Friday, March 28, 2014

The Retail Sales Gap Is The Housing Gap

Atif Mian and Amir Sufi pondered why spending hasn't caught up to trend.

How would spending catch up to trend when employment hasn't caught up to trend?

And why would we expect employment to catch up when home construction lurks below the 1982 recession levels let alone below trend?

And even if employment were caught up, we're not going to have as much retail sales of home furnishings and such household goods until we have as many new homes to furnish.

Chart of New Privately-Owned Housing United Completed: Total and Unemployment Rate: Aged 25-54: All Persons for the United States, Lesser Depression / Great Recession

Notice how in the early 1980s, home construction started up before employment. Just like how in 2006 home construction started slowing before employment ... and then started plummeting before employment.

Chart of New Privately-Owned Housing United Completed: Total and Unemployment Rate: Aged 25-54: All Persons for the United States, 1980s to present

Retail sales include paint, furnishings, and lots of other household goods. So really, is it any surprise that retail sales haven't recovered to trend but rather have only stopped dropping?

Chart of New Privately-Owned Housing Units Completed: Total and Retail Sales: Total (Excluding Food Services)

By and large, the home is where the retail sales live.

And why would a home builder ramp up construction when employment is low? Why is it again that we haven't restored the CCC and WPA this time around to get people working?

Charge of New Private Nonfarm Housing Units Started for United States and Gross Private Nonfarm Residential Construction for United States before and during the Great Depression

Thursday, March 27, 2014

What Came First: The Decline In Housing Or The Mortgage Crisis?

We're awash in a great sea of complicated answers to the question of what caused the Lesser Depression. Why? The story's rather simple.

A graph of what started the Lesser Depression: Housing Starts, Institutional Failures, and Mortgage Delinquencies in the Lesser Depression or Great Recession or whatever it is we'll call it in the long run

For those who would say it all comes down to deregulation, the repeal of Glass-Steagall, and sub-prime loans, please answer this: How could a collapse in loans that comes well after the sharp drop in housing starts supposedly reach back in time and cause that preceding sharp drop in housing starts? Or how could failures of financial institutions travel time to kick off the decline in housing starts before they started failing?

The delinquency rate on single family residential mortgages averaged 2.2% between 1991 and 2007. Let's presume that wasn't a time of extraordinary caution and thus that 2.2% represents a reasonably ordinary rate of delinquencies. That rate dipped below 2 in 2003 and didn't get back up to 2 until the fourth quarter of 2006. Delinquencies didn't climb past 2.2% until the 2nd quarter of 2007, over a year after housing starts began plummeting. It seems quite clear that since there was no rash of delinquencies until well after housing starts crashed, we can't reasonably blame the decline in starts on the delinquencies. In other words, failing sub-prime loans simply don't work as an explanation without time travel.

Chart of Delinquency Rate On Single Family Residential Mortgages from 1991 through Lesser Depression

Bank failures run a similar course. None in 2006 while housing starts drop sharply. Three in 2007. But 25 in 2008. Housing starts fell off the cliff long before banks started failing.

But then, what did go along with the housing starts decline? Why did they stop starting so many? Could it be that folks stopped being willing to pay ever higher prices?

Chart of S&P Case-Shiller 20-City Home Price Index and Housing Starts: Total: New Privately Owned Housing Units Started from 2000 through Lesser Depression / Great Recession

Yep. In early 2006, housing prices tapered, peaked, and then started dropping a bit. And then they went flat for a while. Sellers resisted selling for less than they'd hoped a few months earlier. It's easy to understand reluctance to drop prices when it had so recently been a sellers market. But before long, prices joined in at the same angle of descent they'd set up in housing starts. Of course those two declines would feed into each other. With prices no longer rising and worse declining, it just doesn't make sense to build as much.

And what happens when we don't build as many houses? There's a bit of lag in effect. After all, once a start happens there's usually a few months of building. But as some months go by with a continuing sharp drop in house component orders and furniture sales, we get a decline in employment.

Chart of Employment Rate: Aged 25-54: All Persons for the United States and Housing Starts: Total: New Privately Owned Housing Units Started during the Great Recession / Lesser Depression

And once we have a decline in employment, fewer people can afford houses and fewer people can hold off on selling houses ... at any price.

Chart of Employment Rate: Aged 25-54: All Persons for the United States and S&P Case-Shiller 20-City Home Price Index during the Great Recession / Lesser Depression

In short order, not long after employment started down from the October 2006 peak, the bottom fell out from under house prices after March 2007.

Which brings us to the 2nd quarter of 2007. Remember that? That was when delinquencies started up past the norm for the preceding decades. So here's the question: did all this happen because collapsing sub-prime loans hopped a ride on Dr. Emmett Brown's DeLorean back to before the home prices, housing starts, and unemployment all started down? Or should we perhaps consider that maybe reality actually went in chronological order?

What came first? Home prices stopped rising and housing starts fell. Then unemployment. And we don't get into issues with mortgage-backed securities and complex derivatives until after those three got together. Can someone show us a working time machine or reference to all of this in Nostradamus? If not, no matter how much sub-prime loans and Glass-Steagall's repeal might have made the aftermath worse, it might make sense to presume they didn't have a thing to do with causing the whole mess.

Tuesday, March 25, 2014

When Higher Labor Costs Increase Sales Volume

There's this notion, "Lower labor costs are good for the rich." So some say.

Partly. In micro, yes. In macro, no. Directly and individually, yes. Indirectly and in aggregate, no.

Imagine if my company A sells widgets and competing company B sells widgets and companies C-Z sell other things but not widgets and the employees of companies C-Z buy widgets from A and B. If I unilaterally raise the wages 10% within company A but B doesn't follow suit, that's bad for my relative profit margin. (And it raises the question of whether B's larger profit margin is of more advantage then my potential increased worker loyalty and morale ... which could go either way.) But if all companies A-Z raise the wages, then A and B can both sell more widgets because the employees of companies C-Z have more money to spend.

When one company increases wages alone, it's playing a somewhat risky game. If workers feel more loyal and dedicated on account of the increase, that could boost production, reduce inventory shrinkage, and diminish costs from absenteeism and turnover. As a microcosm of the business world, the increasing company has to place a bet as to whether those advantages will make up for increased wage costs to keep profit margins as good as or better than those at competitors.

It's a different story when all companies engage in the same increase. The in-market competitive risk (seen in a unilateral increase) doesn't apply. Instead, since most products will have a lower mark-up to make up for wages than the amount of the wage increase, it's only a question of whether the increased wages of each company's customers boost sales volume and how much that boosts profits.

Thursday, March 13, 2014

Not So Much With The Spending

Real government consumption expenditures and gross investment as a share of real GDP since 1950.

Real government consumption expenditures and gross investment as a share of real GDP since 1950

What We Should Have Done With The Banks (Hint: It Isn't Letting Them Collapse)

There are still people suggesting we should have let more banks collapse, apparently rekindled by discussions of Wall Street bonuses totaling more than the annual pay of all minimum wage workers.

Per Hyman Minsky in "Stabilizing an Unstable Economy",
"There is no possibility that we can ever set things right once and for all; instability, put to rest by one set of reforms will, after time, emerge in a new guise."
And that applies to letting the free market wipe out banks rather than bailing them out as well. The utility of allowing such a collapse is minimal. After time, a way will be found to once again believe in risky investments and instability will reform, no matter how many banks were allowed to fail. Meanwhile, the harm of such a collapse is significant, as a bank's customers (including businesses with otherwise profitable models) experience financing shortfalls through no fault of their own when that bank goes belly up. And those innocent customers are often themselves wrongfully driven into failure by the failure of the bank. And that means lots of layoffs of otherwise productive workers, massive suffering on account of letting banks collapse.

We arguably should have required that in each bank to be bailed out all the major executives must be fired and thoroughly investigated ... as a condition of the bailout. That was the job that should have been done but wasn't.

Wednesday, March 12, 2014

The Output Gap Continues; The Impact Of Deficit-Hawks

The difference between "no longer getting worse" and "actually returning to normal":

We stopped getting worse. We still need a serious boost -- like from reversing the austerity of recent budget years -- to get back to good. Alternatively, a large enough boost to EITC could be another way of doing that while at the same time helping mitigate our ever-rising inequality.

Speaking of the recent austerity, here's that in a picture:

Had we not implemented such budget-cutting, deficit-hawk, austerity from 2010 (by not increasing spending commensurate with population growth) and even worse after (by actually reducing government consumption expenditures and gross investment), that alone would have at least had us significantly closer to potential by now. In other words, we'd have had more of a recovery.

If The Policies Were Worse, Explain Why The Outcome Is Better (And Vice Versa)

Timothy Taylor presents a challenge to "critics of the U.S. fiscal and monetary policies in the aftermath of the Great Recession". That challenge: "explain why, if the policies were so bad, the outcome has been comparatively so good."

Tuesday, March 11, 2014

Thoma on Capitalism, Inequality, Social Insurance, and Growth

From Mark Thoma writing in the Fiscal Times,
"Why is rising inequality a matter that our social insurance system should address? The idea behind insurance is to spread the costs of harmful events we cannot control across a large number of people. With fire insurance, for example, participants pool their money into a large sum, and the unlucky few that experience fires draw from the pool of money to cover their losses. In the end there is a redistribution of income from the winners who escape a fire to the unfortunate who don’t, but it would be wrong to view this as a net cost to the winners. The insurance premiums buy protection from fire – a benefit – and presumably the benefit exceeds the cost of the insurance.   

At some point, one I believe we’ve passed already, the benefits of inequality in terms of incentives are surpassed by the costs. As Joseph Stiglitz argues, “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.”"