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WHAT WE THINK
End of the housing bubble exposes weakness of the economy
Is the U.S. headed for a new recession?

September 8, 2006 | Page 3

WILL FALLING house prices and skyrocketing energy costs drive the U.S. into a recession in the months ahead? And what will happen to workers, already left out of the boom, when the downturn does finally come?

These questions finally emerged in the corporate media last month, cutting through months of economic happy talk and denial from White House propagandists, Wall Street analysts and the real estate industry alike.

Recent statistics on housing prices and construction make it clear that the booming market of the past few years has ended. As of July, prices of previously owned homes rose at their slowest pace in 11 years, and real housing prices--that is, after inflation is taken into account--have declined. New housing starts were down 13.3 percent over a year earlier.

While this indicates a slowdown, not a crash, the possibility exists that sell-offs could cripple the wider U.S. economy. The reason: housing has driven much of the economic recovery since the boom of 2001.

"The run-up in housing prices has created more than $5 trillion in bubble wealth," left-wing economist Dean Baker wrote recently. "Consumers have borrowed against this new wealth at a feverish pace, pulling more than $600 billion out of their homes in the last year. This borrowing fueled the consumption boom of the last five years, pushing savings into negative territory for the first time since the beginning of the depression."

The Wall Street investment bank Merrill Lynch estimates that investment in housing construction plus consumer spending partly financed by mortgage refinancing accounted for half of total growth in U.S. Gross Domestic Product (GDP) last year. Housing, construction and realty together produced an estimated one-third of all jobs created since 2001--and according to Baker, the construction industry alone could lose 2 million jobs in the near future.

A rapid decline in housing prices could have a further impact--causing a wave of defaults on mortgage payments, particularly for heavily indebted working people with interest-only or adjustable rate mortgages, who would find themselves owing more on their mortgages than their homes are worth.

This, in turn, could trigger a banking crisis. In July, real estate-related loans accounted for a record 33.5 percent of the U.S. banking industry's $9.3 trillion in assets.

A recession isn't right around the corner, and the current business cycle may not end with a bust, but instead a period of stagnant growth and higher inflation--or stagflation, as it was called in the 1970s. Either way, however, the impact on workers is likely to be worse than in past economic downturns.

For now, however, business is great--if you're the boss, that is.

Although estimated growth in GDP for the second quarter was recently revised upward to 2.9 percent--okay, but not strong--profits are skyrocketing. According to the investment bank UBS, this is "the golden era of profitability." In the second quarter of 2006, profits were up 20.5 percent above the level of the same period a year earlier.

Profits account for 12.2 percent of GDP--the highest level in 40 years. Meanwhile, wages and salaries have declined sharply as a percentage of GDP--down to just 45 percent today, from 50 percent in 2001 and a high of 53.6 percent in 1970.

Real wages have fallen 2 percent since 2001. As the New York Times observed, "The current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers."

As the Times noted, "The stagnation of real wages--wages adjusted for inflation--actually goes back more than 30 years. The real wage of nonsupervisory workers reached a peak in the early 1970s, at the end of the postwar boom. Since then, workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973."

Now, fewer workers are working harder for less. Despite an increase in worker productivity of 16.6 percent from 2000 to 2005, total compensation for a worker earning a median income rose only 7.2 percent. Employers pocketed the difference. And there are 1.7 million fewer manufacturing jobs in the U.S. today than at the start of the recession--a pathetic level for an economic recovery.

The picture at the top of U.S. society couldn't be more different. The wealthiest 0.1 percent of households in the U.S.--with an average annual income of $3 million--doubled their share of national income since 1980 to 7.4 percent, according to a study by the New York Times.

George W. Bush deserves plenty of blame for his role in this one-sided class war. But the lopsided shape of this economic expansion "is the result of a quarter-century of policies that have systematically reduced workers' bargaining power," as New York Times columnist and economist Paul Krugman put it.

Those policies include free-trade agreements like NAFTA, passed by a Democratic president and Congress in 1994--not to mention Bush's legislative victories achieved with critical Democratic support, such as the bankruptcy "reform" bill that will keep indebted workers in hock to Corporate America for life.

This is the new economic reality in the U.S.--rising inequality even in boom times, and setbacks for workers during recessions, while both main political parties collaborate to further the employers' agenda.

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