Why the Great Recession was Unnecessary

I believe the Great Recession of 2007-2009 was unnecessary, even given the bursting of the housing bubble. I said so at the time. Almost everybody is a critic of the government's policy during that recession, but most of the criticisms fit into standard ideological frameworks. As a result economists, politicians and bureaucrats, business people and ordinary people learned little useful from the experience. They simply had their own previous ideas confirmed.

I am not calling the recession unnecessary simply because I believe policies leading up to 2007 could have prevented it, though they could have. I believe that government policies enacted in the Clinton administration, notably deregulation of banking, combined with actions or inaction by the Bush administration and the Federal Reserve did lead to the housing bubble, and then to the crash of the economy. But in this essay I will explain why the collapse of the housing bubble did not need to lead to the Great Recession.

This is largely a critique of Capitalism, the real world capitalism of 2007. This is about how business people who control capital act, individually and together. As far as government policy goes, it is about how policy should have been used to prevent capitalists from harming themselves and practically everyone else in the nation. Like mental patients, capitalists sometimes need external restraint, for their own good.

First a bit of a test, a warm up exercise for atrophied minds: in which nation did the economy grow fastest between 1922 and 1932, communist Russia or capitalist America?

Before answering, keep in mind that Americans are constantly trained to believe that capitalism always trumps communism, and that America is exceptional even for a capitalist nation. Also think about the particular years chosen.

Between 1922 and 1932 the American economy shrank, as 1932 was the worst year of the Great Depression. The Russian economy, in contrast, grew quite a bit in that period if only because its economy hit bottom in 1922 or so, in the aftermath of its civil war. Among the world's nations, Russia was likely the least affected by the stock market crash of 1929 and ensuing economic mayhem. That should not be surprising, since Russia did not have a stock market, but a (brutal) command economy hell bent on catching up with capitalist industrialization.

What does that have to do with 2008? Only a pointer: the capitalist boom bust cycle is what you get when no one regulates it, or it if is poorly regulated. By picking different points in a boom bust cycle, you can get different growth (or shrinkage) rates for an economy. By picking particular nations and time intervals you can make capitalism or socialism or command economies like fascism and communism look good, or not. In other words, as they say about investing in mutual funds, past performance is not a guarantee of future performance. Economies are complex. There is no guaranteed winning policy, except perhaps being pragmatic, which is no policy whatsoever.

While the housing market was way overpriced in 2006, driven by foolish lending policies and foolish home buyers, the overall economy was not. The stock market was not. True, the building of new homes had become a driver of the economy, but it was hardly the only industry going on in the United States.

So what could have been done different in 2007 and 2008, aside from using taxpayer money to prop up banks, and in 2009, rather than using taxpayer money to fund greatly expanded welfare and "shovel ready projects?"

I just happened to be watching a representative section of the capitalist class in that period. I call what happened the "capitalist firing squad." In case you don't know the joke, a "leftist firing squad" is a group of people who form a circle to, presumably, execute a capitalist, and instead end up shooting each other. This speaks to the tendency of leftists to focus on being the new Lenin, using their energies to discredit rivals rather than uniting to win over the nation to socialism (or communism, or environmentalism, or whatever).

The capitalist firing squad was literally firing people, laying off round after round of workers. In the house building industry this was necessary. There was no point to building new houses; no one wanted them. And the secondary effects of that were hard to avoid too: much lower demand for plywood, 2x4s, appliances, and etc. That alone would have slowe the growth rate of the economy. But the economy could have kepts growing around the new housing market.

At previous times in history one sector or another took a hit without taking the whole economy down with it.Why didn't it in 2008? The firing squad was the crucial difference.

Could we just admit that for the most part our capitalist class in America is a bunch of degenerates? Of economic cowards? Instead of figuring out how to sell more of their stuff, perhaps even taking advantage of the end of the housing frenzy, pretty much every CEO, in line with the fears of the major shareholders, decided to fire employees even before demand actually shrank. Each rationalized it the same way: they believed demand would drop, and wanted to get ahead of the curve to keep up profitability.

Worse still, each of the CEOs saw a chance to squeeze the remaining workers. They made the remaining workers work harder. This included middle management in particular. 2008 to 2009 was a reign of terror for middle management. Had they been working 50 hour weeks? 70 hour weeks were the new norm. And management is not paid by the hour. Often managers found themselves spending a considerable portion of their week doing jobs their subordinates used to do, before they were laid. Off. And middle management was supposed to be happy about this; "Thank you, master, for not laying me off."

The macroeconomic effects of one bad CEO's decisions are usually minimal. But when the 3000 or so CEOs of the nation's largest companies all did the same stupid thing, the macroeconomic effects multiplied. A small hole in the economy, new house construction, with the attendant banking fiasco, turned into a giant vortice of unemployment. With 5% of the workers laid off, the same craven CEO's decided they had to lay off another 5%. Lemmings would make better CEOs.

Government policy, which was to spend vast sums of taxpayer money and borrow vast sums of money, saved our collective ass. Despite CEO behavior the economy ran on food stamps, unemployment checks, Social Security and Medicare, and infrastructure investment. Eventually CEOs regained confidence, stopped laying off people, and even started rehiring as burnt-our middle managers and workers died of heart attacks, strokes, or just melted into unusable jelly.

Free market ideologues and tax-and-spend liberals are both in denial of what happened and why. The Free Market guys say private enterprise saved the day, ignoring the beneficial effects of what little New Deal and Great Society legislation had not been dismantled. The Liberals deny that there was any downside to a vast expansion of the national debt, and act like the layoffs were natural, not a result of bad decision making.

On the whole, I would say we were lucky the Great Recession did not turn into another Great Depression, or worse. And if we do not make some fundamental reforms, the next time we may not be so lucky. In particular, the next time around the world's investors may not chose to fund our national debt.

CEO's do fine when times are good. A few do fine when times are bad. But at certain times they clearly need supervision. Unfortunately their usual supervisors, stockholders, are often as even more inclined to making bad, panicky decisions than CEOs.

There are two obvious sources for supervision. It should be discrete supervision, exercised only in times when CEOs have a collectively bad history of decision making. But it should be in place to be used the next time it would help. The two sources of supervision are the government or the employees of the businesses. I am hesitant to go with an NRA type of supervision, which seems too much like the fascist program for supervising industry. I'd prefer the workers to have some supervisory power, perhaps by being guaranteed board seats on all publicly listed (in stock markets) corporations.

Given the known cyclical nature of free market capitalism, I would make the corporations pay the real long term costs of labor. If an industry or a particular corporation goes into decline, I don't see layoffs as a problem. Workers can be rehired by other corporations and industries. But if a decline in demand for labor is just cyclical, then corporations should just keep cash on hand to keep workers employed until the down cycle ends. That in itself would minimize recessions and should prevent depressions.

Unemployment, Debt and Demand

I quote the following passage from William Manchester's The Glory and the Dream because it summarizes the liberal, New Deal position on the cause of the Great Depression and recessions in general:

"The real blame lay in he false underpinnings of the Coolidge-Hoover prosperity. Seen in perspective, the Depression appears to have been the last convulsion of the industrial revolution, creating a hiatus [break] before the technological revolution. In the aftermath of the World War [One], the techniques of mass production combine to increase the efficiency per man-hour by over 40 percent. This enormous output of goods clearly required a corresponding increase of consumer buying power—that is, higher wages. But the worker's income in the 1920s didn't rise with his productivity."

But some of the increased efficiency became consumer buying power through the issuing of credit. Hence people bought on credit during the 20s, and when credit-based buying collapsed in 1929-1930, the entire economy went into a downward spiral. Less demand resulted in less production, and so in workers being fired, and so in a further decrease in demand. It was Herbert Hoover himself who used the term "Depression," trying to imply the whole affair was about a wrong mindset, a lack of confidence. If only confidence would return, the economic downturn would reverse itself.

The natural conclusion, if you buy the analysis is the quoted paragraph, is that all society needed to do was to give people more buying power. Society needed to "share the wealth" as socialists said. Then better-paid workers would buy more things; manufacturers would hire more people to make more things, then these hired people would also spend more, until "happy days are here again" [the Democratic Party theme of 1932] and there's "an automobile in every garage" [the Republican slogan on 1928].

But the problems of the Great Depression must have been more fundamental. Under the New Deal [often passed by an alliance of progressive Democrats and progressive Republicans; both parties had conservative wings that resisted the legislation] the federal government used a variety of methods to increase aggregate purchasing power. By 1934 deficit spending was the order of the day. The economy did improve off its 1932-33 lows, but not to anything resembling prosperity. Beginning roughly in 1939 with war orders from Europe, and accelerating in 1940 when U.S. deficits became even larger to prepare for war, the economy finally got back to where it had been in the mid-20s.

Even Democrats worried about the national debt after World War II; by American standards it was unprecedented. But with the slow-motion collapse of the British Empire, the U.S. had become the dominant world power. The revived economy, and high income-tax rates, generated an equally unprecedented stream of revenue to the federal government. Most federal programs were cut back only minimally, and new programs like the Interstate Highway System created jobs and demand for commodities.

When President Franklin Delano Roosevelt and Congress started running up deficits and the national debt in the 1930s they were starting off a small base, most of it left over from military expenditures for World War I. By the late 1950s even most Republican politicians and businessmen believed in deficit spending. Workers and capitalists alike were prospering, if some more than others. It seemed like capitalism propped up by heavy federal spending was the recipe for permanent prosperity.

This all turned sour in the 1970s, following the prosperity of the 1960s resulting from economic imperialism, spending on the Vietnam War and cold war, and the expansion of the New Deal into the Great Society "War on Poverty" programs.

Demand, in itself, could lead to the opposite problem from the Depression: inflation. In order to stop inflation, the Federal Reserve raised interest rates (and tightened the money supply). A series of recessions, interleaved with booms, followed, with aftermath of the most recent and most serious of the recessions still lingering with us.

Also lingering with us is a $17 trillion federal debt. And therein lies the real problem for America and the world. If during periods of prosperity the debt had been paid down (as happened until about 1930), then the only federal debt today would be from the latest recession. Call it $3 to $5 trillion. But no, instead every problem since 1933 has been solved with debt. If you are ideological you can consider it military debt or welfare debt, but it is an obligation of the citizens, regardless of the specifics of its origin.

So where we are now, in early 2014, can be summed up as:

1. The economy has been growing slowly since 2009, partly because of high deficit spending by the government and partly because of the natural tendency to grow off a bottom.
2. Unemployment is well over 6%, and even that excludes a lot of individuals who are under-employed. It's not Depression or even Great Recession levels, but it isn't prosperity either.
3. Inflation has been minimal, lately.
4. People would buy more products if they made more money. Most employees are highly productive because of technological advances.
5. Because there are plenty of unemployed people, wages are stagnant; employers don't have to bid up wages to retain employees.
6. Economic imperialism is not really working anymore. It costs more to patrol the American empire (the entire world, for practical purposes) than the U.S. gets in economic benefit from the rest of the world (as seen by our negative balance of trade).
7. There is a $17 trillion and growing federal deficit. Interest payments already make up a considerable part of the federal budget, and if interest rates (on average on government debt) climb to say 5%, they will eat up a huge part of the annual federal budget.

In a Goldilocks scenario the capitalist class, either out of self-interest or forced by the federal government, would both increase wages significantly for workers and pay off a substantial part of the federal debt. The wage increase would increase demand, resulting in profits that would compensate the capitalists for their sacrifices. With increased demand more of the federal debt could be paid off; prosperous workers could help some with that. Inevitably another recession would roll around, at which time deficit spending would be appropriate to counter the economic cycle until growth resumed.

Do not plan on the Goldilocks scenario. It won't happen in our broken political system. Republicans have done a good job emphasizing the debt issue, but are unwilling to raise wages or tax the super-rich to reduce the debt. Democrats would raise the minimum wage, but won't tax the capitalists and won't do anything about the debt.

The Federal Reserve will keep making excuses to keep interest rates low, saying it is to help revive the economy. But the real reason is allowing interest rates to rise will show how naked the economy really is. The math is simple. 5% of $17 trillion is $0.85 trillion per year. The fiscal year 2013 federal budget resulted in spending $3.45 trillion. But revenue was just $2.77 trillion. So if interest rates rise to 5% on average, and revenue stays flat, interest payments on the federal debt will eat up over 30% of revenue.

So less spending, even on the military. And less spending means less demand, meaning fewer jobs. And lower tax revenue.

Or Congress can kick the can down the road a few last inches, into the wall of reality, and continue to increase the debt even when the economy is relatively good.

Which just happened when the Democrats and Republicans in Congress raised the debt ceiling.

Man, Oh Man: Turkey Zombie Apocalypse

If you have some of the friends I have on Facebook, you know the west coast of the United States is about to be abandoned. People actually believe that the Fukushima nuclear disaster is going to cause the whole coast to glow in the dark. Danger! Danger! Run Away!

I have long advocated shutting down every nuclear reactor in the world, but try to keep my distance from hysteria as well. There is something called background radiation, which was around before scientists started trying to make critical masses. It varies according to where you live, and it is tolerable. You need a lot more radiation exposure than background radiation to suffer any immediate or even long-term harm. Fukushima is bad, but the only people who need to get hysterical about it are the Japanese.

People still live in the Marshall Islands. Their main zombie apocalypse concern these days: rising sea levels from global warming. But in a single incident in 1954, Castle Bravo, the Bikini Atoll was exposed to a 15 megaton nuclear explosion. Way worse than Fukushima. In fact the United States of America tested 67 nuclear weapons in the Marshall Islands between 1946 and 1958. Not a good thing, but not quite the end of the world. Or a reason to abandon California.

Me, I am more worried about the Butterball Zombie Turkeys. You will find it difficult to purchase a fresh, large, Butterball brand turkey this year. Frozen, yes. Small, yes. Other brands fresh and large, yes. But something is amiss in Butterball land, and either corporate spokespeeps are covering up, or corporate scientists don't know the cause. The turkeys did not bulk up. A tiny signal, but isn't that the way zombie movies start? Just a hint, a bad cold, if you will. Then by Thanksgiving 2014 only the rich can afford turkeys. A month of food stamps for a turkey? Maybe it is a Tea Party plot.

Reading an old book about the Holy Roman Empire helps keep a detached perspective. People actually used to believe that the Pope was the spiritual emperor of Earth. Wait ... about a billion people still believe the Pope is the spiritual emperor of earth. More than believed it in the Dark Ages. What is the difference between a Roman Catholic at Sunday Mass and a zombie? A rosary.

The economy is recovering, creeping up on the poor slobs who would really, actually, collect unemployment and stay at home and watch TV, than work. My proposal is too build a giant tomb for President Obama. It would have a square base, one mile by one mile, and would be built of stone. Every unemployed person in the country would be employed cutting stones out of quarries and carrying the stones - no heavy equipment allowed because that would contribute to global warming - and placing them in a roughly pyramid shape.

What really, really worries me is that we are spending so much money occupying foreign nations with troops and private contractors when we need to prepare for the federal debt apocalypse. What's the point of imperialism if we can't tax the other nations and pay off our debt and have a better life? It just doesn't make  any sense. Must be that Tea Party again. They recognize the debt problem (unlike Liberals, who think the problem is imaginary), but they are against new taxes, even on South Korea and Afghanistan and Israel. We protect them, they should pay protection money!

Jeepers! Man of man! My pyramid idea is going viral in progressive Democratic Party circles ...

Immigrants and Housing Proposal

I was surprised to find the following in the New York Times this morning:

"Two senators, Charles E. Schumer, Democrat of New York, and Mike Lee, Republican of Utah, have proposed a bill that would offer three-year visas to foreigners who spent at least $500,000 to buy homes in the United States. But the idea has many opponents who fear expanding the nation’s oversupply of workers (a worry not shared by a fair number of economists)."

That was in a longer article, Goodbye House, Hello Pot Plantation by Catherine Rampell. There are over 1.2 million for sale and empty houses in the U.S. today, including hundreds of thousands repossessed by banks but being held off the market. On the other hand moving the unemployment number back to 5% would soak up all of this housing (partly in the form of rentals) and create more than enough demand for another construction boom.

We are in a massive housing and economic Catch 22. We probably can't get to 5% unemployment unless there is strong new construction. Housing construction requires local labor (can't be done overseas) and the materials used themselves are heavy enough that shipping is a large cost component, so they tend to be regional as well. In addition banks are reluctant to loan to home buyers. That would change if housing prices firmed.

I proposed moving house-buying immigrants to the front of the line back in A Cheap, Quick Housing and Economy Fix [November 18, 2008]. A number of people thought it was a good idea, but getting traction in anything related to immigration is difficult.

If you want to look at the Lee-Schumer bill or track it through Congress, it is S. 1746: Visa Improvements to Stimulate International Tourism to the United States of America Act. Here is the key text:

(a) Nonimmigrant Status- Section 101(a)(15) of the Immigration and Nationality Act, as amended by section 5(a), is further amended by adding at the end the following:
‘(X) subject to section 214(t), an alien who, after the date of the enactment of the VISIT USA Act--
‘(i)(I) uses at least $500,000 in cash to purchase 1 or more residences in the United States, which each sold for more than 100 percent of the most recent appraised value of such residence, as determined by the property assessor in the city or county in which the residence is located;
‘(II) maintains ownership of residential property in the United States worth at least $500,000 during the entire period the alien remains in the United States as a nonimmigrant described in this subparagraph; and
‘(III) resides for more than 180 days per year in a residence in the United States that is worth at least $250,000; and
‘(ii) the alien spouse and children of the alien described in clause (i) if accompanying or following to join the alien.’.

One of my complaints about the New York Times and other traditional web sources is that they hate it when a link takes you off their site, unless it is a paid ad. Not only do they not link to one of the bill tracking sites (there are several), they do not even give the official name of the bill, or its number. So getting more detail is unnecessarily difficult in this hyperlinked age. That is poor reporting, in my view. Probably not because of the reporters themselves, but because of "policy."

Where are the Jobs?

Yesterday a friend called up, highly distressed. Her last short term job had been as a census worker in 2010, and her jobless benefits ran out this May. She is about to become homeless, although that probably means she will start couch surfing, not living in the street. I know she has not been diligent looking for work. Like some of my acquaintances, she enjoys a prolonged, taxpayer-funded vacation from the stress of work. Nevertheless, she has done some looking, and if jobs were more plentiful here is California, she would probably being going to work on Monday instead of facing an eviction notice.

Multiply that by about 14 million, and you have a nation filled with capable people who are not employed. The lucky ones are getting unemployment compensation. State benefits typically last six months; the Federal government extends that to a full two years during times of high unemployment.

There is no one cause of unemployment, but there are a few key factors at play. There are two big holes in the economy right now. One is construction, with its attendant employment of realtors and of workers that produce products that normally go into building like wood, cement, glass, and metal.

The other is government, particularly state and local governments. Ever since the economy turned up from the depths of the recession, private employers have been hiring, if not as quickly as we would like. June brought another wave of layoff notices for public employees like teachers, bureaucrats, and police. The net has been very few jobs.

In 2008 the Republicans and Democrats united briefly to save Wall Street, the banking system, and the big American automobile manufacturers. That done, they fell to quarrelling. The Republicans quarrel among themselves, Tea Party people against the old school. Almost no one listens to Barack Obama, whose lack of leadership qualities were disguised by his rhetorical abilities until he actually became President.

But high unemployment is not Barack Obama's fault. It is not anybody's fault. It evolved over time, and our politics have not yet evolved to the point where we can deal with the new reality.

Let's start by putting on our thinking caps. Why not use the money that is paid out in unemployment to pay people to do real work? In the most appalling cases, public school teachers are laid off, so they can sit on their butts for two years while the few remaining teachers take on ever more students. Can you spell S-T-U-P-I-D? But the same is true in the private sector. Some people get worked to death during a depression and almost wish they had been lucky enough to be aid off.

The problem is that our economic rules and regulations, and even business culture, are "fighting the last war." That is, they were designed to fix problems that might be the same on the surface, but that have different causes than in the past. So the fixes don't work any more, at least not as well as they should. We are feeding leaded gasoline to cars designed for unleaded, then acting surprised when the engines die.

Most of the programs we now have to deal with recessions and unemployment were initiated during the Great Depression (with bipartisan support, I might add. Go look at the Congressional Record if you don't believe me). Some pre-date that, like the Federal Reserve System. The Great Depression itself had no one cause; it was the perfect storm of changes in the global economy and American culture and politics. Hoover did not have the tools in place to deal with it, and even the New Deal did not work well. If Hitler had not started World War II (causing everyone to start ordering arms and grain from the U.S.), the Depression might have lasted even longer than it did.

Some people thought that war spending was the ticket, after that experience. The problem is that while the U.S. benefited economically from the war, the economies of Great Britain, Germany, France, Italy, Russia, China and Japan were essentially destroyed. The U.S. make out best when other nations fight. Other nations make out best when they remain neutral and the U.S. fights the evil villain of the decade. The only defense spending that really helps the U.S. economy is when it is just a fig leaf for civilian spending, like the Federal Defense Highway System. Built to move tanks around the nation quickly and make road contractors rich, that defense effort is now what we call Interstate Highways.

Some people think China is to blame (two decades ago they said the same about Japan). As late as 1750 China had the world's largest economy, then it was ripped to shreds by the Great Powers (including the U.S.) and had a third world economy by 1950 when the Communists took over. I don't see how we can honestly blame China for unemployment in the U.S. In fact, if not for China buying U.S. products, we would have even more unemployment. China would buy more products if we produced them. We don't produce more products because over 10% of our workforce are loafing when they'd be willing to work if they were offered a job and their unemployment checks were cut off.

Unemployment insurance was designed to provide temporary relief to workers, allowing them to find new jobs and stay productive. During recessions it also answers as a counter-cyclical measure, keeping demand up until the business cycle gets going again. It is not a jobs program. We had no real jobs programs during the Great Recession. Some extra money was spent on infrastructure, but infrastructure work is highly mechanized and the money goes for cement and diesel fuel for bulldozers and cranes. Only a fraction is used to hire workers.

Aside from government stupidity, which is ageless and unlikely to change, the root cause of joblessness is inefficient allocation of capital, which is a function of capitalist stupidity. Let me be clear: American capitalists are rapidly becoming world class idiots, and I don't just mean Donald Trump. Not all of them are dysfunctional, there is a spectrum, but a significant proportion of our capitalist class are seriously screwing things up for all of us.

There have always been some stupid capitalists, in particular heirs to capital have a way of regressing towards not being much smarter than the average joe. Over time that sort of ordinary ineptitude sorts itself out, as their heirs of the Carnegies and Fords lose their dough to the up and coming Bill Gates and Mark Zuckerbergs.

Nevertheless, the American capitalist class as a whole has seriously ossified during the last 30 years. They want sure things; they are risk averse. Hiring people for existing businesses is a risk. Starting a new business is very risky. Sure there are people who still do that, like venture capital firms, but they are the exception.

Government could do something about joblessness, but won't. It isn't that the Republicans are standing in the way of the Democrats. Ever since George McGovern failed to get elected President the Democrats have been quite capable of standing in their own way.

The good news is that we are still at the beginning of an economic up cycle. As the economy improves, our capitalists will feel safer, and want to use their money to make more money, rather than just hoarding it. To do that, they will have to hire more store clerks, maybe even begin making housing loans again, and paying workers to repair homes so people can move back into them.

If the capitalists were really smart, they would fire their $10 million + a year corporate CEOs and hire equally competent, probably more competent men at a fraction of the cost. The fact that they can't be bothered to do that shows just how bad they have become at allocating capital.