Ignorant Economy

 

I decided the appropriate label for this economy is "ignorant," because that's who it favors, who favors it and what it is. Last things first, this economy is ignorant because it is unplanned and unthoughtful. That makes market fundamentalists giddy as they sing hosannas to the "invisible hand." Whether that hand's works are unplanned or unthoughtful we cannot know, according to the fundamentalists, exactly because they are invisible. Nonetheless, they say the workings of the economy demonstrate the wonders of demons or gods busy behind the scenes. That things are working out is attested by increasing corporate profits and fat wallets.

Now, as a scientist, I have a hard time crediting the paeans of the Chicago and Stanford neo-classicists. Most the same claims could be made by "reading" entrails of chickens, or casting bones. I don't hear anyone claiming "cause and effect," as in 'did this, got that.' I don't even hear claims of general tendency, as in tilting the pinball table. (But, more on this below.) Instead, the wonders of neo-classicism are taking hold and improving things. The best part of believing in neo-classical economics (besides evoking the other familiar "neo," neo-conservatism) is that it doesn't require you to produce evidence or test hypotheses. The Mumbo-Jumbo formula (lip-synced sound bytes) takes care of all that effort. As the Disney song goes, 'when you wish upon a star ... your dreams come true.'

What wish has come true? The invisible hand has generously dealt out chips and chips to Big Winners, which is maybe why there is a Poker craze going on among the rich. (What else can they do with their useless money?) The rest of us aren't supposed to notice the fast shuffle because the hand is invisible. Still, government statistics are inevitable facts of life every month. The latest ones show just how well those making over $100,000 annually are doing. They are reaping in dividends, bonuses, pay raises and the other goodies that come from increasing corporate profits. While all that loot is filling up the garage, the Bandit is fighting off the mob so those gains will remain unsullied and untaxed. The rich are doing very well, indeed; at least 20% better since 2001.

The ruffians occupying the under side of the coin are under control. Their wages are not going up. In fact, those living in households receiving less than the median annual income of $42,300 - the working class - have taken a net pay cut of 20% since 1973. It's easy to see why that is so, despite workers' wage increases of 300-400% since 1973. Cars and houses now cost 10 times more than 30 years ago. Even the $0.59 loaf of sourdough bread has risen to over $3. That's a powerful yeast inflating the bread. It is true that gas and beer are relatively cheaper than they were 25 years ago, which certainly favors drunk driving, road rage and other behavior that gets people clapped in overcrowded jails. The invisible hand is serving ruffians their just desserts.

If the Bandit Administration has accomplished anything,. it is bringing back Topic One: Real Estate. In the years after Reagan's 1980 election, the main topic of conversations really were real estate, real estate and real estate in that order. In San Francisco, it was almost a relief, as Real Estate (RE) talk drove endless babbling about sex and drugs underground. People were fascinated with their investments in property, and gloated over all the money they were racking up in ledger books. That was the era of Gordon "Greed is Good" Gecko. Now it's all back, which is where the tilt comes in: The Federal Reserve Bank's low interest rate policy, combined with Bandit tax policy, encouraged a Real Estate Boom. For a few years the financial people denied there was a RE Bubble, but this year they acknowledge it. The Bandit revels in it, even though Dr Alan Greenspan still denies blowing any Bubbles. No one claims responsibility, even if they are wallowing in it. It's just another gift of the invisible hand.

Who benefits from the RE Boom? The same upper income folks, of course. Almost all of the booming home sales are being made among the upper 1/3 or so of incomes. Houses are being bought and sold like the Internet stocks of a few years ago. This is not a boom for the lowest 2/3 of households: they don't have the down payments for 2nd and 3rd homes (which is the "happening" market). Who gets the money invested in Real Estate? First of all Real Estate Brokers and Agents, then construction workers, and home furnishings corporations after that. Home Depot and Lowe's are doing a booming business selling whatever stuff made in China you cannot find at Wal*Mart. The housing bubble pays lots of sales commissions, and makes independent contractors well off for a while. The biggest winners are the corporate home builders, whose stocks have also risen dramatically. In Marxist terms, the temporary beneficiaries are the petit bourgeoisie, but the permanent winners are the upper classes - the plutocrats and their lesser oligarchs.

I know, who can believe WalterB? You're right, this sounds like Radio Moscow. These days, you can't even hear this sort of thing on Central China TV (CCTV). But, it also sounds like it is.

The Computer Revolution is over. While semi-skilled contractors and real estate financiers and sales people are making a bundle, the stuff that caused a 20 year boom languishes. This is most easily seen by checking out the stock market, where, for example, MICROSOFT has been going nowhere for years while INTEL managed to work its way back to about 40% of its pre-2001 value. Computer programming and networking are going gangbusters in places like Korea, China and India, and even in some parts of Eastern Europe, but they are shrinking in the United States. For the time being, many of those techie-wizzie head offices are right here on the West Coast - many of them are a not-too-long drive from my home - but the stuff of their business is moving Westward with the Sun. San Francisco's EBay, for example, does more business in Germany and China than the United States. BOEING was stuck in Seattle for the longest time, but finally moved to defense-friendly Chicago a few years ago. When DAIMLER-BENZ took over CHRYSLER, it promised to keep the management in Detroit, but that promise was soon forgotten. What's the point? Head offices follow the money. There isn't much of that anymore in the United States for the technorati (or literati).

So, while Americans buy ever more SUV gas guzzlers, as they did in July, and drive even more than last year, as they did this summer, they will pay ever higher gas prices with their inflated bucks. Of course, the prices don't matter to the rich and wealthy, who don't give a damn about rubbing working noses in the "filth" ( a polite Greek word). After all, there are gold souls, silver souls, brass souls and iron souls; we do know who is which.

I am certainly surprised about how long the RE Bubble has gone on. I correctly identified it as a Bubble in 2002, when everyone else said it wasn't. But I was wrong about it bursting back then. I assumed people would have learned their lesson form recent experience Blowing Bubbles. It was then just one year after the Biggest Bubble Gum Bubble ever collapsed and got stuck on our faces. But, as I said, this is an ignorant economy, not one where people learn anything.

The worrisome part of the Bubble comes when the distribution starts. "Distribution" is the process of the wealthy dumping their holdings on unsuspecting "investors." There is a simpler way to think about it: Musical Chairs. When the financial cognoscenti hear the last few bars of the tune, they know it's time to stop dancing and head for firm seating. That's when they pass off their beautiful partners to whatever eager dandy will have them. In Australia, they call it "shearing the sheep."

Fundamentalists of every stripe must feel good about it. Those Biblical urgings about being fruitful and multiplying are happening. Men are building giant shelters in which they put their women back in bed, where they don't need shoes, even while pregnant. This is the Good Ole Daze, when people knew their places.

I feel like it's Ground Hog Day, but I can't figure out what gant sin I've committed to bring it on. (Maybe I have Alzheimer's?) The Hand refuses to take off the Invisible Glove, at least for me. It's a ghostly Wall St transparency. Could there be nothing at all there?

P.S. It is interesting that the RE Bubble is "invisibly" blown up by Federal policy. Unlike stocks and bonds, real estate buyers (and speculators) only have to pony up as much as bankers and mortgage companies demand. There are no SEC or other Federal regulations that require at least 50% (or any) equity in all positions. Currently, it is possible to buy real estate with as little as 3% down, and to continue owning it by paying interest only. Even in the Roaring Twenties, investors had to have at least 10% of the principal value of the stocks they owned. In addition, in equities markets, owners have to maintain their margin. Today, when the owner's equity in a stock portfolio falls below 50%, the owner must deposit more money (that day!) or sell some assets. The margin maintenance rule does not apply to real estate owners.

In addition to lax purchase and maintenance rules, real estate is heavily subsidized in the tax code. Without the tax subsidies, the American real estate industry would collapse overnight. It is not just the mortgage deduction , but thousands of other tax loopholes that favor real estate. For example, real estate sales are largely exempt from capital gains taxes. In comparison, there are few deductions and advantages granted to investors in stocks and bonds. While the argument for this light-handed treatment of real estate has always been that it helps ordinary people, actually the biggest beneficiaries are real estate corporations and corporate owners of real estate. The clearest example is the disparity created by California's Proposition 13, which prevents assessment of properties except when sold. Since the average household moves and sells its present home within 5 years, almost all residential real estate is re-assessed for tax purposes in 5 years or less. On the other hand, owners of commercial property (hotels, motels, apartments, office buildings, factories, etc) have an average holding period of at least 20 years, so their taxes are usually based on antique market values. Relatively, this amounts to a huge windfall to business interests and only temporary tax relief for most households. (Of course, the ultra-conservative proponents of Prop 13, prominently including the LA Apartment Owners Assoc, knew that when they proposed the initiative.)