Don't Be Fooled by the False Economic Recovery
After five years of unemployment, government deficits and financial struggle, every American wants to call it a recovery and call it a day. That's why some optimistic economic data this week seem to have messianic importance, in the ever-optimistic belief that higher consumer confidence and rising home prices will deliver us from economic evil.
But if evil has one power, it is the power of illusion, to mask reality. And, in this case, that is also the power of the positive economic data.
Take the consumer confidence numbers, which are measured every month by the Conference Board and act as one of the more foolish hinges on which to hang our hopes. Consumer confidence in May jumped to 76.2, on a scale of 100. In the popular interpretation, that indicates that consumers believe the economy is improving.
It's also an object lesson in the silliness of believing in the validity of consumer confidence. As history shows, countries and people have long been confident when they had no reason to be.
For instance, the consumer confidence numbers themselves are not as confident as they seem. As Michael Santoli at Yahoo Finance points out, the average consumer confidence number during a recession is about 79, and even with our recent boost, we're still lagging below that low bar.
There is more evidence that Americans lack psychic economic ability. The May data shows the highest measure of consumer confidence since February 2008. That was a time in which a housing crash was already well underway, and only a month before before Bear Stearns collapsed and confirmed that the country was in a financial crisis. At least six months before that, in August 2007, three major hedge funds invested in subprime real estate had to be bailed out by the French bank BNP Paribas, and the Federal Reserve and other central banks started pumping $300bn into the global banking system. Any collective confidence back in February 2008 was foolish and unwitting of the crisis that had already started in the higher rungs of finance.
Similarly, the idea of a strengthening recovery is out of step with some bubblicious activity, including the dubious and sudden rise in housing prices.
Housing prices have risen at the fastest rate in seven years, as the Case-Schiller Index of national housing prices showed today. However, the sources of that rise - as with all sudden booms - are dubious. While house prices are rising, incomes, purchasing power and lending are not keeping up.
The housing recovery, for instance, seems to be just another stage of the foreclosure crisis. Note that the areas where house prices have risen the most - Arizona, Las Vegas and California - are all areas that were hurt most deeply by the housing crash. So pry between the boards of the housing recovery and the termites start crawling out. Here, you'll find some old villains of the last housing bubble, crawling on the same properties. There are the house-flippers and the financial institutions, the foreclosure players that regenerate whenever there is a boom.
In this case, they may be creating the boom themselves. House-flipping in California has reached levels not seen since 2005, according to the Wall Street Journal. This rise in price is, by all accounts, artificial. Housing, like all products, responds to the laws of supply and demand. When supply decreases - when there are fewer homes on the market - then prices will rise. This is what is happening now.
There is evidence that lenders are controlling the housing supply by reducing the number of houses for sale. Last year, AOL Real Estate's reporting suggested that as many as 90% of available properties were not even really on the market, but just polished for sale and being held back to keep supply low.
Then, last month, three major banks, including Citigroup and Wells Fargo, halted all their sales of homes in foreclosure; this also reduced the supply of homes on the market. The reduction in housing supply, then, is largely artificial, designed by the banks and institutions that hold thousands of houses and thus have the most to gain from higher house prices.
The result is what looks like a housing recovery to the rest of us, but is, in fact, something of a trap. Fitch, the ratings firm, issued a warning that the alleged recovery in housing is moving too fast and could reverse.
There is one thing that housing prices do accomplish, however: the so-called "wealth effect." Along with a booming stock prices, higher property values make people feel rich. This then encourages them to go out and spend money.
There are enough problems with the wealth effect idea, but let's leave it here: spending real money based on vaporous paper wealth is unwise. Household debt is still high and savings are still low, which has been a persistent problem in the US for years. Median household incomes have collapsed since the recession, indicating that most households are making do with less money. According to Robert Reich:
This is nothing new; it's just more visible in this un-recovery. You can see by this handy income-distribution chart that over the past 44 years, middle-class incomes have barely budged. So it's fair to say that if people are spending more, they're likely to be shelling out money they don't necessarily have (in the form of credit cards, for instance).
That makes sense. There is a persistent unemployment crisis in the United States that has gone unaddressed by either Congress or corporate America. Around 12 million people are unemployed, about 40% of whom have been out of work for six months or more - rendering them unemployable in the near term. Poverty is rising so that nearly 15% of Americans are on food stamps. Ben Bernanke, the chairman of the Federal Reserve, didn't bother to pretend the recovery is particularly robust.
Still, why should we question good news? Even if a recovery is made of vapor, it can make people feel good. So why not believe in a recovery if it makes us feel better?
The reason to maintain skepticism of good times a-coming is that an economic recovery can ? and is ? used to package a lot of political snake oil. As long as people believe in a recovery, Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems like the plague of corporate tax rates. If Americans believe in a recovery, CEOs can keep claiming that they don't need to invest in the United States or hire American workers.
A recovery allows real estate agents and banks to tell Americans that they can't borrow money for the home they want, that they can't participate in the housing market, while wealth private investors scoop up as much as they can. A recovery allows lawmakers to pretend that their destructive policies of deficit cutting and austerity were productive, rather than destructive.
A mythical recovery, in short, gives cover to a lot of irresponsible people hoping that Americans won't look behind the curtain.
There is a momentary discomfort in realizing that the recovery is weak. When the absurd illusion of a "better economy" is gone, lawmakers and CEOs may be forced to stop believing in the myth of a good economy and actually start working to create the reality of it.