Wednesday, April 23, 2014

Capitalism in 21st Century

Popular Economics Weekly

All the hullabaloo re Thomas Piketty’s master economic work, Capitalism in the 21st Century has overlooked its real importance. Economics is finally becoming a science, rather than just social science based more on theories and formulas (such as mathematical models), than empirical research until now.

T Piketty and friends have collected 2 centuries of economic data—such as tax returns—to verify what was suspected but not known. That returns to the owners of capital have historically exceeded that of labor—i.e., wages and salaries—by a margin of 5 percent, vs. just 1.5 percent per year for employees. In other words, the returns on capital have historically grown faster than overall economic growth, which determines the growth rate of employees’ salaries.

Even Piketty’s prescription to level the playing field, a tax on capital, is but one solution. Robert Shiller expounds something much more feasible in his terrific book,  Finance in the 21st Century. He describes a futures market that insures everything from salaries, vocations, to national GDP growth. In other words, putting the financial markets in the business of insuring against failure.

earnings

Graph: WSJ Marketwatch

The 2.7 percent median wage growth in the first quarter was the strongest since the fourth quarter of 2009, when wages grew 2.8 percent. Importantly, the wage growth was faster than the 1.4 percent increase in seasonally adjusted consumer prices over the same period. Without adjusting for seasonality, median weekly wages were $796 in the first quarter.

It is important that wages are rising faster than inflation for the first time in 4 years. It means consumer purchasing power is increasing again. Household incomes have actually been stagnant for more than 30 years, only keeping up with inflation, so that most consumers had enough income for necessities.

cpi

Graph: Econoday

Year-on-year, overall CPI inflation was 1.5 percent in March, compared to 1.1 percent in February (seasonally adjusted). The core rate increased 1.6 percent year-on-year, matching the rate for February. For March, not seasonally adjusted year-ago percent changes for total and core CPI were 1.5 percent and 1.7 percent, respectively.

Consumer price inflation firmed in March, but it was for just one month—not yet setting a trend. Within the Fed, the hawks likely will point to the stronger numbers while the doves will say it is too early to say that inflation is up to the 2 percent goal. This means driving is cheaper and eating is more expensive.

But Janet Yellen has been saying that interest rates will stay down much longer, even if inflation rises above their 2 percent target. And that can only hearten consumers and homebuyers who don’t want the Federal Reserve raising rates until they see a real jobs recovery and sustained wage increases.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Tuesday, April 22, 2014

Opposing the Bully Mentality—Part II

Financial FAQs

How does one stop the bullies? Put simply, find a way to stand up to them. Economic bullies behave no differently than individuals when confronted by a person or organization willing to oppose them. But how are the 80 percent that are wage and salary earners to do that whose incomes has been whittled away since the 1970s by anti-union legislation and outright banning of collective bargaining in many of the right to work states?

Popular culture has enshrined the superhuman heroes who have tamed bullies; from Superman and Wonder Woman, to Batman, and now Captain America taming Nazi bullies. But taming economic bullies doesn’t have a popular precedent other than Robin Hood, it seems.

And Robin Hood was an English legend. America can only come up with its opposite, reverse Robin Hoodism, or taking from the poor and giving to the rich. That is how Nobelist Paul Krugman characterizes Republican attempts to cut taxes further and oppose raising the minimum wage.

“In the past, Republicans would justify tax cuts for the rich either by claiming that they would pay for themselves or by claiming that they could make up for lost revenue by cutting wasteful spending. But what we’re seeing now is open, explicit reverse Robin Hoodism: taking from ordinary families and giving to the rich. That is, even as Republicans look for a way to sound more sympathetic and less extreme, their actual policies are taking another sharp right turn.”

So the cards seem to be politically stacked against those who oppose the economic bullies. “(But) It wasn’t always this way,” says Marketwatch’s Rex Nutting. “In the 1950s, 1960s and into the 1970s, trade barriers, strong unions and discrimination gave workers (white male workers, that is) more bargaining power to get higher pay. It created the middle class.”

The result of such economic bullyism is that American wages haven’t grown since the 1970s, except for a brief period in the 1990s, when the Federal Reserve allowed the unemployment rate to fall to 4 percent, before beginning to raise interest rates. Thank you, President Clinton (and then Fed Chairman Greenspan during his easy money phase).

The share of national income that goes to labor (including the CEO’s salary and his stock options) has plunged from about 63 percent to 57 percent, says Nutting. The 6 percent of national income that’s going to profits instead of wages amounts to nearly $900 billion a year.

workpercent

Graph: WSJMarketwatch

“For corporate businesses, after-tax profits are at record levels as a share of national income,” says Nutting. “Since the recession ended, profits are up 65 percent to $1.68 trillion last year. Small businesses aren’t doing quite so spectacularly, but their income is up 13 percent and their net worth is up 33 percent to $8.7 trillion since the recession ended. And the workers? Even after a big gain in the first quarter, median wages are down 3 percent since the recession ended.”

Many commentators and sociologists in particular assert 9/11 brought modern economic bullying to a high point. It’s rationale was the US put on a semi-permanent war footing, so that “Allegiance to the old public virtues—respect of the Bill of Rights, the Geneva Conventions and the rule of domestic and international law—was mocked and dismissed as quaint and soft by our new drill sergeants, according to a recent Canadian study. “From then on a state of emergency replaced the rule of law and set itself up as the norm.”

On a personal, workplace level, “If we are in a constant war-like mode societally, it sounds trivial, it sounds child-like, it sounds naively utopian to say, ‘Can’t we all get along?’” says Gary Namie of the Workplace Bullying Institute. “If you call for civility or a suspension of unmitigated, unfettered aggression, they call you a wimp. They think you are a wimp.”

There is another term for economic bullies, used by Professor Krugman, among others, in his most recent NYTimes column. They are sadomonetarists, or bankers and economists who want to tighten credit even during such tough economic times, as now: “At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.”

That, of course, is the most cogent definition of a bully. They want to demonstrate how tough they are, regardless of the consequences. For instance, the NAACP recently posted a report by Devin Burghart, Leonard Zeskind and the Institute for Research & Education on Human Rights called “Tea Party Nationalism,” exposing what it calls links between various Tea Party organizations and racist hate groups in the United States, such as white-supremacist groups, anti-immigrant organizations and militias, who have by definition, the bully mentality.

The bully mentality manifests in many forms, besides politically. The gun lobby via the NRA, ALEC, and other organizations have succeeded in blocking government study of the causes of gun violence, even though 31,000 gun-related death occur per year, the highest by a factor of 10 of any country in the world. Needless to say that inhibits development of policies and laws that might lower gun violence, whether in the schools or our inner cities.

So it turns out the bully mentality is part of human nature, really, and so part of our culture. It is then up to those employees who want to better themselves to find a way to oppose that culture and mentality. That means pushing back against the fear that such bullying engenders in all of us—against the ‘boss’ mentality, as well. Remember, such fear has to also be felt by those economists and politicians that allow it.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Saturday, April 19, 2014

Q1 Wage Growth Highest in 4 Years

Popular Economics Weekly

This may finally be the year when jobs and the economic recovery are for real for most Americans. Median weekly wages grew at the fastest pace in the first quarter in more than four years, according to data released by the Labor Department on Thursday.

Why? Because unemployment rates are falling, and that pushes up wages, needless to say. And almost no wage growth since 2008 has kept consumers from spending more. Unemployment rates in all states had dropped below 9 percent for the first time since 2008. Twenty-one states have unemployment rate decreases, 17 states and the District of Columbia had increases, and 12 states had no change, the U.S. Bureau of Labor Statistics reported today.

clip_image002

Graph: Calculated Risk

Rhode Island had the highest unemployment rate among the states in March, 8.7 percent. The next highest rates were in Nevada and Illinois, 8.5 percent and 8.4 percent, respectively. North Dakota again had the lowest jobless rate, 2.6 percent. California still has the 4th highest unemployment rate at 7.9 percent.

clip_image004

Graph: WSJ Marketwatch

The 2.7 percent median wage growth in the first quarter was the strongest since the fourth quarter of 2009, when wages grew 2.8 percent. Importantly, the wage growth was faster than the 1.4 percent increase in seasonally adjusted consumer prices over the same period. Without adjusting for seasonality, median weekly wages were $796 in the first quarter.

It is important that wages are rising faster than inflation for the first time in 4 years. It means consumer purchasing power is increasing again. Household incomes have actually been stagnant for more than 30 years, only keeping up with inflation, so that most consumers had just enough income for necessities.

clip_image006

Graph: Econoday

Year-on-year, overall CPI inflation was 1.5 percent in March, compared to 1.1 percent in February (seasonally adjusted). The core rate increased 1.6 percent year-on-year, matching the rate for February. For March, not seasonally adjusted year-ago percent changes for total and core CPI were 1.5 percent and 1.7 percent, respectively.

Consumer price inflation firmed in March, but it was for just one month—not yet setting a trend. Within the Fed, the hawks likely will point to the stronger numbers while the doves will say it is too early to say that inflation is up to the 2 percent goal. This means driving is cheaper and eating is more expensive.

But Janet Yellen has been saying that interest rates will stay down much longer, even if inflation rises above their 2 percent target. And that can only hearten consumers and homebuyers who don’t want the Federal Reserve raising rates until they see a real jobs recovery and sustained wage increases.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Thursday, April 17, 2014

New-Home Sales Answer to RE Recovery?

The Mortgage Corner

Privately-owned housing starts in March were at a seasonally adjusted annual rate of 946,000. This is 2.8 percent above the revised February estimate of 920,000, but is 5.9 percent below the March 2013 rate of 1,005,000. Single-family housing starts in March were at a rate of 635,000; this is 6.0 percent above the revised February figure of 599,000.

We can see from the initial 2008 chart date that multifamily construction (red line) is back to pre-recession levels, but single-family starts are at 75 percent of pre-recession levels (blue line).  This mirrors the surging demand for more rental housing, which still boosts overall growth.

“We see improving signs of new-home construction as we move into the spring buying season,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB).  “The strongest recovery is in the Northeast and Midwest, where builders were hampered by severe winter weather earlier in the year.”

“Today’s report is in line with our forecast of a gradual strengthening in the housing sector in 2014,” said NAHB Chief Economist David Crowe. “However, several uncertainties including tight credit conditions for home buyers and erratic job growth are making builders cautious about getting ahead of demand.”

Single-family construction is the better barometer for home sales, since it also boosts, building design, insurance and mortgage activity, and so economic growth. And it is picking up in the spring thaw. Multifamily starts fell 6.1 percent to 292,000 units.

clip_image002

Graph: Calculated Risk

Lower mortgage rates are helping, as refinance mortgage applications jumped 7 percent, and purchase applications are up 1 percent in the latest MBA applications survey. It’s because the 30-yr conforming fixed rate has again dipped to as low as 3.875 percent for 1 origination point in California.

clip_image004

Graph: Calculated Risk

But applications are still at post-recession lows. They have returned to 1997-98 levels, and have dropped from early 2013 levels when fixed mortgage interest rates were in the 3 percent range. It seems that QE3 did bring down interest rates sufficiently to help the housing recovery, but now applications are stuck at the low level as QE3 is being ‘tapered’. The Fed is predicted to end QE3 purchases by the end of 2014.

That leaves uncertainty about the direction interest rates into the fall and winter.  They have recently plunged because of uncertainty over the confrontation in the Ukraine, and how much sanctions might damage economic activity.  The US is saying it can’t hurt domestic growth, and the IMF has predicted a pickup in worldwide growth, but what if Putin decides to invade the Ukraine?

Then all bets are off.  But at the very least it would keep interest rates at the current low level, and so help the housing market, in particular.  It also means middle income consumers still lack the means to boost their housing purchases when rates are much higher.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Tuesday, April 15, 2014

The Bully Mentality

Popular Economics Weekly

Why does the USA have such a problem with bullies? Whether in the schools, in politics, or on Internet social media? The result has been teenage suicides, horrendous school shootings by students who felt bullied or belittled, and now a whole political party that opposes anything that smacks of aiding the poorest, seniors, and less educated.

Paul Ryan’s latest budget proposal, is one such example of Republican bullying tactics. It is a repeat of past years’ proposal that would cut $5 trillion from government spending, 69 percent of the cuts in the Ryan budget come from programs that benefit people with low or moderate incomes, according to the Center on Budget and Policy Priorities. Why pick on the poor?

Economist Paul Krugman can’t understand it either. “…while supposed Obamacare horror stories keep on turning out to be false, it’s already quite easy to find examples of people who died because their states refused to expand Medicaid. According to one recent study, the death toll from Medicaid rejection is likely to run between 7,000 and 17,000 Americans each year.

“But nobody expects to see a lot of prominent Republicans declaring that rejecting Medicaid expansion is wrong, that caring for Americans in need is more important than scoring political points against the Obama administration. As I said, there’s an extraordinary ugliness of spirit abroad in today’s America, which health reform has brought out into the open.”

The “ugliness” is really a bully mentality. Bullies prey on those weaker than them, and so they have tried every trick in the book to oppose any programs that smack of aiding those most in need. Why? Because it would empower the less fortunate so they are not so easily bullied. The Republican-dominated red states are the best example of the bully mentality.

If Republicans can’t keep their constituents poor and less educated, then they would lose their hold over them, and so their power. Conservatives oppose expanding educational opportunities such as Head Start and pre-school aid because it would encourage rational thinking, and an appreciation of science. Their constituents would then begin to understand global warming, and maybe evolution.

Republicans opposition to expanding voters’ rights; even social security and Medicare; is because Repubs fear being outvoted by those very same immigrants, minorities and seniors that depend on those services to improve their circumstances, and would enhance economic growth, by the way. Republicans only answer is to restrict voting hours and pass draconian voter ID laws in the red states. It is restricting citizens’ voting rights, even though sacrosanct and protected by the constitution.

In fact, the bully mentality requires such ignorance of facts about economic growth as well. The slow recovery from the Great Recession has mainly been because private businesses have been reluctant to hire due to slack demand, and governments have been unable to spend more on public services. Yet Republicans have opposed any form of government stimulus spending, even on badly outmoded infrastructure that will only cost more to repair and replace in the future.

Not all Republicans are bullies, and not all Democrats enlightened progressives, of course. But the bully mentality of House Speaker John Boehner’s “no compromise” tactics, or Senator Mitch McConnell’s filibustering of even the most innocuous Obama Administration appointments have been the reason recovery from the Great Recession hasn’t been stronger.

Fostering a culture of fear and ignorance is not the way to run a political party, or a country. Such tactics that attempt to suppress the rights of those that disagree, as well as the willful denial of scientific and economic facts are a danger to our democracy, not to speak of the US position as a leader of democratic nations. That is the ugliness that has crept into American politics. It is a complete denial of greater opportunity for all but Republicans’ most conservative constituents, and disregard for the most basic human rights.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Thursday, April 10, 2014

Yellen’s Federal Reserve To Keep Rates Low

The Mortgage Corner

The Fed’s FOMC minutes of their last meeting were just released, and they show the Fed intends to keep interest rates low for as long as possible, until the unemployment rate drops substantially. And the Fed’s maintenance of low interest rates will do the most to boost housing sales this year.

In fact, they are dropping the 6.5 percent unemployment rate bar that former Fed Chair Bernanke had said was the point at which they would consider beginning to raise interest rates. That’s because the 6.5 percent rate has almost been reached without any improvement in the long term unemployed. It’s at 6.7 percent in March and the Labor Department’s JOLTS report says that with 4.2 million job openings (blue line in graph), the 6.5 percent rate could happen anytime.

jolts 

Calculated Risk

Jobs openings increased in February to 4.173 million from 3.874 million in January. The number of job openings (yellow) is up 4 percent year-over-year compared to February 2013, while the number of hires (blue line) hasn’t been rising as fast. So it seems reasonable that the hire numbers will pick up as more jobs become available. Meanwhile, the number of Quits and Layoffs (blue and red bars in graph) has been declining, another sign of improving job opportunities.

The Fed minutes also mentioned that there were other obstacles to higher employment—excess savings by both consumers and business that weren’t being productively invested—that could slow also down job formation.

In fact, the minutes for the first time stated that ‘lowflation’ was a problem holding back demand, and so hiring. Why? Because too low inflation—just above 1 percent at present—was a sign there wasn’t enough demand for goods and services to yet warrant additional hiring.

“Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee's objectives”, said the FOMC minutes. “In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit.”

This is basic macroeconomic theory that Fed Chair Yellen has researched, and the reason she is now the Fed Chairperson. She understands economics, and why job opportunities have been growing so slowly. Both consumers and businesses are holding on to their savings. So the Fed would have to see improvement in these factors, as well, leading to slightly higher inflation, before beginning to raise interest rates.
Real estate will also benefit from the Fed’s decision. One sign of better sales is that inventories continue to improve. Housing Tracker reports that 2014 existing-home inventories (red line) are slightly above last year and improving, due to fewer foreclosures and short sales.

housetrack

Graph: Calculated Risk

“As of April 07 2014 there were about 745,168 single family and condo homes listed for sale in the 54 metro areas we track, said Housing Tracker. “The median asking price of these homes was estimated to be $269,029. Since this time last year, the inventory of homes for sale has increased by 7.7 percent and the median price has increased by 11.1 percent.”

This in itself will improve sales, but the continued prospect of lower interest rates will do the most to boost home sales this year.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Saturday, April 5, 2014

Jobs Recession Finally Over?

Financial FAQs

Is the jobs recession finally over? It’s taken this long to bring employment back to pre-Great Recession levels. Overall employment is still slightly below the pre-recession peak (437 thousand fewer total jobs).  But private employment is now above the pre-recession peak by 110 thousand and at a new all-time high.

Marchjobs

Calculated Risk

Total nonfarm payroll jobs rose 192,000 in March after a 197,000 boost in February and a 144,000 increase in January. The net revision for the prior two months was up 37,000. Expectations for March were for 206,000. Private payrolls gained 192,000, following an increase of 188,000 in February. Analysts projected 215,000 for March.

We can now see where many of the missing jobs remain—in governments. Although state governments added 8,000 net jobs in March, the federal government shed another 9,000 jobs, according to the just released Bureau of Labor Statistics report. Over the past year, employment in the federal government has fallen by 85,000, so we know the major reason we are barely back to the 2007 level of employment. In fact, some 700,000 state and federal jobs were lost during the Great Recession.

Unfortunately, political gridlock has caused so many essential government, or government-sponsored jobs to be lost.  There shouldn’t be a debate over what federal, state and local government expenditures are necessary to maintain decent economic growth. Can one imagine what it would do to economic growth if the $2.2 trillion in deferred infrastructure building—in roads, bridges, electrical and energy distribution networks had been done, not to speak of the additional jobs created?

Or, instead of losing 300,000 teachers and the lost education opportunities to students, education spending had been expanded? A good comparison is with the GW Bush administration, when Republicans were in power. Then they were for much more government spending.

The public sector grew during GW Bush's term (up 1,748,000 jobs), but the public sector has declined since Obama took office (down 718,000 jobs). These job losses have mostly been at the state and local level, but they are still a significant drag on overall employment.

The private sector is the main jobs provider, of course.  The single area that could provide the most bang for the buck is the construction industry. Since construction employment bottomed in January 2011, construction payrolls have increased by 532 thousand - but there are still 1.76 million fewer construction jobs now than at the peak in 2006, per an excellent analysis by Calculated Risk.

That also means the building-construction industry and all its ancillary services—such as mortgages, insurance, home furnishings—has much more room to grow. Private residential construction is returning to normal levels at last, but not public (which has fallen since ‘shovel-ready’ ARRA stimulus money ran out in 2010, which created or saved some 3 million jobs) and non-residential spending.

constructspend

Calculated Risk

The bottom line is that all construction sectors have to improve to bring enough jobs back. These are mainly blue collar workers that lost badly during the Great Recession, due to the housing bubble. The good news is that professional and business services jobs grew double any of the other job categories in the March payroll survey.

Professional and business services added 57,000 jobs in March, in line with its average monthly gain of 56,000 over the prior 12 months. Within the industry, employment increased in March in temporary help services (+29,000), in computer systems design and related services (+6,000), and in architectural and engineering services (+5,000).

This should give a large boost to construction jobs this year and next.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen