Tuesday, August 30, 2011

The Fed’s Paralysis—Who Will Do the Right Thing?

Popular Economics Weekly

I actually agreed with Fed Chairman Bernanke in his latest Jackson Hole speech, when he said the Fed can’t grow the economy without some help. The weak growth of late has panicked markets, and Fed policy doesn’t seem to do the trick. Its record low interest rates aren’t helping at the moment, though that is keeping the housing market from dying completely.

So who is setting our monetary and fiscal policy these days? No one, at the moment. The White House is always one step behind events—worrying about deficit reduction when it can’t shrink the deficit without more job growth. And Congress is obsessing about the size of government, when government employment and spending have been shrinking faster than in the private sector.

“The country would be well served by a better process for making fiscal decisions,” was Bernanke’s understatement of the year, signaling it was fiscal policy that should now take the lead in growing the economy. So is Bernanke is throwing up his hands at the moment, in refusing to even hint at what other stimulus policies might come from the Fed until after a special 2-day September convocation of the FOMC? He was putting the policy ball back in the politicians’ court. It’s up to them to settle their differences if they want growth.

It’s of course obvious our ‘lack of a policy’ is now being set by the right wing of the Republican Party, who oppose all forms of stimulus. The downsizing of government has been their agenda since Ronald Reagan, and their only way seems to be by creating recessions. In fact, there have been 5 recessions during the last 3 Republican administrations. Two occurred during Reagan’s presidency (1980, 1981-82), one during Bush I (1991) and two during GW Bush’s presidency (2001, 2007).

Bernanke has been a strong advocate for an active Fed in stimulating economic growth in the past, which is why Nobelist Paul Krugman in effect called him craven for caving in to the Republican extreme right wing. “Now just imagine the reaction if the Fed were to act on the…arguably more important parts of the Bernanke 2000 agenda—more purchases of long term debt (i.e., a QE3), an announcement that short term rates would stay low for an extended period, to further reduce long term rates; and an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4 percent range for inflation, to be maintained for a number of years.”

Bernanke himself actually accused the Bank of Japan at that time of a “self-induced paralysis” in not providing more stimulus to their sputtering economy, according to Krugman. “Well now, the Fed is suffering from externally induced paralysis,” he concludes.

At a time when growth has slowed drastically through the first 2 quarters of 2011 after soaring above 4 percent for several quarters last year, the fears of a double-dip recession is depressing financial markets at the moment. But the outcome is more likely a “growth recession”, defined as slow growth amid rising unemployment that the Japanese have been experiencing for the last 20 years.


Bernanke’s scholarly treatise on the causes of the Great Recession comes at the same time that GDP Q2 growth had just been revised downward to 1 percent from 1.3 percent. “Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis,” said Bernanke.

Well, duh. How is that new news? He actually pins most of the blame for the current slowdown on the euro debt crisis and S&P downgrade. “It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.” But then he goes on to discuss the need to cure the long term deficit, and only at the end of his speech does he mention the necessity for more job creation to cure the short term deficit due to the Great Recession.

“In the short term, Bernanke said, “putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.”

Why so much emphasis on debt, rather than recovery? It is because of timidity on all sides, from the White House and Congress. Even Europe is suffering from the same paralysis in not providing enough aid to Greece, a paralysis that is now spreading through several other countries, says Krugman

“The fiscalization of the crisis story — the insistence, in the teeth of the evidence, that it was about excessive public borrowing — has become an article of faith on both sides of the Atlantic. And that faith has done and will do untold damage.”

So in effect the current slowdown is due to a paralysis of will from our leaders, not lack of monetary and fiscal tools to bring about a sustained recovery.

Harlan Green © 2011

Saturday, August 27, 2011

Real Estate Prices Are Rising Again!

The Mortgage Corner

Here’s a shocker. Prices of homes with agency-conforming mortgages rose for a third straight month in June and at an accelerating rate. This maybe the first time we can see housing reviving since last June’s homebuyer tax credit ended. 

The Federal Home Finance Authority (that supervises Fannie Mae and Freddie Mac) purchase-only house price index is up a surprisingly strong 0.9 percent in June following a 0.3 percent increase in May (revised from plus 0.4 percent). Homebuyers want to buy, in other words, in spite of the reluctance of banks or their regulators to make it easier for borrowers in good financial standing to qualify for a mortgage.


The year-on-year rate improved for a second straight month, to minus 4.3 percent vs minus 6.2 in May and minus 6.3 percent in April. Seven of nine census divisions posted monthly gains led by a 3.3 percent gain for the East North Central. The Pacific region was the weakest at minus 0.8 percent.

What is happening? Contract signings for existing home sales were on the rise in June as the pending home sales index rose 2.4 percent to 90.9. The gain is especially notable given that it follows a surge in May of 8.2 percent. The year-on-year rate is another positive, moving from May's plus 13.4 percent to 19.8 percent. June is led by mid-single digit monthly gains in the West and in the largest region which is the South.


However, the recent boost in signings of pending existing home sales is not following through with actual closings as hoped. Existing home sales fell 3.5 percent in July to a 4.67 million annual rate that was well below expectations for 4.92 million and followed a 0.6 percent rise in June. Much of this is because of tighter lender restrictions, and uncertain real estate values that may have brought in lower appraisal values.

A little noticed surprise this week was another gain in construction spending.  Construction outlays in June advanced 0.2 percent, following a revised 0.3 percent gain in May (originally a 0.6 percent decrease). The boost was led by private nonresidential outlays with public spending also up.  Private nonresidental spending rose 1.8 percent, following a 1.2 percent boost in May. 


So despite weakness in homes sales in May (existing homes down 3.8 percent and new homes down 0.6 percent), home prices are holding up. The Case-Shiller seasonally adjusted 10-city composite rose 0.1 percent in May, following a 0.4 percent gain the month before. Apparently, supply is down enough to keep monthly price changes from declining.  Also, buyers are likely concerned about possibly higher mortgage rates as the Fed was ending its second round of quantitative easing.


A look at the unadjusted data shows wide gains as the unadjusted composite 10 index rose 1.1 percent.  But spring and summer are when demand is strongest. So will the summer rally hold? Existing and new home sales are still falling, but that is last month’s news.


Supply on the market at the current sales pace turned higher to 9.4 months from 9.2 and 9.1 in the two prior months. In turn, the median price slipped 0.9 percent to $174,000 and down 0.8 percent for the average to $224,200. Year-on-year prices, which had turned positive in June, are back in the negative column, at minus 4.4 percent for the median.

So the real estate recovery is uneven, and new home sales at record lows. Why? Everyone is waiting for someone to resolve the foreclosure crisis. Banks are waiting for government, and government is too timid to require banks to speed up clearing their books of delinquent mortgages. No one is helping homeowners, in other words. Conservative that want to cut spending are setting the agenda, rather than those who want to revive housing. This is unfortunate, as Fannie Mae and Freddie Mac—who originate at least 80 percent of mortgages these days—in particular should be easing their qualification criteria, or the housing market cannot revive.

Harlan Green © 2011

Sunday, August 21, 2011

Our Psychological Depression

Popular Economics Weekly

The plunging financial markets are telling us something depression, but it is more about crowd psychology, than actual events. Americans are very depressed about their financial prospects. Duh, says Paul Krugman, given the congressional deadlock. So why is it causing such market turmoil? I maintain it is because of the unfounded downgrade by Standard & Poors of U.S. Treasury securities to AA+ from AAA. This event has to be almost as shocking as 9/11 to our collective psyches. For just as Bin Laden meant the 9/11 attack to be an attack on our economy, the S&P downgrade means we are no longer the world’s only economic superpower.

So will the downgrade, which hasn’t been matched by either Fitch or Moody’s bond rating services, have an effect on real economic growth is the question. Yale Professor Robert Shiller and other behavioral economists maintain that consumer confidence, or ‘animal spirits’, affects consumers’ behavior. Professor Shiller also says that much of how people judge the economy doesn’t come from facts or economic fundamentals, but the stories they hear, as well as the degree of optimism or pessimism they feel about their own circumstances. For instance, surveys by Professors Shiller and Karl Case in their Macro Markets LLC, show that the housing bubble was fueled in large part by hearsay and media stories that housing values had always risen, and would continue to do so.


So confidence is only one factor that economists look at for their predictions. It’s a good thing, because we are seeing moderate economic growth at the moment and jobs being created. Even retail sales are surging 8 percent annually at the same time that consumer confidence measured by the Conference Board and University of Michigan surveys is at recession-levels.

So it may be that plummeting confidence in financial markets is causing the extreme market volatility of late, rather than economic fundamentals. For instance, the rise in the Consumer Price Index showing some inflation was the reason given for the stock market plunge, along with very negative Empire State and Philadelphia Fed industrial sentiment surveys.


But inflation is also a sign of increasing demand, and prices must rise for businesses to expand. The core CPI index without food and energy fluctuations is up just 1.8 percent annually, while industrial production is still healthy, according to the Federal Reserve. On a year-on-year basis, overall industrial production is rising at 3.7 percent in July. Overall capacity utilization in July also improved to 77.5 percent from 76.9 percent the prior month, signaling that businesses are expanding.

Then why were the Philly and Empire State surveys so pessimistic? It may be that since both surveys are a consensus of managers’ predictions about future prospects, they could also have been affected by the S&P downgrade, which is radiating outward as hedge funds and retirement funds with extensive holdings of Treasury securities also risk being downgraded by S&P, who has decided that it has to make up for allowing AAA ratings on subprime mortgage securities during the housing bubble, thus prolonging it.


There are also other indicators that show sentiment doesn’t match behavior. Imports are surging, the reason for the larger trade imbalance, which corroborates the higher retail sales’ numbers. And weekly initial unemployment insurance claims continue to fall. Though there was a slight uptick in last week’s claims, the four-week average fell for the seventh straight week, down 3,500 to a 402,500 level that is nearly 20,000 lower than the month ago comparison. In fact, private sector nonfarm payrolls grew 154,000 in July, following an 80,000 rise in June and 99,000 increase in May.


S&P has admitted their downgrade wasn’t really about the numbers, but about their judgement that the political situation could be gridlocked for years to come. This is because the numbers aren’t that bad. Most of the deficit is short term; caused by the Bush tax cuts, ywo unpaid wars and lost revenues from the Great Recession. The wars will end, so defense budgets will shrink, and revenues rise as economic activity continues to pick up. Politicos might also realize that most of those Bush tax breaks should probably be allowed to expire in 2012, rather than be renewed. This in itself would save some $3.8 billion over the next 10 years, according to the Center for Budget and Policy Priorities.

So S&P wasn’t making a judgment about the near term deficit, which they had overestimated by $2 trillion, but about what the federal deficit may look like in 10 years. Yet how can anyone know about events so far into the future? Though given the post-recession frayed nerves of consumers and investors, even the slightest ‘aftershock’ can cause an outsized response.

Harlan Green © 2011

Friday, August 19, 2011

Warren Buffet’s Truth—No Shared Sacrifice

Popular Economics Weekly

The Oracle of Omaha wrote a very profound New York Times’ Op-Ed recently. Warren Buffet said to “Stop Coddling the Super-Rich”; that what we needed was shared sacrifice in such times of plunging confidence in economic growth. But “when they did the asking, they spared me,” he said.

This cuts to the heart of why we even had a Great Recession, and how to dig ourselves out of the huge debt hole that resulted. There has been no shared sacrifice to date, and without it the economy and financial markets cannot recover. Firstly, the deficit cannot be paid down unless the richest individuals and corporations allow their tax breaks to expire.

The non-partisan Center for Budget and Policy Priorities has calculated that making all of the GW Bush tax cuts permanent would cost roughly $3.8 trillion over the next 10 years. And the Joint Committee on Taxation has calculated all the tax loopholes given oil, agriculture and the like will cost the U.S. Treasury roughly $1.3 trillion just in 2011 tax expenditures. That is our tax monies, folks, that is being paid to keep the super rich.

This is part of the redistribution of wealth that has occurred just since 1992. The top 400’s aggregate taxable income has risen from $16.9 billion to $90.0 billion in 2008, said Buffet. And their federal income tax rate fell from 29.2 to 21.5 percent. So the general taxpayer has been paying a multi-billion tax bill for the tax breaks of Big Business and the wealthiest. Reagan Budget Director David Stockman has labeled it the “reverse Robin Hood effect”.

What have the richest done with our tax monies? Certainly some have expanded their businesses, but much of it went overseas. U.S. corporations have some $1 trillion in unrepatriated profits from their overseas’ businesses sitting in foreign accounts, at the moment.

Much of it has also boosted executive incomes and stock buyback plans. USA Today recently reported that median CEO salaries increased 27 percent in 2010. Data from the Bureau of Labor Statistics shows, however, that workers in private industry experienced only a 2.1 percent pay increase last year. As USA Today points out, though, the great increase in CEO pay in 2010 is not really indicative of booming profits, but rather reflects the fact that many companies have been cutting costs and laying off workers.

In fact, the largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim, says USA Today. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.

And there is even less shared sacrifice in our increasingly unprogressive tax structure. To understand why, Buffet says you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. But for the middle class typically, they fall into the 15 percent and 25 percent income tax brackets, in addition to heavy payroll taxes.

“Back in the 1980s and 1990s,” said Buffet, “tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

“I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000.”

There is much more to Republicans’ disavowal of shared sacrifice, of course. GW Bush thought that by borrowing the monies for his 2 wars, he would prevent widespread anti-war sentiment so soon after Vietnam, our longest war. And it also muted criticism of his tax breaks for the wealthiest. Vice President Cheney’s infamous saying, “Ronald Reagan proved that deficits don’t matter.” was its incredible rationalization that helped to plunge us into the Great Recession.

“Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances,” says Buffet. “…It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.”

But that is clearly the objective of Tea Party Republicans in their budget cutting crusade. With the economy still recovering, unemployment still high, we cannot afford the taxpayer subsidies that are setting record budget deficits. The taxpayer paid tax breaks won’t reduce the debt load, but it will prevent any real economic growth before 2012, as I have said.

So there is even a deeper reason to bring back the idea of shared sacrifice. For as Americans become more hopeless about their economic futures, they become more passive. And passivity means they don't vote, and so participate in the democratic process, as is evidenced by progressively declining voter roles since the 1970s. The massive redistribution of wealth that has occurred most recently has bred a greater cynicism about the democratic process. Warren Buffet may not know this, but less participation in our democracy means fewer control the levers of power, as happens in Third World countries controlled by oligarchies made up of the wealthiest families. And it was depression-era Germans badly discouraged by the destruction of their economy that elected a Hitler.

Harlan Green © 2011

Wednesday, August 17, 2011

Growing our Economy—Lessons of History

Financial FAQs

What will increase the demand for more goods and services, the key to growing our economy? It’s been slowing since the 1970s, so is the question du jour, now that politicos are beginning to worry about the consequences of their budget-cutting frenzy. Everyone has their own answer, of course, that reflects their particular agenda—whether it’s shrinking government (lower taxes create more jobs), or using government to stimulate spending (when private sector won’t).

The answer is absurdedly simple and just needs some historical research to understand, rather than an economics degree. The problem has been a gradual reduction in the rate of economic (GDP) growth since the 1970s that was caused by many factors, but has resulted in a reduction in the overall demand for domestic goods and services—or aggregate demand in economic terms.


The long term slowdown was accompanied by increasing wealth disparities, as well as deregulation of whole business sectors—from media to transportation to finance. In fact, financial deregulation was the root cause of the housing bubble and Great Recession. It was also a time of tax cuts for the wealthiest when the maximum income tax bracket was reduced from its high of 92 percent in the 1950s to the current 35 percent, as well as increasing budget deficits.

This also hints at how to increase said aggregate demand, which is a combination of consumer and government spending, net exports, and investments to maintain or expand businesses. But it won’t be easy. Because it involves extensive restructuring of our tax code that has increased deficits and reduced incomes for most Americans since the 1970s, as well as strengthening financial regulations that would prevent another credit bubble--not downgrading government services, in a word. Only then will we be able to pay down our debt as well as grow much of the wealth lost during the Great Recession.

Today we are seeing the results of slower growth—increasing wealth disparities, higher disease rates than other developed countries, fewer educational opportunities (too expensive), a higher crime rate, and highest per capita prison population of all developed countries. We are imprisoning the dispossessed, in other words, rather than offering them the means to succeed.

Unfortunately, the gradual decline in economic growth has been largely below the radar of many economists, as well as the general public. Economists attribute much of it to aging factors, and the maxing out of credit use by consumers that has reduced consumption. Card use had surged through the 1960s when credit cards were introduced. But doesn’t the fact that above 65 households now earn more after inflation than those below 65 tell us something else?

If seniors are doing better—thanks in large part to Medicare and Social Security—then our aging population isn’t a main cause of declining demand. And if consumers have reduced their borrowing—that make up some 70 percent of economic activity—then it must be because of the fact their real, after tax incomes have not grown since the 1970s.

Aggregate demand, or AG, is a measure of what people or governments are willing to buy/sell, or invest. It must roughly equal the supply side of the supply-demand equation over time—U.S. Gross Domestic Product, the sum of all goods and services produced domestically.

This is why it is important to understand the concept of aggregate demand. An aggregate demand curve is the sum of individual demand curves for different sectors of the economy, says Wikipedia, the most available definition source. It’s not complicated. Aggregate demand is usually described as the sum of four separable demand sources.



  • clip_image005is consumption (may also be known as consumer spending) = ac + bc(YT),
  • clip_image006is Investment,
  • clip_image007is Government spending,
  • clip_image008is Net export,
    • clip_image009is total exports, and
    • clip_image010is total imports = am + bm(YT).
  • C is personal consumption expenditures or "consumption," demand by households and unattached individuals for goods and services; its determination is described by the consumption function. The consumption function is C= a + (mpc)(Y-T)

Consumers make up some 70 percent of economic activity, hence the importance of personal consumption expenditures (PCE). Businesses say they won’t expand or hire more workers unless they see greater demand for their products, which is understandable. It is only ideologues, or those with a political agenda who say not so. If we give more tax breaks to the producers and investors, they will automatically create more jobs. More profits = more jobs, in their words.

Alas, that has never happened in history, as Warren Buffett said most recently. The administrations of Ronald Reagan and GW Bush gave the largest tax breaks to business and investors in the belief it created more jobs. But the result was 3 recessions, not greater demand (actually 4, including Bush I’s term), and also the largest increase in deficits of those times.

It should be blindingly obvious that the resultant massive concentration of wealth at the top has reduced overall aggregate demand for the rest of ‘U.S’. Most aggregate demand is generated by the incomes of the wage and salary earners, but also some of the smaller self-employed businesses, whose incomes have barely kept up with inflation since the 1970s.

And as the formula shows, demand is stimulated by government as well as private sector spending and investment. Right now, the private sector is hoarding their cash, as we have said, so it must be up to the government to dig us out of the debt hole—by job creation programs that put more monies in consumers’ pockets, not tax breaks for the wealthiest. Only then will we increase incomes of the 80 percent who have suffered most from the restructuring of our economy that has happened since the 1970s.

Harlan Green © 2011

Tuesday, August 16, 2011

No ‘Double-Dip’ (In Spite of Republican Efforts)

Financial FAQs

There will be no double-dip recession, in spite of the wild rumors and the S&P downgrade of U.S. debt to AA+. So what are the markets worried about? It is the lack of political leadership, which means government support of jobs’ and other growth programs.With corporations’ record profits over the past 2 years plus a $2 trillion cash hoard, and banks’ $1 trillion in excess reserves, there is no way the U.S. economy can sink back into recession territory. No, but Republicans efforts to stymie further stimulus spending could slow growth enough to upset Obama in 2012.

In other words, Republicans are purposely blocking any new efforts to stimulate growth. They want the economy to fail, so that President Obama will fail. They hate Barack Hussein Obama so much, in other words, they are willing to blatantly lie about the effectiveness of government stimulus spending. Obama’s problem is he doesn’t’ welcome their hate, as did President Roosevelt, and thus hasn’t unmasked their blatant hyprocrisy.

It is not new news, unfortunately, that Republicans’ words have not matched their actions. They love government stimulus when it is spent in their districts, and they even know it creates jobs—in their districts, of course.

Rachel Maddow has been talking about this for some time, and Huffington Post’s Sam Stein reported on leading Tea Partier Michelle Bachman’s many requests for some of the Obama stimulus $$ to be spent in her Minnesota district.

“A Freedom of Information Act request filed by The Huffington Post with three separate federal agencies reveals that on at least 16 separate occasions, Bachmann petitioned the federal government for direct financial help or aid”, says Stein. “A large chunk of those requests were for funds set aside through President Obama's stimulus program, which Bachmann once labeled "fantasy economics." Bachmann made two more of those requests to the Environmental Protection Agency, an institution that she has suggested she would eliminate if she were in the White House.”

Rachel’s ‘They’re Not Embarassed Hall of Fame’ includes 110 Republicans who have touted the success of the Obama stimulus spending in their districts in 2009-10, while saying publicly it wasn’t a success. Her Blog links to research by such as the Center For Public Integrity.

“Individually, over half of the entire Republican caucus has hailed nearly every aspect of the stimulus as a success — from infrastructure funds, to food programs, to education grants,” said the Center in joint research on their past record. “But politically, admitting its success might harm the GOP’s chances in November (2010). So with Republicans fixated on winning politically, they have focused on deceiving the public by calling the stimulus a failure, while pretending successful programs aren’t stimulus funded.”

Then, “Rep. Pete Sessions, the firebrand conservative from Dallas, Texas, who has relentlessly assailed the Democratic-passed stimulus law as a wasteful "trillion dollar spending spree", said the Center For Public Integrity, didn’t prevent him from asking for stimulus funds in 2010 that “…will create jobs, stimulate the economy, improve regional mobility and reduce pollution,” in his district.

In fact, the list is huge. Those asking for money before the 2010 election included “Tea Party favorites like freshman Massachusetts Sen. Scott Brown and Rep. Michele Bachmann, R-Minn., former presidential candidates Ron Paul and John McCain and Republican congressional leaders like Senate Minority Leader Mitch McConnell of Kentucky and Rep. Mike Pence of Indiana,” said the Center for Public Integrity.

But the economy is in fact reviving, as lower initial jobless claims and the Labor Department’s JOLT survey point to more hiring in the second half of 2011. For instance, Bond Trader Wrightson-ICAP said the June report on job openings and labor turnover (JOLTS) was a little less sluggish than expected. Total job openings climbed to 3.11 million, which is just below the March peak of 3.12 million.

“The pace of new hires and separations both fell modestly in June, as expected, but did so from upwardly-revised May levels. While the labor market remains less dynamic in terms of gross worker flows than was the case prior to the recession, the data for May and June were not quite as soft as anticipated.”


Wrightson ICAP has also taken issue, as has this reporter, with the recent downward revisions to GDP growth that were one of the causes for alarm that a double-dip was immanent. (The BEA had released revisions for GDP that showed the recession was significantly worse than originally estimated, mostly because consumers had cut back.) Hiring during the first 3 months of 2011 totaled more then 200,000 per month, with 1.96 million nonfarm private payroll jobs created in just the past 13 months. And 154,000 private payroll jobs were added in July, with expectations it will be revised upward. In fact, quarter GDP growth numbers are notoriously inaccurate. For instance, last year’s Q2 growth was revised upward from 1.8 percent to 3.8 percent, largely due to the government stimulus spending.

But consumers aren’t cutting back, as the Fed’s consumer credit report cited a huge surge in consumer borrowing. Though personal consumption was reported to have contracted in June (a lagging indicator?), you'd never know it from June consumer credit data, which show a $15.5 billion surge for the largest gain in more than four years. This is in part because auto sales are surging again, as well as back to school sales.

The gain is led by a $10.3 billion surge for non-revolving credit, less of a surprise given June's strength in motor vehicle sales, says Econoday. But the best news may be revolving credit which rose $5.2 billion for a second straight solid gain.


The result is that retail sales have surged to more than 8 percent—a number from the boom times. So look for higher GDP growth ahead, and no double-dip. The question is why haven’t Democrats called the ‘They’re Not Embarassed Hall of Famers’ on their incredibly blatant hypocrisy that gained the Republicans so many seats in 2010? Why can’t Democrats welcome the hate of their enemies, as did President Franklin D Roosevelt?

Harlan Green © 2011

Tuesday, August 9, 2011

Republicans’ Dark Side—Their Job Killing Machine

Financial FAQs

As Maureen Dowd just put it in a New York Times Op-ed, the debt ceiling audience has staggered away from a “slasher flick still shuddering…The gory, Gothic melodrama on the Potomac is a summer horror blockbuster—without the catharsis.” The shuddering had to come from the audience facing what Jungians would call their shadow side—the worst, most atavistic part of our nature that we have avoided facing until now.

In this case, it is the rise of the job killers—no compromise Republicans who would rather sink the economy that raise any revenues to pay down the debt. They are being led by the Tea Partiers, a mix of racists, misogynists, birthers—mostly white and less educated—who want to take back America to what it was before the last wave of immigrants reached our shores—maybe 100 years ago?

The result was incredible panic selling as ghoulish whispers of recession echoed through the financial markets. But a double-dip recession? No way, not with corporations holding $2 trillion in excess cash profits, and banks holding $1 trillion in excess reserves. These excesses are the real reason the Fed has held interest rates so low for so long. The Fed is attempting to coax them into doing something with their cash and reserve hoard, rather than hold them in MZM accounts—zero maturity earning almost zero interest rates.

Americans have not had to face the worst elements of our culture for a long time. Although our characterization of Vietnamese as “gooks” in order to make them enemies despicable enough to invade wasn’t so long ago.

The debt ceiling agreement was no catharsis because not enough was done to prevent the S&P downgrade of U.S. Treasury debt to AA+. They could not agree to reduce the deficit roughly $4 trillion, in S&P’s view, to stabilize the deficit by 2015. So S&P has begun to slash AAA ratings here and abroad.

Paul Krugman’s comment on the dark consequences of the European Union also embracing austerity when it should be stimulating growth was “Got that 30s feeling, all the way.” The results of insufficient job creation and growth would be ugly; such as the unrest in Greece cited in an AP report by Krugman.

ATHENS, Greece — They descended by the hundreds -- black-shirted, bat-wielding youths chasing down dark-skinned immigrants through the streets of Athens and beating them senseless in an unprecedented show of force by Greece's far-right extremists. In Greece, alarm is rising that the twin crises of financial meltdown and soaring illegal immigration are creating the conditions for a right-wing rise -- and the Norway massacre on Monday drove authorities to beef up security.

It took FDR, maybe our greatest President, and WWII to pull us out of the Great Depression. Right now, we have no such leadership when we need him or her the most. We happen to have President Obama, who seems to not want to face his own inability to find any villains of the Great Recession. And so the villains are prevailing at the moment.

If only he could face his enemies—which are those who want to tear him down by tearing down the economy. Roosevelt was able to face them down in his famous 1936 Madison Square Garden reelection campaign speech while on crutches and debilitated by polio:

“Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.”

Obama has failed to recognize the bullying tactics of House Republicans, such as blatantly ruling out any kind of compromise during the debt ceiling negotiations. It was also the Nazi’s main tool of intimidation during their rise in 1930’s Germany, described most recently via U.S. Ambassador William E Dodd’s account, “In the Garden of the Beasts”.

It is even showing up in our schools with the rise of children’s bullying in schools. Is all this pessimism warranted, is the real question, or is it the product of our 24/7 media feeding frenzy that wants to show up any sensational incident or event in its worst light to gain attention?

Alas, it is more than that. It is the steady loss of opportunity and growing income inequality we have allowed to happen over the last 30 years that is the real cause of the rise of our dark side. Michael Moore answers it best in his latest letter to his followers:

“From time to time, someone under 30 will ask me, "When did this all begin, America's downward slide?..."It ended on this day: August 5th, 1981.

“Beginning on this date, 30 years ago, Big Business and the Right Wing decided to "go for it" -- to see if they could actually destroy the middle class so that they could become richer themselves. And they've succeeded.”

On August 5, 1981, President Ronald Reagan fired every member of the air traffic controllers union (PATCO) who'd defied his order to return to work and declared their union illegal. They had been on strike for just two days.

Reagan had been backed by Big Business in his run for the White House and they, along with right-wing Christians, wanted to restructure America and turn back the tide that President Franklin D. Roosevelt started -- a tide that was intended to make life better for the average working person, said Moore.

The best evidence of Republicans job killing machine is their attack on government spending in the debt ceiling agreement, when government employment has fallen by 946,000 over the past 13 months, according to Barron’s Gene Epstein, while private payrolls have grown by 1.96 million over that time. And their attack has continued in Wisconsin, Indiana, and even Ohio with cuts in public employee benefits. This is when we most need to strengthen our governmental institutions that pay for environmental protection, education, health care, and public safety.

These are not signs of an incipient recession, in other words, but a lack of responsible leadership, as even S&P said in their downgrade announcement. So how do we put the darker side of ‘U.S.’ back into its bottle? The huge stock market losses make it harder for even the no tax, free marketers to deny the results of their work. The free market had spoken, after all, and did not like what it saw.

We can hope the panic subsides and rational thought returns. But it is really up to our leaders to lead again, as President Roosevelt once did.

Harlan Green © 2011

Saturday, August 6, 2011

Consumers Are Spending Again!

Popular Economics Weekly

A little noted Federal Reserve report on consumer debt just pulled a big surprise. Consumers are borrowing on their credit cards again. Though personal consumption contracted in June, you'd never know it from consumer credit data, which show a $15.5 billion surge for the largest gain in more than four years. This is in part because auto sales are surging again, as well as back to school sales.

The gain is led by a $10.3 billion surge for non-revolving credit, less of a surprise given June's strength in motor vehicle sales, says Econoday. But the best news may be revolving credit which rose $5.2 billion for a second straight solid gain.

Are consumers really beginning to spend again? If so, look for higher GDP growth ahead, in spite of the S&P downgrade of federal government debt to AA+ from AAA, the first time that has happened to the U.S. It is too early to know if the downgrade of Treasury securities will have an effect on interest rates, or even be on the radar of ordinary consumers.


This is important because the personal consumption expenditures (i.e., consumer spending) has not yet recovered from the recession. Last Friday, the BEA released revisions for GDP that showed the recession was significantly worse than originally estimated, mostly because consumers had cut back. And Personal Income less Transfer Payments is one of four indicators the National Bureau of Economicclip_image003 Research (NBER) uses in business cycle dating to determine recessions, as we have said.


Here is Calculated Risk’s graph on the historical fluctuations in personal income that happens during recessions (blue streaks). Prior to the revisions, the BEA reported this measure was off close to 7 percent from the previous peak at the trough of the recession. With the revisions, this measure was off almost 11 percent at the trough - a significant downward revision and shows the recession was much worse than originally thought.

But the graph also shows that it is now less than 5.1 percent below its prior peak. Combined with a rise to 5.4 percent in the personal savings rate in July, this is another sign that consumers are regaining their financial health.

And motor vehicle sales soared in July. Unit sales show a big monthly gain, up nearly six percent vs June to a 12.2 million annual rate. The gain points to relief for the motor vehicle component of the retail sales report which has posted four straight declines in the aftermath of the March earthquake and tsunami that disrupted the Japanese supply chain.


And finally, jobs are returning to the private sector as the Bureau of Labor Statistics (BLS) reported 117,000 non-farm payroll jobs created, with the unemployment rate dropping back to 9.1 percent, and a good jump in average hourly wages, also a big improvement from last month’s jobs report.


The U.S. economy added an even larger 154,000 in the private sector, though partly because 193,000 people dropped out of the labor force, according to the latest government data. Job gains in May and June were also revised up by a combined 56,000, the Labor Department reported last Friday. Even better news was that average hourly wages rose 10 cents to $23.13, though the workweek was unchanged at 34.3 hours.

We can hope that with the debt ceiling crisis now on the back burner until 2012, the focus will return to job creation. There are lots of ways to create jobs in the private sector, which includes the return of some 70,000 private industry construction workers after temporary resolution of the FAA funding cutoff. Does it matter who pays them in times like these?

Harlan Green © 2011

Friday, August 5, 2011

Why Are Republicans Playing With Fire?

Financial FAQs

The reports that 4,000 FAA employees and up to 70,000 airport construction workers narrowly escaped being laid off until Labor Day is unbelievably true. And this is the height of the summer travel season.

In this case, Senate Majority Leader Harry Reid had to scotch together a last minute compromise after Republican Senator Orrin Hatch scotched an earlier compromise of the House bill negotiated by Senators Rockefeller and Kay Bailey Hutchinson that would have cut spending on rural airport subsidies, according to the New York Times.

In fact, such actions are putting into question the motives for Republicans’ opposition to any kind of stimulus spending to spur economic growth. Republicans have once again brought us ever closer to another recession by imposing their anti-government, anti-union agenda.

What else should we think? In fact, we just had the 30th anniversary of President Reagan’s firing of 11,000 striking Air Traffic Controllers that Governor Scott Walker has been holding up as his model for banning collective bargaining of public employees in Wisconsin. (Though that may soon be reversed with next week’s Wisconsin recall elections.)

The only problem is that Reagan wasn’t against collective union bargaining according to Associate Professor Joseph A. McCartin of Georgetown University, author of a forthcoming book, “Collision Course: Ronald Reagan, the Air Traffic Controllers, and the Strike That Changed America.” And it exposes Scott Walker’s total disregard of both history and the truth.

“Although he opposed government strikes, Reagan supported government workers’ efforts to unionize and bargain collectively’” said Professor McCartin in a recent New York Times’ Op-ed. “As governor, he extended such rights in California. As president he was prepared to do the same. Not only did he court and win Patco’s endorsement (the Traffic Controllers union), he directed his negotiators to go beyond his legal authority to offer controllers a pay raise before their strike—the first time a president had ever offered so much to a federal employees’ union.”

How close are we to a double-dip recession? The latest revisions to Q1 and Q2 2011 Gross Domestic Product growth show that consumer spending has shrunk—mostly from a lack of confidence in the future, and household debt that is still too high. This is while DOW Jones plunged 512 points on Thursday—due to fears of another recession. So this is not the time for Republicans to be playing with fire.

It is why GDP growth has slowed so drastically. There are 4 indicators used by the National Bureau of Economic Research Business Dating Committee to determine a recession—employment, personal income less transfer payments, real GDP growth, and industrial production, as we have said. Of the 4, industrial production and GDP growth have been recovering since mid-2009. But they are really dependent on employment and personal incomes less transfer payments, which haven’t done so well. Personal incomes have improved for those who are employed, but the money is either being saved or used to pay down debts.


And employers are not hiring enough workers to keep up with population growth. So there is really no excuse for Republicans’ ideological blindness that opposes any kind of government action to stimulate growth, unless it is intentional. In other words, would they use another economic collapse to try to knock out Obama in 2012? It is a horrific thought, if so. Republicans should keep in mind the Blame Game can work in unexpected ways. Playing with fire during this economic conflagration could forfeit their chances of winning anything.

Harlan Green © 2011

Thursday, August 4, 2011

Why Repeat 1938?

Financial FAQs

Why does the final debt ceiling agreement look like 1938, when Republicans took over Congress after President Roosevelt ok’ed spending cuts while raising some taxes? Because Congress may make the same mistake—a repeat of the Great Depression by cutting spending when the U.S. economy hasn’t recovered from the Great Recession.

Democrats lost 71 House seats and 8 Senate seats in the 1938 election, after Roosevelt had been persuaded by his advisors cut back on New Deal programs, which precipitated the 1937-38 second depression and gave Republicans ammunition to say the New Deal hadn’t worked. Production, profits and wages had regained their 1929 levels by the spring of 1937. Unemployment remained high, but was considerably lower than the 25 percent rate seen in 1933.

So in June 1937, some of Roosevelt's advisors urged spending cuts to balance the budget. WPA rolls were drastically cut and PWA projects were slowed to a standstill, according to Wikipedia. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 per cent and production of durable goods fell even faster.


Does this look terribly familiar? In other words, we might be doomed to repeat the historical mistake of listening to creditors to whom so much of the federal debt is owed by cutting spending without creating jobs, when we should be stimulating growth both to reduce the ratio of debt to GDP and help debtors repay their debts.

The new agreement doesn’t allow any revenue increases in the first stage of some $2.1-2.4 trillion in mandated spending cuts over the next 10 years. This of course means the debt isn’t being paid down. All of the Bush tax cuts had added $3.7 billion to the $14 trillion in debt, with tax loopholes extended for energy and agribusiness, two wars and two recessions making up most of the rest. The spending cuts weren’t paid for then, and aren’t being paid for now, in other words.

But, had we continued the stimulus spending of 2009-10 that included the $787 Billion in ARRA stimulus, spent more of the $11 billion set aside for the HAMP mortgage modification program, and extended the homebuyer tax credits that expired last June, we might have started both a real estate recovery and longer term economic growth.

Instead, we are close to a ‘double-dip’ after just leaving the Great Recession. The first part of the Great Depression actually ended in 1934, which lulled everyone into believing that cutting spending in 1937 would do little harm. But it just made the Depression worse, until spending from government debt that topped 122 percent of GDP during World War II ended the Great Depression!

 So history is very clear on what it takes to stimulate jobs and economic growth—more spending on policies that produce growth. That is the only way to bring down the debt level. But one can’t borrow for the wrong things, such as tax cuts. As one pundit put it, business doesn’t care where the dollars come from—a public or private worker. Calculate Risk has kept tabs on the possibility of a double-dip recession and second quarter numbers show the economy has almost ground to a halt. GDP growth revisions show Q1 2011 rose just 0.4 percent and Q2 1.3 percent in the ‘advance estimate’.

 Personal Consumption Expenditures, which account for almost 70 percent of activity, have been falling for just the past 3 months for a number of reasons, including a spike in energy and food prices, and falling vehicle sales due to the Japanese Tsunami. It is why GDP growth has slowed so drastically. There are 4 indicators used by the National Bureau of Economic Research Business Dating Committee to determine a recession—employment, personal income less transfer payments, real GDP growth, and industrial production. Of the 4, industrial production and GDP growth have recovered the most.

There is some hope with the July Institute of Supply Management non-manufacturing survey that showed overall service sector activity had risen 2.7 percent in 12 of its 18 industries, which account for more than 70 percent of all economic activity. So we have not yet entered a double-dip. But without a viable job creation program, that may still happen.

So history as well as basic economics tells us those who want to shrink government by slashing spending without programs that also grow the economy are wrong. What would it take to convince them otherwise? Another Great Depression, or a Great War?

Harlan Green © 2011