Saturday, April 30, 2011

Growth vs. Taxes?

Financial FAQs

Conservatives love to repeat their mantra that economic growth and higher taxes are incapatible.  But a very good recent Op-ed by New York Times pollster Charles Blow gave the best description of the result of non-progressive tax policies. The historical picture shows that a lower the tax rate for the richest among us—the so-called highest marginal tax rate—coincided with a lower overall growth rate of our economy. This refutes the tax cutters justification for reducing government services—that the private sector is best engine of growth. In fact, a certain amount of government services are necessary for decent economic growth.


“The spurious argument that cutting taxes for the wealthy will somehow stimulate economic growth is not borne out by the data,” says Mr. Blow. “A look at the year-over-year change in G.D.P. and changes in the historical top marginal tax rates show no such correlation. This isn’t about balancing budgets or fiscal discipline or prosperity-for-posterity stewardship. This is open piracy for plutocrats. This is about reshaping the government and economy to benefit the wealthy and powerful at the expense of the poor and powerless.”

There are other reasons for slower growth, of course. A slower growing population with more seniors, saturated consumer markets (more than 2 cars in a garage?), are two of the reasons. But during the period 1951-63, when marginal rates were at their peak—91 percent or 92 percent—the American economy boomed, growing at an average annual rate of 3.71 percent. The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm—just the opposite. Whereas during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.

Why is there a correlation between slower overall economic growth and a shift in wealth towards the top? The richest invest less of their incomes in either consumption or investments, for starters. This has been shown in many studies. But also, the more unequal wealth distribution was a direct cause of both the Great Recession, and the Great Depression, which had almost identical wealth shifts to the top. The middle and lower class incomes declined at the same time that Wall Street and the banks—proxies for the interests of the wealthiest—agitated for fewer financial controls. In both cases, reduced regulation and the easy credit engineered by the Federal Reserve enabled consumers to borrow beyond their means to keep up their standard of living.


The lower marginal tax rates were also a reason for the burgeoning deficit, and further market instability. So curing the budget deficit is really a common sense matter. We must grow our economy by boosting everyone’s income, in other words, not just that of the wealthiest, while holding our expenses. We did it in the 1990s. That can only happen with increased job formation, and a fairer tax code.

There are many causes of slower economic growth, but only a few ways to boost a recovery in growth. The historical record shows just cutting taxes or lowering the highest marginal tax rate that funnels more money into the pockets of the wealthy, but downsizes public funding for research and development, programs that develop new talent by nurturing educational opportunities, and debases a regulatory environment that prevents excessive risk-taking by Wall Street, leads to slower growth.

Harlan Green © 2011

Thursday, April 28, 2011

Will Real Estate Recover This Selling Season?

The Mortgage Corner

Some very heartening news came out today. Sales of newly built, single-family homes rose 11.1 percent to a seasonally adjusted annual rate of 300,000 units in March, reported the U.S. Commerce Department. The gain partially offsets a large decline that occurred in new-home sales this February, when activity hit a record low due partly to poor weather conditions.


New-home sales have been rising since January, and the inventory of homes for sale is at a record low—just 183,000 units, a 7.3 months’ supply at this sales rate. Does that mean we will finally see some kind of a construction recovery this year? The analysts are mixed. Wells Fargo Securities projects only modest increases over the next two years, according to Calculated Risk, with 330,000 new-home sales likely this year, followed by 440,000 in 2012. It is likely to take another three years before new-home sales return to healthy annual sales of around 770,000, said Wells Fargo economist Anika Khan.

Existing-home sales, housing starts, and even pending home sales that close in approximately 60 days also ticked up at the beginning of this selling season. Existing-sales in March 2011 (5.10 million SAAR) were 3.7 percent higher than last month, but were 6.3 percent lower than March 2010, with inventory hovering around an 8-months’ supply.


In fact, commercial real estate has been reviving—in part because its prices were never in a bubble, and businesses are beginning to expand again. Apartment construction has also been expanding due to higher rents. So it is the individual housing market that has been suffering, as some 2 million homes either sit in foreclosure, or have delinquent loans, as we said in a past column.


The key to a recovery will be reducing the inventory of existing homes. The good news is that inventories have been declining since the top of the bubble, even though almost 50 percent of existing-home sales are either short sales, or foreclosures. Inventories began to rise again in 2010 as more people lost their jobs, so that 2 million homes are now in trouble, as we said (though 50 percent are just 30-day lates, which are more likely to recover). And reducing inventory will also depend on the amount of pent-up demand—i.e., the number of prospective homebuyers waiting for prices to ‘settle’. We know that more than 1 million new households are formed every year, and rents are rising as rental vacancy rates decline. So it will the dollars and cents calculation—whether it is cheaper to rent or buy—that will decide when some of the 3 million new households formed over the past 3 years decide to buy.

While the existing home sales report showed a modest rise in home prices, the more reliable Federal Housing Finance Authority—regulator of Fannie Mae/Freddie Mac—home price index suggests otherwise. Home prices continued a recent downtrend and it appears to be worsening somewhat.  The FHFA purchase only house price index declined 1.6 percent in February, following a revised decrease of 1.0 percent in January (originally down 0.3 percent).  The latest weakening is consistent with the increased share of home sales being distressed sales.  The FHFA home price index is seasonally adjusted and is based on repeat transactions (comparing same houses) with conforming loan amounts, whereas the existing home sales report has neither of these key features.


"The March pace of new-home sales more accurately reflects current market conditions than the extremely low pace we saw in the first two months of this year, when unusually poor weather likely kept buyers away," said NAHB Chief Economist David Crowe. "That said, the average sales pace for the first quarter of 2011 held at about the same level seen for the last half of 2010. A limiting factor is the extremely thin inventory of new homes for sale, which is now at its second-lowest level in history. Builders continue to confront major challenges in obtaining financing to build new homes, and the shortage of new product makes it that much tougher for them to compete with existing homes on the market. At the same time, tighter lending conditions are making it more difficult for qualified buyers to obtain a mortgage."

This is the best of all worlds for buyers at present, of course, with record low interest rates for those able to qualify for a mortgage, and housing prices back to the 2002 level.

Harlan Green © 2011

Friday, April 22, 2011

What Will Bring Back Jobs?

Popular Economics Weekly

What policies that will do most to bring back jobs is being sidelined by the budget debate. Everyone agrees boosting aggregate demand; the sum of consumer spending, foreign and domestic investment, exports and government stimulus—is the way to create jobs. The argument is over whether the private or public sectors are better at it.

That shouldn’t be the debate. Given this is the worst downturn since the Great Depression, all stimulus cylinders must be firing. That increases both corporate profits—though already at record levels—and the revenues needed to pay down debt.

Here is why. As Calculated Risk reported recently, there are currently 130.738 million payroll jobs in the U.S. (as of March 2011). There were 130.781 million payroll jobs in January 2000. So there was no increase in total payroll jobs in over eleven years. Only in January 2010 did the number of ‘Hires’ and ‘Job openings’ again begin to rise above the number of ‘Layoffs’, according to the Labor Department’s latest Job Openings and Labor Turnover (JOLTs) survey.


And the median household income in constant dollars was $49,777 in 2009. That is barely above the $49,309 in 1997, and below the $51,100 in 1998. “Just a reminder that many Americans have been struggling for a decade or more. The aughts were a lost decade for most Americans,” said Econoday.

What are the 80 percent of consumers who are fully employed buying? Mostly durable goods, like cars. Manufacturing is leading us out of the recession, in part because of the weak dollar that has goosed exports. Econoday tells us over the past 12 months industrial production has been strong with a 5.9 percent gain and with manufacturing up a notable 6.6 percent.   Manufacturing has been led by durables (up 11.3 percent) with motor vehicles being particularly robust (up 16.3 percent).


So we are in bit of a Catch-22 situation. The weak dollar exchange rate is also worrying deficit hawks, since they believe it endangers foreign investors (mostly the Chinese and Japanese) from investing their excess dollars in the U.S., maybe causing interest rates to rise abruptly. Standard & Poor’s rating agency has put the U.S. on what is essentially a credit watch, saying it didn’t believe Democrats and Republicans would be able to agree on how to reduce the deficit by election year 2012.

Yet the only thing that does reduce budget deficits is growth. Great Britain has proved that with its conservative government that was elected on a drastic spending cut platform. The result is their economic growth has slowed drastically.

The New York Times reported on first year results of Britain’s austerity program in a recent article. “…one year into its own controversial austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising,” said the NYTimes. “Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group based here, forecasts that real household income will fall by 2 percent this year. That would make Britain’s income squeeze the worst for two consecutive years since the 1930s.” So many British economists now believe they are in danger of a double-dip recession.

This has to be a case of ignorance not being a blissful state. President Roosevelt attempted to balance the budget in 1937 after 4 years of recovery from the first Depression, but it plunged the U.S. into its second Depression, which wasn’t cured until WWII increased government spending (and borrowing) to the tune of 120 percent of GDP. It was only surging post-war growth of the 50s and 60s that brought debt down to 40 percent of GDP where it essentially remained until 1980, when President Reagan and the Republicans again attempted to balance the budget on the back of drastic tax cuts, lowering the top income tax bracket to 39 percent from 48 percent. This resulted in two back-to-back recessions in 1982-83.

So, when one side of the budget debate takes tax increases but not tax cuts off the table, there are two results. Tax cuts only provide limited stimulus, as the Bush tax cuts proved—they increased the deficits from essentially $0 in 2000 to more the $2 trillion in 2008, in spite of low unemployment and inflation. A failure to pay down the budget deficit and invest in needed infrastructure, education and research projects that increase productivity, damages both our economic growth and competitive position in the world.

“Every U.S. policymaker should therefore wake up every morning and remind themselves of the following,” says Econoday.  “There are currently 7.25 million fewer payroll jobs than before the recession started in 2007, with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.

But that won’t happen if we continue to squabble over ideologies, rather than focus on how to create more jobs.

Harlan Green © 2011

Thursday, April 21, 2011

What Will Bring Back Real Estate?

The Mortgage Corner

We are now beginning to see what is holding back the residential real estate market. The lack of jobs is one cause, of course. But two other factors—the reluctance of lenders and their loan servicers to modify loans, faulty—even fraudulent—foreclosure practices, and too restrictive mortgage credit may be even bigger factors.

Both new-home construction and existing-home sales have been languishing at the bottom of the market since January 2009 with a brief surge during the homebuyer tax incentives of 2010. The beginning of this year’s selling season is giving it some lift, with March housing starts and existing-home sales up.

The National Association of Realtors reports March was a "decent" month for existing home sales with a 3.7 percent gain to a slightly higher-than-expected annual rate of 5.1 million. Prices firmed slightly, up 2.2 percent for the median reading to $159,600. Yet year-on-year, contraction of 5.9 percent is a little deeper than 5.2 percent in the prior month. Slightly more homes were on the market, 3.549 million, but the solid rise in sales brought down the supply reading slightly to a still very heavy 8.4 months.


The report warns that credit standards are still too tight, reflected in a record all-cash sales rate of 35 percent in the month. Distressed sales made up 40 percent of all sales for the highest rate in nearly two years. The housing market may be lifting slightly but is still near the bottom, as we said.

A look at the distressed markets will tell us why in this Calculated Risk graph. A total of some 2 million housing units are delinquent. Although 30-day lates are slowly declining, the pending Foreclosed (FC), and REO (bank-owned) inventory of about 1 million units hasn’t declined since July 2009.

And the new measures promulgated by the Federal Reserve may take time to implement. For instance, one measure is requiring banks and mortgage servicers to have one point of contact for borrowers either in trouble or wanting to modify their mortgages. Another is not allowing banks to proceed with a foreclosure if it is simultaneously working on a loan modification.


Qualifying for mortgages has become harder, with credit scores below 680 for even Fannie Mae/Freddie Mac conforming loans no longer qualifying. That means those millions who might have lost their homes could be out of the home buying market for years. That is, they may have solved their financial problems, but it takes many years to get a credit score back above the 680 level.

The Case-Shiller Home Price Index is of no help, as home prices are still declining in most of its 20 metro markets. Its survey tells us that housing prices may have another 10 percent decline, based on historical price-to-rent ratios.


Here are the Federal Reserve “consent decrees” with the 10 largest commercial banks that include Bank of America, JP Morgan Chase and Citibank:

  • strengthen coordination of communications with borrowers by providing borrowers the name of the person at the servicer who is their primary point of contact;
  • ensure that foreclosures are not pursued once a mortgage has been approved for modification, unless repayments under the modified loan are not made;
  • establish robust controls and oversight over the activities of third-party vendors that provide to the servicers various residential mortgage loan servicing, loss mitigation, or foreclosure-related support, including local counsel in foreclosure or bankruptcy proceedings;
  • provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process; and
  • strengthen programs to ensure compliance with state and federal laws regarding servicing, generally, and foreclosures, in particular.

The Fed concluded its announcement with a warning:  “The Federal Reserve will closely monitor progress at the firms in addressing these matters and will take additional enforcement actions as needed.”

Harlan Green © 2011

Tuesday, April 12, 2011

The Wrong Budget Debate

Financial FAQs

We are having the wrong budget debate. Washington is not talking about paying down the federal debt, which now totals some $9.5 trillion held publicly. Budget deficits are created when revenues don’t equal spending. So when the focus is only on cutting taxes and public spending by downsizing government and so public services—such as in protecting our health, the financial markets, the environment, education—and not increasing those revenues, then it doesn’t cure our budget problem. In fact, it just aggravates the problem, while putting more people into poverty.

The best example is the last time we had a balanced budget—in 1999. It was a time when Congress agreed to the Pay-as-you-go rules. Spending increases had to be balanced with revenue increases. And only when our economy was booming—21 million jobs were created during those years, and the highest income tax bracket was raised to 39 percent—were there enough revenues to pay down the debt. The debt that had been built during the 1980s by cutting taxes didn’t disappear by cutting spending, in other words.

This is obvious to the average household. Consumers know that, unless they pay down their debts the debt doesn’t go away. They are careful not to accumulate more debts, of course. But the real problem is how to shrink the debt by putting more of their income into paying it down, while spending less. Shrinking their incomes to pay down the debt doesn’t work, period.

Governments have had to do the same. Our largest public debt as a percentage of the economy was the 120 percent of GDP accumulated from WWII. It took the massive spurt in growth during the 1950s and 60s to pay it down to below 40 percent of GDP in the 1970s. It was accompanied by massive public spending on infrastructure (e.g., highways, education) that raised everyone’s standard of living—not just the wealthiest.

This was paid for by taxing the wealthiest among us, whose top tax bracket was 91 percent under Republican President Dwight Eisenhower. And by raising everyone’s standard of living, our economy prospered since prosperous consumers meant more demand for goods and services, hence more jobs.

The 1920s were a similar period of inequality as we have today. The top 1 percent income bracket controlled 23.5 percent of national income as now, when there was no unemployment insurance, deposit insurance, and social security to protect the savings of average consumers and the elderly.

Roosevelt’s New Deal corrected that problem and brought on the post-war prosperity by guaranteeing that most Americans could prosper.


As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47 percent of the debt held by the public of $9.49 trillion and 32 percent of the total debt of $14.1 trillion (that includes the social security trust fund). The largest holders were the central banks of China ($1.1 trillion) and Japan ($885 billion). The share held by foreign governments has grown over time, rising from 25 percent of the public debt in 2007 before the Great Recession.

One would think, therefore, that paying down debt should be the first priority of any U.S. administration. But the debate has been skewed by those who profit most from cutting taxes, without growing public revenues—Big Business, Wall Street, and their investors who have corralled 40 percent of the wealth of this country. It is obvious they care little about the debt, since they advocate cutting public spending without raising revenues needed to pay down the debt.


We know how the current federal debt was accumulated since 2000. The largest percentage—more than $3 trillion—came from the Bush tax cuts of 2001 and 2003, which reduced not only the highest income tax brackets from the Clinton era 39 percent to 35 percent, but reduced long term capital gains and dividend taxes that mainly benefit the wealthy to a maximum 15 percent. Then the Iraq and Afghanistan wars cost another $1 trillion of borrowed money. The Great Recession accounts for most of the rest of the deficit. So all this happened while reducing the income needed to pay for that debt.

Curing the budget deficit is really a common sense matter. We must grow our economy by boosting everyone’s income, in other words, not just that of the wealthiest, while holding our expenses. We did it in the 1990s. That can only happen with increased job formation, and a fairer tax code. Just cutting taxes that funnels money into the pockets of the wealthy, but cuts funding for research and development, programs that develop new talent by nurturing educational opportunities, and a regulatory environment that prevents excessive risk-taking by Wall Street, can only lead to more debt, not less.

Harlan Green © 2011

Saturday, April 9, 2011

The Have and Have-Not States

Popular Economics Weekly
A very interesting study came out recently which analyzed the percentages of passport holders in each state. The results were perhaps not so startling. Those states with the highest percentage of passport holders had also the most diverse population, were most educated, most politically liberal, and the wealthiest. Of course, wealth seems to go in hand with education, which shouldn’t be surprising. But those same states also had the best public services, most creative workforce and best health care outcomes, as well.
Conversely, those states with the fewest passport holders were the least educated, least wealthy, and had the least amount of governmental services—the poorest states, in a word. What does this mean for our future? It means we are slowly evolving into the have and have-not states, with those red states in the Midwest and South falling behind in receiving the benefits of a modern society.
Another way of looking at it is this tells us which policies work. Downsizing government, privatizing health care, and schools doesn’t create more wealth for the many—just the few, as has been proved by the huge shift in wealth upwards since the 1970s. Good and available public services in education, health care, and infrastructure create more wealth, not less.
Let us start with wealth. Maryland leads with a $34,000 median per capita income, followed by New Jersey, Connecticut, Delaware, Alaska, and Massachusetts. New York, California, and New Hampshire aren’t far behind. Conversely, Mississippi, West Virginia, Alabama, and Arkansas are at the bottom of the wealth ladder.
Those states also have the highest and lowest educated workforces, respectively, and even more importantly, are the most innovative workforce. There is a reason for it. The higher percentage passport-holding citizens have more open personality traits, such as Openness to Experience, according to studies done by Cambridge University Psychologist Jason Rentfrow and his colleagues.
And finally, states with more passport holders are also happier. There is a significant correlation (.55) between happiness (measured via Gallup surveys) and a state’s percentage of passport holders.  Yet again, that correlation holds when we control for income. Though it is a leap, this tells us why there is also such an unequal distribution of wealth, and what it does to the poorest states. They have less access to the rest of the world—whether via world class universities or even international airports.
So the question should be how to bring the Have-Not states into the 21st century?
Harlan Green © 2011

Tuesday, April 5, 2011

The Real Employment Picture

Popular Economics Weekly

Nonfarm payroll employment increased by 216,000 in March, and the unemployment rate was little changed at 8.8 percent, the U.S. Bureau of Labor Statistics reported today. It is a start, but we have a long way to go to have a sustainable recovery. The economy is in recovery mode—both manufacturing and the service sectors are expanding, in other words—but with lots of slack demand and empty facilities yet to fill.


Overall Gross Domestic Product is now back to producing what it did in 2007—that is, with 7.1 million fewer workers. Those unemployed mainly belong to the 80 percent of wage and salary earners who are actually earning less than before the Great Recession—if they even have jobs. The most difficult task will be to find decent jobs for the part timers and long term unemployed—those out of work for more than 6 months—if we are to bring back the sectors still lagging; real estate, construction and their corollary industries (insurance, building supplies, mortgages, etc). Real estate itself has shrunk to about 2 percent of GDP, when it averaged 7 percent over the last decades.

The last three months of job creation averaged about 160,000 payroll jobs per month. That is more than enough to keep up with the growth in the labor force, but it will only push the unemployment rate down slowly. Private payrolls were a little better at an average of 188,000 per month, as state and local governments continued to lay off workers.

In fact, economists say even if we are to maintain a 200,000 per month net job gain, it will still take until 2016 to get us back to anywhere near full employment. The decline in the unemployment rate from 8.9 to 8.8 percent was good news, though the participation rate was unchanged at 64.2 percent. This is the percentage of the working age population in the labor force, and is still below the 67 percent participation rate over the past 20 years.


And so we still have to rely on manufacturing and booming exports for any growth at all. New orders, export orders and backlog orders slowed during March in an otherwise solid ISM manufacturing report. The composite headline index, which got a big lift from a slowing in supplier deliveries and from continued strength in production and employment, edged back only two tenths to a still very strong 61.2 that indicates month-to-month growth in overall activity at roughly the same level as February.

Government jobs fell 14,000, following a 46,000 drop in February.  For the latest month, state & local government declined 15,000 with 9,200 in local government education. The biggest negative in the employment report was for wages. The earnings picture in March is disappointing as average hourly earnings for all workers were flat, matching February. On a year-ago basis, wages were up only 1.7 percent, equaling the February pace, when earnings expand at 3 percent during good times.  Earnings clearly are lagging headline retail (CPI) inflation.


But we are seeing very little overall inflation in overall Personal Consumption Expenditures, even with exploding oil and food prices, which have more to do with the Mideast worries and droughts than longer term demand factors. On a year-ago basis, PCE prices are up just 1.6 percent in February—up notably from 1.2 percent the month before.  Core inflation nudged up to a 0.9 percent year-on-year pace versus 0.8 percent in January, still below the Fed’s target range of 1.5 to 2 percent.

Why so little inflation? Because two-thirds of product costs are labor costs, and incomes are barely keeping up with living expenses, as we said. We will know when there is sufficient demand to push up overall prices, when consumers stop looking for bargains and are willing to pay for higher prices in other than the necessities. And that won’t happen until most of those 7.1 million have found work again.

Harlan Green © 2011