Which is worse, getting trapped in an elevator for hours or being marooned on a deserted island? Most of us, thankfully, will never have to choose – but most might decide that a one-time misfortune is more bearable than prolonged misery.
Historians who will ultimately critique the economic policies of the Obama administration might come to the same conclusion.
In many sectors – including housing, autos and state and local governments — intermittent attempts to delay an inevitable downdraft have created a stutter-step recovery, with the economy struggling to gain traction.
The recent dip in leading indicators, which fell in April after rising for nine months, raised anew concerns about the durability of the upturn. A soft retail sales report last month, a wobble in car sales and a surprising slip in the Philadelphia Federal Reserve Bank index of economic activity fed the uncertainty. These soundings reflect inevitable month-to-month variability in many economic indicators, but also speak to the fragility of the recovery.
Normally, economies hit bottom and then rebound with greater assurance than we have seen in this cycle. In 1973, 1980 and 1981, for instance, job growth resumed almost immediately; in this recession it took 19 months before we stopped losing jobs. Also, in this most recent downturn, it took 12 quarters from the onset of the downturn before output recovered to pre-recession levels. That compares with between 4 and 5 quarters for what is described as a “median” recession by the Minneapolis Fed.
This recession was fierce, and invited policies aimed at softening the blow – policies which may be responsible for dampening the upturn. Nowhere is this more of an issue than in housing, where a $29 billion one-time house buyer tax credit and numerous mortgage modification programs have done little to stem the slide in home prices; the most recent S&P/Case-Shiller reading found prices continuing to drop at a 2% to 3% annual rate.
The $8,000 tax credit is estimated by the National Association of Realtors to have generated one million new home sales during the recession. Unhappily, it appears that many of those sales were borrowed from future demand. Existing home sales dropped 0.8% in April from May, and fell nearly 13% from the year-earlier level, which had been buoyed by the tax credit.
Ron Utt, a fellow at the Heritage Foundation, says efforts by the Obama administration to encourage house buying and to keep people in their homes have “left us with a lingering problem,” virtually drowning in foreclosures and defaults. He says “I’m a big fan of taking the hit while trying to soften the blow for those in the most tragic circumstances.”
He notes that programs allowing people behind on their mortgages to stay in their houses for extended periods have led many borrowers to employ tactics known as “strategic defaults” – that is, they pay their credit card, cable TV and cell phone bills, while not putting a penny towards their mortgage. These folks know they are unlikely to be evicted. Mr. Utt points out that in some states people can stay on practically indefinitely.
The problem is that such behaviour encourages others to do the same. Instead of selling and moving on, people hold on in hopes the government will ride to their rescue. This uncertainty acts as a speed bump in the process of clearing the overhang of underwater properties. The so-called “shadow inventory of housing” is considered by some likely to put a lid on any price recovery – possibly for several years to come. In fairness, it is not only government interventions which have circumvented what might have been a more normal housing cycle. The flood of foreclosures overwhelmed the banks, leading to outrage over “robosigning” and a hold-up in the processing of mortgages – a delay that further puts off any real hope of recovery.
It is not only housing that has seen cyclical interference from the White House. Though auto sales are up, it’s possible the snap-back would have been even more vigorous had taxpayers not shelled out billions in Cash for Clunkers. The Council on Economic Advisors estimated that the trade-in program yielded some 440,000 in additional car sales during the second and third quarter of 2009, providing GDP growth of 0.1% and 0.4% annualized. Their report temporized that “the boost to the level of GDP is temporary, and is followed by a drop that marginally reverses the increase reflecting the slightly lower lever of sales in the “payback” period.
Edmunds.com, an online source for auto research, had a darker view, suggesting that the program yielded only 125,000 incremental sales, for which taxpayers paid $24,000 per vehicle.
More broadly, the federal government’s efforts to bolster state and local spending – a target of much of the $800 billion stimulus program — simply pushed budget cuts forward. Unfortunately, the day of reckoning is upon us; the centre for Budget and Policy estimates that states face a combined budget gap of $125 billion in the fiscal year ahead.
Already the decline in local government employment is muffling the rise in private hiring. In April, the unemployment rate rose to 9% from 8.8%; the private sector added an encouraging 268,000 workers, partly offset by 24,000 jobs lost in the public sector. So far this year some 60,000 government employees have been laid off, and the states have barely begun to push through mandated cutbacks.
What if all these programs had not been enacted? Would a much-worse outcome in 2009 have prepared the way for a more robust recovery today? These efforts to soften the blow may have rescued the economy from the free-fall initiated by the fiscal collapse in late 2008. However, the impact on the mood of the nation, and the resurgence of growth, is not clear-cut.
One clue may be found in the Conference Board Consumer Confidence series. According to the National Bureau of Economic Research, the economy hit bottom in June 2009. Though consumers’ confidence about the economy has picked up since then, the gains have been intermittent. In eight of the 22 monthly readings since that time, confidence has dropped; at nine points consumers were less upbeat about the current situation and in seven months they grew less positive about the future. After the 1982 recession, to pick one, confidence gained much more steadily.
The rescue efforts of the White House undoubtedly provided some relief for hard-hit sectors of the economy during the recent recession. The issue is whether they stole fire from the turnaround. Today’s uncertain progress is torturous, akin to being marooned and alone. I’d rather be stuck in an elevator.