Our Tragedy of the Commons—Austerity That Doesn’t Work

Popular Economics Weekly

There is a longer term fiscal crisis that current budget negotiators are ignoring. It is called the Tragedy of the Commons -- the long term neglect of common resources and facilities used by all, including our air, water, and public infrastructure, thus allowing them to deteriorate to conditions that require enormous sums to fix in the future.

All of the 'fiscal cliff' discussions have centered on how to cut government spending on public programs or raise enough revenues to diminish the current deficit that was created by too much borrowing over the last decade -- to pay for two wars, the Bush tax cuts, and consequent Great Recession that diminished revenues further.

But in fact there would be a much smaller deficit if instead the negotiations included reversing the neglect of our public resources and services. That is where we can immediately gain back some of the approximately $6 trillion in output lost due to the Great Recession. Most economists agree that up to three million jobs were created or saved in 2009-10 just from the $830 billion ARRA spending enacted by President Obama when he took office.

How much more growth could we gain from fixing the $2.2 trillion in deferred maintenance on our highways and bridges -- the estimate by the American Society of Civil Engineers? The ASCE report, Failure to Act: The Economic Impact of Current Investment Trends in Surface Transportation Infrastructure, found the nation's deteriorating surface transportation infrastructure will cost the American economy more than 870,000 jobs, and suppress the growth of the country's Gross Domestic Product by $897 billion by 2020. Conducted by the Economic Development Research Group of Boston, the report shows that the nation is facing a funding gap of about $94 billion a year compared with our current spending levels.

Most economists know how to stimulate a greater demand for those 'lost' goods and services. Economists call it aggregate demand, demand that is powered by a combination of consumer plus government plus capital expenditures. And there is very little domestic capital investment at present. It is being hoarded by corporations, or invested overseas.

Study after study has shown that economic growth reduces deficits, rather than spending cuts, per se, as evidenced by Great Britain's conservative government focus on cutting government spending. Austerity has just increased their deficit, and put them in danger of losing their AAA rating, said the New York Times' Adam Davidson.

"The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since -- even despite the stimulus provided by this summer's Olympic Games -- the number has hovered around 7.9. The overall level of economic activity, real GDP, is still below where it was five years ago, too. Historically, it's almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real GDP that is around a half-trillion dollars more than it was in 2007.)"

The term Tragedy of the Commons was coined by Garrett Hardin in a 1968 article. He said that problems that fall into this category have no technical solutions. They require changes in human attitudes and behavior, such as sustainable development of our common resources, rather than neglecting them. And that creates jobs that give more bang for the buck.

Three-fifths of all jobs lost during the Great Recession paid middle-income wages, while those created during the economic recovery pay low wages, according to a new study by the National Employment Law Project, largely because of the huge cutback in public and private investment. Both economic forces and government budget cuts are causing this deficit of good jobs, according to the study, as we have discussed in past articles.

We need for our congressional negotiators to correct this Tragedy of the Commons. The workers are there, already trained, in both the public and private sectors. Such investments can no longer be put off, or the fiscal cliff could become a bottomless pit that damages economic growth for decades to come.

Harlan Green © 2012

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

Housing Prices In “Sustained Recovery”

Popular Economics Weekly

The S&P/Case-Shiller Home Price Index October headline was “Sustained Recovery in Home Prices”, as housing inventories continue to drop, while the latest estimates of household formation for young adults in particular are as high as 1.3 million per year of new households to be formed in coming years.

The S&P/Case-Shiller Home Price Index, a leading measure of U.S. home prices, showed home prices rose 4.3 percent in the 12 months ending in October in the 20-City Composite. Anticipated seasonal weakness appeared as twelve of the 20 cities and both Composites posted monthly declines in home prices in October.

Graph: Calculated Risk

The 10- and 20-City Composites recorded respective annual returns of +3.4 percent and +4.3 percent in October 2012 – larger than the +2.1 percent and +3.0 percent annual rates posted for September 2012. In nineteen of the 20 cities, annual returns in October were higher than September. Chicago and New York were the only two cities with negative annual returns in October. Phoenix home prices rose for the 13th month in a row. San Diego was second best with nine consecutive monthly gains, said the Case-Shiller report.

And Housing Economist Tom Lawler via Calculated Risk estimates upwards of 1.3 million households annually could be formed over the next couple of years, due in part to pent-up demand and normal population growth.

Most of the evidence for rising prices comes from the huge drop in housing inventories. New-home sales’ inventories are down to 4.7 months in today’s release of new-home sales, levels we haven’t seen since the 1980s. This Calculated Risk graph dating back to June 1963 shows months of supply at historically low levels, which means an impending supply shortage.

Graph: Calculated Risk

New home sales were up 4.4 percent to an annual rate of 377,000. New home sales have slowly been building up momentum this year, while existing-home sales jumped 5.04 percent, and showed a similar drop in for sale inventories to 4.8 months.

Graph: Calculated Risk

Total Existing-home sales rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million units in November, and are 14.5 percent higher than the 4.40 million-unit pace in November 2011. Sales are at the highest level since November 2009 when the annual pace spiked at 5.44 million.

Other indicators, such as declining vacancy rates show a similar lack of adequate housing inventories. This means that new home construction will have to essentially double in upcoming years to satisfy the need.

Harlan Green © 2012

Home Sales Surging

The Mortgage Corner

Total existing home sales are accelerating, and prices are rising along with declining inventories. Sales that include single-family homes, townhomes, condominiums and co-ops, rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million in November from a downwardly revised 4.76 million in October. They are 14.5 percent higher than the 4.40 million-unit pace in November 2011. Sales are at the highest level since November 2009 when the annual pace spiked at 5.44 million.

NAR chief economist Lawrence Yun said there is healthy market demand. "Momentum continues to build in the housing market from growing jobs and a bursting out of household formation," he said. "With lower rental vacancy rates and rising rents, combined with still historically favorable affordability conditions, more people are buying homes. Areas impacted by Hurricane Sandy show storm-related disruptions but overall activity in the Northeast is up, offset by gains in unaffected areas."

Graph: Calculated Risk

The problem now is inventory, as months of supply have been falling as lenders work off their shadow inventory of defaulted properties. Supply fell sharply to 4.8 months at the current sales rate from 5.3 months in October which was already a multi-year low. The number of existing homes on the market, at 2.03 million, is the lowest since 2001.The good news is that it is boosting home prices.

The national median existing-home price for all housing types was $180,600 in November, up 10.1 percent from November 2011. This is the ninth consecutive monthly year-over-year price gain, which last occurred from September 2005 to May 2006.

October FHFA home prices, a better measure of affordable homes with Fannie Mae or Freddie Mac conforming loans were up a better than expected 0.5 percent nationally after remaining virtually unchanged in September. On the year, the index was up 5.6 percent after increasing 4.1 percent the month before.

Graph: Econoday

Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 22 percent of November sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in October and 29 percent in November 2011. Foreclosures sold for an average discount of 20 percent below market value in November, while short sales were discounted 16 percent.

Graph: Econoday

LPS reports that delinquencies continue to decline. The total delinquency rate has fallen to 7.03 percent from the peak in July 2010 of 10.57 percent. A normal rate is probably in the 4 to 5 percent range, so there is a long ways to go. The in-foreclosure rate was at 4.08 percent. There are still a large number of loans in this category (about 1.96 million).

"The market share of distressed property sales will fall into the teens next year based on a diminishing number of seriously delinquent mortgages," said the NAR’s Yun.

Well, it does look like 2013 will fulfill predictions that housing will be in full recovery. The Fed has said it will hold interest rates at record lows through 2015, so what more could prospective home buyers wish for? Maybe a few more new homes under construction.

Harlan Green © 2012

Q4 GDP Growth Improving

Financial FAQs

We are seeing faster economic growth in the fourth quarter, even after the upward revision of Q3 GDP growth to 2.7 percent from 2.0 percent. The reason? The 146,000 jump in November payroll jobs, soaring retail sales, and the Fed’s determination to maintain QE3 with $45 Billion per month in bond purchases for several more years, if necessary, to boost employment. 
This is in spite of Hurricane Sandy that shut down much of the east coast. We can therefore expect that Q4 growth might exceed 3 percent, putting us back on the path to a more normal growth pattern.
Retail sales is leading the growth. Motor vehicle sales rebounded 1.4 percent after a 1.9 percent decrease in October.  Earlier in the month, unit new motor vehicle sales pointed to an even stronger increase but the Commerce Department’s sample size is not as good and all Personal Consumption Expenditure spending may be even stronger.

Graph: Econoday

And industrial production rebounded in November with notable help from Hurricane Sandy and a boost in auto assemblies, up 1.1 percent, following a decline of 0.7 percent in October (originally down 0.4 percent).  The market consensus was for a 0.3 percent gain. Capacity utilization for total industry rose to 78.4 percent from 77.7 percent in October.
The bottom line is that manufacturing has seen sharp swings over the last two months due to Hurricane Sandy.  But net for the period, this sector is still soft.  The clearly positive news is that consumers are out shopping for new cars, which is good news for manufacturing.  It suggests that while consumers are in a bad mood about the pending fiscal cliff, potential tax increases, they are spending despite survey recorded glum views, said Econoday .

And inflation is falling.  Year-on-year, overall CPI inflation came in at 1.8 percent versus 2.2 percent in October (seasonally adjusted). The core rate eased to 1.9 percent in November from 2.0 percent the prior month.

Lastly, the Federal Reserve just announced a new policy at its last FOMC meeting of the year.  It voted to continue with QE3, the $45 Billion in securities’ purchases per month until either the unemployment rate falls to 6.5 percent from its current 7.7 percent, and/or inflation tops 2.5 percent per year. 
Since it looks like inflation has been subdued, and the Fed believes it will take until 2016 to bring down the unemployment rate to its new target, the Fed could maintain easy credit for several more years, which is the best of all conditions for economic growth to continue.

Harlan Green © 2012

Gun Violence Has Too Many Causes

Popular Economics Weekly

The tragic Newtown, Connecticut elementary school mass shooting is just the latest in a string of mass shootings that have contributed to more than 1 million dead by guns over the past 3 decades in the U.S.—an average of almost 32,000 per year.
This is when no other country in the developed world has had more than 400 documented gun killings in a year, outside of wartime. The problem in understanding the causes of such mass shootings may be that much gun violence has many causes that make it difficult if not impossible to understand in isolation.
But not if we look at the culture of violence that has made U.S. the most violent nation on earth. In fact, gun violence, as violence in general, has too many causes. Studies bear out that record income inequality, a poor social safety net and lax, almost nonexistent gun control laws all contribute to the U.S. record as the most gun violent culture in the world.
The Trayvon Martin killing illustrated this culture with the Stand Your Ground Laws being enacted in several states. And thereby we are beginning to see where the National Rifle Association, backed by some elements of Big Business, is leading this country—into a greater lawlessness, at the very least. For the Stand Your Ground Law enshrines the gangster code—shoot first and ask questions later.
As Paul Krugman said in a March New York Times Op-ed after the Trayvon Martin killing:

“Specifically, language virtually identical to Florida’s law is featured in a template supplied to legislators in other states by the American Legislative Exchange Council, a corporate-backed organization that has managed to keep a low profile even as it exerts vast influence (only recently, thanks to yeoman work by the Center for Media and Democracy, has a clear picture of ALEC’s activities emerged). And if there is any silver lining to Trayvon Martin’s killing, it is that it might finally place a spotlight on what ALEC is doing to our society — and our democracy.”

Krugman was exposing the links between corporations and the NRA that continues to push for guns to be worn by everyone everywhere, with or without background checks or even licenses.
Why the push by the NRA, and Big Business for more guns, as I said back in April? The reason most gun advocates and the NRA give, is that it is for the purpose of self-defense in an increasingly violent world. The NRA even asserts it decreases violence. But studies cited in an excellent book, Gun Violence: The Real Costs by Philip J. Cook and Jens Ludwig show that gun use tends to increase gun violence—i.e., there are almost 4 times more fatalities in gun-related robberies than other robberies with knives, clubs, etc.
And a study cited in the Justice Department’s National Crime Victimization Survey (NCVS) on home invasions found that just 3 percent were able to use guns against someone who broke in (or attempted to do so) while they were at home, when 40 percent of households have guns.
So it turns out guns are not very helpful in self-defense. Also overlooked is the fact that criminals are predators, and predators prey on the weakest and most vulnerable, not those who look like they can defend themselves. So really, does the agenda of the NRA to abolish all gun controls do more than reinforce the fear factor, the fear that your neighbor may be your assailant?

“But where does the encouragement of vigilante (in)justice fit into this picture?” asks Krugman. “In part it’s the same old story — the long-standing exploitation of public fears, especially those associated with racial tension, to promote a pro-corporate, pro-wealthy agenda. It’s neither an accident nor a surprise that the National Rifle Association and ALEC have been close allies all along.”

The culture of violence is not a pretty picture in our crowded cities in particular. Philadelphia averaged more than 30 gun-related deaths per month in 2011, when Europe as a whole had less than 300 per year. The last time U.S. gun violence was this high was during the Great Depression, when we had gangsters like Al Capone, John Dillinger, and Bonnie and Clyde.
English Sociologist Richard Wilkinson has brought this out in books and lectures, especially his TEDx lecture on the roots of violence and crime, in which he charts that countries with the most inequality in wealth are also the most violent countries. And surprise, the U.S. is now one of the most unequal countries—in terms of wealth and opportunities for wealth—in the world, as has been brought out by the CIA World Factbook. It is ranked 94th of the 136 countries ranked by the CIA for income inequality, next to Camaroon, Zimbabwe, which are some of Africa’s poorest countries.
There are many who will say that the deeds of a psychopath cannot be prevented. But is that the point when it is so ridiculously easy for an individual to purchase an arsenal without an alarm being set off? Why would anyone such as the Aurora, Colo. shooter need 6,000 rounds, for instance, said the New York Times?

“With a few keystrokes, the suspect, James E. Holmes, ordered 3,000 rounds of handgun ammunition, 3,000 rounds for an assault rifle and 350 shells for a 12-gauge shotgun — an amount of firepower that costs roughly $3,000 at the online sites — in the four months before the shooting, according to the police. It was pretty much as easy as ordering a book from Amazon.”

Do we need another reason to require reporting such weapon sales, other than for war?

Harlan Green © 2012

2013 Will Be Year of Housing Recovery

The Mortgage Corner

Wall Street is jumping on the real estate band wagon. Not only are hedge funds now buying foreclosed homes in bulk, reducing the ‘shadow inventory’ of homes with delinquent mortgages, but the record low interest rates are boosting both refinance and purchase transactions says the Mortgage Bankers Association.

For instance, The Refinance Index increased 8 percent from the previous week and is at its highest level since the week ending October 12, 2012. The seasonally adjusted Purchase Index increased 1 percent from one week earlier.

“Continued uncertainty due to the lack of resolution regarding the fiscal cliff led interest rates lower last week, with mortgage rates reaching a new low in our survey,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Refinance activity increased, with the refinance index hitting its highest level in two months, and the refinance share reaching its highest level since January 2009. Applications for purchase increased for a fifth consecutive week, and are running almost ten percent above their level at this time last year.”

Graph: Calculated Risk

In fact, the 30-year fixed conforming rate for single unit loan amounts under $417,000 dropped as low as 3.125 percent with zero points in origination fees last week, and has been hovering around 3.25 percent with zero points for several weeks. This is largely because the Federal Reserve is continuing its bond buying program, called QE3. The FOMC will probably announce additional bond buying tomorrow that will start in January after the conclusion of Operation Twist. “I don't expect the Fed to announce tomorrow a change to thresholds (using the unemployment rate and inflation) for the timing of the first Fed Funds rate hike,” said Calculated Risk.

And Merrill Lynch has come out with its 2013 real estate forecast. Merrill believes 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25 percent and home prices are set to rise 5 percent over 2012. Merrill also believes the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years, as we have discussed in past Popular Economics columns.

In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. There has also been a shift toward short sales as a means of disposing distressed properties, which boosts the prices of distressed properties, since banks benefit from higher sale prices than via foreclosures. Moreover, investor demand is strong, particularly for distressed inventory.

Merrill also forecasts housing starts to increase another 25 percent to an average of 975,000 and home prices to increase 3 percent in 2013. “The housing market is turning into an engine of growth once again. Housing construction will likely add to GDP growth in both 2012 and 2013 growth,” said Merrill. “The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.”

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time, says Merrill Lynch, as quoted by Calculated Risk.

So we can say 2013 should be a very good year for housing, with population pressures increasing as young adults move out of their parent’s home at the same time that banks are ridding themselves of problem properties at a faster rate, and as the Federal Reserve continues to keep interest rates at historic lows.

Harlan Green © 2012

Michigan Republicans Repeat Economy Wrecking Doctrine

Financial FAQs

Michigan has become the latest Republican-led effort to wreck economic growth in passing a right-to-work laws that restrict unions. With all apologies to Naomi Klein’s Shock Doctrine, Repubs are no longer waiting for recessions to enrich their wealthiest supporters—such as passing GW Bush tax cuts during the 2001 recession and in 2003 that caused the largest budget deficit in history, precipitating the Great Recession.

Michigan is a text book example of how ALEC and Americans for Prosperity, the big business lobby and the Koch Brothers have worked to bust unions. Michigan is the 24^th state to enact Right-to-Work Laws that take away unions’ ability to organize and charge union dues to finance union benefits. But more insidiously it weakens the ability to bargain for their own wages and salaries. This is when corporate profits and CEO salaries are already the largest in history.

We know the result in the other 23 states. They are the poorest states, who require the most government assistance. So this exposes Republicans and conservatives agenda in general. Restricting union organizing and collective bargaining impoverishes the majority of wage and salary workers, which drives the poorest into government assistance at the slightest economic downturn. It therefore preserves the profits of the investors who live off of corporate profits, while passing on the costs of wrecking the incomes of the majority to government-financed programs—i.e., our tax monies.

Wisconsin’s direct restriction of collective bargaining rights for government employees was the most blatant example until now. By directly restricting their incomes and benefits, it puts a wrecking ball to economic growth in Wisconsin, putting it into the group of have-not states that have consistently lower standards of living.

Many studies have shown this, but the most convincing evidence is listing the have-not states. They include the most rural and red states in the South and Midwest dependent on government benefits to supplement the meager incomes and lower standard of living of their citizens.

The AFL-CIO has put out the latest statistics on union, vs. non-union incomes and benefits: Employees covered by union contracts receive 28 percent more in wages and benefits than workers without unions.  For women workers, the union advantage is 34 percent. For African American workers, the union advantage is 29 percent.  And for Hispanic workers, the union advantage is a whopping 50 percent.  When “right to work” laws weaken unions and drive down wages and benefits, workers have less to spend and the entire economy – particularly small business--suffers.

It should be blindingly obvious why Republicans are pushing their anti-union agenda. It increases their wealth and power at the expense of everyone else.

Harlan Green © 2012

Unemployment Rate Falls to 7.7 Percent

Popular Economics Weekly

Economists are rubbing their eyes with the November jobs report. It seems stimulus spending works. Obama’s $830 Billion ARRA stimulus + the Federal Reserve’s QE efforts to hold down interest rates has now created almost 6 million jobs since the Great Recession, and in spite of Hurricane Sandy.

The plunge in November unemployment was good news in several sectors. Firstly, Hurricane Sandy didn’t have much of an effect. In fact, it will stimulate more job formation in the coming months during the reconstruction. We know this because it mostly affected the goods-producing sector, which posted a 22,000 drop in jobs after an 18,000 gain the prior month. In November, manufacturing jobs slipped 7,000, construction fell 20,000.

Had there been no Hurricane Sandy, payroll jobs would have increased more than 200,000—back up to early 2012 levels. Private service-providing jobs rose 169,000 in November after a 171,000 increase in October. For November, notable gains were in retail trade (up 53,000), professional & business services (up 43,000), and health care (up 20,000).

Secondly, the retail trade numbers are particularly encouraging as these jobs have risen 140,000 over the past three months, suggesting healthy holiday sales this year.

Graph: Econoday

That is why consumers are spending more. Consumer credit is a very good indicator of spending and outstanding debt in September rose $11.4 billion, following August's very large revised gain of $18.4 billion. The non-revolving component, inclusive of the student loan category and auto sales, rose $14.3 billion in the month on top of August's $14.1 billion gain. Revolving credit, where credit card debt is tracked, actually fell, down $2.9 billion for the third decrease in four months.

Graph: Calculated Risk

And lastly, state and local governments are hiring again, a sign that lingering effects of the Great Recession might be over. Calculated Risk’s graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011. So far in 2012, state and local governments have actually added a few jobs, and state and local government employment increased by 4,000 in November.

We know that some of the lower unemployment rate was due to discouraged workers leaving the work force, and that is the tragedy of still timid efforts to stimulate job growth. It is a fact that almost any infrastructure stimulus spending, such as in President Obama’s original $4B budget offer, would not only create many more jobs, but more than pay for itself in added revenues.

Harlan Green © 2012

Fourth Quarter Economic Growth Higher

Popular Economics Weekly

We are seeing a boost in Q4 economic growth, in spite of “fiscal cliff” worries. Service sector growth has increased significantly, job formation is accelerating, and real estate is coming back to life, thanks mostly to more jobs.

The service sector is our largest business sector and its ISM's non-manufacturing index rose five tenths to 54.7 with business activity over 60 for the first time since February. New orders are near 60 at 58.1 for a more than three point gain and the best reading since March. But employment is barely over 50, at 50.3 for a nearly five point monthly dip for the worst reading since July. Businesses are doing more with less as seen in this morning's productivity report and in the details of this report. But still, the gain in activity and orders is good news and other indicators show jobs increasing.

Graph: Econoday

The Non-Manufacturing Business Activity Index registered 61.2 percent, which is 5.8 percentage points higher than the 55.4 percent reported in October, reflecting growth for the 40th consecutive month. The New Orders Index increased by 3.3 percentage points to 58.1 percent. And overall growth is accelerating.

Graph: Econoday

Even more important was the upward revision in Q3 Gross Domestic Product growth to 2.7 percent, which will boost fourth quarter growth as well. Real GDP growth for the third quarter was revised up significantly because of a large inventory buildup, rather than increased sales.  But the Commerce Department raised the second estimate to 2.7 percent annualized, from the advance estimate of 2.0 and second quarter rate of 1.3 percent.

And we know that real estate activity has picked up, because housing prices are rising. The Case-Shiller Index has been rising since January. Improvement was really evident in the year-on-year rate which is up to plus 3.0 percent from plus 2.2 and plus 1.1 percent in the prior two months. Gains were in nearly all 20 cities, with Phoenix and San Diego prices rising the most.

Graph: Econoday

And the Conference Board’s consumer confidence index in November was steady and firm with buying plans for homes a special positive. The consumer confidence index rose to a new recovery high of 73.7 in November from an upwardly revised 73.1 in October. Strength was centered in the expectations component which is up 1.1 points to 85.1.

Graph: Econoday

Lastly, the most positive indicator of future sales is pending home sales up a very strong 5.2 percent even with the impact of Hurricane Sandy.  This is based on only a fractional decline in the Northeast, at least in the October report. The Midwest showed a very strong gain as did the South. The NAR’s October pending home sales index is at a five-year high.

Graph: Econoday

Real estate has seen falling foreclosure inventories, as well. And Hurricane Sandy will give a big boost to reconstruction of much of the Atlantic seacoast, boosting construction employment. So 2013 could be a very good year for economic growth, if as I believe any fiscal cliff issues will be resolved sometime early next year.

Harlan Green © 2012

High Pending Home Sales—A 2013 Housing Shortage?

The Mortgage Corner

The huge jump is pending home sales could presage a sharp drop in inventory of homes for sale in 2013. Why? There are fewer foreclosures because of the declining shadow inventory of homes in default that have been bloating the for-sale inventories resulting from the housing bubble. And this is already causing home prices to rise while housing construction is still lagging, 50 percent below its recent high.

The Pending Home Sales Index just released by the National Association of Realtors, a forward-looking indicator based on contract signings but not closings, increased 5.2 percent to 104.8 in October from an upwardly revised 99.6 in September and is 13.2 percent above October 2011.

Lawrence Yun , NAR chief economist, said buyers are responding to favorable market conditions. "We've had very good housing affordability conditions for quite some time, but we're seeing more impact now from steady job creation, and rising consumer confidence about home buying now that home prices have clearly turned positive."

Outside of a few spikes during the tax credit period, pending home sales are at the highest level since March 2007 when the index also reached 104.8. On a year-over-year basis, pending home sales have risen for 18 consecutive months.

Graph: Calculated Risk

"The Northeast saw some impact from Hurricane Sandy, but limited inventory in the West is keeping a lid on the market. All regions are up from a year ago, with double-digit gains in every region but the West," Yun said. Housing inventories are down 23 percent in one year.

And we see that foreclosure inventories have been declining, as have foreclosure rates. We now see short sales replacing foreclosure sales, down to just 20 percent of all sales from its high of 35 percent just after the Great Recession.

Calculated Risk reports Lenders Processing Service released their First Look report for October today. LPS reported that the percent of loans delinquent decreased in October compared to September, and declined about 7 percent year-over-year. Also the percent of loans in the foreclosure process declined sharply in October and are the lowest level since August 2009.

Graph: Calculated Risk

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 7.03 percent from 7.40 percent in September. Note: the normal rate for delinquencies is around 4.5 percent.

Lastly, home prices are rising because of the declining for-sale inventories. Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio, since housing prices cannot rise faster than rents (i.e., household incomes) over the longer term. Therefore the ratio between rents and prices tells us if housing prices are rising abnormally, as happened during the housing bubble. As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.

Graph: Calculated Risk

This actually means that we should see a surge in housing construction, and therefore construction jobs in 2013. Stay tuned for the National Association of Home Builders sentiment survey that tracks builder’s confidence in new home construction to confirm that will happen.  Its index has already tripled since its post-recession lows.

Harlan Green © 2012

Household Formation Key To Housing Recovery

Financial FAQs

The formation of new households—young adults leaving the homestead—has always been an important ingredient of home sales. We are talking about 18 to 34 year-olds who have been staying at home during the Great Recession for understandable reasons—whether lack of jobs, or college. And 2011 was the first year that household formation returned to more normal levels, which is why we are seeing housing beginning to recover.

One impact of the Great Recession is that it markedly reduced the rate at which Americans set up households, said a recent Cleveland Federal Reserve report on household formation. But pent up demand from young adults finding jobs will certainly reverse that trend and lead to a stronger sales and price increases.

Compared to the previous 10 years, the growth rate in the number of households was cut by two-thirds between 2007 and 2010. This slowing in household formation reflects the overall weak economy, but it has also negatively impacted the housing market, as lower household formation rates reduce housing demand.

Graph: Cleveland Fed

While younger adults between the ages of 18 and 34 make up a relatively small proportion of heads of households, they account for almost three-quarters of the overall shortfall in household formation. The growth in the number of younger households was lower in metropolitan areas that experienced weaker labor and housing markets, though, to be sure, household formation slowed across the United States, consistent with the widespread nature of the shocks to output, labor, and housing markets that occurred during the Great Recession.

From 1997 to 2007, about 1.5 million households were formed on average each year in the United States. Then the Great Recession hit, and in the ensuing three years, the rate fell to 500,000 per year. This decline in household formation occurred even as the U.S. population was expanding at a rate of 2.7 million per year, only slightly below the rate of 2.9 million a year observed between 1997 and 2007. A “modest” rebound has since followed during the economic recovery, with 1.1 million new households being created in 2011.

That is why we predict much better years ahead for housing. The Harvard Joint Center for Housing Studies (JCHS) in a recent blog said, “Given the trends of the last five years, the spurt in household growth to an annual rate of 900,000 through the first three quarters of this year is notable.  If the upward trend in household growth continues, housing should see a sustained recovery in 2013.”

Graph: JCHS

In fact, we are already seeing the rebound in 2012, with both housing construction and new home sales increasing significantly. The Census Bureau reports New Home Sales in October were at a seasonally adjusted annual rate (SAAR) of 368 thousand. This was down from a revised 369 thousand SAAR in September, but up 17 percent from October 2011. Supply, at 4.8 months for the lowest reading since 2005, is very tight and actually is limiting sales, according to Calculated Risk.

Graph: Calculated Risk

And sales of existing homes increased in October, even with some regional impact from Hurricane Sandy, while home prices continued to rise due to lower levels of inventory supply. Total housing inventory at the end of October fell 1.4 percent to 2.14 million existing homes available for sale, according to the National Association of Realtors, which represents a 5.4-month supply at the current sales pace, down from 5.6 months in September, and is the lowest housing supply since February of 2006. It is 21.9 percent below a year ago when there was a 7.6-month supply, a sure sign that housing is already in recovery.

Harlan Green © 2012

National Home Prices (Finally) Recovering

The Mortgage Corner

Is the end of the housing bust in sight?  The Case-Shiller Home Price Index reported the fourth consecutive year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006. The YoY increase in September suggests that house prices probably bottomed earlier this year.

And this is the slow time of year when families that have already moved to put their children in new school districts. It really means that those at the bottom of the housing bubble—Las Vegas (up 1.4 percent, 3.8 percent YoY), Phoenix (up 1.1 percent, 20.4 percent YoY), San Diego (up 1.4 percent, 4.1 percent YoY)—are finally seeing some relief from the worst economic slump since the Great Depression.

Graph: Calculated Risk

“Home prices rose in the third quarter, marking the sixth consecutive month of increasing prices,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “In September’s report all three headline composites and 17 of the 20 cities gained over their levels of a year ago. Month-over-month, 13 cities and both Composites posted positive monthly gains.”

The Federal Housing Finance Authority (FHFA) house price index posted also another monthly increase in September. This measure is up 4.4 percent YOY, a bigger YOY gain than the 3 percent rise in the Case-Shiller index. Also, the FHFA index is down just 16 percent from its peak, about half the cumulative decline in the Case-Shiller gauge. Most of the discrepancy reflects the fact that the FHFA index is much less affected by distress sales, since it covers only properties financed with conventional GSE mortgages (Fannie Mae and Freddie Mac), which have more stringent qualification guidelines.

This may be because of the continuing rise in consumer confidence. The Conference Board’s Consumer Confidence survey rose again with buying plans for homes a special positive, said the report. The consumer confidence index rose to a new recovery high of 73.7 in November from an upwardly revised 73.1 in October. Strength is centered in the expectations component which is up 1.1 points to 85.1. The present situation component is down one tenth to 56.6.

Graph: Econoday

A major reason for the increased confidence is a jump in those who expect to buy a house in the next six months. This is the latest indication of building momentum for the housing sector. Inflation expectations are another plus in the report, down two tenths for the 12-month outlook to 5.6 percent in what is a reflection of falling gas prices.

California is also doing well. I reported last week that Southern California home sales also rose sharply in October as move-up buyers joined investors, according to San Diego-based DataQuick, shifting the mix of homes selling upward as foreclosure resales hit a five-year low. Southern California's real estate market bucked the typical fall slowdown last month, with buyers snapping up pricier homes and sales roaring up 18 percent over the prior month.

Sales hit a three-year high for an October, rising 25 percent from the same month last year. The median sale price for a Southland house last month was $315,000, equal to September and up 17 percent from October 2011.

Harlan Green © 2012

Falling Households Incomes—The Real ‘Fiscal Cliff’

Popular Economics Weekly

It is household income that is falling off a cliff. This is partly due to the busted housing bubble and subsequent Great Recession that shaved 40 percent from household wealth. But household incomes haven’t been rising as fast as inflation since the 1970s, either. So we should be worrying about the drastic decline in buying power, rather than Congress’s inability to agree on a federal budget, if we want to cure the looming ‘fiscal cliff’.

If we don’t find a way to improve average household finances, Americans could plunge into decades of slow growth and the continued deterioration in their standard of living. Why? We are a consumer society, so that 70 percent of U.S. economic growth is powered by consumer spending. That is why government has to be part of the solution.

Three-fifths of all jobs lost during the Great Recession paid middle-income wages, while those created during the economic recovery pay low wages, according to a new study by the National Employment Law Project. Both economic forces and government budget cuts are causing this deficit of good jobs, according to the study.

For instance, many of the losses in well-paying jobs came from state and local governments, which have cut 485,000 jobs since February 2010, NELP found. Many mid-wage government workers that have been laid off during the economic recovery include teachers and police officers.

There is an easy way to reverse the downward spiral in wages—begin to upgrade our aging public services. In what New York Times Nicholas Kristof has labeled A Failed Experiment, the World Economic Forum ranks American infrastructure 25^th in the world, down from 8^th in 2003-4.

One would think with the ongoing drought, Tsumanis, and Hurricane Sandy that we would know how important government is to the solution of our many problems. New Jersey Governor Chris Christy certainly thought so in lauding President Obama for his help during Sandy. So the most obvious place to start is a national program to repair our crumbling infrastructure that the American Society of Civil Engineers estimates needs at least $2.2 Trillion in repairs and upgrades over the next 5 years just to keep it safe.

The wealthy have always had an answer to the ongoing decrepitude of public services, said Kristof. “Public playgrounds and tennis courts decrepit? Never mind—just join a private tennis club. I’m used to seeing this mind-set in developing countries like Chad or Pakistan, where the feudal rich make do behind high walls topped with shards of glass; increasingly, I see it in our country.”

The ASCE has launched a new series of reports that take a closer look at the economic impacts of America’s deteriorating infrastructure. These economic studies look forward to 2020 and 2040 to predict impacts on GDP, personal income, and jobs if current infrastructure investment trends continue. 

The first report was released in July 2011 and focused on surface transportation. The landmark study, Failure to Act: The Economic Impact of Current Investment Trends in Surface Transportation Infrastructure, found the nation’s deteriorating surface transportation infrastructure will cost the American economy more than 870,000 jobs, and suppress the growth of the country’s Gross Domestic Product by $897 billion by 2020. Commissioned by ASCE and conducted by the Economic Development Research Group of Boston, the report shows that the nation is facing a funding gap of about $94 billion a year compared with our current spending levels.

In fact Nobel Economist Joseph Stiglitz asserts in a recent Project Syndicate blog that “Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits.”

Most of the federal ‘fiscal cliff’ was created by borrowing to finance serial tax cuts and increased military spending that benefited the few at the expense of the many, instead of shoring up social security and Medicare reserves, as Bush Treasury Secretary Paul O’Neill advocated.

In fact, those tax revenues were diverted to the real ‘takers’, the wealthiest Wall Street financiers and corporate CEOs who have managed to capture most of the created wealth over the last decades. Just in 2009, it’s well documented that 93 percent of the income increase went to the top 1 percent of income earners through lower dividend and capital gains taxes, as well as record corporate profits.

But that means taking political power back from the elites who would rather starve government programs that could boost middle class incomes and consumers, asserts Chrystia Freeland in Plutocrats, The Rise of the New Global Super-Rich and the Fall of Everyone Else. Plutocrats are putting the wealth accumulated from deregulation of the U.S. economy into developing the middle classes of developing countries such as India, China, and Brazil, rather than the U.S.

Need we say more? Should we continue to allow the private good to trump public good? Not unless we enjoy reverting back to conditions like those in the developing world.

Harlan Green © 2012

Southland Home Sales Up, Foreclosures Down

The Mortgage Corner

Southern California home sales rose sharply in October as move-up buyers joined investors, according to San Diego-based DataQuick, shifting the mix of homes selling upward as foreclosure resales hit a five-year low. Southern California's real estate market bucked the typical fall slowdown last month, with buyers snapping up pricier homes and sales roaring up 18 percent over the prior month.

Sales hit a three-year high for an October, rising 25 percent from the same month last year. The median sale price for a Southland house last month was $315,000, equal to September and up 17 percent from October 2011, according to DataQuick.

Sales rose sharply in most mid- to-higher-cost markets. Sales between $300,000 and $800,000 – a range that would include many move-up buyers – jumped 41.5 percent year-over-year. October sales over $500,000 rose 55.2 percent year-over-year, while sales over $800,000 rose 52.4 percent compared with October 2011.

Gary Wood’s analysis of Santa Barbara County’s MLS sales including Carpinteria/Summerland, Montecito, Hope Ranch, downtown Santa Barbara and Goleta through October 2012 were similar. Sales rose to 100 from 83 in September. The median sales price also came up from $750,000 in September to about $815,000 in October with escrows rising from 94 to about 120 for the month. The median list price on those escrows showed the biggest upswing—going from $762,540 to almost $900,000.

Year over year, the numbers of sales are still way up with about 1,050 transactions completed compared to 780 last year. The median sales price is basically unchanged but down just a little from $800,050 in 2011 to about $795,000 now. The escrows are also still way up from 841 last year to about 1,150 this year while the median list price on those escrows has risen a little from about $825,000 last year to approximately $830,000 now.

Graph: RealtyTrac

Foreclosure resales – properties foreclosed on in the prior 12 months – accounted for 16.3 percent of the Southland resale market last month. That was down from 16.6 percent the month before and 32.8 percent a year earlier. Last month’s level was the lowest since it was 16.0 percent in October 2007. The foreclosure resales had hit a high of 56.7 percent in February 2009 during the Great Recession.

The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the third quarter of 2012, a decrease from the second quarter of 2012, and a decrease of 59 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

“Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric.  Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. ”

And foreclosures nationwide are declining as well, mostly in the 26 so-called non-judicial states that enable Trust Deed auctions, such as California and Texas. This was the largest decline in foreclosure inventory ever recorded. Judicial states’ foreclosure inventory was at 6.61 percent, and the non-judicial states’ inventory was at 2.42 percent, reports the MBA.

Harlan Green © 2012

Next 4 Years—Back to the Future

Financial FAQs

President Obama’s victory means it’s Back to the Future for economic as well as social policies. It means he now has the mandate to implement what the electorate chose him for—a functioning government to not only fix disasters such as Hurricane Sandy, but the economy; to lead the United States of America into the future rather than backward with Republican economic policies of the 1920s, as Obama said in the third debate.

Yes, that does mean government creates jobs, contrary to the Bain Capital ethos—whether in Detroit, or with clean energy investments, infrastructure building, better regulations that prevent economic disasters, and lower cost student loans that enable a better educated workforce.

That is, if he doesn’t give in to Boehner’s House Republicans who aren’t budging on returning tax rates to the Clinton era, when 23 million jobs were created and there was greater prosperity for all.

Paul Krugman has called it economic blackmail. “Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy... So they are, in effect, threatening to tank the economy unless their demands are met.”

The fiscal cliff is not the real problem, or large budget deficits at a time when the economy still needs a boost. It is not really a cliff, according to most analysts. The Center for Budget and Policy Priorities is one of many that say it is more of a slope, in that the effects of letting the Bush tax cuts lapse and the sequester agreement to cut government spending only begin to take effect in 2013.

“In fact, the slope would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution). This means that if there is no agreement by January 1, policymakers will still have some (although limited) time to take steps to avoid the serious adverse economic consequences that the Congressional Budget Office (CBO) outlines in its recent analysis of what will happen if the expiring tax cuts and new spending cuts take effect on a permanent basis.”

Exit polls showed voters tended to blame Bush for the Great Recession, rather than Obama, and so have given President Obama the opportunity to lead us back to fiscal sanity. It turns out Republicans tried to label Democrats as the tax and spend party, but voters decided Republicans have been the real tax-cut and spend party; which is true. Presidents Reagan and GW Bush were responsible for both the largest tax cuts and largest budget deficits since WWII, in their decision not to follow the pay-as-you-go budget rules that said tax cuts had to be matched by spending cuts.

It really boils down to how much to tax which U.S. taxpayers. Conservatives have called for lower taxes in the name of greater freedom from government controls. But Obama’s victory is a victory for the right to choose—the freedom to choose union representation and negotiate wages via collective bargaining, or women’s control of their health, family planning, or even a cooler climate.

The future belongs to those who have recognized that the richest have been helping themselves, rather than the country. It belongs to those who see that government is for the common good, rather than the few. This is the direction, however halting, that government has been marching ever since the New Deal began to cure the flaws and real damage that unrestrained capitalism can cause—back to the future.

Harlan Green © 2012

It’s the Consumers Turn

Popular Economics Weekly

We know that consumers will continue to push economic growth this fall and winter for several reasons. Firstly, the Bureau of Labor Statistics monthly JOLTS report showed 3.6 million job openings (yellow line), and more than 4 million hires (blue line), which is slightly more than the red and blue blocks that show total layoffs and quits. That is why payrolls are increasing some 157,000 per month in 2012, according to the BLS.

Graph: Calculated Risk

And consumers know this, which is why they are spending more. Another big increase in student loans drove consumer credit higher, up $11.4 billion vs. August's very large revised gain of $18.4 billion. The non-revolving component, home to the student loan category, rose $14.3 billion in the month on top of August's $14.1 billion gain. Revolving credit card debt actually fell $2.9 billion for the third decrease in four months.

Graph: Calculated Risk

And in spite of Hurricane Sandy, the advance figure for seasonally adjusted initial jobless claims was down to 355,000 for the week ending November 3, a decrease of 8,000 from the previous week's unrevised figure of 363,000. The 4-week moving average was 370,500, an increase of 3,250 from the previous week's unrevised average of 367,250, according to Calculated Risk. Claims may spike up, though, if Sandy causes many jobs to be lost in coming weeks. But the recovery—reconstruction efforts should more than make up for the losses.

Graph: Calculated Risk

If we look at the long term in this graph that goes back to the 1970s, with gray shaded areas showing recessions, we see that claims are following normal trends. The lows seem to be 300,000 claims per week in each business cycle. So as long as the trend is downward, employment is increasing and consumers will feel more secure about their finances.

Harlan Green © 2012

More Jobs Equals Happier Consumers

Popular Economics Weekly

It is not secret by now that whoever convinces the majority they are the best jobs creator will win the Presidential election. Today’s 171,000 payroll increase with upward revisions for the past 2 months may tilt things slightly in President Obama’s direction. The change in total nonfarm payroll employment for August was revised from +142,000 to +192,000, and the change for September was revised from +114,000 to +148,000, which hugely increases the monthly average in the fall after a spring lull.

Graph: CBPP

In other words, employers are finally realizing this recovery is for real, regardless of the ‘fiscal cliff’ outcome. What are the nay sayers worst fears? That restoring Clinton-era tax rates will reduce the deficit! Monthly job growth has averaged 173,000 over the past four months compared to a 67,000 average in the April-to-June period, says WSJ Marketwatch.

The civilian labor force rose by 578,000 to 155.6 million in October, and the labor force participation rate edged up to 63.8 percent. Total employment rose by 410,000 over the month. The employment-population ratio was essentially unchanged at 58.8 percent, following an increase of 0.4 percentage point in September.

Graph: Econoday

That may be why consumers are cheering up. The Conference Board’s October consumer confidence index improved to a reading of 72.2, up from 68.4 in September. The present situation index increased to 56.2 from 48.7, a huge jump, while expectations climbed to 82.9 from 81.5 last month. Consumer confidence is now at its highest level this year.

Or, it could be housing prices have been rising this year. The Case-Shiller Home Price Index showed prices rising in 19 of the 20 cities surveyed. On a year-ago basis, the 20-city index is up 2.0 percent, following 1.2 percent in August, Not Seasonally Adjusted.

Graph: Econoday

Either way, the economy is expanding fast enough to warrant hiring more workers, and consumers know that. Add in the jump in personal incomes, which are now increasing more than 2 percent per year (though 3 percent plus needed to bring back full employment), and we may have a very good 2013.

Harlan Green © 2012

Two Percent Growth Isn’t ‘New’ Normal

Popular Economics Weekly

There are many ways to look at the “weak” 2 percent growth numbers for Q3, though just the ‘Advance Estimate’ and so subject to at least 2 more revisions. But such weak growth isn’t due to excessive government regulations (since deregulation has not created greater overall growth, only more recessions). The record low interest rates mean that banks and corporations have too much money to spend, but no place to invest it, since consumers aren’t spending as they used to.

Weak growth over the past decade in particular can mainly be traced to the fall in household incomes, and what consumers can really afford. If their incomes were growing as in 2000 before the Bush tax cuts and wars, for instance, then we would already be back to 1990s levels of economic growth—when 4 to 6 percent annual growth rates were more normal—before the last 2 recessions (gray bars) as the graph shows.

Graph: Calculated Risk

And where has the lost household income flowed, since corporations have the highest profits in history as a percentage of GDP? It has been paid to the investor class and corporate CEOs, in the form of increased dividends, capital gains and stock options, or is part of the $2 trillion cash hoard held by corporations.

Graph: CBPP

For it is the tremendous shift of wealth that has stunted growth since 2000 and caused the Great Recession. Incomes of the wealthiest have soared, mainly because of 2001 and 2003 tax cuts that lowered investment tax rates for the wealthiest and drastically cut tax revenues, while incomes of 99 percent barely grew. This diminished purchasing power of consumers has accounted for most of the $6 trillion in lost output that resulted from the 18-month Great Recession (12/2007 – 6/2009).

It is an example of the failure of small government policies that instead of creating more prosperity for all, diverted it to the wealthiest. And the resulting record income inequality has damaged economic growth say more and more studies, such as a recent IMF study by Andrew Berg and Jonathan D. Ostry that suggests income inequality might shorten our economic expansion by one-third in jobs lost and goods products.

“…a careful look at the varying levels of inequality in different countries demonstrates just how much societal divides in wealth really matter. Countries with high inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth,” said the authors in a Foreign Affairs article.

The U.S. has fallen to the lowest ranking on income inequality. The CIA World Fact Book ranks the U.S. 94^th in income equality below all developed countries, Iran, and Russia. In fact, the U.S. is just above Jamaica and the poorest African countries. Wealth—both income and assets—has become concentrated among fewer and fewer Americans, in other words.

In spite of consumers’ massive loss of income, the University of Michigan reports confidence is being restored—though nothing like the 1990s readings of 100 plus. Hence the belief that consumers are becoming resigned to a ‘new’ lower growth normal. The 88.1 reading for current conditions is up a noticeable 2.4 points from September to hint at general growth for October's slate of economic data. The expectations index is up a sizable 5.5 points from September which hints at confidence in income prospects and is a positive for the holiday shopping outlook.

Graph: DShort

But this new normal for lower growth is nothing like the 1990s, as we’ve said, and as the graph makes clear. Contrary to Mitt Romney’s assertion that governments don’t create jobs, we can now see the effects of FEMA’s disaster relief efforts after Tropical Storm Sandy. Governments spend most revenues in the private sector—whether for defense, education, environmental protection, infrastructure or research.

So we do not have to accept slower growth, if we recognize and right the record inequality that has caused our market economy to repeatedly crash. As Nobel Economist Joseph Stiglitz was quoted in a recent review of his latest book, The Price of Inequality, “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset — its people — is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education and technology, impeding the engines of growth… “

Harlan Green © 2012