What Is the New Normal?

 Popular Economics Weekly

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What will the future look like with the COVID-19 pandemic about to end, and a possible new cold war with Russia just beginning? It is a time when governments come to the rescue. We’ve seen it happening with the demise of COVID-19 due to the development of miraculous vaccines that only governments can research and fund.

But it also means consumers have been given more money to spend, which has resulted in the highest monthly inflation numbers since 2005.

The consumer price index jumped 1.2% last month, driven by the higher cost of gasoline, food and housing,  the government said Tuesday. It was the largest monthly gain since Hurricane Katrina in 2005 and resulted in the highest annual increase in 40 years, crimping the spending of consumers and investments of producers.

Scary as that may be, the FRED graph shows that it has been higher in 1974 and 1980 during the Arab oil embargos when it rose to 14 percent, per the FRED graph. Inflation is also happening with commodities such as wheat and oil because of the sanctions against Russia for invading Ukraine and threatening the West with nuclear weapons if NATO interfered with Putin’s wholesale destruction of another country.

We are also seeing how the EU, US and Japanese governments have come together to aid Ukraine. But all of this takes lots of money, which only governments can spend, as I said. It took $trillions to vanquish the pandemic, and we see with the proposed 2022-23 fiscal year budget of $5.8 trillion what must be done to keep the US on a strong growth path.

It really means the transfer of more wealth from the private sector via higher taxes to pay for programs that promote more jobs and protect Americans from economic disruptions that may be caused by the Ukraine war.

For instance, the proposed budget includes a so-called “billionaire tax” that would apply a minimum tax rate of 20 percent to both the income and unrealized capital gains of households with a net worth over $100 million. The tax is projected to raise $360 billion over 10 years — more than half of it from billionaires that have prospered the most since the Great Recession of 2007-09.

To emphasize that wealthy Americans can afford higher taxes, the Times interviewer mentioned that some 130 new American billionaires were created just from 2020 to 2021.

French economist Thomas Piketty, author of the best-selling Capital in the Twenty-First Century, and sure to be a future Nobel Prize-winner in Economics, stated recently in a NY Times Magazine interview, “…the period of maximum prosperity of the U.S. economy in the middle of the century was a period where you had a top income tax rate of 90 percent, 80 percent, and this was not a problem because income gaps of 1 to 100 and1 to 200 are not necessary for growth.”

The income gaps have risen to more than 300 to 1 for CEOs vs. their employees during the 1980s as inequality levels grew to what they are today. We cannot possibly pay for the programs needed to protect Americans if such levels of inequality continue. That is already happening with the 5.6 percent annual rise in average hourly wages, with transportation, leisure and retail trade employees’ average wages rising even faster, as we said last week.

I said last week that now isn’t the time to worry about inflation or the Fed engineering a soft landing, or any ‘landing’ at all. It is precisely during such uncertain times that we need elevated growth and a government that steps up, while partisan politics step down, even with an upcoming election in November.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Slowing Retail Sales?

Popular Economics Weekly

Graph: Econoday

Retail sales are slowing this fall, yet consumers’ confidence is at an all-time high with incomes finally inching above the inflation rate. Why are consumers saving more and buying less this season? It could be higher interest rates, as the Fed has raised short term rates 5 times, already, so that the Prime rate that determines credit card debt is now 5 percent when it was 4.25 percent one year ago.

Or, they see this recovery from the Greatest Recession since the Great Depression as not that impressive. August retail sales barely managed a 0.1 percent monthly gain as tracked in the blue column of Econoday’s graph. Retail sales are only about 1/3 of total consumer spending which are mostly services. Nevertheless, August's results are pointing to slowing for total consumer spending as tracked in the green bars and which will be posted at month end, when third-quarter GDP numbers are first released.

In fact, wages are rising for just the top one percent of income earners, according to Thomas Piketty, who should win the Nobel Prize in economics this year for his research on the real and growing income disparities in western countries. The U.S. is at the bottom of developed countries, because other developed countries offer far more in benefits; such as universal health care, paid maternity leave, and higher minimum wages that offset the income disparities.

His 2014 best-seller, Capital in the Twenty-First Century  pulled back the curtain on the rising wealth of the one percent due to their ownership of capital; the means of production; as described by Nobelist Paul Krugman in the New York Review of Books.

“Capital still matters; at the very highest reaches of society, income from capital still exceeds income from wages, salaries, and bonuses. Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality. But wage income at the top has also surged. Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.”

Then why are consumers so optimistic? The University of Michigan sentiment survey rose to 100.8 from 96.2 in July for the strongest showing since March this year, as well as since 2004. It has to be the ‘goldilocks’ growth consumers and employers are experiencing at present.

Economic growth is neither too hot nor too cold, as I said last week. Both retail CPI and wholesale PPI inflation indexes have been falling (i.e., prices not too hot), while it has become easier to find jobs with higher salaries (i.e., job market not too cold).

It does look like American consumers feel we are in a sweet spot, even though costs are now rising due to the new tariffs. Maybe it’s one last fling before the inevitable downturn when interest rates continue to rise and consumers can buy no more. But who knows when that will happen?

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

A Greater Lawlessness—Self Interest vs. The Common Interest

Popular Economics Weekly

Are we at the beginning of an era of Greater Lawlessness, or nearing the end with the greatest law breaking we may have seen in our lifetime? And are we at the beginning or end of the greatest wealth accumulation by the wealthiest, of another Gilded Age that last happened in 1900, at the beginning of the Industrial Age?

In a potentially bombshell report, CNN reported Wednesday night that the FBI has information that suggests members of President Donald Trump’s team may have colluded with Russian operatives to coordinate the release of damaging information in an effort to torpedo Hillary Clinton’s presidential campaign.

FBI Director James Comey had already testified in televised House hearings that the Trump campaign team was under criminal investigation for collusion with Russian intelligence operatives in trying to undermine the legitimacy of US elections and democracy in general.

Such interference by Russian and even Wikileaks has led to the election of possibly the most corrupt President in US history, with his refusal to divest himself of his assets that are creating countless conflicts of interest, as well as blatantly ignoring the emoluments clause of the US Constitution that prohibits presidents from being compensated by foreign governments.

How did the US, leader of the free and democratic world since WWII, become so weak and vulnerable that Russian hackers could help to elect Donald Trump, an openly pro-Putin ally who wants to implement the Kremlin’s own foreign policies and subvert those of the democratic western world?

We have had major lawbreaking by Presidents before with Nixon’s Watergate, which was a break into Democratic National Committee headquarters to steal their election plans. Sound familiar?

Then there was President Reagan and the Iran-Contra Affair in the 1980s, which entailed the secret shipping of some $8 million in weapons to Khomeini’s Iranian government to aid them in their Iraq war, and more than 250 criminal convictions of Reagan era office holders for law breaking.

This was in part because President Reagan considered government the problem, and therefore its laws and regulations to be subverted or ignored when inconvenient to his goals.

What were those goals? It’s in fact a long story, but one that can be summarized easily. Such a greater lawlessness of elected representatives and presidents in particular, began with the concerted push to transfer greater wealth to the already wealthy begun in the 1970s and catalogued best in Jacob Hacker & Paul Pierson’s Winner-Take-All Politics. It was the beginning of massive tax cuts, and gutting of labor protection laws, the backbone of middle class prosperity, which weakened labor’s ability to both organize and bargain collectively, and resulted in the massive globalization of the labor force.

These policies were implemented under the rationale that self-interest trumped the common interest championed by governments, and therefore those laws that supported public interest should be subordinate to private interests. Its ideologues and supporters advocated an economic program called trickle-down economics that maintained the owners of capital knew best how to run a country and create the greatest prosperity for all with only the most minimal government regulations and protections, in order to maintain US leadership as a world power.

This led to the abuses of the housing bubble and wholesale loss of middle class wealth from overleveraged Wall Street, a shadow banking system, and failure of financial institutions such as Lehman Brothers that bankrupted millions of ordinary workers.

It led to the Great Recession, which did as much damage to the US economy as the much longer Great Depression, but without the leadership of an FDR and Francis Perkins, his Labor Secretary, who created most of the modern social safety net, including social security and the Fair Labor Standards Act, the first minimum wage and overtime laws for American workers.

It has also led to the greatest income inequality since the beginning of the Great Depression in 1929, which in turn led to the polarized electorate we have today. There is very little left of the middle class created after WWII that grew due to New Deal legislation that protected unions and collective bargaining, funded early education and government research that gave US the technological edge.

Under the aegis of a revolt against globalization, we have instead elected those who believe healthcare should be restricted only to those that can afford it, a government so diminished that it no longer is able to protect the environment, educate all in public schools and tuition-free public universities, or protect the public from Wall Street excesses, (which means another recession is inevitable).

All this could only have happened with the greater lawlessness we have today that a president and White House make no attempt to hide. President Trump seems to believe in the Mafia code, a code that trusts only his family and closest associates, where the only honor is the honor among thieves, some of whom are turning out to be Russian oligarchs whose stolen wealth he is more than happy to launder in his various real estate holdings.

CNN, basing its report on unnamed U.S. officials, said the evidence is largely circumstantial and is not yet conclusive, though the investigation is ongoing and is now focusing on the possibility of that collusion. The FBI’s information is based on “human intelligence, travel, business and phone records and accounts of in-person meetings,” CNN said.

Rep. Adam Schiff (D-Calif.) went a step further Wednesday, telling MSNBC “there is more than circumstantial evidence now” of collusion with Vladimir Putin’s Russia.

So is this the beginning, or the end of an era of rampant lawlessness that began almost 50 years ago, and that few of the lawbreakers have paid for, from Presidents to Wall Street financiers?

Maybe the various investigations will help is to understand what has happened to the no longer United States of America?

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Who Killed Our Middle Class?

Popular Economics Weekly

It’s becoming clear that our Middle Class—the midsection of U.S. earners and consumers—has shrunk alarmingly. And this is the main reason for the political polarization today that in the words of journalist Christopher Hedges, has driven the Republican Party “insane”.

Our society has become so polarized that Donald Trump needed the support of the Ku Klux Clan, white nationalists, and Vladimir Putin to become President-Elect. Whereas it has been the Middle Class values of probity, honesty and a belief in science, first satirized in Moliere’s Le Bourgeois Gentilhomme, (The Middle Class Gentleman), that has been the stabilizing influence in American politics since WWII.

The main difference between poverty and middle class and between middle class and wealthy, noted one researcher, “is belief in, and planning for, moving up as a working assumption.” A report from the Pew Research Center found that, for the first time since the 1970s, families defined as “middle income” are actually in a minority in the US – squeezed from both ends by an enlarged poverty-stricken group below them, and an enriched group above them.

Graph: Fortune Magazine

This graph shows the shrinkage of those defined as middle class from 1979 to 2014—from 38.8 percent (gray line) to 32.09 percent (blue line), according to a Pew research study. The shrinkage reads like a textbook example of the future that French economist Thomas Piketty predicts for the world in his best-selling, Capital in the Twenty-First Century.

In 1971, there were 80 million households in the US defined as middle income – compared with a combined 52 million in the groups above and below. Now, there are 120 million middle-class families, but 121 million rich and poor – “A demographic shift that could signal a tipping point,” says Pew.

So who or what is at fault for the result; record income inequality last reached in 1929 that led to the Great Depression? We can fault President Reagan, who was first to break the unions with his firing of all federally employed Air Traffic Controllers that belonged to PATCO, the traffic controllers union.

Or conservatives’ espousal of the Reagan motto, “government is the problem,” which caused massive downsizing of government regulation, as well as regulators, and the ensuing de-regulation of whole industries, such as the airlines, telecommunications, and financial markets.

But the truth may be much closer to the present—in fact, from the Presidency of Bill Clinton. For it was President Clinton who veered so far to the right in his 1966 reelection campaign (thanks to Republican strategist Dick Morris) that he preempted the Republican platform by continuing to deregulate the financial markets with the repeal of the Glass-Steagall Act that separated FDIC depositor-insured banking from higher risk investment banking, financing the addition of 100,000 more police to combat the drug epidemic, and downsizing poverty programs with welfare reforms that took tens of thousands off the welfare rolls, which required them to take low-paying menial jobs to receive even a limited amount of financial support.

The Republicans, as Chris Hedges said, were thus driven politically insane into the waiting arms of Trump's rascist, anti-immigrant voting block. President Clinton had preempted the bread and butter issues (such as law and order, smaller government, family) that were once their own, which led to formation of the Tea Party, and a new political civil war declared on Big Government ruled by the northern elite that had ruled for so long. It was our 150 year-old Civil War taking a new form, in other words, but with almost the same mix of combatants.

Hillary Clinton, unfortunately, wasn’t able to break away from the Clinton mix of conservative economics (e.g.,balancing the federal budget) and social liberalism that resulted. The culture wars against abortion, civil rights, and welfare (including Obamacare) were the only issues the Republican Party had left. The result was and is President-elect Trump, an ideologist of neither party. Trump is an advocate of no government, where possible, who can count on the loyalty of only his most trusted associates and family.

Sound familiar? It is politics of the tribe, the close=knit family, held by gangsters and oligarchs, with everyone else to be treated with obfuscation and outright deceptions.

Even more significant is the record inequality since 1979, resulting from the loss of those policies that built up the middle class after WWII, policies from the New Deal, such as social security and Medicare, entitlements, unionization of whole industries, leading to the unparalleled prosperity of the 1950s and 60s.

So let us hope a majority of our politicians realize, as a majority of Americans still do, that our prosperity and stability rest on a middle class that hasn't given up hope for a better life.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What Happened to Link Between Profits and Productivity?

Popular Economics Weekly

What’s the link between profits and productivity, on which economic growth is based? It has broken down of late, so that profits are no longer used to enhance productivity. And without higher productivity, we see the standard of living for most of US no longer rising.

Labor productivity has to do with the amount of output per worker, which in turn depends on the amount of capital expenditures (capex spending) on plants and equipment. The current tepid economic recovery that has averaged slightly above 2 percent GDP growth has been attributed in large part to lower labor productivity.

So why, with corporations making record profits over the past 2 years as a percentage of GDP (accompanied by today’s comparatively low tax rates and large tax loopholes) aren’t corporations investing more in productivity that would enhance their profits as well?

In fact, such record profits seem to have created a different investment environment, one that is conducive to what Nobelist Robert Stiglitz calls monopolistic behavior last seen during the Gilded Age of the early 1900s.
Monopolistic behavior means that businesses and even whole industries prefer to keep themselves in power by amassing more wealth for their shareholders and executives, rather than invest those profits to also benefit their employees and the public domain.

The result is lower investments in productivity, made mostly via investments in capital, or capex spending. And studies show increased capex spending does boost productivity, as historically higher profits have in the past boosted capex spending.

A 1964 NBER working paper by economist Robert Eisner highlighted that fact. “The historical correlations are indeed indisputable; periods of high capital expenditures have been periods of high profits and periods of low capital expenditures have been periods of low profits.”

(Therefore)“…I would suggest that capital expenditures are undertaken in the pursuit of profits, or perhaps in order to reduce the risk associated with expectations of profits…I would view the rate of investment demand as related to the expected profitability of investment, something which is quite different from past or current profits.”

So during this period of the highest corporate profits as a percentage of GDP and GDI in history, corporations have been hoarding their profits. This has to change; firstly, because so many working-age adults are still out of work some 7 years after the end of the Great Recession.

And secondly, a return to another Gilded Age, also warned by economist Thomas Piketty in his epochal Capital In the Twenty-First Century, means another era of high income inequality, and so a period with greater economic instability. This happened during the Great Recession, due in large part to a record income inequality last seen in the run up to the Great Depression.

Both private industry and governments have to invest more in R&D research, for starters. An early reading of the April service-sector PMI Flash Index showed growth in new orders, hit by weakness in investment spending, continues to slow and is among the weakest readings in the 7-year history of this series. Respondents in the sample say clients are unwilling to commit to new projects. 

And though the April Durable Goods orders just out were strong (i.e., goods that generally last more than 3 years), a negative in the report is a sizable 0.8 percent decline in core capital goods orders which ominously is the third straight decline for this reading and the fifth out of the last seven reports. Year-on-year, orders are noticeably in the negative column at minus 5.0 percent. These readings point squarely to stubborn weakness in business investment and uncertainty in the general business outlook, said Econoday.

How does this explain today’s actions of those corporations with huge profits that aren’t investing in their future growth? Actually, it can. For, if businesses find more ways to line their pockets, such as using financial engineering by speculating in markets—i.e., either by hedging commodities or stock buybacks—then they will neglect to make money the old fashioned way by creating new products and services.

A recent Reuters Special Report entitled, The Cannabilized Company, said that in the most recent reporting year, share purchases reached a record $520 billion. Throw in the most recent year’s $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than the companies’ combined net income of $847 billion.

And it confirms the cost; reduced innovation spending in new products that would boost future productivity. “…among the approximately 1,000 firms that buy back shares and report R&D spending,” said Reuters, “the proportion of net income spent on innovation has averaged less than 50 percent since 2009, increasing to 56 percent only in the most recent year as net income fell. It had been over 60 percent during the 1990s.”

Thus, maximizing shareholder value with stock buybacks has “concentrated income at the top and has led to the disappearance of middle-class jobs. The U.S. economy is now twice as rich in real terms as it was 40 years ago, but most people feel poorer,” said Reuters

A good example of this practice is tech icon IBM. CEO Sam Palmisano left in 2011, having received more than $87 million in compensation in his last three years at the company. Meanwhile, revenue declined for the past three years, and earnings have fallen for the past two. The stock is down a third from its 2013 peak, while the S&P 500 has risen 34 percent. To rein in costs, IBM has cut jobs. It now employs 55,000 fewer workers than it did in 2012.

Thus it turns out maximizing stock prices is neither maximizing shareholder value nor longer term profits—since it only benefits the few. Should this be the sad fate of American business? No one likes to give up power—not our major corporations, certainly—power that was built up over the past 40 years of consolidation and reduced regulation.
But such record income and opportunity inequality cannot continue indefinitely. This is what revolutions are made of.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Baltimore and the Lessons of Inequality

Financial FAQs

David Brook’s most recent New York Times Oped talks about the dissolution of social bonds in Baltimore neighborhoods. “Even in poorest Baltimore, there once were informal rules of behavior governing how cops interacted with citizens,” he says in quoting The Wire Producer David Simon, an awarding winning TV series of life in a Baltimore ghetto: “…that’s happened across many social spheres…in schools, families and among neighbors. Individuals are left without the norms that middle-class people take for granted.”

The problem is there is no longer a majority of the middle class, which has been decimated most recently by the busted housing bubble, but over a much longer period by the loss of those jobs dominating the post WWII economy that migrated overseas and blighted cities and even suburbs as a consequence.

And without a substantial middle class, those middle class norms will no longer regulate social behavior. The result of no accepted social norms is social chaos, as we have been seeing in the riots, hence the bullying tactics of police against those most affected by the loss of jobs and educational opportunities in trying to restore a semblance of order, the poorest among us.

In fact, the Baltimore riots are the result of an economic system that can only be described as broken, where the bullies win, everyone else loses. We are living the result of economic and political policies that have created the greatest income inequality since 1929 and the Great Depression. Yet no one, including David Brooks, wants to face that fact.

Thomas Piketty’s Capital in the Twenty-First Century, described the result of such inequality in earlier centuries, such as Europe’s pre-WWI Belle Epoque era, where inherited wealth was the main path to upward mobility, and Oligarchies ruled.

The U.S. path to such inequality was the concerted push of Big Business and Wall Street to weaken labor laws and trade treaties that allowed American businesses to both automate the workplace and move many jobs overseas, well documented by Jacob S. Hacker and Paul Pierson’s Winner Take All Politics, How Washington Made the Rich Richer—and Turned Its Back on the Middle Class. Those jobs, the core of middle class incomes of the 1960s and 70s, went to foreign lands where costs were cheaper and labor laws nonexistent. The result since then has been stagnant or shrinking household incomes for everyone but the top income brackets that rely on capital gains and stock options, or gaming the financial system.

The epidemic of police killings of African American males is just the result. It is plain for all to see, whether in Ferguson, where the best blue collar jobs now belong to law enforcement with the closing of several auto factories, and the police force is more than 80 percent white, wherever poverty has become endemic. "It's a shortage of everything," said Shermale Humphrey, a 21-year-old who joined the protests in a recent LA Times article. "It's a shortage of jobs. Of African Americans on the police force and in government. Of people not being able to get a good education."

It is a bully mentality that has permeated our government, as well, where education spending has been cut drastically, which hurt the Ferguson school system, in particular. One reason why many families moved to these suburbs in the first place was a decent school system, better than in downtown St. Louis. However, two north county districts — including the one where Michael Brown graduated from high school in May — have lost their state accreditation in recent years. The district Ferguson shares with a neighboring town remains accredited but scores low on state tests.

Since 2000, the median household income in Ferguson has fallen by 30 percent when adjusted for inflation, to about $36,000, said the LA Times. In the census tract where Michael Brown lived, median income is less than $27,000. Just half of the adults work, yet benefits such as food stamps have been cut drastically.

All of these cutbacks in government spending in particular, and not just due to the Great Recession, has weakened our own economy considerably and delayed a full recovery from the Great Recession. Measures such as TARP and ARRA that saved many banks and stimulated economic growth until 2010, were terminated when anti-government conservatives took over Congress and did everything they could to lower taxes on the wealthiest, starving government programs of funding necessary to revive economic growth.

Ferguson and now the Baltimore riots exemplify what has happened to the lower economic classes. For U.S. economic growth has gradually declined since the 1980s, in particular, when maximum income tax brackets first declined from 70 to 40 percent, and the policies of those who intone ‘Government is the Problem’ have eroded the rights and wealth of the majority of Americans.

Whether it is instituting right to work laws in those states that have lowered incomes by blocking collective bargaining and discouraging union organizing, or unlimited campaign financing that enhances the power of corporations, or restricting Obamacare in those states that won’t set up their own exchanges for the poorest, these policies have weakened our own economic system, so much so that social chaos has resulted.

That is why such middle class values that are based in large part on financial stability are no longer the norm. The huge transfer of wealth that began in the 1980s, and the wholesale deregulation of industries that accompanied the transfer, has allowed U.S. corporations to hire and fire as they please, generating record profits, without passing on some of the benefits to their employees. It has destroyed the middle class and all it stood for.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Political Consequences of Inequality

Financial FAQs

Paul Krugman recently highlighted the dangers of Europe’s austerity policies and the growing inequality of the developed world, the worst since the Great Depression. The result then, as now, has been the growing strength of right wing parties in Europe, such as Marine Le Pen’s National Front in France, and Hungary’s Jobbik Party; all rascist, anti-immigration parties calling for some form of independence from the European Union.

“Look at France, where Marine Le Pen, the leader of the anti-immigrant National Front, outpolls mainstream candidates of both right and left. Look at Italy, where about half of voters support radical parties like the Northern League and the Five-Star Movement. Look at Britain, where both anti-immigrant politicians and Scottish separatists are threatening the political order.”

And now we have upcoming Greek elections that threaten to derail the euro as the EU’s currency, or if the favored Syriza party wins, Greece will demand at the very least to renegotiate its austerity agreement with the EU.

“And the devastation in Greece is awesome to behold,” says Krugman. “Some press reports I’ve seen seem to suggest that the country has been a malingerer, balking at the harsh measures its situation demands. In reality, it has made huge adjustments — slashing public employment and compensation, cutting back social programs, raising taxes. If you want a sense of the scale of austerity, it would be as if the United States had introduced spending cuts and tax increases amounting to more than $1 trillion a year. Meanwhile, wages in the private sector have plunged. Yet a quarter of the Greek labor force, and half its young, remain unemployed.”

These austerity policies are keeping Eurozone unemployment still in the double digits, with France’s rate still above 10 percent, (whereas Germany’s is 5 percent), and that is unacceptable to growing nationalist movements in particular that want to break away from the European Union.

The results are a growing income inequality that the World Economic Forum’s Global Agenda Councils name the top threat to global stability in 2015.

“While wealth is rapidly increasing in developing nations, and advanced economies struggle with stagnation, there is great concern about rising economic inequality in all parts of the world, particularly in Asia, according to the Global Agenda survey. The Outlook 2015 report suggests renewed focus on improved education, tax policy and job creation as ways to alleviate the problem.”

It turns out that much of the nationalists’ support is coming from Vladimir Putin’s push to destabilize Europe for its opposition to his annexation of Crimea and parts of Southern Ukraine. But don’t blame it on Putin, who is just taking advantage of European policymakers protecting their own economies, instead of the overall EU economy. Rather than spend more money to stimulate growth, as the U.S. Federal Reserve has done with its QE purchases, they want to balance their budgets and thus favor the creditors, when it is Europe’s debtor nations that need relief, if they want to break out what could become a deflationary spiral.

It’s the old story that Thomas Piketty has retold in his Capital in the Twenty-First Century—the tendency of profits from capital in western, free market economies to rise to the top of the wealth ladder when government policy making is weakened and financial regulations ignored, as happened during the Great Recession.

Europe is now suffering the same fate, with conservative governments in control and the debtor nations such as Greece still being punished, while Germany flourishes as it protects its own interests rather than that of the EU as a whole.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Who Are the Real Takers?

Popular Economics Weekly

We have been there before. The Census Bureau reported that the poverty rate fell in 2013, the first drop since 2006. It fell to 14.5 percent, down from 15 percent in 2013, but 45.3 million people are still living at or below the poverty line, which for a family of four was $23,834.

Then who are the real "takers" that have held up economic growth and more jobs? It's can’t be the 47 percent that conservative polemicists and many of the 2012 presidential candidates maintained didn't pay federal income taxes. Three-quarters of entitlement benefits written into law in the United States go toward the elderly or disabled. That's according to the Center on Budget and Policy Priorities.

And it’s more than 90 percent of entitlement benefits when working households are included. Only about 9 percent of all entitlement benefits go toward non-elderly, non-disabled households without jobs (and much of that involves health care and unemployment insurance)

We should really be looking at those whose incomes have soared due to their success in slashing their own tax bills during difficult economic times, while blocking government job creation that would employ more of the 47 percent. The top 1 percent has taken 97 percent of income growth since the end of the Great Recession.

This is the first statistically significant decline in poverty since 2006 (and only the second since 2000). But the rate remained well above its 12.5 percent level in 2007 and even further above its 2000 level of 11.3 percent. At last year's rate of improvement, we would need to wait until 2018 for it to fall to or below the 2007 pre-recession level, and until 2020 to fall below the 2000 level, according to the Center For Budget and Policy Priorities.

Why do we have such a high poverty rate 5 years after the end of the Greatest Recession since the Great Recession? Who are the real takers that have not only created the greatest income and wealth inequality since the Great Depression that has created such dire poverty, but weakened our economy and power to maintain democratic values in the world?

FDR in his second inauguration speech said, “The test of our progress is not whether we add more to the abundance of those who have much, it is whether we provide enough for those who have too little.”

For starters, the red states controlled by Republicans have fought to downsize almost all government funded programs such as Medicare, food stamps, and Obamacare, yet they receive the largest share of government benefits, says Wallet Hub, a consumer finance blog.

For instance, South Carolina receives $7.87 for every $1 it pays in taxes. Mississippi and New Mexico, two of the most Red states, are ranked 40 out of 50 states in receiving the most in federal benefits, yet consistently vote for conservative policies that seek to limit government spending and benefits. And that includes badly needed spending on education, deteriorating infrastructure, and environmental regulation, all of which would provide more jobs in the underemployed U.S. economy.

This is an issue of our time, as we come severely weakened out of the Greatest Recession since the Great Depression. The takers are those who want it all, and the evidence is there for all to see—a weakened economy and a government lacking the powers to “stop evil and do good”.

“Nearly all of us recognize that as intricacies of human relationships increase,” said FDR in 1936 at the height of the Great Depression, “so power to govern them also must increase—power to stop evil; power to do good. The essential democracy of our nation and the safety of our people depend not upon the absence of power, but upon lodging it with those whom the people can change or continue at stated intervals through an honest and free system of elections.”

And so the real takers are also those who support ALEC, the American Legislative Exchange Council, or the Koch Brothers’ Americans for Prosperity that boilerplate legislation that has restricted voters’ rights by passing voter ID laws, restricting voting hours and anti-union collective bargaining, which are fundamental rights in any democracy.

It is mainly those conservative polemicists and presidential candidates who damn government in order to better their own financial position. And they have succeeded in lowering the maximum marginal tax rates from 92 percent during the Eisenhower presidency to its current low of 39 percent.

They have been so successful in taking from the wealth created by the many that the richest 10 percent now control some 50 percent of U.S. wealth, and most of the incomes growth since the end of the Great Recession, as we said.

Thomas Piketty, in his best-seller, Capital in the Twenty-First Century, perhaps said it best in attempting to explain why income and wealth inequality has worsened so much, brought about by lower taxation of the wealthiest.

“…the spectacular decrease in the progressivity of the income tax in the United and States and Britain since 1980, even though both countries had been among the leaders in progressive taxation after World War II, probably explains much of the increase in the very highest earned incomes,” he said.

Why lower taxation? Piketty explains it thusly. “Our finding that skyrocketing executive pay is fairly explained by the bargaining model (lower marginal tax rates encourage executives to bargain harder for higher pay) and does not have much to do with higher marginal productivity.”

There are several ways such record inequality slows growth. Firstly, growth is powered by what is called aggregate demand, the demand for goods and services that consumers, government, and investment generates. And since consumers power some 70 percent of economic activity and governments another 20 percent, when their spending declines, so does economic growth.

It is this record inequality that was the main cause of both the Great Depression and Recession, as declining incomes and cutbacks in government spending drastically reduced the demand for those goods and services. The years 1929 and 2010 were the years of greatest income inequality and greatest economic instability, according to Piketty and research partner Emmanuel Saez.

And economic growth has been steadily declining over the past 3 decades. It has averaged just 2 percent since the end of the Great Recession in 2009. There are numerous studies, including by the International Monetary Fund and Nobelist Joseph Stiglitz among others, that affirm the negative effect on growth of such inequality.

In fact, a recent IMF report said that “inequality can undermine progress in health and education, cause investment-reducing political and economic instability…which tends to reduce the pace and durability of growth."

So if we want to preserve our democracy, and help other countries towards greater democracy (instead of breeding more terrorism), we can no longer afford to allow the real takers to continue to take it all. The world has become too dangerous.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Have a Higher Minimum Wage?

Popular Economics Weekly

The International Monetary Fund just came out with a depressing prognosis for US economic growth—2 percent this year, and maybe 3 percent next year? Why? A too bad winter, slowdown in the housing market, and stagnant wages.

Graph: Trading Economics

But both housing and economic growth in general are dependent on growing incomes. So we need a higher minimum wage, for starters. Some of the richest cities are doing that. Seattle raised its minimum wage to $11 per hour. But overall household incomes aren’t rising faster than inflation, and congressional Republicans are resisting any raises, even though it would benefit the poorest states they control.

In fact, both household incomes and inflation are also rising just 2 percent per year, when they would need to rise 3 to 4 percent to boost growth and lower the unemployment rate further, currently 6.3 percent.

We only have to look to countries with a higher minimum wage to see what a difference it makes. Australia’s minimum wage is now $16.35 per hour for fully employed adults, whereas ours is still $7.25 per hour, nationally. And so Australia’s growth rate is averaging 3.5 percent per year. If we achieved that growth rate again, social security would be solvent as far as we can look into the future, say economists.

Graph: Trading Economics

More evidence that higher wages stimulate growth comes from comes from many sources, including Thomas Piketty’s Capital in the Twenty-First Century, that documents 2 centuries of income and wealth transfers, and the return to historical levels of income inequality that is hurting economic growth.

And a new paper argues inequality is not only bad for those at the bottom. It is also bad for economic growth as a whole and a major reason why the recovery from the Great Recession has been so weak.

It is synopsized in a Washington Post article that attacks inequality vs. economic growth directly. Barry Z. Cynamon and Steven M. Fazzari, economists working with the Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis, say that stagnant income for the “bottom 95 percent” of wage earners makes it impossible for them to consume as they did in the years before the downturn.

Graph: St. Louis Fed

Consumer spending which drives 70 percent of the U.S. economy, dropped sharply during the recession (gray column in graph). And while it has picked back up in the years since for the top 5 percent of wage earners — which the Census Bureau defines as households making more than $166,000 a year — “there is no evidence of a recovery whatsoever for the bottom 95 percent,” Fazzari said.

Raising the minimum wage isn’t the best answer, of course. Creating programs that promote more jobs is the best answer to boosting wages and salaries of the 95 percent. And that has to start with government that needs to replace and repair our ageing roads, bridges, and all public infrastructure, for starters.

That’s because our private sector banks and corporations are still hoarding their cash reserves, or sending them overseas. It’s more than $5 trillion at last count, and that means a real loss of wealth and jobs for those Americans that need it most.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen