Thursday, March 24, 2011

What to do with 30-year Mortgages?

The Mortgage Corner

Are 30-year mortgages a thing of the past? If so, too bad. Much of the debate over the future of Fannie Mae and Freddie Mac revolves around whether their main product—the 30-year mortgage—will disappear if Fannie and Freddie in their current form are dissolved. That would increase the costs (and decrease affordability) of home ownership.

Why the debate? Because 30-year mortgage are considered very risky extensions of long term credit, say privatization advocates, which require some kind of either explicit or implicit government guarantee and regulatory oversight. In other words, banks and other financial entities without those guarantees would want to offer shorter term fixed rate mortgages—say, with 15 to 20 year terms.

This is because shorter term mortgages have less risk, which is why loans tied to the Prime Rate—which can change overnight, and is now at 3.25 percent—offer the lowest rates for home equity mortgages, commercial lines of credit, etc.

The problem, however, is that 30-year amortized fixed rate mortgages provide the least risk to homeowners. A 30-year amortized payment is more affordable versus a shorter amortization term, and borrowers can rely on its fixed 30-year payment schedule to pay down their debt,. Though, in fact, the average life of a 30-year mortgage is seven years due to the mobility of American households.

Everyone agrees that 30-year fixed rate mortgages have made housing more affordable, and has boosted both the homeownership rate, and housing market in general. So the real debate is what to do with Fannie and Freddie, who have become government wards because of the Great Recession. Fannie guarantees some $1 trillion in mortgages, and holds $1.5 trillion in its own portfolio that has not been sold into the secondary market of mortgage-backed securities.

Treasury Secretary Timothy says we must be cautious in winding down their assets—maybe over a ten year period—so as to not flood the markets with too many mortgages, thus devaluing them. Mortgage activity is still low because of the housing bust, and Fannie and Freddie are its main conduits. The four-week moving average of the Mortgage Bankers Association purchase index is still at 1997 levels, and even with the large percentage of cash buyers recently, this still suggests fairly weak home sales through April.


Harvard economics’ Professor Ed Gleaser believes Fannie and Freddie should remain public entities, because if they were privatized, government would step in again, anyway, as they are entities ‘too big to fail’. “I support the public option not out of blind faith in the public sector, but out of profound skepticism toward mixed public-private models, like Fannie and Freddie,” said Gleaser. “The free-market friends of privatizing those entities envision a bold new world where the government no longer stands behind their debt. But if the last three years have taught us anything, it is that the government is not going to sit by and let a major part of the financial system fail.”

Barron’s Magazine has taken the privatization side of the argument in an August 28, 2010 article: “Today, Fannie (ticker: FNMA) and Freddie (FMCC) own or insure some $5.7 trillion of the $11 trillion U.S. mortgage market. Moreover, they provided around 75 percent of the funds flowing into the mortgage market in the past year.

“In a housing conference hosted by Secretary Geithner, there was some agreement that the government should either offer back-stop, catastrophic insurance on all residential mortgage securities, whether bundled by the GSEs, banks and other financial intermediaries,” said Barron’s, “or, perhaps, get out of the insurance game entirely except for affordable-housing investment pools. In other words, there would be no home-field advantage for Fannie or Freddie.“

The reason for their extreme caution? Both new and existing-home sales continue to decline, dropping 16.9 and 9.6 percent, respectively, in February. New-home sales are at a record low in part because of the large number of foreclosures flooding the market.


Whatever happens to Fannie and Freddie, Geithner asserted, they will have a much smaller footprint in the future so as to not pose a systemic risk. Among other things, the Government Sponsored Entities (GSEs) could lose the implicit government backstop on their corporate debt at some point so as to curb any future buccaneering. Or, perhaps, the GSEs would be restricted to buying mortgages or other securities merely for warehousing purposes, in anticipation of creating new mortgage-backed securities.

Harlan Green © 2011

Monday, March 21, 2011

The Japanese Lessons

Popular Economics Weekly

The Japanese twin disasters—an earthquake plus Tsunami—have highlighted both why Japan’s economy has basically sputtered since its real estate and stock bubbles burst in 1989-91, and why ours is taking so long to recover—we were not prepared for the shocks.

Japan, the country best prepared for natural disasters, wasn’t prepared for a disaster of this magnitude, just as Wall Street believed in a free market ideology that said banks knew enough to avert financial disaster in policing themselves without adequate regulatory oversight.

Just so, Japan wasn’t prepared for the bursting of its twin asset bubbles—in real estate and the stock market, when a single property in Tokyo briefly had a higher value than all of Manhattan. The result was real deflation, with prices falling for decades. And both Japan and U.S. wouldn’t put adequate resources to make up for the lost output, which is why our economy continues to sputter along.

In Japan’s case, it was because it chose to spend its monies trying to prop up failed institutions—rather than writing them off—because of the interlocking ownership of banks with corporations with real estate assets (called Keiretsu). So it couldn’t muster enough yen to stimulate more spending by its populace, who did what people instinctively do during recessions, they hoarded their assets in an attempt to keep them from losing value.

Deflation seems to be a puzzle that eludes even many economists. As Nobelist and former World Bank Chief Economist Joseph Stiglitz said recently in a Barron’s interview, “Money that isn’t spent lowers global aggregate demand”—i.e., can’t spur economic growth and so job creation.

And that is exactly what needed to be done. Dr. Stiglitz has called it Hoover economics, in memoriam of our President Herbert Hoover who tightened credit conditions at the beginning of the Great Depression, when he should have made credit easier.


“I am surprised that so many European leaders and some Americans, having seen the disaster of Hoover economics, are still going ahead with austerity,” he said, referring to the push by Germany and Great Britain to pay down their budget deficits. “The evidence is overwhelming that it will lead to an economic slowdown.”

The result for Japan has been an extended Great Recession, with falling prices and wages that has put it now in third place in GDP, according to the IMF, behind the U.S. and Chinese economies. We do know that deflation makes consumers more cautious. They tend to wait for prices to fall further (i.e., be discounted) before buying, whereas during inflationary times consumers react more quickly, thinking prices will be higher if they hesitate. And it is the money they spend, and not save, that circulates throughout an economy that increases aggregate demand.


Deflation, in a word, has been the great fear of Fed Chairman Ben Bernanke, a student of the Great Depression. And so he did not want a repeat of Hoover economics, which is why he has been pumping so much money into the U.S. economy via his various Quantitive Easing (QE) programs that have brought down interest rates on both Treasury Bonds and mortgages.

We have yet to learn the lessons of both the Japanese disasters and our own burst bubbles, according to Dr. Stiglitz. “Bernanke and Greenspan have to bear some responsibility for that ideology that bubbles don’t really exist, and they clearly do.” They weren’t prepared for the financial shocks, in other words. The lesson from Japan’s more recent disasters is that earthshaking events can happen, whether natural or manmade.

Harlan Green © 2011

Monday, March 14, 2011

A Third World U.S. of A.?

Popular Economics Weekly

When we look at the results of the Great Recession, there is one inescapable fact. The U.S. in many ways is looking more like a Third World country than the leading light of the developed world. Not only are Americans’ quality of life worse off than even in 2000, but the rest of the developed world—and some developing countries are rushing past us into this, the 21st Century.

An example is Mauritius, a tiny 1.3 million population tropical archipelago that Nobelist Joseph Stiglitz recently visited. “Suppose someone were to describe a small country that provided free education through university for all of its citizens,” says Professor Stiglitz, “transportation for school children, and free health care – including heart surgery – for all. You might suspect that such a country is either phenomenally rich or on the fast track to fiscal crisis.

But Mauritius isn’t rich with just a $6700 per capital income since breaking away from Great Britain in 1968. It also has no natural resources of its own. “Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net. Many countries, not least the US, could learn from its experience,” says Stiglitz. And, GDP growth has averaged 5 percent over the past 30 years.

Many smaller countries are putting us to shame, in other words, in terms of encouraging growth while caring for their citizens. American’s pay less towards public services that benefit all than any other developed country—except for health care, where health providers manage to extract twice the per capita spending than in other developed countries, with much worse outcomes—20 percent worse in the case of infectious diseases in a recent British Isles study.

At a time when Americans should be enjoying a better standard of living than their parents, for example, this is the first generation where the parents will have done better than their children on the whole. This is not only in the amount of wealth that has disappeared in the Great Recession—more than $4 trillion in lost value of both homes, stocks and bonds—but in health factors such as longevity, our birth death rate, and amount of infectious diseases. And wealth lost by the federal government has created the huge budget deficits that have made it even harder to put economic growth back on track.

Back to more mundane news, retail sales are surging, as working consumers seem to be on track to boost spending. The malls are filling up again, in other words, with Bank of Tokyo-Mitsubishi’s same-store sales survey tracking higher and the U.S. Commerce Department’s monthly retail sales up a huge 1 percent.


“Overall retail sales in February surged 1.0 percent, following a revised 0.7 percent boost in January and a revised 0.6 percent increase in December,” said Econoday in its weekly update, with auto and gasoline sales leading the way. Year over year sales are up a huge 8 percent, with sporting goods, hobby, book & music stores, also up 1.3 percent, and food services & drinking places, up 1.2 percent. This is boom-time spending, folks, so those with jobs seem to have regained some confidence.

Working consumers can spend more because they are borrowing again. Overall consumer credit outstanding rose $5.0 billion in January, following a $4.1 billion gain the prior month. The latest increase was entirely from the nonrevolving component which surged $9.3 billion in January following December's $2.1 billion gain—i.e., mainly from financing for motor vehicles.


This is while the U. of Michigan’s most recent sentiment survey took a dive with the latest gas price hikes. Mid-March weakness was centered in the leading component, the expectations index which plunged 13.3 points to 58.3. The expectation drop will weigh on the Conference Board’s index of leading indicators as it is one component of the index of leading indicators. It was because of the Mideast volatility, and how rising gas-energy prices might weigh on inflation. Though any prolonged price spikes would slow down economic growth, which will depress any inflationary tendencies.

So such sensitivity to energy price shocks is a sign that economic growth hasn’t taken hold for the majority of Americans. Too many are still out of work, and the average worker’s salary hasn’t grown at all after inflation is figured in. The bottom line is that debt loads are still too high for most of us, and government spending to support economic growth will only shrink as deficit reduction becomes Washington’s priority.

Unfortunately, we are looking in the wrong places for deficit reduction at present. Rather than let the Bush tax cuts for those making more than $250,000 per year lapse, which will cost taxpayers $850 billion over 2 years, “The Republicans’ bill hacks away at funding for the Environmental Protection Agency, the Securities and Exchange Commission, the Occupational Safety and Health Administration, the National Labor Relations Board, the Commodity Futures Trading Commission, the USDA’s food inspection unit, and the Food and Drug Administration”’ says Marketwatch’s Rex Nutting.


So unfortunately, do not look to so-called fiscal conservatives to cut budget deficits. Those doing it in the name of reducing the size of government have only succeeded in making those deficits larger. Our deficits were fairly low—until the Reagan/Bush I (1980-92, and Bush II (2000-08) eras. Those were the administrations that advocated tax and government spending cuts as the path to prosperity, as we said last week. So once again, need we say more?

“…the question is not whether we can afford to provide health care or education for all, or ensure widespread homeownership”, said Professor Stiglitz. “If Mauritius can afford these things, America and Europe – which are several orders of magnitude richer – can, too. The question, rather, is how to organize society. Mauritians have chosen a path that leads to higher levels of social cohesion, welfare, and economic growth – and to a lower level of inequality.”

The United States of America is going in the opposite direction at present.

Harlan Green © 2011

Friday, March 11, 2011

Who’s to Blame for the Deficits?

Financial FAQs

The blame game is back on in Washington with the budget debate.  But it is really a cover for hidden agendas.  Job formation is finally bringing down the unemployment rate, but hasn’t yet brought back 7.1 million of the jobs lost from the Great Recession. What is holding up job formation? It is in fact the debate over whether to ‘fix’ the federal deficit, or continue the various government stimulus programs that are helping bring down unemployment.


Let us be clear about it. Austerity measures to bring down deficits don’t grow economies when economic growth is not yet sustainable. Great Britain’s newly elected austerity government is proving that. In the debate over the budget, the deficit hawks seem to be leaning on the claim that austerity will actually increase employment, because it will raise business confidence, says Nobelist Paul Krugman in a recent blog piece. But how’s that going in Britain, where the Cameron austerity program was supposed to lead the way?


Not so good, according to Britain’s latest BDO business confidence survey, which is a poll of polls that pulls together all the results of the main business surveys. It’s December headline? “Severe drop in service sector confidence spells danger for UK economy--Private sector unprepared to fill the hole left by public sector cuts.”


And a post from UC Econ Professor Brad Delong catalogues when the federal deficits grew most as a percentage of GDP growth. It was fairly low—until the Reagan/Bush I (1980-92, and Bush II (2000-08) eras. Those were the administrations that advocated tax and government spending cuts as the path to prosperity. Need we say more?

So why are we finally seeing some increase in hiring? Consumers feel confident enough to begin spending again. And it takes a period of increased spending before employers will hire more workers. The consumer ended up with a fatter wallet in January, though it did not open it up as much as in recent months. Personal income in January surged 1.0 percent, following a 0.4 percent gain the month before.


The consumer confidence surveys are one gauge of consumer demand. The Conference Board's index rose to 70.4 in February for the best reading in three years. January was revised more than four points higher to 64.8. Most of the improvement was related to a better assessment of the jobs market.  Fewer consumers in February said jobs are hard to get, at 45.7 percent, compared to January's 47.0 percent. Also, upward revisions were especially striking in the assessment of future income which before this report had been in unprecedented inversion; that is more saw their income decreasing than increasing. Not anymore, says Econoday, as 17.3 percent see their income improving versus 13.8 percent seeing a decrease.

And so employers are beginning to hire again. Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate fell to 8.9 percent from 9.0 percent, reported the U.S. Bureau of Labor Statistics.


But the unemployment rate for the “marginally attached & Part Time” still tops 15 percent, while the median duration of unemployment tops 20 weeks, which means not enough jobs are yet being created to absorb new entrants.

That means private sector employers are still reluctant to expand.  That is, we really will not see a sustained recovery that feeds other sectors—such as housing—until the unemployment rate drops much lower, which Fed Chairman Bernanke predicts won’t happen for several years, as we said last week.  Therefore for the deficit hawks to call for austerity measures now would do to our economy was it is doing to Britain’s—lower business confidence, when the deficit hawks say it should increase confidence. So who is right?

Harlan Green © 2011

Tuesday, March 8, 2011

Public vs. Private Sector—No!

Financial FAQs

Believe it or not, when job creation is the issue, there is no conflict between the public (government) and private sectors of our economy. Yet it is a common misconception that governments take money and jobs away from the private sector.

The private sector only begins to hire more workers when it sees a sustained demand for its products and services, period. And that doesn’t happen during recessions. For instance, motor vehicles sales are surging—up over 13 percent annually in a steady growth pattern since last June. And because auto manufacturers have seen such sustainable growth, the manufacturing sector is hiring workers again.


But this wouldn’t have happened if government had stayed out of the picture. Both Chrysler and GM needed government help. Why? The private sector didn’t want to step up to restructure them. Corporations have been hoarding more then $2 trillion in cash from record profits over the past 2 years rather than investing in new facilities, while banks have been hoarding more than $1 trillion in excess reserves—reserves above and beyond what is required—instead of lending out to businesses wanting to expand. This is while the economy has lost more than 7 million jobs.

Overall demand had plunged due to the greatest recession since the Great Depression and the private sector had become risk averse—really risk averse; not wanting to take any chances at all, especially with the near-collapse of our financial system.

Why are we only now seeing an increase in hiring? Consumers feel confident enough to begin spending again. The consumer ended up with a fatter wallet in January, though it did not open it up as much as in recent months. Personal income in January surged 1.0 percent, following a 0.4 percent gain the month before.


As in December, consumer spending for the latest month was led by auto sales, as we said, and higher gasoline prices. Personal consumption expenditures increased a modest 0.2 percent, following a 0.5 percent advance in December.   For January, strength was led by nondurables, up 0.9 percent (including gasoline), with durables advancing 0.4 percent.

And so employers are just beginning to hire again. Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate fell to 8.9 percent from 9.0 percent, reported the U.S. Bureau of Labor Statistics last Friday.


December and January payrolls were also looking better. The change in total nonfarm payroll employment for December was revised from +121,000 to +152,000, and the change for January was revised from +36,000 to +63,000. The only real weakness was in government employment, which fell by 30,000. Local governments, many struggling with budget pressure, have cut 377,000 jobs since September 2008.

This means the private sector has only begun to venture from their foxholes.  We really will not see a sustained recovery that feeds other sectors—such as housing—until the unemployment rate drops much lower, which Fed Chairman Bernanke predicts won’t happen for several years.  The so-called private sector of small and large businesses has yet to make a substantial contribution to the ongoing recovery, in other words.

Harlan Green © 2011

Sunday, March 6, 2011

How Do We Boost Economic Growth?

Popular Economics Weekly

There is a tremendous misunderstanding of how to boost economic growth, and this is hurting the recovery. Conservative politicians want to cut taxes and government services, while progressives want to use government to boost growth. Yet it really doesn’t matter who does the boosting. The results are the same.

The best way to understand growth is with a concept used by economists, aggregate demand, that we have mentioned in past columns. Aggregate demand can be thought of as income and assets earned by consumers, private business, the financial sector and government. And said income and assets can be either hoarded in mostly MZM accounts (Money at Zero Maturity—i.e., earning 0 interest), as it is now, spent on things, or invested in facilities that produce more things.

Our economy has become seriously skewed during the past 10 years because corporate profits zoomed, while household incomes have not even kept up with inflation.

This is not the column to discuss the whys, including why so much income has migrated to the top 1 percent income bracket. But the result has been that most corporations haven’t invested in their employees. Which is why aggregate demand—the source of economic growth—has suffered mightily.

We know that consumers make up 70 percent of GDP growth, for example. So because their incomes were stagnant, they had to borrow to maintain their standard of living. And because they indebted themselves so heavily while their incomes remained stagnant, most have not been able to boost their spending during the recovery.

So business spending, which makes up the other part of aggregate demand (along with government spending) hasn’t been expanding because of so much excess industrial capacity. We know that excess capacity is still a problem today, as evidenced by the latest industrial production numbers.

Overall capacity utilization is improving, rising to 76.0 percent in December from 75.0 percent in November.  It is at its highest since a reading of 77.9 percent for August 2008, but is still far below the 82 percent long term average.


Industrial production posted a healthy 0.8 percent gain in December, following a 0.3 percent rebound in November.  However, the boost was led by a monthly 4.3 percent surge in utilities output, following a 1.5 percent increase in November.  By market groups, strength was widespread.  Production of consumer goods increased 1.0 percent in December; business equipment, 0.6 percent; nonindustrial supplies, 0.1 percent; and materials, 1.0 percent.


And because most profits have not been flowing back to average consumers, employers are not seeing enough demand for their products and services to warrant hiring more workers. That is the major reason for the entire government stimulus—to boost aggregate demand. The $787 Billion American Recovery and Reinvestment Act (ARRA) was in fact not enough to bridge the so-called lost output gap between potential and actual GDP growth over the past 2 years. The Fed’s purchase of government securities has held down interest rates, enabling businesses to borrow cheaply, and preventing real estate values from going into free fall.

Then what is the answer on how to create sustainable aggregate demand? The major push should be reestablishing the middle class that has been so decimated by lost jobs and much of its wealth—both in stocks and real estate. New York Times’ David Leonhardt is one of the few pundits to voice this concern in his most recent column, “In Wreckage of Lost jobs, Lost power,” in which he laments the loss of labor’s bargaining power.

Whereas employment in most other developed countries, including Japan and Russia, is much higher than in the U.S., corporate profits are lower. This is because U.S. domestic workers’ bargaining power has been severely diminished, in part because of laws that give employers the advantage in hiring and firing. And Germany and Canada, who barely had a recession, encourage companies to cut work hours for all during slowdowns—called ‘short work’—rather than lay off some, so that the pain of reduced incomes is spread over the entire workforce.

There are many other ways to cure insufficient aggregate demand, such as more progressive taxation. For instance, the top income tier during the Eisenhower years had a 95 percent tax rate on its top income bracket. This had the effect of siphoning off money from the wealthiest who spend the least percentage of their income, and putting it into the more productive use of building infrastructure, such as the interstate highway system, or education, or into more research and development.

Also, a better-run health care system would reduce health costs, which are double per capita in the U.S. vs. other developed countries. This would have several benefits, including increasing the competitiveness of U.S. made products, while boosting workers’ benefits and incomes.


There is still almost $3 trillion in lost output—the difference between actual and potential GDP growth caused by the recession, as we said. But unless we get over the conservative-progressive divide on how to bridge that gap, we won’t be able to generate sufficient aggregate demand that will bring back the jobs and salaries lost during the worst downturn since the Great Depression. U.S. workers don’t care which sector generates their jobs, so neither should politicians.

Harlan Green © 2011

Friday, March 4, 2011

More Jobs in 2011!

Popular Economics Weekly

The jobs market is in full recovery mode this spring. March seems to be the month when shoppers begin to shop in earnest and employers are hiring again. Both the service and manufacturing sectors of the economy are surging, labor productivity is high, and retail sales have shot up.

Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate fell to 8.9 percent from 9.0 percent, the U.S. Bureau of Labor Statistics reported today.


December and January payrolls were also looking better. The change in total nonfarm payroll employment for December was revised from +121,000 to +152,000, and the change for January was revised from +36,000 to +63,000. The only real weakness was in government employment, which fell by 30,000. Local governments, many struggling with budget pressure, have cut 377,000 jobs since September 2008.

Retailers cut 8,000 jobs. Payrolls in goods-producing industries rose by 70,000 last month, including 33,000 in manufacturing. The sector has added 195,000 jobs since December 2009.

Activity for the bulk of the economy accelerated further in February from an already strong pace, according to the ISM's non-manufacturing report where the composite index rose three tenths to 59.7. This reading is important because the service sector is two-thirds of U.S. economic activity. Anything above a reading of 50 shows month-to-month growth and because it was above January also shows month-to-month acceleration.


February's strength is centered in output readings including acceleration for business activity (akin to a production reading on the manufacturing side) and in employment which came in at 55.6 for a more than one point gain and the best reading of the recovery, according to Econoday.

The 2.6 percent increase in Q4 labor productivity also signaled that employee costs are at an all time low (so no inflation danger), while workers productivity is maxed out (why hiring is picking up).


Year-on-year, productivity was up 1.9 percent in the fourth quarter-down from 2.9 percent in the third quarter. This is the most obvious sign that worker productivity—output per worker-hour—is maxed out. It is taking more hours for a single worker to increase output further, in other words.

Overall, the productivity and cost numbers have been favorable toward corporate profits as companies have squeezed more out of workers not laid off during the recent downturn. However, many economists doubt this pattern can continue and firms soon will have to boost hiring to maintain output and revenue gains.

The best sign of increased hiring is in fact state filings of weekly initial claims for unemployment, which has been plunging. Pointing strongly to month-to-month acceleration for payroll gains, initial jobless fell a substantial 20,000 in the February 26 week on top of a 25,000 decline in the prior week. The number of claims, at 368,000, is the third sub 400,000 reading in the last four weeks (note the February 19 week was revised 3,000 lower to 388,000). The four-week average, down 12,750 to 388,500, is the first sub 400,000 reading of the recovery, according to Econoday.


Lastly, though the 4th Quarter GDP economic growth estimate was revised down slightly to 2.8 from 3.2 percent, final demand, its major component including all sales by domestic producers, jumped 6.7 percent. This is a combination of domestic sales and exports, which have also been surging.


We can therefore say that combined with ballooning retail sales—annualized motor vehicle sales have climbed above 13 percent with U.S. companies like GM showing 40 percent sales’ increases, that we are finally in full recovery mode.

Harlan Green © 2011

Thursday, March 3, 2011

Wisconsin’s Message—Preserving Prosperity

Financial FAQs

There is one overriding lesson in the Republican vs. Democrat struggle to preserve union negotiating rights in Wisconsin and elsewhere. If Wisconsin’s unions lose the right to collective bargaining, Wisconsin will not only lose their most productive workers in fields such as teaching, nursing, and even in police and fire—50 percent of whom have college degrees—but also impoverish their economy.

This is because reducing employees’ incomes and benefits does the same thing as reducing government spending in general during recessionary times. It reduces demand for the very goods and services that spur economic growth, as we said last week, at a time when the private sector cannot boost its own spending and investment.

So Wisconsin Governor Scott Walker is in effect biting the hand that feeds him, and all Wisconsinites. There are many ways to address budget deficits, but giving tax breaks isn’t one of them. This reduces revenues, increasing the very budget deficits that need to be addressed.

This is something that many politicians and ideologues simply do not understand. A Tea Party candidate and Illinois Republican congressman, Joe Walsh, recently echoed this misconception on Sunday’s ABC This Week: “Every dollar we take out of the public sector goes into the private sector, and it will grow the economy.” No, it won’t necessarily grow the economy. The tax cuts of the Bush era were meant to grow the economy, but resulted in record debt levels and the Great Recession. In fact, we now know only the ‘economy’ of the wealthiest benefited. This philosophy of ‘trickle down’ economics won’t work, if its benefits are not distributed evenly.

Right now because of the huge wealth disparity that prevails, most private sector dollars go into the hands of such as the Koch Brothers who funded Scott Walker’s campaign and other wealthy backers, not into the hands of those workers who will spend it. And the purpose of their support of conservative causes in the case of the Koch Brothers is obvious, to reduce the amount of government regulations in general. There is also a clause in the legislation that dissolves unions’ collective bargaining rights—called SB 11—that also allows sale of Wisconsin’s public utilities without any competitive bidding. And that wouldn’t benefit the Koch Brothers who already own 45 percent of Wisconsin’s power plants?

So opposing in effect what are the rights of workers everywhere—whether union or non-union—Scott Walker and company impoverish Wisconsin and so drive one more state into the ‘have-not’ category by reducing workers incomes and benefits, including health care.  America’s declining health care system already produces the highest infant mortality rate, for example, and a declining longevity at the bottom of any developed country, according to numerous Pentagon, CIA, and IMF surveys. Our wealth inequality is also the greatest of any developed country, approaching that of Mexico.

And it seems Governor Walker wants to do the same for Wisconsin. Walker’s bill throws the old one-two punch at health care in Wisconsin. First, it undermines the ability of health care workers to advocate for improved working conditions that improve patient care. Then it gives Walker’s administration the power to unilaterally change the state’s Medical Assistance program, subject only to review by the state legislature’s Joint Finance Committee (dominated by very conservative Republicans) and the minimum standards set by the federal government. The state’s Department of Health Services can make these unilateral changes even if the changes conflict with other existing aspects of state law.


In fact, history shows that it was unions via collective bargaining who formed America’s middle class after WWII—by redistributing income from the topmost income earners that prevailed before the Great Depression to a workforce that was able to participate in the increased post-WWII productivity brought on by its technological advances.


It is a different matter today. The richest 1 percent of households have garnered 23.5 percent of national income, as it did in 1928, whereas the top 1 percent had just 9 percent of national income in the 1970s . All other income classes have seen a decline in real, after tax incomes, since then. It is a well-known fact thanks to recent research by two economists sure to be on the Nobel Prize short list, Emmanuel Saez and Thomas Piketty, that has not yet reached the national consciousness.

This is the major reason for the economic instability we are experiencing at present, and why governments as well as consumers had to rely on so much borrowed money. What will it take before policymakers realize this? Sharing the pain also creates a shared prosperity.

Harlan Green © 2011

Tuesday, March 1, 2011

More Jobs = Faster Recovery

Popular Economics Weekly

There really is an innate conflict between policies that create more jobs, and policies that advocate cutting budget deficits during hard times. Policy makers have to ask themselves, which is more important—creating more jobs, or reducing debt? It depends on the timing. Debts are accumulated during bad times—especially public debt—and paid down in good times. The question is when is the economy strong enough to begin to pay down the deficits that have been created.

Everyone knows too much debt was accumulated in the last decade—most from tax cuts; but also from two wars, falling personal incomes, and the last two recessions (2001 and 2007-09). Most of the federal deficits were created by falling revenues that couldn’t cover those higher debt loads incurred by financing tax cuts and wars with borrowed money, as Alan Greenspan has famously said.

So the Wisconsin debate on public employees’ right to collective bargain is bringing this debate front and center—which is a good thing. Most states have to balance their budgets each fiscal year by law. The question is whose budget to cut. Taking collective bargaining (for salaries, not benefits) away from Wisconsin’s public employees is the worst way to balance its budget, because it takes away the means to cure their deficit.

For by reducing salaries and or benefits of its public employees, Wisconsin takes away a huge engine of economic growth by reducing the spending and saving power of its consumers, who as wage and salary earners make up 80 percent of the workforce and 70 percent of all economic activity. The dilemma for policy makers is how to add jobs and keep manageable deficits, in other words.

In fact, the only real way to cure any budget deficit is by growing revenues, not reducing spending. The reason for the deficits (which usually occur during recessions, remember) is loss of tax revenues—whether at the state or national level. This unfortunately is not clear to either most pundits or ideologues. Revenues shrink during recessions, period. And it takes a long time to ‘regrow’ those revenues.

The latest Gross Domestic Product numbers tell us as much. It wasn’t until Q4 2010 just ended that GDP growth—a proxy for overall economic growth—was back up to the level before December 2007, the beginning of the Great Recession. It took all of 2008, 2009, and 3 quarters of 2010, in other words, to return economic growth to pre-recession levels.

(And, it was done with 7 million fewer employed!) Fewer workers are now producing more, so that labor productivity is soaring. But with so-called unit labor costs cut to the bone, productivity—or output per worker—will only decline, unless employers hire more workers.


That is why governments tend to borrow more during hard times, in the hopes that it will stimulate enough spending to stop a precipitous drop in demand, and so jobs. But it is a delicate balancing act, since the credit rating agencies that determine bond interest rates watch budget deficits closely, and will drop a government’s rating almost as quickly as those for corporations.


Collective bargaining is the right of employees to negotiate with their employers, a right that unions in particular have enshrined in their charters. And guess who make up the majority of union membership? Public workers make up 36 percent of public employees, vs. just 9 percent of the workforce in private business. It is a combination of both blue collar (police and firemen), and white collar (teachers and workers in government administration).

So in fact, reducing workers salaries and benefits that make up approximately 80 percent of the workforce in order to cut budget deficits does more than cuts the demand for goods and services. It starves governments of the revenues needed to cure those deficits. Some form of government stimulus spending is therefore necessary until employment returns to levels that create a sustainable demand.

Harlan Green © 2011