly turn into crises.

Despite this recognition, little real regulation has materialised. And as we turn over in the night, Wall Street has re-instituted mortgage-backed securities and begun mimicking such instruments for life insurance policies and patents.

At the global level, the US won't seriously discuss the fact that reliance on the currency of a dominant power that borrows too much wreaks havoc on the world. Since little has been done, developing nations still have the incentive to accumulate reserves and thus accentuate global imbalances where the global poor loan to the rich.

On climate change, Jubilee's G20 assessment puts the amount of carbon-friendly stimulus dollars at $180bn. This is welcome, but without real action by the US and China – who account for 46% of global carbon dioxide emissions – such funds will go wasted.

China won't act unless the US does, and the Obama administration can't act if Congress doesn't. Congress must be on board before the administration goes off to Copenhagen to negotiate a global climate treaty, less they suffer the same fate as the Clinton administration in 1997 when it negotiated the Kyoto protocol without the advice and consent of Congress. That blunder lead to no deal at home and little action globally.

If G20 leaders help the US wake up and smell the coffee on the hard realities of the global economic crisis, they can help shame the US into getting back on a more sustainable course. We're dreaming if we think we've done enough to fix this crisis and prevent the others that loom.

guardian.co.uk © Guardian News and Media Limited 2009

Labels: economic crisis, G20, G20 summit, global economic crisis, Kevin Gallagher

 

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9/24/2009 02:33:00 PM 0 comments

 

UN Calls for Overthrow of Free Market Ideology

by Dollars and Sense

From yesterday's Telegraph..

The United Nations has called for a return to state-led "industrial policy" for poorer countries in what amounts to a rejection of the free-market thinking that has dominated global institutions for the last 30 years.

By Ambrose Evans-Pritchard
Published: 8:04PM BST 16 Jul 2009

Supachai Panitchpakdi, head of the UN Conference on Trade and Development (UNCTAD), said the financial crisis had exposed the deep failings of growth models adopted in Africa, the Pacific, and parts of Asia, usually under pressure from the West.

"Some advanced countries may be seeing an end to the crisis but it's still darkness at the end of tunnel for the least developed, and many of them are going backwards. We're talking about a billion malnourished people," he said in London.

Capital flows to poorer states and export earnings have together collapsed by $2 trillion (£1.22 trillion) since the credit crunch began. "This is an alarming trend, and it's not a result of their own doing," he said.

Mr Supachai said the world had spent some $5 trillion on financial support since the crisis began but almost nothing has reached the most vulnerable countries. "There is very little trickle down," he said.

While Eastern Europe has been rescued by the International Monetary Fund, the world's 49 "least developed countries' (LDCs) are too poor to meet the loan conditions.

UNCTAD said market ideology has distorted the structure of farming in many of these countries over the years and prevented them creating light industries and processing needed to move up the manufacturing ladder. "The market-led reforms since the early 1980s have, to a large extent, failed to correct this deep-seated weakness," said the agency's annual report.

Decrying a "false dichotomy" between the virtues of the free market and the alleged vice of state dirigisme, it said there is much to learn from the calibrated "industrial policies" of Malaysia, Sweden, Taiwan, and Finland.

"Not all decisions made by governments are always rational. Governments are subject to capture by special interests. The same criticisms, however, apply equally to the market," it said.

UNCTAD said the commodity boom of recent few years masked the underlying problems, as well as leaving countries exposed to sudden shocks and debt crises. The claim may raise eyebrows among those in the City who think that a "commodity supercycle" driven by China has transformed the prospects of mineral-rich states, despite the price correction over the last year.

The UN's tilt towards "smart dirigisme" would have caused apoplexy in Washington under the Bush Administration, and will remind some critics of development orthodoxies in the 1960s.

It may receive a less chilly reception from President Barack Obama and his Democratic Congress. As global leadership shifts ineluctably from West to East it is no longer possible in any case to ignore the success of Asia's state-led systems. The ideological baton is passing.

Read the original article.

Labels: economic crisis, Free Market, industrial policy, recession, United Nations

 

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7/17/2009 11:46:00 AM 0 comments

 

Economy Is Even Worse Than You Think (WSJ)

by Dollars and Sense

From Tuesday's WSJ:

The average length of unemployment is higher than it's been since government began tracking the data in 1948.

By MORTIMER ZUCKERMAN | July 14, 2009

The recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. What we can see on the surface is disconcerting enough, but the inside numbers are just as bad.

The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:
[Commentary] David Klein

—June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse.

—More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

—No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.

—The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.

—The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).

—The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.

—The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.

—The goods producing sector is losing the most jobs -—223,000 in the last report alone.

—The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance.

Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period.

Read the rest of the article.

Labels: economic crisis, unemployment

 

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7/17/2009 11:40:00 AM 0 comments

 

No Economic Bottom Yet

by Dollars and Sense

From the Center for American Progress. PDF with graphs here.

July Economic Snapshot by Christian E. Weller

We are learning the hard way that Wall Street, the economy, and the labor market are three separate things. While Wall Street enjoyed a bright spring, the economy continues to struggle, and job losses still mount.

The economy may be nearing its bottom, but it hasn't reached it yet. Job growth won't resume until the economy has turned the corner for good, no matter what Wall Street hopes for. A strong, sustained economic recovery will take time and public investments in health care, energy independence, public education, and innovation for years to come. These investments will help create and save millions of jobs right now and foster faster productivity growth that can translate into more and better jobs in the future.

1. The U.S. economy shrinks quickly. In the first quarter of 2009, gross domestic product declined at an annual rate of 5.5% after falling by 6.3% in the fourth quarter of 2008.

2. Massive job losses continue. The U.S. economy shed 467,000 jobs in June 2009. The economy has lost 6.5 million jobs since the recession began in December 2007, and 3.4 million jobs-or 52.4% of the total-just in 2009.

3. Unemployment stays high among the most vulnerable. The unemployment rate was 9.5% in June 2009-the highest level since August 1983. The African-American unemployment rate stood at 14.7% in June 2009, the Hispanic unemployment rate was 12.2%, and the unemployment rate for whites was 8.7%. Youth unemployment jumped to 24.0% last month. And the unemployment rate for people without a high school diploma stayed at a high of 15.5%, compared to 9.8% for those with a high school degree and 4.7% for those with a college degree.

4. Unemployed are out of a job for record lengths. The average length of unemployment was 24.5 weeks in June 2009, the median length came to 17.9 weeks, and 29.0% of the unemployed were out of a job for 27 weeks or more. All three of these measures are at their highest levels since the Bureau of Labor Statistics started to collect these data in 1948.

5. After-tax income grows because of public support. After-tax income expanded by an additional $107 billion on an annual basis as compared to before-tax income from February to May 2009. Lower taxes and social benefits combined amounted to $361 billion and more than offset lower wages, less capital income, and less proprietor income from February 2009 to May 2009.

6. Benefits decreased before the crisis. The share of private-sector workers with a pension dropped from 50.3% in 2000 to 45.1% in 2007, and the share of people with employer-provided health insurance dropped from 64.2% in 2000 to 59.3% in 2007.

7. Family wealth disappears at record pace. Total family wealth decreased by $16 trillion in 2009 dollars from June 2007-the last peak of family wealth-to March 2009. This reflects a drop of 24.2% during these 21 months, the fastest decline in any 21-month period since the Federal Reserve started to collect these data in 1952. What's more, total family wealth stood at 467.1% of after-tax income, the lowest level since September 1992.

8. The housing market is still sputtering. New home sales in May 2009 amounted to an annualized, seasonally adjusted rate of 342,000-32.8% lower than a year earlier-despite a year-over-year drop in median new home prices of 3.4%. Existing home sales were 3.6% lower and their median sales price 16.8% less than a year earlier.

9. Mortgage troubles mount. One in eight mortgages is delinquent or in foreclosure. In the fourth quarter of 2008, the share of mortgages that were delinquent was 9.1%, and the share of mortgages that were in foreclosure was 3.9%. The share of new mortgages going into foreclosure stayed at its record high of 1.4%.

10. Families feel the pressure. Credit card defaults rose to 7.5% of all credit card debt by the first quarter of 2009, an increase of 79.2% from the fourth quarter of 2007.

Labels: Center for American Progress, Christian Weller, economic crisis

 

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7/13/2009 12:32:00 PM 0 comments

 

The Recession Tracks the Great Depression

by Dollars and Sense

From yesterday's Financial Times:

The recession tracks the Great Depression

By Martin Wolf | June 16 2009

Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us. It is one of the guides we have to our present predicament. Fortunately, we do have the data. Unfortunately, the story they tell is an unhappy one.

Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words. In their paper, Profs Eichengreen and O'Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted.

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan's industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: "Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event."

Yet what gave the Great Depression its name was a brutal decline over three years. This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated.

Profs Eichengreen and O'Rourke describe this contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent. Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher. In the US, the general government deficit is expected to be almost 14 per cent of GDP.

All this is consistent with the conclusions of an already classic paper by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard. Financial crises cause deep economic crises. The impact of a global financial crisis should be particularly severe. Moreover, "the real value of government debt tends to explode, rising an average of 86 per cent in the major post–World War II episodes". The chief reason is not the "bail-outs" of banks but the recessions. After the fact, runaway private lending turns into public spending and mountains of debt. Creditworthy governments will not accept the alternative of a big slump.

The question is whether today's unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression. If the latter wins, we will not. What everybody hopes is clear. But what should we expect?

Read the rest of the article.

Labels: economic crisis, financial crisis, Great Depression, Martin Wolf, recession

 

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6/17/2009 04:48:00 PM 3 comments

 

Economy Still In Freefall

by Dollars and Sense

A nice, albeit grim, summary of the current economic outlook by Christian E. Weller of UMass Boston for the Center for American Progress (CAP) (full pdf report with graphs can be found here):

WASHINGTON, DC-The current recession is the worst the U.S. economy has seen in decades. Mounting job and wealth losses are accelerating and hurting families, while all private sectors of the economy-consumers, investment, and exports-are shrinking.

The federal government is the only sector that can turn the economy around. The government thus has to address a multitude of challenges, including slowing the recession and putting the economy on a path to a stronger recovery, while also dealing with the large looming deficits created by irresponsible management in the past. If these large challenges are not addressed, though, families will experience growing economic pains for years to come.

1. GDP growth turns negative: In the fourth quarter of 2008, GDP declined at an annual rate of 6.3 percent, the largest decline since the first quarter of 1982. The drop in growth reflected a 4.3% decline in consumer spending, a 22.8% fall in spending on homes, a 21.7% decrease in business investment spending, and a 23.6% drop in exports.

2. Job losses accelerate: The U.S. economy shed 663,000 jobs in March 2009. Since the recession began in December 2007, the economy has lost 5.1 million jobs, 2.7 million of them-or 53.35 of the total-in just the last four months.

3. Broad rise in unemployment rates: In March 2009, the unemployment rate was 8.5%-the highest level since October 1983. The African-American unemployment rate stood at 13.3%, the Hispanic unemployment rate at 11.4%, and the unemployment rate for whites at 7.9% in January 2009. Youth unemployment has soared to 21.7%; meanwhile, the unemployment rate for people without a high school diploma grew to 13.3%, compared to 9.0% for those with a high school degree and 4.3% for those with a college degree.

4. Hours at work at historic low: Average weekly hours amounted for production workers-the vast majority of the American workforce-fell to 33.2 hours in March. This was the lowest level since the Bureau of Labor Statistics started to calculate these data.

5. Wages still up due to low inflation: In February 2009, inflation adjusted weekly earnings were 2.5% higher and hourly earnings were 4.1% higher than a year earlier, largely because of low inflation in recent months. This is unlikely to last. Inflation adjusted weekly and hourly wages have already decreased in January and February 2009.

6. Benefits decreased before the crisis: The share of private sector workers with a pension dropped from 50.3% in 2000 to 45.1% in 2007, and the share of people with employer-provided health insurance dropped from 64.2% in 2000 to 59.3% in 2007.

7. Family wealth disappears at record pace: From June 2007-the last peak of family wealth-to December 2008, total family wealth decreased by $15 trillion in 2008 dollars. This reflects a drop of 22.8% during these 18 months, the fastest decline in any 18-month period since the Federal Reserve started to collect these data in 1952. Total family wealth stood at 483.3% of after-tax income-the lowest level since March 1995.

8. The housing market stalls: New home sales in January 2009 amounted to an annualized, seasonally adjusted rate of 337,000, 41.1% lower than a year earlier, despite a year-over-year drop in median new home prices of 18.1%. At the current rate of new home sales, it will still take 12.2 months to sell all new houses on the market. Existing home sales were 4.6% lower and their median sales price 15.5% less than a year earlier.

9. Homeowners' wealth losses mount: The values of all homes fell by $3.9 trillion from December 2006-the last peak of housing wealth-to December 2008. Home equity to after-tax income has dropped to 74.0%, the lowest level since September 1967, and home equity as share of home values dropped to record low of 44.7% by December 2008.

10. Mortgage troubles mount: One in nine mortgages is delinquent or in foreclosure. In the fourth quarter of 2008, the share of mortgages that were delinquent was 7.9% and the share of mortgages that were in foreclosure was 3.3%. The share of new mortgages going into foreclosure stayed at its record high of 1.1%.

11. Families feel the pressure: Credit card defaults rose to 6.3% of all credit card debt by the fourth quarter of 2008, an increase of 52.4% from the fourth quarter of 2007.

Labels: Center for American Progress, Christian Weller, economic crisis, Umass Boston

 

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4/07/2009 12:18:00 PM 0 comments

 

Why Georgists Correctly Predicted the Crisis

by Polly Cleveland

For more on the Georgists, Henry George, and the idea of a land tax, see this excellent sidebar D&S co-editor Amy Gluckman wrote to Mason Gaffney's excellent article about how a land tax helped rebuild San Francisco in 1906, and could be used to rebuild New Orleans after Katrina.

Why Georgists Correctly Predicted the Crisis, and Why Conventional Economists Couldn't

Land bubbles of varying severity and universality recur roughly every eighteen to twenty years. Like Henry George, modern Georgists attribute recessions and depressions to these bubbles. A huge real estate bubble of the 1920's preceded the Depression of the 1930's. That bubble actually began to burst in 1926, three years before the stock market crash of 1929. So when "house values" exploded around the world during the last decade and then began to decline in 2006, many of us predicted the worst. I even convinced my husband it was time to sell our property--but alas, too late.

A few prominent economists recognized the bubble's threat, notably Karl Case and Robert Shiller of the Case-Shiller Home Price Index. But most economists didn't see the crisis coming until it ran them over. Why couldn't they see what Georgists saw? (Non-economists can skip to the last paragraph.)

1. Like Adam Smith and other classical economists, Georgists assume a three-factor world: land, labor and capital, earning economic rent, wages and interest respectively. But starting in the early 20th century, conventional economics merged land into capital. Land disappeared so completely that Robert Solow could joke in 1955 that "...if God had meant there to be more than two factors of production, He would have made it easier for us to draw three dimensional diagrams."

2. Conventional economics airbrushes out economic rent. The National Income and Product Accounts omit or conceal rent. They exclude even realized capital gains, let alone unrealized gains. They lump rent received by business into profits. When I teach micro I have to explain to students that those cute little triangles we label "consumer surplus" and "producer surplus" are really economic rent.

3. Conventional microeconomics is static. Textbooks incorporate discounted present value poorly, or omit it altogether. In teaching micro, I've had to write a special section on discounting--after all, someday, students will buy houses and take out mortgages. Bubbles are just unrealistic projections of rent, capitalized into the present. Without discounting, how can we understand them? (Mind you, many Georgists don't understand discounting either; they explain bubbles as the work of "speculators." But at least they know bubbles are destructive.)

4. Conventional macroeconomics tosses out the good part of micro, namely, marginal analysis. So in conventional macro, all taxes are alike, all consumer spending is alike, all saving and investment is alike. Economists can truly believe that it's good for the economy now to borrow money (from whom?) and spend it on roads and bridges. How can they understand that overspending on infrastructure stimulates bubbles?

5. Conventional economics disregards a central Georgist assumption: distribution of wealth matters. Moreover, the tax and subsidy system is rigged to drive rent to the top of the heap. This very rigging of the system also encourages bubbles. So the Georgist cure is to reverse the rigging, capture the rent and redistribute it to society either in the form of public goods, or directly as tax credits or grants. That's a dangerously radical idea.

One hundred years ago, Georgists allied with Progressives to form a powerful movement for political and fiscal reform. In The Corruption of Economics, Mason Gaffney argues that neoclassical economics assumed its blinkers precisely to thwart that movement--leaving modern economists helpless.

Labels: economic crisis, financial crisis, Georgists, Henry George, housing bubble, land tax, Polly Cleveland

 

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3/25/2009 04:01:00 PM 4 comments

 

Capital Flowing Out of Developing Countries

by Dollars and Sense

From Nouriel Roubini’s RGE Monitor:

The reversal of capital inflows due to deleveraging or losses in financial markets has been one of the most significant effects of the financial crisis on emerging and frontier economies. After a period in 2007 and 2008 when many emerging markets faced the problem of dealing with extensive capital inflows, now capital flows have reversed. Private capital flows in 2009 are expected to be less than half of their 2007 levels, posing pressure on emerging market currencies, asset markets and economies. Countries that relied on readily available capital to finance their current account deficits are particularly vulnerable. Furthermore, capital outflows pose the risk that governments may react with some type of capital controls or barriers to the exit of foreign investments.

Note that the piece later adopts a different tone on capital controls, accepting their use on a temporary basis and noting that Iceland, Ukraine, Argentina, Indonesia and Russia, among others, have already adopted them.

Foreign direct investment (FDI) is considered by many to be a major and more stable source of financing for many developing countries. FDIs slowed down sharply in recent quarters ...

The outlook for the flow of portfolio investments is even less encouraging. ... About half of the EM [emerging market] fund purchases that have occurred since 2003 have now been withdrawn. According to the Institute for International Finance (IIF), net private capital flows to emerging markets are estimated to have declined to US$467 billion in 2008, half of their 2007 level. A further sharp decline to US$165 billion is forecast for 2009 ...

The World Bank estimates that in 2009, 104 of 129 developing countries will have current account surpluses inadequate to cover private debt coming due. ...

With rising unemployment and falling real wages, remittances will also subside with pressure on the standard of living, growth and external balances of labor-sending countries. In addition to these private capital flows the reduction of official flows, including development assistance is also set to slow as donors scale back their funding in the face of greater domestic needs. However funds available from multilateral institutions like the IMF and regional development banks may partly offset the decline in other funds and withdrawal of private capital. The G20 seems to have neared an agreement on doubling or tripling the IMF’s lending capacity and regional development banks like the EBRD, ADB and others are boosting their capital base and scaling up their lending to support regional banks. ...

Read the whole analysis here.

Labels: capital controls, economic crisis, Emerging markets, IMF, Nouriel Roubini

 

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3/18/2009 09:57:00 AM 0 comments

 

Net Worth Plummets

by Dollars and Sense

The Fed reported today that household net worth has fallen for a sixth straight quarter. The latest quarterly drop was a staggering 9%, the largest quarterly drop since record-keeping began in 1951.

Household net worth has fallen 20% from its high of $64.36 trillion in the second quarter of 2007 to $51.48 trillion in the fourth quarter of 2008.

Over 4 million jobs have been lost since the recession formally began at the end of 2007.

Labels: economic crisis, Household net worth, recession

 

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3/12/2009 02:08:00 PM 1 comments

 

Financial Times on 'The Future of Capitalism'

by Dollars and Sense

FT launches this new series today. The first day’s pieces dutifully concede that neoliberal policies with respect to the financial sector have failed—but the questioning doesn't go too much deeper so far...

Check it out here.

Labels: capitalism, economic crisis, financial crisis, Financial Times

 

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3/09/2009 10:12:00 AM 0 comments

 

Cheese Sandwiches For School Kids

by Dollars and Sense

Cash-strapped school districts from California to Florida are taking a tough approach on the growing number of school kids whose parents have fallen behind on their school lunch bills. Instead of hot meals, the children are given a cold cheese sandwich, a piece of fruit, and a milk carton.

From the wires:

ALBUQUERQUE, N.M. - A cold cheese sandwich, fruit and a milk carton might not seem like much of a meal - but that's what's on the menu for students in New Mexico's largest school district without their lunch money.

Faced with mounting unpaid lunch charges in the economic downturn, Albuquerque Public Schools last month instituted a "cheese sandwich policy," serving the alternative meals to children whose parents are supposed to be able to pay for some or all of their regular meals but fail to pick up the tab.

Such policies have become a necessity for schools seeking to keep budgets in the black while ensuring children don't go hungry. School districts including those in Chula Vista, Calif.; Hillsborough County, Fla.; and Lynnwood, Wash.; have also taken to serving cheese sandwiches to children with delinquent lunch accounts.

Critics argue the cold meals are a form of punishment for children whose parents can't afford to pay. Parents who qualify for free meals are not affected.

"We've heard stories from moms coming in saying their child was pulled out of the lunch line and given a cheese sandwich," said Nancy Pope, director of the New Mexico Collaborative to End Hunger. "One woman said her daughter never wants to go back to school."

Some Albuquerque parents have tearfully pleaded with school board members to stop singling out their children because they're poor, while others have flooded talk radio shows thanking the district for imposing a policy that commands parental responsibility.

Second-grader Danessa Vigil said she will never eat sliced cheese again. She had to eat cheese sandwiches because her mother couldn't afford to give her lunch money while her application for free lunch was being processed.

"Every time I eat it, it makes me feel like I want to throw up," the 7-year-old said.

Her mother, Darlene Vigil, said there are days she can't spare lunch money for her two daughters.

"Some parents don't have even $1 sometimes," the 27-year-old single mother said. "If they do, it's for something else, like milk at home. There are some families that just don't have it and that's the reason they're not paying."

Albuquerque Public Schools students receive a cheese sandwich in lieu of a hot meal if they have exceeded a set amount of meals charged to their account, ranging from two at high schools to 10 at elementary schools. The schools' Web site warns: "Once the charging limit is met, students will be offered an alternate meal consisting of a cheese sandwich and a beverage."

The School Nutrition Association recently surveyed nutrition directors from 38 states and found more than half of school districts have seen an increase in the number of students charging meals, while 79 percent saw an increase in the number of free lunches served over the last year.

Rest of the story here.

Labels: economic crisis, school lunches

 

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2/25/2009 04:30:00 PM 0 comments

 

Eastern Europe's Economies Tanking

by Dollars and Sense

From RGE Monitor, Nouriel Roubini's outfit. Who knew that the Baltic countries have been running current account deficits much larger (relative to GDP) than the United States?

Eastern European Tinderbox: How Explosive Could It Get?

The Central and Eastern Europe (CEE) region is the sick man of emerging markets. While the global crisis means few, if any, bright spots worldwide, the situation in the CEE area is particularly bleak. After almost a decade of outpacing worldwide growth, the region looks set to contract in 2009, with almost every country either in or on the verge of recession. The once high-flying Baltics (Estonia, Latvia, Lithuania) look headed for double-digit contractions, while countries relatively less affected by the crisis (i.e. Czech Republic, Slovakia and Slovenia) will have a hard time posting even positive growth. Meanwhile, Hungary and Latvia’s economies already deteriorated to the point where IMF help was needed late last year.

The CEE’s ill health is primarily driven by two factors—collapsing exports and the drying-up of capital inflows. Exports were key to the region’s economic success, accounting for a significant 80-90% of GDP in the Czech Republic, Hungary and Slovakia. By far the biggest market for CEE goods is the Eurozone, which is now in recession. Meanwhile, the global credit crunch has dried up capital inflows to the region. An easy flow of credit fueled Eastern Europe’s boom in recent years, but the good times are gone. According to the Institute of International Finance, net private capital flows to Emerging Europe are projected to fall from an estimated $254 billion in 2008 to $30 billion in 2009. Whether or not this is formally considered a ‘sudden stop’ of capital, it will necessitate a very painful adjustment process.

Classic Emerging Markets Crisis In The Works?

What is especially worrisome is that the days of easy credit flows were accompanied by rising external imbalances that rival or even exceed the build-up of imbalances in pre-crisis Asia—e.g. current account deficits in Southeast Asia from 1995-97 fell within the 3.0-8.5% of GDP range, while those in CEE were in the double-digits in Romania, Bulgaria and the Baltics in 2008. As examined in a recent RGE analysis piece, the vulnerabilities in many CEE countries—high foreign currency borrowing, hefty levels of external debt and massive current-account deficits—suggest the classic makings of a capital account crisis a la Asia in the late 1990s.

Read the whole piece here.

Labels: Eastern Europe, economic crisis, Europe, Nouriel Roubini

 

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2/25/2009 10:24:00 AM 0 comments

 

Lines Swell At Food Banks

by Dollars and Sense

Another sobering sign of the times from the Times. Highlights both the lack of a safety net in the United States as well as the shame associated with falling on hard times, even during the greatest global economic crisis in a generation:

Newly Poor Swell Lines at Food Banks

MORRISTOWN, N.J.-Once a crutch for the most needy, food pantries have responded to the deepening recession by opening their doors to what Rosemary Gilmartin, who runs the Interfaith Food Pantry here, described as "the next layer of people" - a rapidly expanding roster of child-care workers, nurse’s aides, real estate agents and secretaries facing a financial crisis for the first time.

Demand at food banks across the country increased by 30 percent in 2008 from the previous year, according to a survey by Feeding America, which distributes more than two billion pounds of food every year. And instead of their usual drop in customers after the holidays, many pantries in upscale suburbs this year are seeing the opposite.

Here in Morris County, one of the wealthiest counties in the country, the Interfaith pantry opened for an extra night last week to accommodate the growing crowds. Among the first-time visitors were Cindy Dreeszen and her husband, who both have steady jobs - his at a movie theater and hers at a government office - with a combined annual income of about $55,000.

But with a 17-month-old son, another baby on the way, and, as Ms. Dreeszen put it, "the cost of everything going up and up,” the couple showed up in search of free groceries.

"I didn’t think we’d even be allowed to come here," said Ms. Dreeszen, 41, glancing around at the shelves of fruit, whole-wheat pasta and baby food. "This is totally something that I never expected to happen, to have to resort to this."

Full story here.

Labels: economic crisis, economic indicators, food pantry, food security, New York Times

 

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2/24/2009 04:28:00 PM 0 comments

 

Too Much Office Space Spells Big Trouble

by Dollars and Sense

The next big financial time bomb could well be commercial real estate. Vacancy rates have skyrocketed across the country, rental income is down, and many commercial investors will need to refinance massive loans in the still frozen credit markets.

From the NY Times:

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market "since the wrenching 1991-1992 industry depression."

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.

The persistent chill in lending from banks to the credit markets will make that difficult, even for borrowers who are current on their payments, setting the stage for loan defaults.

The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. "Each one by itself is not significant," he said, "but the cumulative effect will put tremendous stress on the financial sector."

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks - like Bank of America, JPMorgan Chase and Morgan Stanley - each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

Labels: credit crisis, economic crisis, real estate market

 

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1/04/2009 09:30:00 PM 0 comments

 

Rebuild the Economy: Invest in People

by Polly Cleveland

The New York Times published my letter below December 26, 2008. Meanwhile, Mother Jones has just published (not yet online) a first class piece by David Cay Johnston, "Fiscal Therapy." He details how we can rebuild the economy without increasing the deficit by a dime, simply by reversing the great tax and subsidy machine that pumps wealth from the poor and middle class to the rich.

"Louis Uchitelle is absolutely correct that President-elect Barack Obama’s spending plan may fail—or worse, backfire ("Maybe It Can't: A Trap in Obama’s Spending Plan," Week in Review, Dec. 21). Spending on infrastructure, even green infrastructure, is a relatively slow, low-return investment. To rebuild the economy right now, we need fast, high-return investment, public and private.

"First, we need public investment in people: health care to keep us productive; education to train us for new jobs or upgrade basic skills; and extended unemployment insurance.

"Second, we must unburden the sector that provides the most employment and the highest and fastest return on investment: small business.

"Here is how: Rebate the payroll (Social Security) tax on low-wage earners. This tax has become a major killer of small-business jobs. Then reduce deficit spending. Treasury runs a deficit by selling bonds; the more that banks can stock up on safe government bonds, the more they will cut off relatively risky (but high-return) small business. But how to reduce deficit spending? Start by killing military pork."

Polly Cleveland

Labels: deficit, economic crisis, economic stimulus, financial crisis, recession

 

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12/29/2008 12:07:00 AM 2 comments

 

More Working Parents Can't Afford Daycare

by Dollars and Sense

A growing number of working parents are unable to pay for daycare, according to a story in the Washington Post. Although the article doesn't specify hard numbers, it that code enforcers, social workers, and others are finding more young kids left home alone. Daycare centers that usually have long waiting lists are cutting staff and scrambling to fill open slots.

Daycare costs for preschoolers often rival rent costs, and subsidized slots are only available for families with extremely low income, if they can find providers who are willing to take the vouchers at all.

Unlike other industrialized countries, the US does not provide national childcare for pre-school age children. Federal law only mandates that employers provide 12 weeks of unpaid leave during any year.

Penn State economist Robert Drago takes an in-depth and comprehensive look at this and other work/life issues in his book Striking a Balance: Work, Family, Life.

Labels: childcare, economic crisis, Striking a Balance, work life balance

 

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12/21/2008 09:55:00 PM 0 comments