And Down Will Come The Economy, Tax Cuts & All
It’s one thing to talk abstractly about a house of cards; its another thing to be living with an economy built upon that very premise. Throughout the Bush administration, we have been sold on the benefits of tax cuts for the wealthy; with the promise of insuring a healthy economy. All the while, I believe this paper tiger economy was actually built and sustained by the implementation of artificially low interest rates and shoddy mortgage lending practices.
This shortsighted effort was designed to limit the depth of an economic downturn and to spur equity spending on the part of middle income Americans in the absence of the fundamentals necessary to create real economic mojo. At the same time, the tax cut strategy served to bolster the GOP’s alliance with wealthy benefactors. Unfortunately, the winds of a weak financial environment have returned to find an economy which is all the more vulnerable and far more suspect.
At the moment, we are witnessing a conflation of events that at best signals a tumultuous period of tepid GDP growth. A candid reality check likely suggests we are on the leading edge of a recession that may persist well into 2009. Let’s look at the indicators.
Home prices in the U.S. fell in the third quarter by the most in at least two decades as the subprime lending crisis caused sales to slump.
Home values retreated 4.5 percent in the three months through September from the same period a year before, the most since records began in 1988, according to a report today by S&P/Case-Shiller. It followed a 3.3 percent drop in the second quarter.
Prices will probably keep sliding as foreclosures force more properties on to the market and sales weaken as mortgages become harder to get. The slump threatens to slow consumer spending as fewer homeowners will be able to afford vacations, new autos or home improvement projects.
Lehman Brothers said the decline in home prices is the start of an extended decline in the market.
“We look for home prices to fall well into 2009 as excess inventory is slowly cleared and foreclosed homes return to the market at a discounted price,” the company said in commentary published Tuesday.
This will translate to a 15 percent decline in national home prices from peak to trough, Lehman Brothers said.
The property value of U.S. homes will fall by $1.2 trillion, and “at least” 1.4 million homeowners will lose their properties to foreclosure in 2008, according to a study released Tuesday by the U.S. Conference of Mayors and the Council for the New American City.
Global Insight predicted that the economy would grow at a 1.9% rate in 2008, “a full percentage point lower than would have been the case without the mortgage crisis.” It also said U.S. gross domestic product growth would be $166 billion lower next year because of mortgage market problems, and that consumer spending would fall to 2% growth.
If you’ve followed the reports on housing and the subprime lending crisis, the news has gotten progressively worse each time new data is released. Frankly, I see no reason to conclude we won’t see more of the same. Given the fact that so much of our current economic growth has been the result of consumers spending the equity they’ve accumulated from the recent housing bubble, the impact of lower housing prices, foreclosures facilitated by adjustable rate mortgages, generally higher interest rates, and stricter mortgage terms has not yet been fully calculated or understood.
Add in the projections that housing prices will fall at least fifteen percent before the downturn has reached bottom and one begins to see the magnitude of the pending economic slide. While difficult to calculate the amount of spending which results from homeowner’s borrowing against expanding home values, it isn’t difficult to imagine the significance of declining home values…and that ignores the impact of existing inflationary pressures which will no doubt cut into any discretionary spending that remains feasible.
Let’s look more closely at the reports which measure consumer confidence.
With Christmas only a month away, American consumers became more pessimistic about the economy in November, sending a widely watched barometer of confidence to the lowest level in two years amid worries about rising fuel costs and a housing market slump.
The New York-based Conference Board said Tuesday that its Consumer Confidence Index dropped to 87.3, marking a four-month slide and continuing down almost 8 points from the revised 95.2 in October.
It was the lowest reading since 85.2 in October 2005 when gas and oil prices soared after hurricanes flooded New Orleans and shut down a large chunk of the nation’s oil refineries. It also marked the sharpest drop since September 2005 when the index plummeted 18 points from the previous month.
The big worry is that shoppers will take their time returning to the stores this holiday season amid worries that higher gas, an escalating credit crisis and a slumping housing market could push the economy into a recession.
With consumer spending accounting for two-thirds of U.S. economic activity, any further dropoff of consumer spending increases the risks of a recession.
Pretty simple stuff…if you have less money to spend and lack the equity to borrow it, then the only answer is to spend less money. Once that reality sets in, consumer confidence is apt to fall even further in what becomes nothing short of a cause and effect downward spiral. Once this happens, job losses can’t be far behind as retailers and manufacturers are forced to lay off employees in the absence of stable or expanding sales.
The Fed also forecast that the unemployment rate would rise to between 4.8 percent and 4.9 percent next year, compared to the previously estimated 4.75 percent for 2008.
In the past two months, U.S. unemployment rate stood at 4.7 percent, a level still considered low by historical standards. Before September, the jobless rate had remained in a range of 4.4 percent to 4.6 percent since the same month of 2006.
With economic growth slowing, the unemployment rate would increase “modestly” next year, stabilize in 2009 and then decline slightly in 2010, the Fed said.
Yes, this anticipated increase in unemployment is minimal…if only that were the end of the story. Projecting unemployment is not only difficult; it is dependent on all of the factors mentioned above. Should the economy follow a worse case scenario, then one would expect unemployment rates to exceed these preliminary projections. Again, all of these measurements feed off of the others and once recessionary momentum is unleashed, predicting the bottom becomes a crap shoot. In an economic downturn, bad news relating to each individual item exerts a downward ratchet effect upon all of the others.
Further, the one item that must improve in order to help halt the effects of a recession…consumer confidence…is often the most difficult to impact and the slowest to respond to signs of improvement. As such, the fix may well be in place long before one begins to see a shift in momentum.
I would equate the economic process to what one might experience if one were in a line of individuals holding hands and spinning in a circle…those anchored in place at the front of the line start moving first and by the time the person at the end of the line starts moving, the momentum is in full swing and apt to send that person flying at a pace they cannot control or maintain. The process (momentum) continues until the links that keep the line functional and turning begin to break (holding hands in this example). The same is true of the economy.
A view of the economy isn’t complete without looking at the stock market…and the news isn’t any better.
Stocks took it on the chin again late in Monday’s session, as investors dumped shares across a broad range of companies.
The Dow Jones industrial average plummeted 237.44 points, or 1.8 percent, to 12,743.44.
Based on daily closing prices, the Dow and the Standard & Poor’s 500 index reached 10 percent declines from their Oct. 9 highs, a move known on Wall Street as a “correction.” It was the first such correction since the late winter of 2003.
The repetition of headline-grabbing market declines so far this month appears to be having self-fulfilling impact on investor sentiment.
Would-be stock market investors these days are like people prone to panic attacks, said Jack Tilton, technical analyst at Channel Trend. “When in the middle of the night with the wind howling do you decide to open that closet door?” he said.
Of all the economic indicators, the stock market is likely the least predictive of recessions. While corrections happen far more often than recessions, the recent weakness doesn’t help consumer confidence. In essence, if the economy is teetering on the edge, a stock market correction may simply provide the final psychological nudge.
I want to close by returning to the politics of economics. The GOP, under the guidance of George Bush, has argued that the tax cuts enacted shortly after the President took office served to move the economy out of recession. If one accepts that premise, then a new recession would seem to suggest two things. One, the tax cuts may not have been responsible for bringing us out of the prior recession…especially since they don’t appear to be capable of keeping us out of a new recession. Two, if we are entering another recession, then perhaps the tax cuts were little more than a political calculation.
If, as I’ve argued, the economy was actually propped up through other means (low interest rates and lenient mortgage terms), then one would hope the GOP would now focus on measures that would actually benefit and buttress the economy. Unfortunately, just today we find Larry Kudlow arguing that the GOP should not only embrace the past tax cuts; they should put forth the argument that they are once again essential to jump start our sluggish economy.
The Wall Street Journal’s Gerald Seib has an excellent column this morning on the threat of an economic downturn and the relevance of tax cuts to reignite the economy. He notes that Republicans have an important opportunity to push tax cuts as a spur to the slumping economy, whereas Democrats are still stuck with a tired tax-hike message and an obsessive desire to undo the Bush tax cuts.
Seib does not go into the incentive effects of lower marginal tax rates versus the one-shot demand-side effects of temporary tax cuts.
Former Clinton Treasury Secretary Lawrence Summers is now predicting a 2008 recession. But he’s calling for temporary tax cuts for low and middle-class families. Unfortunately, history clearly shows this approach will not work.
Democrats also will try and make the case that taxes should be cut for the so-called middle class, and raised on upper-income earners. This is futile. It’s also bad politics. Taxing successful earners is a tax on capital and investment, which has recently become scarce during the housing crisis.
Republicans should take care to propose lower tax rates on middle-income earners, as well as successful investors. The real supply-side “bang for the buck” comes at the top-end, but across-the-board rate reductions do have positive economic and political benefits. Collapsing the middle-income brackets — 15 percent, 25 percent, and 28 percent — would make a lot of sense.
Given the economic and credit-market concerns sweeping down Wall Street and Main Street these days, it’s time to talk tax cuts. But the right kind of tax-rate reduction must be part of the new-tax-cut riff.
Now you have to admire Kudlow’s moxie…but little else. Try as I might, his argument seems to be akin to suggesting we embrace more of the same despite lacking the evidence needed to substantiate doing so. Truth be told, when the average American looks back on the Bush years…and compares where he or she now stands financially…there should be little doubt that the bubble has burst and the bank account is bleak.
I suspect most Americans will be hard pressed to get on board with a “new-tax-cut riff” when they come to the realization that its being brazenly advanced by those individuals who were fortunate enough to actually benefit measurably from the last round of the Bush administration’s “conning-me-economy”.
As I recall, the average family received approximately $650 in tax savings. The relevant question is whether one believes the resulting economy continued to enrich the average American or merely those wealthy individuals who received the lion’s share of the savings.
Think about it…don’t those individuals promoting another round of “trickle-down” tax cuts have to be better off now than they were seven years ago? If they are, then why should the average American (who isn’t better off) be in favor of rewarding the very people who told us the last tax cuts were an insurance policy against recession as well as a guarantee of a robust economy? How many tax cuts followed by recession do we have to have before we say never again?
November 27th, 2007 at 7:32 pm
“A candid reality check likely suggests we are on the leading edge of a recession that may persist well into 2009. ”
You guys are a bunch of liberal bubble heads just copying and twisting what you read in the media to equal the word recession.
It’s called a correction. Deal with it and move on and get ready fucking buy for the next upswing. The Clinton Years saw the greatest wealth generation in America ever… And then there was a correction. The Bush years have seen the 4th or 5th greatest time of wealth generation in America. Black Friday was a success and more drivers hit the road for the with the highest fuel prices since the Carter Administration when we actually were in a recession and had extremely high interest rates so the economy could not move.
Dan… This isn’t blogging… This is freaking paranoia. The housing market is going in places in went up real fast where it shouldn’t, like Stockton CA, a place you couldn’t pay me enough to live at ever again. It ain’t all doom and gloom everywhere.
Panic when you see two or three points added to the unemployment rate quickly other than that, wait the correction out. The stock market increased over 10% before it fell this month. It had to go down.
November 27th, 2007 at 8:05 pm
Steve, paranoia can be diagnosed by observing events and comparing them to the illusion of the observed. You are a paranoid dellusional.
The facts before you should tell you the economy is in serious trouble. It’s not a partisan or ideological observation. It’s not a matter of faith or dissonance. All the FACTS say, “Hey, STUPID PEOPLE, the economy is in TROUBLE!” All those predicters - like disparities and deficits - that you cons say are meaningless, just happen to be mirrored by the stats from 1987, and 1929, let alone the 70’s. History repeats itself because selfish idiots ignore it. Don’t fall in with the selfish idiot crowd.
JMJ
November 27th, 2007 at 9:23 pm
I’m calling BULLSHIT Jersey. Prove it! What are the facts? C’mon…let’s hear it.
I’ll start… 4% increase in air travel over last weekend from the previous year.
http://blogs.usatoday.com/ondeadline/2007/11/get-ready-for-h.html
1.6% more people drove…
http://www.usatoday.com/travel/news/2007-11-15-aaa-thanksgiving_N.htm
And we all know about the 8% increase over last year on Black Friday.
Stop with bullshit Jersey. IF there was a recession hanging over our heads I’d expect us all to spend less. Didn’t happen now, did Jersey. C’mon… talk your way out of that one. If people are so screwed by the “economic disaster of the mortgage crisis” then why the fuck are they still spending?
November 28th, 2007 at 6:13 am
Wealth disparity mirrors 1929.
Housing price corrections mirror 1987.
The sub-prime market mirrors the S&L crisis of 1987.
Oil and food prices (not measured by the Fed for inflation) mirror the early ’70’s.
We are in two failed wars.
Our national debt is reaching ten trillion dollars.
The Baby Boomers are about to retire - and all that goes with that in all those varied sectors.
The trade deficit is approaching 1 trillion - a full tenth of our debt.
The dollar is reaching record long-term lows.
And so forth…
If I need a link for any of this, please get yourself aquainted with a internets thingy known as the “Google.”
And if you can’t at least acknowledge that there is cause for serious concern, then you truly are just suffering sever cognitive dissonance and just can’t be man enough to admit that your guys really, really, really screwed things up.
JMJ
November 28th, 2007 at 7:10 am
steve,
Loathe though I am to try and get involved in a disagreement with you and Jersey, the IMF is saying that the US and Europe are heading for economic difficulty.
Alternatively, here is another view or two from the BBC’s economics correspondant.
And finally, here’s another ,a href=”http://news.bbc.co.uk/1/hi/business/7115392.stm”>report on the US house prices. There are also some interesting links on the side bar.
November 28th, 2007 at 11:52 am
Jersey,
I agree with much of what you said about the economic indicators. We are very near a recession and I believe we are headed for a depression. I just hope the Democrats don’t get in there and raise my taxes. I’m barely scraping by, but the Dems look at my income and think I’m rich. I’d rather see the income tax eliminated and a national sales tax implemented in it’s place. Knowing the Dems, though, they would do that, but raise my overall taxes in the process.
I disagree that we are in two failed wars. We haven’t failed, we haven’t lost, and we will not fail or lose unless the Democrats get in there and surrender to the terrorists.
November 28th, 2007 at 12:05 pm
Daniel, I am curious to know if you draw parallels with the tech bubble in the 90’s and if you blame the government for one, none, or both of these bubbles gone bust? I am also curious if you think that times of recession tax policy should be to raise, lower or status quo? I do not see any scenario in which raising taxes will help the economy. I realize there argument as to the tax cuts (help or not help) but have not heard anyone espouse higher taxes as a economic driver. The dow has rebounded yesterday and today so we are no longer at the 10% down number to required to be called a correction however I do not believe this means that all is well. The seasonal numbers for retail both for friday and internet lsales look good which is generally a good indicator of consumer sentiment but the season has just begun. The mortgage mess and higher oil prices are bound to take their toll how much is yet to be determined. The thing about economic projections is that you will find as many bulls as bears because it is so hard to predict and there are so many varibles. Lastly, even thought the repos will harm many families, it will help many as house prices will come down and be a buying opportunity for many who have found house prices out of reach.
November 28th, 2007 at 1:14 pm
Steve,
Please! I’ll happily meet you back here to compare notes when this downturn plays out. The implications of the subprime crisis are just beginning to unfold. As to corrections vs. recessions, I believe they are differently defined concepts. A ten percent drop in the stock market is considered a correction…and a recession is defined to be two consecutive quarters of negative GDP growth. Corrections happen frequently and aren’t always tied to recessions. Feel free to call a bad economy whatever you want.
As to your telling me to “deal with it”…excuse me, but last I heard you hadn’t been appointed to any position affording you such authority…so deal with it yourself, my friend.
Perhaps you would be better served to keep your head buried in the sand…then all of the relevant data might not be so troubling and threatening to you. My apologies for putting you in such a bind.
manapp99,
I believe the tech bubble was more of a market driven event than a government augmented situation. The bad decisions made during the tech bubble were primarily made by private investors…office space was overbuilt to accommodate rapidly expanding tech companies…stocks were promoted and snatched up by fund managers and individuals looking to hit the jackpot…and to a lesser extent, lenders funded projects that lacked sound financial merit. In essence, the government wasn’t the driving force behind the tech bubble…though they certainly enjoyed the accolades that come with a “healthy” economy.
The housing bubble is far more a government driven event. Prior to the historically low interest rates, I suspect you couldn’t have found a banker or a bookie to bet they would ever reach such lows. Therefore, it is much more likely that the fed chose short term stability. Yes, their actions probably cut short the recession but it was the equivalent of “you can pay me now or pay me later”.
I see the housing bubble more like the S&L crisis of the late 80’s…though the S&L was driven by suspect and corrupt banking practices, far too much speculative commercial building, and a wholly lacking system of government oversight. The housing bubble originated with the practices of the government whereas the S&L didn’t. While both lacked adequate lender oversight, the housing bubble couldn’t have happened without the actions of the fed.
I don’t see raising or lowering taxes as the solution to economic downturns. The issue of taxes and tax cuts is, for the most part, an unrelated event…though the GOP loves to tout tax cuts as essential to combating recessionary periods. Frankly, I’ve never bought the “trickle-down” theory and I say as much because job growth is primarily a function of small business efforts and I don’t believe the recent tax cuts were weighted to assist small business owners.
Those who promote “trickle-down” argue that wealthy people invest tax savings…and while they might, I believe most of it isn’t invested in small business ventures; rather in safe and secure blue chip stocks and endeavors. These individuals simply have no need or motivation to gamble so they aren’t often the ones who spur innovation and the job growth that comes with it. That is far too risky for those who have already “made it”.
As to holiday spending, unfortunately the average American fails to curtail spending as long as they have those little plastic squares with numbers on them…some how they are able to slide the card while ignoring the mounting debt they will have to pay next month. At some point, the amount of debt and the lack of saving is going to catch up with the consumer…and the government. Are we there? I don’t know. Are we closer to being there? You bet we are. Will we get there? No doubt we will unless we change our ways. Unfortunately, our government sets an awful example which only encourages the average American to embrace deficit spending.
Your comments with regard to lower housing prices only works if people have jobs that provide income, if people aren’t buried in debt, and if people have some savings for the higher down payments that will result from the imposition of revised lending practices. Unfortunately, the vast majority of Americans will see their home values decline and therefore their ability to borrow and spend equity will be curtailed.
Yes, projecting the economy is a crap shoot…but anyone who chooses to ignore the many indicators is playing with fire…IMO. As globalization continues to advance, our ability to maintain our status quo (our wealth relative to the rest of the world) is going to be challenged. Every time a U.S. multinational corporation sends jobs to India, China, etc, our economic independence and autonomy is more at risk. I think of it like osmosis…there is always pressure to achieve equilibrium. With regards to globalization, that can only mean we will have less and other nations will have more. That’s a reality Americans have yet to embrace.
Thanks to all for sharing your thoughts.
Regards,
Daniel
November 28th, 2007 at 11:14 pm
“As to your telling me to “deal with it”…excuse me, but last I heard you hadn’t been appointed to any position affording you such authority…so deal with it yourself, my friend.”
Oh… excuse me, Royal Heinous…
Secondly… market bounced 500 points… Third (to Jersey) the War isn’t over so stop admitting defeat before it is. Why do you hate freedom?
Dan…Jersey… call me when unemployment gets over 9%…
November 29th, 2007 at 9:04 am
The wars are lost for all intents and purposes, you lunatics. Face reality.
We cannot sustain the “surge” in Iraq indefinitely. Eventually we will have to withdraw. When we do, all hell is going to break loose, and in the end we will probably see the rise of a hostile Shi-ite theocratic state.
In Afghanistan, the Taliban are resurgent and have come to embrace the heroine trade, which in and of itself will kill more Americans every year than the terrorists could in their best decade.
The wars are failures and anyone who says otherwise, in my mind, is a dellusional fool, at best - a sleazy loser who can’t admit that your sleazy con leaders are failures at every single thing they do, at worst.
JMJ
November 29th, 2007 at 12:01 pm
As George Bush said “supply side economics is voodoo economics” .
The two biggest deficit were run up by reagan and bush II. And that was after reagan doubled the social security tax. Which is strange since that is a regressive payroll tax.
November 29th, 2007 at 3:34 pm
Steve,
Oh my, did I upset the quintessential trash talker? I’ll try to remember my place next time…
Speaking of that 500 point jump…take a look at the following. I’m sure the nuance and complexity of the stock market must confound and annoy you…
http://articles.moneycentral.msn.com/Investing/SuperModels/TodaysMarketFearsWorthHeeding.aspx
Regards,
Daniel
November 29th, 2007 at 3:41 pm
Hey Jersey, are you sure you aren’t French? Why are you so quick to surrender?
November 29th, 2007 at 4:24 pm
Oui oui, mon ami!
Ya’ know, for a guy with the moniker “Independent mind” you have about the most status quo mind I’ve ever encountered. I’m an American and proud of it. If I were French, I’d be proud of that. If I were you, I’d change my moniker to “Status Quo Rightwing Mouth-Piece.”
Surrender what? What do we have to surrender? Does Iraq and Afghanistan belong to us? Funny, I never remember seeing them on the map of the US.
JMJ
November 29th, 2007 at 5:30 pm
Hey Jersey… way to pick on the new people… Bravo! I wish we all were as intelligent as you.
Do you do your own laundry or do you make your mom come down to the basement and get it for you?