Friday, July 31, 2009

The MARE policy: what economic recovery?

The Obama Administration's financial gurus are continuing the huge gamble with our future - what I call a Maintain the Appearance of a Recovering Economy (MARE) policy, which has two elements:
  • A "talk about it enough and they will come around" philosophy designed to reinvigorate the American consumer economy with the optimism that a recovery is underway.
  • The "trickle into" theory of economics involving the short-term use of government debt (instead of private debt) to infuse money into select businesses and the banking industry hoping the money will trickle into the rest of the economy.
According to the press the economy is nearing recovery. Most economic pundits experts appear to believe that what's important in the economy is how upper level employees of banks and brokerage firms are doing. At least that is the core of the current economic optimism as presented in the media.

And as that optimism is repeated, stock prices rise which immediately benefits (1) individual corporate executives and large shareholders (mostly over 50 years of age) and (2) a greatly reduced number of retirees and baby boomers over 60 still holding stocks as part of their retirement investments. (That's "the old gray" MARE benefit.)

What's this policy doing for ordinary people with children under 22 who are going to school? At some point, after all, the economy is not about banks or brokerage firms or any corporation or business. It should be about people having money, money to spend on food and money to pay their bills.

Right now it appears that the "trickle into" MARE policy has trickled in enough money so upper level and mid-level employees still employed by banks and brokerage firms may be reasonably assured of an income, perhaps huge incomes in the firms that received the most federal bailout money directly, or indirectly from AIG.

Swell. Now about the remaining 300,000,000 Americans, many of whom are in families that have greatly reduced or no income, including those who worked for brokerage firms and banks who were laid off in 2007-2008....

One in six Americans are unemployed or underemployed. Here in California are being told that in terms of jobs we "will have lost more jobs - over 1 million - than any other state in the union" and that we should "be prepared for the long haul" as the employment will not be recovering at least until 2013. But we'll not be alone as many states will be waiting until "after 2015."

What will happen in the meantime? A pretty good indication is being reported:

About 1 in 10 Californians with a home loan is now in default, and there's growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate -- the percentage of borrowers who have missed several payments and are in the first stage of foreclosure -- climbed in June to 9.5% in California and 9.9% in Los Angeles County....

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

Oh. The millions unemployed won't be making payments on their mortgages, or on other loans and credit cards. And they won't be buying much which results in delinquent lease payments from retail stores to mall building owners, causing delinquent payments on commercial mortgages....

But we keep reading that things are getting better. Certain economic indicators tell folks that in some parts of the country the economy is stabilizing. After all the housing sector showed a significant gain in the number "newly-built home" sales and the third straight monthly increase in the sales of previously owned homes. Oh sure sales are still near all-time lows, but things are improving.

Or maybe the jump is simply short term because buyers are taking advantage of federally subsidized record-low interest rates, the new temporary tax credit for first-time home buyers, and the close-out-sale-prices in areas hit hard by foreclosures.

After all there is a glut of existing "inventory" in most urban areas and "newly-built homes" doesn't necessarily refer to homes the construction crews finished last week. The term "newly-built homes" means homes that have not been occupied since construction was completed.

There are thousands of "newly-built homes" across the country that no construction worker has been in during the last six months. And there are thousands of construction workers in the home building industry unemployed or underemployed who won't be seeing their economic recovery any time soon.

How is the government stimulus program working out for the ordinary family? It being reported that IHS Global Insight, one of the more reliable economic forecasters, still expects infrastructure spending to decline 4.3% in 2009, to decline 1.6% in 2010, then increase 2.4% in 2011 when both state government tax receipts increase slightly and the federal $120 billion stimulus package becomes fully implemented.

Statistics like this can be misleading. If one makes the big (and incorrect) assumption that the 2008 infrastructure spending level was not below a desirable level, with the one time stimulus 2011 infrastructure spending will still be 3.6% below 2008.

Therefore employment in infrastructure construction in 2011 will still be significantly below 2008 levels. In other words, without continued borrowing by the federal government to expand state and local government infrastructure spending over the next three years, it will be nearly impossible to see the employment levels in infrastructure construction industry recover to 2008 levels until at least 2014.

The "Great Recovery" headlines are misleading unless you accept that an increase in Gross Domestic Product is great without jobs - a "Jobless Recovery," Federal Reserve Chairman Ben Bernanke is calling it. A jobless recovery means that the difference in economic well-being between economic classes will increase further. If workers continue to be unemployed or underemployed, they aren't sharing in the "recovery" so it isn't a recovery for the middle class and poor.

Sure, it helps the grinning car salesman whose commission income past year has been a disaster to have the so called "Clunkers" subsidy program, which quite literally is a transfer of money from the grandkids mostly to corporate interests. After all, the bloated inventory of new cars on dealers lots around the nation was reduced by 250,000 in one week by people applying for the $1 billion in borrowed federal money. Unless you work for or own a car dealership, it's no big deal. Comments from those in the auto industry still are pessimistic:

"There's nothing here to support a major change in the forecast," said Gary Dilts, senior vice president of global automotive at J.D. Power & Associates.

Dilts, whose former employer, Chrysler Group L.L.C., went through bankruptcy this year along with General Motors Co., does not expect vehicle sales to even flirt with the 17-million-a-year level they had reached four times since 2000. He is holding firm to a forecast of 10 million for this year.

In other words, it isn't going to alter the recovery for former auto workers and laid-off workers in related industries. It was money given to auto dealers, perhaps shared with employees and perhaps resulting in new car orders, hopefully benefiting US. Government owned Chrysler and GM or at least American-owned Ford.

AutoNation is the largest U.S. dealership chain by sales operating 264 dealerships in 15 states and sold more than 3,000 new cars in the week. AutoNation's President and Chief Operating Officer Mike Maroone commented in the company's recent earnings call:

Our observations are that the majority of our ‘Cash for Clunkers’ volume is incremental, a larger percentage of the trade ins are domestic, and on the sales side the majority are imports. In aggregate credit scores for our ‘Cash for Clunker’ customers are better than normal and the program has not negatively impacted our used vehicle business.

So the customers are mostly people not in financial difficulty who are trading domestic clunkers for new imports. The company's Chairman and CEO Michael J. Jackson said:

"It's been a huge success. "I think there has been a psychological effect and gotten consumers to start buying cars again."

It's an interesting take, and it illustrates what's really going on.

Ignoring the paperwork snafu's and the fact that the first billion is theoretically gone (Congress is trying to provide a couple more billion), what is happening is that dealers will now have to decide how many of the cars to replace with new ones. The options before dealers are to reduce their debt (they borrow to "floor" their inventory) or gamble that after the pent-up demand flushed out by the subsidy program is gone, they'll find customers with the money to buy cars.

Since 2007, an estimated 5 million overdue car buyers are waiting to find out if the value of their home will recover, if their 401(k) or kid's college fund will regain some of the losses that occured over the past two years, and/or if they will have a job next year. It's hard to believe that many are saying because of high auto sales in July 2009 could signal a bottom to the worst sales slump since 1976. If you want to buy a car, it's hard to ignore a $4,500 government gift. But this is hardly a good example for creating a responsible economy:

So even though it was the last day at his job as a production controller for a West Columbia, S.C., manufacturer Mr. Dunn took his severance check, his 1989 pickup with about 300,000 miles and headed to Dodgeland.

With the help of the rebate and cash from his savings, he bought a red, 2009 Dodge Caliber. "The economy is picking up," he said Friday. "It seems like it is anyway."

This is the worst example of the MARE effect. Even though Mr. Dunn lost his job, with an optimistic outlook he took his severance check and some savings to buy a new car. And if he doesn't have job two years from now, then what?

Within that question is the more critical one. A brief job retention effect will occur at car dealerships through the fall of this year, but not new hiring. Auto financing banks and auto dealership inventory financing sources generally have been bailed out - banking again. But even if dealers do order some new cars, manufacturers cannot sustain plant operations without continued retail growth.

As noted in the previous post, over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. Nationwide, the National Employment Law Project estimates that that 540,000 Americans will exhaust their unemployment insurance benefits by the end of September, and a whopping 1.5 million will run out of coverage by the end of the year.

Congress is likely to extend their benefits for a second time, by borrowing from the beneficiaries' grandchildren of course. This is the safety net that hopefully keeps the beneficiary families from having to live in their cars. These benefits don't produce anything nor help morale. These benefits won't turn the beneficiaries into conspicuous consumers. These benefits won't turn the beneficiaries into believers in the "recovery."

Nor should anyone forget that after the stock market hit bottom mid-November 1929 there was 48 percent bear market rally that peaked mid-April 30 1930 followed by the real crash that bottomed out mid-June 1932 after which no beginning of a real sustained similarly steep long term bull market appeared until May 1953. No one should think that the recent bear market is based on a "recovery."

A "recovery," meaning the end of the Great Recession and the end of the Great California Slump, can be declared when employed workers numbers exceed mid-2007 numbers increased by the percentage increase in the workforce and unemployment rates fall below 6%. The MARE policy of talking optimistically about a recovery doesn't make it so. Borrowing from our grandchildren to infuse money into banking and select businesses in the short term won't result in enough money trickling into the economy to create a significant increase in jobs.

It's the ordinary people's economic lives that have to improve for a shared recovery. That won't happen by borrowing from our grandchildren unless the money is spent by government hiring enough ordinary people directly to create enough of a multiplier effect within the economy to create confidence at the retail level so that businesses will create new jobs for ordinary people.

It's the ordinary people's economy that counts.

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