The job losses are still concentrated in construction, manufacturing and retail trade. Jobs were added in healthcare and in professional and technical services, according to the Bureau of Labor Statistics. It's still a blue-collar and pink-collar recession. For instance, the unemployment rate of workers with less than a high school education rose from 7.6% in December, 2007 to 7.8% in April of 2008. The unemployment rate for workers with a high school diploma increased from 4.7% to 5% over the same time period. But the unemployment rate is down (a fraction) for workers with a bachelor's degree or more--from 2.2% to 2.1%.

It's beginning to look like a short and shallow recession.

Will the downturn be short and shallow or deep and vicious? With all apologies to William Shakespeare, that is the question. It isn't an idle one, either, and it's difficult to answer with any degree of confidence even though it's increasingly clear the Federal Reserve has succeeded in its several months-long campaign to prevent a credit crunch from turning into a financial collapse. The quarter-point cut Apr. 30 in its benchmark interest rate to 2% is probably the central bank's last maneuver in that crusade for some time.

Even though the risk of apocalypse has been averted, the economic glass could be half empty. Perhaps most worrisome is the nearly 13% price decline in residential homes from a year earlier in 20 major metropolitan markets followed in the Standard & Poor's/Case-Shiller index. The housing market's downward momentum shows no signs of abating.

The government's latest gross domestic product report has business spending falling across the board, with outlays on residential and non-residential construction, capital goods, equipment, and software down in the first quarter of 2008. Consumer confidence is falling, too. One figure in the Conference Board's April report caught the eye of Bernard Baumohl, managing director of the Economic Outlook Group in Princeton , N.J. The proportion of people surveyed who expect their incomes to rise over the next six months fell to 15.1%, "the lowest percentage this organization recorded since 1967 when it began this line of questioning," he writes.

Still, there is a chance the glass is half full. Take the stock market. It's barely in correction territory, down less than 11% from its peak reached in October, 2007. The Bush Administration's $168 billion rebate to taxpayers will start reaching consumers soon, with at least some of that money spent at malls and big-box stores. The forward earnings of the S&P 500 are down only 5.4% at the end of April from last October's record high, according to economist Edward Yardeni of Yardeni Research. That compares to a 17.5% peak-to-trough decline during the previous profits recession at the beginning of the decade, he adds.

So, half empty or half full? The April employment report due out on May 2 could provide an answer. "Central to the outlook for the economy in the balance of this year is just how much has the job market weakened," says James Paulsen, chief investment officer at Wells Capital Management, which is part of Wells Fargo.

Certainly, last month's payroll plunge of 80,000--the biggest drop in five years--convinced a majority of private sector economists that the U.S. was in a recession or sliding toward one. (A close look at the numbers behind the 0.6% gain in GDP in the first quarter of 2008 won't persuade many economists to change their outlook.) Jobs matter.

One key measure is simply, how big is the payroll drop? The Bloomberg survey of economists for April's employment report has a consensus decline of -75,000. That figure would be consistent with a business community facing tough times but reluctant to embrace mass layoffs. If payrolls come in around consensus that would suggest a short, shallow recession, says Mark Zandi, chief economist at Moody's Economy.com. (He's forecasting a 100,000 decline.)

What if the job number jumps to the 150,000 to 200,000 level? Those figures are consistent with the job market of a typical post-World War II recession. Assuming history holds, the downturn would come to an end around the time summer shades into fall. But payroll declines in the 250,000 to 300,000 range would suggest a vicious downturn. The recovery wouldn't start until the end of the decade, Zandi says.

It's not just the magnitude of the payroll drop that matters. Who gets handed a pink slip also counts when trying to fathom the economy's direction. So far, this has been largely a blue-collar and pink-collar downturn. Job losses have been concentrated in industries such as manufacturing, construction, and retail, and it's the less-educated workers in these industries that are suffering the most on the job front. For instance, the unemployment rate for workers with less than a high school diploma is up from 7.6% in December to 8.2% in March. Workers with a high school diploma have also seen an increase over the same time period, from 4.7% to 5.1%.

In sharp contrast, workers with a bachelor's degree or higher are doing relatively well, despite massive layoffs at a number of beleaguered financial institutions. For example, the unemployment rate for well-educated workers fell a fraction from December to March—2.2% to 2.1%. Watch out if the job-loss figure spreads to better-educated and better-paid workers in such white-collar professions as health care, education, and information technologies.

In a sense, everything flows from jobs. The more confident workers are that they won't join their neighbor at the unemployment center, the quicker home prices and consumer spending revive. Of course, the exact opposite dynamic holds, too.

But on a more positive note it seems that the growing embrace of "sustainability," especially among young people, could give added impetus to a trend of avoiding debt and saving more. It's striking how discussions on sustainability, say, on the merits of various ways to lower your carbon footprint, often include asides on staying away from The "sustainability" movement and its message of conservative consumerism and fiscal probity could end up moving from the tributaries of society to the social mainstream. (Much as organic foods moved from the rare coop in certain neighborhoods to the grocery aisles at Wal-Mart.) The sustainability gospel that "less is more" gives additional momentum to a greater appreciation of thrift.

At least this is an idea I'm exploring.

Here's a nice analysis of the consumers situation from the Quarterly Review and Outlook from Hoisington Management.

Going forward, the main problem for the U.S. economy is likely to be a protracted period of restrained consumer spending. In the expansion from 2002 to 2007, real Personal Consumer Expenditures (PCE), which comprised 71.5% of GDP at the end of last year, posted a 3.1% per annum increase, down from 3.5% and 4.2%, respectively, in the expansions of the 1990s and 1980s (Chart 2). The subdued gain in spending would have been even less had consumers lived within their means, as real personal income (2.5%) expanded less than the spending rate. With spending outpacing income, the personal saving rate dropped from 2.4% in 2002 to 0.4% in 2007.

A disparity of 0.7% per annum between the growth of income and spending might seem insignificant until you consider that income must also support all the other demands on consumers -- investment in housing and other real assets, financial investment, and gifts to charitable and other causes.

The story of the past several years is how much the gains in the economy have gone to a few at the top. Instead of a rising tide lifting all boats, it has been a rising tide lifts a few yachts. It isn't a healthy state of affairs for the American economy or society.

The main cause of the weaker trend in personal income in this decade was lackluster real wage and salary income that rose just 1.8%, or one-half the rate of gain in the expansion of the 1990s. This meager gain was caused by the sluggish .8% payroll employment growth rate that was the smallest of any expansion since World War II. With this key determinant of consumer spending restrained, consumers lived well beyond their means, only because their paper worth was boosted by surging home prices.

Families boosted their standard of living with women entering the workforce in droves starting in the 1970s. The rise of two income couples masked the slow growth of overall wages. In the '90s and '00s credit cards, home equity loans, and mortgage refinancing helped families increase their buying power. Much of the growth in debt reflected an attempt by families to keep up their standard of living at a time when incomes weren't growing much. But now families are strapped trying to meet interest and principal payments, their savings are tapped out, their home values are crumbing. Debt is no longer an option for shoring up living standards. There isn't another financial rabbit Americans can pull out of their hat.

The problem going forward is that real wealth is now declining, with the bottom yet to be found. Assuming home prices fall only 30% from their peak (some estimate a 50% decline), while stock prices rise 10% from the first quarter level and inflation is 2% per annum, the real wealth loss is about $7 trillion (Chart 4). Using the $1 to 7.5 cent ratio, this will constitute a drag on real PCE of 1.8% per annum from 2008 to 2010. Considering that the 3.1% rate of increase was the last expansion's average, a 1.8% drag will be a 60% reduction in consumer spending growth over the next three years just from the cash out/wealth effect alone.

It's a safe bet that with both the housing market and the economy deteriorating more federal money (as well as state funds) will go toward supporting housing this year. But once the downward trajectory moderates, the government should learn from recent experience and take a radical stance: Forget propping up housing. Instead, eliminate the many taxpayer subsidies for housing. Yes, you read that right.

There's no question the U.S. tax code is full of special tax provisions that favor housing. Among the biggest breaks are the mortgage interest deduction, the deduction for state and local real estate taxes, and the capital gains exclusion for homes. (The first $250,000 in profit is exempted from capital gains taxes for individual filers, and a $500,000 profit for couples). The federal tax code funnels more than $100 billion dollars annually into the housing sector, estimates the Tax Foundation in Washington D.C.

This figure doesn't include the mammoth subsidized institutions that support the housing and mortgage markets. This includes Government Sponsored Enterprises like Fannie Mae and Freddie Mac, to name only two of the best known players. The Congressional Budget Office estimated that in 2003 the benefit of the explicit and implicit ties to the federal government for GSE like Fannie Mae and Freddie Mac amounted to a federal subsidy of more than $23 billion, according to economists William G. Gale, Jonathan Gruber and Seth Stephens-Davidowitz in their 2007 paper, Encouraging Homeownership Through the Tax Code.

Yet in a modern, dynamic high-tech economy why should homes get preferable tax treatment over stocks and other investments? The tax gap in treatment is significant. Take capital gains. Say you'd invested in a basket of high-tech stocks three years ago and now you sell the portfolio for a $500,000 profit. Well, you'll pay a 15% capital gains tax rate on the gain, writing a $75,000 check to Uncle Sam. But you and your husband also sell the home you bought three years ago for a $500,000 profit. Guess what? The Internal Revenue Service gets nothing. Indeed, the economy-wide tax rate on housing investment is close to zero compared with a tax rate of some 22% on business investment, according to the President's 2005 Advisory Panel on Federal Tax Reform.

By the way, the tax break for capital gains on housing was signed into law in 1997. Is it a coincidence that home prices soared 79% of the time between the first quarter of 1997 and the first quarter of 2005, with home prices not just going up but rising at an increasingly rapid rate, as calculated by Peter Bernstein, a long-time advisor to institutional investors and author of Against the Gods: The Remarkable Story of Risk? It's doubtful.

What's more, the mortgage interest deduction is bad tax policy. It's sold as a middle class subsidy, but it doesn't really work as advertised. The reason is that the biggest break is enjoyed by the highest income households. For instance, the President's Tax Reform commission calculated that individuals making more than $200,000 a year received more than 8 times the benefit of those earning between $50,000 and $75,000 a year. In addition, the rate of homeownership in Canada, Australia and Britain is comparable to the U.S., but these countries do not have the mortgage interest deduction subsidy.

These days, no one can doubt that a home is an investment. It's an asset class, like stocks and bonds. Indeed, one reason why housing prices hit such stratospheric heights was the potent combination of owners treating homes as an investment, and the capital markets shoveling huge sums of money into real estate through such innovations as collateralized mortgage obligations (CDOs). For awhile, the net effect was to increase the liquidity of real estate "investments", supporting an unprecedented degree of speculative activity.

The tax code shouldn't bias investment money to favor one kind of investment over another--certainly not in an intensely competitive global economy. Let the economic fundamentals dictate where investors place their financial bets on the future rather than the tax-writing prejudices (and campaign contribution solicitations) of Congress and the White House. "The current tax system distorts the economic decisions of families and businesses, leading to an inefficient allocation of resources and hindering economic growth," reads the final report of the Tax Reform commission.

To be sure, calling for the end of housing subsidies is at best reminiscent of tilting at windmills. (Does anyone really remember the President's 2005 tax commission? The report was buried fast.) Governments have long favored housing. The world's first subsidy Constantinople, speculates David Smith, founder and head of the Affordable Housing Institute in Boston. The subsidy was a perpetual grant of a ration of bread--the panes aedium. It was given to anyone that built a home in the city, and the panes aedium was passed along to the new home owners at sale. "Strikingly, the panes aedium was not just a first-time home buyer incentive, but an ongoing property asset, in much the same way as real estate tax abatements or exemptions are intrinsic property rights in the modern," writes Smith.

That said, the lesson of the past decade is that too much investment money goes to real estate in modern America. At a time when companies from China, India, South Korea, Brazil and other emerging markets--as well as traditional rivals from Europe and Japan-- compete with American firms for markets and profits, it's time to take residential real estate off its tax-favored pedestal..

"Worst Ever" Post-WWII Crisis??!?

If this is the worst ever crisis why are layoff announcements still extremely low, why is the 4-week average of initial unemployment claims still below 380,000 and why do 95 percent of Americans which want a job, have a job? Why are the balance sheets of nonfinancial corporations stronger today than almost anytime since the 1960s? If conditions are the "worst ever" for the consumer, why has aggregate household liquid asset holdings risen by the outstanding rate of almost 10 percent in the last year? Finally,if this is the "worst crisis ever" why does the world economy still enjoy healthy growth coming from more diverse places in the globe than perhaps ever in U.S. history? There are indeed serious issues surrounding the contemporary crisis, but do you think perhaps there has been just a bit of an overreaction????

It looks like the Senate has decided the way to attack the housing problem is to reward some reliable campaign contributors--i.e. homebuilders. How else to explain that the bulk of the legislative package goes toward a new tax break for home builders. It allows homebuilders to claim current losses against taxes paid in prior (and more profitable) years. In essnce, they're getting a hefty tax rebate.

Go figure.

Worse yet, the Senate dropped the one proposal that could have made a difference: Allowing bankruptcy judges to modify the terms of residential mortgages in personal bankrupty.Bankruptcy is a well-established safety net. It has many experienced judges and trustees. The move would go a logn way toward solving the housing foreclosure crisis. But the financial services industry opposed it--and the Senate listened. Question is, how does the financial services industry manage to wield political power after all the damage they've done to the economy and households?

Is the ghost of Thomas Robert Malthus stalking the global economy? Sad to say, it sure seems like it.

Malthus was a key figure in the 18th and early 19th century in developing modern mainstream economics. (And Darwin hit on the idea of natural selection after reading Malthus' Essay on Population.) But Malthus is best remembered for his grim argument that there is a tendency from "the wretched inhabitants of Tierra del Fuego" to "the beggars of Teshoo Loomboo" for population growth to outstrip resources.

The grim dynamic runs along these lines: Growing incomes lead to increased fertility and reduced mortality. That means there are more mouths to feed on the same land. Growth and income fall. The process repeats itself, over and over again. Little wonder the Victorian historian Thomas Carlyle described Malthus as "Dreary, stolid, dismal, without hope for this world or the next."

Evidence for the Pessimists
In the 21st century, the worry revolves around the dramatic expansion of the global economy and consumer purchasing power in China, India, Brazil, Chile, Mexico, Russia, and other emerging markets. The rise of the frontier economies is putting too great a strain on natural resources. The price increases we're witnessing aren't a temporary market dislocation, but a permanent shift into an Age of Scarcity.

Could the pessimists be right?

They have some evidence in their corner. Certainly, despite some recent declines, commodity prices are at nosebleed heights. The Rogers International Commodities Index, made up of 36 different commodities ranging from agriculture to energy to metals, is up 383% over the past 10 years. Oil prices have jumped from $23 a barrel in 2003 to around $100 currently. Part of that oil price hike could also reflect that the world is near "peak oil," the term used to define the transformative moment when global oil production starts declining gradually over time.

China Putting Price Controls on Food
Food prices are skyrocketing, too. The Food & Agricultural Organization of the United Nations says its food index is at its highest level since its creation in 1990. High food prices are pinching household pocketbooks in developed nations like the U.S. But they are catastrophic to incomes in developing ones. That's why Mexico has seen mass protests about the cost of tortillas, Senegal, Mauritania, and other parts of Africa have had riots over grain prices, and children have marched in Yemen protesting child hunger.

Governments are also getting nervous. They're taking various measures to restrain price increases and secure supplies. For instance, according to the Asian Development Bank's latest outlook, import duties on food and cereals are being temporarily cut in some countries and in others exports are being taxed or restricted to increase domestic supplies of food. A number of countries, like China, are also putting on price controls on food. "Artificial restraints on prices and inflation today that blunt market incentives are only likely to lead to higher prices in the future," worry the authors of the Asian Development Report for 2008.

Still, there's good reason to believe the Age of Scarcity isn't here. For one thing, the long-term impact of steep market prices and technological innovation shouldn't be underestimated. The late Julian Simon, an iconoclastic environmental optimist and professor of business administration, captured the essential dynamic in the introduction to his essay "Forecasting the Long-Term Trend of Raw Material Availability."

"The key sequence runs as follows: (1) increased pressure of population and income growth upon resources, causing an increase in prices; (2) perception of the scarcity problem with its attendant opportunities; (3) search for new solutions to the problem; (4) discovery of solutions that leave us better off than if the original problem had never risen."

What Would Schumpeter Say?
Indeed, instead of Malthus, the touchstone economist for our era is Joseph Schumpeter. He's best known for his metaphor of "creative destruction," the process by which new technologies, new markets, and new organizations supplant the old. Knowledge, innovation, and entrepreneurship are what count. Just ask the risk-takers in Silicon Valley, Route 128, and the Beltway who are eagerly pursuing alternative energy technologies with the price of oil so high.

But equally important in the shorter run is public policy--specifically poor public policy. Take the surge in food prices. "I'm not with Malthus on this one," says C. Ford Runge, agricultural economist at the University of Minnesota. "The phenomenon is the result of a conscious, rational, self-interested claim with horrendous collateral consequences."

Diversion of Food Crops into the Energy Supply
To be sure, the demand for better foodstuff partly comes from increased wealth in developing nations. People can afford better diets, and that demand is putting long-term pressure on supply.

That said, Runge is scathing about the massive subsidies shoveled at the biofuel industry in the U.S., Europe, and elsewhere. One cost of propping up the industry is a global runup in food in grain prices. This can be traced in part to energy legislation enacted by Congress and signed into law by President George W. Bush in 2007.

Talk about unintended consequences. The diversion of food crops into the energy supply--and the attendant runup in prices--has been a disaster for the nearly 1 billion of the world's poor who are chronically food-insecure. Runge notes that in Asia grains account for 63% of diet, 60% in the former Soviet Republics and North Africa, 50% in sub-Saharan Africa, and 43% in Latin America. Here's a thought: Before painting nightmarish visions of a Malthusian moment, why not get rid of biofuel subsidies first?

Remembering the Club of Rome
And then governments in the developing nations can focus on improving their farming techniques and yield. The Asian Development Bank calls for governments to accelerate their efforts to improve technical progress and productivity "through infrastructure, especially irrigation systems, and institutional support through credit markets and extension services."

Commentators and analysts have periodically predicted a Malthusian nightmare--wrongly. Remember the Club of Rome and its terrible forecast about the limits to growth published during the 1970s oil and food crisis? How about the 1980 bet between population pessimist Paul Ehrlich, the brilliant biologist, and the eternal optimist we mentioned earlier, Julian Simon. Ehrlich picked five metals on Sept. 29, 1980 that he thought would rise in price, figuring that a Malthusian squeeze would send natural-resource prices soaring.

The wager? If inflation-adjusted prices rose, Simon would pay Ehrlich and if prices fell Ehrlich would pay Simon. The payoff date: Sept. 29, 1990. Well, the 1980s came and went, and despite a stunning 800 million increase in world population in the '80s, the metal prices dropped. Ehrlich settled the bet with Simon for almost $600.

Almost two decades later, we'll make our own wager: We won't enter an era of scarcity today so long as we embrace public policies that encourage lots of innovation and bigger markets.

It's a well-reported, sad (but all too common) story of Wall Street fleecing school boards.

Two Cheers for Free Trade

Pacts like Nafta are essential to the health of the U.S. economy, but we could do a lot more to relieve the unpleasant side effects

by Chris Farrell

Remember the "giant sucking sound"? That was 1992 Presidential candidate Ross Perot's colorful auditory description of how multitudes of Americans would lose their jobs to low-wage competitors in Mexico.

Well, it's more than a decade and a half later, and Perot's bête noir, the Nafta agreement, is once again the subject of heated debate in a campaign for the White House. Democratic Presidential candidates, Senators Barack Obama (D-Ill.) and Hillary Clinton (D-N.Y.) have both criticized the agreement (BusinessWeek, 3/19/08).

But the regional fears Nafta inspired in 1992 have gone global in 2008. In addition to Mexico, most of the world's dynamic emerging markets, including China, India, and Brazil, have become strong players in the global economic arena. Americans worry about competition from overseas companies and workers from other lands emigrating to the U.S., especially with the economy faltering amid falling home prices, tottering financial markets, and shaky consumer confidence.

The case for freer trade and open markets is overwhelming. Economic evidence and economic history alike support the view that freer trade over time invigorates economic growth by encouraging the spread of new commercial ideas, new technologies, and new ways of organizing everyday life. Consumers enjoy lower prices and greater choice. Competition from overseas rivals encourages corporate efficiency and innovation.

The Politics of Trade

To be sure, free trade is a powerful economic medicine that can have some unpleasant side effects, and policymakers could do a better job of ameliorating attendant job losses and other economic dislocations. But the problems associated with free trade are manageable compared to those caused by closed economic borders. (Just ask Messrs. Smoot and Hawley.)

Yet many economists worry that election-year pressure from voters to "do something" about income inequality, stagnant wages, and pink slips is pushing Washington toward protectionism. Invoking the Harry Potter books, Greg Mankiw, Harvard University economist and former head of the White House Council of Economic Advisors, writes in a recent New York Times opinion piece that "no issue divides economists and mere Muggles more than the debate over globalization and international trade." Mankiw sees the crux of the problem as this: "Where the high priests of the dismal science see opportunity through the magic of the market's invisible hand, Joe Sixpack sees a threat to his livelihood."

With all respect to Mankiw, a terrific economist with a best-selling textbook, that's nonsense. First of all, give Joe Sixpack credit. The knowledge gap between the "high priests" and ordinary Americans is exaggerated. It seems to me most voters have a pretty good grasp of the gains from freer trade with the rest of the world. Protectionists and immigrant-bashers garner plenty of media attention, yet voters have handed over relatively little power to the apostles of protectionism over the past three decades or so. Just ask free-trade opponents Ross Perot, Pat Buchanan, and Tom Tancredo, each of whom failed in a Presidential bid. Meanwhile, Bill Clinton and George H.W. Bush each pushed through a number of free-trade agreements during their Presidencies.

Yes, the politics of trade is often a dance with two steps forward and one step back. Yet at the end of the day the embrace of globalization is strong.

Keeping the Faith

Even more important, it's not Joe Sixpack who is at fault. It's economists such as Mankiw who bear much of the blame for the current backlash in many quarters against international competition. As everyone who took Economics 101 knows, the gains from trade are dispersed throughout the economy while the costs are highly concentrated. Too many employees in recent years have felt the downside of "creative destruction." Thanks to the routine corporate restructurings, downsizings, reengineerings--pick your favorite euphemism--in Corporate America, there's little job security and stagnant wages.

Yet the economic priesthood continues to devote enormous intellectual firepower to making the case for freer trade and writing op-ed pieces extolling the benefits while ignoring the downside and dismissing the losers. "They have been quick to denounce opponents of this [free trade] agenda as 'protectionists' who should not be allowed in polite circles," writes Dean Baker, co-director of the Center for Economic & Policy Research in the latest issue of the Real-World Economics Review. "Yet, they rarely acknowledge the unavoidable implication of trade theory--that a large segment of the U.S. workforce will have to endure lower living standards as a result of the current course of trade liberalization."

In the battle of public-policy ideas, American economists do wield influence. It's time to claim victory in the free-trade debate. But if economists want Washington and the general public to keep the free-trade faith they need to get more involved in helping out the "losers." And it doesn't matter whether the culprit is international competition, deregulation, technological innovation, or some combination of the three.

No, protectionism is not the answer. Let's all agree on that, and move on. But preserving the economy's dynamism calls for the considerable brainpower of the economic profession to help come up with ways that offer workers better security in an era marked by rising fears of wage stagnation, job turmoil, long-term unemployment, and underemployment, unaffordable or unavailable health insurance, and increasingly at-risk pension plans. Now that's a challenge worth taking up.

But here is a key difference: The 75 year forecast projects smaller deficits in the years following 2041. The improvements come thanks to immigrants that work and pay taxes, but return home before collecting benefits. The contribution of these immigrants reduces the system's long-term shortfall from 1.95% of future wages to 1.70%--a dramatic difference. According to Andrew G. Biggs, formerly principal deputy commissioner of the Social Security Administration and currently a scholar with the American Enterprise Institute, that means an immediate and permanent increase of 1.7% in the payroll tax--from 12.4% of wages to 14.1%--would keep the program solvent for 75 years.

Of course, not everyone agrees that's what we should do. But the notion that there is a Social Security crisis, well, there isn't one.