Mass protest just the start
The rage in Massachusetts this week is nothing compared to what will be faced when congress comes up for re-election in November. There is no recovering from the Great Recession - most American households, above all the soon-to-retire baby boomers, are cooked. - David Goldman
The No-Recovery Economy and the 2010 Elections
January 21st, 2010
By David Goldman
There is a German expression — Das Groschen faellt pfennigweise — which says, roughly, that the quarter you put in a pay phone drops by pennies. You get the joke by small increments. The economic reports trickling out over the last month confirm, little by little, that there is no recovering from the Great Recession. Most American households, above all the soon-to-retire Baby Boomers, are cooked. The popular rage we saw in Massachusetts this week ain’t nothing compared to what we will face by November, when Congress comes up for re-election.
Today’s dismal jobs claim number, including news that 600,000 Americans joined the supplemental employment insurance rolls, confirms the bleak employment forecast I issued in December. The argument for employment recovery boiled down to the observation that changes in employment appeared to be correlated with changes in inventories. With the inevitable rebound of inventories from extremely low levels, employment supposedly would recover. As I showed in the linked report, there does appear to be a relationship between changes in employment and changes in inventories:
Closer examination of the data, however, shows that the correlation is one-sided. When inventories are falling, changes in employment are highly correlated with changes in inventories, because in recessions, companies reduce inventories and fire workers. But the correlation breaks down completely in recoveries.
That’s because the old jobs at big companies never come back; new jobs are created by smaller startups. And just what sort of startups are supposed to provide jobs today? Not tech, which outsources everything; not construction; not finance; not retail; and surely not state and local governments, which must close a $200 billion budget deficit in 2010.
With 22% unemployment (including long-term “discouraged” workers), where do American households stand? Dean Baker at the Democratic-leaning Center for Economic and Policy Research assembled a few interesting factoids:
● Baby boom cohort is in its peak saving years (ages 46-64)
● Defined benefit pensions are disappearing
● Most have little savings
Median 45-54 -@$50,000
Median 55-64 -@ $60,000
● Housing equity vanished with crash (Many underwater)
Median 45-54 -@$30,000
Median 55-64 -@$70,000
At least one Democratic think-tank is warning that the world of American households is going pear-shaped. Baker’s conclusions:
1. Saving rate is rising back to normal levels
2. Housing wealth is likely to decline further
3. Demographics are hugely tilted towards savings
4. High unemployment will deter consumption
5. Excess capacity will restrain investment
6. Over-valued currencies create uncertainty
Obama gets part but not all of the joke. Here are extracts from his interview yesterday with George Stephanopoulos on ABC News:
The same thing that swept Scott Brown into office swept me into office.
People are angry, and they’re frustrated. Not just because of what’s happened in the last year or two years, but what’s happened over the last eight years.
You’ve got really hard-working folks all across the country, who have seen their wages flat line and their incomes flat line.
They feel more secure than ever. Then suddenly you’ve got this bank crisis in which their 401Ks are evaporating, their home values — their single-biggest investment — is collapsing.
And here in Washington — from their perspective — the only thing that happens is that we bail out the banks.
STEPHANOPOULOS: But you’re in charge, now.
OBAMA: No — well — absolutely. No, keep in mind the point that I’m making here.
It was the right thing to do for us to salvage the financial system, and I make no apologies for that, at all. But we knew at the time how politically toxic that was.
What it gave people a sense of is, “We’re spending all this money, but I’m not getting any help.”
And, “Gosh — I wanted Obama to come in there to start making sure that I was getting help; not the big special-interest and the institutions.”
Now if I tell them, “Well, it turns out that we will actually have gotten TARP paid back and that we’re going to make sure that a fee’s imposed on the big banks, so that this thing will cost taxpayers not a dime,” that’s helpful. But it doesn’t eliminate the sense that their voices aren’t heard, and that institutions are betraying them.
And I think that’s been expressing itself all year. And they’ve gotten increasingly frustrated over the course of the year.
So I take complete responsibility for the fact that — A — we had to salvage a financial system that could have made things much worse. We had to take the steps that we did at the beginning of the year, in order to stabilize the economy.
And I am actually glad to see that the economy’s now growing again, and we have the prospect of a much better economy in 2010. But that doesn’t negate the anger and the frustration that people are feeling.
Two key point are marked in bold and italics. The first is exactly correct: the same thing that swept Obama into office worked in Scott Brown’s favor this time around. That is substantially what I wrote in Asia Times Online on Tuesday morning prior to the vote.
Secondly, he still hopes against hope that an improving economy will pull his chestnuts out of the fire.
I begin with the premise that the economy will be worse, not better, in November. An inventory rebound and a reduction in the current account deficit should produce positive GDP growth, but jobs and incomes will continue to shrink. The boomers will realize that there is no light at the end of the tunnel: most of them are looking at retirement on Social Security and little else (the median $140,000 of assets will produce a meager $8,400 a year at 6% interest).
At some point, Obama will figure out that the economy won’t bail him out. He isn’t FDR in 1933. Roosevelt had the great good luck to take office at the nadir of the crisis, after three years of Republican mismanagement. The economy already had shrunk by 30% and a third of the country was out of work. No-one could blame the Democrats for that, and Roosevelt kept the public’s confidence through the 1936 elections even though improvement in the economy was de minimus. Obama, on the other hand, watched 5 million jobs disappear during his first year in office, three times more than were lost in Bush’s last year. It might not be his fault, but the bastard baby nonetheless lands on his doorstep.
Obama then will make a violent turn to the left and propose an over-the-top New Deal style program that the Republicans will shoot down — giving him the chance to run against a do-nothing Congress. That why my First Things colleague Jody Bottum warns that the Massachusetts Senate race might have won Obama re-election in 2012:
With the gift of an obstructionist Senate—an obstructionist Senate minority, of all wonderful political gifts—he has ten months in which he can pass large parts of his agenda while bemoaning the naysayers who thwart him. Thank Scott Brown for this possibility: We might even be spared some of the anti-bank, anti-Wall Street, anti-business demagoguery that has been looming in Obama’s recent rhetoric. The president now has something else to run against.
As I wrote in Asia Times Online on Tuesday:
When Reagan took office in 1981, the baby boomers were in their 20s and 30s, America had a 10% savings rate, the current account was in surplus, and America was the world’s largest net creditor nation. Reagan was able to cut taxes and finance an enormous budget deficit because the world’s demand for US Treasury securities was correspondingly large. In 2010, the baby boomers are in their 50s and 60s, America has saved nothing for a decade, the current account remains in severe deficit and the world is choking on the existing supply of Treasury securities. Cutting taxes to stimulate the economy is not as simple this time round.
Professor Reuven Brenner and I argued in the December 2009 issue of First Things that fundamental changes in American economic policy are required to emerge from the Great Recession. We proposed that the United States fix the dollar to the Chinese yuan and other currencies in order to re-orient trade flows to the developing world. We added, “We have been borrowing in order to consume; we need now to save in order to invest. We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes.”
Americans need to be told that they will need to invest before they can consume, and that the cure will take years rather than months to take effect. It’s not a happy message, and no one in politics is willing to deliver it - if indeed anyone in politics understands it.