[Marxism] Recession Realities: Why The Worst is Yet to Come

Louis Proyect lnp3 at panix.com
Fri Dec 5 08:05:03 MST 2008


http://www.cqpolitics.com/wmspage.cfm?docID=news-000002991269
CQ TODAY ONLINE NEWS
Nov. 26, 2008 – 5:44 a.m.
Recession Realities: Why The Worst is Yet to Come
By Madison Powers, CQ Guest Columnist

When President-Elect Obama announced the members of his economic team 
this week, he tried to prepare the country for the fact that economic 
recovery would take time. He stated pointedly that things are likely to 
get worse before they get better. He might well have added that, if the 
past is any indicator, things are likely to get much worse for many of 
those who already are among the worst-off and that the worst that is yet 
to come is well down the road past the point at which economists 
formally declare the recession at an end.

We are in for more bailouts beyond what we have seen thus far, and we 
are likely to see more mistakes no matter how talented the new economic 
team is. In particular, they are likely to be wrong both in initial 
response and estimation of how much money is at stake, and an added 
political challenge will be that of navigating a course after public 
trust in experts has eroded.

The first round of bailouts got off to a bad start, both in terms of 
public policy and public confidence. Almost everyone asserted that there 
was one and only one available solution and that they had just days to 
pass necessary legislation. The plan was to buy up “toxic” assets known 
as mortgage-backed securities, and the theory was that doing so would 
get the backlog of bad debt off the books so that stock prices would 
stabilize and banks could once again lend money.

Congress demanded in return accountability and transparency, but they 
got neither. In fact, they did not even get the plan they voted for. In 
a matter of weeks, the Secretary of the Treasury reversed course.

The new plan is to inject capital into failing banks in exchange for a 
stake, usually in the form of preferred stock, raise the $100,000 cap on 
FDIC insurance of bank deposits to $250,000, and set aside a few hundred 
billion more to shore up banks that might weaken under the strain of bad 
loan debt over the course of the coming months. This was in precise 
detail the alternative favored by dissenting voices such as James K. 
Galbraith only ten days into the crisis.

The public has to be prepared for more mistakes and more mid-course 
correction, in part, by being informed in advance that we are and will 
remain in uncharted territory with little option but to experiment. Even 
if the current bad debt problem is contained, the economy should not be 
expected to recover for quite a long time. The reasons are instructive, 
both for the sake of managing the political expectations and for 
preparing for the next policy choices we will face for years to come. 
Three points are especially important.

First, there is no easy fix for the housing crisis. Median home prices, 
as of last week, fell 11.3% over the last year, but a more important, 
less reported benchmark is the fact that prices are nearly 20% off the 
peak in third quarter of 2005. While the immediate focus is (rightly) on 
how to aid those estimated 20% of mortgage holders who owe more than 
their homes are worth, the longer-term threat is that the housing 
problem is not merely a product of a short-term imbalance of supply and 
demand for which we simply have to wait a few quarters for correction.

The more likely scenario we will face is a staggering and prolonged 
housing glut lasting through 2025. Moreover, the likely continued 
decline in values due to oversupply will hit hardest among some of the 
economically most vulnerable members of society living in the outer 
suburbs and exurbs of the nation’s largest cities.

Second, the real burden of job loss typically lags months or even years 
past the point that the official definition of a recession indicates 
that a recovery has begun. In the last recession that lasted for eight 
months of 2001, for example, the unemployment figures peaked only in 
2003 (at about the current unemployment rate). So the economic pain will 
be greatest for ordinary middle class workers long after those fortunate 
enough to have generous 401(k) plans see some improvement in their stock 
portfolios. Whatever we spend now will reduce greater need for 
expenditures later, but we have to be prepared to spend in deficit mode 
for many years to come, even under the best case scenario.

The third long-term economic problem is the massive deterioration of 
state and local budgets. Some large city mayors have petitioned for a 
share of the credit lines guaranteed under the bailout plans designed 
for the financial institutions. Their near-term credit crunch is urgent 
but it is but a tip of the iceberg.

At least 41 states face budget shortfalls. In some states, the 
percentage is quite large, at or above 10% in the hardest hit states. 
But the worst impact comes later. During the first year of any recession 
the inevitable decreases in tax revenues are partially offset by 
previous year surpluses and “rainy day” funds. Many of those funds never 
got replenished adequately from the last recession, in part because they 
had cope with the peak of unemployment well into their 2004 budgets.

Looking ahead, then, we have to prepare for the fact that the heaviest 
burdens on the states are still years out from now. Past experience also 
shows that even the richest states have been unable to make up for the 
losses on their own and, in the case of the 2001 recession, the federal 
government undertook bailout schemes totaling $20 billion. This time 
around, the combined mid-year shortfall for the 2009 fiscal year alone 
is well beyond that amount.

The important lesson for the federal government is that they need to 
prepare now for that bailout, and it is likely to cost less and avert a 
worsening recession if they deal with it now. The reason is 
straightforward. States can’t ride it lean times with deficit spending 
or engage in their own Keynesian pump-priming. Balanced budget 
provisions in their constitutions won’t let them. They have to choose 
between expenditure reductions or tax increases, and the latter is no 
real option.

Recession Realities: Why The Worst is Yet to Come

To make matters worse, just as the federal government undertakes public 
works projects designed to create jobs and stimulate the economy, the 
states will be retrenching their public works programs, thereby making 
the size of the necessary federal government initiative that much 
larger. Federal policy makers might as well plan for that now as well.

Moreover, state and local property taxes always fall substantially in 
periods of economic recession. In many states, various taxes are enacted 
with specific purposes, such as school finance, rather than general 
revenue. The predictable consequence is that large budget reductions 
will disproportionately affect the very things most important for future 
economic development. The standard mechanisms for funding education are 
problematic in good times, but they are disastrously short-sighted 
during an economic downturn.

In economically difficult times, social safety net programs are often 
the first and deepest cuts in state budgets. For example, the Center on 
Budget and Policy Priorities notes that “in the last recession, some 34 
states cut eligibility for public health programs, causing well over 1 
million people to lose health coverage, and at least 23 states cut 
eligibility for child care subsidies or otherwise limited access to 
child care.” We can expect more of the same this time around.

As banks, automobile manufacturers and others get in line for federal 
assistance, it is certain that the line will only get longer, and the 
last in line will be some of the neediest.
Madison Powers is Senior Research Scholar, Kennedy Institute of Ethics, 
Georgetown University. His column appears weekly in CQ Politics on 
Wednesday.

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