Saturday, July 27, 2019

Economic Growth is Slowing

Financial FAQs

Gross domestic product, the official report card on the economy, grew at a 2.1 percent annual pace from the start of April to the end of June, the government said Friday. GDP slowed from a 3.1 percent gain in the first three months of the year.

American consumers don’t seem to care about signs of slowing growth in manufacturing and housing, as most can find good jobs and rising wages in the service sector of the economy, and they are flush with cash. The BEA reports disposable personal income increased $193.4 billion, or 4.9 percent, in the second quarter, compared with an increase of $190.6 billion, or 4.8 percent, in the first quarter. Real disposable personal income (after inflation is factored in) increased a very impressive 2.5 percent, compared with an increase of 4.4 percent in Q1.

But they are becoming more cautious about the future as the personal saving rate -- personal saving as a percentage of disposable personal income – is at 8.1 percent in the second quarter, compared with 8.5 percent in the first quarter, which are highs for this recovery.

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment, said the BEA. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in PCE and federal government spending.

Economists had been predicting the slowdown for some time, as businesses are investing less this year. Manufacturing is the culprit, as no one wants to invest more in plant and equipment with the ongoing trade wars, as we have been saying. There is too much economic uncertainty in China and the EU, and growth in the rest of the world is also slowing because of the overall decline in foreign trade due to the uncertainties, according to the IMF.

The surge in consumer spending was also predicted by the jump in retail sales reported last week. Retail sales rose in June for the fourth month in a row, quieting concerns that the trade wars and weaker manufacturing output would also drag down consumer spending. The most surprising strength in the report was a 0.7 percent jump in auto sales, which the only component of manufacturing seeing steady growth. Nonretailers (Internet), which continue to feed off of traditional retailers such as department stores, was also surprising with a 1.7 percent for the second month in a row.

So any further decline in GDP growth will probably be due to a slower accumulation of inventories and capital investments (as seen in the above capital-goods orders graph) and a growing negative imbalance in exports vs. imports with the decline in manufacturing.

If the Trump administration and Republicans would realize the damage confrontational trade wars and other fear-mongering policies do to GDP growth, they would end such tactics. But it is obvious they only see an upside in their continuing confrontation with allies and adversaries alike, which should come back to haunt them next year when the inevitable worldwide growth slowdown impacts US, and the Presidential election.

And guess what?  The price index for gross domestic purchases increased 2.2 percent in the second quarter, compared with an increase of 0.8 percent in the first quarter, which is a sign of looming inflation, and makes it more unlikely the Fed will want to lower their short term interest rates anytime soon.

Harlan Green © 2019

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Thursday, July 25, 2019

Home Are Sales Declining

The Mortgage Corner


WASHINGTON (July 23, 2019) – Existing-home sales weakened in June, as total sales saw a small decline after a previous month of gains, said the National Association of Realtors®. While two of the four major U.S. regions recorded minor sales jumps, the other two – the South and the West – experienced greater declines last month.

The problem is still not enough affordable housing. The demand is there for mid-range housing, as 56 percent of homes sold in less than 30 days, and unsold inventory is at a 4.4-month supply at the current sales pace, up from the 4.3 month supply recorded in both May and in June 2018; when there is normally a 6-month supply if supply and demand are in balance.

Total existing-home sales,, completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 1.7 percent from May to a seasonally adjusted annual rate of 5.27 million in June. Sales as a whole are down 2.2 percent from a year ago (5.39 million in June 2018).
“Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country,” said Lawrence Yun, NAR’s chief economist. Yun says the nation is in the midst of a housing shortage and much more inventory is needed. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said.
Yun said other factors could be contributing to the low number of sales, as well. 
“Either a strong pent-up demand will show in the upcoming months, or there is a lack of confidence that is keeping buyers from this major expenditure. It’s too soon to know how much of a pullback is related to the reduction in the homeowner tax incentive.”
 What are consumers doing with their high net worth? Many are remodeling, instead of moving. Existing-home owners are remaining in their homes much longer. The recent average is 10 years, when 4 years has been the historical average years of duration in the same residence.

There are slightly more first-time buyers this season with record-low interest rates. First-time buyers were responsible for 35 percent of sales in June, up from 32 percent the prior month and up from the 31 percent recorded in June 2018.

Construction of new houses also fell slightly in June and permits sank to the lowest level in two years, exacerbating the shortage and suggesting a sluggish U.S. housing market has failed to gain much momentum from lower mortgage rates.


Housing starts slipped 0.9 percent to an annual pace of 1.25 million last month, said the Commerce Department. That’s how many homes would be built in 2019 if construction took place at same rate over the entire year as it did in June.

Permits to build more homes, meanwhile, sank 6.1 percent to a 1.22 million pace, the government said Wednesday. That’s the lowest level since mid-2017.

And lastly, new-home sales also declined to a lower-than-expected 646,000 annual rate. The 3-month average is at 636,000 which compares unfavorably against a 673,000 peak in April.

This was still the highest sales for June since June 2007, and annual sales in 2019 should be the best year for new home sales since 2007, according to Calculated Risk, and suggests homebuyers haven’t let up on their enthusiasm to own a home, if they can afford one.

Harlan Green © 2019

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Tuesday, July 23, 2019

It's Up To the Consumers!

Popular Economics Weekly

Consumers are feeling good enough to keep the US economy from sinking into recession at the moment. The consumer sentiment survey edged up to 98.4 this month from 98.2 in June, according to a preliminary reading from the University Michigan.
“Consumer sentiment remained largely unchanged in early July from June, remaining at quite favorable levels since the start of 2017,” said survey chief economist Richard Curtin. “Moreover, the variations in Sentiment Index have been remarkably small, ranging from 91.2 to 101.4 in the past 30 months. Perhaps the most interesting change in the July survey was in inflation expectations, with the year-ahead rate slightly lower and the longer term rate moving to the top of the narrow range it has traveled in the past few years.”
Actually, sentiment has been fluctuating in that range for several years, per the FRED graph, as economic growth and employment finally ramped up in 2015 after the Great Recession, boosting consumer confidence.

Curtin believes that inflation expectations affect consumer confidence, as the survey indicates consumer expectations for growth and jobs (hence confidence) rise with a lower inflation rate. Hence the Federal Reserve mandate to keep inflation stable while low enough to enable growth.  So today’s ultra-low inflation (and interest rates) could be encouraging consumers to spend more.
“The Consumer Expectations Index falls as inflation expectations rise, signifying that consumers view higher inflation as a threat to economic growth,” he continued. “Higher inflation was related more frequently to rising interest rates and was associated with higher unemployment expectations.”
The Conference Board’s Index of Leading Economic indicators (LEI) that is a good predictor of economic activity over the next six months was not so optimistic.
“The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”
Why? Manufacturers’ new orders, building permits in latest housing starts survey, and the yield curve were negative. The interest rate spread between the 10-year Treasury note and fed funds rate has sunk to negative -0.31 percent, from a positive +0.56 percent last December. Long term interest rates sinking below short term rates is a sign of slower growth, since investors rush to buy longer term Treasury bonds as a safe haven if there is too much economic uncertainty, as is happening at present.

A simple way to fix the inverted yield curve problem is for the Fed to lower the fed funds rate again. But is that the right thing to do when retail sales are soaring, and June payrolls totaled 224,000 new jobs? The economy is booming, in other words, so the Fed would normally allow higher interest rates unless other forces are at work—such as White House tweets that are artificially boost stock prices (which enrich stockholders and corporate CEOs), rather than policies that would help Main St. workers—like a higher minimum wage, and better worker protections, and strengthening health care policies, which would promote longer term economic growth.

So in fact other sectors of the economy have to be boosted, if we are to continue in this ‘goldilocks’ growth cycle (i.e., not too hot or too cold). Consumers won’t continue to party, otherwise.

Harlan Green © 2019

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Monday, July 22, 2019

What Happened to Main Street?

Popular Economics Weekly


The main reason we have suffered from historically slow growth and stagnated wages since the Great Recession is in large part due to so-called trickle-down economics, the fallacy that concentrating most of the largess of economic growth on the private sector, and neglecting public sector growth in health care, environmental protection, education, R&D, and public infrastructure, for starters, means the US economy wasn’t paying forward its benefits for the next generations, as Senator Elizabeth Warren intoned at the beginning of her tenure.

It is the public sector that plants the seed corn for future, sustainable economic growth, which private businesses then utilize to create private sector jobs and profits. The US may have the greatest higher education and research facilities, but our elementary and high schools rank near the bottom in the developed countries.

We also rank much lower in health care and environmental protection, which lowers labor productivity and results in sicker workers. Isn’t it better for our country to improve the health and skills of workers (while paying them more) before we replace them with robots?

The Clinton administration made the most recent steps towards the goal of sustainable growth when it cut military spending and put a 2 percent annual increase limit on government expenditures that balanced the federal budget and actually created a surplus for four consecutive years—1996-2000.

But 9/11 and terrorism put the fear mongers back in charge and military spending surged, while public sector spending declined in those seed-corn sectors we spoke of. The result post-9/11 was that Fed Chairman Greenspan kept interest rates below the existing rate of inflation, which grossly inflated the housing market and resulted in the housing bubble.

GW Bush and Fed Chair Greenspan chose the less sustainable growth path when they cut taxes, reducing government revenues at the same time they had to pay for the wars on terror. Once again, budget deficits surged because government revenues declined, and we embarked on a path that led to the Great Recession.

We have the same lesson today. Conservatives and the Trump administration are lobbying the Fed to lower interest rates to boost stock prices further, inflating stock values that are already at record levels in the hopes that it will continue economic growth in the 11th year of this record economic expansion.

There were 224,000 private payroll jobs created in June, economic growth last year averaged 3.2 percent, and first quarter GDP was 3.1 percent this year already.

Unnecessarily low interest rates inflate deficits and asset bubbles if not invested wisely. We really need to grow the public sector and Main Street in whatever way it can be done. Gradually boosting the national minimum wage above the less-than-living-wage of $7.25 per hour would be a good start. Boosting Main Street benefits will do the most to create sustainable, enduring growth—by paying it forward to the next generations.

Harlan Green © 2019

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Thursday, July 18, 2019

Retail Sales Soaring

Financial FAQs

Retail sales rose in June for the fourth month in a row, quieting concerns that the trade wars and weaker manufacturing output would also drag down consumer spending.

The most surprising strength in the report was a 0.7 percent jump in auto sales. Nonretailers (Internet), which continue to feed off of traditional retailers such as department stores, according to Econoday, was also surprising with a 1.7 percent for the second month in a row.

And discretionary spending, such as for restaurants, was up 0.9 percent following prior gains of 1.0 percent, 0.7 percent, and 0.8 percent. “This shows that consumers, flush with confidence and fully employed, are enjoying themselves,” said Econoday.

The list of strengths goes on with both furniture and building materials snapping back with 0.5 percent gains that point to strength for residential investment. Clothing stores saw sales also rise 0.5 percent as did health & personal care stores.

More good news was today’s Federal Reserve Industrial Production report that showed renewed strength in manufacturing—particularly in motor vehicle production. It’s still far below last year’s manufacturing output, however, that was mainly due to the 2017 tax breaks that raised profits.

Manufacturing is by far the largest component in this report and June's results are almost uniformly strong, led by a 2.9 percent monthly rise for motor vehicle production and a 0.7 percent rise for selected hi-tech. Business equipment production posted a second strong increase at 0.5 percent that follows May's 0.4 percent rise in gains that should ease the Fed's concerns over business investment.

Construction supplies also show strength, up 0.5 percent and 0.6 percent in the last two reports in what are positive signals for construction demand that reinforces the increased furniture and building materials gains in retail sales.

One month’s gain in manufacturing does not constitute a trend, however. But consumers are flush and confident, so economists may begin to raise their growth forecasts if this trend continues.

Harlan Green © 2019

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Monday, July 15, 2019

Why Worry About Inflation?

Popular Economics Weekly

Almost everyone, including Fed Chair Powell, is worried about the low inflation rate.  It’s usually nearing 4 percent at this late stage of an economic recovery, not the current 2 percent if the US economy were running on all cylinders. Consumers should be spending more and businesses investing more to expand their markets—especially with the lowest unemployment rate in almost 50 years.

But the largest corporations don’t need to invest more. They have become fat and happy controlling their market share because they have been allowed to grow enough to buy up or stifle much of their competition. And with reduced competition they can spend most of their profits on stock buybacks and soaring CEO compensation packages.

Last Friday’s wholesale Producer Price Index indicated as much, with raw materials for finished goods and services barely budging. There is very little wholesale inflation on raw materials, in spite of the increased tariffs being levied on Chinese goods and elsewhere. This is a very strange because fewer less foreign trade should mean imported goods are more expensive, not cheaper.

The Producer Price Index for final demand advanced 0.1 percent in June, seasonally adjusted, reported the U.S. Bureau of Labor Statistics. Final demand prices moved up 0.1 percent in May and 0.2 percent in April. On an unadjusted basis, the final demand index rose 1.7 percent for the 12 months ended in June, the lowest rate of increase since advancing 1.7 percent in January 2017.

The real problem that Alexandria Ocasio Ortiz for one, highlighted in her questioning of Fed Chair Jerome Powell lzt week is why there is almost no inflation, even with a full employment rate of 3.7 percent? She wanted interest rates lowered sooner to boost higher growth, with some 6-7 million workers either not looking for work, or working part time, but would prefer working fulltime and earn a living wage.

Powell said the U.S. is suffering from a bout of uncertainty caused by trade tensions and weak global growth, but he pledged to do whatever it takes to shore up the economy in what Wall Street took as a sign the central bank will cut interest rates soon.

The retail Consumer Price Index fared slightly better. Year-on-year the core is up 1 tenth to 2.1 percent. Housing and medical care which together make up about 1/2 the index -- are also on the high side, said Econoday.

But outside the core, energy prices fell a sharp 2.3 percent on the month with the gasoline subcomponent down 3.6 percent. Energy prices, which are down 3.4 percent on the year, are not helping the Fed achieve its 2 percent inflation goal.

Trade wars are not really winnable anymore, as I’ve been saying; because we no longer live in a win-lose world where the strong are able to prey or even conquer the weak and vulnerable so easily. Our world has become too populous, and thanks to modern technologies too interlinked for it not to affect world trade upon which economic growth depends.

World trade is now in decline, which means US manufacturing and exports are in decline. So we hope US consumers keep spending, since they make up two-thirds of economic activity, if we grow at all this year.

Harlan Green © 2019

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Friday, July 5, 2019

Why the Huge Jobs Report?

Financial FAQS

The unemployment rate edged up to 3.7 percent from 3.6 percent as more than 300,000 people entered the labor force in search of work, the Labor Department said Friday. That has confounded those that see slowing economic growth in the second quarter, lowering odds the Fed will begin to drop short term interest rates that have boosted credit card and installment loan payments.
Both the unemployment rate, at 3.7 percent, and the number of unemployed persons, at 6.0 million, changed little in June, said the BLS. And the number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 4.3 million in June. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs.
Why, the ‘huge’ jobs gain?  In fact, these numbers tell us the US economy is still not at full employment, and most of the hiring is in the service sector that depends more on domestic demand than geopolitical and trade uncertainties.

Professional firms hired 51,000 workers; health-care providers added 35,000 jobs and transportation and warehouse companies boosted payrolls by 24,000. Shippers have been steadily adding jobs for years amid a boom in online shopping.

Construction companies hired 21,000 workers, while manufacturers' employment increased by 17,000. Both industries had grown more slowly this year and added relatively few workers because of the skilled labor shortage. Transportation and warehousing added another 17,000 jobs.

Because most of the hiring was in the service sector that has lower-paying, less skilled jobs, wage growth and inflation are still tame. The average wage paid to American workers rose just 6 cents to $27.90 an hour. The 12-month rate of hourly wage gains was unchanged at 3.1 percent, which is a low rate of gain at this stage of a recovery.
“Wage growth has tapered off recently despite the tightest labor market in decades, suggesting most workers have gained limited power in wresting higher pay from employers,” said MarketWatch. “Firms are also resorting to more automation to speed up production, keep costs down and get around a shortage of skilled labor.”
And state governments continue to hire as they ramp up their own infrastructure projects without waiting for the federal government to act. State and local government hiring brought on a 33,000 surge in public-sector payrolls.

So who knows when this business cycle will end—meaning when will US economic activity begin a downward slope? It hasn’t yet, in spite of the ongoing tariff wars and geopolitical uncertainties that have mainly hurt the manufacturing sector with the sharp cutbacks in exports and decline in world trade, as I mentioned in an earlier column.

But it hasn't yet affected the service sector, where consumers earn and spend most of their money.  This growth cycle won't end as long as consumers continue to spend, in other words.

Harlan Green © 2019

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Is Housing Market in Gradual Decline?

The Mortgage Corner

Happy 4th of July, everyone, even though it looks like we are nearing the end of this housing cycle; and maybe this business cycle as well.  But we can still celebrate what is now the longest recovery from any recession since WWII.

This Case-Shiller Home Price Index may summarize the housing market going forward. Its 3-month average of same-home prices has been declining since last year. The priciest housing markets like Seattle and San Francisco have risen the least, while Las Vegas and Phoenix that were hit the hardest because of overbuilding during the housing bubble show the sharpest increases.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.5% annual gain in April, down from 3.7% in the previous month. The 10-City Composite annual increase came in at 2.3%, up from 2.2% in the previous month. Las Vegas, said the report.

Phoenix and Tampa reported the highest year-over-year gains among the 20 cities. In April, Las Vegas led the way with a 7.1% year-over-year price increase, followed by Phoenix with a 6.0% increase, and Tampa with a 5.6% increase. Nine of the 20 cities reported greater price increases in the year ending April 2019versus the year ending March 2019.

Another marker is new-home sales, which feeds into the GDP report. It plunged in May, down to 626,000 annualized units, vs. 673,000 in April. Prices also fell sharply, down 8.1 percent on the month to a median $308,000. Year-on-year, the median is down 2.7 percent and right in line with the 3.7 percent decline in sales.

The reasons for its weakness are many. Fewer newly-adult Millennials—the largest population cohort—are buying homes because of soaring student debt and fewer entry-level homes on the market.

And consumer confidence is also sinking. The Conference Board’s Confidence Index just declined from 134.1 to 121.5 in June, a huge drop after two months of increases.
“The escalation in trade and tariff tensions earlier this month appears to have shaken consumers’ confidence," said the Conference Board. "Although the Index remains at a high level, continued uncertainty could result in further volatility in the Index and, at some point, could even begin to diminish consumers’ confidence in the expansion.”
Confidence in jobs also showed a slight decline, said the report, and may be a predictor of weakness in Friday’s unemployment report.

This may be a temporary blip, as the Federal Reserve has hinted that it may begin to drop short term interest rates at their July FOMC meeting. And mortgage rates are again at rock-bottom. So more consumers may reverse course and jump back into housing purchases.

They will face a declining supply, however.  Econoday summarized the current construction industry with these comments:

“Residential spending fell 0.6 percent in May and now shows declines each month this year. Compared to May last year, residential spending is down a very steep 11.2 percent. Single-family homes, the dominant category on the residential side, fell in May and are down 7.6 percent on the year. The one residential plus is new multi-family homes which, reflecting demand tied to high costs for single-family homes, are up 9.3 percent.
So if very low interest rates can’t sustain housing sales, what can? We seem to be nearing the end to this recovery from the Great Recession in its record-breaking 11th year.

Harlan Green © 2019

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Wednesday, July 3, 2019

Manufacturing Slows as Trade Wars Quicken

Popular Economics Weekly

Trade wars are not really winnable anymore—at least the way some world leaders conduct them—or any wars for that matter. This is because we no longer live in a win-lose world where the strong are able to so easily prey on or even conquer the weak and vulnerable.

The world has become too populous, and thanks to modern technologies too interlinked for modern economic bullies—like a Trump, or Russia’s Putin, or even China’s Xi Jinping—to succeed for long in their win-lose negotiating tactics based on perceived grievances.

And that is the reason Trump’s trade wars are failing. NAFTA is still NAFTA, because the U.S. depends so heavily on trade with Canada and Mexico. And now there are predictions that his China trade war will fail as well, because his policies are causing so many losses among his Midwest electorate, and now the US manufacturing sector.

Why are we even having trade wars with our allies, as well as adversaries?

We can thank UC Irvine economic professor Peter Navarro, a protectionist, anti-free trade advocate, for convincing President Trump that multi-lateral trade agreements that link us more tightly to our allies are bad for the U.S., including the 12-nation TPP, Trans-Pacific Trade Partnership, that was designed to curb China’s economic expansionism.

So Trump cancelled the TPP and began his trade wars with our allies in Europe, as well as Canada and Mexico, where the U.S. does most of its trade. The result has been slower growth everywhere, as has been cited in many studies.
“Trade growth, a key artery in the global economy, has also slowed markedly, to around 4 percent in 2018 from 5¼ per cent in 2017, said a recent OECD economic outlook report, “with trade restrictions having adverse effects on confidence and investment plans around the world. In Europe, trade growth has stalled, reflecting a slowdown in both external and internal demand. Leading indicators suggest that near-term trade prospects are weak. Survey indicators of new export orders remain low in China and continue to decline in Europe and many Asian economies.”

The U.S. has the Chicago ISM Business Barometer of business activity to measure such activity, a survey of more than 80 economic indicators that show a general national trend. It is giving similar results to the OECD outlook; slowing US growth as well.

The MNI Chicago Business Barometer decreased by 4.5 points to 49.7 in June from 54.2 in May, marking the first sub-50 reading since January 2017, said their press release. Business confidence dipped significantly in Q2, with the Barometer averaging 52.2, down 13 percent on the previous quarter and almost 16 percent lower than Q2 2018.

This month’s special question asked firms about the impact of government-imposed tariffs on their business. 80 percent of firms said that they were negatively impacted, with tariffs raising prices of their goods leading to a pullback in orders.

The June ISM manufacturing Index also fell to 51.7, the slowest pace in more than two years, hurt by trade tensions with China and Mexico. “Backlog orders continue to contract, inventories are coming down, delivery times are improving, import buying is flat -- all signs of weakness. Another disappointment is a 0.5 point decline in new export orders which are barely growing at 50.5,” said the report.

The LA Times has reported on other damage caused by the trade wars; the sharp decline in Chinese direct investments in US manufacturing that had been growing until last year’s start of the Chinese trade war. Investments shrank to $5 billion in 2018, after $29 billion in plant and equipment in 2017 and $46 billion in 2016, which had been responsible for thousands of new, higher-paying American jobs.

Such win-lose trade tactics are designed to fail, as skilled negotiators have been saying since the end of WWII, when allies and alliances have been necessary to keep the world peace (e.g., the Marshall Plan).
“…win-win negotiation involves working to get the best deal possible for yourself while also working to ensure that your counterpart is satisfied (see also, Win-Win Negotiations: How to Manage Your Counterpart’s Satisfaction), says an article in the Harvard Law School blog. “It means making offers that are good for them and great for you, according to Massachusetts Institute of Technology professor Lawrence Susskind. And it means thinking creatively about how you can get more of what you want by helping the other side get what she wants.”
An Eye-for-an-Eye Makes the Whole World Blind was Mahatma Gandhi's famous insight, patron saint of non-violence.

Most of the western world has progressed beyond that stage, at least, in this world of super abundance. We no longer suffer from starvation or famine in the developed world.  Only by helping those underdeveloped countries still suffering from overpopulation and droughts to enter the modern world will we be able to replace the belief in cut-throat competition of the win-lose crowd that sees conflict as the only solution, with the win-win world of cooperation, and a lasting world peace.

Harlan Green © 2019

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Monday, July 1, 2019

The Presidential Debates—Will Democracy Survive?

Popular Economics Weekly

Much of the media lament over the first Democratic Presidential debates was whether the Democratic Party had moved too far left on immigration and healthcare—whether it was about decriminalizing Central American immigrants crossing the border, or advocating some form of Medicare for all.

Could this allow the reelection of Donald Trump and bring about the decline, if not abolishment, of American democracy as we have known it post-WWII? Russian President-for-life Putin announced at the recent G20 economic summit that liberalism as we know it is now passé.

In an interview with the Financial times, Putin said the “liberal idea,” by which he meant the postwar dominance of democracy, human rights, multiculturalism and tolerance, had become “obsolete.”

Fear not, you lovers of Democracy, that isn’t true by a long shot. As much as oligarchs like Putin would like to find more worlds to pilfer, democracy cannot fail unless modern capitalism, the creation of post-WWII democracy, fails. And it won’t fail because it is the manna on which all nations now depend to sustain their citizens. There is no other economic system that will feed its citizens, as even China knows.

Modern capitalism was created out of the New Deal, with its government support of social programs and regulations that prevent capitalism’s worst excesses—such as unregulated capital markets and monopolistic profit-seeking,  causing the record income and wealth inequality that has brought on the discontent and enabled a President Trump.

It therefore behooves the Democratic presidential candidates, at least, to make the changes necessary to bring back some income parity and a greater social safety net, if for no other reason than it would reduce the souring suicide rates and gun violence that no other western democracy experiences.

How do we save a capitalism that doesn’t just cater to oligarchs like a Putin, or even China’s President Xi--who want capitalism that won’t allow dissent, and therefore the innovation necessary to nurture new ideas and inventions?

Senator Elizabeth Warren has thought out many new ways to make capitalism work for the many, and so democracy. The first step is to take back some of that wealth to strengthen the social fabric that was siphoned off to the wealthiest via lower taxes and deregulation causing many industries to become monopsonies—i.e., overly concentrated so they can control their markets, weaken social programs and employees’ bargaining power.

Warren would pay for her programs with a 3% wealth tax on fortunes over $1 billion, and 2 percent on fortunes between $50 million and $1 billion. According to University of California-Berkeley economists, it would raise about $2.75 billion over its first 10 years, all from taxpayers that the

Massachusetts senator argues have benefitted too much from a generation of tax-cutting that slashed top federal tax rates almost in half and corporate tax rates by 40 percent, accompanying a surge in inequality in both before-tax and after-tax income.

Other candidates like Senator Kamala Harris and Bernie advocate a return to the 70 percent income tax rate on the highest income earners, and an outright breakup of those corporations literally too big to fail; should we have another Great Recession.

How do these proposals benefit modern capitalism so that it benefits the many, rather than the few? Studies show that without public works programs, labor productivity declines, since not upgrading such as infrastructure slows transportation of goods and services. Reducing public health care and environmental protection sickens more people thus reducing work times. Reducing public educational programs and government R&D reduces overall literacy and scientific innovation, period.

There is good news on that front, as I have noted in past columns. Modern capitalism with its checks and balances has enabled the growth of prosperous middle classes at the heart of liberal democracies. No other economic system is able to produce the quantity of goods and services required for a healthy liberal democracy.

The club of rich democracies is not easy to join, per a recent piece in the Economist, but those who get in tend to stay there. Since the dawn of industrialisation, no advanced capitalist democracy has fallen out of the ranks of high-income countries or regressed permanently into authoritarianism.

This is not a coincidence, say Torben Iversen of Harvard University and David Soskice of the London School of Economics in their recent book, “Democracy and Prosperity”. Rather, they write, in advanced economies democracy and capitalism tend to reinforce each other, as I’ve been saying. It is a reassuring message, but one that will face severe tests in years to come.

In other words, taking government out of modern capitalism makes modern democracies weaker and more vulnerable to predictions from those who fear democracy, like Putin.

Harlan Green © 2019

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