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Tuesday, January 5, 2010


One of my very dearest friends is Milton Cantor, a distinguished historian of American radical movements and labor history who, like me, is now an Emeritus Professor from the University of Massachusetts. For years, Milton has twitted me about my seemingly unconquerable optimism, which stands in marked contrast to his darker view of current events. In the circle of professors who, at Milton's behest, would meet periodically for lunch in Amherst, MA, I was viewed as an irrepressible Tigger, bouncily anticipating good things even as the world lurched from disaster to disaster.

Even I have my limits, however, and the time has come to look squarely at some of the deep-rooted problems that confront America. I have had my say about Afghanistan, which I consider Obama's one clear policy mistake. The latest news confirms the bleak anticipation that I have shared with many other far more knowledgeable critics of that policy. But I do not wish to write about that today. Nor will I add my voice to the chorus of climate change Cassandras, though I agree with them completely. Instead, I shall focus on two bits of data that, taken together, make manifest the seriousness of the economic distress now afflicting Americans.

The first datum is this: In the decade just ended, there was no net gain at all in the number of jobs in the economy. During the same decade, the population of the United States grew by roughly twenty-four million. Even allowing for increased numbers of retired persons, these numbers imply an enormous increase in those who are truly unemployed [as opposed to those who are counted as unemployed by the somewhat peculiar methods of the Bureau of Labor Statistics.] The lack of any job growth at all during a decade of supposed economic prosperity implies structural deficiencies in the economy that no short-term stimulus packages can address.

In a structurally healthy economy, a sizable core of working-age adults produces the goods and services that are consumed by children not yet ready for the work world and senior citizens who have left that world. The balance among these three groups in the population is one of the two key indices of the health and structure of an economy [the other is the proportion of the population engaged in the production of food and fiber, but that is not at issue here].

For a very long time in the economic development of the United States, labor was needed to till the fields, staff the factories, and carry out the other productive activities of the economy. Unemployment was always the consequence of a failure of the economic system to coordinate production and distribution -- what Marx quite properly called "contradictions." The principal debate among professional economists, business executives, and government officials was whether to allow the contradiction to work itself out through a severe contraction of the economy [the classical laisser-faire view] or to manage the recovery through deliberate government stimulation [the Keynesian view]. But all sides in this debate took it for granted that during periods of economic expansion, those who had been laid off would be brought back into the economy. The statistics of the past decade show that this shared expectation is no longer correct. In effect, the United States now has tens of millions of working-age men and women are simply not needed by the economy, in good times or in bad. This has long been true for Inner City young men and women, among whom unemployment always stands at disaster levels. Now that structural failing has spread to the economy at large.

Old lefties a good deal more optimistic even than I may see this as a formula for socialist revolt, but I think a fascist reaction is far more likely. Let me repeat: the failure of the economy to create more jobs during a decade of economic growth suggests very strongly that none of the stimuli proposed either by the Obama team or by left critics like Paul Krugman is likely to change the underlying structural defect.

The second datum that weakens my natural optimism is this: Right now, one quarter of all homeowners in the United States are "under water." That is to say, they owe more on their home mortgages than their houses are worth on the real estate market. For those of you who do not own a home, let me explain by way of a simple illustration. Suppose a family bought a home three years ago for $250,000, and took out a 90% mortgage to finance the purchase. They put down $25,000 and assumed a mortgage for the remaining $225,000. In the first three years of a mortgage, very little of one's monthly payments goes to pay off the principal of the debt. Only in the out years is the principal reduced each year in any significant fashion. If the loan was a 6% 30 year fixed rate mortgage, then after three years only about $9,000 of the principal has been paid off, so the family still owes $216,000. But in the present real estate market, their home probably cannot be sold for more than 80% of what they paid for it, which is to say $200,000. In some parts of the country, the drop in resale value has been a good deal sharper. In short, they owe sixteen thousand dollars more to the bank than they can get for the house. Were they to sell, they would have to find that $16,000 somewhere. If, during the go-go years of the past decade, they borrowed against the $25,000 invested in the house by taking out a second mortgage [usually in the form of a Line of Credit], then they are more deeply under water still.

If one has a secure job and a steady source of income, being under water is not, in the short term, a serious problem. No bank is going to attempt to foreclose on a mortgage that is, as they say, performing, merely because at the moment the security put up for the loan [the house] is not worth as much as is owed. But for two quite different reasons, having fully one quarter of homeowners in this situation is very serious indeed.

First of all, it severely restricts the labor mobility on which the efficient operation of a capitalist economy rests. Ever since the rise of capitalism ion the eighteenth century, the structural assumption of the system has been that as capitalists alter their investments, in response to shifts in effective market demand, workers will be free to move to the new jobs created by the investment shifts. The steady movement of workers off the farms and into the factories, the migration of workers westward to the booming economy of California, the growth of new employment concentrations like Silicon Valley all depend on the ability of workers to respond to changes in the labor market. But if one quarter of the home owning families are trapped in their houses by underwater mortgages, then the entire economy will exhibit a kind of friction in the labor market that will interfere with economic growth.

The second problem with underwater mortgages is more long term, but in its way a good deal more serious. A very sizable portion of the American population has been losing work-related pensions and counting on the inflated resale prices of their homes to take the place of the pensions. As the adults in the family approach retirement age, they will find themselves forced to hang onto their jobs longer than they had anticipated. But as we have already seen, the economy really does not need them. Indeed, the economy is unable to absorb the normal population growth that has taken place in the last decade.

Neither of these problems is a consequence of a temporary imbalance in the economy, and neither can be addressed very effectively by the sorts of policies realistically available to the Obama administration [or any other administration, for that matter.] A slow recovery of house prices can alleviate much of the short term problem of the underwater mortgages, but not the longer term retirement problem. And to address the first problem would require a total transformation in this country's conception of the nature of capitalism and the role of the state.

Good luck!


NotHobbes said...

There are tens of thousands in the UK facing problems because of negative equity too. Banks are registering record numbers of repossessions; but hold on! Are these not the banks(RBS, Northern Rock, Halifax etc) that we- the taxpayers- bailed out? The banks that we own controlling interest of?
Forgive me for saying this Professor, but their being allowed to get away with such actions "boils my piss"

Kyle said...

How much of the labor slack is due to either illegal immigration or other "low-skill" immigration. Wouldn't solving that problem, or correcting for those numbers, (or at least mentioning it) drastically change the picture? US birth rates are right about at replacement (2.1) - seems that if we actually assert our authority to control who enters the country, then the employment picture looks a lot rosier.

Robert Paul Wolff said...

If we cut off immigration, we then have large number of low wage jobs that out of work Americans are very loathe to take. There are a great many minimum wage [or below minimum wage] jobs that leave those who take them in poverty. The result, one way or another, is a dramatic lowering of the standard of living for millions of people. I confess that I do not see that as a solution.

NotHobbes said...

"I confess that I do not see that as a solution."

Absolutely! Migrant workers always suffer from horrendous exploitation, be that in the United States, United Kingdom, United Arab Emirates, in fact anywhere. Minimum wages(or even slightly above minimum-for those with a conscience, of sorts) can scarcely provide much of a living for people who quite often find their employer to be their excessively demanding landlord too.
In the UK, this is especially prevalent in agriculture and I bet my last farthing it`s the same there too.
The relevance of my rant?
Agriculture is one area of production being squeezed beyond bursting point by greedy hypermarket chains and demand for lower prices. The producers quite simply cannot afford to pay "the going rate" for jobs wthout losing susbstantially on their profits. Who wants to lose out on profits?
Far better employ a few "21st century negroes" hmmm?
Cutting off immigration won`t happen, period. The "free market" needs it, it thrives upon it; in fact in the current climate, without it, it would collapse!

Ann said...

I just returned from the national economic association meetings in Atlanta, January 2 - 5, 2010. This analysis is more trenchant than any of the presentations I heard there.... But it also reminds me of a term that is not much mentioned anymore: "technological unemployment." This means that Google can serve milions of people with only software automation, and no workers at all! .... and what is otherwise celebrated as productivity growth. That, along with outsourcing and global production networks, means that more GDP growth is needed to create the same number of jobs....Many otherwise optimistic economists of all persuasions were not projecting rapid growth in employment returning any time soon.

Eggs Maledict said...

...please come to Australia and run a course at Sydney Uni. Ahem. Anyway.

Our unemployment metrics were altered under the previous conservative government such that under-employment has become a critical problem for many people in the country, while we retain an artificially low 'unemployment rate'.

Theoretically employers should be hiring here at the moment, since our economy had a relatively soft landing after the GFC drop, but getting work is no easier now than it was 6, 12, 18 or 24 months ago.

The point of mobility also seems rather important to me, since it does a lot to shoot conservative/libertarian economic claims about the poor deserving their lot in the foot. If people literally cannot change their situation, one feels that blaming them for it is a tad unreasonable.