The Great Recession

Three Interesting NDN Events This Week - Angelides, Clean Tech, America in 2050

Got an action packed line up this week for those either able to make it to lunch in our offices, or watch on-line.  Tomorrow we start with the Chairman of the Financial Crisis Inquiry Commission, Phil Angelides, who will be talking about the necessity of understanding where we have been to help inform the decisions about how to best move forward.

Next up on Thursday is the unveiling of a major new paper by our Green Project Director, Michael Moynihan, proposing a new way to help unlock the transformative power of the clean tech and renewable energy revolution.  Michael has been working on this paper for close to a year now, and if these are areas of interest, you won't want to miss it. 

Finally, on Friday, an old friend, Joel Kotkin, returns to NDN with one of the first public events discussing his compelling new book, The Next 100 Million: America in 2050

So, a full week.  To RSVP or to get more information click here.   And look forward to seeing you at one of these wonderful events.

The Housing Crisis and Our National Attitudes Towards Saving

The Great Depression deeply affected the attitudes of the generation that came of age in the 1920s and 1930s. For example, it made the country thriftier and more Democratic. It took two full generations for other social changes to turn us into a society that was more Republican and saved much less -- shifts led, as before, by those who came of age in the bleak times of the 1970s. Our current economic upheavals are the most serious since the 1930s, so it’s appropriate to consider how they may affect American attitudes going forward. And the early surveys suggest that those who came of age during this crisis -- the Millennials born from 1982 to 2000 -- and now America’s largest generation by sheer numbers — already embody distinctive attitudes.

One way to glimpse how these tough times may affect our national psychology is to understand the forces that make times so tough. We’ll start today with an aspect close to people’s sense of themselves: their homes, or more generally, housing. We’ve all now lived through an historic housing bubble which, to begin, was very different socially from most bubbles in history: Unlike tulips, the South Seas, the 1920s stock market or other famous bubbles, this one was not primarily the business of speculators and affluent people. Nearly 70 percent of Americans own their houses, including most middle-class people as well as a broad swath of moderate and even low-income families. So, this bubble’s impact is being felt very broadly. That should be no surprise, since we give home purchases super-sized tax breaks and regulatory subsidies.

The irony is that while we go out of our way to encourage Americans to put their savings in this basket, in the form of home equity, we also encourage them to keep those savings small. First, we provide a large mortgage deduction which encourages people to buy houses -- and to buy way above what they could afford, but for that deduction. That’s one reason why housing prices generally trend upwards. But the way we provide the deduction actually cuts against saving much, since the deduction isn’t for what we “save” by owning our houses -- there’s no tax break for the downpayment, for example. Instead, it effectively encourages people to save relatively little, since they get to deduct only the interest on the mortgage loan, which represents what they don’t own or “save.”  The natural result is that most people borrow 90 or 95 percent of the value of their house --  just as Bear Stearns and Lehman Brothers did. We also encourage people to keep their “savings” in housing small, by providing tax breaks for them to pull out the equity in their houses in the form of tax-preferred refinancing and home equity loans.

The result is that large numbers of people end up saving relatively little by owning their houses -- and that’s especially the case when a housing bubble creates an illusion of significant savings. Federal Reserve data show that people’s home equity, or what they “save” through their homeownership, as a share of the value of their homes, has been generally falling for 60 years — which happens to be the time period since we enacted the major tax preferences for housing. Moreover, since 1985, that share has fallen from nearly 70 percent to 43 percent. Strikingly, this share remained stable during most of the bubble -- because as housing prices rose, people withdrew more and more of what they had “saved” as equity. And in the two years since the bubble first burst, home-equity savings has fallen by about one-third, from 60 percent to 43 percent.

Today, an estimated 12 million people are under water with their mortgages. Since they owe more than their houses are worth, the bursting bubble wiped out their life savings. Moreover, the data which show that people’s home equity is still equal to 43 percent of the value of their homes combines two very different groups of people: Nearly half of homeowners own their houses free and clear (mainly older people), while the other half has modest or little equity.
All of this could really change American attitudes toward saving. For one thing, the generation that came of age as these developments unfolded, along with everyone who staked their economic futures on ever-rising housing values, are much less likely to see housing as a safe way to save. That attitude correction in itself could provide a long-term drag on rising housing prices. There also are millions of people who counted on bubble-prices to fund their retirements. That’s been especially true of later Baby Boomers and early Baby Busters, the parents and older siblings of those coming of age in this period. A rude attitude adjustment is also coming for those who haven’t bothered to save much because they’ve counted on inheriting the elevated value of their parents’ houses.

The bottom line is that Americans once more may find themselves more inclined to save --  because now they have to -- and less inclined to use housing values to do it. Since stocks don’t seem much more attractive, that could mean more saving in the safest assets, which are Treasury bonds. And that would be just what an Administration and government determined to act big, bold and expensively, will need to carry out those plans.

NDN Backgrounder: A Long Great Recession, No Trust In Wall Street, Carbonomics

With President Obama meeting with his top economic advisers today, NDN is pleased to present some of our recent and most important economic analysis.

  • Thoughts on Wall Street 2.0 by Simon Rosenberg, 4/9/2009 - Roseberg explored the crisis of trust between the American people, the world, and Wall Street.
  • Friedman on a Carbon Tax by Michael Moynihan, 4/8/2009 - Moynihan discusses Thomas Friedman's column calling for a carbon tax and delves into the politics of pricing carbon.
  • Carbonomics by Michael Moynihan, 4/2/2009 - Moynihan looks at the connection between pricing carbon and the future of the American automobile industry.
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

Some Depressing Economic Analysis

Hat tip to both Mark Thoma over at Economist's View and Paul Krugman on this study. Economists Kevin Eichengreen and Kevin O'Rourke have some data looking at the global economy and argue that:

the world economy is now plummeting in a Great-Depression-like manner; indeed, world industrial production, trade and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better.

They also point out that the commonly cited comparisons that see the crisis as less severe than the Great Depression are focused on the U.S. only.

More from Eichengreen and O'Rourke:

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.)  Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then
Source: Eichengreen and O’Rourke (2009).

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then
Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then
Sources: League of Nations Monthly Bulletin of Statistics,

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The "Great Recession" label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline.

More here on the policy response, which the authors argue is superior to that of the Great Depression, but, as all things policy go, uncertain to work. Krugman writes: Knowledge is the only thing standing between us and Great Depression 2.0. 

Shapiro Speaks on G-20, Need for Global Economic Action

NDN’s Globalization Initiative yesterday hosted "The G-20 and Beyond: Challenges Facing the Global Economy." The event featured U.S. Rep. Adam Smith, Foreign Policy magazine Editor-in-Chief Dr. Moisés Naím, and NDN Globalization Initiative Chair Dr. Robert Shapiro. Shapiro delivered wide-ranging comments on the global Great Recession, its causes, and the global leadership necessary to combat it:

ShapiroThe world’s political leadership meets today under very unusual circumstances.  Summits of this kind generally involve the ratification of understandings or agreements worked out in some detail long before the leaders meet in the public spotlight.  This time, they convene in the midst of the worst global economic crisis in 80 years.  Not only have they not yet agreed to a set of responses; they and their advisors haven’t come to a common view of what the problem is.  Instead, much of the value of this meeting will come from President Obama, Prime Minister Brown, President Sarkozy, President Medvedev, Chancellor Merkel, and President Hu listening to each other.  They can learn how each of them sees the crisis affecting their own countries, what they understand as its causes, who or what they blame, and what they’re prepared to do.   Last weekend, German officials leaked a communiqué drafted by Gordon Brown calling for coordinated stimulus – leaked it in order to knock it off the table.  Thus far, the United States, China, and Spain are the only nations that have initiated significant stimulus, in part because other major industrial countries have such extended safety nets that there’s less political pressure to stimulate. But as global demand sinks, global stimulus is called for. Even so, it’s clear that the summit is unlikely to produce a coordinated response in this area.   

This is a real loss, because the crisis demonstrates the extraordinary degree to which globalization integrates the economic trajectories and fates of the world’s majorNaim economies.  Part of this reflects the most highly-globalized sector of all, finance, where the products created in New York – mortgage-backed securities and credit default swaps, for example – are traded furiously around the world.  It may be that the European banking system incurs as much damage as our own.  At a minimum, the steps we’ve taken to bail out our own large banking institutions have been taken, in part, to protect the major institutions of our allies.  This was particularly clear in the early takeover of Fannie Mae and Freddie Mac, after the Chinese and European governments informed the Bush Administration that their own central banks held large quantities of Fannie and Freddie paper.   

This deep integration is not limited to finance.  Under globalization, the share of everything produced in the world that’s traded across borders jumped from 18 percent in 1990 to 30 percent in 2007.  The result is that a severe economic shock like the one shaking the world today can produce the mainSmith result of protectionism – a sharp drop in global trade – without any new protectionist laws.  Compared to the year before, exports in January of this year were down over 20 percent here, down about 30 percent in Germany, France, Mexico and Britain, down 30 to 40 percent in Korea, Italy, Canada, Japan, Argentina and – here’s the big one – China, and down by more than 40 percent in Russia.  And one early result is rising unemployment in virtually every nation.

So, the world finds itself in not only a systemic crisis, but a cascading one as well:  That is, a systemic crisis that becomes more and more serious through feedback effects, and a cascading one that also spreads across sectors and countries.

Full remarks here.

The Republican Joke-of-a-Budget

Yesterday, U.S. Rep. Paul Ryan and his GOP cohorts in the House released their alternative budget. (This time with numbers!) The highlights are a freeze on discretionary spending, an utter absense of any common sense, and a chart from fantasy land. Here's what Senate Majority Leader Harry Reid had to say:

If you like this recession, you’ll love the Republican budget.  And if their plan sounds familiar, it’s because it merely repeats the same mistakes of the past eight years – mistakes that have cost millions of Americans their jobs and plunged our nation into the worst economic crisis since the Great Depression.

While the Democratic budget invests in health care, education and energy, the Republican budget will take cops off the streets and eliminate needed transportation projects that create jobs.  While the Democratic budget cuts taxes for middle-class families, the Republican budget continues to give tax breaks disproportionately to multimillionaires and Big Oil companies.  And while the Democratic budget is designed to help families keep their homes and get us out of this recession, the Republican budget will only make a bad situation worse.

What America needs now is a serious and responsible plan that invests in our future, cuts taxes for the middle class and cuts the Republican Deficit – which is exactly what the Democratic budget does.

In addition to Reid's statement, it's worth noting that the Republican budget proposes the sort of sustained policy error that could turn this Great Recession into an actual depression. In fact, America almost emerged from the Great Depression, only to be plunged back in by an attempt to balance the budget in the short term by cutting spending. Reid's statement may be too kind to the Republicans on one point - the GOP budget doesn't merely repeat the same mistakes of the past eight years, it's much, much worse at a time when the stakes are much higher.

Market Bounces, Overall Economy Remains Weak

Even as Wall Street surged yesterday, the New York Times reports that tremendous problems in the economy remain. The story has some bright points, like slightly increasing retail sales and credit rating downgrades to GE and Berskshire Hathaway that weren’t as bad as expected, but most of the news is pretty grim.

Falling stock and home prices have wiped out four years of gains in Americans' net worth since the start of 2008, according to new data from the Federal Reserve. Nearly half of those losses occurred over the last three months of the year, the biggest quarterly decline since recordkeeping began in 1952.

The new data underlined just how quickly wealth created during the biggest credit bubble in history has vanished, leaving Americans without the college funds, nest eggs and other reserves they had set aside.

Americans continue to turn to the government for help -- the number of people filing continuous claims for jobless benefits jumped last week to another all-time high -- and, according to a new survey, foreclosure filings increased last month, despite foreclosure moratoriums imposed by several states and major lenders.

Experts had been hoping filings would level off, or even decline. Lenders such as Bank of America, as well as Fannie Mae and Freddie Mac, which provide funding to banks to offer loans, temporarily halted foreclosures late last year, and some lenders extended their moratoriums through this month as they waited for the Obama administration to release details of its foreclosure prevention plan. That plan, unveiled last week, aims to help up to 4 million homeowners stay in their homes, but it could be months before there's any noticeable impact.

As the recession has deepened, consumers are also having a harder time paying off credit cards and auto loans. Commercial developers and businesses are also struggling to pay their debts. More defaults, combined with the credit crunch, are hurting corporate balance sheets.

Indeed, Wall Street’s collapse has eliminated tremendous wealth for everyday Americans, the effects of which have created a pretty scary feedback loop through the economy. The market will continue to fluctuate, perhaps wildly, over the course of the Great Recession – two of the ten largest leaps in the market came in the Great Depression, and one of the other two came in October. As the saying goes, "even a dead cat bounces."

Leonhardt: Story of the Great Recession Not Nearly Written

Across the upper five percent of America, there's some sense that this Great Recession, as NDN's Dr. Robert Shapiro labeled it in December, just isn't really that bad. Sure, stocks are taking a hit and the financial sector is hurting, but we've been there before. In the New York Times, David Leonhardt lays out how bad this Great Recession really is, and who it has hurt the most, to this point.

What does the worst recession in a generation look like?

It is both deep and broad. Every state in the country, with the exception of a band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid pace. And even that band has recently begun to suffer, because of the sharp fall in both oil and crop prices.

Unlike the last two recessions — earlier this decade and in the early 1990s — this one is causing much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.

The Great Recession of 2008 (and beyond) is hurting men more than women. It is hurting homeowners and investors more than renters or retirees who rely on Social Security checks. It is hurting Latinos more than any other ethnic group.

Leonhardt tells us that could all soon change:

You often hear that recessions exact the biggest price on the most vulnerable workers. And that’s true about this recession, at least for the moment. But it isn't the whole story. Just look at Wall Street, where a generation-long bubble seems to lose a bit more air every day.

In the long run, this Great Recession may end up afflicting the comfortable more than the afflicted.

He points out that the collapse of the financial sector will hurt the wealthy and ultimately lead to a smaller Wall Street. (The same dynamic will ultimately help young families, allowing them to buy into the financial and housing markets at the bottom.) Government policy will reduce inequality. And, most importantly for expanding the economic pie, the nation's unemployed will turn to education, if they can. Community colleges are already feeling budget crunches across the country, especially in the areas where they’re most needed.

There seems to be, amongst conservatives in Congress and the Rick Santellis of the world, a sense that the Great Recession just isn't that bad. They shout "Moral Hazard" as we try and stabilize the housing market, and they cry about deficits that didn't matter to them when the last Administration launch an optional war and ideological tax cuts. But Leonhardt tells us that they're about to start feeling it.

And, even if they aren't big fans of some of the President's plans, let's hope they can work with him to do the one thing we know will grow the economy for everyone in the long term – build a 21st century education system to create the workforce for the next great expansion.

The Choice: Recovery vs. Drift and Decline

Each day you can feel the media and the public grow slightly more aware of the gravity of the economic problems facing America and the world.   We are all still getting our arms around this economic moment, and like Paul Krugman's column today, the emerging conventional wisdom is the recovery is going to be long and hard - longer and harder than any other recession since the Great Depression.  I feel, each day, that it is more and more apparent that we are living in no ordinary time - that the decisions made by our leaders in the days ahead here and across the world will be ones of great consequence.  Ones that will lead to a prosperous and peaceful 21st century; ones reinforcing the drift of the moment, the inability of our politics to face our challenges forthrightly; ones that could indeed make matters much much worse. 

Tuesday night the President will address the nation from the Capitol.  Once again the nation, and the world, wlll be watching.  It will be a critical opportunity for our new President to lay out the challenges we face and the solutions he envisions.  I hope he takes the opportunity to more clearly define the choice we face.  For I don't think the choice is between forward and backward any more, or between progress and failed old ideas.  I think it is a graver choice, a starker choice, a much more serious choice - one of recovery, global stability and national greatness versus continued drift, global chaos and national decline.  

As the saying goes times of crisis are also times of great opportunity.  It is increasingly clear the task of the Obama Presidency will be a great one - to prevent the world and the US from sliding into economic and political chaos, to chart a domestic and global path for recovery, and to update the successful but aging geopolitical architecture forged by FDR and Truman for a new day and a new century.  No small tasks these.  But these are the tasks that are in front of us now.  To put it simply - it is time to remake and renew the world, to offer a "new politics" on a global scale.  

If history is any guide creating this new global architecture that allows us to better manage the collective challenges in front of us won't be easy, or without pain.  Mistakes will be made, years and nations lost.  But it is now the great challenge facing our nation, whose role in the world is different from the rest.  And it will now be at the very center of our politics for perhaps decades to come.  I am anxious to see how the President talks about all this on Tuesday night, the most important night yet of his already historic Presidency.  

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