Sunday, June 5, 2011

It's the Economy, Stupid, and Republicans and Democrats Are Stupid

Politicians make their livings bashing other people, so it's only right and fair to bash them. There's a lot of grist for this mill.

Republican Congressional leaders were quick to criticize the Obama administration on Friday, June 3, 2011, after bad unemployment numbers were announced. Total job creation in May was 54,000, and the unemployment rate rose from 9.0% in April to 9.1% in May. The weak job creation number wasn't surprising, given other recent data signaling stagnation. The unemployment rate increase naturally flowed from the economy's need for a net increase of over 100,000 jobs every month simply to keep up with population growth (which increases the labor force). In addition, some previously discouraged workers may have jumped back into the labor force to actively look for work. That expands the labor force and raises the unemployment rate when there aren't enough jobs for them.

How did the Republicans shoot themselves in the foot? The private sector increased employment in May by a net of 83,000 jobs. That's not a great number, but it shows hiring exceeded firing. The reason for the lower total of 54,000 new jobs was that governments laid off a net 29,000 workers. This is due to state and municipal governments cutting back to meet austerity demands from primarily Republican governors and legislators. Do we think these government workers who lost their jobs because of Republican policies will blame the Obama administration? (Hint: take a look at recent events in Wisconsin politics.) Government employment levels have fallen for seven months in a row, and that's not because the Obama administration is laying off federal employees. If unemployment trends continue like this, expect the growing numbers of unemployed government workers, and many among their family and friends, to vote Democrat. Republicans hoping to see their party do well in 2012 should be careful what they wish for because the jobless have plenty of time to vote.

As for the Democrats, the Obama Administration announced on Saturday, June 4, that it would make a renewed push for principal reductions on defaulting mortgages, in an effort to keep more homeowners in their homes. This is meant to help not only struggling homeowners, but also to keep more houses off the foreclosure and resale markets, where distress sales continue to nudge home prices lower. But principal reduction has been a fools errand. It hasn't worked well in the past and isn't likely to work well now. The people who need principal reduction the most--the jobless--won't qualify because of their lack of income. Banks aren't required to reduce principal, and have little incentive to do so. There may be arguments why banks and mortgage investors lose less from principal reductions than from foreclosure. But the legal latitude banks have to make principal reductions on mortgages they have sold to investors is less clear than proceeding with foreclosure, and banks may be stuck with some or all of the loss to lenders when principal is reduced. In other words, banks may be in a riskier position with principal reduction than they would be with foreclosure (where they can generally pass the loss onto investors because banks mostly sell mortgages they originate). So why would they put themselves at increased risk in order to give a defaulting borrower a break? Never forget that on Wall Street, money talks and bullswaggle walks.

A second, and more important point for political purposes, is that the neighbors are watching. Yes, they want to see if the person next door has a better big screen TV than they, or if the person across the street is having an affair, or if the teenagers two houses away are getting out of control. But keeping up with the Jones would become most urgent if neighbors got a reduced mortgage because they didn't keep up with their monthly payments. Talk about envy. The defaulting Jones would get, perhaps, the equivalent of tens of thousands of dollars over time because they were deadbeats. Principal reductions could have a bandwagon effect--give one to the Jones, and others on their block will start defaulting so they, too, can get a principal reduction. After all, how can you tell your kid to borrow tens of thousands of dollars for college because you wouldn't stiff the bank like the folks next door? If entire neighborhoods start having mortgage default parties, bank earnings will fall and bankers contributions to the Republican Party will soar. Neighbors too proud or too protective of their credit ratings won't default. But they will likely vote Republican to assuage their anger.

So politicians are stupid. That's not news. The scary thing is they don't move up the learning curve. Governance failures are now in vogue. The Japanese government's dysfunction exacerbated its slow reaction to the nuclear crisis that followed the recent earthquake. The Euro bloc's weak governance structure makes bailouts without a true restoration of fiscal discipline the only way to cope with its sovereign debt crisis. This is not a solution, but a deferral of the train wreck to come. California's governance failure has pushed its budget crisis virtually beyond the realm of resolution. And, last but certainly not least, the mud-slinging, gotcha-politics in gridlocked Washington have imperiled the creditworthiness of the U.S. government and the strength of the U.S. dollar. The dumb thing about all this is that Japan, Europe, California and America are all very wealthy. They have the resources to solve their problems. But they can't make their political processes work in a constructive way. Forget all the predictions for the economy and the stock market you're now hearing. Politics has thrown a wild card into the game, and no one knows how things will turn out.

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