Saturday, June 25, 2016

Stricter Gun Controls Now Inevitable

Financial FAQs

You know the tide has turned against gun violence when even the American Medical Association calls it a public health menace at the finish of its annual convention.

“CHICAGO – In the wake of the worst mass shooting in American history and with more than 6,000 deaths already in 2016 from gun violence, the American Medical Association (AMA) today adopted policy calling gun violence in the United States "a public health crisis" requiring a comprehensive public health response and solution,” said its press release.

Additionally, at the Annual Meeting of its House of Delegates, the AMA resolved to actively lobby Congress to overturn legislation that for 20 years has prohibited the Centers for Disease Control and Prevention (CDC) from researching gun violence.

This is after the US Senate could not even agree on banning gun purchases for anyone on the terrorism watch list in the wake of the Pulse nightclub massacre. You know it’s a public health menace when such mass killings are the work of both domestic and foreign terrorists, whether at Aurora, Sandy Hook, San Bernardino, and Orlando.

You know more effective gun control measures are coming, including the banning of military assault weapons like the AR-15, when Nicholas Kristof wrote an op-ed stating that more Americans had died from gunfire since 1968 than in all the wars ever fought by the United States — a claim PolitiFact twice pronounced to be true.
“When 50 people were shot and killed early Sunday morning at a gay nightclub in Orlando,” wrote Kristof, “the toll from gun murders this year rose to somewhere around 6,000 deaths, which means if the trend continues, this year may end up with the highest gun homicide count since Barack Obama took office in 2009. Add to the homicide number the 550 or so victims of police shootings, roughly the same number of accidental gun deaths and the 21,000+ Americans who use a gun to end their own lives, and the total gun mortality number this year may go above 35,000.”
And now the women are getting together, as did those MADD women that enabled stricter drunk driving laws. (You would think the insurance companies would be behind this initiative as well, for all the money in lawsuits they would save.)

Recently, a powerful new gun control group has emerged, called Everytown for Gun Safety, a combining of several smaller gun control groups, including Women Against Gun Violence and Mom’s Demand Action.

This is while former New York Mayor Michael Bloomberg was getting ready to launch Everytown for Gun Safety with a pledge of $50 million, but it lacked foot soldiers. So today Bloomberg and the women’s groups have merged together with 3.5 million supporters.

And the nail in the coffin of unregulated gun violence may have been supplied by the now 8-member Supreme Court which allowed a lower court ruling banning assault weapons to stand, which in effect means that the Second Amendment right to own guns does have limits. The U.S. Supreme Court on Monday left in place gun control laws in New York and Connecticut that ban military-style assault weapons like the one used in last week's massacre at an Orlando nightclub, rejecting a legal challenge by gun rights advocates.

The New York and Connecticut laws, among the strictest in the nation, were enacted after a gunman with a semiautomatic rifle killed 20 young children and six educators in 2012 at Sandy Hook Elementary School in Newtown, Connecticut. In total, seven states and the District of Columbia ban semiautomatic rifles.
“"With approximately 30,000 men, women and children dying each year at the barrel of a gun in elementary schools, movie theaters, workplaces, houses of worship and on live television, the United States faces a public health crisis of gun violence," said AMA President Steven J. Stack, M.D. "Even as America faces a crisis unrivaled in any other developed country, the Congress prohibits the CDC from conducting the very research that would help us understand the problems associated with gun violence and determine how to reduce the high rate of firearm-related deaths and injuries."
So we can now have a discussion about the latest public safety menace, the epidemic of gun violence. It requires similar treatment as did the Ebola and Zika epidemics—eradication of the carriers of that violence; which means stricter licensing requirements for starters, and maybe the banning of military-style assault weapons.

Harlan Green © 2016

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Wednesday, June 22, 2016

Housing Now Leading Economic Recovery

Popular Economics Weekly
Harvard economist and GW Bush chief economic advisor Greg Mankiw’s recent New York Times Upshot column attempts to explain why US growth is so slow. “Here is the sad fact,” he says: “Over the last decade, the growth rate of real G.D.P. per person has averaged just 0.44 percent per year, compared with the historical norm of 2.0 percent. At a rate of 2.0 percent, incomes double every 35 years. At a rate of 0.44 percent, it takes about 160 years to double.”
And Mankiw blames it on policy missteps. E.g., when Barack Obama took office in 2009, the economy was in the midst of the Great Recession, and President Obama’s advisers relied on standard Keynesian theory when they proposed a large increase in government spending to energize the economy.  But it wasn't enough.

Instead of waiting for the stimulus spending to take effect, Obama listened to conservative economists (such as G Mankiw) and supported tax increases too soon in an attempt to pay down the debt accumulated during the Bush administration. The economy hadn’t yet recovered from a very Great Recession. President Roosevelt made the same mistake in 1937 when he also raised tax rates with a Republican Congress, which shrank growth so much that it prolonged the Great Depression.

We do have more signs of improved growth led by housing sales, which may offset some of the policy missteps--due in large part to misjudging the depth of the Great Recession. Sales of previously owned homes increased in May to the highest level in nearly a decade, reports the National Association of Realtors, another sign of durable demand in the housing market despite ongoing headwinds. And a recovering housing market has historically been a leading economic indicator of healthier consumers, hence future growth.

Existing-home sales rose 1.8 percent to a seasonally adjusted annual rate of 5.53 million, the National Association of Realtors said Wednesday. That was 4.5 percent higher compared to a year ago and the highest pace since February 2007 during the housing bubble.
Lawrence Yun, NAR chief economist, says existing sales continue to hum along, rising in May for the third consecutive month. "This spring's sustained period of ultra-low mortgage rates has certainly been a worthy incentive to buy a home, but the primary driver in the increase in sales is more homeowners realizing the equity they've accumulated in recent years and finally deciding to trade-up or downsize," he said. "With first-time buyers still struggling to enter the market, repeat buyers using the proceeds from the sale of their previous home as their down payment are making up the bulk of home purchases right now."
Any recovery depends on boosting aggregate demand—the demand for goods and services from all sectors of the economy, including governments. And to date the Obama administration has been too lax in encouraging both private and public investment that would expand capacity, and so productive jobs.

This is particularly true of government jobs. State and local government employment has been the largest drag on job growth. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, 247,000 in 2011, and 29,000 in 2012, for a total of 669,000 jobs lost due to the Great Recession. 

Through November 2015, reports Calculated Risk, state and local employment is up a net 70,000.   So, in the aggregate, state and local government layoffs are over.  However state and local government employment is still 561,000 below the pre-recession peak.  It is public sector jobs that have suffered the largest decline due to the Great Recession, in other words. Here is the comparison during presidential terms of government job creation.

The public sector grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However public sector declined significantly since Mr. Obama took office (down 638,000 jobs in 2015). These job losses have mostly been at the state and local level, but more recently at the Federal level.  This has been a significant drag on overall employment, needless to say.

How does one boost additional growth with a no-compromise Republican Congress that resists any and all Obama initiatives? (Yet he was able to pass Obamacare, but unable to defend it, resulting in the all-Repub 2014 Congress!).

So public employment is as important as private sector jobs. Not only does this put more people to work, but it provides the necessary energy-transportation-communication networks without which private industry cannot operate.

Harlan Green © 2016

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Friday, June 17, 2016

Builder Optimism Returning to Historical Levels

The Mortgage Corner

After holding steady for the past four months, builder confidence in the market for newly constructed single-family homes rose two points in June to a level of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since January 2016.

And it’s for an obvious reason, as the just released privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,164,000. This is 0.3 percent below the revised April estimate of 1,167,000, but is 9.5 percent above the May 2015 rate of 1,063,000. But mostly large, expensive homes are being built to date, which is hurting affordability.

“Rising home sales, an improving economy and the fact that the HMI gauge measuring future sales expectations is running at an eight-month high are all positive factors indicating that the housing market should continue to move forward in the second half of 2016,” said NAHB Chief Economist Robert Dietz.
In fact, the HMI builder optimism index is returning to a range that prevailed from 1970s to early 2000, in the run up to the housing bubble. It means that 60 percent of the builders surveyed are seeing increased business activity.

But what kind of activity? Mostly larger, even very large homes are being built, rather than the more traditional 16-1800 sf single family homes of yore. Of the estimated 648,000 single-family homes completed last year, just 136,000, or 21 percent, were homes with square footage of less than 1,800.

The number of “moderately-sized” single-family homes completed in 2015 was little changed from 2011, when overall single-family home completions hit at a “record” low. In contrast, the number of homes with 3,000 or more square feet of floor area last year was up 76 percent from 2011’s level.

This is obviously a problem for younger, first-time buyers entering the housing market. Sales of new single-family houses in April 2016 were at a seasonally adjusted annual rate of 619,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 16.6 percent (±15.4%) above the revised March rate of 531,000 and is 23.8 percent (±22.8%) above the April 2015 estimate of 500,000, said the Census Bureau.

The result has been that there is a severe shortage of affordable new housing, driving prices higher. The median sales price of new houses sold in April 2016 was $321,100; the average sales price was $379,800. The seasonally adjusted estimate of new houses for sale at the end of April was 243,000. This represents a supply of 4.7 months at the current sales rate, below the normal 5-6 month supply.

So if builders’ optimism holds we can be sure that new-home construction and sales will provide more homes for buyers—maybe even affordable homes if current construction levels hold.

The Fed has to cooperate by holding interest rates low, of course, but St. Louis Fed President James Bullard said on Friday the current economic trend of tepid 2 percent growth, coupled with a low unemployment rate and quiet inflation are likely to persist and, as a result, the U.S. central bank can sit on its hands.

Harlan Green © 2016

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Wednesday, June 15, 2016

Who Are the Homeowners?

The Mortgage Corner

The Atlanta Federal Reserve Bank just published a housing study entitled, “It’s Not Just Millennials Who Aren't Buying Homes,” that breaks down homeownership by age and household status. And the results show that age and whether one is head of a household makes a difference.


“In recent years, much attention has been focused on the growing tendency of millennials to rent,” says the Atlanta Fed study. “Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust.”
But in fact the homeownership rate has declined in all age brackets, except 65 + year-olds. Why is not clear. We know household incomes since 1980 have declined for all age brackets except seniors whose incomes are boosted by social security, Medicare, and other retirement benefits.
The study also shows that homeownership rates have actually returned to pre-housing bubble levels of 64 percent, the homeownership rate since the 1970s.
“The fact that the average U.S. homeownership rate is close to rates seen in the mid-1980s and mid-1990s while homeownership rates within age groups (under 65) are currently lower than their respective averages in the mid-1980s to mid-1990s suggests that factors other than age may be affecting the average person's decision to buy or rent.”
I believe it has to be declining household incomes that haven’t yet returned to pre-recession levels, even with record low interest rates. According to the Federal Reserve, the median household income was $51,939 in 2013, below the 1999 peak of around $57,000. The Census Bureau estimated real median household income at $53,657 for 2014 and $54,462 in 2015. Household income varies by race, with Asians the highest in 2014 at over $74,000 and African Americans the lowest around $35,000.

So household incomes have a long way to go to return to historic highs. A major reason has to be the soaring inequality that could take decades to correct; if and only if more progressive economic policies can be enacted—such as a wealth tax on large financial assets, and a higher maximum personal tax rate, which hasn’t yet even returned to 1980, Reagan era levels.

The nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49 percent of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down substantially from 62 percent in 1970.

The bottom line is that married couple families still have the highest homeownership rate, whereas non-married singles have the lowest rate. What better reason to own a home than raising a family? And millennials are just now entering the age when they are beginning to form their own households, so their homeownership rate may also rise.

Harlan Green © 2016

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Tuesday, June 14, 2016

The Consumers Is Happy

Financial FAQs

The consumer is happier, at least, due mostly to higher wages, even if overall economic growth is lagging. Consumer sentiments and retail sales are rebounding after a punk first quarter. Corporations don’t want to invest in new plants and equipment—so-called capex spending—so they have to boost their employees incomes in order to convince them to work longer hours and produce more.

Sales at U.S. retailers rose a solid 0.5 percent in May after an even larger gain in the prior month, suggesting consumers still feel confident enough in the economy to stick to their usual spending patterns despite a slowdown in hiring. The sales gains were widespread. Auto dealers, Internet retailers, clothing outlets, gas stations, sporting-goods stores and restaurants all saw a healthy uptick in sales.

This is in large part because small businesses, which employ most of US, are hiring again. The Index of Small Business Optimism rose two tenths of a point in May to 93.8, according to the National Federation of Small Businesses (NFIB) monthly economic survey released today.

Fifty-six percent reported hiring or trying to hire (up 3 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Hiring activity increased substantially, but apparently the “failure rate” also rose as more owners found it hard to identify qualified applicants. ... Twenty-seven percent of all owners reported job openings they could not fill in the current period, down 2 points, but historically strong.

It is in line with the Labor Department’s JOLTS report, which showed 5.8 million job openings, and just 5.1 million hires in April. There are plenty of unfilled jobs, in other words. Why aren’t corporations investing more in capital expenditures? It is hurting economic growth in a big way.

Graph: Econoday

The second revision to first-quarter productivity fell at a quarter-to-quarter annualized pace of 0.6 percent, reports Econoday. It took a 1.5 percent rise in hours in the quarter to produce a 0.9 percent gain in output. With the labor market nearing full employment, this mismatch may very well become increasingly urgent for national policy. Not only did hours exceed output, compensation rose at the same time, up 3.9 percent to lift unit labor costs by an outsized 4.5 percent.

The lack of capex investment is puzzling economists, but one reason has to be they don’t have to, sitting on record profits and $4.5 trillion is cash and cash equivalent assets. Corporations would rather buy back their stock to boost stock prices, and so enrich their stockholders and CEOs than their employees and consumers.

But that will soon change, as corporations will have to continue to pay their employees more, or begin again to invest in expanding their productivity.

Harlan Green © 2016

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Monday, June 13, 2016

Please Protect US, Mr. President!

Popular Economics Weekly

What has happened to our gun laws—especially the assault rifle ban that expired in 2004? Australians had the courage to pass tougher gun regulations—Australia’s Prime Minister in particular, at the time. It takes political courage, in other words, something U.S. politicians seem to lack.

Conservative Australian Prime Minister John Howard, a close ally of George W. Bush, faced political and public resistance to the laws. After just three months as the country's leader, Howard wore a bulletproof vest as he addressed a hostile 3,000-strong crowd opposed to the reforms.

How did he do it? The current Australian gun laws were passed after 35 were killed and 23 wounded in a 1996 mass shooting in Port Arthur, Tasmania.  The shooter was able to buy his assault rifle, even though later he was later determined by authorities to have an IQ of 11. There hasn’t been a mass shooting in Australia since then.

Twelve days after the Port Arthur massacre, the Australian prime minister, John Howard, announced a sweeping package of gun reforms in a country where firearms had long been considered an essential prop in the national mythology of life in the bush.
“At that stage the gun lobby was the ruling lobby in Australia,” says Philip Alpers, associate professor at the University of Sydney. “What happened at Port Arthur is that they were outpaced, outflanked and outwitted by a man who had the power to move in 12 remarkable days.”
Tim Fischer was leader of the National party and Howard’s deputy prime minister in the Coalition government, charged with persuading skeptical country voters to support, or at least accept, reforms. “Port Arthur was our Sandy Hook,” he says. “Port Arthur we acted on. The USA is not prepared to act on their tragedies.”

It was called the National Firearms Agreement — legislation that outlawed automatic and semi-automatic rifles, as well as pump-action shotguns. At the heart of the new law was a massive buyback of about one-fifth—640,000—of all firearms in circulation in Australia. The country’s new gun laws prohibited private sales, required that all weapons be individually registered to their owners, and required that gun buyers present a “genuine reason” for needing each weapon at the time of the purchase, as well as a 28-day waiting period while backgrounds were checked. (Self-defense could not be a reason.) In the wake of the tragedy, polls showed public support for these measures at upwards of 90 percent.
"The laws had widespread public support but faced fierce opposition from some rural supporters … because they believed they were unfairly paying a price for the misdeeds of others," Howard told NBC News in a statement. "This resentment assisted the rise of a new political party which damaged the government at the following election."
Howard persisted with introducing the laws, and went on to win that election and lead the nation for more than a decade. He considers the reforms as a key part of his legacy. An article published online in July by the NRA claimed there was "growing consensus" that the laws hadn't made Australians safer.

Howard acknowledges that "major cultural and historical differences" make it difficult to draw comparisons between the gun cultures in the U.S. and Australia. "Although I had not anticipated the need to act on this matter so early in my term of government, I had always believed there was a clear link between the ready availability of guns and gun-related death," Howard said.
"The national gun control laws enacted after the Port Arthur massacre remain one of the major social reforms ... of [my] government," he added. "All the credible research both in Australia and elsewhere shows that the gun control laws have markedly reduced gun-related deaths."

Total intentional gun deaths fell by half in the decade after the 1996 restrictions were put in place, even as Australia’s population grew nearly 14 percent. The rate of gun suicides per 100,000 people dropped 65 percent from 1995 to 2006, and the rate of gun homicides fell 59 percent, according to a 2010 study by Andrew Leigh of Australian National University and Christine Neill of Wilfrid Laurier University.

“Australia is not like the U.S.” said commentator Michael Pascoe in the  Sydney Morning Herald in response to President Obama’s remarks on last year’s Umpqua Community College killings by a deranged killer, whose mother kept at least 7 guns at home, in addition to the  8 guns plus ammunition carried by the shooter in the slaughter of college students and a teacher.
"We know that other countries in response to one mass shooting have managed to craft laws that almost eliminate mass shootings," said President Obama. "Friends of ours, allies of ours, Great Britain, Australia, countries like ours.”
In fact, the US now has a gun homicide rate 370 times that of Australia's. “Unlike the US,” said Pascoe, “we collectively decided to have a decent social safety net, the concept of a living wage and make good education freely available. Most of us are wary of those with extreme views of any kind.”
Our gun problem of course extends beyond mass violence, says the LA Times. In 2014 alone, for example, the Centers for Disease Control and Prevention recorded 11,208 people shot to death, 33,636 injured by gunfire and 21,175 who killed themselves with a gun. That's a total of 66,019 people who were killed or injured by a gun, which comes out to 1,269 per week, 180 a day or 7.5 per hour.
“The US is too immature a society to be allowed to play with guns,” said the Sydney Morning Herald’s Pasco. “It has never shed its Wild West mythology. Americans still use their courts to kill people, which sends a message in its own way.”
We do not at present have a leader or leaders with enough courage to stand up to the gun lobby, as Australia’s John Howard was able to do. Their most important job should be to protect our citizens, regardless of creed or color.

Harlan Green © 2016

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Saturday, June 11, 2016

Trump Must Hate the Little Guy

Financial FAQs

The Republican Party may rue the day they didn’t vet their presumptive candidate for President. The vetting can no longer just be about his overt and premeditated racism, or even his xenophobic wall building. His business practices are finally coming under detailed scrutiny, and what we see is very ugly.

A USA TODAY article catalogues more than 3,500 lawsuits filed for or against Donald Trump over his business career. Many were filed by small business people and firms that Trump refused to pay for work done on his various real estate properties.

The result was that many were driven out of business. It looks like Trump’s main business model was and continues to be preying on those who are least able to defend themselves legally, in order to enrich himself. This smacks of more than predatory business practices.
David Brooks’ latest New York Times Oped this tries to put a handle on his narcissistic behavior. “By one theory, narcissism flows from a developmental disorder called Alexithymia, the inability to identify and describe emotions in the self. Sufferers have no inner voice to understand their own feelings and reflect honestly on their own actions.”
Could this also be defined as sociopathic behavior, since he seems to have no compunction in harming others financially, especially those least able to defend themselves in court?
Psychology Today defines sociopathy as follows; “A sociopath can be defined as a person who has Antisocial Personality Disorder. This disorder is characterized by a disregard for the feelings of others, a lack of remorse or shame, manipulative behavior, unchecked egocentricity, and the ability to lie in order to achieve one's goals.”
Donald Trump often portrays himself as a savior of the working class who will "protect your job." But a USA TODAY NETWORK analysis found he has been involved in more than 3,500 lawsuits over the past three decades — and a large number of those involve ordinary Americans, like the Friel family, who says Trump or his companies have refused to pay them.

The Friel’s family cabinetry business, founded in the 1940s by Edward’s father, finished its work in 1984 and submitted its final bill to the general contractor for the Trump Organization, the resort’s builder.

Edward’s son, Paul, who was the firm’s accountant, still remembers the amount of that bill more than 30 years later: $83,600. The reason: the money never came. “That began the demise of the Edward J. Friel Company… which has been around since my grandfather,” he said.

This is not to speak of a Florida lawsuit against Trump and his Trump's Doral golf resort--also embroiled in recent non-payment claims by two different paint firms, with one case settled and the other pending, says USA TODAY. Last month, his company’s refusal to pay one Florida painter more than $30,000 for work at Doral led the Miami Dade Circuit Judge Jorge Cueto (whoops, another Hispanic Judge) to order foreclosure of the resort if the contractor isn’t paid.

Juan Carlos Enriquez, owner of The Paint Spot, in South Florida, has been waiting more than two years to get paid for his work at the Doral. The Paint Spot first filed a lien against Trump’s course, then filed a lawsuit asking a Florida judge to intervene.
“In courtroom testimony, the manager of the general contractor for the Doral renovation admitted that a decision was made not to pay The Paint Spot because Trump “already paid enough,” said USA TODAY. As the construction manager spoke, “Trump’s trial attorneys visibly winced, began breathing heavily, and attempted to make eye contact” with the witness, the judge noted in his ruling.”
It looks like Trump’s attorneys and supporters will continue to wince as more stories of his business practices come out—whatever his personality disorder. Republicans should have definitely vetted him, instead of listening to his hype.

Harlan Green © 2016

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Friday, June 10, 2016

Are Most of US Fully Employed?

Financial FAQs

The U.S. Bureau of Labor Statistics reported the number of job openings was little changed at 5.8 million on the last business day of April, in its JOLTS report. (But that’s not exactly true, as it is up from 5.58 million openings in April 2015.) Hires (blue line in graph) edged down to 5.1 million while separations were little changed at 5.0 million. That means there are many more jobs available than workers to fill those jobs. We are approaching full employment, in other words. And who has most benefited?

Actually, most Americans. This is most evident in the Labor Department’s weekly initial jobless claims on which the unemployment report is largely based, which is at a record low. New applications for unemployment benefits declined by 4,000 to 264,000 from a revised 268,000 in the prior week, the government said Thursday.

Claims sit near the lowest level in decades and have barely budged even though the pace of job creation has cratered in the past two months. The economy added just 38,000 private payroll jobs in May after a mediocre 123,000 gain in April—another sign that we are nearing full employment, by the way, as the easy to fill jobs are mostly gone.

In fact, the average American worker is in less danger of losing a job than anytime in modern history. The percentage of employees who were laid off fell in early June to the lowest level since the government began keeping records in 1949, according to an obscure measure known as the insured unemployment rate buried in the initial claims report. The rate fell to 1.5 percent.

The insured unemployment rate divides the number of people collecting unemployment checks by the number of covered workers who are eligible for benefits if they are laid off. The insured unemployment rate reached a 27-year peak of 5 percent in mid-2009 during the Great Recession, and a record 8.9 percent if workers who were receiving extended emergency benefits are included.

We still have many who aren’t fully employed, however. The U6 category in last Friday’s unemployment report includes people who can only find part-time jobs as well as those who’ve grown too discouraged to keep looking—some 8 million. The rate was about 8 percent shortly before the Great Recession began.

What’s more, a smaller share of Americans are now part of the labor force. The so-called labor-force participation rate has fallen to 62.6 percent from 66 percent at the end of 2007. In other words, only 63 of every 100 able-bodied Americans 16 or older hold a job or are looking for one. The last time the level was that low was in the late 1970s.

We can do better, in other words, and there is so much work to be done with our public infrastructure and investment in new businesses, for starters. That’s when we will truly be fully employed.

Harlan Green © 2016

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Friday, June 3, 2016

Should the Fed Raise Rates?

Financial FAQs

It’s incredible that Janet Yellen’s Fed should even be talking about raising interest rates in June, or July. The Fed predicts no more than 2.5 percent GDP growth in Q2, after Q1’s 0.8 percent growth rate. And the May unemployment report was the worst since 2010 with just 38,000 nonfarm payroll jobs created.
“It’s appropriate -- and I’ve said this in the past -- for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said last Friday during remarks at Harvard University in Cambridge, Massachusetts. “Probably in the coming months such a move would be appropriate.”

Really? Most industries cut jobs last month, the first time that’s happened in several years. The increase in hiring was also the smallest since the fall of 2010. Economists polled by MarketWatch had predicted an increase of 155,000 nonfarm jobs.

This is though the unemployment rate fell to 4.7 percent from 5 percent to mark the lowest level since the month before the Great Recession began in December 2007. But the decline owed almost entirely to 458,000 people leaving the labor force.

Adults over 25 without a high-school diploma accounted for about two-thirds of the drop in the labor force, about 10 times the impact they should have had given their share of the population. More than half of those who dropped out were people over 55 years old. Most of them were white and likely Trump supporters.

What is the Fed and Yellen thinking? Inflation expectations are way down, as well as consumer sentiment; one of their red flags for incipient, future inflation that Fed hawks love to cite in their push to raise interest rates (read the banking lobby).

Graph: Econoday

The expectations component for future business looks better, up 7.3 points from April to 84.9, and that ultimately reflects confidence in the jobs outlook. But the 1-year inflation outlook fell another 1 tenth at month's end to 2.4 percent for a major decline of 4 tenths from April. Like the decline underway in business investment, the decline in inflation expectations could also derail chances for a June hike.

The real problem is the severe drop in capex, or capital expenditures, due in large part to declining oil production. Without business investment, jobs cannot continue to grow and full employment should be the primary goal of Fed policy, rather than fighting non-existent inflation.

A historical rule of thumb is that 2 percent inflation rate means 2 percent growth, whereas 3 percent inflation usually means 3 percent plus growth, and we should be shooting for a 3 percent plus growth rate, as in past decades.

This is while new orders for core capital goods, a reading that excludes defense goods and commercial aircraft, fell a very sharp 0.8 percent in data for the month of April. It is the third straight decline and the fifth out of the last six months in a string that has taken this reading to a five-year low. Year-on-year, orders are squarely in the negative column at minus 5 percent and are down 12 percent from their cycle peak in September 2014.

We need to encourage a bit more inflation, in other words, which in turn should improve profits and so encourage more job creation.

Harlan Green © 2016

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Thursday, June 2, 2016

What Happened to Tuition-Free College?

Popular Economics Weekly

Senator Bernie Sanders wants it. Until the Vietnam War, most public colleges and universities had it. So what happened to our tuition-free public universities and colleges?

UC Berkeley is perhaps the poster child to what has happened to the idea of tuition-free colleges and universities. It is something most other developed countries have for its citizens but no longer in the U.S. And tuition-free higher education—particularly for taxpayer funded public colleges and universities—was in the founding charters of most higher public educational institutions.

When I entered UC Berkeley as a freshman in the late 1950s my $300 scholarship covered the first year administration fees. There was no tuition. Today UC Berkeley charges a tuition fee of $13, 518 per academic year for California residents. Out-of-state residents have to add an additional $26,682 in tuition fees.

That is why students today have accumulated some $1.2 billion in student loan debt that averages up to $35,000 per the most recently graduate student in a recent Champlain College panel discussion convened on the subject.

· The total outstanding student loan debt in the U.S. is $1.2 trillion, that’s the second-highest level of consumer debt behind only mortgages. Most of that is loans held by the federal government.
· About 40 million Americans hold student loans and about 70 percent of bachelor’s degree recipients graduate with debt.
· The class of 2015 graduated with $35,051 in student debt on average, according to Edvisors, a financial aid website, the most in history.
· One in four student loan borrowers are either in delinquency or default on their student loans, according the Consumer Financial Protection Bureau.

As late as 1960 The California Master Plan developed under Chancellor Clark Kerr supported keeping the UC system tuition-free. How much has changed since then! It’s almost as if California has been made to pay for being the vanguard for anti-war and anti-establishment protests during the 1960s and 70s; when it was in wholesale rebellion against the policies of the Cold War, or any war.

Why the exorbitant costs for higher education today, and why is it so important to make higher education affordable to most Americans, something that the young people coming to Bernie’s rallies also want? The first answer is that it’s important to have a well-educated public for a functioning democracy.
And Senator Bernie Sanders has made it a central issue in his campaign. “In a highly competitive global economy, we need the best-educated workforce in the world, says Bernie on his website. “It is insane and counter-productive to the best interests of our country and our future, that hundreds of thousands of bright young people cannot afford to go to college, and that millions of others leave school with a mountain of debt that burdens them for decades. That shortsighted path to the future must end.”
There is also the skills’ shortage employers lament about today. College graduates have the highest employment rate and incomes (blue line in graph)—and the lowest unemployment rate; actually below today’s 5 percent unemployment rate. Whereas high school grads have something like a 7 percent unemployment rate, and comparably lower incomes.

It is easiest to blame then California Governor Ronald Reagan, who once inaugurated in 1966 began his attack on higher education. It was the beginning of the Vietnam anti-war protests, and he considered UC Berkeley a hotbed of socialism, and inimical to winning the Cold War.

It was also the beginning of his government-is-the-problem campaign by shifting state resources away from educating California’s students.—firstly, by cutting state funding for higher education, and calling in the National Guard to put down student protests.

But there were other reasons for abandoning The California Master Plan to educate all Californians tuition-free than the growing political polarization from the Vietnam War. Proposition 13 was passed in 1978 that limited property taxes, the main source of state and local education revenues.

Even then annual tuition and fees for Californians was just $630. The big fee increases began in the 1980s, when California enacted the three strikes law to fight the War on Drugs and began to build a record number of prisons. California’s prison population increased 500 percent between 1982 and 2000, according to historian Ruth Wilson Gilmore in her book, Golden Gulag.

The monies went elsewhere, in other words. The expansion of educational institutions stopped, despite the surging student population of baby boomers reaching college age. The result has been that state revenues now pay less than 16 percent of the UC University systems’ costs, and student tuition fees (and debt) now pay for the majority of education costs.

The UC system no longer educates the majority of Californians. This is when a recent McKinsey & Co. report predicts the U.S. workforce will need an additional one million well-educated workers by 2020, when most of the 80 million millennials, children of the baby boomers, have reached college age.

Then where will they be educated? From so-called for-profit colleges, which now make up some 25 percent of post-secondary institutions in the U.S. And they provide a much inferior education, as profit is their bottom line rather than a rounded education.

Bernie is right in this case. That cannot be, if we are to stay competitive with the developed world. It turns out government has to become the solution, the equalizer of opportunity as it once was, if we are to reduce the soaring inequalities of income and opportunity.

Harlan Green © 2016

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