Creative Class

Felix Salmon says there’s no end in sight for the housing bust, pointing to the latest edition of the Case-Shiller Home Price Index. Housing prices are off 36 percent since their 2006 peak.  Housing prices have fallen back to 2002 levels in nominal terms but, as Business Week’s Prashant Gopal notes, they’ve plunged to 2000 levels when adjusted for inflation. Calculated Risk (with great graphics as usual) predicts another 10-20 percent drop,

Regional differences remain pronounced. Phoenix and Las Vegas are down more than 50 percent from their peak values, while Dallas is off only 11 percent. Dallas, Denver, Boston, Charlotte, and New York appear to be holding up best. New York prices remain 73 percent above their 2000 levels, Detroit’s are nearly 30 percent below – in line with their 1995 levels.

Felix Salmon points to Julia Ioffe’s TNR story on Nouriel Roubini, zeroing in on the long journey back to recovery.

Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he had told me earlier. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change. The transition is painful, but the result may be good.”

Salmon’s comment is spot on.

[O]ver the long term, I’m optimistic that the redeployment of US human resources away from finance and into the real economy is bound to be a good thing. But in the medium term, the process of “scaling back and turning inwards” around the globe is going to be extremely painful – and is far from over. Or, to put it a more familiar way, things are going to get worse before they get worse. Only very slowly and very painfully might they start to get better — and it’s not going to happen any time soon.

The thing that strikes me most is how very long it takes for economies to reset themselves during crises. Recovery from both the Long Depression of the 1870s and the Great Depression of the 1930s took the better part of two or three decades. Both required not just a new wave of technological innovation, the creative destruction of various industries, and new modes of government economic intervention, but were premised upon a whole new “spatial fix” – the rise of the “modern” industrial city after the Long Depression and suburbia’s rise after the Great Depression – to set in motion broad new patterns of consumer spending and demand which could power longer-run growth. My own father was just eight in 1929, my mother three, when the stock market crashed. They left Newark for a close-in working class New Jersey suburb in 1960 – three full decades after the onset of the crash.

Governments and central banks certainly have better monetary and fiscal policy tools at their disposal now and are more adept at managing economic downturns. Still, I fear it will be a much longer road to full recovery and a new normal than most people expect.

Felix Salmon points to Michael Lewis’ review of the new Warren Buffett biography by Alice Schroeder.

“Lewis is no fan of Buffett’s, and dwells in his review on many of the investor’s weaknesses: his juvenile shoplifting, his dysfunctional family life, his “diet of an eight-year-old.” He even explains why he thinks that “there has never been a better time to bet against Warren Buffett” – not that Lewis himself is about to do so. Lewis says that Buffett is unhappy with Schroeder’s book; he’ll be much less happy with this article …”

The Pew Research Center recently asked a sample of Americans what they consider to be life’s necessities. Here’s a chart summarizing the key results.

Felix Salmon reacts:

I’m quite surprised that the landline phone is still considered more of a necessity than a cellphone — I can’t imagine that’s going to continue to be the case for long. I am interested in the huge drop in the perceived necessity of the microwave, however. Yes, there’s something about microwaves which just feels old-fashioned and unnecessary — but the microwave hasn’t really been replaced by anything … I’m also surprised that 52% of people consider a TV set to be a necessity, while only 23% of people consider cable or satellite TV to be a necessity: subtract the second number from the first, and you get a good indication of the sheer power of network TV. I’m sure that, too, will erode quickly.

The huge drop in the perceived necessity of clothes dryers, home air conditioning, and dishwashers is I think partly a response to the economic crisis, but more a response to the bursting of the housing bubble: people don’t define themselves by their appliances in the way that they did during the housing boom.

What went up in perceived necessity? Nothing, really — nothing more than the margin of error of 3.6 percentage points, anyway. Although it would have been interesting to see the results if intangibles had been included in the survey.

I mainly agree with Salmon. The results show the fragility of the old suburban, fordist, “keeping up with the Jones’” lifestyle. Looks to me though that the old order has declined, but we’re still awaiting something to replace it.

But this begs a bigger question: When might we see a tipping point toward something new – a new normal, so to speak.

The numbers for high-speed internet and iPod are not so encouraging in terms of potentially signaling the rise of a new higher-tech consumption bundle. But there are many things that are not probed, as Salmon notes. I wonder what the results would be, not just for intangibles but for experiential goods and for things like personal development (education, learning), higher-quality food, exercise, health-care, and a cleaner, greener environment.

It’s important to begin to understand what this new consumption bundle and new lifestyle might be for a simple reason. It’s not government spending that ultimately will set the stage for long-run recovery, but a shift in private consumption that provides the broad pattern of consumer demand that fuels innovation and new patterns of production. As I’ve noted before, it was the rise of suburbanism that powered post-war recovery and expansion.

We’re in the earliest phases of the current reset so it is still hard to tell what the core components of that new consumption bundle might be. The Great Depression began in 1929, for example, and it was not until the 1950s and 1960s that the new suburban lifestyle burst onto the scene fully formed. My dad was an eight-year-old boy in 1929 living with his nine family members in a tiny Newark apartment without a refrigerator or full plumbing. Like so many others of his generation, he bought his first suburban home in the late 1950s. He could not even imagine the total transformation of his lifestyle 20 or 30 years earlier, buying his own home on what was then a farm, filling it with all manner of modern conveniences, and driving his Chevy Impala car to work.

It may not be apparent yet, but a new consumption bundle and a new way of life will have to emerge sooner or later. It will have to be less oriented around the auto-housing industrial complex: We’ll all have to spend less on these things, so we can create demand for the stuff that will power and build our future.

If we look closely we can already notice some of the emergent strands or threads of this new normal – in the shift away from big cars and big houses, away from conspicuous consumption and toward not just organic and energy-efficient, green products, but from material goods to experiences, health, and personal development.

But, it’s still very early in the resetting process. Transformations on this scale take time.

Still, I can’t help but wonder what the shape of the new consumption and new lifestyle might be, and would very much welcome your thoughts.

Lots of commenting and discussing around the internet on the new report (h/t: Mark Samber) from the Center for an Urban Future (of whose work I am a big fan) on the middle class exodus from New York City.

Economists have long argued that wages are sticky. I think it was the late John Dunlop who first discovered this. He told me once that Keynes actually sent him a letter congratulating him on that. Fed Ex has just announced big wage cuts. Felix Salmon says it may be class warfare time.

There’s been a huge shift in power in recent years from labor to capital: corporate profits have been rising much faster than wages for some time now. It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts.

Hmmm… cutting wages in a downturn when folks say there’s a need to stimulate demand and consumption. And double hmmmm… locked up credit markets where people can’t get loans. Try it for yourself, go out there and try to get yourself a mortgage on the buy-of-a-lifetime house. Boy oh boy, quite a vicious set of collective action problems we’re confronting. Not to worry: we have the stimulus and the auto bailout coming (ahem …).

Felix Salmon, who’s been generating some of very best reporting and commentary on the ever-unfolding financial crisis:

[I]f you think that financial reporters are frazzled right now, just imagine what it’s like for the people on the front lines. Stocks are going haywire, volatility’s soaring, counterparty risk is through the roof, regulators aren’t helping matters – and the upshot is shot nerves, hasty decision-making, and generalized chaos.

The same is true, of course, at Treasury, at the New York Fed, and at any other regulatory organization you can think of. And it’s a recipe for disaster. Just remember – if you can keep your head when all about you are losing theirs, it doesn’t matter, because they’re the people in charge.

This is why the speed at which things are falling apart is so worrying. Monster deals are being done and then forgotten about within hours: last night I was at a dinner party, talking about the crisis (natch) and listening to someone say “oh yes, AIG, I forgot about that one”.

I don’t think anybody’s capable of holding in their head all the vital information needed to get a grip on things right now – not in the wake of Lehman and Merrill and AIG and the liquidity injection and the TED spread and Morgan Stanley and the money-market funds and counterparty risk in the CDS market and bans on short-selling and WaMu and negative nominal interest rates on T-bills and the oil price and the dollar and why on earth that German bank wired $300 million to a bankrupt bank and on and on and on and on. We’ve been overwhelmed by the complexity of the system, and nobody knows anything.

Felix Salmon reports on the real estate panel at the Milken Institute’s Global Conference, highlighting this interchange between Sam Zell, Chairman and CEO of the Tribune Company, and Bobby Turner of Canyon Capital Advisors.

Turner, channeling the likes of Ryan Avent and Richard Florida, said that
consumer prefences are going to move away from the suburban lifestyle
as transportation costs soar. Zell agreed, pointing to enormous growth of housing in what he
called “24/7 cities”, putting a lot of that growth down to the societal
deferral of marriage. But as cities become ever more expensive and the suburbs become ever
cheaper, he was asked, won’t corporations move out to the suburbs? No.
Motorola rented 200,000 square feet of office space in downtown Chicago
last year, he said, even as they have over half a million vacant square
feet not far away in McHenry county. If the employees are moving to the
cities, then the companies are going to have to follow suit.

Yep, they sure are.