Are We Already Slowing Down Again?

The data from the last couple of days has me wondering whether the growth in the third quarter – which increasingly looks likely to be reduced from the first estimate in next week’s revision – is something of a tease. Indeed the questions about next year are gathering more ominously and require both thought and action.

Here’s the problem:

Politics.

The so-called centrist Democrats, who are looking remarkably Republican at the moment, are fixated on the size of the budget deficit … in about 2030. That’s when the proverbial hits the fan big time and our ridiculous health care system will bankrupt the country. So these centrists are freezing all talk of taking immediate action to jump start the economy. They are afraid of adding to the deficit twenty years from now.

Likewise the Republicans, who are becoming both more obstructionist and more extreme every day, argue that a 10% unemployment rate is ‘proof’ that the stimulus didn’t work and therefore we should throw the economy to the free market wolves. This is a modern form of the immortal ‘let them eat cake’ sentiment. And we all remember how that went.

Thus, just as it is becoming apparent that the economy is only sputtering to life, and barely at that, we appear to be paralyzed by a combination of timidity and ideology.

The numbers are weaker than I hoped for:

• Retail sales rose, but only because there was a modest growth in car sales. Back that out and the growth is extremely small. This raises a question about the upcoming selling season which now has a more ‘make or break’ feel to it than I first imagined. As long as unemployment persists, and even continues to grow, it is highly improbable that we will see much by way of consumption growth. I keep looking around for a sector of consumption that is lively – something that augurs well for the new year – and all I find is a hint here and there. Those vaunted green shoots of a few months ago have produced a very weak crop, one unlikely to withstand much of a storm.
• Likewise the housing market took a decided turn for the worse: housing starts dropped by over 10% in the latest month of data. This after a few months of steadiness. There are all sorts of explanations floating about as to why this drop occurred, but none can hide the fact that residential construction is deeply in the doldrums. This can be no surprise given the horrendous over-supply of housing that now exists, but we need the industry to stabilize so as to stop its drag on the economy. Construction provided the strongest job growth during the years of illusion and is now a major contributor to unemployment. If it doesn’t reverse course soon it will continue to shed jobs, and thus make matters more difficult for the rest of the economy.
• Real incomes are up about 2.8% on the year, but actually dropped last month because inflation was a tad higher than wage growth. The reason real wages have shown any growth at all is that inflation has been so low for a while now. It isn’t because wages have taken off. Indeed one of the great characteristics of the years of illusion was the general weakness in wages: that weakness drove many families to rely more and more on debt as a source for current consumption.
• The withering of the American Myth Dream is perhaps the defining outcome of the last three decades. By any standard America is now a highly stratified society. Wealth concentration is back to its 1920’s worst, before the re-distributive efforts of the New Deal created the current middle class. It is an irony most of us miss that the statistic used by the CIA to predict an unstable political system abroad – it is fairly accurate – would now predict such instability here. As the illusion is kicked away the body politic gets angry and thrashes about for someone of something to blame. How else can we understand the rise of Sarah Palin?

Which returns me to my lead in.

Politics are now in the way of our success.

The combination of Democratic timidity and Republican ‘let them eat cake’ will block the prospects of corrective action on jobs. We will see some ‘jobs legislation’, but our ability to get the kind of scale aid we need is made remote by the lack of courage in Washington.

No one seems to understand the epic scale of our situation: we came very close to depression. We avoided it, but barely. We are not healed. By analogy we are in the early 1930’s, not out of the woods by any means. A wrong step, or a step not taken, could condemn us to a massive implosion.

That we are even arguing about what to do is disappointing. That some of the blockage is on the Democratic side is desperately so. I can understand the resistance from the free market advocates: their very worldview is under threat, but anyone purporting to be ‘progressive’ or ‘liberal’ – however modest – must surely see through the utopian dream of the free market dogma. The big point to keep firmly in mind is that the free market dream can never exist in reality. That’s why I call it an illusion. It reads well in a textbook. Beautifully well. But in practice it falls prey to the venal habits of regular people. It just doesn’t work. It never has. And never will. Instead it allows the powerful to accumulate more wealth and power to the detriment of those less fortunate. Hence the current concentration of wealth. Hence the ability of banks to pay enormous bonuses even while ‘main street’ continues to suffer.

The scramble for wealth, and the relentless distortion of the system so that wealth can be retained, always dominates the supposed allocative power of a free economy. That’s why we regulate. That’s why we make certain kinds of actions illegal. Free markets are far closer to Thomas Hobbes’ vision of ‘nasty, brutish, and short’ or Schumpeter’s ‘creative destruction’ than they are to Adam Smith’s more benign enlightened ‘invisible hand’.

The relevance of this?

That we are hemmed in by people who truly believe the myth. And they are abetted by people who are scared of a problem that we won’t even face for another twenty to thirty years.

At our current rate of progress – or the lack thereof – those remote problems will be dwarfed by what happens when the economy slides backwards next year.

The chances of depression are small because of the extraordinary stimulus and bail out actions taken so far. But if those actions are all we can do, either because we become complacent, return to illusory ideologies, or simply because we afraid, then those odds start to grow.

Paul Krugman describes this dilemma as our having to choose the third best plan. Politics has removed the first and second best plans: a bout of inflation, or a second stimulus. So we are left to introduce a set of ‘jobs programs’. Even these are being attacked by the free market apologists.

The data suggests we are still on thin ice. The ideologues defending the illusion have big feet. Lets all hope they don’t jump up and down too hard. It’s very cold down there.