Saturday, August 7, 2010

A Slow Recovery at Best- Reflections on My Latest Conversation With “Sam The Developer”

Dr Mark Naison
Fordham University

In order to really understand where the economy is going, you can’t just rely on statistics. You have to talk to real people and see what their actual situation is. I have a excellent entrée to people in many segments of the workforce through my students and former students at Fordham, who work in education, business, and health care, and through the people I work with in the Bronx, some of whom are recent immigrants who work in entrée level jobs. .

But one of most valuable barometers of economic conditions I know is a friend and tennis partner I call “Sam The Developer” an innovative businessman who specializes in developing shopping centers in immigrant, working class neighborhoods throughout the New York Metropolitan area. Sam has made an excellent living finding niches for economic development in communities of color like East New York and the Northwest Bronx, but in the process he has provided hundreds if not thousands of jobs, in construction and in retail, to residents of those neighborhoods. Sam, along with small and medium size business people throughout the country like him, was a major source of private sector job growth before the Recession hit, and was virtually “shut down” during the first two years of the Crisis. No bank would lend to him, and as a result no new project could be launched

When I asked him whether things were getting better, his answer was instructive and frankly not that encouraging. After a two year drought, Sam said, development opportunities are starting to reappear in the New York economy, at least for people like him who work in outer borough immigrant neighborhoods, but under very changed conditions. First of all he said, the construction unions in New York have been broken. No one can build paying union wages, so developers are either hiring non union workers or paying union workers way below what was once the prevailing wage. Secondly, banks are lending again, but under such restrictive conditions as to make it impossible for small businessmen like him to work with them. They are either charging exorbitant interest rates for their loans or demanding that the recipient put up all his or her personal property – including their houses- as collateral, which Sam is unwilling to do

To take advantage of the few opportunities which are there, which Sam said, are largely in building “big box” stores in Brooklyn or the Bronx, Sam has had to get loans guaranteed by government intermediaries through Stimulus Funding. Those loans will keep him in business for several years, but when they expire, Sam will have to get his funding directly from the banks, and he is not sure that they will be willing to lend at rates that will allow him to do business.

Needless to say, the picture Sam paints suggests that the “Recovery” we are in is extremely fragile. First of all, job growth in a key economic sector- construction- in so far as it has occurred at all, has been accompanied by declining wages. This is hardly the kind of economic climate to nurture “consumer confidence” Secondly, banks are so fearful of losses from toxic assets still on their books that they are taking no risks in funding new business enterprises. As a result, it is extremely difficult to get funding for new projects or new enterprises, even when the developer has an excellent track record. Finally, many of the new projects that are being launched are made financial viable by federal stimulus funds, which are likely to run out in the next two years.

Anyway you look at it, this is a grim picture. Banks not lending, new projects remaining dormant, unemployment high, wages falling, Insofar as there is job growth, it comes from industries receiving an infusion of government stimulus funding. But what is going to happen when those funds run out. Will job growth come from consumer demand? The resurgence of small business? An infusion of bank lending?

Unfortunately, if we extrapolate from Sam’s experience, none of that is likely to happen unless the government puts a new injection of Stimulus funding into the economy
An obsession with the deficit may make sense, in the long run, but it in the short run it will doom us to years and years of economic stagnation and extreme hardship for Working America.

Mark Naison
August 7, 2010