Americans believe the economy is in a recession. But is it true?
Just how bad is the U.S. economy? Who's asking? More important, who's answering?
The conventional wisdom is not always wrong. But because it depends so much on emotion, it can often mislead. As a result, it is in times like these that economic fundamentals become so important. Rather than dwelling on the bad news coming from the financial and housing sectors, we believe it is important to look at the underlying drivers of the economy. And those look very solid.
Back in 2002-03, the household measure of civilian employment was much stronger than the payroll survey, signaling economic recovery. However, at the time, many prominent economists, including Alan Greenspan, (wrongly) argued that the payroll survey was right about the economy, not the household survey.
Then, in late 2007, the household survey was weaker than payroll growth, signaling slower growth and gaining some adherents now that it was showing weakness. But in the past few months, the household survey -- which we have followed closely all along -- has turned up strongly. In the first four months of 2008, when the payrolls survey shows a loss of 65,000 jobs per month, the household survey shows a gain of 179,000 per month.
Look for more positive economic data in the months ahead, as the most predicted recession in U.S. history never comes to pass.
As of spring 2008, we're probably just a third of the way through the unfolding debacle in the housing, credit, and financial markets. In political and regulatory terms, the ultimate problems and remedies have only begun to define themselves.
We're not just looking at an ordinary recession. Since the 1970s, the United States has redefined itself from a manufacturing nation to a financial economy built on debt, leverage, and a considerable ratio of speculation. Both political parties have been complicit in this, and the downturn now beginning will be unusual and potentially tragic.
The lesson of history is that previous leading world economic powers, from Rome and Imperial Spain to the Netherlands (back when New York was New Amsterdam) and early 20th-century Britain, have been unable to reform themselves in time to avoid decline. Politics has failed in the face of entrenched interests. In the process, excessive debt and dependence on finance rather than production has been front and center. New nations move to the head of the line -- and these days we can see Asia smiling.
McMansions were on the housing bubble, too. The boom has busted.
The U.S. housing crisis has come to McMansion country. "For sale" signs are sprouting in upscale developments so new they don't show up on GPS navigation screens. Turns out, poor people weren't the only ones who took out risky, high-interest loans during the housing boom. The sharp increase in housing costs -- and the desire to live in brand-new, spacious houses with modern features -- led many affluent buyers to take out loans they couldn't afford.
The White House knows a bailout now would land it back in a briar patch: Who qualifies for help? Since it is impossible to craft legislation that targets only a victimized few, Democrats will cut checks for everyone, which means the White House would be underwriting shoddy financial planning by some middle-class homeowners. This won't sit well with millions of others who went for that boring 30-year fixed, or are working two jobs to make their payments -- as their McMansion neighbors sign up for the government-mortgage-dole.
For 60 years, Americans have pushed steadily into the suburbs, transforming the landscape and (until recently) leaving cities behind. But today the pendulum is swinging back toward urban living, and there are many reasons to believe this swing will continue. As it does, many low-density suburbs and McMansion subdivisions, including some that are lovely and affluent today, may become what inner cities became in the 1960s and ’70s -- slums characterized by poverty, crime, and decay.
If gasoline and heating costs continue to rise, conventional suburban living may not be much of a bargain in the future. And as more Americans, particularly affluent Americans, move into urban communities, families may find that some of the suburbs’ other big advantages -- better schools and safer communities -- have eroded. Schooling and safety are likely to improve in urban areas, as those areas continue to gentrify; they may worsen in many suburbs if the tax base -- often highly dependent on house values and new development -- deteriorates. Many of the fringe counties in the Washington, D.C., metropolitan area, for instance, are projecting big budget deficits in 2008. Only Washington itself is expecting a large surplus. Fifteen years ago, this budget situation was reversed.
Henry Paulson is under pressure to fix the economy.
Treasury Secretary Henry Paulson's plan to overhaul the U.S. financial system includes a crucial proposal: it would officially transform the Federal Reserve into a “market stability regulator” rather than merely a banker’s bank. Is that the kind of transformation the markets need? Does America?
The Bush administration's Homeland Security regime, a massive anti-terrorism overkill that continues to burden Americans with excess regulation (and Canadians with border paralysis), may not be cost effective, but it appears to be the model for the U.S. government's assault on the financial markets.
In the wake of 9/11, George W. Bush had the U.S. government consolidate scores of agencies into one big Department of Homeland Security. The result, by most accounts, has been a dysfunctional operation that, among other things, created an expensive bureaucracy that may or may not have been instrumental in securing U.S. borders. The indirect economic costs -- in lost border trade and efficiency -- would far exceed the direct billions spent screening trade and travel.
If it didn't work well the first time, let's try it again. Treasury Secretary Hank Paulson plans to bring the same thinking to police financial markets as Homeland Security brought to policing terrorism. Hit the problem with massive regulatory intervention, consolidate scores of existing agencies, and build a new, costly and more interventionist regime.
Paulson said this week, "The blueprint is about structure and responsibilities, not the regulations each entity would write." What those regulations actually say, and how competent the regulators are in enforcing them, are obviously critical.
New curbs are needed on mortgage lending; on off-balance-sheet risk; on the opacity of new financial instruments. The blueprint has nothing to offer on any of this. And even if you accept the plan for what it is, it has another big gap. The authority of its prudential regulator is confined to institutions that benefit from "explicit government guarantees" -- meaning deposit-taking banks. But the government's safety net is not confined to firms with explicit guarantees. In emergencies, it deems other institutions (such as Bear Stearns) too important to fail.
Ingenious as markets may be, an exaggerated cycle of credit-driven boom followed by panic-induced bust is neither desirable nor necessary. Better financial regulation can help to attenuate the ups and downs. It is a matter not of more regulation or less, but of making the rules smarter. How to do that is a discussion that has barely even begun.
Mister, we can't use a man like Herbert Hoover again.
Herbert Hoover is a catch-all for political and economic ineptitude in the face of a fiscal crisis. With the United States facing its latest economic slowdown, both parties are pointing fingers and accusing the other of embracing Hoover in some way.
Who is doing such pressuring these days? Not Bush, but that Hoovermonger, Charles Schumer. Schumer used the Bear Stearns collapse to call for "a greater degree of regulation" in the industry that is relevant this time, investment banking.
Hoover knew free trade was beneficial. But his party, the Grand Old Party, was the tariff party. So in spite of himself, he signed a big new tariff, the Smoot-Hawley act, triggering retaliation from U.S. trading partners.
For many decades now, Democrats have contrasted Hoover's concession to protectionists unfavorably with free-trade legislation written by Roosevelt and his globalization guru, Secretary of State Cordell Hull.
Today it is the Democrats who are doing wrong, and they know better. Candidates Hillary Clinton and Barack Obama are both internationalists by temperament, yet they seem to be in a race to see who can repeal the North American Free Trade Agreement first.
Though Bush may be viewed as a laughingstock, he won't have the zero-integrity factors that have kept Nixon and Harding at the bottom in the presidential sweepstakes. Oddly, the president whom Bush most reminds me of is Herbert Hoover, whose name is synonymous with failure to respond to the Great Depression. When the stock market collapsed, Hoover, for ideological reasons, did too little. When 9/11 happened, Bush did too much, attacking the wrong country at the wrong time for the wrong reasons. He has joined Hoover as a case study on how not to be president.
The markets are stressed.
At some point, Wall Street will recover from the current financial crisis, and investors will wax nostalgic about the market bottom that presented a great buying opportunity. Of course, shareholders in Bear Stearns, the venerable investment bank, might be wondering about the upside of losing most of their investment this week in a government-backed buyout by J.P. Morgan.
And given the growing crisis, what about the average American who may have a few thousand dollars in a 401(k), and hundreds of thousands of dollars tied up in a home mortgage? No bailout is forthcoming.
Let’s not forget that it’s the private sector that drives our great economy towards success. Prosperity-killing actions from Washington, like tax hikes, trade protectionism, or massive over-regulation, would certainly stunt the long-run health of the economy.
Ultimately, market prices in the housing sector must adjust. That is the only viable solution. And while some families will be forced to become renters, other families will have a chance to purchase a new home at affordable prices. Capitalism is all about winners and losers, and it’s the market that must drive the adjustment, not the government.
Maybe it is not so mysterious, though, that the Bush administration could simultaneously scold defaulting homeowners for the sin of striving to join the "ownership society" promoted so vigorously by the president until recently, while reversing course to drop all pretense of personal responsibility when a large financial house is at the brink. It seems to be all a question of vision, of who matters in the end in the priorities of an ideology-driven White House.
