Great Recession

As Congress returns from its holiday vacation, it and President Barack Obama need to address a number of challenges facing the country from health care reform to jobs and what strategy to pursue in Afghanistan.  How the Democratic leadership deals with these issues may well determine the future loyalty of an entire generation of new voters, and with it the future of the Democratic Party.

A recent study by two economists, Paola Giuliano and Antonio Spilembergo, entitled "Growing Up in a Recession," suggests that experiencing an economic recession during the impressionable ages of 18-25 can have lifelong effects on a person's attitude toward government and its role in the economy. The Democratic Party's most enthusiastic and loyal new constituency, Millennials (born 1982- 2003), have had their young lives thoroughly disrupted by the current economic downturn. With their level of unemployment exceeding 25%, what is for other generations a Great Recession is for Millennials their very own Great Depression.  Such an experience is likely, according to the new study, to increase Millennial support for policies that favor government redistribution of income and other liberal economic ideas.

However, Giuliano and Spilembergo also demonstrate that this same experience often makes young people less trusting of government institutions. Conservative columnist Ross Douthat suggested recently that the difference between the Democratic New Deal loyalties of the GI Generation that came of age during the Great Depression and the greater Republican orientation of Generation X that experienced Jimmy Carter's stagflation economy in the 1970s is the degree to which government dealt effectively with the economic crisis of their youth. "When liberal interventions seem to be effective, a downturn can help midwife an enduring Democratic majority. But if they don't seem to be working - or worse, if they seem to be working for insiders and favored constituencies, rather than for the common man - then suspicion of state power can trump disillusionment with free markets."

This raises the stakes for what Congress does in the next six months to new heights. Millennials, more than one-third of whom lack health insurance, will be watching closely to see if their needs are addressed in the final version of health care reform, something Millennials support to a far greater extent than any other generation. Of course, failure to pass meaningful reform may well sound a death knell for the emerging Democratic majority that the Obama campaign created last year. 

But Millennials care even more about jobs and the health of the economy.  With record unemployment among members of this generation, any jobs package Congress puts forward must specifically meet the concerns and needs of Millennials. In particular, Congress must deal with the high cost of education (something Millennials still see as the ticket to future economic success), the lack of job opportunities even at the intern level for those just entering the work force, and the lack of access to fundamental job skills training that community colleges can provide to those ready to go to work soon.

While the Democratic leadership often believes that today's youth thinks about issues of war and peace in the same reflexive way that young Baby Boomers did four decades ago, Millennials are more likely to want to understand the mission and strategy for success in Afghanistan before making up their mind on whether or not to support a deepening American involvement in that conflict. With Millennials providing the overwhelming majority of front line troops, however Congress chooses to pay for that campaign, it must ensure that those who do go to fight are better equipped than the military force George W. Bush initially sent to Iraq.

The effectiveness of any legislation Congress adopts over the next six months will not be known for years, but the way Congressional Democrats approach their policy decisions will be clear enough to Millennials.  The stakes are large and will have long-reaching impact. If the decisions are made by cutting deals with special interest groups, none of which represent this generation and its financial concerns, or by compromising Millennial principles of equity and social justice, members of the generation are likely to sit out the 2010 midterm elections and wait for their favorite messenger, Barack Obama, to return to the ballot in 2012 before making their future preferences known. If that happens, the results in the gubernatorial elections in Virginia and New Jersey last month will only be a prelude for a much bigger Democratic disaster next November.  If, instead, Democratic leaders take off their generational blinders and recognize that the base of their party is now made up of an overlapping core of Millennials, minorities, and women and respond accordingly, they will help to solidify the Democratic loyalties of America's largest generation for decades to come. 

For more on this subject, see Winograd & Hais' previous essay, For Millennials, It's The Economy, Stupid.

This month’s off year elections sent one message to Washington that has been heard loud and clear. Voters expect Congress to focus on the economy, especially employment, and take decisive and affirmative steps to deal with both the causes and ravages of the greatest economic downturn in the U.S. since the Great Depression. As the Obama administration considers a variety of new proposals to help bring down the unemployment rate, one key constituency is raising its voice and asking for a return on the investment it made in his presidency.

Members of the Millennial generation, born between 1982-2003, who were eligible to vote in 2008 went for Barack Obama over John McCain by a 2:1 margin and made up over 80% of the President’s winning margin. They continue to support his presidency and identify as Democrats by similar margins. A late October Pew survey indicates that Millennials identify as Democrats over Republicans by almost 20 percentage points (52% vs. 34%), well above the 8-point Democratic advantage among older generations. In the latest Research 2000 weekly tracking survey conducted for Daily Kos, 80% of Millennials had a favorable opinion of the president; only 14% of everyone in this generation viewed him unfavorably. This compares with a 55% vs. 39% favorable/unfavorable ratio among the entire electorate in both the Research 2000 survey and in a series of November surveys conducted by organizations ranging from ABC News and the Washington Post to Fox, although some other polls put the President’s job performance ratings closer to 50%.

But despite the clearly stronger support the President has among their generation, Millennials are increasingly restive about the lack of action in Congress to address the economic problems they face – both now and in the future.

Recent Pew research studies underline the major impact that the recession has had on individual Americans and their families. Thirteen percent of parents with grown children told Pew researchers that one of their adult sons or daughters had moved back home in the past year. Pew found that of all grown children living with their parents, 2 in 10 were full-time students, one-quarter were unemployed and about one-third had lived on their own before returning home. According to the census, 56 percent of men 18 to 24 years old and 48 percent of women were either still under the same roof as their parents or had moved back home.

The lack of jobs was particularly acute among adult members of the Millennial Generation (18-27 year olds), 61% of whom said that they or someone close to them was jobless recently. A clear plurality (46%) says that the “job situation” rather than rising prices (27%), problems in the financial markets (14%) and declining real estate values (7%) is their major economic worry.

As a result, the number one concern among Millennials is the state of the economy and the need for jobs, but they have a unique perspective on how to deal with this issue.

Millennials believe there is a clear link between education and employment and are increasingly concerned that the pathway through the educational system into the world of work is becoming increasingly more difficult and expensive to navigate. Last week, about one hundred of the nation’s top private sector and government leaders gathered for the Wall Street Journal’s CEO Council also identified education as the nation’s top economic priority.

For Millennials, the problem is personal. A smaller share of 16-to-24-year-olds – 46 percent – is currently employed than at any time since the government began collecting that data in 1948. A job market with Depression-level youth unemployment (18.5%) and a wrenching transformation in the types of jobs America needs and produces makes the implicit bargain of education in return for future economic success harder for Millennials to believe in every day.

Recently Matt Segal, Executive Director of the Student Association for Voter Empowerment (SAVE) and Founder and National Co-Chair of the “80 Million Strong for Young Americans Job Coalition” presented some ideas to the House Education and Labor Committee on what Congress could do to address this challenge. He advocated increased entrepreneurial resources be made available to youth; more access to public service careers through internships and loan forgiveness programs; and the creation of “mission critical” jobs in such fields as health care, cyber-security and the environment that would tap the unique talents of this generation. Since two-thirds of Millennials who graduate from a four-year college do so with over $20,000 in debt, debt, his testimony also urged immediate Senate approval of the student debt reform bill recently passed by the House.

There is more that can be done beyond these excellent recommendations. This summer, the President's Council of Economic Advisors released a report outlining the importance of community colleges in making America's workforce more competitive in the global economy. "We believe it's time to reform our community colleges so that they provide Americans of all ages a chance to learn the skills and knowledge necessary to compete for the jobs of the future." The report urged Congress to pass House Democratic Caucus Chairman John Larsen’s bill, The Community College Technology Access Act of 2009, in order to help meet President Obama’s goal of graduating five million more Americans from community colleges by 2020.

Millennials, like their GI Generation great grandparents in the 1930s, are facing economic challenges that caught them by surprise and for which no one prepared them. But Millennials aren’t looking for a handout or sympathy. Instead, in the “can do” spirit of their generation, they are organizing to overcome the challenges created for them by their elders. It’s time for the Democrats who control Congress to recognize these concerns and to act decisively on their behalf.

This essay was cross-posted at New Geography.

David Roche in the FT tomorrow:

When Volker walked into the Fed 30 years ago, the US national savings rate had been relatively static for decades at around 20 per cent of GDP and total US debt to GDP was about 160 per cent. Household debt was 47 per cent of national income. When the credit bubble burst in August 2007, the national savings ratio had fallen to 14 per cent of GDP and debt had risen to 350 per cent with household debt at just under 100 per cent of GDP. Even today, household debt in the US, although now contracting, still exceeds the level at the beginning of this crisis.

The disinflationary forces that drove the switch from thrift to leverage are over. This means the next decade will be one of replacing leverage with thrift. That will hurt retail spending.

The latest increase in the savings rate may be a positive trend in itself. But so far it has only been possible because of the Obama stimulus package. That has accounted for all the 5 per cent growth in household income so far this year. All that has happened is the consumer has saved and not spent the fiscal handouts financed by the Obama debt splurge. From now on, the impact of the stimulus measures will slowly wane and that means any rise in household savings will hit consumption directly.

This will set off feedback loops between the real economy and financial one, in the opposite direction to that we have been experiencing. It will cause consumer incomes and employment to deteriorate, along with the real economy, giving rise to increased defaults on consumer credit, commercial real estate and other loans, as well as, of course, housing mortgages. The default ratio on prime mortgages is already well above the US treasury’s stress test limit set for the banks. And the default rates on consumer debt, including credits, are rising very fast. The credit crisis hit to banks’ balance sheets is far from over.

I am still not yet on the economist optimist's bandwagon.  At the core of so much now is understanding how weak this decade was for the average consumer in America before the Great Recession kicked in.

As the American government struggles with what to do with its new ownership stake in storied corporate brands like AIG, Chrysler, Citigroup and General Motors, one of the fundamental questions that must be asked now is, can these brands - after months of stories about their insolvency - be saved?

I'm not so sure. 

Consider this passage from a NYTimes piece by Keith Bradsher about AIG's struggle with their damaged global brand:

Less than two months after changing its name, the biggest and best-known unit of American International Group is preparing to change its name again, in the latest sign of damage to one of the world’s most famous brands.

A.I.G. changed the name of the worldwide holding company for its property and casualty unit to American International Underwriters in early March.

The renamed A.I.U. quickly began issuing new business cards to employees and printing promotional materials, particularly in Asia. But A.I.G. has now decided that the A.I.U. name does not represent enough of a change, and is in the final stages of choosing a new one, said Leslie J. Mouat, A.I.U.’s regional president for Southeast Asia.

“The advice we’ve received is A.I.U. may be a bit close to A.I.G. — we don’t want to appear as the same leopard with different spots,” Mr. Mouat said in an interview, adding that he was told only Saturday of the decision to change the name again, which has not been publicly announced.

The question facing the Obama Administration now has to be not whether these companies can be saved, but what is the best way for valuable parts of the company to succeed and provide return to their investors (in this case the government).   One way is to prop up the companies, as we are doing now.  But there is a strong argument that these companies are so damaged now that their brand itself is permanently insolvent, and that the best course would be to break the companies up and sell their parts off to other stronger less damaged brands. 

AIG may be changing its name, but I think it will have to do much more than that to convince future customers that this not the same enterprise which made some of the greatest corporate blunders in the history of commerce.   All things being equal, would you buy a car from General Motors now, or or insurance from that company formally known as AIG, or open a new account with Citigroup?

The answer to this question needs to be an important part of what comes next in this difficult debate.

The Times has a story running in tomorrow's edition which is a very important window into what is happening in America today:

In its report Wednesday, the Census Bureau said that Americans’ mobility rate, which has been declining for decades, fell to 11.9 percent in 2008, down from 13.2 percent the year before and setting a post-World War II record low. Moves between states plunged the most, to half the rate recorded at the beginning of this decade.

In addition, immigration from overseas was the lowest in more than a decade, which experts attributed to the lack of jobs.

Overall, movers were more likely to be unemployed, renters, poor and black than non-movers.

For decades, several trends have driven a decline in American wanderlust.

Home ownership rates have risen and owners are typically less likely to move than renters. Two-earner families have become more common and finding employment for both spouses in a new location can be challenging. Americans’ median age has been climbing, while younger people usually move most often.

“It does show that the U.S. population, often thought of as the most mobile in the developed world, seems to have been stopped dead in its tracks due a confluence of constraints posed by a tough economic spell,” said William H. Frey, a demographer with the Brookings Institution.

He predicted that the foreclosure crisis might spur more local mobility, within or between counties, as families shift to rented quarters or move in with relatives.

Brace yourself for very anxious and stormy time, economically and politically, because there’s little prospect that the U.S. economy will improve for quite some time. The latest to weigh in is the Federal Reserve, whose new private forecast sees no growth in sight for the rest of this year and slow gains at best for 2010. The Fed always speaks cryptically (even among themselves). What it means is that the economy is still in free fall, with our best prospect for hitting bottom coming sometime this summer, and then bouncing around the bottom through the fall and into early winter. Why early winter? The only force out there to stop the decline is the stimulus package, which ought to kick in just about then. The Fed didn’t say so, but their view that any recovery is some time off and will be a modest one reflects the judgment -- one I share -- that the administration’s fixes for banking and housing aren’t up to the task.

The Fed also didn’t say so, but the outlook for much of the rest of the world is at least as gloomy, since so many Asian and European economies depend on Americans to buy what they produce and on U.S. businesses to invest in their countries. That’s not in the cards for some time. Trade is falling at a 20 percent rate here, at 30 percent rates across much of Europe, and at 30 to 40 percent rates in much of Asia. This week, for example, we found out that Americans’ purchases of foreign imports in February were down $62 billion from a year earlier. That translates into tens of thousands of jobs lost in a lot of other countries (and ultimately fewer U.S. exports down the line).

The Fed’s view should be a wake-up call for the administration, which still talks about a “V” shaped business cycle, where our deep decline will be followed by a strong and sharp recovery starting late this year. V-shaped recoveries are powered by unleashing suppressed demand: People cut back until they see the light at the end of the tunnel, and then they buy everything they had put off during the recession -- especially houses and other large purchases that require credit. That’s the scenario behind OMB’s risible forecast of more than 3 percent growth next year, followed by two years of more than 4 percent gains.

This misunderstands the very nature of what we’re going through, which is nothing like the other recessions of the last 50 years. This time, the economy’s circulatory system, banking and credit, isn’t working. Even if it were, American households aren’t holding back because their wages are down a bit. They’re being forced to downsize for the long term, because this crisis has wiped out 20 percent of their net worth. It’s even more serious than that, because most Americans used the fast-rising net worth they thought they had over the last decade to support their consumption. Mainly, we withdrew trillions of dollars from the once fast-rising value of our houses so we could go on vacation, buy new furniture, and send the kids to college. We had to do that, because for the first time in more than a half-century, most people’s wages and incomes stagnated during a “strong” expansion.

The current crisis will pass eventually, even as it takes much longer and exacts much larger costs for tens of millions of people than any downturn since the 1930s. When it does, the administration and the country will face once again the profound structural problem of the last decade -- of most people’s incomes stagnating in the face of strong productivity gains, and relatively little job creation during times of strong GDP growth. Addressing that will require all of the President’s skills, because it won’t change unless we slow down rising health care and energy costs, and educate and train everyone in many of the ways we now use to prepare only the top 20 percent of us.

The irony is that if President Obama can put in place policies for banking and housing that would work better than what his advisors have been willing to put out there so far, the economy could recover decently early next year. Then, he could have the political capital for the rest of his agenda, which is targeted just where it should be, on health care costs, energy, and education and training. But if he doesn’t pull off the recovery, none of the rest will happen -- and the Obama years could look a lot like the Bush era.

Check out the following passage.  Is it from the Onion?

No, amazingly, it is from the NY Times today:

During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks - with the added inducement of possibly making some money for themselves.

As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds.

The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

The potential risks - politically for the administration, and financially for would-be investors - are considerable.

The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.

But, as with any investment, there are risks. If, as some analysts suspect, the banks' assets are worth even less than believed, the funds' investors could suffer significant losses. Nonetheless, the administration and executives in the financial industry are pushing to establish the investment funds, in part to counter swelling hostility against the financial industry.

Many Americans are outraged that companies like the American International Group paid out many millions in bonuses despite crippling losses and multibillion-dollar rescues from Washington.

The embrace of smaller investors underscores the concern in Washington and on Wall Street that Americans' anger could imperil further efforts to stimulate the economy with vast amounts of government spending. Many Americans say they believe the bailout programs - and the potentially rich profits they could yield - will benefit only a golden few, including some of the institutions that helped push the economy to the brink.

"This is an opportunity to forge an alliance between Main Street, Wall Street and K Street," said Steven A. Baffico, an executive at BlackRock, referring to the Washington address of many lobbying firms. BlackRock, a giant money management firm, is playing a central role in the government's efforts and is considering creating a bailout fund. "It's giving the guy on Main Street an equal seat at the table next to the big guys," he said.

The new funds are still under discussion, and they are unlikely to be established for several months, if indeed the plans go through at all.

Throughout this financial and economic crisis there has been this lingering sense that those close to Wall Street believe a "recovery" is possible, that our economy and our behaviors will snap back to the pre-crash boom years when cash flowed, government regulators looked the other way and profits were extraordinary.  That those in charge need to channel this "populist" anger towards the Street, calm it down and things will settle back down to normal. 

I just don't think this is going to happen. 

First, economic elites have been deeply and dangerously out of touch with the American middle class this decade. For elites it was a time of boom, appreciating assets, cheap money, and a radical reduction in their taxes.  For those struggling to make it the Bush years were a very different experience - declining incomes, more without health insurance and in poverty, exploding debt and a sense of falling further and further behind. 

Both the intensity of the anger towards the banks and the steepness of our Great Recession can only be understood if one understands that the typical family was already in distress before the Recession began; that for them the economy turned tough years ago and those in power were unconcerned, did nothing about it and if anything told them in a terribly Orwellian fashion that contrary to their experience things were actually good.  This "anger" is not therefore ephemeral, and will not quickly dissipate.  It has built up over a long time, a time when those in power enriched themselves and offered to everyone else a modern version of "let them eat cake."  

Second, what ails the American financial system today is not a crisis in confidence but a crisis of trust; and I agree with Barack Obama that because our families were already in such distress, and have such unsustainable levels of debt the "voracious American consumer" is not coming back soon.  What this means in policy terms is that the Obama Administration should not be focused on saving discredited financial institutions and going back to the good ole days.  Brands like AIG and Citigroup cannot be saved.  Who in their right mind will do business with them given what has happened? What leaders in the developing world, so harmed by this American-led global economic crisis, will allow their citizens or their governments to put money in these wildly irresponsible American institutions?  The government should immediately begin dismembering these companies, selling off whatever valuable parts remain for like Chrysler they are no longer capable of surviving as independent brands. 

For our financial system to regain the trust of Americans and those abroad a much serious effort will have to be made to show that the lax regulatory system has been fixed and consumers better protected; those at the center of the global crisis expunged and damaged brands shut down (and not put in charge of fixing the system itself); and if in any way in this process of fixing everything a small number of elites get super wealthy all these reforms, this effort to build back global trust, may be for naught. 

As I wrote when I returned from my recent trip to Chile, I think the American financial community is in deep denial about the global loss of trust that has come from their reckless behavior.  To many the Masters of the Universe have now become reckless, greedy exporters of economic contagion.  Salvaging the once highly successful American global financial sector will require much more than the firing of a few CEOs or a few slap on the wrists while floating these very same companies trillions of dollars.  It will require first and foremost a rejection of the concept of "recovery;" and it will require a fundamental transformation of Wall Street, a Wall Street 2.0, a new, improved, different and chastened Wall Street, and the sooner we get there the better for all of us.

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, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

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. 

Even California, the land of high-tech and innovation, cannot weather this storm. The San Francisco Chronicle reports that unemployment rose to 10.5 percent in February.

The state unemployment rate jumped to 10.5 percent in February, a level not seen since 1983. All told, the recent economic slide has left 1.95 million Californians scrambling for work.

Friday's report from the Employment Development Department charts a sharp rise from January's 10.1 percent rate and brings the state closer to its modern peak of 11 percent, which occurred in late 1982 and early 1983.

The U.S. unemployment rate for February was 8.1 percent. During the Great Depression, unemployment got as high as 25 percent.

January numbers showed California at 10.1 percent unemployment, one of four states with that number higher than 10 percent. (Michigan, Rhode Island, and South Carolina are the others.) Growth in the 1990s was driven, in large part, by the California led tech boom, and California has generally been on the leading edge of the nation's economic activity. High unemployment in heavy manufacturing driven states was how people understood this recession, but these numbers from California mean something different is afoot.

Of course, California's housing market has been hit especially hard, and then there's this.