New American Paradigm

Global Warming Costs Illustrated

If there is one thing I hope to accomplish one day with this blog, it's convincing a few people that their simplest choices can have devastating consequences for someone somewhere else in the world.

For example, the mining practices used in Africa to power our laptops and cell phones probably resulted in someone's death.  Either the minerals are used to fund wars the way West Africa diamonds once did, or the environmental protections are so lax that people are poisoned or simply driven from their homes.  If consumers agreed to pay just a little more, computer makers could pay more for the material and therefore afford more environmentally sound practices.

Weaponized Keynesianism

Rep. Barney Frank, ever the streetfighter, came up with a classic name for the bizarre cognitive dissonance exhibited by Republicans when it comes to the jobs created by government spending:

These arguments will come from the very people who denied that the economic recovery plan created any jobs. We have a very odd economic philosophy in Washington: It’s called weaponized Keynesianism. It is the view that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation.

This strikes at the heart of the flawed logic that many have in opposition to the stimulus package.  We know for a fact that government spending can have a stimulative effect in a recession.  One need only look to the last depression.

When FDR's New Deal spending began, the GDP grew and unemployment shrank.  When Republicans forced him to balance the budget too quickly, the economy dipped back into recession.  Then we finally climbed out of our economic funk when the US entered WWII and kickstarted the manufacturing sector in building our war machine.

The notion that we should balance budgets in recession and rack up deficits during the good times is totally foolish.

Why Are Housing Starts Up?

Some pundits are pointing to increased housing starts as a sign the economy is recovering. 

Don't be fooled.

A couple things are happening.  As Paul Krugman, Nobel Laureate economist and liberal conscience, notes, a 17% increase in next to nothing is still next to nothing.

new-home construction has come to a virtual standstill, so even large percentage changes mean only a handful of extra homes started. If we’re building 6 homes a month nationwide, and that goes to 7, it’s a 17 percent rise — but makes almost no difference in real life.

There's another issue at hand as well.  In many markets developed lots are in such oversupply they will take years to absorb.  In most cases that means banks have repossessed them from leveraged developers who cannot unload them in a timely fashion. 

Not wanting vacant land on their books, banks are selling lots at firesale prices which makes selling a new home on them competitive with existing homes.  Builders who have survived the crash but sit twiddling their thumbs have nothing to risk snapping up these cheap lots.

Once those developed lots are absorbed, there won't be any new ones for a long times with snakebitten banks reluctant to lend on such projects.

To put it another way, vultures picking at a corpse laying in the desert sun is no sign of health.

Is Unemployment Worse in this Recession?

Yesterday we looked at how unemployment is felt disproportionately by those with less education.  Today I just wanted to update with the scariest chart in world history.  Seriously, it looks like it was drawn by Satan himself with the blood of innocents.

Unemployment by Level of Education

Calculated Risk created a graph that breaks out unemployment rates by level of education.  While it's to be expected that more education attainment means greater pay and job security, what is immediately clear is that this recession is being felt by the poorest amongst us most. severely.  In fact you might say that the gap between the "Two Americas" John Edwards described, is getting wider.

As you can see, the increase is substantially greater for those without a high school diploma or equivalent than that of other education levels, particularly those with at least a bachelors degree. 

Prosperity Without Growth Money Quotes

It's rare that you see a government agency in this country or any speak the truth when "conventional wisdom" is so diametrically opposed to what needs to be said.  In this case, the "conventional wisdom" is that we can continue to seek constant economic growth in a sustainable way.  It's a myth all of us repeat to each other almost as though our existence depended on it, because the signs are all around us that this simply is not possible.  I guess constant reinforcement is necessary to maintain mass hallucinations.

Despite all that, our cousins in the United Kingdom have had a commission reporting directly to the Prime Minister that is attempting to do just that.  You can read the whole report here, but I'm going to share some of the money quotes.

Prosperity Without Growth

This is a big meaty report done by the UK's Sustainable Development Commission called Prosperity Without Growth that I plan on diving into over the next week and will offer some thoughts along the way.  It's interesting to me in that it attempts to answer an emerging and difficult question.  How do you reconcile capitalism and sustainability?

Along the way I think there's a dilemma that Americans in particular, but Western societies in general, will need to ask themselves.  Where is the line between capitalism and consumerism?  We almost intuitively understand that the latter is dangerous and perhaps even immoral but are also deeply suspicious of it as foreign or perhaps vaguely communist.  Ironically it also leads us to embrace anti-capitalist systems like China and become dependent on slave labor to pay for cheap goods.

Americans Saving More, Investing Less

We've mentioned before the marked increase in personal savings before.  This is, of course, a very good thing.  Low personal savings are unhealthy in the long term, so it's only natural that this trend reverse.  Usually though, there are opportunities for investment and that's eventually what brings economies out from under recession.  People start businesses, buy equipment, or otherwise develop the infrastructure necessary for making money.  Otherwise they supply capital in the form of stocks or bonds so that others can do so on their behalf.

Unfortunately, that does not appear to be happening now.  Paul Krugman notes:

That saving ought to be translated into investment, but the investment demand is not there. Housing is flat on its back because it was overbuilt; housing bubbles collapsed not only in the United States, but across much of Europe. Many businesses cannot get access to capital because of the breakdown of the financial system. But even those that do have access to capital don't want to invest because consumer demand is not there. Between the housing bust and the sudden decision of consumers to save, after all, we have a world with lots of excess capacity. The GDP report that just came out says that business-fixed investment, non-residential fixed investment, essentially business investment, is falling at a 40 percent annual rate.

The Way We Were

Typically while suffering in the midst of a recession , Americans can take solace in the fact that the economy can get out of its funk by going back to doing what it was doing before.  Typically....

The problem for us right now is that we can't go back to what got us in this mess.  Unlike normal cyclical ups and downs, our economy for the last several years has been built on a massive expansion of personal debt.  Worse, that personal debt has now been socialized through government bailouts on the bad real estate loans that were used to finance this asset bubble. 

Economists View has the details:

U.S. Household Deleveraging and Future Consumption Growth, by Reuven Glick and Kevin J. Lansing, FRBSF Economic Letter: U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.

We're all waking up with a hangover promising never to do THAT again which means people are dramatically changing their behavior.  That means saving more, taking on less debt, and in turn, buying much much less.  In a consumer driven economy, that means the economy will not be recovering any time soon.

Sometimes paradigm shifts are painful.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the de-leveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates.

So how will this recovery look?  I think we're seeing the canary in the proverbial coalmine in Starbucks.  Is there a better example of the "spend today worry tomorrow" economy than an empire built on $5 flavored coffees?  Don't get me wrong, I've grown up in Western Washington so I take my espresso intravenously, though I still refuse to forgive Howard Schultz for selling our beloved  Sonics.  But it appears I'm not the only one who has trouble seeing how Starbucks fits into this shift in American spending behavior.

Maybe the worst nightmare is this: What if Starbucks is an artifact of an economy that's not coming back? A time of rising, if fleeting, American affluence as we moved from dot-coms and telecoms, to day trading and house flipping, all based on the biggest run-up of debt in the history of the world. For this venti, triple-shot America, it might have been the quintessential bubble drink.

Here's the part I'm having trouble figuring.  Each time things look bad we have some new whizbang industry to pull us out of our funk.  In the 90's we had the internet.  2000's the financial industry.  What is it going to be this time?  I haven't got a clue and that's frightening.  Worse, our political leadership appears to be so clueless about how to actually help create jobs, that they would rather through billions at a dying company that help support growing companies.

Go figure.

Re-Use of Closed Auto Dealers

Over the next few months I expect a question will emerge in communities across the country as GM and Chrysler announce they'll cut a total of 2000 dealerships with Ford surely to follow suit in the near future.  What do we do with the land they once occupied?

This is a question my town, Gig Harbor Washington, has been wrestling with over the last couple years after the Ford and Chevrolet dealerships closed.  You don't realize just how much land these sites take up until you see them closed and the buildings demolished.  It's a question the Daily Green attempts to answer in this article outlining the opportunities and problems.

One critical issue is that the closures will almost certainly be concentrated in the suburbs and exurbs.  The sites were once attractive for the cheap land and access to eager consumers dependent on cars.  But as we've noted before, the days of sprawl are over and it's unlikely the manufacturers will let their more productive urban dealerships go.  Unfortunately, many small communities sought out car dealers hungry for the sales tax they provide and now, with already distressed budgets, could be looking at gaping holes in their economy.  So the trick will be resisting the easy fix and allowing or even encouraging more sprawling development.