Republicans Mortgaged the Future

After the American Century

The US housing market continues to falter. When houses are worth less than people paid for them, some owners will conclude that declaring bankruptcy is their best, perhaps their only option. In June, 2008, one out of every 501 homes in the US was foreclosed - a total of 252,000 properties. That was 50% more than June the previous year. If that monthly rate continues for a year, then 3 million homes will have been given up for auction or sale at reduced rates by the repossessing banks. That represents housing for about 10 million people.

December 12 last year I wrote in this space that "Bush Administration policies encouraged housing prices to soar while undermining the strength of the economy as a whole. A correction is unavoidable. One hopes it will not be too severe." In the ensuring 7 months the correction has continued, and now seems to be nearing a crisis. The news today is that many analysts are worried about the financial health of Fannie Mae and Freddie Mac - names which make them sound like two people. But these are billion dollar institutions that back up the mortgage lending of banks. Both are traded on the stock exchange, and in good times they are stable, safe investments. But their stocks have been falling steady for months, and yesterday each dropped by more than 15%. That's one sixth of their value lost in a single day. Government spokesmen are all "walking on eggs" - treading with the utmost caution, trying to put the best face on how the continuing foreclosures are affecting these institutional cornerstones of the economy. On the bright side, the rate of foreclosure in June was lower than the month before, so the worst may have passed. On the dark side, interest rates already are quite low, so there is not much the Federal Reserve can do to stimulate the economy or make home-buying more attractive.

Everyone assumes that the Federal Government will pour additional money into these institutions if they need it. But the US government is already running a large deficit, borrowing money from abroad to pay some of its bills. In 2007 the deficit grew by $162 billion, an impressive figure, but nothing compared to 2008, which may be the worst year of overspending in US history at more than $410 billion. The worst so far was 2004, when Bush spend $413 billion he did not have. Much of that was for the wonderful war in Iraq. It is easy to forget now that this was the war which we would win quickly and that would pay for itself, because all that oil would be sold to pay for redevelopment. Well, this was not what happened, but the oil has certainly increased in value. All oil producers are benefiting, but not US home and car owners.

Probably the economic storm will pass, housing prices will stabilize and prices will climb again. In that case, the dip in the market has been good for people who wanted to get into the market like my niece who just bought her first house. But if the market continues to fall, at some point the dead weight of unpaid mortgages will put tremendous strain on the economy as a whole. How does anyone sell a house, in order to relocate for a new job, for example, if there are several million foreclosed properties on the market? What happens to the older couple who expected to sell their large house to downsize into an apartment, now that the kids have grown up and moved away?

The crisis is hardly over, in other words. The worse it gets, the more Republicans running for re-election will take the blame in November. Because they mortgaged the future.

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Costly Oil: The Return of Stagflation?

After the American Century

Today the European Bank is widely expected to raise interest rates. The mantra of economists remains that inflation must be controlled through higher rates. In "normal times" this seems to be the case. Raising interest rates makes money a bit more expensive, curbing consumer spending, slowly down the economy. The usual metaphor is that the economy is "overheated," like an engine pushed too hard. But "normal times" are those when the cost of raw materials remain reasonably stable, especially the cost of oil, coal, and other fuels.

Back in the 1970s the American Federal Reserve kept raising interest rates, because of inflation. But the remedy did not cure, because the cause of inflation was higher energy prices. What resulted was absurd. The interest rates went up to almost 20% to combat inflation while the economy stagnated. The pundits called this "stagflation" and we may be about to see the same thing happen again.

As of this morning, the price of oil has reached $145 a barrel. In the United States and in Europe consumers have been protesting, to no effect, because they are complaining to their national governments. But in a globalized economy, no prime minister can control the price, except by lowering gasoline taxes. This would stimulate consumption, however, and be bad for the balance of trade in an oil-importing country. Nor will raising interest rates lower the cost of oil, except marginally, by reducing economic activity.

Wise leaders - unlike George W. Bush - might respond to this new situation in the following way.

(1) Tax vehicles not by weight but according to how much oil they use, i.e. very low taxes for the most efficient vehicles and punitive taxes for those that are not.

(2) Halt road-building and invest the same money in public transit.

(3) Permit some rezoning of cities, so that population density can be increased. Deconcentration of American cities, which began in the 1920s and 1930s, has created a sprawling energy-inefficient economy, making it harder for mass transit. Rezoning might be modeled on the fine exampleof the Dutch.

(4) Give tax-incentives to energy conservation of all types, including building insulation, heat-pumps, and better architectural design.

(5) Restructure utility prices so that there is a financial reward to the companies that reduce consumer demand.

(6) Invest in alternative energy R & D and in its installation.

These are not new ideas. They are the ideas which most governments have ignored, in practice, for the last two decades.

The current high prices signal the need for a new energy regime. This is not just another economic storm that can be survived by raising interest rates.

If you want to know a bit more about the history of US energy consumption, see
David E. Nye, Consuming Power: A Social History of American Energies (MIT Press).

Energy Efficiency and Better Transportation

After the American Century

Energy should be a key issue of this presidential campaign. The US has had a failed energy policy under Bush. Consumption of all forms of energy has risen. Imports of oil, in particular, have burdened the economy and made the nation increasingly dependent on uncertain suppliers. Undemocratic regimes control much of the world's oil, notably in Venezuela, Nigeria, Iran, and Saudi Arabia, while one could discuss whether there really is democracy in Russia or Iraq. Americans are pumping billions of dollars into these economies every time they tank up.

The only solution seriously advanced by the Bush Administration has been that of substituting alcohol for some of that gasoline. This has pleased farmers, as they can grow more corn that before and get higher prices for it, too. But the diversion of agricultural production to providing oil substitutes is not a wise choice, for world agricultural prices are rising so fast that millions of people are now on the brink of starvation.

Fortunately, there are other solutions. Unfortunately, Americans have been slow to embrace them. Least glamorous, but most effecive, is conservation. I drive a car that gets about 43 miles to the gallon, double the US average. (I should have bought one that is even more efficient.) If all Americans purchased such automobiles, their vast consumption of oil would drop by 50%. Furthermore, I have chosen to live relatively near to my place of work, so my round trip is less than 10 miles. Few Americans live that close. Better yet, the Danish government has built a comprehensive system of cycle trails, including traffic lights, that makes it safe and convenient to bike to work. It takes me no more than 20 minutes each way, while driving is only 5 to 8 minutes faster. Few places in the US have provided such an infrastructure, so Americans drive even short distances because that is often the only safe alternative when going to buy milk or a newspaper. By my rough estimate, compared to Europeans, Americans drive twice as far using cars that are only half as efficient. In short, if Americans switched to more efficient cars they would import much less oil. By reducing demand, they might also push down the price at the pump.

But buying the right kinds of cars is only the beginning. Let me be blunt. My fellow Americans, you have been squandering billions of dollars driving cars that are larger than you need. You have devoted half the land in your cities to roads, driveways, and parking lots. You have imprisoned yourselves in an inefficient and individualistic transportation system that is now choking the nation almost to death. You once had a comprehensive system of mass transit, in the form of light-rail, that existed in every major city and most towns until c. 1930. You have abandoned that system in most places and almost destroyed the passenger railroad network as well. You should be demanding its reconstruction.

In 2008 it is long past time for a change. It is time to demand from presidential candidates the construction of high-speed railroads, of the sort long used successfully in Japan and France. These trains routinely go 200 miles an hour - or faster. It is 190 miles from Boston to New York, 225 miles from New York to Washington. Each trip would be about an hour on such a train. It could be possible to go from Chicago to Minneapolis in about two hours, or from St. Louis to Chicago even less. Flying should be for distances of at least 500 miles. It is idiotic to drive or to fly shorter distances, because the time and hassle needed to go to the airport, get through all the security arrangements, board, fly, disembark, collect bags and then travel to the city center, is hours longer than the time needed to take a good train for the same distance. Likewise, it is foolish to drive several hundred miles because it is tiring, expensive, and environmentally damaging. On the train (in Europe) you can sleep, relax, read a book, or surf the net.

In 2008 it is time to wake up to the pleasures of not driving and to discover the relief of not standing in lines at airports. Instead of bankrolling autocratic regimes that happen to have oil supplies, instead of pumping out exhaust and causing global warming, instead of spending billions of dollars in Iraq, ostensibly to build democracy, but also to protect access to oil, it is time to rebuild the US into a more efficient and competitive nation that does not need so much oil in the first place.

Taking Stock After the PA Primary

After the American Century

It is time to take stock and get the bigger picture in focus after yesterday's primary. The results are in, and Hillary Clinton has won Pennsylvania by roughly 9.5% over Barack Obama. This was a bit more convincing victory than some polls had predicted, but by no means a surprise. It tells us that voters over who are over 45, women, or working class, cannot easily be won over to Obama's side. Clinton successfully portrayed herself as a local girl, whose father came from Scanton. Its citizens responded by voting for her by a margin of 3 to 1.

This means Hillary will continue to run, and that, in her words, she "won't quit" because "the American people don't quit." For the Democratic Party, however, this is the nightmare scenario, in which the primary campaign does not choose a candidate and the convention risks becoming a free-for-all. Since February 5, the campaign has lost its lofty tone and become increasingly negative. All close observers can see that Clinton is primarily responsible for the change. Today the New York Times, which endorsed her, nevertheless editorialized against her tactics, citing in particular an "advertisement" (if one can call it that) that depicted all the worst crises in twentieth century US history, including the Stock Market Crash of 1929, Pearl Harbor, the Cuban Missile Crisis, the Cold War, 9/11, and even a cameo role for Osama bin Laden. The powerful imagery has nothing to do with the differences between the candidates, but was marshalled so Hillary could once again suggest that she had more experience. (However, McCain will beat "McClinton" on experience, particularly military experience.)

Meanwhile, what is happening outside the bubble of Democratic Party politics? President Bush has fallen even further in the polls. Now just 28% approve of the job he is doing. But Congress is even less popular, with some polls giving it just 20%, although the average of all polls is 22%. The electorate is not happy because the economy is in recession and hundreds of thousands of home buyers teeter on the edge of foreclosure. Because food prices are rising while incomes are stagnant. Because the wars in Iraq and Afghanistan continue. Moreover, many are now making the link between the billions of dollars spent on the war and the weakening economy. Normally, with such dissatisfied voters and such an economy, the Republicans would have no chance in November. But the unresolved race between Obama and Clinton has given them a chance, and McCain is the ideal candidate to make the most of it.

Now step back further, away from the clamor of the election. The dollar has just sunk to a historic low against the Euro. It now costs $1.60 to buy the same Euro that was worth 99 cents on January 1, 2000. This difference will almost certainly get worse, because the US continues to buy more than it sells and because European interest rates are considerably higher than those in the US. America may be in recession, but in much of Europe the problem remains inflation. (Indeed, in Denmark the unemployment rate is less than 2%, foreign workers are streaming in to meet demand, and home loan interest rates are over 5%.) While the downturn in the States will slow growth elsewhere somewhat, the realization is growing that China and India have become large enough to keep the world economy steaming ahead. If the US is only stagnating and not collapsing, the Europeans may have little to worry about. In economics, it's called "decoupling."

The candidates have not talked about this, or what to do about it. While the election preoccupies the US, the nation's economic centrality is fading. The dollar can fall drastically, and the nation can go into recession while the rest of the world as a whole grows at an average annual rate of 3-4% or more. In Pennsylvania, the voters look at their shuttered factories and can sense the problem, but the candidates blame NAFTA. Unfortunately, the reasons for the economic weakening of the US are far more complex and risk becoming more permanent than the next administration. That is why this blog is called After the American Century. The US needs to wake up to the severity of its economic problems.

The Strange ABC Debate

After the American Century

Remarkably, the recent debate between Senators Clinton and Obama focused a good deal on trivial matters. The US economy is slipping into recession, the imbalance of trade with China is now more than $250 billion, the war in Iraq costs millions of dollars every hour, prisoners held without basic human rights continue to rot on Guantanamo, and the dollar has fallen to its weakest level in 25 years - the phrase "in the toilet" comes to mind - and in the midst of such real problems, the questions ABC  presented to the candidates were pathetic. 

Back in the sixties, at media events students used to chant, "The whole world is watching." This is even more true now than it was then, but American journalists seem to be unaware of it. How idiotic ABC looks from outside the US! 

The Bush Economy: End of the "Almighty Dollar"?

After the American Century

The US mortgage crisis and the falling prices for houses have been making headlines for months. The stock market is also jittery because consumer spending has begun to fall, as homeowners feel the equity shrink. In a few cities, such as Cleveland, a glut of unsold homes on the market has created a crisis. Housing values are in free fall. Even though most people are not selling their homes, when the value of a house drops, it has a psychological effect.

Bear-Stearns was part of the rush of speculators who got caught up in the housing bubble, stimulating the market, acquiring sub-prime mortgages, luring people to buy homes they could not afford. And now, Bear-Stearns, on the brink of collapse, has been "saved" for a little while, at any rate. Why did the Bush Administration not try to save the homeowners? Then it might have saved Bear Stearns as a secondary result. Why is a speculative corporation more worth saving than several million home owners? This is the Bush double standard at work.

Of course, if Bear Stearns collapses, other investment houses and even some banks might collapse as well. (It might be the domino effect, which never happened in Vietnam, but maybe this is where the under performing domino effect can make a comeback.)

If a really big organization like Bear Stearns is run badly, society has to pay for it twice - first by suffering the effects, and second by bailing out the people who inflicted the suffering. Instead, Bush should take a truly conservative line: corporations that are run badly should not expect a government handout. Their overpaid executives, many of whom make more money in one year the most working people make in their entire lives, should not helped. Rather, the victims of such corporations should be protected from unscrupulous lenders.

My father was a lifelong Republican, of the old school. He had actually read Adam Smith. He was an engineer and an educator who ended his career as a college dean. He also was a investor. But his fellow Republicans wandered far off the path of hard work, stewardship, and honesty, and he was robbed in the last years of his retirement by Enron. That corporation's brazen lies, arrogance, and manipulations knew no bounds, and the executives of that corporation were campaign contributors to George W. Bush and Dick Cheney.

A few of Enron's executives have been sent to prison, but the Bush Administration did not punish many, and the punishments were mild compared to the economic destruction they caused. The executives cooked their books and issued misleading profit statements, when they were really losing money. Near the end, they quietly began selling their own stock holdings, since they knew that the company was close to worthless. But they would not let their employees sell their stock, and many lost everything. Enron's leaders milked the company literally to death, as they robbed investors and abandoned their employees, who lost their jobs and their pensions.

That is how the Bush League Economy works. It started by giving huge tax cuts to the wealthy. It continued by letting many of the white-collar criminals from ENRON get away. In Iraq, it was time to give away billion dollar contracts (with no competitive bidding) to Bechtel executives and other old friends. And now it is time to bail out Bear Stearns. Save the capitalists, and the American public be damned? Actually it is worse than that.

The Bush economy apparently will end with a debacle much bigger than the collapse of Enron. Does this prove that the Republicans cannot safeguard the economy for the well-being of all Americans? No, it is much worse than that. The Republicans have failed to safeguard the value of the dollar itself, which is plunging to new lows. Things will continue to get worse before they can have any hope of getting better, because the Bear Stearns bailout requires the US Federal Reserve to print more money, making the dollar even less valuable. Ominously, the oil markets are beginning to operate in other currencies, and one wonders if the dollar will ever again be "almighty". If things get much worse, this blog might have to change its title to "After the American Economy."