The Uncertainty Blues

There are several headlines today that you really don’t want to see if you’re hoping for an economic recovery.  This one is especially chilling:  ‘Home prices fall 4.1%, near 2009 lows’. There are good reasons this doesn’t bode well.  The first is that the construction sector is a large economic generator in our economy and it also is a job generator. The second is that when people feel less wealthy, they spend less.  Both tend to have recessionary effects.  It doesn’t look like things will improve either.

And things may get a lot worse, said Robert Shiller, a Yale economist and half of the Case-Shiller team, in a web conference after the report’s release.

“There’s a substantial risk of home prices falling another 15%, 20% or 25% more,” he said.

Shiller cited a few reasons for his bearish stance. The government is expected to reduce the presence of Fannie Mae and Freddie Mac in the housing market. These agencies currently provide loan guarantees for about two-thirds of mortgages. If they fade away, private mortgage money will have to fill the gap and the cost of mortgage borrowing will surely rise. That will hurt home prices.

There’s also talk of possibly ending the mortgage interest tax deduction for many homeowners. Meanwhile, the weak economic recovery may be threatened by higher oil prices as a result of turmoil in the Mideast.

At the web conference, Shiller’s index partner Karl Case wasn’t much more optimistic.

“I see [the market] bouncing along the bottom with a slight negative trend,” said Case, an economics professor emeritus at Wellesley College.

Unrest in Libya and Bahrain are also driving up oil prices. Both of these countries are oil producers.  This also drove stock market prices lower.  This is also not good as stock market decreases also make people feel poorer so they spend less.  Additionally, higher gas prices forces people to readjust their budgets.

U.S. investors returned from the long holiday weekend in a selling mode amid increased concern about developments in North Africa and the Middle East.

Global financial markets recoiled overnight as Libya appeared on the verge of civil war and continuing protests in Bahrain sent crude prices surging. After Brent crude futures approached $110 per barrel in London, benchmark West Texas Intermediate (WTI) surged above $91 per barrel in New York trading midday Tuesday.

Higher energy prices threaten the global economic recovery, on which much of the two-year rally in stocks has been based. Heading into this week, the S&P was up 100% from its March 2009 low, meaning both that continued growth is “priced into” stocks and there a lot of paper profits waiting to be booked.

In recent trading, the S&P was down 1.6% while the Dow was off 1.1% and the Nasdaq by more than 2%.

On top of this, we still have high unemployment coupled with increasing threats of lay offs for state and local workers.  Any lay offs or decreases in wages and benefits has the same effect: it makes people feel poor and makes them re-arrange their budgets.   Unions have been largely responsible for benefits and salary levels enjoyed by all workers. Any attempts to further erode collective bargaining is sure to suppress wages and benefits in all sectors.  Several polls today seem to indicate that most people are aware of this and oppose weakening unions.  Here’s one such poll from USA Today.

Americans strongly oppose laws taking away the collective bargaining power of public employee unions, according to a new USA TODAY/Gallup Poll. The poll found 61% would oppose a law in their state similar to such a proposal in Wisconsin, compared with 33% who would favor such a law.

All of this uncertainty is sure to impact the economic outlook.  Many of these are indicative further weakening. Remember, tax cuts for businesses work only if they have revenues.  They won’t have increased revenues without customers.  Higher oil prices–as well as higher prices for other commodities like food–are likely to transfer dollars away from discretionary spending.  We could see further weakening in the demand for consumer durables like cars and big appliances.  I’ve noticed some rather spectacular sales this weekend for these items.  We’ll see in a few months if those commercials today are acts of desperation to unload inventory.

It appears that many in government are purposefully trying to shrink not only the government but also the economy. I’m not sure why every one has decided to go to faith based tax cuts rather than rely on economic theory.  It’s as if years of experience and evidence have been thrown out the window.  Many Republican governors are doing the same thing that created budget problems for Wisconsin.  They are creating deficits by passing tax cuts benefiting the rich and passing the sacrifice to the poor and middle class. The poor and middle class are the consumers that really matter in an economic crunch.  They spend most of their money and they do it on goods that generate local jobs. Remember, this just happened at the national level too. We’ve seen tax cuts go predominantly to the wealthy while talk of benefit cuts are rampant.

State budgets across the country are in disarray as a weak economy, the end of tens of billions in Recovery Act funds, and a GOP-led House that is pushing for deep cuts to many programs that benefit state and local governments set the stage for massive in shortfalls over the next two years. Instead of making the tough choices necessary to help their states weather the current crisis with some semblance of the social safety net and basic government services intact, Republican governors are instead using it as an opportunity to advance several longtime GOP projects: union busting, draconian cuts to social programs, and massive corporate tax breaks. These misplaced priorities mean that the poor and middle class will shoulder the burden of fiscal austerity, even as the rich and corporations are asked to contribute even less.

Follow that Think Progress link to find some of the worst states with worst abuses.  Arizona tops the list.

Now, however, Governor Jan Brewer is proposing to kick some 280,000 Arizonans, mostly childless adults, off the state’s Medicaid rolls. Brewer claims such a move is the only way to get the state’s fiscal house in order, as it would save $541.5 million in general funding spending. Brewer also wants to save $79.8 million by dropping 5,200 “seriously mentally ill” people from the state’s Medicaid program. Instead of balancing out these draconian cuts with additional revenue increases or simply not making the cuts in the first place, Brewer instead signed $538 million in corporate tax cuts into law two weeks ago.

Other states to watch out for are New Jersey, Texas, Michigan, Ohio and of, course, Wisconsin.  Here’s an example from Florida.

Scott’s radical budget proposal, unveiled at a tea party event, includes $4.6 billion in spending cuts that would result in the direct loss of more than 8,000 jobs. It would also privatize large areas of state services, including juvenile justice facilities, Medicaid, and some hospitals. Education spending would be cut by more than $3 billion and teachers and other public employees would see their pensions under threat. Such deep cuts in essential programs and services are necessary to offset Scott’s proposal to cut corporate and property taxes by at least $4 billion.

If these things occur, you can look forward to a return to the Depression Years.  I guarantee it.