Tuesday, January 29, 2013

Dr. Robert Shiller Says No Housing Boom

The Mortgage Corner

Dr. Robert Shiller, Yale Econ Professor, and co-creator of the Case-Shiller Home Price Index, has become very cautious in his latest articles. Don’t expect much in the way of a housing boom in 2013. He isn’t even sure even prices will continue to rise as they have over the past 3 years given all the headwinds, such as tighter mortgage regulations, a declining percentage of homeowners versus renters, and low consumer expectations in general.

This is in spite of the fact that home sales are up some 5 percent, and his own price index is 5.5 percent higher in one year, for the strongest year-over-year growth since August 2006 with increases in 19 of 20 cities..

“On the one hand, there were sharp price increases in 2012, with the S.&P./Case-Shiller 20-City Index, said Dr. Shiller, “which I helped devise, up a total of 9 percent over the six months from March to September. That comes after what was generally a decline in prices for five consecutive years. And while prices dropped very slightly in October, the trend was quite encouraging for the market.”

“But some of these changes were seasonal,” he continues. “Home prices have tended to rise every midyear and to fall slightly every fall and winter. And for some unknown reason, seasonal effects have become more pronounced since the financial crisis.”

Yet he cites a consensus of some 100 economists that real prices will rise 1 to 2 percent over inflation in coming years. Folks, that is the historical norm for housing prices in the 20th century that Dr. Shiller himself cites in his second edition of Irrational Exuberance.

Why so much pessimism from the Oracle who actually coined the term ‘irrational exuberance’ that Fed Chairman Greenspan used in his famous speech so many years ago?

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Graph: Calculated Risk

I believe he is neglecting what is behind the current surge in home buying—pent up demand, and record low interest rates that the Fed has vowed to keep low until the unemployment rate falls to the 6 percent range from the current 7.8 percent. Pent up demand is a powerful driver of home building, for one thing. And household formation is predicted to double to some 1.3 million per year in coming years from a low as 350,000 annually during the Great Recession.

That, and real interest rates make homes the most affordable in history, according to the National Association of Realtors. While this won’t bring us back to boom times, it will at least restore housing to its proper place in the economy.

Even though national existing-home sales declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, sales are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

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Graph: Calculated Risk

The result is total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing, as we have said in past weeks. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

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Graph: Econoday

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

Hence we do not share Dr. Shiller’s uncertainty about the direction of home prices. Extremely tight housing inventories mean demand has picked up substantially. It all might depend on one’s definition of a housing ‘boom’. No one expects a return to the bubble years when consumers borrowed more than they earned. Maybe it’s a relief just to return to a more normal housing market?

Harlan Green © 2013

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Thursday, January 24, 2013

2013 U.S. Economy Finally In Recovery

Popular Economics Weekly

With tax rates returning to more normal levels from the rollback of Bush era tax cuts, and Republicans giving up on denying debt ceiling increases until April that would force more cuts in government spending, there seem to be very few domestic factors to hold back more robust growth in 2013.

The “No Budget, No Pay-Act” bill could also open a path to a longer term increase: It would require the House and Senate to each agree by April 15 to a budget resolution for fiscal year 2014. And such a measure, which is intended to set spending and revenue levels for the next five to ten years, might include debt ceiling increases, say congressional staffers.

We are already seeing signs higher growth is happening—maybe even approaching 3 percent GDP growth in 2013. The Conference Board’s Index of Leading Economic Indicators (LEI) just jumped 0.5 percent in December, industrial production is rising again, and retail sales are surging. This and increased housing production are sure to increase hiring. Weekly initial jobless claims have already fallen to 330,000, close to the longer term average.

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Graph: Calculated Risk

The drop in jobless claims was the biggest factor in the LEI increase that predicts future growth. Conference Board economist Ken Goldstein said: “The latest data suggest that a pickup in domestic growth is now more likely, compared to a few months ago. Housing, which has long been a drag, has turned into a positive for growth, and will help improve consumer balance sheets and strengthen consumption. However, for growth to gain more traction we also need to see better performance on new orders and an acceleration in capital spending.”

What will help capital spending is surprising strong industrial production, with the manufacturing component up 0.8 percent following an increase of 1.3 percent the prior month.  Motor vehicle production was strong with a 2.6 percent rise after a 5.8 percent boost in November, along with other sectors.  Excluding motor vehicles, manufacturing output increased 0.7 percent after a 0.9 percent rebound in November.

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Graph: Econoday

And retail sales are increasing 5 percent per year, almost back to early 2000 levels. Gains were led by furniture & home furnishings, food services & drinking places, and health & personal care.  A decline was seen in electronics & appliance stores. Overall consumer spending was moderately healthy in December and likely will lead many economists to bump up their fourth quarter GDP forecast (which had been nudged down last week from a negative international trade report).

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Graph: Econoday

More housing construction in particular will boost growth this year, as it leads directly to new construction jobs, as well as boosts the financial sector. The jump in December housing starts was led by the multifamily component although single-family starts also were up notably.  Multifamily starts jumped 20.3 percent after a 6.3 percent decline in November.  The single-family component gained 8.1 percent in December after decreasing 3.2 percent the prior month.

The lesson seems to be that for all the political quarreling, there are fundamental factors driving growth. Increased hiring is driving up the demand for goods and services. Record low interest rates are boosting housing and stimulating exports due to the weaker dollar. The U.S. economy seems finally to be out of intensive care, and government is now aiding, rather than obstructing better growth.

Harlan Green © 2013

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Tuesday, January 22, 2013

Existing-Homes Inventory at Record Lows

The Mortgage Corner

The housing market is recovering with the highest sales and price rises since 2007. Only problem is that inventory is also at the lowest level since 2007, with just 4.4 month’s supply of housing on the market. We haven’t seen this low a level since early 2000.

The result is that housing prices are predicted to rise some 5.6 percent this year, and housing construction to top 1 million units for the first time in 5 to 6 years.

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Graph: Calculated Risk

Total national existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, but are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

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Graph: Calculated Risk

The preliminary annual total for existing-home sales in 2012 was 4.65 million, up 9.2 percent from 4.26 million in 2011. It was the highest volume since 2007 when it reached 5.03 million and the strongest increase since 2004.

The result was total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing—which includes both single family homes and rental units for those who aren’t purchasing. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

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This Calculated Risk graph that dates back to 1968 tells us how far construction has to grow to even return to historical levels of 1.5 million annual units. The shadowed areas are recessions.

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

The real problem at present is the political gridlock. “Builders’ sentiment remains very close to the index’s tipping point of 50, where an equal number of builders view conditions as good and poor, and fundamentals indicate continued momentum in housing this year,” said National Association of Home Builders Chief Economist David Crowe. “However, persistently tight mortgage credit conditions, difficulties in obtaining accurate appraisals and the ongoing stalemate in Washington over critical economic concerns continue to impede the housing recovery.”

Need we say more about what is holding back not only housing growth, but overall economic growth in this country?

Harlan Green © 2013

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

Sunday, January 20, 2013

Juicing Employment Is Good

Financial FAQs

The subject of juicing is in the air with Lance Armstrong’s confession that he and his cycling teammates injected various stimulants to win races. Yet he told Oprah on her show he didn’t think he was cheating. “Scary, hunh?”

But when it comes to stimulating growth of the U.S. economy after a recession there shouldn’t be any debate about boosting economic growth. Yet bond vigilantes and other austerity advocates think governments are cheating in some way by spending to stimulate economic growth, and create jobs (rather than let growth continue to stagnate).

But in reality, it is the age old attempt to restrict government from being effective in its various mandates, including helping to grow the economy; which also helps to right the record inequality that was a major cause of the Great Recession.

My goodness, we have such huge budget deficits, say the deficit hawks and bond vigilantes (who sing the same basic tune). This means their thinking is even scarier. It’s as if the Great Recession never happened. Because some deficits are good during an economic recovery, when there is little chance of inflation. Fed Chairman Bernanke has even said we could tolerate 3 to 4 percent inflation—instead of the current 2 percent—and it wouldn’t hurt economic growth.

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Graph: BLS

In fact, we can’t have real inflation until the unemployment rate drops back to 6 to 6.5 percent. One Fed Governor, Naryana Kocherlacota, even wants to wait until it falls to 5.5 percent, which is closer to the historical norm for inflation to kick in. This is why the Fed Governors set such a target before beginning to tighten credit.

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Graph: BLS

History has shown there isn’t sufficient demand to drive up prices when unemployment is high, which is the same as saying not enough money is in circulation that would drive up inflation. A good recent example is in the 1990s as the accompanying graphs show. When unemployment rose, inflation fell at the same time. Inflation then remained in the 2-4 percent range during the 1990s when unemployment was between 4-6 percent, which seems to be the norm, as we said.

We call it austerity when inflation hawks hold sway as they are doing in Europe at the present. It is also the rationale used by the deficit hawks who resist any stimulus spending, even though history has shown it decreases record inequality, the major cause of the current recession and economic stagnation, as we said. Nobelist Joseph Stiglitz is one who has trumpeted the necessity of decreasing inequality if we want real growth.

This is the lesson that Bernanke’s Fed has learned, and why they continue to pump money into our economy by buying up bonds and mortgage-backed securities with successive Quantitative Easing programs.

So Lance Armstrong’s ‘juicing’ does teach us something. It is a label misused by those protecting their wealth who resist all stimulus spending that benefits most Americans, and decreases record inequality. Using monetary stimulants to boost economic growth when unemployment high is good, because it creates a healthier economy, more jobs, and yes, a winning mentality for the right reasons.

Harlan Green © 2013

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Thursday, January 17, 2013

What Budget Problem?

Popular Economics Weekly

Does Congress know that our federal budget deficit has been shrinking steadily since 2009, the end of the 18-month Great Recession? Yes, that’s right. A combination of cuts in government spending and very low interest rates on the public debt have been bringing down what is really an apples and oranges problem. Annual deficits are decreasing, but they still add to the overall public/private debt, much of which is held by the Federal Reserve in bonds they can sell back to the public when the economy improves sufficiently.

In the depths of the most recent recession, the fiscal year that ended Sept. 30, 2009, the deficit was 10.1 percent of gross domestic product, the value of all the goods and services produced. Since then, the deficit has declined to 9 percent of GDP in 2010, 8.7 percent in 2011 and 7.0 percent in fiscal 2012. Private analysts predict the deficit will be between 5.5 percent and 6.0 percent of GDP in fiscal 2013, says Calculated Risk quoting Wall Street Journal’s David Wessel.

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Graph: Calculated Risk

And bond investors must know this, since they keep buying Treasury Bonds, whose yields are hovering near all-time lows. The U.S. has no problem paying its bills, in other words. Inflation hawks have been crying inflation over the Federal Reserve’s bond buying program since the end of the recession. Yet interest rates, the best indicator of inflationary tendencies, continued to decline to their current lows.

That is why much of the outcry over the debt ceiling has been fabricated by those who want little or no government, who believe all government spending is for the 47 percent of ‘takers’, when in fact a large part of the government ‘largesse’ goes to the wealthiest to finance their tax breaks. Most of the federal debt comes from past spending, the spending run up since 2000 in fighting two wars, the Bush tax cuts, and recession. This is after 4 consecutive years of budget surpluses under President Clinton, as the graph shows.

Because debt held by the public flows through financial markets, it has more immediate relevance to the economy than intragovernmental debt, which is a matter of internal bookkeeping. As of the end of December 2012, debt held by the public (subject to the limit) totaled $11.563 trillion, says the Concord Coalition.

The rest of government debt for the most part is intragovernmental debt, consisting of trust fund accounts that are credited with dedicated revenue such as Social Security and Medicare payroll taxes (FICA). In theory, any surpluses in these accounts are “saved” for future benefit obligations. As of the end of December 2012, intragovernmental debt (subject to the limit) totaled $4.831 trillion. Hence the grand total of federal debt is $16.4 trillion.

But we know how to pay it down. The Clinton Presidency showed us how. It is important to reduce government spending, particularly on defense, which is being done as the wars wind down. Another part is fostering job formation programs that increase tax revenues, as happened during the 10-year growth cycle of the 1990s, the longest growth cycle in our history. Twenty one million jobs were created just during the 8-year Clinton term.

In fact, history shows growth remains mediocre without government revenues to support it. This is not just to finance social welfare and senior pension programs. There is so much public infrastructure repair and upgrades that need to be financed at the state and national levels which private industry cannot initiate.

For instance, building our national highway system in the 1950s was a huge boost to growth, and there is a multi-trillion dollar deterioration of current public infrastructure. Much more needs to be spent on schools just to keep up with rising worldwide educational standards. This is not to speak of environmental protection, renewable energy, and research and development that only governments can instigate.

Americans do know how to foster growth. But it has always been due to the partnership of private and public sectors, something our current Congress seems to have forgotten.

Harlan Green © 2012

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

Tuesday, January 15, 2013

The Hunger Games Are Coming…

Financial FAQs

Was the Sandy Hook Elementary School massacre the sign of an apocalyptic future? Or the Aurora Theatre shootings by a cold-blooded killer?

The Hunger Games is a riveting portrayal of how the young see the modern world, where a privileged elite has a “Stalin-like” control over who lives in plenty or poverty in a post-apocalyptic North America. Author Susan Collins has said it "tackles issues like severe poverty, starvation, oppression, and the effects of war among others."

And the young just coming of age are not far from the truth. A vision of decline and limited opportunity fills the daily news. Declining resources and global warming could cause future wars, says the Pentagon. America has become a war zone with school children no longer safe and more than 10,000 gun-related deaths per year. Even Social Security and Medicare may not be available for future generations, say its Trustees.

In fact, a record number of Americans are already living below the poverty line, while University of California economist Emmanuel Saez found the top 1 percent of households garnered 65 percent of the nation’s income growth from 2002-07, the beginning of the recession.

And that is the problem. The U.S. doesn’t suffer from a scarcity of needed resources, or the means to finance adequate social services. It has been suffering from a redistribution of the wealth upward over the past 30 years that is no longer available to finance those means.

While overall household incomes (and consequent economic growth) have been steadily declining, the wealth of the top income brackets has been as steadily increasing. And the result is what the young see—a vision of scarcity in the real world that isn’t real. Modern industry has conquered the means of production. Rather, such scarcity results from a conscious policy by a politically powerful minority that demands more benefits for them while cutting benefits for all Americans.

The result is wages, money that flowed to employees of firms, fell to a record low of 43.5 percent of GDP, while corporate profits are the highest on record. It is a level of inequality and redistribution of resources matched by a few of the poorest countries in the world. The U.S. level of inequality has been ranked just above some of Africa and Asia’s poorest countries by the CIA’s World Fact Book.

Ms. Collins has said her stories were inspired in part by TV reality games, with their fight for survival, as well as the Iraq War, a war over the control of resources. But the popularity of The Hunger Games, or Survivor and all the TV reality shows is a testimony to the present reality for millions of Americans. One reason this young adult fiction remained 100 weeks on the New York Times’ best seller list was that it does mirror the modern reality for many, where starvation and the fight for survival still exists.

That is certainly true in the developing world, but shouldn’t be true in the United States of America. The adults have badly made a hash of the modern world, says The Hunger Games. They have created poverty in the land of plenty, and so are not to be trusted.

The adults lied about the Iraq War, when they covered up the knowledge that there were no weapons of mass destruction. Adults also lied about the benefits of tax cuts for the wealthy. It made everyone else poorer. Their policies created 5 successive recessions since 1980. The Great Recession happened because adults ignored or broke existing laws and regulations in order to enrich themselves. The adults have made a hash of governing because they strove to break down the government’s power to govern.

The Hunger Games is a cry that adults can no longer rule their world wisely. So beware, adults. The young are watching you.

Harlan Green © 2012

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

Saturday, January 12, 2013

Mortgage Quality Highest in Decade

The Mortgage Corner

Record low interest rates and low prices, are making housing more affordable than ever. This is also helping lower default rates, as average credit scores have soared, and Debt to Income Ratios used to quality borrowers have plunged since the end of the Great Recession. This tells us that the Fed’s efforts to hold down interest rates until at least 2015 is producing results.

The National Association of Realtors’ Housing Affordability Index showed that housing affordability is expected to set a record in 2012. The trade association is forecasting that its index of housing affordability will hit a record level of 194 in 2012, up from 186 in 2011, when the prior record was reached. NAR data go back to 1970.

A reading of 100 means that a household with median income would have exactly enough income to qualify for buying a median-priced existing single-family home. A level of 194 for last year means that families had almost double the income needed for buying a median-priced existing single-family home. However, skeptics might note that NAR’s index didn’t fall below 100 even during the recent bubble. Indeed, the last time the index reached under 100 was in 1985, when mortgage rates were in double digits.

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Graph: WSJ Marketwatch

This is while average credit scores for so-called conforming loans purchased by Fannie Mae and Freddie Mac started rising in 2008 and remain high. In the third quarter, the weighted average credit score of single-family mortgages purchased by Fannie reached 761, while the score was 762 for Freddie-acquired loans. Those levels are up from the 730s in 2008. Consumer confidence in the housing sector grew last month, marked by continued positive attitudes toward home price, rental price, and mortgage rate expectations, according to Fannie Mae’s December National Housing Survey results.

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Graph: WSJ Marketwatch

While credit-score standards have increased post-bubble, debt-to-income ratios have been falling. For home-purchase loans, the weighted average debt-to-income ratio at the time of origination is currently around 34 percent, down from a bubble high of about 40 percent. “The average debt-to-income ratios are back to basically the early 2000 levels for reasonable, sustainable mortgage payments,” said Mark Fleming, chief economist for analysis firm CoreLogic. “Apart from credit scores maybe being a little bit too tight, all of the other aspects of the traditional metrics on which you underwrite mortgage loans are really back to reasonable and tried and true levels.”

Continued price improvement is dependent on interest rates maintaining their lows for a sustained period. Fed Chairman Bernanke has promised to maintain such low rates until the unemployment rate has declined to 6.5 percent, which won’t probably happen until 2015, as I’ve said.

More mortgage relief is also coming from the $8.5 billion settlement with 10 major loan servicers. The firms involved in this agreement are Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo. Roughly 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010 will receive cash compensation under the settlement, with payments ranging from a few hundred dollars to potentially as much as $125,000 in a small percentage of cases. Those eligible are expected to be contacted by the end of March, regulators said.

Harlan Green © 2012

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

Wednesday, January 9, 2013

January Housing Inventory Declines 24 Percent

The Mortgage Corner

The surest sign that property values will increase this year is the large decline in homes for sale. This is in part due to increasing sales, with existing-home sales up some 6 percent, year-over-year. But there is also a sharp decline in the so-called shadow inventory of homes in mortgage default, as well as outright foreclosures.

According to the deptofnumbers.com for (54 metro areas), overall inventory is down 23.9 percent year-over-year in early January, and probably at the lowest level since the early '00s. This Calculated Risk graph shows the NAR estimate of existing home inventory through November (left axis) and the HousingTracker data for the 54 metro areas through early January.

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Graph: Calculated Risk

According to the NAR, national inventory declined to 2.03 million in November down from 2.11 million in October. This is the lowest level of inventory since December 2001. Inventory is not seasonally adjusted, and usually inventory decreases from the seasonal high in mid-summer to the seasonal lows in December and January as sellers take their homes off the market for the holidays.

Gary Wood’s December Santa Barbara MLS data also show signs of less inventory for sale. In December 2012 escrows remained strong with about 90 down from 98 in November and the median list price on those escrows went up from $811,850 the previous month to over $900,000, so we may be seeing prices rising substantially this year. But closing periods are falling. For instance, the $550,000 to $599,999 price average sale period averaged just 9 days, while 6 other price ranges closed within 20-30 days.

Continued price improvement is dependent on interest rates maintaining their record lows through 2013, of course. But Fed Chairman Bernanke has promised to maintain such low rates until the unemployment rate has declined to 6.5 percent, which won’t probably happen until 2015. So that will also stimulate the building of more new housing. Some of it will be rentals, as vacancy rates are tumbling. It is also depending on more new households forming. And economists are predicting that household formation could almost double in coming years from its low during the recent recession.

Harlan Green © 2012

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

Saturday, January 5, 2013

Unemployment—Why Still So High?

Popular Economics Weekly

What will bring US back to full employment is a very big question among economists. The problem is that the 155,000 per month nonfarm payroll average in 2012 isn’t enough to either absorb new entrants, or those that have lost jobs during the Great Recession.

Most macro economists know this. Only investment of more money grows a sluggish economy. And that requires more than the Fed’s printing of money (which at least keeps interest rates low), but isn’t in itself a direct catalyst for investment programs. It requires Congress and more expansionary fiscal policies to create jobs programs that will directly improve economic well-being. Until that happens, this will be a limpid recovery.

We know government spending tied to specific programs works because the $787 billion ARRA stimulus package of 2009 created or preserved as many as 3 million jobs. Had it been continued, say economists such as former Obama Chief Economic Advisor Christina Romer, we would have a much lower unemployment rate today.

December nonfarm payroll employment rose by 155,000, and the unemployment rate was unchanged at 7.8 percent, the U.S. Bureau of Labor Statistics reported Friday. The change in total nonfarm payroll employment for October was revised from +138,000 to +137,000, and the change for November was revised upward from +146,000 to +161,000.

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Graph: Calculated Risk

The crux of our problem? The Labor Force Participation Rate was unchanged at 63.6 percent in December. This is the percentage of the working age population in the labor force. The participation rate is well below the 66 percent to 67 percent rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics, according to the Labor Department, as birth rates decline and the labor force ages, reducing the labor supply.

So how to put more Americans back to work? Keynesian and Neo-Keynesian macro economists, such as Paul Krugman, know the answer. He has said, for instance, “If the American Jobs Act, proposed by the Obama administration last year, had been passed, the unemployment rate would probably be below 7 percent.”

Create programs that put money back into the pockets of those consumers who spend it—mainly the 80 percent who earn wages and salaries. They are the drivers of aggregate demand, the amount of money actually in circulation that produces ‘things’. Most of the income gains since 2000 have shifted to the top 10 percent who spend considerably less as a percentage of incomes. Or, it has remained in corporate coffers with their record profits, rather than reinvested domestically—precisely because of the slack demand.

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Graph: CBPP

So we are back to the chicken and egg argument. Which comes first? We know the historical answer. Chickens aren’t laying more eggs because consumers are eating less eggs. And that’s because they can’t afford to buy more eggs. So farmers cut back on egg production.

Meanwhile, the public sector has been badly neglected—repair of roads, bridges, schools, the research and development of new technologies, to name a few. There are jobs waiting to be filled that only public revenues can finance, in other words. So there is no reason to allow the further deterioration of the ‘things’ that benefit all Americans, regardless of income level.

Harlan Green © 2013

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

Thursday, January 3, 2013

Happy New Year—A 2013 Recovery!

Popular Economics Weekly

Any doubts how dependent the rest of the world is on U.S. growth was dispelled on ratification of the ‘fiscal cliff’ bill by Congress. The world’s stock markets rallied on the news. The DOW was up + 2.35 percent, Europe’s FTSE + 2.19, Hong Kong’s Hang Seng + 2.98 percent, and so forth.

With the ‘fiscal cliff’ no longer a cliff (thanks to Congress finally listening to voters), 2013 might be the year of full recovery from the Great Recession. Real (after inflation) U.S. Gross Domestic Product is up 2.5 percent from its pre-recession highs, with only China’s growth rate higher since the Great Recession. This is in spite of various catastrophic events—such as Hurricane Sandy and the debt ceiling debate yet to come.

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Graph: Econoday

Details are still vague on all details of the final fiscal cliff negotiations, but we know it preserves the tax rates prevailing at the end of 2012, except for those individuals earning more than $400,000 and households earning over $450,000. It also allows taxes on capital gains and dividends to go up, and extends benefits of the unemployed. Additionally, the Senate bill delays the onset of the "sequester" — the swift, automatic spending cuts — for two months.

The increased tax revenues will boost growth in 2013. Why? Northern Trust’s retired Chief Economist Paul Kasriel said in his blog what many economists are saying—that the additional revenues will boost private sector growth.

“The Treasury is going to collect higher taxes from me and either transfer them to you or buy something from you. In other words, an increase in tax revenues will not ‘suck’ spending power out of the economy, but rather redistribute that spending power.”

And this is just what is needed to stimulate higher growth. The additional revenues flow to US consumers who will spend it domestically, thus creating more jobs. US national and local governments spend directly to benefit constituents, in other words, whether in education, infrastructure, the social safety net, or research and development.

The fiscal cliff deal also extends the child tax credit and the college tuition credit for five years, individual and business tax extenders for two years, and the Medicare "doctor fix" for one year. The Alternative Minimum Tax will be permanently fixed. The agreement also extends the farm bill for one year.

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Graph: Calculated Risk

So the additional tax revenues mean 2013 should be the year that our governments no longer act as a drag on growth. State and local governments have been a drag on GDP for twelve consecutive quarters. Although not as large a negative as the worst of the housing bust, this decline has been relentless and unprecedented. The good news is the drag appears to be ending.

Harlan Green © 2012

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