Existing-Home Sales Improve

Financial FAQs

Home resales rose in August to their highest rate in more than two years and groundbreaking on new homes also climbed, signs that a budding housing market recovery is gaining traction. The National Association of Realtors said that existing home sales increased 7.8 percent last month to an annual rate of 4.82 million units.

This is while housing starts rose 2.3 percent last month to an annual rate of 750,000 units, the Commerce Department said.

And with 30-year conforming fixed rates now 3.25 percent for less than a 1 point origination fee in California, it looks like the Fed’s QE3 promise of low mortgage rates for as long as it takes will help to speed up the housing recovery.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 7.8 percent to a seasonally adjusted annual rate of 4.82 million in August from 4.47 million in July, and are 9.3 percent higher than the 4.41 million-unit level in August 2011.

Graph: Inside Debt

And housing inventory decreased 18.2 percent year-over-year in August from August 2011. This is the eighteenth consecutive month with a YoY decrease in inventory, said Calculated Risk, and is boosting housing prices. Months of supply declined to 6.1 months in August.

The national median existing-home price for all housing types was $187,400 in August, up 9.5 percent from a year ago. The last time there were six back-to-back monthly price increases from a year earlier was from December 2005 to May 2006. The August increase was the strongest since January 2006 when the median price rose 10.2 percent from a year earlier.

Nationwide housing production rose 2.3 percent to a seasonally adjusted annual rate of 750,000 units in August, according to newly released figures from HUD and the U.S. Census Bureau. This increase was fueled entirely by gains in the single-family sector, where the pace of new construction rose in every region for a combined 5.5 percent gain to 535,000 units.

Graph: Calculated Risk

“Builders across the country have been reporting noticeable improvement in the number of serious buyers who are in the market for a new home, and today’s report shows that this is translating to some welcome gains in construction activity,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB). “While there is still plenty of room for improvement, it’s encouraging to see this continuing trend that is spurring much-needed job growth.” For every 100 new single-family homes that are built, 300 new jobs are created, he noted.

At 535,000 units, single-family housing production hit its fastest seasonally adjusted annual pace in more than two years this August. Meanwhile, multifamily housing production declined 4.9 percent to a seasonally adjusted annual rate of 215,000 units.

Calculated Risk says total starts are up 57 percent from the bottom start rate, and single family starts are up 51 percent from the low. Right now starts are on pace to be up about 25 percent from 2011. Also note that total permits are up sharply from last year. So we can see that single-family construction has to double to reach the longer term 1 million unit mark average since 1962.

We can also see from the Calculated Risk graph that the housing bubble really took off beginning in 1992 and peaked in 2006, so it could be 10 years—2019—before that 1 million unit new-home construction volume is again reached.

Harlan Green © 2012

Bernanke’s QE3 Challenge

Popular Economics Weekly

Should we call him King Ben? Much like King Arthur, Fed Chairman Bernanke and his Roundtable of Fed Governors have taken on the confidence fairies, to use Paul Krugmans’s term, the austerity promoters who believe the only way to run an economy is with little debt, and even less government.

In fact here is no question that the Fed’s QE3 stimulus will boost economic growth, has already boosted growth by keeping interest rates at historic lows. Those, such as the rating agencies who believe Quantitative Easing has little or no effect on employment or economic growth understand very little about macro economics, or economic growth in general.

Bernanke has in effect thrown down the gauntlet, not only to U.S. banks and investors who are hoarding their cash, but to Euro Zone countries that believe austerity is the way to financial health, by saying the Fed will do whatever it takes for almost an unlimited amount of time to spur employment and economic growth.

We can already see the results of QE3 in the plunge of both short and long term Treasury rates, as well as the rise in the euro to 1.32 to the dollar in just one day. It will make U.S. products cheaper all around, and European products more expensive, thus boosting U.S. exports and manufacturing.

By the same token, Bernanke is telling all those corporations and investors sitting on their hands, that he can and will outwait them. That is, the Fed will keep rates this low until they call ‘uncle’, which is another way of saying until employment and economic growth have returned to more normal levels. If they choose to stay on the sidelines, in other words, they will ultimately pay the price in reduced profits, because they will have been left behind in the ultimate recovery.

The FOMC press release said it very succinctly: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

The door was opened to QE3’s implementation after the European Central Bank okayed an open-ended purchase of sovereign country bonds with terms up to 3 years, which means it is finally taking steps to bring down interest rates in Spain and Italy, in particular.

There was also another reason for the Fed’s actions. Manufacturing weakened in August for industrial production overall, led by mining and utilities. And manufacturing employment has been growing over the past year. Overall industrial production fell 1.2 percent, following a 0.5 percent jump in July (originally up 0.6 percent). Overall capacity utilization slipped to 78.2 percent from 79.2 percent in July. The consensus forecast was 79.2 percent, said Econoday. This has to concern the Fed, which wants it closer to the long term utilization rate of 80.3 percent.

Graph: Econoday

Probably the most convincing evidence that Quantitative Easing works is the albeit slow revival of housing sector. Economists are agreed that the collapse of housing values has been a major deterrent to consumer spending. This could be the year that housing finally begins to recover, as the major housing prices indexes all show substantial gains, while foreclosures have fallen 23 percent in a year.

Graph: Econoday

“One of the goals of Fed quantitative easing and Operation Twist (which brought down longer-term rates, including mortgage rates) is to boost asset prices.  There has been a clear rebound in equity prices since the recession and nice Fed policy is impacting asset prices in the housing market,” said Econoday.

In other words, home prices are clearly on the recovery with Case-Shiller reporting a 0.9 percent rise in June for its 20-city index which followed a robust 1.0 percent gain the prior month. The latest reading was the fifth rise in a row and the fourth very strong rise in a row. The year-on-year rate, at plus 0.5 percent, shows its first positive reading in nearly 2 years. Gains swept 18 of the 20 cities led by a sharp rebound for Detroit and a third straight monthly rebound for Atlanta. West Coast cities also show strong gains.

Housing isn't the only sector that affects consumers, of course. Household incomes, which have fallen since 2000, have to rise again. But that will only happen when the demand for new jobs grows, which is the real target of Sir Ben's QE3 challenge.

Harlan Green © 2012

Home Builder’s Confidence at High

The Mortgage Corner

This is very big news. Builder confidence in the market for newly built, single-family homes rose for a fifth consecutive month in September to a level of 40 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This latest three-point gain brings the index to its highest reading since June of 2006.

It’s due in part to the extremely low new-home inventory, which is back to 1980’s levels, as well as the Fed’s announced intentions of maintaining rock bottom mortgage rates until mid-2015, if you believe the latest FOMC press release.

Graph: Econoday

Builder confidence rose across every region of the country in September. Looking at the three-month moving average for each region, the Midwest and West each registered five-point gains, to 40 and 43, respectively, while the South posted a four-point gain to 36 and the Northeast posted a two-point gain to 30.

"Builders across the country are expressing a more positive outlook on current sales conditions, future sales prospects and the amount of consumer traffic they are seeing through model homes than they have in more than five years," noted NAHB Chief Economist David Crowe. "However, against the improving demand for new homes, concerns are now rising about the lack of building lots in certain markets and the rising cost of building materials. Given the fragile nature of the housing and economic recovery, these are significant red flags."

Constructing spending is also stronger, as is new home sales, especially single family construction. New one-family structures rose 1.5 percent, following a 3.1 percent boost the prior month.  New multifamily structures advanced 2.8 percent after a 3.5 percent increase in June.  So, the recent uptrend in housing starts was not misleading.  Spending on new private residential structures continues to improve.

Graph: Econoday

Homebuilders are becoming more optimistic because new home sales were up 3.6 percent in July to an annual unit rate of 372,000. This is the best of the recovery outside of stimulus driven sales in the spring of 2010.

Graph: Econoday

The rise in total sales is drawing down supply, which explains the very strong readings in the monthly home builders' housing market index. Supply at the current sales rate is 4.6 months which is down from 4.8 months in June and compares with 6.7 months a year ago. Low supply of new homes points to increased building activity ahead and to gains for construction employment.

Lastly, it really looks like Ben Bernanke and his Board of Governors’ open-ended “QE3” $40 billion per month bond-buying program will give housing the boost it needs to finally take off with such low mortgage rates for years to come.

The FOMC press release said it very succinctly: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

Harlan Green © 2012

Income Inequality Behind Most Poverty

Financial FAQs

There were 46.2 million Americans in poverty in 2011, as median household income decreased to its lowest level since 2000, according to a Census Bureau report released this week that illustrated the toll from ongoing labor-market weakness.

The main culprit is the still high unemployment rate of 8.1 percent 3 years after the end of the Great Recession. But two other factors play a big part in creating the record poverty—the slow real estate recovery from its worst bust since the Great Depression, and growing inequality. The top 10 percent had the only income increases in 2011, according to U.S. Census figures.

Actually, both the unemployment rate and housing would be recovering much faster if inequality wasn’t so high. A recent column in Popular Economics Weekly highlighted what has happened since the 1970s to create the record inequality—plunging incomes of the middle class, for one, in both the private and public sectors, largely due to a blend of less progressive taxation and wholesale deregulation that has created a much more monopolistic corporate structure. This has diverted more corporate profits to investors and corporate CEOs. It is a lesson few policy makers seem to have learned. Even Henry Ford knew the importance of growing incomes for everyone back in 1914, as I have said, when he raised his workers’ salaries to the “unheard of salary” of $5 per day, so that they could afford to buy his Model T’s.

Graph: DShort.com

And Nobelist Joe Stiglitz highlighted the results of such inequality in his latest book, “The Price of Inequality”. “I won’t run through all the evidence here, except to say that the gap between the 1 percent and the 99 percent is vast when looked at in terms of annual income,” he said in a Vanity Fair article, “and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets.”

Such inequality has caused many of the economic ills of the past decade, including the two most recent recessions. “It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest. It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop.”

Except for the Federal Reserve’s just announced action to implement “QE3” through 2015, nothing is being done to create more jobs with a Congress and White House deadlocked on whether tax cuts or stimulus spending is more important.

So the situation is dire, needless to say, which is why the Federal Open Market Committee extended it credit easing period into 2015. “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

Bernanke also pronounced the maximum employment target was around 6 percent, a full 2 percent drop from the current 8.1 percent, which in effect probably wouldn’t happen until at least 2015. That, combined with the ongoing euro problems and softness in China’s economy were what probably spurred the Fed to further actions.

So there is a direct connection between too much inequality and high unemployment. Professor Stiglitz said it best in the Vanity Fair article.

“It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest,” said Stiglitz. “It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop. Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do.”

Many are now voicing a growing concern on what record inequality has already done to U.S. economic growth and our position in the world, especially over the past decade.  Now it is really up to ordinary Americans to get that message to the policymakers who will make a difference, who understand that our economy only works when all citizens are able to participate in its benefits.

Harlan Green © 2012

Why Do We Need QE3?

Financial FAQs

It’s not hard to see why we need “QE3”, the Fed’s bond buying program to keep long term interest rates low. It’s almost an act of desperation. The Fed is the only game in town to stimulate growth at the moment, when we are teetering on the edge of several ‘fiscal cliffs’.

That is, the private sector is not creating enough jobs on its own to pay down the budget deficit, or maintain a secure social safety net. In fact, the unemployment rate has to fall at least 2 points—close to 6 percent—to bring us near full employment and an economy that returns us to prosperity. The U.S. economy is also dealing with the prospect of another credit downgrade that could endanger our fiscal solvency.

“The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails,” said Fed Chairman Ben Bernanke at the Fed’s annual Jackson Hole conference, “but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

Graph: Calculated Risk

There were just 96,000 payroll jobs added in August, with 103,000 private sector jobs added, and 7,000 government jobs lost. A meager total much below the first part of the year. The unemployment rate decreased to 8.1 percent (from the household survey), and the participation rate declined to 63.5 percent, mostly from the decline in manufacturing employment, which depends on exports which have flagged of late.

The reason for “persistently high levels of unemployment” is not a mystery. Incomes of the 80 percent of wage and salary earners whose spending powers most economic growth have fallen with no relief in sight when productivity gains are soaring. The problem is very little of those gains are flowing to the workers producing those goods and services.

From 1948 to 1973, the productivity of all nonfarm workers nearly doubled, as did average hourly compensation.  Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time, according to government data analyzed by the Economic Policy Institute.

That is a lesson that seems to have been lost at least since the 1970s. So until programs that stimulate actual job growth are enacted, there won’t be much more job growth, in spite of the Fed’s best efforts.

What programs are needed? This is also self-evident. Programs that decrease the record income inequality, the worst since the 1920s. And can be government-led, at the moment, without increasing the deficit. That is the misinformation being spread by those who do not understand growth. Romney, Ryan, et. al., don’t seem to realize that spending tax dollars on infrastructure, education, fire, police, healthcare, and the like, are actually dollars spent in the private sector that are deficit neutral. It’s called pay-as-you-go, the congressional rule that any spending increase had to be matched with a revenue increase. This rule that served President Clinton so well and enabled 4 consecutive budget surpluses, was only abandoned in 2000 when the Bush-Cheney administration cut taxes while increasing spending.

The huge inequality gap has reached historical levels not seen since 1928, which has depressed demand for the goods that drive growth. Economic historians such as Professor James Livingston, in particular, have known this. Private investment has been diminishing as a share of GDP since 1900. “So corporate profits do not drive economic growth — they’re just restless sums of surplus capital,” said Livingston, “ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

The policies that created such weak payroll numbers cannot be allowed to continue. Fed Chairman Bernanke and his Board of Governors are the only federal officials able to act at a time when our economic health hangs in the balance.

Harlan Green © 2012

Fewer Foreclosures Boost Housing Prices

The Mortgage Corner

Calculated Risk just reported that Lender Processing Services (LPS) released their Mortgage Monitor report for July with some good news. According to LPS, 7.03 percent of mortgages were delinquent in July, down from 7.14 percent in June, and down from 7.80 percent in July 2011.

Graph: Calculated Risk

LPS reports that 4.08 percent of mortgages were in the foreclosure process, down slightly from 4.09 percent in June, and down slightly from 4.11 percent in July 2011.
This gives a total of 11.12 percent delinquent or in foreclosure. It breaks down as:
• 1,960,000 loans less than 90 days delinquent.
• 1,560,000 loans 90+ days delinquent.
• 2,042,000 loans in foreclosure process.

“Nationally, 18 percent of borrowers who are current on their loan payments are ‘underwater’ (owing more on the mortgage than the home’s current market value),” continued Calculated Risk from a Herb Blecher report, “ranging from a low of 0.4 percent in Wyoming to nearly 55 percent in Nevada. As negative equity increases, we see corresponding increases in the number of new problem loans. In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines – should they occur – could jeopardize recent improvements.”

Graph: Calculated Risk

But we are seeing that real estate prices are beginning to climb in those same states that gained, then lost the most equity during the bubble and consequent bust. “Home prices gained in the second quarter,” says David M. Blitzer, Chairman of Standard and Poor’s Dow Jones Indices. “In this month’s report all three composites and all 20 cities improved both in June and through the entire second quarter of 2012. All 20 cities and both monthly Composites rose for the second consecutive month. It would have been a third consecutive month had we not seen home prices fall in Detroit back in April."

Graph: Calculated Risk

And Housing Wire reports that “a sustained uptick in home prices in more metros caused the number of improving housing markets across the nation to rise to 99 in September from 80 the previous month, according to the National Association of Home Builders and First American Home Price Index.

This is while there are already principal reductions happening for the non-Fannie and Freddie home loans. Billions worth of subprime mortgages once handled by Saxon Mortgage Services received more principal write downs since Ocwen Financial Corp. took over the portfolio.

Ocwen, now the largest subprime servicer in the U.S., completed its October 2011 acquisition of Saxon from Morgan Stanley in April 2012.More than $22 billion in mortgages transferred through the deal.

Just 11 percent of all modifications done on these loans included a principal reduction as of May. But in the three months since, Ocwen wrote down principal on 56 percent of modifications on Saxon loans, according to Laurie Goodman, chief analyst at Amherst Securities.

So now we are waiting for implementation of the recent National Mortgage Settlement Act that Wells Fargo, Citibank, Bank of America, Ally, and JPMorgan Chase agreed to. Among other things, it appropriates $25 billion to both settle borrowers’ claims of fraudulent foreclosure practices, but also help homeowners needing loan modifications now, including first and second lien principal reduction that aren’t Fannie Mae or Freddie Mac insured.  (Those mortgages are covered by the HARP loan modification program).  The servicers are required to work off up to $17 billion in principal reduction loan modifications and other forms of loss mitigation nationwide. Eligible borrowers will by contacted by the Servicers and will receive letters offering principal reductions or other modifications starting in June 2012.  This modification process will continue for approximately 3 years.

For loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers. Keeping in mind the timeline above, you may contact the banks directly if you need additional information:

• Ally/GMAC: 800-766-4622
• Bank of America: 877-488-7814 (Available M-F  7am - 9pm CT and Saturdays  8am CT - 5pm CT
• Citi: 866-272-4749
• JPMorgan Chase: 866-372-6901
• Wells Fargo: 800-288-3212 (Available M-F 7 a.m. to 7 p.m. CST)

Harlan Green © 2012

August Jobs Report—Manufacturing Slowdown

Popular Economics Weekly

The headlines said a “weak” job report on Friday. But it had nothing to do with politics or economic policy, at least directly. The jobs drop was all in manufacturing due to problems in Europe and China. So it’s really up to consumers to continue to open their pocketbooks over the holidays to keep this economy going, and that is happening to some extent.

But indirectly, government payrolls are still shrinking. And government investment as well as consumer spending are the twin engines of economic growth these days, which is the major reason we have 2 percent, instead of 3 percent GDP growth at this stage of the recovery.

There were just 96,000 payroll jobs added in August, with 103,000 private sector jobs added, and 7,000 government jobs lost. A meager total much below the first part of the year. The unemployment rate decreased to 8.1 percent (from the household survey), and the participation rate declined to 63.5 percent, mostly from the decline in manufacturing employment, which depends on exports which have flagged of late.

Graph: Calculated Risk

This can be traced to both the European recession, since 25 percent of U.S. exports go to Europe, and China’s growth slowdown. Manufacturing had been leading the recovery until now. But the service sector has taken over, with 119,000 service sector payroll jobs added and 15,000 manufacturing jobs lost in August; half of which were auto manufacturing that will spring back in the fall. And since the service sector accounts for 70 percent of total nonfarm payrolls, this means consumers are spending again, which is enough to keep us out of another recession.

So the economy has added 1.11 million jobs over the first eight months of the year (1.21 million private sector jobs), according to the Bureau of Labor Statistics. At this pace, the economy would add around 1.8 million private sector jobs in 2012; less than the 2.1 million added in 2011. Also, at this pace of payroll job growth, the unemployment rate will probably still be above 8 percent at the end of the year, says Calculated Risk.

The August ISM Non-manufacturing index for the service sector was at 53.7 percent, up from 52.6 percent in July. The employment index increased in August to 53.8 percent, up from 49.3 percent in July. Note: Above 50 indicates expansion, below 50 contraction.

Graph: Calculated Risk

Meanwhile, manufacturing has been slowing and until it picks up again the service sector will be the main engine of growth. The outlook for the nation's manufacturing sector is increasingly going into reverse based on the ISM's report where new orders, at a sub-50 level of 47.1 in August, show their third straight monthly contraction and at the deepest rate since April 2009. New export orders are definitely part of the problem, at 47.0 for what is also the third straight month of contraction. Manufacturers, as they wait for new orders to return, are increasingly drawing down their backlogs which are at 42.5 for the fifth straight month of contraction.

Graph: Econoday

This is no coincidence, as the EU economy is back in recession, having contracted in the second quarter—April to June. And with the German and Nordic countries insisting on more austerity for Spain and Italy, it’s third and fourth largest economies, economic contraction will continue, putting more downward pressure on manufacturing. The two bright spots are in transportation—domestic aircraft and vehicle manufacturing—which are surging.

So the economic news is mixed, with consumers continuing to spend, retail sales up, but exports down. This will boost certain sectors, mainly the consumer sectors in the service industries. But given that employment in private service-producing industries is currently 93,496,000 vs. just 18,744,000 in private goods-producing sector (i.e., manufacturing) when seasonally adjusted, the hurt in Europe in particular won’t cramp overall growth.

However, the bottom line is that we need more stimulus spending, in part to help states rebalance their budgets. The debt problem will take care of itself, because any job creation programs at all will increase the demand for goods and services, which in turn increases tax revenues. Austerity is not the answer with U.S. or in Europe when the unemployment rates are so high. The consensus among economists is that our unemployment rate has to drop below 6 percent to come anywhere near the 3.25 percent ‘trend’ growth of recent years that would bring back prosperity. But without a Congress willing to act on job creation, this won’t happen.

Harlan Green © 2012

Henry Ford’s Arithmetic Would Cure Budget Deficit

The Financial FAQs

Why don’t Republicans get it? As President Clinton said in his convention speech, there was one word to explain the difference between Republican and Democrats budget proposals—arithmetic. The numbers had to add up, and as a ‘good old boy’ from Alabama, he knew that 2 plus 2 equals 4, whereas Republicans couldn’t, or wouldn’t do the arithmetic.

“We Democrats — we think the country works better with a strong middle class, with real opportunities for poor folks to work their way into it with a relentless focus on the future, with business and government actually working together to promote growth and broadly share prosperity,” he said. You see, we believe that “we’re all in this together” is a far better philosophy than “you’re on your own.”

“So who’s right? Well, since 1961, for 52 years now, the Republicans have held the White House 28 years, the Democrats, 24. In those 52 years, our private economy has produced 66 million private sector jobs. So what’s the job score? Republicans, 24 million; Democrats, 42 (million).”

Even Henry Ford knew his arithmetic back in 1914, said Hedrick Smith in a recent New York Times Op-ed, when Ford raised his employees’ pay to the “unheard of sum of $5 per day” in 1914. Henry Ford knew that boosting his employees’ incomes created more wealth for everyone.

“Not only was it a matter of social justice, Ford wrote, but paying high wages was also smart business,” said Hedrick. “When wages are low, uncertainty dogs the marketplace and growth is weak. But when pay is high and steady, Ford asserted, business is more secure because workers earn enough to become good customers. They can afford to buy Model Ts.”

This incredibly self-evident truth has been lost by the apostles of smaller government, who have not only worked to diminish the role of government, but labor as well with their attacks on collective bargaining and union organizing in general. And that is why the Great Recession is turning into the worst recovery.

“From 1948 to 1973, the productivity of all nonfarm workers nearly doubled, as did average hourly compensation,” said Smith. “But things changed dramatically starting in the late 1970s. Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time, according to government data analyzed by the Economic Policy Institute.”

Graph: DShort.com.

Republicans have forgotten Henry Ford, have forgotten that consumers make up 70 percent of all economic activity, and cannot boost the recovery with the diminished incomes of today. In fact, they have been hurt most by pro-business policies that have suppressed wage and salary growth, while lowering tax rates for business and the wealthiest since 1970s.

This is a little-known fact. Consumers have been driving economic growth since the 1920s, when we switched from an industrial society that made things, to a service-oriented economy that serviced people and things, while most manufacturing migrated overseas with its cheaper labor. Historical economists, such as Rutgers’ James Livingston, say that a combination of consumer and government spending created most of the growth between 1900 and 2000, rather than capital investment from the private sector.

Yet, economic growth has declined steadily since the 1970s to its current 3.3 percent annual average. This is at the same time that incomes have skewed upward so that incomes of the top 5 percent of earners have approximately doubled since the 1970s, whereas incomes of the middle and lower quintiles (i.e., 20 percent segments) have basically remained flat.

So conservatives and the even more conservative Republican Party forgot Henry Ford’s arithmetic. Who could afford to buy his Model T’s, otherwise? Big Business has concentrated on enriching themselves, including the investor class and CEOs, while neglecting to build the incomes of the real consumers who generate most effective, or aggregate demand for their goods and services. The resultant income inequality has not only damaged domestic economic growth, but demoralized those consumers who could do most to invigorate the economy.

Graph: DShort.com

This is while corporations have accumulated almost unlimited power over the past 30 years that has given them the highest profits in history as a percentage of GDP. And now the Supreme Court’s Citizen’s United allows them unlimited political contributions to tilt the playing field even more in their favor with the $2 trillion cash hoard accumulated because of those profits.

This should be a no-brainer, getting the arithmetic . Big Business interests should know that spreading their wealth around would further enrich themselves as well, but they got into the lobbying business in a big way, which is documented in Jacob S Hacker and Paul Pierson’s Winner Take All Politics, How Washington Made the Rich Richer—and Turned Its Back on the Middle Class, and now effectively control two branches of government.

So part of the solution is obvious, at least. Get the arithmetic right. Restore to government its necessary powers to regulate the economy, maintain the safety net and, yes, re-distribute wealth to where it will do the most good—raise our educational standing in the world, boost research and development that we may retain our technological leadership as Henry Ford envisioned so long ago, and above all look out for the welfare of all wage earners, not just the few.

Harlan Green © 2012

Repubs Platform—Reverse Robin Hoodism

The Financial FAQs

Reagan Budget Director David Stockman and even President Obama have called it the reverse the Robin Hood effect, or taking the meager wealth from the poorest to give to the wealthiest. Because the Tea Party has created the Republican election platform, their agenda has been laid bare, which is a blatant effort to suppress the wages and salaries of 80 percent of our workforce. This after more than 200 years of government working for both the advantaged and disadvantaged.

The Republican platform no longer even tries to hide what they want to do--make the poor and middle classes even poorer by shrinking the social safety net, as well as restrict or outright ban collective bargaining of both public and private sector employees.

It is unbelievable, but true. Their platform even includes removing all restrictions on assault rifles, with no limits on magazine sizes, and taking away a woman's freedom to choose her own health care options, including contraception.

They are doing it in their time-tested way, playing the blame game again. As Rick Santorum said in his convention speech—“Almost half of Americans are on some form of government assistance,” implying that the poorest among US are too lazy to work. But most who receive government aid have retired on social security and Medicare, with very few on welfare, thanks to Clinton’s welfare reform that required welfare recipients to find work.

In fact, playing the blame game is their attempt to direct attention away from their own wholesale draining of the public coffers with tax breaks for the wealthiest that continue to increase the federal deficit, while income inequality is already at record levels. They would even make it worse under the Paul Ryan’s budget proposals by continuing to cut taxes, as well as social security, Medicare, education, and environmental protection programs.

Meanwhile defense spending would increase from some $500 trillion to over $900 trillion in 10 years by some estimates, if we follow Ryan’s prescription,  when we are the only super-power. This includes 9 super-carriers when no other country has even one.

What best confirms the Republican Party’s outright suppression of wages and salaries is the change in labor laws that have happened since at least 1980, when President Reagan disbanded the FAA Air Traffic Controllers Union, after only 4 days of negotiations.

In a just released report by the Center for Policy and Research, “Protecting Fundamental Labor Rights: Lessons from Canada for the United States,” begins with a comparison of the current state of organized labor in the United States and Canada.  It notes that, from the 1920s to about 1960, Canada and the United States had roughly the same unionization rates. But in 1960, the two began to diverge. As of 2011, the unionization rate in Canada stood at 29.7 percent, compared to less than half that in the U.S., at 11.8 percent.

While Canada and the U.S. both have elections as one route to forming unions, Canadian workers in several provinces also have the much faster option of card-check certification. Under card check, once a majority of employees signs cards in support of unionizing, an employer is required by law to recognize their union. . While the United States, however, workers must first file a petition showing support for unionizing and then vote to unionize in an election before an employer is required to recognize their union, unless an employer voluntarily recognizes a union.

And this can take months, during which companies are able to employ tactics to intimidate their workers. “During this time, U.S. employers usually engage in anti-union campaigns, often committing illegal acts – such as threatening to close the workplace or threatening to fire workers – to discourage them from voting to form a union,” said the report . “In fact, workers were illegally fired in about 30 percent of certification elections in 2007. Unfortunately, the legal response to such practices is slow and ineffective.”

Even more damning is the direct suppression of wages in the 23 right to work states  that say workers don’t even have to join a union, or outright banning collective bargaining of public workers, such as teachers, police and fireman, in Wisconsin, which other states are attempting to emulate.

For instance, A February 2011 Economic Policy Institute study found:

• Wages in right-to-work states are 3.2 percent lower than those in non-RTW states, after controlling for a full complement of individual demographic and socioeconomic variables as well as state macroeconomic indicators. Using the average wage in non-RTW states as the base ($22.11), the average full-time, full-year worker in an RTW state makes about $1,500 less annually than a similar worker in a non-RTW state.
• The rate of employer-sponsored health insurance (ESI) is 2.6 percentage points lower in RTW states compared with non-RTW states, after controlling for individual, job, and state-level characteristics. If workers in non-RTW states were to receive ESI at this lower rate, 2 million fewer workers nationally would be covered.
• The rate of employer-sponsored pensions is 4.8 percentage points lower in RTW states, using the full complement of control variables in [the study's] regression model. If workers in non-RTW states were to receive pensions at this lower rate, 3.8 million fewer workers nationally would have pensions.

The damage to economic growth is considerable when the 80 percent of Americans who are wage and salary earners have not been able to boost their incomes sufficiently to grow the economy. The facts are daunting. Income inequality has been growing since the 1970s—so much so that economic growth will continue to suffer, unless workers have sufficient bargaining power to begin to grow their incomes again.  But that can’t happen unless/until they recognize who is blocking their path to greater prosperity.

Harlan Green © 2012