The “happy talk” campaign in the US media and coming from the White House is just that: Happy Talk.
To get a real picture of what is happening with this economy, here are a few things to keep in mind.
Yes, the rate of decline in economic activity has slowed. But that is to be expected. When an economy is going at full tilt, as the US economy was doing in early 2007, a slowdown of any significance yields huge numbers, in terms of falling production, falling factory utilization, falling car sales, or, this time around, falling housing prices.
But once you get to the same period in 2008, you’re already in a deep recession, and there really isn’t that much farther to fall. If, for example, the carmakers have basically shut down by fall of 2008, and are just working off huge inventories, then you are not going to see more factory closings and further reductions in production (how do you reduce production below zero?). Incidentally, the latest "happy talk" report from the Commerce Department, claiming that consumers boosted spending by 0.4% in June, is basically just the result of the government's $4500-per-car one-time "cash for clunkers" new car stimulus give-away--hardly an indication that consumers are suddenly opening their wallets.
The same can be said about unemployment, although here there is another twist or two. Yes, the huge layoffs that saw the number of new unemployed jumping by 6-700,000 per month in the early part of this year seem to be over, and now new unemployment is rising by “just” 500,000 a month or so, but that’s because all the major employers have already shut down or shut down entire shifts. There are not that many people who can be laid off any more, at least in large groups. This gets painted as “the pace of layoffs is slowing” as if that’s good news, but it is the opposite.
But there is more trickery and misinformation regarding unemployment statistics, too. One has to do with the oft-noted claim that the number of people collecting unemployment benefits is declining—especially the long-term unemployed. But the reason for this is not that people are finally finding jobs. It’s that unemployment benefits are being exhausted. The upper limit for collecting unemployment benefits in the US is 79 weeks, and that’s only in some states where unemployment is particularly high. In other states it is 72 weeks or even as low as 59 weeks.
Also, unemployment benefits, which reportedly average $300/week, but can be a lot less depending upon where a particular person worked and what state he or she lives in, are lost if a person does some part-time work, and since nobody can support a family on $300 a week, many people on unemployment end up getting part-time jobs and lose their unemployment benefits. That’s not a good sign either.
Finally, unemployment benefits only cover about half of American workers. The rest, because they have already only been able to find part-time jobs, or because they’ve been working “off the books,” or because they are so-called “independent contractors”—people like gardeners, freelance writers, lawyers, consultants, plumbers, etc.—aren’t covered by unemployment insurance. When they get laid off, they are on their own. And increasingly, the layoffs and job losses in this declining economy are falling on people in that category. The early lay-offs were done by managements of big companies which looked ahead, saw the downturn, and implemented “cost-cutting” measures, which meant slashing production and laying off workers. Independent workers and small businesses, whose owners are personally hit when they have to shut down production or operations, have struggled to stay in business as long as possible, but are now entering the jobless rolls at an accelerating rate.
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But, and here’s a crucial point, many of them simply don’t get recorded by the government statisticians as being unemployed. Anyone who works even a few hours a week at some odd job, or for free in a family business, is not counted. Anyone who sees no job prospects out there and just gives up isn’t counted. Anyone who finds a half-time job, but needs a full-time job is counted as employed. It didn’t use to be this way. In a more honest time, more than three decades ago, such people were counted as unemployed, but politicians pushed to have them excluded to keep the official unemployment numbers looking lower. If all such people were added to the unemployment numbers we would have unemployment in the US at over 18 percent, and possibly closer to 20 percent. That’s one in five Americans out of work.
And remember, even though we are now in an economy that is functioning at a depressed level, it is still in decline, and those unemployment numbers are rising, not stabilizing.
Put that together with the fact that Americans collectively have lost $14 trillion in wealth. They’ve lost invested savings, which are still down almost 20 percent from where they were a year ago, and don’t appear likely to recover any time soon. (Remember, even if the stock market falls 40 percent and then rises 40%, it will still be down. Consider: If you had $1000 invested in a broad index like the S&P, and it dropped 40% as happened last fall, you lost $400, and have just $600. If the market then recovered 40%, though, which it hasn’t by a long shot, you only gain 40% of $600, or $240, so your portfolio is still only back to $840.) That $14 trillion also includes the lost value of people’s homes, which until 2008 were being used to prop up living standards as people borrowed on the rising equity in their property. With housing values in much of the country now down anywhere from 20% to 80%, many homes are now worth less than the amount of money still owed on people’s mortgages. They can’t sell, and often, they can’t pay the mortgage check.
Where is the consumer spending supposed to come from that used to represent a whopping 70% of economic activity in a United States that long ago stopped making things? The answer is: nowhere. The amount of lost wealth makes a joke of the celebrated Obama stimulus plan, which was less than $1 trillion, and which is spread out over two years.
There is simply no money to restart the orgy of consumer spending that kept the US economy afloat for so long.
People can’t even borrow if they want to. Banks are not lending, because they know that the happy talk is nonsense, and they don’t want to loan money to people and businesses that are liable to go belly up as the recession continues. That’s why card companies like American Express and many Visa issuers, instead of just charging a late charge when card-holders miss a monthly payment deadline as in the past, are now just jacking up the interest rate they charge, --in American Express’s case to 28% or over 2% a month! That’s not the action of a bank that is expecting to get repaid by a customer—it’s the extortionate action of a usurer that wants to extract as much money as possible from a borrower that it expects to have go bust. Banks are canceling personal and business credit lines right and left too, making a joke of the Obama administration’s claim that it bailed out the banks so that they would “start lending again.”
Even the story about housing sales improving is misleading. The reason it is happening is that so many homes have foreclosed that the sale of foreclosed homes by banks is now a significant part of the total housing market.
Again and again, much of the “happy talk” we hear, if examined closely, turns out to be bad news being misinterpreted, often deliberately.
Finally, it should be added that because of massive unemployment, which is approaching levels not seen since the Great Depression, and because of the massive loss of personal wealth, this recession is not likely to act like any of the other recessions of the post-World War II era. These have all been “U” or “V”-shaped affairs, where economic activity would either drop and then, after lingering at a low level for a while, recover at an accelerating rate, as in a “U”, or plunge precipitously to a sharp bottom and then quickly recover, as in a “V”. This time, we are more likely to see an “L”-shaped recession, where the economy hits bottom at some point, and then operates for years at a much lower level. That lower part of that “L” might rise slowly, but it wouldn’t rise by much. In this case, we would see continued high levels of unemployment, lower wages, and no bounce-back in personal wealth.
So if we want to make the correct policy decisions, not to mention the right political decisions and personal financial and basic life decisions, let’s cut the happy talk, and start keeping it real.
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