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This Time Is Not Different

Or so it seems.

12:00 AM, Jul 23, 2011 • By IRWIN M. STELZER
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If you want to have a relaxed summer break, definitely do not include on your beach reading list This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff. Based on a massive multi-nation data base covering 800 years the authors conclude that, in the case of past financial crises, “the duration of housing price declines has been quite long lived … unemployment rises for almost five years, with an increase in the unemployment rate of about 7 percentage points … [which would mean an 11 percent rate in the U.S. before things get better] … unemployment consequences of financial crises are strikingly large … recessions surrounding financial crises are unusually long compared to normal recessions … huge buildup in government debt.” If that is not enough, Reinhart and Rogoff, professors of economics at the University of Maryland and Harvard University respectively, make clear that the notion that “this time is different” is wishful thinking, and point out that the global scope of the recent crisis makes it difficult for economies to avail themselves of a boost from increased exports, as was the case in past crises that were restricted to individual nations or regions.

This time is different.

If you are looking for “kindly light” amid the “encircling gloom,” to borrow from Cardinal Newman, don’t look in the financial pages or at recent economic reports. “Layoffs Deepen Gloom” and “Slowing Sales Imperil Growth” lead recent stories in the Wall Street Journal. “The Housing Horror Show Is Worse Than You Think” headlines a story in Bloomberg Businessweek.

And worry that recent data suggest that the good professors’ assertion that this cycle is no different from its predecessors when it comes to the housing and jobs market, and the fiscal condition of the afflicted countries.

♦ Housing: Sales of existing homes in June fell for the third consecutive month to a seven-month low, and sales this year are trailing last year’s, which were the weakest in thirteen years.

♦ Jobs: New jobs being created are too few to prevent the unemployment rate from creeping up, even though the number of people in the work force is declining. Many banks are laying off staff in response to pressure on profit margins hit by falling demand for loans and the increased cost of complying with the hundreds of regulations being turned out by administrative agencies eager to implement the Dodd-Frank law, which marked its first anniversary last week. Cisco Systems and Lockheed Martin have announced layoffs, and last week’s report of initial claims for unemployment compensation was “a modest disappointment,” say Goldman Sachs’ economists, who expect another rise in claims this week. Most disturbing, 30 percent of the unemployed have been out of work for more than a year, and will find it increasingly difficult to re-enter the labor market.

♦ Government debt: No need to repeat here the story of the massive increase in government debt resulting from wildly increased spending and the fall of tax receipts due to the recession. That problem is compounded by the inability, at least as this is written, of the president and the Republicans in Congress to agree to increase the debt ceiling and to bring down the deficit. Not all the fault is in our politicians, some is in ourselves: a majority of Americans do not want the debt ceiling raised, either because they don’t believe Treasury Secretary Geithner’s threat that therein lies default, or because they prefer the consequences of default to more deficit spending.

The decline in the already halting growth of the economy is worsened by the administration’s insistence that its regulation-heavy approach to transforming the economy not be slowed by the mere fact that 16 percent of American workers are out of work, involuntarily working short time, or too discouraged to continue looking for jobs. The National Labor Relations Board is challenging Boeing’s right to build a plant in employer friendly South Carolina, even though it is expanding its plant in the union friendly state of Washington, and is proposing to make it more difficult for employers to oppose unionization of their workforces. This latter effort would be the most sweeping change in the rules since 1947.

Not to be outdone, the Environmental Protection Agency has announced plans to set more stringent air quality standards. If finalized, those regulations will have their greatest impact on manufacturing jobs. That is not meant to suggest that non-manufacturers such as bankers and non-bank lenders can heave a sigh of relief: President Obama last week nominated Richard Cordray to head the new Consumer Financial Protection Bureau to regulate credit card issuance, mortgage practices, and other financial transaction. Cordray, a former attorney general of the state of Ohio, much beloved by trial lawyers who contributed generously to his election campaign in Ohio, has promised to apply his expansive view of regulation to the 111 largest banks and a host of non-bank lenders such as prepaid card companies. Some of these companies indeed need heightened regulatory supervision, but Cordray’s critics say he is more an anti-business zealot than a judicious regulator.

All of this rattles businessmen. The latest survey of small business sentiment has fallen for four consecutive months and only 11 percent of small businesses expect to do much hiring. Bill Dunkelberg, chief economist of the Federation of Independent Small Businesses, tells the press, “Between the deluge of new regulations and a Washington policy agenda that is largely ignorant of Main Street needs, stubbornly low consumer spending, and grave concern … about the federal budget, there is not much to be optimistic about as a small-business-owner.” That pessimism is exacerbated by the continued difficulty many small businesses have in obtaining credit, another condition characteristic of post-financial-crises periods according to Reinhart and Rogoff.

That “stubbornly low” consumer spending is a result of the fact that consumer sentiment, as measured by the Reuters/University of Michigan survey, fell to a two-year low in July. That finding is reflected in other surveys, and in my own non-scientific sample of sentiment as I travelled last week from the East Coast to the Rocky Mountains.

Perhaps everyone will cheer up when the president and the Congress find a way to avoid default, even if the solution concocted merely does what every politician swears he will never do – kick the can down the road. But hold the applause for any plan to cut the deficit just as the economy is weakening. A new study by the International Monetary Fund finds that a 1 percent cut in a country’s deficit reduces real output by two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point. “Another year of recovery would help confidence more than a premature swing of the fiscal axe,” warns the Economist. That thought could throw a wet blanket over any Tea Party. 

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