Economy

This week’s housing news was a primer on globalization. U.S. existing home sales fell 27 percent in July, twice as sharp a drop as Wall Street analysts said to expect. (Of course, they’re the same geniuses who didn’t see their own meltdown coming, didn’t expect the long, deep recession that followed, and couldn’t figure out that the recovery would be slow and halting.) Right away, our stock markets sank by one to two percent – no surprise there – but we weren’t alone. On Wednesday morning, the financial news led with “European Stocks Drop on Dismal U.S. Home Sales Data” and “Most (Asian) Stocks Fall Amid Speculation on U.S. Home Sales Report.”

Why does a bad report on American home sales rattle investors a half-world away? To be sure, housing is an important piece of every U.S. recovery. And the world pays close attention to ours, since we remain by far both the world’s largest market for imports and the place where most foreign multinationals maintain their subsidiaries. This time, however, there’s more at stake. Housing is both a lynchpin for a full recovery from the financial crisis that pushed most of the world to the brink of depression; and the key to something better than our current stumbling expansion.

The link to finance is straightforward. Everybody remembers how Wall Street’s largest institutions swooned or crashed when the end of the housing bubble brought down hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that backed them up. But when Washington stepped in to rescue most of them, it took out its own risky bet that a housing recovery would quickly stop the bleeding. So we never seriously considered what Sweden did so successfully in the early 1990s – and what we did ourselves to resolve the S&L crisis: Take over an insolvent Bear Stearns, AIG or Merrill Lynch, pull out the weak and failed assets, and sell the still-healthy stuff to new investors who would promptly reopen the institution under a new name. And the bailouts didn’t even require that these institutions put their books back in order by getting rid of the most risky housing-based assets which they still held. 

The catch is that if the housing market continued to deteriorate – as it did – more of those assets would decline in value or fail outright. Those losses, current and prospective, leave finance much less willing to lend to most other companies. And that means that strong business investment, which is a critical part of all healthy expansions, this time will follow a housing recovery, not lead it.

There’s more at stake in the current housing market than the pace of business investment. Some 70 percent of U.S. households are homeowners, which makes housing values the most important piece, by far, of most Americans’ wealth and economic security. So, the sharp drop in those values has made most of Americans poorer than they had been, and, unsurprisingly, people who feel poorer tend to spend much less. The health of the housing market, in short, now directly affects both business investment and consumer spending, and with them the outlook for the entire U.S. recovery. 

It is little wonder that world markets reacted badly to this week’s dismal U.S. housing report.  Beyond the 27 percent drop in existing home sales – and one day later, sales of new homes also fell sharply – nearly one-third of the houses that did sell were “distressed” properties. That means they were either in foreclosure or sold for less than their outstanding mortgages. Average home prices did inch up a little bit, but the only reason was that the end of the temporary tax credit for first-time homebuyers led to a particularly sharp fall in their purchases, which normally involve lower-priced homes. 

Nor are there signs of a real housing recovery anytime soon.  Foreclosures are still running at four times their normal levels – and nothing drives down a neighborhood’s housing prices and slows down sales more than nearby homes in foreclosure. On top of that, supply continues to way outpace demand: At current rates of home sales, it would take over a year to clear all of the homes already on the market today.

If we don’t take serious steps to finally turn around these conditions, the United States and much of the rest of the world will be looking at a weak expansion, or worse, for several more years.  One measure that could have a powerful effect would be steps to bring foreclosure rates down to normal levels. For example, congressional Democrats could advance a new program modeled on student loans for homeowners with mortgages in trouble. Homeowners who qualify could borrow the funds they need to stay in their homes, at a low interest rate, with no interest due the first year so long as they stay in the homes for at least two more years.  

Most Republicans will denounce it as just another “big government program.” Yet, without a housing recovery, the alternative is not only smaller government but also a smaller economy, because businesses can’t find loans, people can’t find jobs, and most consumers  can’t spend like they used to.

In a new study released by NDN today, we calculate that the plan released by John Boehner yesterday would add more than $3 trillion to the deficit over the next ten years.

That the new economic plan from the House Republican Leader explodes the deficit and does nothing meaningful to cut government spending raises very real questions about the Washington Republican Party's commitment to the promise of a new age of austerity and fiscal rectitutde Republican victories will bring.

I would also add that the utter lack of fiscal seriousness of this proposal - despite the very public positioning of the Republican Party today - recalls the economic recklessness of the recent conservative era in Washington which brought a decline in wages and benefits for the average American, an exploding structural deficit, the Great Recession/massive job loss and a global financial meltdown.  Boehner's new plan makes no effort to break from this horrendous legacy, and raises very real questions about the economic strategy of the GOP which must be answered by the GOP leader and all his candidates seeking the House. 

Of the many questions to be asked, there is a simple one all Republicans should answer now: "how exactly are you going to reduce the deficit over the next ten years?"

My guess is that not a single Republican running for major office could actually lay out a plan that would reduce the deficit over this time frame.  If anyone finds such a plan - rather than a rhetorical commitment to do so - please send it along.

PM Update - Sam Stein of the Huffington Post, and Jonathan Cohn of TNR have each written pieces today based on our study.  If you see any more let us know.  And feel free of course to spread this important study through your networks too.

Friday Update - Keith Olbermann talked about our study on the air last night, and a smart new Newsweek piece by Andrew Romano also references it.

Friday PM Update - CBO reports this week that if the health care bill passed this year is repealed, as Boehner proposed in his economic plan, it would add another $455 billion to the deficit over the next ten years, pushing Boehner's plan over the $4 trillion mark.

A fully-sourced pdf of this analysis can be found here.

House Minority Leader John Boehner spoke in Cleveland, Ohio yesterday, and outlined a five point plan economic plan.  This brief analysis examines the impact of his plan on the federal budget deficit and the national debt over the next ten years.  

The Fiscal Impact of the Boehner Plan

1. Fully Extend the Bush Tax Cuts.

Increase deficits and debt by $3.8 trillion over ten years. 

2. Have the president veto the Employee Free Choice Act, a carbon tax or cap and trade, and “any other tax increases on families and small businesses” if passed during a lame-duck session of Congress.

Unable to assess impact of hypotheticals, but the provision impairs ability to address deficits and debt, including the potential loss of $624 billion in revenue over ten years from a carbon regime. 

3. Call on Congress to repeal the provision in healthcare reform mandating that small businesses file IRS 1099 forms on purchases of over $600.

Increase the deficits and debt by $17 billion over ten years per Congressional Budget Office estimate.  The provision was included in the Patient Protection and Affordable Care Act to close the business tax gap.

4. Reduce non-defense discretionary spending to 2008 levels.

In 2008, non-defense discretionary spending was approximately $494 billion.  Under the President’s proposed 2011 budget, non-security discretionary spending is $530 billion. In his State of the Union Address, the President announced a three year freeze on non-security discretionary spending, and levels drop to $490 billion in 2012 and $480 billion in 2013.  Boehner’s remarks did not address a plan beyond that point. This proposal would therefore save $36 billion next year and nothing thereafter.

5. Resignations of the President’s economic team, starting with Secretary of the Treasury Geithner and National Economic Council Director Larry Summers.

The position of NEC Director is not Senate confirmed, so it is fair to estimate that it would take the Administration two weeks to fill that position. Estimating for the taxes paid on his $172,000 annual salary , two weeks without an NEC Director would save the Federal government between $5000 and $6000.

Treasury Secretary Timothy Geithner makes an annual salary of $191,300.  Because he is Senate confirmed, it is safe to estimate that it will take two months for his confirmation. Therefore, two months without a Treasury Secretary would likely save the Federal government between $25,000 and 26,000. Therefore, these resignations amount to a fiscal impact of $30,000 - $32,000 of deficit reduction over the next two months.

Total Fiscal Impact of the Boehner Plan: Increase Deficits and Debt by roughly $3.781 trillion over ten years.

House Minority Leader John Boehner spoke in Cleveland, Ohio this morning, and outlined a five point plan "to break the ongoing economic uncertainty." Here, devoid of spin or messaging, are the five steps he'd like President to take "immediately" -

• Announce he will fully extend the Bush Tax Cuts.

• Announce he will veto the Employee Free Choice Act, a carbon tax or cap and trade, and “any other tax increases on families and small businesses” if passed during a lame-duck session of Congress.

• Call on Congress to repeal the provision in healthcare reform mandating that small businesses file IRS 1099 forms on purchases of over $600.

• Reduce non-defense discretionary spending to 2008 levels.

• Ask for and accept the resignations of his economic team, starting with Secretary of the Treasury Geithner and National Economic Council Director Larry Summers.

Boehner also said that "We've tried 19 months of government-as-community organizer," and that we should "put grown-ups in charge."

What do you think of his plan?

By fusing the personal political and economic preferences of many business people with anecdotes and national level opposition to President Obama, conservative think tanks and pundits have spent the last months offering a damning narrative about the president’s agenda over the course of his term. It’s been powerful – the president had created uncertainty, they said. Health care reform and the prospect of higher taxes left businesses uncertain about what they were going to face in the years ahead. Even the stimulus, which poured $800 billion into the economy, including the broadest tax-cut in American history, was supposedly contributing to a perfect storm of radical liberal economic illiteracy that was ensuring that unemployment remained at 9.5 percent. 

The only problem with that narrative is that it’s completely untrue and devoid of actual economic evidence. Today in the Washington Post, Neil Irwin writes (emphasis added):

CHICAGO -- Corporate profits are soaring. Companies are sitting on billions of dollars of cash. And still, they've yet to amp up hiring or make major investments -- the missing ingredients for a strong economic recovery.

Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.

But here in the heartland of America, senior executives say neither side's assessment fits.

They blame their profound caution on their view that U.S. consumers are destined to disappoint for many years. As a result, they say, the economy is unlikely to see the kind of almost unbroken prosperity of the quarter-century that preceded the financial crisis.

…

What role is government policy playing in fostering corporate caution?

The executive class in the Chicago region is none too pleased with many of the policies of President Obama, their former hometown senator. They criticize his willingness to let Bush-era tax cuts expire at year's end for households that make over $250,000 and allow the capital gains tax rate to increase. They dislike aspects of his landmark health-care law, and some fear that the financial overhaul legislation enacted this summer will make it harder for them to get loans.

"Congress has been very tough on businesses," said Jason Speer, chief executive of Quality Float Works of Schaumburg, Ill., which makes the industrial equivalent of toilet ball floats, items that sell for up to $1,200 and are used to measure water levels in farm and industrial equipment. The company also makes the metal balls that go on the top of flagpoles.

Fundamentally, executives objected to Obama's policies on the grounds they would make the United States a less competitive place to operate in the long run.

But when Speer and other executives were pressed on the role that tax and regulatory policies play in hiring, they drew only vague connections. Speer said his decision whether to hire is driven primarily by demand for his products. Orders are coming in strong enough that he is running about 20 hours a week of overtime. So he is weighing whether to hire two or three additional manufacturing workers.

None of the executives interviewed linked a specific new government initiative with a specific decision to refrain from hiring.

On one hand, it would be great if these conservatives were right – it would make our economic problems much easier to solve. The President just could have gone on vacation on day one, and the economy would have fixed itself – No stimulus package, no reforming 1/6 of the American economy, no reigning in the excesses of a financial system that was clearly out of whack. Maybe, if he’d just gone away, business people wouldn’t be passing on profitable investments sitting under their noses instead of hoarding all this cash. (If conservatives are truly right, then, when they take over, they’ll just shrink government, and everyone in America will be healthy, wealthy, and wise. Oh wait…)

Even a cursory examination of the economic data reveals that the conservative narrative has no basis in reality. It’s tempting to interview a conservative business person, let them tell an anecdote that is informed mostly by their personal political preferences, and write that they’re “on the front lines of the economy.” Happily, Neil Irwin didn’t do that – instead he put their views to the test. And, while the business people Irwin talked to didn’t see the case for more stimulus, many economists do. On the flip side, it’s hard to find mainstream economists out there backing up the conservative narrative.

Here’s the real point – we can all agree that the economy is in truly bad shape. Tremendous structural challenges remain, and businesses have no reason to assume that consumers will come flooding in their doors within the year. American consumers, first hit with a lost decade of wage stagnation and median household income decline followed by the destruction of personal wealth, primarily in housing, do not possess the ability to drive the American (much less the global) economy as they have in the past. 

What Irwin’s article says to me, more than anything else, is that the current state and future outlook for the economy are unacceptable, so a robust economic agenda isn't a hindrance on growth, but rather a necessity. Nice words about the business community from Congress and the President won’t actually improve the economy, but policies that allow everyday Americans back into the game and build a 21st century economy – so that businesses can see more capable consumers in the future – will. 

Rob was on Fox News today to explain how the stimulus has helped regain the jobs lost during Obama's presidency, but that it has not created a strong recovery because the crisis was triggered by a financial meltdown that reflects structural problems that no stimulus can address.

Also, Rob appeared on CNBC last Friday in a discussion on Social Security benefits. Rob weighed in that if the government were to look to Social Security benefits cuts as a means to control the deficit, wealthy retirees would better absorb the burden than middle income earners.

The news that China’s GDP will surpass Japan’s this year, making China the world’s number two economy, raises important issues for the United States.   There’s no prospect of China taking over our number one slot anytime soon:  Even in our present shape, the American economy will produce at least $14.3 trillion in goods and services this year, compared to China’s $5.3 trillion.  But the Sino-Japanese shakeup in global economic rankings is a sign that we have to raise our game.

The lesson here comes less from China’s ascendance than from Japan’s decline.  Twenty years ago, Japan had racked up 30 years of extraordinarily rapid growth – just as China has today – and scaremongers predicted that Japan would soon overtake us.  Yet, Japan’s good times ended abruptly in 1991, ushering in two decades of economic stagnation.  The origins of Japan’s long downward slide should be all too familiar to Americans, since it began with the sudden collapse of a huge real estate and stock market bubble, which then triggered a banking crisis and deep recession.  

Sweden had a financial meltdown the same year as Japan; yet Sweden put together a new policy consensus around economic liberalization, and the Swedish economy came roaring back within three years.  On the other side of the world, Japan suffered year-after-year of policy mistakes and paralysis by the long-ruling Liberal Democratic Party, and the result was two decades of economic languish.  Moreover, the particulars of Japan’s decline should be an object lesson for our own public officials: Hemmed in by powerful interests and an irresponsible opposition, the LDP couldn’t bring itself to clean up Japanese banks or fix the country’s housing market, much less undertake deeper economic reforms to prepare Japanese businesses and workers for the intense competition of globalization.  So, Japan was left instead with years of financial-sector weakness that limited business investment – sound familiar? – especially for the new enterprises that drive technological innovation and job creation.

As Japan continued to falter economically, the LDP spent trillions of yen on new public projects – and invested almost nothing in reforming their economic policies or upgrading the skills of Japanese workers, especially millions of Japanese women consigned to positions with no future in a modern, idea-based economy.  The result has been the country’s prolonged economic stagnation, and faltering competitiveness even for its global companies.  From 1990 to 2005, for example, Japan’s share of the world market in producing high-tech goods collapsed from 24 percent to less than 15 percent.

The question for the United States is whether our own political system has the capacity to address the challenges here which echo Japan from a generation ago.  We may not face the prospect of a national economic reversal as severe as Japan’s, and our world-class corporations should continue to prosper.  Yet we face serious challenges of our own which, if left unaddressed by Washington, could consign a majority of ordinary Americans to economic stagnation for a long time.

At the top of this catalog of challenges are jobs, because the storied capacity of America’s companies to create new jobs has eroded badly.  In the Bush expansion of 2002-2007, our private sector generated less than half as many net new jobs, relative to growth, as it did in the Clinton expansion of the 1990s, the Reagan expansion of the 1980s, and even the Carter expansion of the mid-to-late-1970s.  The best policy response here is to reduce the cost to businesses of creating those new jobs.  And we know just how to do that – cut the employer’s payroll tax burden for net new hires, and slow future increases in the health care costs which employers have to pay.

The outstanding question is whether Washington can raise its game and enact these kinds of reforms.  Let’s frame the political challenge in the terms that have dogged economic reform in Japan for so long.  Can congressional Republicans accept a tax increase, even one designed to fund a corresponding payroll tax cut?  Optimally, the tax increase could contribute something on its own – for example, a carbon fee that also would help address issues of energy security and climate change.  For the other side of the aisle, can Democrats support a tax cut for business, even if it’s the most effective way to spur job creation?  Similarly, can Republicans swallow hard and support more regulation of our broken health care market, in order to reduce costs for business – and are Democrats prepared to trim federal outlays for powerful health-care interests if doing so will ultimately help create jobs and raise wages? 

Here’s another challenge we have to meet in order to avoid a version of Japan’s fate: Restore higher levels of domestic savings to support higher levels of both private investment and public investments, especially in education and training, and in 21st century infrastructure including universal broadband and a modern electricity grid.  We know, after two generations of trying, that tax breaks aren’t enough to convince most Americans to save more: Since the 1990s, we’ve provided generous tax breaks in various forms that cover 80 percent of all personal saving, to no avail.  The only certain way to raise national savings, it appears, is to reduce public dissaving by lowering budget deficits.

Facing a slow economy that could go on for a long time, can Republicans accept cuts in defense spending – even with Secretary Robert Gates’ blessing – and measures to expand revenues?  Ronald Reagan, of course, took the same two difficult steps a generation ago; but he was more willing to compromise, it seems, than many of his current-day followers.  Across the aisle, will Democrats vote for measures that expand revenues from those they don’t call “rich,” even gradually, along with initiatives to trim future Medicare and Medicaid costs in part by trimming benefits?  

Stating these challenges so directly exposes the political difficulties.  But we should know by now what can happen eventually when a wealthy country – one like Japan – loses the political will to raise its’ game.  

On Friday, Rob went on Fox News to discuss Reaganomics as a solution to our weak economy. Rob reminds us that we went through a period of tax cuts and deregulation without modification during the Bush administration, which resulted in the Great Recession and 92% of the job losses seen in this cycle. What we could do, however, is make cuts in the payroll tax for employers who expand their workforce.

Washington Post blogger Ezra Klein picked up Rob Shapiro's blog from Tuesday on who to blame for unemployment. He made a helpful graph and said this:

 

"Obama's America," tweets Republican political consultant Patrick Ruffini, linking to this map of economic devastation.

Fairly or not, Ruffini raises an interesting question: How much unemployment can we blame on the Obama administration? Economist Rob Shapiro dug into some Bureau of Labor Statistics data and came back with the best numbers I've seen on the subject. He separated job losses into two buckets: Those that happened before the stimulus, which was Obama's major effort to deal with joblessness, and those that happened after the stimulus. Here's what he found:

"From December 2007 to July 2009 – the last year of the Bush second term and the first six months of the Obama presidency, before his policies could affect the economy – private sector employment crashed from 115,574,000 jobs to 107,778,000 jobs. Employment continued to fall, however, for the next six months, reaching a low of 107,107,000 jobs in December of 2009. So, out of 8,467,000 private sector jobs lost in this dismal cycle, 7,796,000 of those jobs or 92 percent were lost on the Republicans’ watch or under the sway of their policies. Some 671,000 additional jobs were lost as the stimulus and other moves by the administration kicked in, but 630,000 jobs then came back in the following six months. The tally, to date: Mr. Obama can be held accountable for the net loss of 41,000 jobs (671,000 – 630,000), while the Republicans should be held responsible for the net losses of 7,796,000 jobs."

We can argue about how much of the job losses should really be pinned on Republicans or Republican policies, of course. Financial deregulation happened under Bill Clinton, for instance. And it's hard to hold George W. Bush solely responsible for a global financial crisis. But insofar as the job losses go, it's hard to credibly blame this White House for the vast, vast majority of them.

That said, though this wasn't Obama's economic crisis, it is his economic recovery. There's a fair question as to whether another set of policies could've led to faster job growth over the last year or so. And the recent shakiness in the recovery is cause for concern on that front. So it's worth looking at Shapiro's proposal to strengthen the recovery, too:

Those can be found in Rob's blog from Tuesday - here.

We liked the President's rhetoric yesterday about America needing to do more to stay prosperous in a more competitive global economy.

I said we’d build an economy that can compete in the 21st century -- because the economy that we had even before the recession, even before the financial crisis, wasn’t working for too many Americans.  Too many Americans had seen their wages flat-line, their incomes flat-line.  We were falling behind and unable to compete internationally.  And I said we need an economy that puts Americans back to work, an economy that’s built around three simple words -- Made in America.  (Applause.)  Because we are not playing for second place.  We are the United States of America, and like the Texas Longhorns, you play for first -- we play for first.  (Applause.)  

Now, when it comes to the economy, I said that in today’s world we're being pushed as never before.  From Beijing to Bangalore, from Seoul to San Paolo, new industries and innovations are flourishing.  Our competition is growing fiercer. And while our ultimate success has and always will depend on the incredible industriousness of the American worker and the ingenuity of American businesses and the power of our free market system, we also know that as a nation, we've got to pull together and do some fundamental shifts in how we've been operating to make sure America remains number one.

So that’s why I’ve set some ambitious goals for this country. I’ve called for doubling our exports within the next five years, so that we're not just buying from other countries, I want us to sell to other countries.  (Applause.)  We've talked about doubling our nation’s capacity to generate renewable energy by 2012, because I'm actually convinced that if we control the clean energy future, then our economic future will be bright -- building solar panels and wind turbines and biodiesel and -- (applause.) 

And I want us to produce 8 million more college graduates by 2020, because -- (applause) -- because America has to have the highest share of graduates compared to every other nation.

Whole speech here.