The Oser View

George Jetson's Job

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“George Jetson lives in the future and he works in a factory where all he has to do is push a button. He pushes it and robots do all the work. His job is literally a joke, and the joke is, you can design all those robots to do the work, but you can't design a robot to push a damn button? “

--Leonard Richardson, 2009

The joke is not quite as funny as it was in the 1960s.  Robots are doing the work and George is out of a job.  The predicament of the quintessentially middle-class George is a near perfect symbol of the US socio-economy, a word I’ve coined to denote the deepening bifurcation of modern America.  The economy is recovering, but a large segment of the population, many of whom always considered themselves as solidly middle-class, is not.  The reason is that robots—or computers or low-wage workers in other countries or simply greater individual productivity—are now pushing the buttons.  
On November 24 we got a concentrated picture of what the new socio-economy looks like.  Because of the Thanksgiving holiday, more data releases were crammed into one morning than I can ever remember.  These data were:

Data	Source & Period
Mortgage applications, new & refinance	Mortgage Bankers Association -weekly
Durable Goods Orders	Census Bureau – October
Personal Income & Spending, Personal     Consumption Expenditures Index	Bureau of Economic Analysis – October
Initial & Continuing Jobless Claims	Bureau of Labor Statistics – weekly
Consumer Confidence	University of Michigan – November
House Price Index	Federal Housing Finance Agency – September
New Home Sales	Census Bureau - October

Altogether the data was decidedly mixed, but the markets chose to focus on the good news, especially the continuing growth in consumer spending.  The chart shows spending by consumers for services by month on a seasonally adjusted annual basis.  Spending on services represents about two-thirds of all consumer spending, with spending on non-durable goods accounting for another 22.5 %.  This propels the economy, because it means that almost 90% of what we buy today, we’ll have to buy again

tomorrow, or at least in the next year or so.  As you see, spending on services has been rising steadily since hitting a trough in the summer of 2009.   More than anything else, this is why economists have declared the recession over and why the stock market has rebounded from its March 2009 low.

The other bit of good news was that the fewest number of first-time unemployment insurance claims were filed in the week ended November 20 since the summer of 2008.  Weekly initial claims peeked at 651,000 in March 2009 and have since been trending down.  Still last week’s total of 407,000 remains well above the pre-recession average of about 325,000.  And, continuing unemployment claims, a much more significant gauge, remain unacceptably high and well over the long-term average.  Nearly 4.2 million Americans continue to collect unemployment insurance with 863,000 getting extended benefits. This compares to well under three million from 2004 through 2007.

The market chose to ignore the bad news.  Durable goods orders fell and remain far below pre-recession levels, in terms of total dollars, again on a seasonally adjusted annual rate.  Still, this data series is subject to both large monthly swings and large monthly revisions.   As a result, the markets discounted October’s drop in orders as either a normal pause in a general upward trend or simply a reporting error that would be rectified in a later revision.  

The housing reports were worse than expected, and the expectations were not rosy.  While applications for mortgages rose, home values continued to drop.  The Federal Housing Finance Agency reported that the average value of purchased homes was 1.6% lower in the third quarter than in the second and 3.2% lower than in the third quarter of 2009.   (The data comes entirely from mortgages purchased by Fannie Mae and Freddie Mac.)  At $191,000, the average home purchase price is back where it was six years ago, and 14% below its 2007 peak.

More distressing still is the continuing abysmal slump in new home sales. Calculated on the usual seasonally adjusted annualized rate, just 283,000 new homes were sold in October.  A mere 202,000 new homes were on the market, the fewest since 1968.  Existing home sales also remain at extremely depressed levels.

The picture that emerges is of a strengthening economy within a stagnant society; that is, a bifurcated socio-economy.   In every recent recession, businesses have learned how to produce more with less expense as measured by productivity per hours worked.  Businesses do not forget the lessons when they recover from the shock of the recession.  Consumers, however, forget the shock more quickly.  Those who have jobs begin spending freely again, spurred on by relentless advertising, door-busters, and other come-ons.  But following each recession, a larger pool of unemployed and under-employed is being left behind.  This time, the bifurcation is being widened. Household wealth is being squeezed by falling home values and the unavailability of traditional credit.  Consumers can still use the credit cards but bank lending remains tight, not because banks and credit unions don’t want to lend, but because their regulators won’t let them.  The big shots in Washington piously mouth their hopes for easier credit, but examiners on the ground squelch all attempts to take anything resembling risk.  The outcome is a statistical economic recovery but societal malaise.  The rich will bet richer, the poor will get poorer, while the middle class struggles in a slow-motion downward grind, their lifestyles becoming ever more difficult to maintain.   

We look back on the utopian future imagined for George Jetson in the 1960s with an odd nostalgia.  Maybe the joke was on us after all.      

Yes, Maybe He Could Have

 

 

 

 

But, no, actually, he didn't. The unemployment rate was 6.2% when voters went to the polls in 2008. Now, it's 9.6%. That's why independent voters decided that anyone was better than those in power, flocking to the Republicans and "shellacking" the Democrats. The really interesting parts are around the edges. What tipped the margin of victory or defeat in the close races? Part of this question involves the votes of African-Americans, who have comprised an essential part of the Democratic Party's base since the 1930s.

Every political party in the world, large or small, has a base or bases. You are a member of a political party's base if you would never vote for any other party's candidates. Notice that this is different than saying you would always vote for your party's candidates. Members of a party's base do have a choice: They can vote for their party's candidates or they can stay home. This means that a political party is in trouble if it neglects its base.

The Census Bureau recently published a report, "Voting and Registration in the Election of 2008," that documents how energized the Democrats' African-American base was two years ago. Sixty-five percent of voting-age Blacks voted, about even with Non-Hispanic Whites (66%) and well ahead of Hispanics and Asians, both at 49%. This was a huge increase from previous presidential elections as the chart above shows. In 2008, 12.3% of all voters were African-American, about the same as their percentage of the population as a whole. CBS News estimates that this year only 10% of voters were African-American, implying a loss of three million votes, nearly all of which would have gone to the Democrats.

African-Americans as a group have been hit much harder by the recession than others. Their unemployment rate jumped from 11.4% to 15.7% in the two years it took for the White unemployment rate to go from 5.5% to 8.8%. In housing, the situation is just as bad, and, to make matters worse, a recent study published in the American Sociological Review indicates that the damage was deliberate.

Written by two Princeton University researchers, "Racial Segregation and the Foreclosure Crisis" argues that African-American neighborhoods were specifically targeted for subprime loans that were then packaged, sold, and securitized. Such targeting was possible, indeed easy, because housing in the United States remains intensely segregated. "In areas with large African-American communities—places such as New York, Chicago, Detroit, Atlanta, Houston, and Washington—declines (in housing segregation) have been minimal or non-existent."

This is not exactly news. It's a fact of American life that we take for granted without following its trail of consequences. Princeton's Jacob S. Rugh and Douglas S. Massey did follow the trail. They argue that minority neighborhoods were ideally suited for subprime lending as it evolved in the 1990s because they were served by few mainstream lenders. "Subprime mortgages accounted for 43% of the increase of in black home ownership during the 1990s and 33% of the growth within minority neighborhoods." The initial impact of subprime lending in minority neighborhoods was deceptively beneficial. Easy terms and low or non-existent down payments created loan volume that in turn drove appraised home values higher. Higher values in their turn allowed subprime borrowers to avoid financial problems by refinancing into lower "teaser-rate" ARMs or bolster their reserves with a home equity line.

But with the crash in home values nationwide, several factors came together to put African-American neighborhoods in a vice. All the subprime lenders were gone and the securitization of subprime loans abruptly ceased. Since these lenders had dominated the housing markets in segregated neighborhoods, home values collapsed with their demise. The few mainstream lenders who have previously served the neighborhoods either deserted them, or if they were deeply embedded, collapsed in the general debacle. For all intents and purposes, housing markets in segregated urban neighborhoods evaporated.

Everyone in the neighborhoods suffered. Those residents who remained solvent saw much of their accumulated wealth disappear. Those who did not faced foreclosure rates that rose from 3.3% of subprime loans to 15.6% in 2009. Rugh and Massey conclude, "Ongoing racial segregation, discriminatory lending, and an overheated housing market combined to leave minority groups uniquely vulnerable to the housing bust."

A second conclusion brings the losses suffered by segregated neighborhoods back to the political process. "The utter collapse of subprime lending exposed the extremes of a pricing regime that assessed risks individually but not collectively, not accounting for the aggregate risk of ever-increasing subprime lending and securitization." An aggregate risk of this magnitude is not a local problem; it's a national problem. But the political regime inaugurated in January 2009 decided not to talk about race let alone address it. A Democrat president and congress neglected one of its primary bases, permitting the illusion to flourish that America is a post-racial society.

What could the federal government have done? Well, for one thing they could have designed mortgage rescue programs specifically for racially segregated neighborhoods. Such programs would have included principal forgiveness, payment moratoriums, and restructuring of "teaser" or "exploding" ARMs. Second, the government could have made a market, setting a base price for homes whose owners simply could not pay their mortgages under any circumstances. Third, the government could have subsidized cheap mortgages for new buyers in segregated neighborhoods. Fourth, the government could have instructed its captive mortgage accumulators, Fannie Mae and Freddie Mac, to offer especially advantageous terms for buying mortgages from lenders who would agree to make traditional 30-year mortgages in segregated neighborhoods. Fifth, the government could have targeted jobs programs aimed at repairing and rehabbing homes and commercial buildings. And that's just a start.

Why should the government have spent federal tax dollars on such racially targeted programs? The answer is simple. Not having done so is going to cost a lot more dollars. It's true that foreclosure rates are high in segregated neighborhoods, but not nearly as high as might be expected given the even higher delinquency rates. Lenders don't want to own properties that they can't sell and that entail significant costs to maintain. It makes more financial sense to let them sit abandoned or sell them to vultures at pennies on the dollar. Of course, this is a purely short-term benefit. The long-term disadvantages are obvious. In many cities, stable neighborhoods of working people in the middle- to lower-income brackets are now in serious danger of deteriorating into slums or worse, the urban deserts of east Detroit.

Only a dreamer would expect a new urban agenda to emerge from the Democrats' 2010 election debacle. The only lesson the Democrats appear to have taken to heart is to become more like the Republicans. In 2010, a significant portion of a core Democratic base stayed away from the polls. Unless Democrats take notice and bring race back into the national dialogue, they are likely to lose even more next time around. As long as Blacks and Whites can't live in the same neighborhoods, Americans still have a lot to talk about.