Curious Capitalist

Foroohar: Housing Will Not Save the Economy

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When it comes to the U.S. economic recovery, the conventional wisdom is that it’s all about housing. That’s where the majority of Americans keep the majority of their wealth. It’s 15% of the economy and has been driving what upswing we’ve seen so far — investment in residential housing has been expanding by over 10% a year, and contributing around a half a percentage point to our overall annual GDP growth.

But the housing news has started to turn sour. September sales are down sharply, in part because of a rise in mortgage interest rates. And there’s little doubt that October’s numbers will be bad too, because of the shutdown and the disruption to mortgage applications. Prices are still up, but they tend to lag the other data. It’s quite possible we’ll see a slowdown in those gains too.

Population growth means that the longer-term outlook for housing is still fairly bright (a recent Goldman Sachs report on the topic noted that the U.S. is creating around 1.3 million new households a year, and many of them will want their own picket fences). But as I’ve written before, I think the idea that housing can create a recovery is the tail wagging the dog.

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To create a true recovery, we need income growth. Without it, people don’t have more money to spend, and thus can’t bring down their debt and take on new or bigger mortgages. (The average American’s credit score is still many points below what mortgage-lending banks want to see.)

To create income growth, you need unemployment to come down closer to 6%. (It’s 7.2% now and may go higher over the next few months as the shutdown-related statistics are tabulated.) That’s not happening. And we still don’t really know why.

Of course, the Fed is doing everything it can to keep the housing sector going. There’s talk, for example, that even if we start to see “tapering” on bond purchases, the Fed may stick with its program of buying mortgage-backed assets to bolster the home market. But housing experts don’t necessarily see this as a good thing. Earlier this week, I attended the Economist’s Buttonwood gathering, where Nobel laureate Robert Shiller was among the speakers. When asked about the recovery in housing, he said, “I’d much rather see the government raise taxes and fund infrastructure spending to create a recovery — it would be a lot better than cutting interest rates and possibly creating a housing bubble to stimulate recovery.” Wise words from the man who predicted the last housing crisis.

18 comments
vadertime
vadertime

The reason why unemployment is above 7% and continues to remain this high 5 years into the recovery is due to efficiencies and productivity gains. The Great Recession was not good for the labor market, but it did expose weaknesses in the American labor force. The outdated skills and lack of a technologically sophisticated workforce that had been masked over the past 40 years by the booms, busts and bubbles. The average American actually lost buying power compared to his income 30 years ago. Wealth has continued to concentrate upward into the top 5% of the income strata. Meanwhile, the large middle class has lost ground in both income and job mobility. Millions of workers of working age have left the job force permanently either because they are tired of looking for jobs that no longer exist or simply because they have reached an age where age is a disadvantage in the marketplace and therefore they have chosen to retire. 

Financial instruments and fiscal policy will not fix deep-rooted problems that plague our work force. An entire generation of American workers does not have the marketable skills for a 21st century economy. That is why, even as the employment numbers come down, the type of work people are finding is in the service industry, which typically tends to be low age or minimum wage. One of the things that happened during the Great Recession was that after employers laid off millions of workers, they found ways to still be productive with fewer workers. Once employers discovered these efficiencies, mostly thanks to technology, there was no going back. 

Labor, as a variable cost, is also the biggest overhead cost for any company. For over a century, businesses have been attempting to lower labor costs. During the 1970s and through the 2000's the best way to lower labor costs was to export the labor component overseas. Just look at Apple, Dell and HP. Almost all the components for these manufacturers are made outside the United States. However, this may be changing too for two reasons. The first is that after almost 40 years of exporting labor to Asian countries, there standard of living has increased substantially to the point where it is now becoming more difficult to justify lower labor cost by exporting labor overseas. Secondly, and this the really important piece, is technology and the technological advances in manufacturing. Whereas there were no robotics 40 years ago, they are commonplace in every manufacturing sector today. Computerization and automation has made American manufacturers more efficient and competitive as manufacturing returns to America.

Unfortunately, we have a labor force mired in a 20th century, economic paradigm. Our leaders who set public policy have not prepared the American economy for a workforce of the 21st century. Even our public education sector lags much further behind than other countries in the areas of technology and science. It's great to repeat the mantra of STEM, but where is the policy that will give this idea any teeth. We have already lost a generation, which we may not be able to recover. Let us prepare the next generation a little bit better to meet the challenges of the 21st century.,


AlphaJuliette
AlphaJuliette

 "To create a true recovery, we need income growth. Without it, people don’t have more money to spend, and thus can’t bring down their debt and take on new or bigger mortgages. (The average American’s credit score is still many points below what mortgage-lending banks want to see.)"

Average wages have only increased 5% since 1979.  Yet, businesses keep increasing their prices and squeezing what's left of the Middle Class.

"To create income growth, you need unemployment to come down closer to 6%. (It’s 7.2% now and may go higher over the next few months as the shutdown-related statistics are tabulated.) That’s not happening. And we still don’t really know why."

As noted in another article http://business.time.com/2013/10/23/foroohar-americas-real-economic-crisis-is-flat-wages/ Ms. Foroohar says that businesses are holding onto their investment money because our illustrious Congress continues to operate in the land of dysfunction.  No confidence = no business investment and expansion.

If the people have money they will spend the money.



 

SamuelClemens
SamuelClemens

Oh no. You need to panic about government book keeping entries and not question the failure to tax adequately. Only then when we have destroyed demand and rewarded the "job plunderers" will good times bloom. Only when the incredibly wealthy have even more and the rest even less. Only then. Ask Paul Ryan. Ask any of the neo-Confederates who shut down the government. Ask any Blue Dog with their hand out. Alan Simpson will tell you. Alan Greenspan will tell you. Larry Summers too. Just look at their magnificent track records.

BobJan
BobJan

Manufacturing produces products that all people use. Products wear out and must be replaced. Hiring American workers to produce products at a living wage enables the worker to purchase American goods. And the circle goes on. Producing products in foreign countries makes prices lower but enables certain segments to buy products while the remaining populace struggles to make ends meet. In the end the latter produces an unhealthy society which we've seen for at least the last 15 years if not longer. And the burden on government to subsidize the low wages or unemployed is a huge burden on the taxpaying public. Corporations and business' paying less than a living wage are a drain on all of our society. While the corps and companies have wheelbarrows of cash, they only give it to the politicians who by their reluctance to govern have created an environment that makes the wealthy donate to their campaigns in order to keep their flow moving. As far as the average Joe is concerned government is a pariah who feeds off the wealthy for their own enjoyment leaving the average citizen further and further behind every day. "Our Congress is the most expensive money can buy".

DeweySayenoff
DeweySayenoff

"To create income growth, you need unemployment to come down closer to 6%. That’s not happening. And we still don’t really know why."

The reason is Economics 101: There isn't enough disposable income in circulation among those willing to spend it to drive the necessary increased demand for the goods and services businesses offer across a wide enough spectrum of industries to stimulate new, liveable wage job growth.

Look at where the wealth is: Businesses are fat with cash reserves.  The stock market is soaring (The S&P 500 index hit several consecutive new record highs recently).  There IS money out there, but it's not in the hands of the middle class and working poor.  THOSE are the spenders.

While the wealthy DO spend a great deal of their income, they don't spend a fraction of it compared to the percentage of what the middle class and poor typically spend of theirs.  There are a hell of a lot more middle class and poor than there are wealthy, too.  So a few thousand spending 100 million each don't have the spending punch of a few hundred million spending a couple of thousand each.

Economics 101 says that the only way to generate new jobs is to increase demand.  Supply side voo-doo economics postulates that increased investment (to lower prices by improving productivity and efficiency) and tax breaks for the "job creators" will stimulate spending among those who spend enough in enough places to make a difference to the economy.  The fact is, once business improves production, they fire workers, even if demand has increased because they're more productive.  And study after study has shown that as belt-tightening goes on at businesses because now there are fewer employed people spending as much money as they used to, even when demand picks up, job creation lags by months or years as more work is placed on the employees that weren't fired - all without an increase in their pay.  So while products are cheaper, no one has the cash to buy them.

The businesses have the money, but aren't creating jobs.  Demand then peters off because the businesses have all the money again, it's paid to the investors (eg the wealthy) as dividends (or whatever) and they invest again - and almost none of it goes back into circulation to be spent again.  Anyone newly hired is then fired again.

This is why new job creation today is in low-wage, temporary or part-time employment and why the income of business and the wealthy is at record highs while the income of the middle class and poor continues to shrink.

There is no mystery here.  And there is no mystery about how to fix it: Shift the federal tax burden from those least able to afford it to those most able to afford it.

Let's face it, everyone, paying federal taxes or not, pays taxes one way or another.  Sales taxes are most common, and go to the states.  State income and property taxes go to the state and county (though the property taxes only apply to those who own taxable property, of course).  But the most important part of stimulating the economy isn't how much or to whom in taxes one pays, but how much of their disposable income they spend on non-necessities.  Those who DON'T spend an appreciable percentage of their income are the PROBLEM.

Is it good to save for a rainy day?  Sure.  But big banks don't need deposits from the poor and middle class to operate.  They get investment profits already they can use for investments.  They're not paying anything close to what they earn in interest to customers.  The best bet for savings and loans for most Americans: a local credit union.  That should be SOP for everyone unless they need the more exotic services offered by the big banks.  Smaller fees, easier to get loans, and often better terms.

If one loosens the tax burden on the lower 80% of Americans, that frees up enough disposable income in enough pockets in enough places across the country to stimulate a positive economic outlook (spending drops even if there's money to spend when people think the economy is going to tank again), increased spending and to actually force new job growth.  With more jobs, more people work and pay taxes.  As real income and wealth among the WORKING middle-class and poor grows (It's consistently shrunk from between 16% to 58% since 1980 - and those figures are from 2010.  It's even worse today), the taxes can be adjusted to keep the economy from running away.

In the end, the working middle class and poor get wealthier faster, the wealthy get wealthier slower (they will benefit from a stimulated economy, of course, only more of the income will go toward taxes than before) and money stays circulating as needed to keep a more stable economy.  Of course, with the jellyfish we call Congress, and an extremist right movement that think tax breaks for the poor are somehow "unfair" (or worse, think that a flat tax rate IS fair) no one has the spine to do this.

It only takes the political will to do this.  And in today's world, that ain't gonna happen.  Welcome to the New Economy, folks.  Your grandchildren will live like you do today, only the wealthy will be wealthier and your grand-kid's home will be little more than a cardboard box costing them as much in rent as you pay for your place today.

I just thought someone should point out the obvious about why the unemployment rate isn't getting better.  Maybe analysts and pundits should to back to school and take basic economics from someone NOT indoctrinated in the discredited school of Reaganomics.

Adam_Smith
Adam_Smith

Rana is right. Without income growth what consumers spend on housing must either come out of their other spending or must increase their debt. The Fed wants mortgage rates low because it is hoping that the economy will lift itself by its bootstraps if consumers go more into debt to spend and raise demand which will encourage businesses to expand production and hire more workers who will use their income to pay off their debt. There are many ways for this plan to fail. For example, new consumer demand might be met largely through imports instead of domestic hiring. Another way is that consumers are unwilling, or just plain unable, to cooperate as they are trying hard to pay down the debt they already have.

Robert Shiller is also correct. The best way for government to stimulate a new cycle of sustained growth would be to tax those rentiers benefiting from rising asset prices and spend on actual domestic production, primarily infrastructure. I particularly like the idea of a financial transaction tax as a suitable revenue source.


CarlLegg
CarlLegg

The current run-up in housing has been driven mostly by big investment pools (Goldman, Black, etc.), with massive amounts of cash looking for rental income. Now that the pools are mostly invested, and real estate values have been artificially driven up 30-50% in some markets, interest rates are going up, rental supplies are up, rents are softening, investors will start pulling out, and a reversal in RE values will follow in 2014-2015. Look for 10-15% reversal by 2Q14. 

tom.litton
tom.litton

Isn't that true of every industry?

"To create a true recovery, we need income growth. Without it, people don’t have more money to spend, and thus can’t bring down their debt and take on new or bigger candies."

It isn't that much of a stretch is it?

Besides, won't the recovery in housing lead to rises in income in the construction industry (one of the hardest hit industries)?  Will that not have a similar effect as a rise in any other industry?

StephenSchwartz
StephenSchwartz

'We need to raise taxes in order to recover our economy,' says the author of the article.  That's not what Economist Shiller said, however.  Fail.

DeweySayenoff
DeweySayenoff

@BobJan The focus of any economy should be on the circulation of money.  To facilitate that, as I wrote below, stimulating demand by increasing spending is the only way businesses will create new jobs.

Tax credits and breaks for businesses don't work to create jobs  in any great number and never have.  The profits after upgrading go straight to the pockets of the managers or investor, and as I also wrote, often times, jobs are closed off because the business can do the same (or more) with fewer people.  I'm not opposed to this philosophy in moderation.  But we'll never successfully regulate businesses to adhere to any kind of "don't screw over the economy" social ethic.  It's easier to simply tax them (when needed) or shift the tax money around to the spenders.

No business is going to hire anyone new - ever - if there is no demand for that person to be hired.  Spending stimulates that demand.  While the lag between increased demand and increased hiring is often vast, the karma produced by making workers work herder (usually for no increase in pay) happens when jobs are plentiful and those overworked and underpaid workers - who are the core workers of any business if they were treated that way - jump ship to a business who is disposed to treating them more humanely.  But before that happens, people need to spend money to stimulate the economy.  Since they have no wealth to speak of, they have nothing extra to spend.

Little known datum: From The Mercury News

SETTING THE RECORD STRAIGHT (publ. 9/14/2013, pg. A2)
In a story about U.S. income inequality the Associated Press incorrectly reported that capital gains were counted in figures showing that the richest 1 percent of Americans last year earned more than 19 percent of all household income, the most since 1928, and that the top 10 percent earned a record 48.2 percent. Counting capital gains, the top 1 percent earned 22.5 percent, the most since 2006, and the top 10 percent earned 50.4 percent, the most on records going back roughly a century.
 

That means that 50% of the country's income is going to 90% of the people.  It's even worse as you peel off the top earners.  Half of the people in the U.S. live on less than 5% of the nation's income. So like I said, the working poor and middle class don't earn enough to spend enough to stimulate new job growth.  It's almost all going to the wealthy, who don't spend enough to do the job.  A blog posted at USNews has a relatively unbiased assessment of the problem, which pretty much echoes what I'm saying here.

Businesses aren't entirely to blame.  People do that to get rich.  But we can pass laws controlling capital gains while controlling the economy through proactive tax burden shifting so that the overwhelming majority of money isn't pooling or stagnating like it is now.

DeweySayenoff
DeweySayenoff

@tom.litton In a word: No.

Construction of new housing is not going to generate enough revenue across the economy to stimulate any appreciable rise in disposable income nation-wide.  That's what's needed to actually stimulate the economy.  Housing is a way to DISPOSE of wealth.  Not to spend it.  And the markets supporting the construction industry tend to be limited, which also interferes with how income is distributed across the economy.

Regionally, it may have an effect in high-growth areas.  But for the most part, it's NOT middle-class America BUYING the homes today.  It's the wealthy who have already recovered their losses buying investment property to flip again.  The problem with THAT strategy is that the only other people who are BUYING homes are other wealthy people, since the average American can't measure up to the credit scores needed for a mortgage.  So flipping isn't going to happen much, if at all.  All the rise in home prices is doing is making it harder to sell a home since the flip margins are getting smaller as demand tapers off.

Because these homes are often being rented until they are flipped (often at higher rent than other housing), more the disposable income of middle class America is going to the wealthy.  Typically, a wealthy family doesn't spend as much, by percentage, of their income as a middle class family does.  They invest it in things like real estate and stocks - and neither does anything to actually stimulate the economy. (If investing stimulated the economy, based on the cash reserves of big business today, we'd have 3% unemployment.)

Demand for new housing drives the housing industry, and there's inventory not on the market that will go there sooner or later.  Some 3 million single-family homes sit unoccupied today.  They've been kept off the market to encourage new construction.  Once those hit the market, the new construction will drop to next to nothing again and all the income from that will dry up again.

So, no, the housing industry will not stimulate any recovery.  It will likely lead to more recession, instead.

duduong
duduong

@StephenSchwartz 

It does not sound out of character from Shiller, who, rare among American economists, does not subscribe to free-market fundamentalism.

j45ashton
j45ashton

@StephenSchwartz Seems to be a direct quote, not an opinion by the reporter.  Calling her a liar?  Prove it.

tom.litton
tom.litton

@DeweySayenoff @tom.litton No individual industry is going to generate enough revenue across the economy to stimulate any appreciable rise in disposable income nation-wide.  That is my point.  The housing industry (and by extension the construction industry) had been hit hardest and therefore has the furthest to go before going back to full employment.   So any upswing in it is going to have a higher ceiling (and therefore more potential to help the economy) than say software development, which wasn't hit that hard.

Even if it's just wealthy people flipping houses, that is still extra money in the hands of real estate agents selling the house and construction workers fixing it up.  The unemployment for the construction industry was over 16% at the start of the year and is 8.5% in Sept.   That can't be bad for the economy or the middle class.  It certainly isn't awful for the construction workers that were unemployed last year and have steady work now.