One of the big debates on the economic blogs right now is whether the upbeat end of 2011 was just a blip or the beginning of a genuine trend.
“What upbeat end to 2011?” I hear you ask. So let’s back up and start there.
Recent numbers. The most obvious thing was the decrease in the unemployment rate from 9.1% in September to 8.6% in November.
By itself, though, that number isn’t too impressive, particularly since it’s only partly due to new jobs and partly to people leaving the work force. But other numbers support the idea that things are turning around: In November and December, housing starts began to increase and more people bought new cars. Plus, Christmas spending was up.
Houses and cars matter. At the most immediate level, recessions happen because people stop spending. That causes production to drop, so other people lose their jobs. Then they also stop spending, and things spiral downward.
But this is like saying that you’re hungry because you haven’t eaten enough — it’s true, but it ignores any underlying causes. You might be dieting or hunger-striking. Or maybe there’s a famine or you’re poor in a rich country or your jailer has cut your rations. Telling a hungry person “You should eat more” isn’t wrong, but it’s not always helpful.
Bearing in mind that why we haven’t been spending might matter, a huge part of how we haven’t been spending is that we haven’t been buying cars and houses. Smith points at this graph of domestic spending with (red) and without (blue) housing and transportation.
The blue graph looks like a relatively mild recession, while the red one reflects the deep recession we really had. Smith says that the drop in (red) spending amounted to $400 billion, of which $200 billion was decreased construction. Over a somewhat longer period, the construction-spending drop was $500 billion and the automobile-spending drop was $240 billion.
And that makes sense: If (like most people) you continued to have an income during the recession, you probably didn’t stop eating or paying your utilities. But you quite likely did get anxious enough to put off buying a new car or house.
Why the up-tick might continue. Trends always spread too far and last too long. People who are honestly worried about losing their jobs really shouldn’t buy new cars or houses. Once a recession gets going, though, even people who need, want, and can afford new stuff will delay buying it out of a general sense of uneasiness.
But eventually those people get tired of waiting for the sky to fall, and go out and buy stuff anyway. When they do, a virtuous cycle replaces the vicious cycle of recession: Their spending gives other people jobs, so those people also spend more, and so on.
Smith and Yglesias see pent-up demand that is about to burst out. Seattle TV station KOMO reports:
Back in 2008, when Consumer Reports asked people about their primary vehicle, the average age was 5 years old. Today, it’s 9 years old.
Ditto for housing: We more-or-less stopped building houses in 2008, but new households keep forming. Smith believes the household-to-house ratio is approaching 1, and that any uptick in the economy will increase household formation even further. He predicts:
this is at least suggestive that there is a looming outright housing shortage.
But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. … This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.
Why it might not. Yglesias suggests one reason his rosy scenario might fail: The boom would also increase inflation, which the Fed might decide to resist by raising interest rates, thereby smothering the boom in its cradle.
But other economic bloggers (and even other Smiths) doubt the whole scenario. Naked Capitalism’s Yves Smith, for example, gets back to that underlying-cause thing:
People and businesses are not going to borrow and invest if they are not confident of their future. With short job tenures, over 30 years of stagnant real worker wages (and falling in the most recent 12 months), exactly what is there for the bulk of the population to be optimistic about?
We’ve had a very successful three decade effort to break the bargaining power of labor, and covered that up with rising consumer debt levels. That paradigm is over, but no one in authority seems willing to go back to an economic model where rising worker wages drive economic growth. Until we get policies that address that issue, I don’t see a reason to be expect robust growth levels.
She also doubts that house-construction will make any serious move until the overhang of foreclosed properties gets sold to people who can afford them.
The business cycle. At its root, the Smith/Yglesias boom prediction is a classic business-cycle argument: Things only go so far up or down before natural forces turn them around.
Like Yves Smith, I’ve been arguing for a while (here and here) that we don’t have a classic business cycle any more. As wealth gets more concentrated, our booms and busts have more to do with investment bubbles than with production and consumption. We don’t “recover” quickly, because what we’re “recovering” to was never real.
Some of Karl Smith’s pent-up demand isn’t real either. For example, I am one of those people driving an old car: My 2002 Saturn Vue has 168K miles on it, more than I’ve put on any other vehicle. But because quality has improved, it still runs great. I’m not pining to get rid of it as soon as I have a little money.
I also have a 5-year-old laptop computer. Not so long ago, a 5-year-old laptop was a museum piece, a 286 in a Pentium world. But in the cloud-computing era, 5-year-old laptops also work just fine.
Then we come to housing, and those under-employed 20-somethings who want to get out of their parents’ houses — my nephew, for example. The career path of most 20-somethings I know doesn’t resemble anything my generation would have called a “career” thirty years ago. Today’s “career” is a string of temporary jobs, possibly united by some kind of theme.
If we have a boom, those temporary jobs will last longer and pay more — maybe even a lot more, if things really get rolling. But they won’t become pre-Reagan-era careers, so buying a house still isn’t going to make sense. The argument that housing always goes up — people really said that not too long ago — isn’t going to ring true for a long time to come. And if your next temporary job is a thousand miles away, that house you can’t sell is an albatross, not an asset.
So I agree with bankruptcy lawyer Max Gardner: “We’re turning into a Nation of renters rather than homeowners.” We can’t invest in stable housing because (even in good times) we don’t have stable jobs.
Split the difference. When I examine my objections, though, they mainly say that the forces the optimists point to aren’t as strong as they think, not that those forces don’t exist at all. My Vue and my MacBook aren’t going to last forever. And maybe my nephew will rent an apartment rather than buy a house, but somebody will still have to build that apartment and make the appliances to fill it.
So even if the business cycle isn’t the only thing happening any more, there still is a business cycle, and it does seem to be pointing up.
So are happy days going to be here again in 2012? Probably not. Has the country solved its long-term economic problems? No. But I think it’s as if we’re in the spring of a cold year: We’re still going to get a summer, and it will be warmer then than it is now.