Navigating the Jobs Crisis: What Workers Know about Recovery
Thursday, 11/26/2009 - 9:16 am by Alice O Connor | One Comment
In the wake of the highest unemployment rate in 25 years, the Roosevelt Institute asked historians, economists and other public thinkers to reflect on the lessons of the New Deal and explore new, big ideas for how to get America back to work. On this Thanksgiving Day, Alice O’Connor reminds us that a job is not just the means to economic security, but to psychological and social security as well.
In 1940 Yale Professor of Economics and Director of Unemployment Studies E. Wight Bakke published a pair of volumes titled The Unemployed Worker and Citizens Without Work, reporting the results of a remarkable eight-year study of unemployed workers and their families in Depression era New Haven. Seventy years later, the study’s analysis still resonates, and never more so than in light of this month’s unemployment figures showing jobless rates in the double digits, where they are expected to stay for the next couple of years.
Bakke’s study was based on a premise that would be greeted as anathema in most economics departments today: that understanding unemployment would require looking beyond what could be revealed in statistics and household survey data. It would require an exploration of the social and psychological as well as the economic meaning of work. It would also require spending real time in the working-class communities most affected by job loss. And it would require asking workers and their families what they thought, how they felt, and how they were coping, emotionally and materially, with what Bakke memorably called “the task of making a living without a job.” Accordingly, Bakke and his field researchers joined the ranks of New Haven’s unemployed workers from 1932-39, acting as interviewers and observers and social surveyors while the realities of mass and long-term unemployment hit home. New Haven’s unemployed, Bakke learned, felt robbed of their livelihoods but also of their self-respect, their place in the community, their sense of having a future, and, for the men in particular, their authority as breadwinners in the family. Not all of these losses were entirely bad — Bakke wrote about the subtle democratization of family life as husbands “adjusted” to the autonomy of their income-earning wives — but his study left no doubt that putting people back to work was key to psychological as well as economic recovery.
Ultimately, the most striking of Bakke’s insights were political. Like others studying the impact of mass unemployment at the time, he was well aware of the dangers it presented to democracy. But he had the more immediate politics of relief in mind. Taking aim at the still-favored mythology that aiding workers would make them dependent on the dole, he documented the extraordinary lengths they would go to first to avoid and then to minimize their reliance on public relief. He also wrote about a subtle shift in working-class attitudes and consciousness, from an individualistic to a more “collective” understanding of self reliance, and of the role of government in providing work and economic security for its citizenry. And here, in a way he could hardly have anticipated when he started the study in 1932, Bakke was picking up on what had become a keynote in Franklin D. Roosevelt’s New Deal: employment-centered economic recovery and reform.
From the start of his administration, FDR made putting people back to work a high and visible priority for economic recovery. In 1933, Congress established the Public Works Administration, a massive jobs-generating investment in the nation’s public infrastructure that would come to employ millions in construction, engineering, and related industries. This came at the very time the administration was acting to restore confidence in the financial sector through measures such as the Glass-Steagall Banking Act and the creation of the Federal Deposit Insurance Corporation and the Securities and Exchange Commission — all in 1933-34.
Pressured to do more amid 25%-plus unemployment rates, the administration soon instituted a series of more direct federal jobs programs, which by 1943 had created jobs for more than 8.5 million people and extended public employment to the nation’s social and cultural as well as its civic infrastructure. Employment was also the centerpiece of major economic reforms launched in the Social Security and Wagner Acts of 1935, and the Fair Labor Standards Act of 1938 - which among them instituted old-age retirement, unemployment insurance, child welfare, wage and hours standards, and rights to collective bargaining that would come to anchor the promise of economic security. These and other New Deal measures were deeply flawed by the racial and gender exclusions they perpetuated. But their lasting legacy can be found in the thousands of schools, parks, bridges, roads, airports, and post offices constructed by public workers; in the extraordinary art, music, theatre, and literary creations federally-employed workers contributed to our cultural heritage; and, as Bakke no doubt appreciated, in the recognition that having citizens with meaningful, well-paid work was a sign of a fully functioning political economy.
This, then, is why Bakke and the workers he wrote about still speak to us, all these decades after The Unemployed Worker and Citizens Without Work first appeared and amidst the worst economic downturn since the Great Depression. Their thoughts and feelings about the meaning of work are echoed by millions of individuals, families, and communities facing the prospect of a future without it, and by the scores of others taking wage and hours cuts instead. Their resourcefulness in coping with economic hardship was admirable but had its limits, as do the resources of those caught up in the spiraling effects of today’s Great Recession.
Their experience, like that of their contemporary counterparts, told them what no dry and detached compilation of economic indicators could: that recovery without jobs is no recovery at all. And their plea, soon crystallized into an organized political demand, was for an economy that would support rather than undermine the needs and aspirations of the people who make it work.
Alice O’Connor is a Professor of History at the University of California, Santa Barbara.
Why hasn’t the 30yr mortgage interest rate come down further, based on the inflation rate, as it has done during other recessions?
Enclosed you will find my opinion and solution to this question and the underwater mortgage problem, which I sent to the HUD secretary.
To Secretary Shaun Donovan:
I am a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. I have over forty years in the financial world.
The increasing number of foreclosures is weighting down our economic recovery. It is imperative to FHA and the GSEs and the economy, that they are decreased. Consumer’s confidence and financial condition must be improved if we are going to have a lasting economic recovery.
Enclose you will find an economic paper I wrote that outlines a program that will improve our economy and decrease foreclosures and unemployment. It will help the financial condition of FHA, FNM and FRE.
Mortgage Interest Rate At Historical High
If there is one thing a capitalistic economy needs to operate efficiently is a means of exchange that is in balance with available supply. Leonard C. Tekaat
The private financial industry has failed to bring mortgage interest rates down sufficiently, to help the economy recover from the deepest recession our economy has experienced in 70 yrs. With the Fed funds rate at near zero, the 30-year fixed rate mortgage rate should be much lower. From 1993 to1998, to pick a period that the economy was operating fairly well, the 30yr fixed rate mortgage interest rate was approximately 100% above the Fed funds rate. The Fed funds rate was approximately 3.5% and the mortgage interest rate was approximately 6.5%. The inflation rate or Consumer Price Index was approximately 3.5%. The fixed rate mortgage interest rate was approximately 300 basis points above the Fed funds rate. Currently the Fed rate is at near zero, the 30 year fixed rate mortgage interest rate should be at about 3%, which is 300 basis points above the Fed funds rate or 300% above the inflation rate.
One of the primary problems with the housing market is that the 30yr fixed rate mortgage that is currently being offered to the public has an interest rate that is too high to sufficiently increase consumer’s purchasing power. Before the current economic crisis occurred the same mortgage interest rate was approximately 6.5%. The current interest rate for the same mortgage is approximately 5%. The spread between the interest rates is not wide enough to warrant the cost of a majority of people with mortgages to refinance. If these people refinanced their mortgages at 3%, it would lower their monthly mortgage payments, there-by increasing their purchasing power. With more purchasing power, the consumer would increase demand in the economy, which would stimulate the economy. People do not have sufficient purchasing power. This is reflected in the fact that unemployment and foreclosures rates continue to rise.
With a spread of over 475 basis points between the Fed rate and the interest rate of a 30yr fixed rate mortgage, the only entity whose financial condition is improving is Wall St. investment brokerages and the big banks, which have ties to those brokerages. All money is returned to the banking industry after it is introduced into the economy. If the money were lent to the people with mortgages, at a lower starting interest rate, it would help the banks and the economy.
With the economy faltering because of a lack of consumer demand and investor and consumer confidence in the future, a stimulus is needed to include the consumer in the economic recovery.
To bring down single-family mortgage interest rates the government should encourage the creation of a mortgage or create a mortgage with a starting interest rate of 3%, to stabilize home prices, increase employment, and stimulate the economy with increased demand. A Stimulus Mortgage should be created. We need to change the terms of our mortgages so Fannie Mae (FNM) and Freddie Mac (FRE) can buy and securitize the new mortgages with a lower beginning interest rate. With fewer foreclosures the Federal Housing Administration (FHA) would not have as many claims and its financial condition would improve. The down payment should be at least 5% of the purchase price. The Zero Inflation Taxation Policy should also be enacted to help prevent another housing bubble. (More on this later)
Lower starting mortgage interest rates would be better for our economy than tax credits. Tax credits decrease government revenues, which increases the deficit. The government has to borrow more money, which has to be paid back either by a tax increase or an inflation tax. A smaller federal deficit and an improving economy would calm the world’s fears of a weak dollar and another round of inflation and higher interest rates. As our economy improves the dollar would strengthen, stabilizing commodity prices. The Stimulus Mortgage would create more economic activity by a greater number of people than tax credits. A tax credit takes purchasing power from one person and subsidizes the purchase of the home by another person. The tax credit is unfair and decreases the other person’s purchasing power by increasing their tax burden.
When the financial crisis occurred in September 2008 the Fed and Treasury helped the economy by using the TARP money to stop the financial sector from collapsing. The financial service industry is now in much better condition. It is Main Street that is now in need of a shot in the arm to get well. It can be done without costing the taxpayer any money.
Lower starting mortgage interest rates, funded by the Treasury or the Fed would not cost the taxpayers anything, because after home prices stabilize and the economy improves, the mortgages can be sold to private investors. The Fed will do this with all the mortgage-backed securities that they have bought in the last year. If the Fed had been buying mortgage-backed securities that included the Stimulus Mortgage I believe our economy would have improved more than it has in the past year. As the economy improves, without inflation, the dollar will strengthen, which will help stabilize commodity prices.
Banks and financial institutions are not confident with loaning money to homeowners to refinance their homes, for new mortgages, or make a loan modification, when home prices are decreasing. If a 30 yr. adjustable rate mortgage was created with a starting interest rate of 3%, this would jolt the economy back to life, the toxic securities will become valuable again, as they become performing assets and home prices stabilize and then slowly appreciate.
The interest rate on these new mortgages should increase one-quarter percent per year and cap out at the currant market rate of 5%. To decrease defaults on mortgages, the borrower would have to qualify at the 5% interest rate to obtain the loan. These new mortgages should not be tied to any index. People do not trust indexed mortgages because of our recent history and the uncertainty of the future. We can cap the mortgage interest rate at 5% because the Fed will not be the only entity that will be controlling inflation and inflation psychology. Read Alternative Economic Stimulus Plan and Zero Inflation Taxation Policy at http://www.economysflaw.wordpress.com/
We are currently trying to capitalize the banks by infusing money directly into them. This policy is wrong because the collateral is losing value. As the value of the collateral decreases the banks need more capital to stay viable. The value of the collateral must be stabilized first, for the banks and investors to be confident enough to lend money against it.
What will this stimulus mortgage do for the economy? When the homeowner refinances their home from a 6% mortgage interest rate to a 3% interest rate their monthly interest payment will decrease by 50%. A $1500.00 monthly mortgage interest payment will decrease to $750.00. That will be like the person receiving a $750.00 stimulus check each month for the first year and thereafter a little less each year for the next seven years. Multiply this by millions of people and you will have a stimulus plan that puts the purchasing power were it should be, with the people. The foreclosed property inventory would be quickly sold and housing prices would stabilize. Loaning money to banks does not create demand in the economy, people do!
If mortgage interest rates were available at a starting rate of 3% and the borrower was qualified at a 5% interest rate, the chance of a foreclosure would be close to zero. The eight years it would take for the interest rate to rise to 5% would allow the economy to heal. Business activity would increase; this would increase the value of commercial properties reducing the coming crisis in that area of the economy. With home values stabilized investors will be willing to invest in mortgage backed securities again rather than treasuries. With the mortgage interest rate increasing every year, the investor will know that their rate of return will increase for the next seven years unlike treasuries.
Mortgage interest rates historically have been about 100% above the inflation rate for the last 30 yrs. With inflation at 0% and home prices deflating, mortgage interest rates for the last year have been about 5 to 6% that means they are 500% to 600% above the inflation rate!
With the enactment of the Zero Inflation Taxation Policy this policy will help control inflation and inflation psychology. This policy will maintain the lowest possible interest rate and the chance of another housing bubble would be near zero. Low interest rates will help maintain the value of the mortgages and mortgage-backed securities. Investor will be confident enough to make long-term investments in mortgage-backed securities, which will create a market for 30-year mortgages. (Go to web site to read about this policy change and its benefits.)
Banks and investors should be encouraged to modify the underwater mortgages by changing the tax code so that it would be beneficial to them and the borrower when the excess amount of the mortgage is reduced.
Until all the underwater home mortgages are modified the economy will not fully recover. We need the owners of these homes to be able to participate in the economy to increase economic activity. To modify their mortgages we should use a modification agreement, not a refinancing agreement. For those people who own a home that the mortgage is greater than the currant selling price, a clause should be included in the modified mortgage agreement that states, the bank will discount the mortgage, an amount equal to 20% of the monthly payment, each month, for a maximum of ten years, or until the selling price of the house plus repairs equals the amount of the mortgage, if the borrower agrees to pay off the entire unpaid balance due. This policy would allow for an orderly decrease in mortgage balances that are above the selling price of the home and more people would elect to stay in their homes and pay their mortgages.
Posted by Leonard C. Tekaat | November 29th, 2009 at 9:39 pm