Calculated Risk has a graph showing the trends in shipping traffic at the Port of Los Angeles. Inbound traffic was 20% lower in December than it was in December, 2007. Export traffic was down to 2005 levels.
It looks like the entire world is going to have to get used to a size L economy, not just the United States.
In the meantime, the stimulus bill was introduced in the House of Representatives today. The opening bid is $825 billion, $550 billion of which is spending.
I’m not an economist, I’m not even kind of an economist. But there are a lot of other people out there who are not economists who have a lot to say about the economic stimulus, and some of what they’re saying leads me to some questions. Oh how I wish I could demand that a real economist answer them.
People are saying that Obama’s stimulus plan is too small. For example, here’s John Judis:
There’s much to like in Obama’s plan. But there are two important ways he may have to go further. Most economists agree that what finally pulled the U.S. out of the Great Depression was military spending for World War II. Some liberals argue that if the Roosevelt administration had not abandoned a Keynesian stimulus strategy in 1937-38, the U.S. might have gotten out of the depression without a war. But in 1936, unemployment was still at 16.9 percent; by 1942, after two years of war spending, it was 4.7 percent, strongly indicating that it was war spending that did it. I am not suggesting that the United States start a world war in order to solve the world’s economic problem. But I am suggesting a strategy that could be called the fiscal equivalent of war.
So let’s talk about fiscal stimulus a little bit. For at least the past decade, the US (and world) economy has grown due to one factor — the rise in housing prices. As housing prices went up, people borrowed against the value of their homes and spent the proceeds. That took the place of real income growth. As we now know, the rise in housing prices was not sustainable. Prices stopped rising, people lost the ability to borrow, and now the economy has essentially shrunk down to its pre-bubble size.
I don’t know how to mathematically model any of this, so let me use an analogy. Before the housing bubble burst, the economy was a size XL shirt. Now it’s size L shirt. The economy is rapidly losing weight so that it can fit into the size L shirt. What this means is closed down factories, canceled construction projects, and massive job loss.
The purpose of fiscal stimulus is to stretch the shirt back out to size XL. This works by replacing consumer borrowing (by way of home equity loans, cash-out refinances, and credit cards) with government borrowing. The idea is that the government will stretch the shirt until the economy grows enough for the shirt to remain size XL without fiscal stimulus.
So that leaves me with two questions about the stimulus plan in particular. One, is the government able to stretch the shirt as much as it needs to, and two, for how long will it be required to stretch the shirt? There’s some level of government borrowing that is not sustainable. And there’s some level of borrowing that can be managed for a year or two but not longer.
And my bigger question is this: what if the size L economy is the new normal, and the only thing that will save us in the end is population growth? What then is the proper course of action for the government? If the current crisis is a product of structural change, what’s the best recourse? Replacing consumer borrowing with government borrowing isn’t going to save us if there’s no path back to the size XL economy anytime soon.
Update: I am very glad this guy is our next President.
What I learned today: graduating from college and entering the workforce during a recession can have a lifelong negative impact on your earnings.
Michael Lewis explains in a nutshell why the financial industry must be carefully regulated:
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
Paul Krugman posts a graph of housing prices in Las Vegas, relative to the prices in 2000. It’s interesting if only because it’s actually bubble-shaped.
I’m finding it interesting to read the debate on economics blogs about how effective the stimulus package that the government will pass early next year is likely to be in addressing the economic collapse that we all hope won’t linger for ten years.
For what it’s worth, I think Tyler Cowen is close to the truth when he writes this:
Note that under standard theory neither monetary nor fiscal policy will set right the basic problems from negative real shocks and indeed the U.S. economy is undergoing a series of massive sectoral shifts. That includes a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.)
That’s why we’re in for pain for what may be a very long time. I think we should all hope that the more optimistic economists are right on this issue, because some stimulus package is inevitable.
For the pro-stimulus argument, Brad DeLong and Paul Krugman are the essential stops.
For what it’s worth, non-economist Jim Henley wrote the best summary of the economics of the past 20 or 30 years that I’ve read:
During the period of Republican dominance, government policy contributed to stagnant real wages for most Americans, but to keep consumption up, fostered ever-more-creative ways for them to take on debt. The recent real-estate bubble (still deflating) was the final(?), decadent stage of the con. Now the jig is up: what falling asset prices reveal is that the country was a lot less wealthy, in real terms, than we imagined. In the absence of broadly shared prosperity, society can’t maintain a robust growth in genuine wealth.
You can leave out the stuff about Republicans if you like, increased ability to take on debt did replace wage growth as the means by which people improved their standard of living over the past 10 or 20 years. The difference between borrowing and having is that now the economy is going to suffer as people try to pay down the debt they’ve accumulated as rapidly as possible.
Intuitively, if the economy’s size was based in large part on borrowed money, government borrowing could make up some of the difference since businesses and consumers are borrowing less, but clearly that can only work for a short time as we try to find some more reliable means to rebuild the economy.
It’s interesting to see price-rent ratios flagged everywhere as the clearest sign that we were in a housing bubble over the past decade or so. It reminded me that the first place I saw this indicator mentioned was at Winterspeak.com in January, 2004. The post is about Boston housing prices, but the metric applied in many markets. Just goes to show you that the housing bubble was never a mystery to those who were paying attention.
The Washington Post’s Steven Pearlstein calls out Wall Street executives for failing to lead in the years when the entire economy shackled itself to the unsustainable rise in housing prices. In this case, leadership means accepting reality and helping other people see and accept that reality as well.
Throughout the expansion of the real estate bubble, there were plenty of people out there who were saying that the bigger the bubble got, the more damaging the collapse was going to be. Unfortunately, none of them were in a position to do much about it.
Here’s Pearlstein:
One thing we know about leadership is that it rarely involves using excuses such as “All the other kids were doing it.” That’s only a slight oversimplification of what we’ve heard from the masters of the financial universe in explaining how things could have gone so wrong. The more elaborate explanation goes something like this:
“Yes, we saw that there was a deterioration in underwriting standards for loans, and yes, we understood we were taking on additional risks to our company and to the system by making lots of those loans and putting them on our books. But you have to remember that this was where the big growth in the industry was coming from. If we had refused to go along, we would have effectively put ourselves out of the game. We would have lost market share. Our profitability would have been significantly lower. Our stock price would have been hammered. We would have been crucified by analysts and the financial press, short-sellers would have begun to circle, and before long some hedge fund masquerading as an ‘activist investor’ would have bought a stake and begun to agitate for a change in management.”
Pearlstein then goes on to describe what real leadership looks like. And what I like is that he makes the most important point — leadership is more than telling the truth. Anyone can explain what’s wrong and hope people listen to them — leadership is about bringing about needed change. None of the many economists, journalists, bloggers, or innocent bystanders who saw this coming were able to prevent the subsequent unraveling. But the CEO of one major investment bank could have. One highly placed cabinet official could have. One committee chair in Congress probably could have. The head of the Federal Reserve could have. The President certainly could have. They all declined because it was easier to try to blend in with the herd.
It’s not as though I, a programmer who blogs about whatever shiny idea captures his interest, is any smarter than the CEO of Lehman Brothers or wiser than the Secretary of the Treasury. I just don’t have any vested interests or any influence over what actually happens. The risks are much greater for people who are in a position of leadership, but they’re the ones who asked to be put in these positions in the first place. The fact that they opted into the shared delusion rather than facing reality is the most damning indictment of their leadership that can be made, and none of the excuses they’re making should be accepted.
Honda is selling off its Formula One team and getting out of the business of supplying other F1 teams with engines to save money given their poor fortunes in the current economy. Much attention has been paid to the suffering of America’s inept automakers, but it’s also true that all of the auto manufacturers are doing very poorly right now. Anyone think that Japan, South Korea, and Germany are just going to let their car companies bite the dust? I doubt it.
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Things are tough all over
Foreign workers in Dubai have abandoned thousands of cars on the side of the road near the airport, catching one-way flights back to their countries of origin. I’ve often said that Dubai is to Las Vegas as Las Vegas is to everywhere else. Looks like that counts double when it comes to the real estate bust.