Fair Play Benefits All of Us

The Popular Economics Weekly
The idea of fair play may be the key issue in 2012—with the Presidential campaign and economic growth. How so? Both political parties are jockeying to portray their message as fair—Democrats want to restore the middle class, and Republicans still believe the wealthiest are already paying their fair share of taxes. So they maintain any tax increases at all will harm growth prospects.

And President Obama’s message in his 2012 State of the Union speech was even more encompassing. He said “A return to the American values of fair play and shared responsibility will help us protect our people and our economy. But it should also guide us as we look to pay down our debt and invest in our future.”

So President Obama also believes the issue of fair play could dominate this election year. But how will it protect our economy and pay down our debt? Obama wasn’t clear on this, but past history and economic research tells us why. Simply put, the more equal distribution of wealth even up through the 1990s when the maximum tax brackets for income, capital gains, and even dividends’ taxes were higher, produced a thriving middle class so that overall economic growth was higher that it is today with a vastly reduced middle class.
And fair play is in the news. Andrew Kohut’s most recent New York Times Op-ed highlighted a recent poll which “found that 66 percent of Americans believed there were “very strong” or “strong” conflicts between the rich and the poor — an increase of 19 percentage points since 2009”. And, “they care about policies that give everyone a fair shot — a distinction that candidates in both parties should understand as they head into the 2012 campaigns’.

“An awareness of economic inequality is not new,” says Kohut. “Pew surveys going back to 1987 have found an average of 75 percent of the American public thinking that the “rich are getting richer and the poor are getting poorer.” As far back as 1941, 60 percent of respondents told the Gallup poll that there was too much power in the hands of a few rich people and large corporations in the United States.”

In fact, fair play is a very important part of consumer and business confidence, say economists Robert Shiller and Nobelist George Akerlof in Animal Spirits, How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, which further develops famous economist John Maynard Keynes’ thesis that animal spirits, or emotions, drive most financial decisions. And we can measure the degree of confidence at any time in the economy, mainly via the two major sentiment surveys of the Conference Board and University of Michigan.

Graph: Inside Debt

What is most obvious from the survey data is that consumer and investment spending rises and falls with confidence levels. For instance, retail sales sank to negative levels from 2008-2010, at the same time as both confidence surveys. And we know that consumer spending makes up almost 70 percent of economic activity, with 50 percent of it coming from retail sales.

Graph: Econoday

What is their confidence based on? Akerlof and Shiller list 5 elements, of which fair play may be the most important:

• The cornerstone of our theory is confidence and the feedback mechanism between it and the economy that amplify disturbances.
• The setting of wages and prices depends largely on concerns about fairness.
• We acknowledge the temptation toward corrupt and antisocial behavior and their role in the economy.
• Money illusion is another cornerstone of our theory. The public is confused by inflation or deflation and does not reason through its effects.
• Finally, our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.

Akerlof and Shiller’s Animal Spirits therefore develops Keynes’ thesis further. A major part of any business decision is whether the public has confidence in and trusts the economic conditions that determine whether they should spend or save, invest in expansion or lay off workers.
In other words, when the playing field is not perceived as fair, then the public retreats to inaction. “If this is what we mean by confidence, then we immediately see why, if it varies over time, that it plays a major role in the business cycle,” say Akerlof and Shiller.
President Obama was talking not only about the huge decline in income inequality over the past 30 years, and un-progressive tax code that allowed countless tax loopholes and benefits for those individuals and industries that needed them the least, but the loss of opportunity and social mobility that has put the U.S. near the bottom of all developed countries in quality of life factors, according to Richard Wilkinson, a leading authority on the effects of inequality.
And we know a more progressive tax structure means more economic growth and increased tax revenues. President Clinton proved this with his combination of reduced government spending and higher maximum tax brackets that caused 4 consecutive years of budget surpluses.

Whereas the Republican’s sense of fair play doesn’t play well with most Americans, according to the Pew survey. “Just 11 percent of Americans say they are bothered by the amount they pay, while 57 percent of respondents say they are bothered by what they believe are unfairly low amounts paid by the wealthy.”

Then why is it Republicans in particular continue to oppose any government help to boost economic growth? It could be what Robert Frank calls cognitive illusion, in a recent Sunday New York Times Economic View article. Their wealthy supporters believe higher taxation means they will lose out on the things they value most, and which go to the highest bidders—waterfront properties, precious jewels or art, etc.

“But a tax increase is different,” says Frank. “It affects all participants in the bidding for positional (i.e., luxury) goods. And because it leaves everyone with less to spend, it has essentially no effect on the outcomes of those contests. The same paintings and the same marina slips end up in the same hands as before.” So there is no reason for the 1 percent not to enjoy the benefits of fair play, as well. “…higher spending on many forms of public consumption would produce clear gains in satisfaction for the wealthy,” says Frank. “It’s reasonable to assume, for example. That driving on well-maintained roads is safer and less stressful than driving on pothole-ridden ones.”

Harlan Green © 2012

Such Pessimism is Unwarranted—Who Should Rescue Housing?

The Popular Economics Weekly
Why is it so many pundits—and some economists—continue to be pessimistic about 2012 growth? Business and Wall Street economists in particular are predicting just 2 percent GDP growth for all of 2012, according to a recent CNBC report.
Why such pessimism? The reason cited is that “the improving data masks unsustainable fundamentals — an unusual drop in the savings rate, a jump in auto purchases due mainly to a recovery from Japan’s natural disasters last spring, and a surge in inventories”.
Firstly, there is not an “unusual” drop in the savings rate (which is really dependent on household incomes, let us not forget). It is slightly under 4 percent, and had dropped to 1 percent during the bubble years of early 2000, before rising to 6 percent during the Great Recession. Consumers are just beginning to spend again after paying down their debts for the past 3 years (2009-11), in other words. And consumer spending makes up 70 percent of economic activity.

Graph: Calculated Risk

This is while the “jump’ in auto purchases just brings it back to more historical levels of 13-14 million sold, but not to the bubble years of 16 million. And there is no surge in inventories. They are still at historically low levels, as businesses are still overly cautious because aggregate demand for their products and services is still weak.

Graph: Econoday

So business inventories are anything but surging. Inventories rose 0.3 percent in November as did business sales, keeping the stock-to-sales ratio unchanged for a fifth straight month at a lean 1.27, said Econoday.
It is understandable that businesses have just been through the greatest recession since the Great Depression—which lasted 10 years, and took a world war to cure. But there are many more tools to stimulate growth since then. And we know what stimulates growth—government spending; including for the safety nets (social security, unemployment benefits, Medicare), and investments in infrastructure and research—in order that consumers can continue to spend and businesses invest.

Most economists have to know this, so there has to be another reason for their pessimism. Banks in particular are lobbying for more Federal Reserve, as in QE3, to boost the housing market. "Obama Administration officials have come to realize that the ongoing dysfunction in the mortgage market is a key impediment to sustained expansion," Vincent Reinhart, chief U.S. economist at Morgan Stanley, said in the CNBC article.

"Their problem is that there is no chance of coming to terms with the Congress to fix the mess," Reinhart added. "The result is that the administration is moving toward mortgage modification, but not decisively. Purchasing MBS is a way that the Fed can support that movement and signal the seriousness of the enterprise."

But Congress isn’t the only reason for housing’s problem. The Obama Administration is still not serious about either their HAMP or HARP II loan modification programs. They had set aside some $11 trillion from the ARRA legislation back in 2009 that hasn’t been spent! Why? We are not sure, but know Treasury Secretary Tim Geithner is a great friend of banks. Neither he, nor the Office of Thrift Management (OTC) that overseas banks are requiring the banks and loan servicers modify eligible mortgages on their books, when the Executive Branch, has the power to do so.
So the banks and Wall Street have come begging to the Federal Reserve once again to provide stimulus by buying up to as much as $1trillion more of mortgage-backed securities. But why not first get rid of the excess inventory of bad mortgages and foreclosed properties banks are holding on their books? There have been several suggestions on how to do this, including by the Fed in a recently published White Paper to Congress: “The U.S. Housing Market Current Conditions and Policy Considerations”. That is, there are other solutions. But even with the huge TARP bailout and growing profits, banks and Wall Street still want government to continue to pick up their tab.
Existing-home sales have just jumped, by the way, which bodes well for housing in 2012. The latest monthly data shows total existing-home sales rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 million-unit level in December 2010.

Graph: Econoday

Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply at the current sales pace, down from a 7.2-month supply in November. Home sales are now back to a 1998 sales’ level, before the housing bubble took off. Maybe that is where it will be for some time to come. That means Banks and Wall Street need to get over their hangover from the housing binge they profited so well from.
Harlan Green © 2012

Mortgage Applications-Builder Optimism Rising

The Mortgage Corner
Are homebuyers and borrowers finally realizing that mortgage rates might not fall much further? We are seeing a huge jump in both mortgage and builder activity, and much of the most recent interest rate drop has been because of Europe’s solvency problems, which could reverse once the uncertainty is resolved. This is in spite of still restrictive underwriting standards by the likes of Fannie Mae and Freddie.
Mortgage applications increased 23.1 percent from one week earlier (last week’s results included an adjustment for New Years Day), according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 13, 2012.

“Interest rates dropped last week due to continuing anxieties regarding the fragile economic situation in Europe,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.  “With mortgage rates reaching new lows, refinance volume jumped and MBA’s refinance index reached its highest level in the last six months.  Purchase activity also increased as buyers returned to the market after the holiday season.”

The Refinance Index increased 26.4 percent from the previous week to its highest level since August 8, 2011. The seasonally adjusted Purchase Index increased 10.3 percent from one week earlier to its highest level since December 12, 2011.
And builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the latest NAHB/Wells Fargo Housing Market Index (HMI). This is the highest level the index has attained since June of 2007.

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB). "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000.

Graph: Calculated Risk

But Single-family starts increased 4.4 percent to 470,000 in December - the highest level in 2011, and the highest since the expiration of the tax credit. This should give a boost to 2012 growth.
Another upside surprise was signs of increased employment. For the week ending January 14, the advance figure for seasonally adjusted initial claims was 352,000, a decrease of 50,000 from the previous week's revised figure of 402,000. This was the largest plunge in jobless claims in 3 years. The 4-week moving average was 379,000, a decrease of 3,500 from the previous week's revised average of 382,500.

So we are seeing a reason for the jump in builder confidence rising four points to 25 on the NAHB/Wells Fargo Housing Market Index (HMI), as we have said.
Existing-home sales might also pick up, because of the fire-sale prices. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

Graph: Calculated Risk

We know that it’s the combination of a better jobs market and even increased household formation that increases the demand for housing. Demand is increasing in spite of some 4 million homes somewhere in the foreclosure process. Maybe a key is that the younger, echo boomer generation is creating more households. Household formation has fallen drastically since 2007, so maybe this is the year when it will return to historical levels.
Harlan Green © 2012

Smart Government Creates Better Growth

Financial FAQs

It is smart government that creates better economic growth, not smaller government, per se.  Smart government means effective government that finances and regulates what the private sector can’t or won’t.  So that doesn’t mean downsizing government for its own sake, since the private sector can’t regulate itself, and won’t finance what it doesn’t believe will be profitable.

A recent New York Times’ Op-ed by Paul Krugman talks about what it doesn’t take to run a government—specifically whether owning a private equity firm or being a corporate CEO qualifies one to be President of US. Well, Herbert Hoover and perhaps GW Bush were the last 2 Presidents who were business executives, and the policies of both caused the largest economic downturns in our history.

Why? Because they subscribed to ideologies rather than the reality they were facing. Hoover reacted to the 1929 Black Friday market crash by tightening credit to protect the creditors, thus causing record deflation, when he should have loosened credit to counteract the plunging prices. JM Keynes hadn’t published his theories until 1936 that said a Great Depression was like wartime—emergency spending measures were the only way to lift production during such tough times.

Whereas GW Bush believed in Trickle-down economics. He reacted to 4 years of budget surpluses under President Clinton by believing (as did Fed Chairman Greenspan) all those tax monies should be returned to the private sector—mostly by giving tax breaks to the richest—since “Deficits don’t matter”. Instead everyone’s income fell except that of the top 10 percent, causing the huge borrowing binge that burst the housing bubble.

Both business Presidents came from the private sector, which meant they had little idea of how to make government work. The fallacy was in believing it was up to the private sector alone to bring back growth. But growth doesn’t happen by itself. Not when the private sector becomes overextended and over indebted, which is the cause of all recessions and depressions, really.

Economists know it is oversupply that drives down prices and so profits, causing debt defaults on the most highly leveraged. This is why we have business cycles and is no fault of government, which doesn’t produce anything. In fact, economic downturns occur fairly regularly, as anyone can check on the National Bureau of Economic Research website, www.nber.org. It is how to climb out of those holes that is hardest for business types to know.

Modern history since the Great Depression tells us in fact government is not the problem. It doesn’t rob from anyone, but instead finances the most important segments of our economy. Besides defense it finances education, future research and development, public services, and environmental and financial regulation—that private sector business won’t. It’s too risky for private businesses, and doesn’t give them immediate returns. How does one calculate the profit from use of our public highways and bridges, for instance? Yet without those services the private sector cannot function.

So what about the huge government debt amassed since 2000? In fact, it isn’t the dollar amount that matters, but what it is as a percentage of GDP. We had no problem with running the deficit up to 121.7 percent of GDP in World War II, even though most of the ‘goods’ went up in smoke, rather than back into the economy. Firstly, it generated jobs for everyone, including women. And secondly, it modernized our industrial base that enabled U.S. to grow out of such debt until it fell to 40 percent of GDP in 1980, while giving the post-WWII U.S. economic superiority over those economies devastated by war.

The deficit only began to grow again under President Reagan, who coined the term, “Government is the problem”. Why? Because as his Budget Secretary David Stockman explained, cutting taxes didn’t reduce deficits, because it reduced the revenue needed to pay for the tax cuts. It was only when President Clinton restored the pre-Reagan tax rates and reduced government spending that we had 4 consecutive years of budget surpluses. In fact, what was left of the WWII debt—some $1.2trillion—would have been paid off if GW Bush had elected to continue his policies rather than borrow more money.

Graph: Wikipedia

Christina Romer, former White House Chief Economist, explained the effects of government stimulus spending in a recent New York Times Sunday Op-ed . A historian of the Great Depression, her thesis is that without the various stimulus programs, such as Obama’s 2009 ARRA $800 billion stimulus spending, we would still be in a deflationary recession.

Furthermore, “In place of the tepid budget agreement now in place,” said Dr. Romer, “we could pass a bold plan with more short-run spending increases and tax cuts, coupled with much more serious, phased-in deficit reduction. By necessity, the plan would tackle entitlement reform and gradually raise tax revenue. This would be the World War II approach to our problems.”

Then what is smart government? It’s been proven time and again that just returning $$ to the private sector during deep recessions doesn’t spur growth, because they don’t spend it. Two examples are the current cash hoarding by corporations of more than $2 trillion, while paying outsize incomes to their executives, and banks keeping almost all of their reserves with the Fed rather than lending their excess cash out to spur growth.

Why do they continue to hoard? The private sector really doesn’t like much risk, contrary to assertions by free marketers who trumpet that entrepreneurs must lead the way for any recovery, if only there was less regulation! In fact, there are very few successful entrepreneurs, because the failure rate of entrepreneurs is very high. The track record of venture capital tells us so. Even the track record of Presidential candidate Mitt Romney’s Bain Capital is mixed at best. Private Equity Firm Bain Capital may have actually eliminated more jobs than it created, when the record is looked at closely.

Harlan Green © 2012

More Jobs Key to 2012 Growth

Popular Economics Weekly
How do we know what to look for in 2012? We should not be looking at the headlines, which tend to trumpet totally conflicting news. But more accurate information is available—usually several months later.
For instance, jobs’ formation was much better than initially reported from August onward by the Bureau of Labor Statistics. And some of the regional activity indicators like that of the Philadelphia Federal Reserve that panicked markets have since been revised upward.
The problem? In an attempt to make seasonal adjustments—i.e., tweak the numbers so that they reflect any changes above or below what is normal for that season—the data sometimes subtracts too much from the seasonal variations, making the initial numbers look much worse than they are. The result is, “If the market had known then what it knows now, the drop in the markets in August would have been much milder”. Said a recent Marketwatch article.
So savvy investors should not be reacting to the initial headlines. For instance, the most accurate unemployment picture is given by the Bureau of Labor Statistics JOLTS report, which lags the unemployment report by 2 months. It is a survey of actual job openings/layoffs. It’s latest report is for November, which showed 3.2 million openings, unchanged from October. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in November was 1.0 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 30 percent since the end of the recession in June 2009.

Graph: Calculated Risk

Jobs openings declined slightly in November, but the number of job openings (yellow) has generally been trending up, and are up about 7 percent year-over-year compared to November 2010. Quits increased in November, and have mostly been trending up - and quits are now up about 12 percent year-over-year. These are voluntary separations and more quits might indicate some improvement in the labor market. (see light blue columns at bottom of graph for trend for "quits").

Graph: Econoday

The monthly employment report shows significant broad-based improvement. And the unemployment rate dipped to 8.5 percent, as we know.  Payroll jobs in December jumped a relatively healthy 200,000 after rising a revised 100,000 in November and increased a revised 112,000 in October.  Private payrolls again outstripped the total, gaining 212,000 in December, following increases of 120,000 in November and 134,000 in October.
The Institute for Supply Management (ISM) manufacturing and non-manufacturing (service sector) indexes are the best measure of overall economic activity, and both continue to increase.

Graph: Econoday

The latest gain in the Manufacturing Composite was led by increases in the production and employment indexes.  Production jumped to 59.9 from 56.6 in November.  Employment rose to 55.1 from 51.8.  The boost in employment is likely a vote of confidence by manufacturing management for stronger demand in coming months.

Graph: Econoday

The ISM non-manufacturing Composite Index is not so robust, but still holding above 50 percent, with its overall activity index at 56.2 percent, still a very good number.
And as I said in a recent Mortgage Corner column, construction activity is picking up, which is the part of real estate that influences actual economic growth, since it powers insurance, mortgage, and real estate sales, among other businesses. Only public construction spending hasn’t picked up in 2011, but all other areas of commercial and residential construction have.

Graph: Econoday

So this data tells us there is still a lot of fear to overcome, with many pundits and forecasters expecting the worst—the worst being more of what happened last year—whether it is supply disruptions, Tsunamis, the Middle East, or a euro crisis. We need another year of solid growth, in other words, before the economy becomes strong enough to endure such ‘shocks’.
Harlan Green © 2012

Will the Fed Rescue Real Estate?

The Mortgage Corner

How can we thank Federal Reserve Chairman Ben Bernanke for keeping our economy afloat? Not only has the Fed kept interest rates low enough to prevent actual deflation, as has happened to Japan over the past 20 years and shrunk their economy. But the Fed is now proposing commercial banks under its purview take a more proactive position not only by modifying more ‘underwater’ loans on their books, but actually renting out those it has taken back in foreclosure to tenants; including their former owners.

It is currently circulating a White Paper entitled “The U.S. Housing Market Current Conditions and Policy Considerations” that asks both government supervisors—specifically those of GSEs like Fannie Mae, Freddie Mac, FHA and VA—and private mortgage holders to both loosen their overly restrictive underwriting standards, allow more loan modifications, as well rent out the REO properties they hold, until they are able to be sold!

This is medicine that was applied once before—during the Great Depression—by the Roosevelt Administration, under the Home Owner’s Loan Corporation. It sold bonds to bring down interest rates for something like 1 million homeowners, or rented them back to those who had lost their homes, until they could again be sold.

The data currently show that less than half of all lenders are currently offering mortgages to borrowers with FICO scores of 620 with a 10 percent down payment. Yet these loans are within the GSEs purchase parameters, according to the White Paper, which means little risk to the loan originators.

Particularly first-time homebuyers aged 29 to 34-year-olds are affected, with only 9 percent taking out a mortgage from 2009 to 2011, while 17 percent took out mortgages from mid-1999 to mid-2001.

Why the urgency now? “Perhaps one-fourth of the 2 million vacant homes for sale in the second of 2011 were REO properties…and the continued flow of new REO properties—perhaps as high as 1 million properties per year in 2012 and 2013—will continue to weigh on house prices for some time,” said the Fed.

And we know housing prices continue their decline in most areas, according to the S&P Case-Shiller Home Price Index and other indicators. The Case-Shiller 20-city composite is down a seasonally adjusted 0.6 percent in October following a revised 0.7 percent decline in September and a 0.4 percent decline in August.

Graph: Econoday

Individual cities show a decline in Atlanta where monthly rates of adjusted decline have been 4.1 percent, 4.8 percent and 2.9 percent the last three reports. Other weak spots include Minneapolis, Los Angeles, and Chicago as well as Las Vegas and Miami.

So this is a good time for lenders to rent their REO properties, as rents have been rising while national multifamily vacancy rates have plunged. Depending on whether you use U.S. Census Bureau or REIS, Inc. data, the vacancy rate is hovering around 9.8 percent or 5.2 percent, when they were as high as 11.8 percent during the recession.

Graph: Calculated Risk

“…the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance,” said the White Paper. “Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions—for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties—or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.”

So there is hope for real estate when the Fed decides it is time to assist housing, after Chairman Bernanke and others in various speeches have highlighted the drag that a devastated real estate market has on overall economic growth. That is to say, it is time for the banks holding all those vacant homes to get them off their books and back into the real economy.

Harlan Green © 2012

Government Has to Work—or Else

Financial FAQs

We can no longer afford to listen to those conservatives who believe government is the problem, since there is no viable recovery from the worst recession since the Great Depression without government investment in sectors that will grow our future economy—particularly in education, infrastructure and the Research and Development of new technologies such as jump-started the Internet.

So say more economists, such as Nobelist and former chief World Bank economist Joseph Stiglitz in his most recent Vanity Fair article, “The Book of Jobs” that details how we recover from the Great Recession, and which sectors will prosper and expand. This means a “wrenching transition” of our whole economy, as happened in the 1930s, which means government has to be part of the solution.

“The problem today is the so-called real economy,” says Dr. Stiglitz. “It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.”

And so just as with the Great Depression, government has to be part of the transition. Those who advocate little or no government—such as Libertarian candidate Ron Paul who would abolish just about all government—do not seem to realize it would be a return to the beginning of the Industrial Revolution so well documented by Charles Dickens—when there were no child labor laws, for instance.

Or a return to the Great Depression (really two, back-to-back) that lasted almost 10 years when there was no social security, unemployment insurance, or government investments that modernized the industrial sector for World War II.

“It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery,” said Stiglitz. “The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.”

So, surprise-surprise, the Great Recession wasn’t really the fault of anyone in particular but a cascade of events that are driving us hell-bent out of the industrial, blue-collar era of factory jobs into the White Collar Service and Information Age. And we cannot do this without public-sector investments that must ease the transition; otherwise we are doomed for a “much longer long slump than necessary,” in Stiglitz’s words.

It was small government conservatives like Presidents Reagan and GW Bush that had been wasting taxpayers’ monies to pay for foreign wars and tax cuts since 1980, rather than paying down the deficit or even shoring up social security and Medicare. GW Bush wasted 4 consecutive budget surpluses of the Clinton era. And the low interest rates engineered by Fed Chairman Alan Greenspan for that purpose in turn inflated the housing bubble, lending a sense of false prosperity.

The result of such small government policies was the Fed then took away the punch bowl in 2006 and raised interest rates 17 consecutive times that in effect burst the bubble by raising all those teaser and liar loan interest rates too high for borrowers who shouldn’t have qualified for them in the first place. But that only hastened the inevitable rush away from Industrial to the Information Age. Factory jobs and salaries had already begun to decline in the 1970s along with household incomes for most Americans.

“Today we are moving from manufacturing to a service economy,” says Stiglitz. “The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology.”

“What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.”

In other words, we need to put public monies where it will do the most good. Corporate profits today are the highest in history as a percentage of GDP—more than 14 percent—yet their CEOs haven’t been investing it wisely. Most of their profits have been either hoarded, invested overseas, or used to buy back stock to increase the stock options held by corporate executives. It has lined their own pockets, rather than that of their employees and therefore the economy as a whole.

And that is where today’s right and far right wing conservatives want even public monies to flow—into their supporters’ already full pockets—when they won’t allow the Bush tax cuts to expire that have bloated the federal deficit. This will only hasten the decline of America already suffering from record high income inequality, low rates of social mobility, record high violent crime rates, and a government they don’t want to work for the future of all Americans.

Government has to work—or else.

Harlan Green © 2011

Will Real Estate Recover in 2012?

The Mortgage Corner

The recovery road may remain bumpy for real estate in 2012 but construction spending continues to increase from low levels of activity, and so housing starts. Much of it is multi-family apartments going to both new households and those who have lost their homes. This should mean replacement of sadly depleted housing inventories, as new construction is not replacing the units taken out of circulation through deterioration or outright destruction.

The total residential stock in the United States is approximately 127 million units – around 75 million owner occupied, some 32 million rentals and 10 million “other” (second / holiday homes etc) – so that conservatively – at least 0.5 percent - or 635,000 units of this stock (depending on age within specific markets) should be replaced annually, said a recent housing study.

Despite the low baseline, activity is stronger than expected as construction spending in November jumped 1.2 percent after slipping 0.2 percent in October (originally up 0.8 percent). The market consensus called for a 0.5 percent increase in November.

Graph: Calculated Risk

The November increase was led by a 2.0 percent gain in private residential outlays, following a 2.3 percent boost in October. Both the single-family and multifamily subcomponents showed strength. Public outlays rebounded 1.7 percent, following a 1.8 percent decline in October. On a year-ago basis, overall construction outlays improved to up 0.5 percent in November from down 0.6 percent in October.

That may be because housing prices are still falling overall. In real terms, the S&P Case-Shiller Home Price Index is back to Q1 1999 levels, the Composite 20 index is back to April 2000, and the CoreLogic index back to March 2000. In real, inflation-discounted terms, all appreciation in the '00s is gone, says Calculated Risk.

Graph: Calculated Risk

Another sign that housing is coming off a second bottom is that pending existing home sales rose a very strong 7.3 percent in November on top of October's 10.4 percent gain.

Graph: Econoday

November's gains were led by the West and include the Northeast and Midwest with the South showing no change. November and October taken together show solid gains for all regions.  The index is at its highest level since April 2010, during the federal homebuyer tax holiday.

This is while the seasonally adjusted estimate of new houses for sale at the end of November was 158,000. This represents a supply of 6.0 months at the current sales rate, which is the long term supply average. But 158,000 for sale is far below the replacement rate needed for population growth, hence the increase in new construction.

Graph: Calculated Risk

Most of the increase this year has been for multi-family starts, but single family starts are increasing too. Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.

Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes has edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Existing-home sales might also pick up, because of the fire-sale prices. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

Graph: Calculated Risk

So it does look like additional housing stock will be needed in 2012 just to fill the rising demand for rental properties. And the construction industry will benefit, which has lost more than 2 million jobs during the Great Recession.

Graph: Calculated Risk

Construction employment declined by 20 thousand jobs in October, and is now down 2.2 million jobs from the peak in April 2006. However construction employment is up 27 thousand this year through the October BLS report. After five consecutive years of job losses for residential construction (and four years for total construction), says Calculated Risk, it looks like construction employment will increase this year. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed.

Harlan Green © 2011