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Word of The Week: Moribund?

Moribund. Work the word around in your mouth. Pronounce it carefully. Mull it over. Moribund.

It’s the perfect word to describe so much of our economy. Take housing for example.

Moribund is the perfect word to describe real estate right now. Yesterday we read the homebuilder’s report. This is a survey of developers and others in the construction business. It measures their level of optimism. As with many such indices a result of over 50 implies that more than half of those surveyed saw business improving. September’s index reading edged down one point suggesting that the industry took a slight turn for the worse. Then again it’s hard to imagine how much worse things could be because after that slight decline the index now stands at 14. Yes. 14. If that isn’t a good description of a moribund industry I don’t know what is. And it isn’t as if this is a temporary phenomenon: the index has hovered between 13 and 16 for the past six months.

As if to rub salt in the wounds, we learned today that new home construction is sagging even further. Builders began construction of only 571,000 new homes in August, down 5% from July. The damage was spread across the country, but the Northeast was particularly hurt. Starts there suffered a sharp decline, especially in the construction of multi-home buildings. For most of this summer construction has limped along at about half the rate we would expect in a robust economy.

And there is no sign of improvement on the horizon.

Millions of households are locked into homes with their mortgage higher than the home value. So they cannot move without recognizing a loss. This takes away a great deal of activity in the real estate market: American typically change homes about every five years. Clearly in our era of depressed activity that amount of movement is a thing of the past. No only this but the lingering problems in the jobs market and the continuing rotten wage outlook so dampen the prospect for recovery in construction that the word moribund sounds almost optimistic.

What to do?

Well don’t ask our politicians or our business leaders. Their ideas are definitely moribund. Perniciously so.

Apparently our elite has decided to engage in a re-enactment. Instead of debating today’s issues and tossing around some new ideas to energize the economy, engender growth, and solve the malaise, they have decided it would be cool to re-visit the arguments of bygone eras.

Some of them talk as if we are in the 1970’s. These are the ones who are terrified of inflation and want to scrunch down on the economy before we are swept away in a tidal wave of hyper inflation. Most of our central bankers seem to belong to this group. Paul Volcker being the latest to dredge up the inflation ghost from his far too vivid imagination. While core inflation has ticked up a tad recently, its current pace – about 2.0% – is hardly the stuff of Weimar proportions. I doubt we will be needing those wheelbarrows to carry our cash any time soon. So quite why Volcker and his ilk have decided to terrify us with tales of gloom and to pile on the agony of austerity 1970’s style I have no idea.

But at least those folks are relatively modern.

There are others, my favorite Republicans mainly, who have gone back further. They want to re-run the late 1800’s. They depend upon ideas developed by an odd mix of Central and East European thinkers who were commenting upon and reacting to issues in that part of the world before industrialization and democracy had altered the economy much. Those thinkers were driven crazy by the specter of peasants running amok and asserting rights that might muck up the smooth workings of the landed aristocracy and the newly emerging heroes of what appeared to be a brave new world: the entrepreneurs of early capitalism. Worse still, the decaying authoritarian regimes of the various empires that cluttered the political landscape provided those thinkers with a demon to argue against: the state was the enemy of modernization because the state was embodied, not in a democratic representative government subject to regular elective overthrow, but in a dynastic, parasitic, hereditary regime bent on self-preservation. No wonder the economic theories that emerged from that era are deliberately constructed to “prove” that markets benefit society and that governments are all evil, error prone, distractions. The conflict between the early classical economists, and especially the Central European members of that group, and the ancien regime was a worthy fight to have. Back then.

But, to mock Louis XIV, l’etat is decidedly not moi anymore. The dynasties are gone. That fight is old, and the weaponry used in that bygone age is dull, rusty, and, frankly, inappropriate, in our modern societies replete with representative government. No matter how inefficient that government might appear, it is representative. To argue that it is the enemy, is to suggest that democracy itself is the enemy.

In America with its republican, anti-democratic heritage – don’t tell me you think the Senate is democratic – those antiquated arguments against royal imposition still resonate. They have re-surfaced potently in our contemporary Republican party. They are of no use in solving our much more modern problems. Voters have spoken in favor of those entitlement programs. That a few sullen anti-social and anti-democratic libertarians view the taxes needed to pay for such programs as equivalent of 1800’s style imposition is quaint, but when baked into policy today, dangerous.

Yet here we are re-enacting the overthrow of the house of Hapsburg.

No wonder we aren’t making progress.

Moribund indeed.

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What A Depressing Week

I tried my hardest to hide from the flow of depressing news this week, but here I am on Friday feeling battered by it all. This was a week in which we had our worst suspicions confirmed.

Yes, the American economy is now deeply divided into haves and have nots.

Yes, the so-called recovery is evaporating as we meander about in the no man’s land of stagnation.

Yes, our elite is fumbling at every opportunity to do something about the malaise.

Yes, the threat from European ineptitude is almost as strong as that fro our own incompetence.

And, yes, the Republican hard core supporters are as extreme as we all feared.

Combine this lot and you end up with a toxic, corrosive, and potentially devastating brew. No wonder I wanted to hide from it all.

Where do I start?

Well, let’s get the normal numbers out of the way. Quickly, since they will make us all queasy. New claims for unemployment assistance rose again. They are back to the level they reached in June – 428,000 – and show no sign of relenting. Gone are the weeks where we could fantasize that claims were distorted by clerical, seasonal, statistical, or weather related quirks. The well of excuses has dried up. Our economy is simply not capable of creating jobs. It was what now seems an eternity ago when we were celebrating weekly claims trending down towards the magical mid-300,000 range. That is well out of reach at the moment. Unfortunately our unemployment problem is going to stick with us for a long while. Equally, or perhaps more, unfortunately I doubt there will be any serious attempt as a resolution. Our interminable election cycle implies that it is in the Republican party’s interest to remain obstinately anti-worker as it seeks to create an electoral advantage. So I expect a great deal of smokey rhetoric about fixes backed by an equal amount of cynical inaction.

We also learned this week that inflation has edged up somewhat. Even core inflation – the measure that strips out volatile stuff like energy and food costs – has risen to touch the 2.0% mark. While that’s not a problem, despite what you will be hearing from the right wingers, it implies that the average family is being squeezed Since incomes are flat, any rise in inflation erodes real purchasing power.

No wonder people are uneasy or angry.

Meanwhile our elite fiddles.

The explanation for our elite’s complete inability, and unwillingness, to resolve the malaise is apparent when you read the awful Census Bureau report on poverty released earlier this week. It is a damning indictment of the last thirty years. Inequality is now so extreme here that America ranks alongside what we would all claim to be third world countries. These are places the average American would disdain as badly run, corrupt, and poverty riddled backwaters. They are places we, in our finer moments, pity. We look at the as places where the poor are mistreated, forgotten, and abused by their obviously corrupt leaders.

Well we are one of those places.

We rank alongside The Philippines and Mexico. So not only is our health care system sinking rapidly to that level, but our economy is also. At least in terms of its ability to distribute or share the wealth it generates. And lest we forget: it certainly generates wealth. But that wealth is now super concentrated in the hands of the well educated. Our society has an Edwardian air to it. A servant class is thriving to assist the wealthy. And an underclass is growing rapidly to provide cheap labor to supply the rich with the food and services they require to maintain their own lifestyles.

There are signs of angst in the elite: stories about the decline of the middle class are now abundant. This outbreak of handwringing is touching. And totally ineffective since it is inevitably accompanied by statements about the long term intractability of the problem, and the urgent message to us all that we must avoid class conflict.

As if that conflict doesn’t already exist.

It does.

Don’t fool yourselves. We are riven through with class conflict. Our political discourse doesn’t reflect it yet. But it will if we don’t change course.

With our poverty levels rising, wages stagnant, and the chances of securing a solid middle class lifestyle diminishing for millions of families, the central question we will be facing over the nest decade is how to avoid social unrest as the gaps in our society widen even more. The elite has benefitted from a perfect storm: globalization came along to squeeze our workers just as technocratic education became the key to wealth. Our growing industrial productivity means we can make things without the workers that formed the backbone of the middle class of the 1950’s, 60’s and even the 70’s. Those days are gone. They are not coming back, despite the luddite instincts of some on the left who seem to want to draw down the curtain of global integration.

The poverty of ideas runs as deeply on the left as it does on the right.

Indeed, as contradictory as it may sound, it is big business most likely to sound the alarm most effectively. Business, after all seeks profit. It suffers when our middle class stops buying. It has to react. Just this week we read in the Wall Street Journal that Proctor & Gamble, that iconic provider of goods to the middle class, is abandoning most of its marketing efforts in that direction. Why? Their analysis – something they are knee deep in – tells them that the middle class is so threadbare that it is no longer worth the effort. Instead they are beefing up product development and programs designed to sell to our society as it now is: divided. Some very rich. Most poor.

So big business is a canary in the mine. And their actions suggest that the current malaise is not a temporary phenomenon needing a fix from a stale text developed in the 1930’s. That would solve only the magneto problem – to borrow Keynes’ apt phrasing. It would not undo the division of our society that is the root cause of our longer term issues. For that we need to turn to a politically connected economic theory. It doesn’t exist.

What does exist, unfortunately for us, is an extreme right wing theory adapted by our contemporary Republican party.

They are reacting to another canary in the mine: the Tea Party. Laughable, scary, and extreme these folks are real. And they are worth our paying attention to. They exist because they feel threatened. Looking at the typical demographic we learn that the average Tea Party supporter is white middle class and nearing retirement. These are exactly the people who feel the accumulated changes in our society the most. Right or wrong – mostly wrong – they feel as if they behaved according to the rules. And yet those rules are not returning the pot of gold they were promised. So they lash out. Indiscriminately. Irrationally. They pick on “the other” whether it be minorities, immigrants, atheists, or educated people. The list of enemies is long and heterogenous. No two Tea Party supporter have the same grudge. But they all have some sort of grudge. And they need someone to blame. The neo-libertarian right has managed to channel the blame onto government. Hence the notion that Obama is a socialist.

The left, as usual, has adopted a superior tone when dealing with the unwashed of the Tea Party. Instead of articulating anything new in response to the anger, the left has simply ridiculed the confused and often ignorant antics associated with the movement. The result has been that we have not fully embraced the message being sent: there is deep seated resentment throughout society about the failure of the economy to deliver the long assumed relentless increase in standard of living.

Left wingers may think, as many I know do, that the failure stems from right wing policies. The belief is that the steady erosion of union power, the vilification of government, and the drumbeat of deregulation – all central tenets of libertarian thinking – will inevitably, and I stress that inevitability, produce the very society we now condemn.

In stark terms the clash between the individual liberty so central to capitalism and the egalitarian pull so central to democracy has been won convincingly by the capitalists. Democracy has been rolled back. The libertarian aim is to gut it even further by eliminating social programs altogether. Those programs offend the libertarians both because they imply a need for taxation in order to pay for them, and because they imply an erosion of the rugged individualism that stands behind their philosophy.

This impulse was given clear manifestation at the latest Republican debate. The crowd, and avowedly extreme group, cheered at the idea of a sick person dying, when the alternative was providing social health care. That Hayek, the great hero of libertarians, advocated social health care in order to mitigate the anger of the poor, went unnoticed. Our modern libertarians have moved beyond their core beliefs into a fear driven cynicism and outright hatred of their fellow citizens that is frightening. History will not judge them kindly.

But.

That there are Americans who follow those ideas is sufficient evidence to support the notion that our problems are deep rooted and need long term, collective, and well thought out responses.

Right now we are not seeing anything remotely adequate.

We need to tackle inequality. To do that we need to educate our people, not simply to compete in a global workplace, but so they can perform as citizens. The left’s frustration over things like the environment, over teaching of evolution, and many other issues can be solved were our education system producing citizens well versed in those issues. Clearly is isn’t. That so many erstwhile middle class voters can support policies that ruin the middle class is a great paradox needing remedy. And the delusion of libertarianism and its hatred of government needs to be exposed as the profoundly anti-social message that it self-avowedly is.

After all, “we the people” is a clarion call for democracy, not for capitalism. Nor for libertarianism. We are our government. We are not our own problem. The lack of balance between capitalism and democracy is the source of our malaise. It is time to re-establish a more democratic balance.

I would like to think that economists could contribute to regaining this balance. But, unfortunately, they have defined economics deliberately to ignore social, institutional, cultural, and other impulses that constrain economic activity. They pretend society doesn’t exist in order to model society’s economic aspects. The error in that should be obvious. Apparently it isn’t. So most economic theory is rendered useless or irrelevant awaiting the outcome of the more important debates about how society should construct and apportion wealth.

Once that great debate about the core issues of economic activity are completed, economists can re-enter the discussion and tell us how best to set up markets. They are the engineers who implement someone else’s science.

Pathetic.

As I said: it’s been a depressing week.

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Obama’s Meaningless Speech

It has been well received. It had lots of nice things in it. It might have helped our unemployment problem.

That’s it.

It was a political speech designed to begin Obama’s re-election campaign. We have a year of this pointless stuff to come. Such is the total collapse of our political process that everything said, all the content of the pretty speeches, and all the serious comment in the press, is an adornment of will be an interminable election cycle.

It has very little to do with jobs.

Why?

Precisely because it was an election speech.

That means the Republicans cannot vote for it. Nor can they ignore it. What they can do is to debate it, eviscerate it, and attempt to debase it sufficiently that Obama cannot claim the political win he so desperately needs.

All of which means that, by the time something actually gets passed into law, it will be watered down and far different from whatever we heard yesterday. And it will do precious little to alleviate the plight of our fellow citizens who are unemployed.

This makes it almost an worthless exercise for us to examine the proposal too much. Nice though it appears. The important message for anyone interested in economic policy and the economy in general is that politics now is more important than solving economic problems. We can expect nothing of substance to be decided as the bitter opposition to Obama digs in even more deeply.

His speech can be called a political win. But from our point of view it is meaningless.

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Post Labor Day Pieces

Labor Day is gone again. Another year into our economic malaise and little to show for it. The feeling I sense most is one of frustration, mixed with a growing skepticism that anyone knows what to do to get the country rolling again. The most popular narrative in the media is that we need to tackle our debt crisis, and that this needs to be balanced with some short term tinkering in order to spur job creation.

Tinkering?

Phooey.

We need surgery.

But we won’t get it. Another part of the common narrative explains why: the thought is that Keynesian policy failed us – exhibit A being the rotten outcome from the 2009 stimulus – and that any further such effort is throwing good money after bad. Besides, the same thought goes, we are up to our eyeballs in debt because of all that government intervention, and have no more room to add to debt levels without tipping the economy into a state of bankruptcy.

Add in all the usual homilies about government borrowing sucking all the credit from the market so that the private sector cannot borrow, invest, and thus propel us all forward, and the sanctimonious commentators sit back as if they have discovered some deep truth. Some inescapable truth about economics that only the foolhardy try to avoid.

That truth being that we ought to let the market – whatever that is – correct itself. Which it can only do once the government is firmly constrained, reduced, and otherwise neutralized.

This narrative is, of course, straight from the right wing playbook supported by right wing economic theories. It endures and manages to influence policy makers despite the total lack of credible evidence to suggest that it is correct.

For instance I find it odd that those who argue we should let the market solve our problems seem willing to ignore market based evidence. Were they to tune in to actual market signals they would find it emitting a primal scream. Interest rates are at near all-time lows. Cash is flooding into the US. Far from saying pay down debt, the market is urging, vociferously, that we borrow more. In other words we have a once in a lifetime opportunity to borrow vast amounts of money and invest it in our future. With rates at 2% practically any sensible long term investment would turn a neat profit for society. We could rebuild our infrastructure, refurbish our electrical grid, rebuild our bridges, invest in non-carbon energy sources to cut our dependency on oil, and we could even, and I realize this is a stretch, rebuild our rotting inner city schools.

This would be a great gift to our children. Yes it would burden them with debt repayment costs. But those costs would be much smaller than the ones they would incur for the same amount of activity. We would, in effect, being giving them a cut-priced, but refurbished, infrastructure. Anyone flying into or out of New York City confronts the antiquated and failing physical assets we currently make do with. At 2%, all that could be improved. Or at least some of it.

But no.

Notwithstanding the urging of the free market and its message to borrow and invest, we are being led by policy makers intent on paying back debt. So lacking in imagination, energy, and substance are they that they ignore the very market they laud. So ideologically hidebound are they that they fail to see the opportunity we have. They don’t want to see it. They don’t want to muddy their ideological purity by acknowledging that the market, that paragon of economically efficient allocation of resources is begging, just begging, to allocate resources to US government debt.

This blind and willful disregard for evidence will cost our children dearly.

Not only will they inherit a diminished economy, but they will still be faced with having to refurbish our shabby and shamefully neglected infrastructure. An infrastructure that will represent a constraint on the growth they can squeeze from the economy.

Meanwhile in another supreme example of ineptitude, Standard and Poors continues to give a higher rating – AAA – to mortgage backed securities that include elements of sub-prime debt, than it does to US government debt. The absurdity of this is indescribable. The enormity of the stupidity boggles the mind. It is, naturally, easily explained. The mortgage debt issuers pay to make sure their debt retains that coveted AAA rating. The US government clearly doesn’t. Never has there been a more clear and distasteful example of corruption on Wall Street. Yet it continues. Mercifully the credit markets seem to ignore S&P – as current interest rates suggest. Which begs the question: how does S&P continue in business? It is clearly irrelevant, corrupt, and incompetent. I can only assume inertia is the key factor keeping them afloat. All those money managers who rely on S&P ratings are too lazy or too ignorant to change their ways. Perhaps they are too stupid to undertake their own credit analysis. Or, perhaps, they are just as corrupt, and don’t want to be exposed as being part of the same game.

Oh.

And one last thing this post-Labor Day week.

Today’s report on new claims for unemployment assistance showed an increase. Small, admittedly, but an increase nonetheless. Claims rose from 409,000 to 411,000. It is not worth my while to tell you what I think of this. One word will suffice: awful. What we need, clearly, is a major speech outlining a series of bold, but still small-enough-to-get-voted-through steps to attack this problem that blights our great nation. We need more political grandstanding. More rhetoric. More inspiring words. More faux emotional moments when the camera can pick out an unemployed worker beaming with pride at the imminent action promised by those words.

More nothing.

As today’s numbers clearly indicate, the recovery is in full swing and our labor force should be grateful for the stirling leadership from both the White House and Congress. I tip my hat to the policy makers. It takes courage, inventiveness, and a willingness to work together to produce such results this far into a recovery.

Courage to look the unemployed in the face, and blame them for their misfortune.

Inventiveness to avoid even the simple things that could be done to help the unemployed.

And a great willingness to work together to corrupt and stall our political process sufficiently that the purpose of government becomes simply to be re-elected rather than to govern.

With leadership attributes like these we can all rest assured that my report next Labor day will mirror, almost exactly, this one.

Only we will then be closer to an election that will resolve, yet again, absolutely nothing.

Labor Day? I think not.

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Confidence Sucks

Having survived an earthquake and a hurricane within a few days of each other I have a feeling that the economy cannot throw up much to upset me. Neither of those events amounted to a great deal here in New York City: the enormous energy spent by our various bureaucracies and breathless media in the run up to the hurricane dwarfed the rather meager effort of the storm itself which tricked us all and devastated inland areas rather than the more glittery targets here. Still all those boarded up storefronts and taped up windows spoke volumes about the risk aversion of New Yorkers when it comes to their personal belongings. I just wish that those of them who populate the trading desks of Wall Street banks had the same attitude towards risk when it comes to gambling with other people’s money. But that seems like a forlorn hope on my part.

Speaking of forlorn:

Today’s report on consumer confidence is all we need to know about the trajectory of the economy. Confidence sucks.

Dragged down by deteriorating views on jobs, incomes, and general economic conditions the Conference Board’s measure of consumer confidence dropped like a proverbial stone, falling from 59.2 in July to 44.5 in August. To put this in context, in a strong economy the index often reaches the 90+ level, and the drop in August one was of the largest ever recorded.

Add this rotten report to the ongoing hesitancy of business to spend its pile of cash, which is still accumulating and sitting idle on balance sheets around the country, and we see immediately that the threat to the economy is in our collective belief that things have not yet turned a corner.

Despite the mild positive tone that consumers gave the Conference Board about their intentions to buy cars or large durable goods items – both seem set for a slight uptick – the overall message was one of unmitigated gloom. It may well be that, as the Economist magazine rightly points out, the normal causes of recession such as inventory movements, a turn in real estate, a sudden burst of unemployment, or a tightening by the Fed are all absent. Indeed for one reason or another they are all remarkably quiescent. Yet consumers are extraordinarily glum. We are stuck in an economy where the lack of confidence creates the very stagnation that drains away confidence even more. Our risk aversion is way beyond that commensurate with actual economic conditions. Things are not quite as bad as they appear.

One example of what I mean by this is the outlook for inflation. Consumers, according to the Conference Board are expecting an inflation rate of around 5.8% over the next twelve months. But the actual number will be more in the 2.0% range. Given such a high expected number it would be rational for consumers to be spending money to defeat the run up in prices. But they aren’t. They are saving, even though the returns they are getting on those savings are ludicrously below their estimate of inflation. In other words consumers are completely willing to experience a loss on their savings because of their perception of the risks that roam the future economic landscape.

Do consumers know something that eludes the analysts?

It doesn’t matter.

Economic behavior is far from rational – despite the theorizing of mainstream economists whose entire constructs are built on the illusion of rationality. Indeed rational expectations are more quicksand than bedrock for anyone trying to interpret consumer activity. Be that as it may, we are clearly becalmed in a Sargasso like sea. It will take a shot in the arm, and a great deal of effort choose your own cliche at this point – to get us moving with any optimism.

Which is unfortunate given the political theater of our electoral process.

One reason why confidence may have been rocked last month was the depressing spectacle of our elite discussing the debt ceiling in apocalyptic terms when, (a) the debt ceiling was irrelevant and unimportant, and (b) what really matters is the outlook for jobs and incomes, neither of which have received serious attention for months. When a nation is this badly led, and when an elite is this divorced from reality, it is almost certain that voters will react with alarm and nervousness.

So we are left trying to find bright spots within the despair.

Here’s a perverse one:

All that storm damage will have to be fixed. That implies a spurt in construction. This will amount to a mini stimulus in those states hit the hardest. Whether it will offset the loss of business from storm damage I cannot tell: but at least it’s a nugget we can cling on to as our elite meanders about in the desert trying to avoid being grown up about the real issues.

When confidence sucks this much it’s these little things that can brighten our days. One thing’s for sure: Washington won’t.

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