Rdan here…Rebecca just emerged from the bottom of the Grand Canyon on her way to a massage somewhere in the Southwest. Hence for some reason she is not publishing much at the moment.:) This one is late to AB, but still intersting.
by Rebecca Wilder
Consumer confidence: that extremely coincident, but often cited as leading consumer spending, indicator of really just jobs growth during recovery has struck again, down near four points to 50.4 in July.
During the recovery phase of the business cycle, confidence is highly correlated with jobs growth. The chart below illustrates the recession and recovery path of consumer confidence since 1973. The 2007-2009 recovery in confidence – I mark the technical end of the recession at June 2009 but the exact month is not important- is tracking earlier “jobless recoveries”: 1990-1991 and 2001.
The problem is, we can’t afford (economically, that is) a jobless recovery this time around!
Consumers are not feeling very good these days, with good reason! I like the way Dean Baker tersely puts it:
It is incredible that economists and economic reporters still focus on consumer confidence. Consumers are actually spending at a relatively high rate. (The savings rate is well below historic levels.) The problem is that they lost $8 trillion in housing wealth. The housing wealth effect on consumption is something that economists have known about for more than 60 years. It’s too bad that they seem to have forgotten and so have the reporters who cover this issue.
The problem is not confidence. It is a lack of money. That is why consumers are not spending more and will not anytime soon regardless of how happy they are.
Rebecca: In my view, it’s (more precisely) the lack of money during the recovery of a balance sheet recession (Richard Koo of Nomura developed this idea). In order to lower household leverage (i.e., pay down debt burden) the easy way, a significant increase in nominal income is needed, wage growth. And a significant increase in wage growth only occurs when the demand for labor is rising…precipitously. Only then will workers have enough pricing power (in aggregate) to demand sufficient wage gains in order to deleverage the safe way (not through default).
Recently, economists have been testing the theory that structural unemployment is rising (Economist.com post here). In my view, focusing on structural unemployment is just a policy excuse. It gives policymakers a reason to mitigate the large(r) policy impetus that is needed. Bad idea.
Richard Koo argues that structural unemployment is not rising:
When the deficit hawks manage to remove the fiscal stimulus while the private sector is still deleveraging, the economy collapses and re-enters the deflationary spiral. That weakness, in turn, prompts another fiscal stimulus, only to see it removed again by the deficit hawks once the economy stabilises. This unfortunate cycle can go on for years if the experience of post-1990 Japan is any guide. The net result is that the economy remains in the doldrums for years, and many unemployed workers will never find jobs in what appears to be structural unemployment even though there is nothing structural about their predicament. Japan took 15 years to come out of its balance sheet recession because of this unfortunate cycle where the necessary medicine was applied only intermittently.
Rebecca: Although this may appear to be a normal jobless recovery, recoveries from which consumers have prospered in the past through debt accumulation, it’s not. Jobs growth is key to the deleveraging cycle; and with forecasts of the unemployment rate in the 8%-10% range through 2012, still 7% in 2013, the prospect of sufficient private-sector income generation looks very gloomy.
The problem is a LOT of that household leverage is in underwater mortgages on both coasts and other bubble areas (NV, AR, etc). 10% wage growth will not help you much if you house is $300,000 underwater. You can’t get there from here. Greenspan even said as much last weekend. And we have seen both here at AB and other places that there is still 20-30% more drop in housing prices to get back to historical trends.
Somebody is going to eat the losses. Strategic Default and foreclosure is the way for people to delverage that is good for them. They are carrying to much dead weight debt and your not going to get enough wage growth to cover that debt – even if they have a job.
Thus people stop spending. Or they go to the close by Florida beaches vs. the Spanish coast. And everyone is worried about their jobs. Heck the DoD just announced some massive layoffs of contractors at the Pentagon and Hampton Roads (becuase they are easy to fire…) so even the military is not safe.
Then add all the College debt that has been added, not dischargable in bankruptcy, and even young people are in trouble and strapped for cash.
The problem is not lack of money, ITS TOO MUCH DEBT.
Islam will change
Since Rebecca probably won’t be around, I thought I would respond. It was my impression she suggested three very broad scenarios of how the process could happen, and that debt was central to the problem, and that the severity of the de-leveraging was the problem to be addressed. Wage gwoth won’t solve a problem but helps to mitigate the problem, but then this is also tied to our trade policies and who gets to keep the money that is flowing.
The most benign deleveraging included wage increases, but such increases appear to have slowed to minus territory. Also, lots of deficit hawk people seem to exclude their own particular kind from austerity measures….seeking alpha is rampant with these notions.
I agree mostly with Rebecca and your comments. I just object to the notion that wage growthis going to get us there. Yes it will help mitigate the problem, but getting a 10% wage increase from $55K to $60K is not going to solve the problem of being $300,000 underwater house or $150,000 in student debt.
Debt is the central problem, but its so massive that wage growth (which BTW, is not on the horizen) won’t solve it. We need houseing to get back to the historical trend lines. Getting back there will be very painful since someone needs to eat the loss.
The US is swimming in debt. And I don’t see a good way to pay it off. I think we will eventually inflate our way out of this mess. With all the pain that intails. Even a small chance we will loose our position as the worlds reserve currency (luckily there is no one else to step up to the plate, like we were in 1942 when we took the lead from the Brits).
What would also help would be to allow the discharge of education debt in bankruptcy (change the law). Not only would it get people out of debt, it would put some reality into loans for education.
Islam will chnage
“Somebody is going to eat the losses. Strategic Default and foreclosure is the way for people to delverage that is good for them.”
Well, I wish there was someone else to eat my losses. Unfortunately there isn’t. Having retired and moved to NV in 2006, I paid cash for my house which is now worth about 40% of what I paid for it. At the same time my 401K took a shellacking. I’m 62 and couldn’t get another job in my former profession even if I wanted one. So my “golden years” are going to permanently scaled back. Oh, and still putting the youngest  through last year of college, while his older brother has moved back into our downsized retirement home. Posting this not so much for sympathy as to point out that my situation is far from unique. My whole generation is in nearly the same boat.
Yes actually…drb48. More than many care to admit or go find out numbers. This age range has been hard hit in many parts of the US…
The education debt problem dserves its own post. I agree it is profound.
buffpilot: “The problem is not lack of money, ITS TOO MUCH DEBT.”
As we have things set up, except for a (relatively) small amount of currency, the amount of money equals the amount of debt. That is true of both private and gov’t debt. So we can rephrase your statement as, “The problem is not lack of money, it’s too much money.” Do you believe that? I don’t, and I don’t think that you do, either. 🙂
I think that we agree that private debt is a big problem. That debt represents money, but the debtors don’t have that money, other people do. If the debt is paid down, we (the whole economy) have less money. (That is true of both private and gov’t debt.) If people discharge their debt by bankruptcy, that also reduces the money available. And it has many bad social effects, as well. Do we really want a lot of bankruptcies?
One way of looking at it is as a lack of money **in circulation**. Right now, banks are not lending, and corporations are hoarding cash. Those are bottlenecks.
How do we get money circulating? Get it into the hands of people who will spend it. State and local gov’ts will spend it. Poor people will spend it. Unemployed people will spend it. People who have been unemployed will spend it. And right now, with banks and business not lending and spending, and state and local gov’ts unable to spend, it is up to the Federal gov’t to supply the money for circulation. (We cannot rely on foreigners to spend for us right now, for a number of reasons.)
I do not disagree with the notion of too much debt or that wage growth would not make the deleveraging process less painful, but I guess I am not convinced that we do not have structural unemployment problems. The extent of the leveraging necessary to keep the economy growing at a time when real wage growth for most workers was nonexistent tells me that we have structural unemployment problems.
I was talking about personel debt. Family debts. NOT the Feds. Sorry if I wasn’t clear.
And your rephrase of my statement is WRONG. The US problem right now is too much debt. A lot of which cannot / will not ever get paid off.
People have too much debt. They need to discharge it. Rebecca’s idea that raising wages will help but will not solve the problem is correct. To service the debt people are not spending. And when you so far in debt, there is no hope to get out. People servicing underwater homes are not going to get better economically, they will do far better to walk away and let foreclosure and/or bankruptcy discharge their debt and get a fresh start. If your up to your eyeballs in debt, with no assets, the LAST thing you do is increase your debt and continue spending. That’s stupidity on steroids.
Banks are not lending becuase 1) people are not borrowing, 2) Credit was way to liberal for the last decade (leading to the housing bubble) and banks are actually looking to see if people can, you know, pay them back before lending and 3) the banks are way to far in debt, holding tons of bad paper, they need the money to meet their Fed reserve requirements. Corporation are hoarding cash becuase that”s the safest bet in this uncertain regulatory environment.
And adding MORE Fed debt to the picture of already huge Fed deficits as far as the eye can see, seems to me just continueing to dig the hole your in.
Islam will change
Agreed. I’m in the first of my kids college education search and the costs, even in state, are unf***beleiveable. Stanford, one of my kid’s initial choices, cost $50K year. That’s $200K to graduate (even with AP course credits he couldn’t cut that down much). Same with Michigan (and its cold). I won’t pay to send him to the ivies, kudos to Mat Yglesious for warning me about them!, and I’m not sure how much scholorship money he is eligible for. Loans are easy, but you have to pay them back and I don’t like the idea of my kid leaving college with a big chunk of debt – even with my support.
So we are getting down to Oklahoma, UT and A&M, and maybe Ohio State. He wants to go to a big scholl with a good pre-med program. Any advice from you ABers out there?
$200K will get you a good starter home on a third acre, two cars, and cable for a year!
Islam will change
I don’t get the argument here. Why are “consumer confidence” and “not having enough money” mutually incompatible? It seems a truism that having enough money is a necessary but insufficient condition to make the decision to spend. There also has to be confidence that the money spent can easily be replaced — i.e., earned in a job one is not likely to lose. That’s why gimmicks that temporarily give people more money, or even tax breaks that add $20 bucks to a weekly paycheck, don’t have much effect. A long-term public commitment to hire millions to update the national infrastructure, on the other hand, not only will give people more money, but will give them the confidence to part with it a little more freely.
I would also note that trying to jumpstart consumer confidence by immediate reduction of the deficit seems like the most laughable possible policy idea.
A student can renege on loans id they are not making a wage that is “sufficent” to pay back the loan. One has to apply to Direct Loans and they will determne such. They may end up paying a much smaller amount as determined by Direct Loans. They can also not pay for 3 years, interest free. After that the interest accumulates until 25 years passes and then th e loan is canceled and becomes income for the student. This is then negotiated with the IRS which is pretty easy “right now.”
I would strongly urge anyone to consolidate uner “Direct Loans” as they are far easier to deal with then banks.
Maybe structural unemployment as an excuse is not so lame (dependent upon your [and economist’s] meaning of it). Since 2001 the percentage of people in the civilian labor force has been dropping. Was this cyclical or structural? I would call it a structural change in how people are employed.
Spencer aptly shows the change in productivity gains associated with Labor as opposed to Capital. Capital has been seeing an ever increasing share of the gains. Volcker broke the back of inflation by neutering labor. Labor has never regained its posture since then and we have been on a downward spiral at emphsized by the cassandra “Elizabeth Warren.” Wages for 90+percent of the population has either been stagnant or decreasing since 2001 and here again what took one salary in the seventies now takes two to acquire that middle class status.
It is just now the skewing the productivity gains towards labor, it is job creation and the changing of the paradigm where capital appreciation wthout labor input is taxed heavily such as CDS and investment in Labor investment is given a greater priority by the government in law and tax treatment.
buffpilot: “I was talking about personel debt. Family debts. NOT the Feds. Sorry if I wasn’t clear.”
I guess that I was not clear. You and I agree that we have too much family debt, consumer debt. 🙂
buffpilot: “People have too much debt. They need to discharge it.”
buffpilot: “Rebecca’s idea that raising wages will help but will not solve the problem is correct.”
buffpilot: “And adding MORE Fed debt to the picture of already huge Fed deficits as far as the eye can see, seems to me just continueing to dig the hole your in.”
But now you are talking about US gov’t debt. That is a different kind of critter.
The way we have set things up now, almost all of our money is debt. That is, it is owed to somebody. If all the debt were paid off, all that money would disappear, and we would be virtually penniless. (Actually, we would each have on average almost $3,000.) The economy would seize up, wouldn’t it?
Likewise, almost all of our debt is money. That is, it is money in somebody’s pocket or bank account, money that could be used to pay off the debt. (That is true for bank debt and gov’t debt.)
Now, for households to reduce their debt, where is that money coming from? Bank money represents somebody else’s debt, so that doesn’t really help, does it? But gov’t money that represents the gov’t’s debt is a different matter.
Personal debt is a burden. It must eventually be paid off, even if it is rolled over. But gov’t debt can be rolled over indefinitely, since we have a fiat currency. The gov’t is the source of gov’t money. It does not really depend on the bond market; instead, the bond market depends on it.
Even if you think that gov’t debt is a burden, you have to admit that unless the US becomes a major net exporter all of a sudden, the source of money to pay down private debt has to come from the gov’t deficit. Our battle cry must be, “Show us the money! Bigger deficits! Now!”
urban legend: “A long-term public commitment to hire millions to update the national infrastructure, on the other hand, not only will give people more money, but will give them the confidence to part with it a little more freely.”
A real jobs bill! 🙂
Seems we didn’t quite get our point across on personel debt. Seems we agree.
I desagree about Fed debt. You make the assumptions that I don’t feel will hold. 1) You assume the US will have the worlds reserve currency reguardless of how much we print. I disagree. 2) You assume inflation is not a threat, I lived through the Volcker days. 20% inflation really, really sucks. Right now I’m pretty sure our flooding the market with cash is just keeping deflation at bay – even though we need it in the housing sector. But inflation can return. 3) As Bruce is pointing out above, some level of government debt is probably good. How much? Not sure (I haven’t read that thread), but I know it less that what Obama is proposing. We can’t print our way out of this whole. See Weimer Germany. At some point we have to live fairly close to our means.
Lastly your ideas about money and debt are way off the reservation. I’ll be honest and say I’m not sure where to start on that. But I stand by my statement – when your already in a huge whole the first thing you need to do is stop digging. We cannot save ourselves with the printing press.
Islam will change