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.