From the November 16, 2008 Sunday Times (London)
November 17, 2008
by Irwin Stelzer
Travelling from London to Phoenix and then to Washington does more than throw one’s body clock into a spin. It is disorientating.
In London, the gloom is thicker than the fogs of yesteryear. The prime minister is blaming the world’s problems on America, while assuring the nation that he has the entire world financial crisis under control. Or would, if only the Saudis and the Chinese would cough up billions in cash to match the few farthings Gordon Brown has available to contribute to a co-ordinated global stimulus package.
In Phoenix, the home of John McCain and many of his very conservative supporters, the gloom seems even deeper. Not only are the voters there attempting to adjust to a president-elect who shares neither their social values nor their economic philosophy, but they are living on the sharp edge of the emerging recession. The Arizona economy depends heavily on the property market, and to say that this market is depressed is to understate the perceived problem. The situation is so dire that many of the Mexicans who came across the border to work on construction projects can’t find even low-paid work, and so are heading back home.
Then to Washington, a city that is heavily Democratic and where blacks are in the majority. Euphoria reigns. Construction cranes are everywhere, and although the property market is softer than in the past, commercial space is being readied to house the growth in government that is inevitable when the president-elect and his activist team take over. And that means jobs for the private-sector lobbyists, lawyers and hangers-on who inevitably attach themselves to a new administration in the manner of the sandpipers who feed on the backs of hippopotamuses in the Serengeti National Park.
Lobbyists are particularly frantic. All save $60 billion of the $350 billion initial authorisation under the emergency economic stabilisation act has been spent and, as The New York Times described the “mad scramble”, “the Treasury department is under siege by an army of hired guns for banks . . . and insurers — as well as from improbable candidates like a Hispanic business group representing plumbing and home-heating specialists.” Then there is the “fix housing first” group that wants mortgage rates lowered to 2.99% and a $22,000 tax credit for new buyers.
Estate agents in Washington are also eagerly awaiting the arrival of the 3,000 Democrats whose jobs are within the gift of the new administration. They will sop up some of the excess inventory, especially in the posh Georgetown section favoured by liberal politicians and bureaucrats.
Barack Obama’s transition team knows better than to join in the local glee. On Friday the government announced that retail sales in October plunged by 2.8%, the largest decline in 16 years. Sales at the Best Buy chain of electronics stores dropped by 7.6%, while Neiman Marcus (-28%), Saks (-17%) and JC Penny (-13%) say that “customers just weren’t walking through the door”, despite swingeing discounts on every- thing, including previously sacrosanct luxury brands. Only Wal-Mart, that haven for the price-conscious, boosted sales, and by an unexpectedly large 2.4%.
The number of workers without work continues to rise, as does the number unemployed for more than 27 weeks. House prices continue to fall, and buyers who dipped a toe in the water are cancelling their contracts in record numbers. Share prices show little sign of having touched bottom. And General Motors, which is burning cash at the rate of $2.3 billion (not million) a month, will be broke early in the new year.
The Democrats, for whom the United Auto Workers (UAW) delivered the key state of Michigan, are calling for a bailout — and they want it now. The Bush administration would like to leave that chore to president-elect Obama. And with reason. GM was losing money even in the good times, and there is no reason to believe that $50 billion or so will enable it to survive in the long term. Besides, some 40m American taxpayers who do not have health insurance, some because they cannot afford it, are not pleased at the prospect of watching their tax dollars finance the lavish healthcare plan that the UAW extracted from a compliant General Motors in the good old days when all costs could easily be passed on to consumers.
This is turning out to be the conservatives’ line in the sand. They will argue that allowing GM to go bankrupt would enable the courts to order changes in the company’s onerous labour contracts — laid-off workers receive the same pay as those on the assembly line. And just as the airlines continued to fly while in bankruptcy, GM could continue to produce such cars as it might be able to sell.
Meanwhile, several of the policy initiatives in place have eased the credit crisis. As Federal Reserve Board governor Kevin Warsh — a private-sector banker in an earlier life, and no mere academic or bureaucrat — pointed out last week: “[We have had] a forceful response from monetary, fiscal and financial policymakers. There are some notable signs of improvement. Short-term funding spreads are retreating from extremely elevated levels. Funding maturities are being extended beyond the very near term. Money-market funds and commercial-paper markets are showing signs of stabilisation. And the credit-default swap spreads of banking institutions are narrowing significantly.”
This doesn’t mean that credit markets are about to return to normal — whatever “normal” is. But remember: the policies adopted have not had time to work their way through the economy. Worse still, Treasury secretary Hank Paulson is changing his position on the use of bailout funds almost daily. This is better than persisting in error, but it is off-putting to those who suspect that further changes are in store when Obama’s secretary of the Treasury allows Paulson to return to his bird-watching. And turns his attention to the so-called real economy.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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