Defeating The Greater Lawlessness

 Popular Economics Weekly

“The Republicans’ hunger for power has now reached such a point that they have selected and continue to support a president who has lied and cheated his whole adult life; from Trump Casinos to Trump Towers, from stiffing bankers and his workers to cooking the books.” H Green/Huffington Post

NYTimes

We knew as long ago as Nixon’s Watergate that the Republican Party harbored a lawless tendency when it suited them. Why else would President Reagan engineer the illicit Iran contra arms deal with Khomeini, or President GW Bush invade Iraq when UN inspectors already knew Saddam Hussein had destroyed his weapons of mass destruction a decade earlier, I said in 2017?

Now we have illegal tariffs and an unpopular war with Iran, one that will drive inflation even higher and might take years to return to the Federal Reserve’s 2 percent target to fulfill its mandate of full employment with stable prices.

The result? Another recession, sooner or later, as happened during Presidents Reagan (2) and GW Bush terms. In Bush’s case, he managed to turn four years of Clinton budget surpluses (1996-2000) that could have kept social security and Medicare solvent for decades into a worldwide Great Recession (2008-09), the worst since the Great Depression, according to most economists.

President Trump’s Republicans are following the same path with his huge tax cuts while borrowing $trillions to fight his wars, cutting public services to the bone and closing whole departments by firing more than 300,000 federal employees.

Republicans have doubled down on their lawlessness by allowing his illegal wars and tariffs, and maybe what could precipitate the next recession; their determination to deport as many undocumented immigrants as possible without allowing them due process or a legal pathway to citizenship.

Immigrants are taxpayers that add workers to our shrinking population, and their loss is depriving our economy of essential services—agricultural workers that supply our groceries, for starters, but also a large part of construction, healthcare, transportation and lower paying service workers in leisure and hospitality.

This can only be done because Trump’s Republicans either ignore or disregard the civil laws, as well as economic laws, and even the constitution in their hunger for power. This is impoverishing more Americans, not to speak of turning a blind eye to the illegal enrichment of the Trump family and their supporters.

What can be done to return the $trillions in wealth and power that Republicans have taken away from the American people via their massive tax cuts to corporations and wars that were never paid and ignore the most basic rules of capitalist enterprise, such as debts must be paid, contracts and treaties honored?

The sad fact is that the Iran war wasn’t necessary because President Obama had already negotiated a nuclear arms agreement with Iran and Trump’s tariffs have been mostly based on ignorance of foreign trade tradeoffs, not unfair trade practices.

The history of greater lawlessness and hunger for more power is leading to a massive disruption in foreign trade which is the life blood of the world’s economies. It is repeating the mistakes that choked off world trade in 1930 and led to the Great Depression.

The question is how much longer will consumers and voters tolerate the record of Republicans’ failures that have led to four recessions just since 1980 that were the result of their hunger for more power?

Polls are showing that ordinary Americans are beginning to understand what it means.

Harlan Green © 2026

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

Will Fannie and Freddie’s Investors Finally Succeed?

Financial FAQs

It is welcome news for Fannie Mae and Freddie Mac investors that Judge Margaret Sweeney in the Federal Claims Court in Washington Tuesday granted a motion that will force the U.S. Treasury to release all discovery document materials in its possession that pertain to the decision to take Fannie Mae and Freddie Mac into conservatorship.

Why? Because the White House, US Treasury, and Federal Housing Finance Authority have been stonewalling discovery requests by investors who want to know exactly why the GSEs were put into conservatorship in the first place.

This is important for several reasons—not least is the reputed $36 billion in preferred Fannie stock alone that was ‘taken’ by the government when it claimed Fannie and Freddie were in danger of collapse, and so had to be recapitalized with government support to the tune of $186 billion.

But that has been paid back in spades, and the GSEs are not being allowed to recapitalize. This is when commercial banks that were granted some $350 billion in TARP funds by the same Republican Treasury Secretary under GW Bush (Henry Paulson, former Chairman of Goldman Sachs) were allowed to be recapitalized. So Wall Street benefited, but not Main Street homeowners that for the most part still depend on Fannie and Freddie to guarantee most home loans.

Instead, due to a last minute (2012) ‘tweak’ to the original conservatorship order, all profits go into the Treasury’s General Fund, which has raised suspicions that Treasury is behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders, at least. How is that fair when the GSEs weren’t responsible for the bubble, or subprime loans, or the Great Recession, at all?

We know this because some $14 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

The request, made by Fairholme Funds, is a big win for them in the battle to review federally sealed documents in its case against the United States government. Fairholme is one of several former investors in the government-sponsored enterprises who say their ownership stake was illegally taken from them by the federal government during conservatorship. They are fighting in court to get that stake returned.

The more than ten thousand discovery documents will be available to the United States District Court of Appeals in Washington D.C. and the United States District Court.

There is plenty of evidence that Fannie and Freddie were still solvent at the time. Even Treasury Secretary Henry Paulson reassured Congress of their solvency, while Bear Stearns was going under in 2007.

"Fannie Mae and Freddie Mac play an important role in our housing markets today and need to continue to play an important role in the future," Secretary Treasury Henry Paulson told the House Financial Services Committee at a hearing on financial regulation. "Their regulator has made clear that they are adequately capitalized."

And mortgage delinquency rates are almost back to historical levels. For instance, June’s existing-home sales report showed just 8 percent of sales were comprised of forecloses homes, lowest since 2007 and the housing bust.

 

Graph: Seeking Alpha

The profits have been enormous for US Treasury. “Taxpayers have been paid back and the companies are now left with little capital due to the net worth sweep,” says Seeking Alpha in its latest article on the issue. “Based on Judge Lamberth's ruling (of last year dismissing Fairholmes suit), the government could be sued for a taking if the companies are liquidated. Reform must include adequate compensation to shareholders, as well as a method to bring capital back onto the balance sheet. After 2010, solvency was never a problem.”

And now we have Judge Sweeney ruling in favor of discovery that will enable investors to untangle the ‘rest of the story’.

Harlan Green © 2015

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

What Would Save the Euro?

Popular Economics Weekly

Now that Greece has voted NO on the latest European Commission-European Central Bank-IMF proposal (the so-called troika), will Greece stay in the Eurozone? If so, Greece may save the euro.

Why is this choice even necessary when most economists know the solution to their problems—something that would be a combination of easing the most draconian conditions that have really been imposed on all EU and Eurozone members, and a European version of our Marshall Plan that would reinvest in productive capacity to bring back growth to those countries suffering most from the worst recession since the Great Depression.

And isn’t just Greece. As Paul Krugman’s most recent Op-eds have asserted, countries from Finland to Spain to the Netherlands are also suffering from too much austerity—austerity in the sense of focusing too much on cutting spending and raising taxes to pay down the debt accumulated mostly from the Great Recession, when more spending is needed to speed up economic recovery—which is the only proven way to pay down debts.

Graph: Trading Economics

“The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.”

It is a dilemma brought on mostly by the EU’s massive bureaucracy that rules almost every facet of EU life. One commentator said the regulations that must be satisfied to join the EU would rise to 5 feet if stacked vertically.

Included in those requirements are economic policies—such as budget deficits cannot exceed three percent. Another condition even more draconian is an inflation target of 2 percent. It is mainly a German condition from their past. It brings back the horror of economic collapse that led to Hitler and the Holocaust. Yet without a higher and more flexible inflation target, sustainable growth cannot happen. The recovery from GW Bush’s first recession only happened with massive deficit spending and a 5 percent inflation rate at one time.

The horror of hyperinflation is really no longer possible in a modern world so interlinked by trade and finance (and modern technology that produces anything required cheaply and quickly). We suffer from oversupply of goods and services, in other words, that makes deflation the most real danger.

In fact, Japanese-style deflation has been more the norm since the 1980s, since then Fed Chairman Volcker’s focus on austerity (in the form of sky-high interest rates) to bring down America’s sky-high inflation of the early 1980s.

Then why isn’t there more discussion among the ‘troika’ of debt relief, which seems to be Greece’s main problem? The austerity policies foisted on Greece by the troika has put Greece into a major depression, with 25 percent unemployment and a 25 percent reduction in its economic growth. And nothing but higher and sustained growth can ever pay down the huge mountain of debt—some $323 billion at last count—owed to its creditors. But to allow that to happen Greece’s debt load must be eased in some way.

Columbia University economist Jeffrey Sachs, a specialist in economic development, has lamented Germany’s insistence on adhering to agreed upon ‘rules’, rather than allowing more flexibility in Greece’s debt repayment terms.

“Sovereign debts have been restructured hundreds, perhaps thousands, of times – including for Germany. In fact, hardline demands by the country’s US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of Adolf Hitler in 1933. After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world. Yet Germany has failed to learn the lessons of its own history.”

And we know what happens when history repeats itself. Even Germany has to know. So saving Greece is important for a number of reasons--not just European unity. Foremost is the need to reform an unworkable system, to make it more flexible, with plans that would be already in place to aid countries that have suffered the most from the Great Recession--which lest we forget, was almost a repeat of the Great Depression.

Harlan Green © 2015

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

Enslavement of the Middle Class

Financial FAQs

It is becoming obvious that the American middle class (topic dujour among presidential candidates these days) has been enslaved by an ideology that only benefits the wealthiest among US. It is an ideology of austerity that has prevailed in the U.S. at least since the 1980s, and Paul Krugman says is putting Europe into its Second Great Depression.

It is really an economic ideology of the 18^th century first formulated by Adam Smith—of fewer government services and lower taxes that has made corporations all powerful with the greatest profits in their history, left American workers with little or no control over their livelihoods, and resulted in the greatest income inequality since the 1920s.

Such an insidious ideology has kept the poorest states poorer, caused declining investment in education (our seed corn for future entrepreneurs), is quickly degrading our public infrastructure, and even the ability to protect ourselves. President Obama’s State of the Economy report and latest speeches have made it obvious. The greatest income inequality since the 1920s is here to stay, unless there are major changes in economic policies.

That is why most Americans (at least the 90 percent) have become harried, 24/7 workers with little vacation time, poor health care options (in spite of Obamacare), too expensive educational opportunities, too few well-paying jobs, and little protection from the globalization that stronger labor laws would bring.

Those policies have been called supply-side economics, under the theory that giving more tax breaks to the wealthiest by reducing capital gains and maximum tax rates, while shrinking government investment and oversight, would induce the wealthiest to put their money into productive investments, thus creating more jobs.

But that never happened. When President Reagan cut the maximum income tax rate from 70 percent that prevailed in the 1970s to 50 percent, it and 2 recessions created the largest budget deficit of that era, which is why he instituted 11 tax hikes to bring the budget back into a semblance of balance. This was all catalogued by his budget director, David Stockmen in The Triumph of Politics.

Then we have GW Bush’s further tax cuts on both maximum income tax rates to 35 percent and capital gains to their lowest in modern history that so depleted tax revenues it created the largest budget deficits in history, and ultimately the Great Recession.

It’s no use sugar coating the truth any longer. Since the end of the Great Recession, the top 1 percent of income earners have garnered 96 percent of total income since 2009, after a brief dip. And Americans still have the greatest income inequality of the developed western world.

Why could such inequality be here to stay? In part because so much wealth has flowed to so few, and it is easy to buy influence in this country. The most obvious receivers of such largesse are the conservative members of Congress, mostly Republicans, who continue to block the economic reforms that would better the lives of those that live on Main Street.

Nobelist Paul Krugman said as much in his latest NYTimes Oped: “So what does it say about the current state of the G.O.P. that discussion of economic policy is now monopolized by people who have been wrong about everything, have learned nothing from the experience, and can’t even get their numbers straight?... Clearly, failure has only made them stronger, and now they are political kingmakers. Be very, very afraid.”

Graph: CEA Report

The White House just released their Council of Economic Advisors 2015 Report, chaired by Jason Furman. It said, “The second important factor influencing the dynamics of middle-class incomes is inequality. This, too, is a global issue. In the US, the top 1 percent has garnered a larger share of income than in any other G-7 country in each year since 1987 for which data are available, as shown in the above graph.”

It should be clear what must be done to remove the obstacles that hold back most Americans from a better life. Let us start by jettisoning the 18^th century myth which enslaves all economic classes, a myth that only holds us back in the 21st century. Indiscriminately lowering taxes while minimizing government services and oversight hasn’t improved the lives of anyone except the wealthiest among us.

Harlan Green © 2015

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

December Unemployment Report Sets Record

Financial FAQs

Friday’s Labor Dept. nonfarm payrolls report has just set a record for annual job creation. The U.S. added 252,000 new jobs in December to extend the strongest streak of hiring since the mid-1990s, but wages fell and more people dropped out of the labor force to slightly tarnish an otherwise excellent employment report.

Graph: WSJ

The economy has added at least 200,000 jobs for 11 straight months, the longest streak in almost 20 years. In 2014, the U.S. created 2.95 million new jobs to mark the largest gain since a 3.18 million increase in 1999.

In December, President Obama noted that the economy had created 10.9 million jobs over the past 57 months. The number is now 11.2 million with December added in plus an additional 50,000 jobs added to the past 2 months. This streak of growth is improving the net job creation over which Mr. Obama has presided, which now puts him in fourth place among the last 10 presidents in terms of job creation.

Graph: WSJ

The economy has 6.1 million more jobs today than when Mr. Obama took office in January of 2009. That puts his total job creation ahead of presidents John Kennedy, Gerald Ford, and George H.W. Bush, who each served one term or less. It also puts him well ahead of President George W. Bush, whose final year in office also comprised the beginning to the longest and deepest recession since the Great Depression.

The nation’s unemployment rate also continued to tumble, falling to 5.6 percent from 5.8 percent and hitting the lowest level since June 2008, the Labor Department said Friday. The fall in the jobless rate stemmed partly from the increase in the number of people working, but more Americans also dropped out of the labor force. As a result, the percentage of working-age Americans 16 or older fell again to match a postrecession low of 62.7 percent — a level last seen in 1978.

That may be why wages aren’t rising above 2 percent annually, when 3 to 4 percent annual wage increases are the norm during economic recoveries. Wage gains have ranged from 1.7 percent to 2.1 percent since 2010, just two-third as fast as they normally grow. Economists predict a tightening labor market will spur higher wages but so far earnings haven’t budged much.

Graph: WSJ

And Chicago Fed President Charles Evans has speculated that the Fed won’t have to raise interest rates until 2016, if inflation doesn’t pick up to the 2 percent target of stated Fed policy.

Private payrolls increased 240,000 after rising 345,000 in November. Goods-producing jobs jumped in December, led by construction which advanced 67,000 in December after a 20,000 increase the month before. Manufacturing employment increased 17,000, following a jump of 29,000 in November. Mining rose 3,000 in December, following a 1,000 boost the prior month.

Private service-providing jobs gained 173,000 after a 294,000 jump in October. The latest increase was led by professional & business services. Government jobs increased 12,000 after rising 8,000 in November.

Harlan Green © 2014

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

288,000 Payroll Jobs Created

Financial FAQs

Is the Great Recession finally over? It would seem so with total nonfarm payroll employment up by 288,000, and the unemployment rate down by 0.4 percentage point to 6.3 percent in April, the U.S. Bureau of Labor Statistics reported today.

And the change in total nonfarm payroll employment for February was revised from +197,000 to +222,000, and the change for March was revised from +192,000 to +203,000. Need we say more about the jobs recovery? In fact, private employment is now above the pre-recession peak by 406 thousand, but we are still 113,000 jobs below the overall pre-recession peak because governments lost so many jobs—such as 300,000 teachers.

Graph: Calculated Risk

It’s been the cutbacks in state, local and federal spending that has kept US from a full-blown recovery. This graph that compares government hiring under GW Bush (red line) with Obama (blue line) tells us the damage such a loss of government jobs has done to employment. So there is still much work needed to bring everyone back to work. A real shocker was that the labor force fell by 803,000 in the Household survey, which is why the unemployment rate plunged from 6.7 to 6.3 percent.

Graph: Calculated Risk

In fact, some economists are predicting there might be a labor shortage in 10 years, since so many are either dropping out of the labor force, or just not entering it in sufficient numbers as the baby boomers retire. There is no question that some of the damage was self-inflicted, what with the partisan budget battles and downgrading of US sovereign debt by S&P.

Other factors that kept growth and employment low were soaring corporate profits that weren’t reinvested, while workers’ wages and salaries remained stagnant, so that consumers spent less. The just released first quarter 2014 GDP grew 0.1 percent, in part because of the winter, but also because businesses didn’t order more goods to restock their shelves.

Some of the employment increase was also due to the end of a very severe winter, so we don’t know if such job creation can be sustained. It will be in part up to Janet Yellen’s Fed to keep interest rates down as long as possible, and not be fooled by the artificially low unemployment rate that is due more to workers leaving the workforce than entering it.

Harlan Green © 2014

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

Jobs Recession Finally Over?

Financial FAQs

Is the jobs recession finally over? It’s taken this long to bring employment back to pre-Great Recession levels. Overall employment is still slightly below the pre-recession peak (437 thousand fewer total jobs).  But private employment is now above the pre-recession peak by 110 thousand and at a new all-time high.

Calculated Risk

Total nonfarm payroll jobs rose 192,000 in March after a 197,000 boost in February and a 144,000 increase in January. The net revision for the prior two months was up 37,000. Expectations for March were for 206,000. Private payrolls gained 192,000, following an increase of 188,000 in February. Analysts projected 215,000 for March.

We can now see where many of the missing jobs remain—in governments. Although state governments added 8,000 net jobs in March, the federal government shed another 9,000 jobs, according to the just released Bureau of Labor Statistics report. Over the past year, employment in the federal government has fallen by 85,000, so we know the major reason we are barely back to the 2007 level of employment. In fact, some 700,000 state and federal jobs were lost during the Great Recession.

Unfortunately, political gridlock has caused so many essential government, or government-sponsored jobs to be lost.  There shouldn’t be a debate over what federal, state and local government expenditures are necessary to maintain decent economic growth. Can one imagine what it would do to economic growth if the $2.2 trillion in deferred infrastructure building—in roads, bridges, electrical and energy distribution networks had been done, not to speak of the additional jobs created?

Or, instead of losing 300,000 teachers and the lost education opportunities to students, education spending had been expanded? A good comparison is with the GW Bush administration, when Republicans were in power. Then they were for much more government spending.

The public sector grew during GW Bush's term (up 1,748,000 jobs), but the public sector has declined since Obama took office (down 718,000 jobs). These job losses have mostly been at the state and local level, but they are still a significant drag on overall employment.

The private sector is the main jobs provider, of course.  The single area that could provide the most bang for the buck is the construction industry. Since construction employment bottomed in January 2011, construction payrolls have increased by 532 thousand - but there are still 1.76 million fewer construction jobs now than at the peak in 2006, per an excellent analysis by Calculated Risk.

That also means the building-construction industry and all its ancillary services—such as mortgages, insurance, home furnishings—has much more room to grow. Private residential construction is returning to normal levels at last, but not public (which has fallen since ‘shovel-ready’ ARRA stimulus money ran out in 2010, which created or saved some 3 million jobs) and non-residential spending.

Calculated Risk

The bottom line is that all construction sectors have to improve to bring enough jobs back. These are mainly blue collar workers that lost badly during the Great Recession, due to the housing bubble. The good news is that professional and business services jobs grew double any of the other job categories in the March payroll survey.

Professional and business services added 57,000 jobs in March, in line with its average monthly gain of 56,000 over the prior 12 months. Within the industry, employment increased in March in temporary help services (+29,000), in computer systems design and related services (+6,000), and in architectural and engineering services (+5,000).

This should give a large boost to construction jobs this year and next.

Harlan Green © 2014

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

Greenspan’s Greed and The Federal Deficit

Popular Economics Weekly

The deficit this year is expected to be $514 billion— just 3 percent the size of the economy and significantly less than the $1.4 trillion deficit Congress ran up when it pumped stimulus into the economy in 2009.

“Although the deficit in the Congressional Budget Office’s baseline projections continues to decline as a percentage of GDP in 2015, to 2.6 percent, it then starts to increase again in 2016, reaching 4.0 percent of GDP in 2024,” said the CBO. “That figure for the end of the 10-year projection period is roughly 1 percentage point above the average deficit over the past 40 years relative to the size of the economy.”

Why do we have such a large federal budget deficit today, in spite of the current reductions of CBO projections? It now totals $17 trillion counting the US Treasury’s own debt to itself—when we had 4 consecutive annual surpluses in the Clinton years of 1997 to 2001, and an overall budget deficit reduced to $3.2 trillion in privately-held debt.
The answer in a nutshell is unrestrained human greed, something that even Alan Greenspan recognized, though he wouldn’t admit it was the result of his own laissez faire market ideology of lower taxes and less market regulation.

''It is not that humans have become any more greedy than in generations past,” he famously lamented in 2002 testimony before the Senate Banking Committee. “It is that the avenues to express greed had grown so enormously.”

That quote was not only fatuous—humans have always become more or less greedy depending on those so-called opportunities for greed—but it was his decision to back GW Bush’s deficit spending that erased the Clinton budget surpluses.

Graph: FactCheck.org

There were of course 2 recessions—in 1991 and 1997, plus the wars on terror, plus TARP and the Bush era tax cuts. But it was then Fed Chairman Alan Greenspan’s testimony that enabled the Bush/Cheney record deficits of those and subsequent years such as on January 26, 2001 Senate testimony:

"Continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer term fiscal policy issue of whether the federal government should accumulate large quantities of private -- more technically, nonfederal – assets,” he said at the time. “At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. ... This development should factor materially into the policies you and the administration choose to pursue."

In fact, it was the unregulated greed of Wall Streeters that Greenspan had in fact encouraged in opposing regulation of derivatives—used by regulated banks, as well as unregulated hedge funds—that led to the Great Recession that bankrupted millions.
The Clinton surpluses had almost balanced long-term federal debt, and first Bush Treasury Secretary John O’Neill lost the debate on what to do with that surplus. He had wanted the surplus to strengthen social security, Medicare, and other government spending programs. O’Neill was fired for his opposition to the Bush tax cuts.
In other words, Greenspan gave Bush the cover he needed after 9/11 to use that surplus to finance tax cuts on capital in particular—including abolishing the inheritance tax, lowering capital gains and dividend taxes almost 50 percent—that mainly benefited Wall Street and its investors, rather than Main Street.

“Why did corporate governance checks and balances that served us reasonably well in the past break down?” he asked. “At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community.”

We have you to thank, Dr. Greenspan, for those "opportunities for avarice" that resulted from of your unbridled enthusiasm for such policies at that time. It also brought on the Great Recession and record deficit we have today.

Harlan Green © 2014

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Managing Expectations—The Fed’s Two-Edged Sword

Popular Economics Weekly

It does look like the results of Fed Chairman Bernanke’s push for greater transparency in Federal Reserve policy deliberations are coming home to roost. Stock and bond prices have been whipsawed since Bernanke made the seemingly offhand remark that QE3 security purchases could be cut back by the end of the year.

Just what did Bernanke’s Fed expect, in their crusade to manage expectations for greater growth with the printing of so much money? Its seems to have backfired, at least for the moment. The market plunges that resulted from his remarks are testament to the fact that investors believed any hint of higher interest rates could slow down or even halt the recovery. The markets obviously believe the recovery isn’t yet strong enough to tolerate higher interest rates, contrary to the Fed’s own expectations for growth.

Paul Krugman said it best in a recent blog post: “What went wrong? The Fed grossly misunderstood the nature of the relationship between its statements and market expectations. It believed that the market was listening closely to the details of what it said. In fact, the market doesn’t — and probably shouldn’t…what the Fed conveyed with the tapering talk was a sense that its heart really isn’t in this stimulus thing.”

So Bernanke’s crusade for greater transparency can be a two-edged sword, in that the underlying reason for greater transparency was to test how well the Fed could manage expectations for greater growth—by pushing both short and long term interest rates to record lows—thus telling consumers and businesses they could borrow cheaply with overly optimistic projections for future growth.

But as former Fed Chairman Alan Greenspan once said; “Human nature being what it is, the vast majority of us are disinclined to offer half-thought-through, but potentially useful, policy notions only to have them embarrassingly dissected in front of a national television audience. When undertaken in such a medium, deliberations tend toward the less provocative and less useful…The undeniable, though regrettable, fact is that the most effective policymaking is done outside the immediate glare of the press.”

Fed Governor Jerome Powell was one such example, when he tried to mitigate Bernanke’s remarks. “The reaction of the forward and futures markets for short-term rates appears out of keeping with my assessment of the [Federal Open Market] Committee’s intentions, given its forecasts,” Mr. Powell said. “To the extent the market is pricing in an increase in the federal funds rate in 2014, that implies a stronger economic performance than is forecast either by most FOMC participants or by private forecasters.”

And that is what happened. The Fed Governors attempts at greater transparency have come out as conflicting statements and speeches—maybe well thought out, but nevertheless confusing.

Then came the revision of Q1 GDP growth downward from 2.4 percent to 1.8 percent, largely on downward revisions to consumer spending. So right away we see that Bernanke’s basis for his optimism was being cut away. Faster growth may not be with us, as least not in the foreseeable future. So maybe it’s not such a good idea to attempt to ‘manage’ expectations. Or maybe the Fed doesn’t have a good read on what those market expectations are, which can be a sword that cuts both ways!

Harlan Green © 2013

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

Why Shouldn’t the Fed Do More?

Financial FAQs

Fourth Quarter Gross Domestic Product growth was a bust. And so cries are rising for the Fed to do more to promote growth (since Congress and the White House can’t or won’t). Actually the Fed has done more in the past to promote growth—mainly by ignoring its own inflation goals.

An excellent piece by New York Times’ Binyamin Appelbaum highlighted the controversy over whether the Fed’s $85 billion per month purchasing of Treasury and Mortgage Backed Securities is enough to stimulate more growth.

What, you say? Isn’t $3 trillion already on their books too much? Not really, when you look at what even Fed Chairman Bernanke’s predecessor, wily Alan Greenspan (master of do what I say, not what I do), was able to engineer during his almost 20-year tenure. How did he do it? He basically ignored the 2 percent inflation Federal Reserve target when he wanted to stimulate more growth, while supporting record-breaking budget deficits during the GW Bush administration, in particular.

Inflation rose as high as 6 percent during the late 80s in an attempt to boost growth for the first Bush, before the 1991 recession sunk his chances at reelection. And he tolerated 5 percent plus inflation in the early 2000s. Both times unemployment fell to between 4 to 5 percent. This was considered full employment before Greenspan finally put on the credit brakes by raising interest rates.

It is obvious Chairman Bernanke does not have Greenspan’s panache, for want of a better word. History shows higher inflation is needed to boost growth, and developing countries such as China tolerate much higher inflation rates precisely for that reason. Yet the Federal Reserve Bank of Cleveland calculated in a January report that average expected inflation over the next decade was just 1.48 percent per year.

The Fed seems to have painted itself into a corner with its stated mandate of 2 to 2.5 percent inflation. It’s a scenario eerily similar to Germany’s fixation on inflation since its 1920s hyperinflation, and the reason Germany is punishing the Mediterranean countries with its austerity demands. Such intransigence is causing Europe to fall back into recession. Great Britain’s conservative government is slavishly following Germany’s lead, leading to its own triple-dip recession since its Conservatives Party took office.

It’s as if the Fed can only look in the rear view mirror. Inflation (price stability) became its dominant goal in 1977 over maximum employment, after years of what came to be called stagflation—rising unemployment plus inflation. The Federal Reserve Reform Act of 1977 enacted a number of reforms to the Federal Reserve, making it more accountable for its actions on monetary and fiscal policy and tasking it with the sometimes conflicting goals to "promote maximum employment, production, and price stability".

But the 70’s inflation was mainly caused by the Arab Oil Embargo and spiking oil prices, among other things—a scarcity of supply—which is no longer the case. It spawned supply-side economics, or, the theory of diverting more wealth to the actual suppliers so they will produce more to bring demand and supply back into equilibrium—with large tax breaks, for starters. And that stimulated the supply of everything with a vengeance; due to globalization (and consequent loss of employee wage bargaining power), corporate monopolization, and deregulation so that oversupply and falling prices became the problem.

Now the greater danger is continuing the tepid growth policies that break the record for length of long term unemployment. As the latest very unprogressive tax accord shows, the U.S. might repeat Germany’s mistakes with greater government austerity when precisely the opposite is needed. Neither Presidents Reagan or GW Bush had any problem with deficits—in fact created the largest federal deficits since WWII.

Why can’t this Democratic administration learn the same lesson? It’s time for the Fed Governors to take the side of consumers and drop their inflation bias. It has become a straitjacket when higher inflation is needed to boost growth. Consumers and employers might tolerate a bit higher inflation, if they knew Fed policy had corrected its inflation bias to encourage more income and jobs growth after 30-plus years of wage stagnation.

Harlan Green © 2013

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Michigan Republicans Repeat Economy Wrecking Doctrine

Financial FAQs

Michigan has become the latest Republican-led effort to wreck economic growth in passing a right-to-work laws that restrict unions. With all apologies to Naomi Klein’s Shock Doctrine, Repubs are no longer waiting for recessions to enrich their wealthiest supporters—such as passing GW Bush tax cuts during the 2001 recession and in 2003 that caused the largest budget deficit in history, precipitating the Great Recession.

Michigan is a text book example of how ALEC and Americans for Prosperity, the big business lobby and the Koch Brothers have worked to bust unions. Michigan is the 24^th state to enact Right-to-Work Laws that take away unions’ ability to organize and charge union dues to finance union benefits. But more insidiously it weakens the ability to bargain for their own wages and salaries. This is when corporate profits and CEO salaries are already the largest in history.

We know the result in the other 23 states. They are the poorest states, who require the most government assistance. So this exposes Republicans and conservatives agenda in general. Restricting union organizing and collective bargaining impoverishes the majority of wage and salary workers, which drives the poorest into government assistance at the slightest economic downturn. It therefore preserves the profits of the investors who live off of corporate profits, while passing on the costs of wrecking the incomes of the majority to government-financed programs—i.e., our tax monies.

Wisconsin’s direct restriction of collective bargaining rights for government employees was the most blatant example until now. By directly restricting their incomes and benefits, it puts a wrecking ball to economic growth in Wisconsin, putting it into the group of have-not states that have consistently lower standards of living.

Many studies have shown this, but the most convincing evidence is listing the have-not states. They include the most rural and red states in the South and Midwest dependent on government benefits to supplement the meager incomes and lower standard of living of their citizens.

The AFL-CIO has put out the latest statistics on union, vs. non-union incomes and benefits: Employees covered by union contracts receive 28 percent more in wages and benefits than workers without unions.  For women workers, the union advantage is 34 percent. For African American workers, the union advantage is 29 percent.  And for Hispanic workers, the union advantage is a whopping 50 percent.  When “right to work” laws weaken unions and drive down wages and benefits, workers have less to spend and the entire economy – particularly small business--suffers.

It should be blindingly obvious why Republicans are pushing their anti-union agenda. It increases their wealth and power at the expense of everyone else.

Harlan Green © 2012

President Obama’s Record Achievements

Financial FAQs

Why so many doubters of the President’s record? Candidate Romney would have us believe Obama has accomplished nothing, but in fact President Obama has one of the most history making legislative records since FDR. The Washington Monthly lists just 50 of President Obama’s top accomplishments.

We could start with Obama Care, or the Affordable Care Act, which no other President was able to enact, or ARRA, the $787 Billion stimulus that funded $100B in infrastructure improvements alone and supported state public service employment (police, fire, etc.), or doubling fuel efficiency of autos, or cutting nuclear weapon inventories of Russia and the U.S,, or passage of Dodd-Frank financial regulation, and so on.

In fact, he has scored successes in almost every sector of our society—universal health care, nuclear disarmament, energy conservation, education, financial regulation, consumer protection, job creation, and even housing—in spite of the record number of Senate Republican filibusters.

But more importantly, Obama has in fact reversed the Greatest Recession since the Great Depression with his economic policies and job creation programs. Yes, his so-called ‘Keynesian’ stimulus programs include recapitalizing banks, and a structured bankruptcy that brought back Chrysler and GM, thus saving 1 million jobs. And ARRA is credited with saving up to 3.5 million jobs, by the way.

This won’t satisfy Romney-Ryan supporters, of course, who believe only way to prosperity is to reduce taxation of the wealthiest. But it has never worked. GW Bush’s tax cuts and borrowed money created just 3 million jobs in his 8 years, versus 5 plus million jobs under Obama to date.

And it can’t work. Why? The wealthiest have for the most part hoarded their wealth; first paying themselves, then parking much of it overseas in tax havens, or investing in other countries. They have been increasing their share of our economic pie since the 1970s, creating the greatest inequality of income and opportunity since 1928.

Chrystia Freeland’s history of the wealthiest, Plutarchs, The Rise of the New Global Super-Rich and The Fall of Everyone Else, documents just how wealthy the wealthiest have become at the expense of everyone else, as she says. Just in the first year 2009-2010 of this economic recovery, for instance, 93 percent of income gains went to the top 1 percent while the top 0.01 percent gained an average $4.2 million per household.

And now we know inequality is bad for growth and our position in the world. A recent IMF study by Andrew Berg and Jonathan D. Ostry suggests such inequality might shorten our economic expansion by one-third in jobs lost and goods products.

“…a careful look at the varying levels of inequality in different countries demonstrates just how much societal divides in wealth really matter. Countries with high inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth,” said the authors in a Foreign Affairs article.

Graph: CBPP

We actually know more than that. British sociologist Richard Wilkinson has studied inequality and written extensively about it. Countries with the greater inequality have higher rates of poverty, violence (30,000 gun deaths per year in U.S., 1 million over the last 4 decades), prisons per capita, and lower levels of health and education.

So in fact, inequality is more a symptom of third world status than being world’s superpower. In The Spirit Level, he and Kate Pickett document the damage that inequality brings to societies.

Graph: Spirit Level

In the case of the U.S., it will mean a decline from being the world’s only super power, as the Plutocrats garner ever more wealth for themselves, and less for the benefit of a stronger democracy. It is a sad story. Only investments in healthcare, education, Research and Development in new technologies that Obama advocates will strengthen our democracy.

Harlan Green © 2012

Romney-Ryan Austerity Leaves Out 47 Percent

Popular Economics Weekly

It should be obvious by now that the Romney-Ryan program of fiscal austerity—cutting government spending, while cutting taxes in the hope businesses and their investors will invest more of their wealth—can’t work. Latest evidence is the just out IMF 2012 World Economic Outlook (WEO) report that confirms European austerity policies over the past year have made things worse.

So how can Romney say he will create 12 million jobs during his tenure by cutting government spending while lowering taxes? He has said his blueprint is Paul Ryan’s House passed budget bill that drastically downsizes safety net programs, and cuts some $5 trillion in taxes over 10 years, without specifying where he will raise additional revenues to pay for those tax cuts. Since no expert believes it can be done without removing such favored tax shelters as the home mortgage interest deduction, it will create the same austerity trap Europeans now find themselves in.

For instance, we know from the IMF study Great Britain has fallen back into recession over the past 3 quarters by explicitly following Conservative PM Cameron’s austerity program. Ireland and Greece are also in recession because of draconian spending cuts, with Italy and Spain soon to follow.

Chapter One of the WEO report stated that current European policies that demand a reduction of debt as the path to recovery without job creation programs were wrong. In fact, “…IMF staff research suggests that fiscal cutbacks had larger than-expected negative short-term multiplier effects on output, which may explain part of the growth shortfalls,” said the report.

This only confirms what Keynesian economists such as Paul Krugman have been saying for years. The only path to increasing economic growth is to literally create more jobs. Only then will there be sufficient revenues to grow the economy and thereby reduce debts, both in the private and public sectors.

As Lord Keynes famously said, jobs can be digging ditches and then filling them up again, or, how about repairing some of the $2 trillion in needed U.S. infrastructure repairs being put off, which will only increase their costs? Roosevelt’s New Deal created WPA projects that grew the economy by putting people back to work—such as building Hoover Dam, planting trees and the like.

The reason austerity has been ruling economic policies of late is bond vigilantes have been in control, a relic of Germany’s fears of a repeat of their 1920s inflation rate, and U.S. creditors’ fears of inflation that eats away at bond prices. Republican conservatives have used this argument to demand lower taxes, though it has done nothing to reduce government debt. Republican Presidents Reagan and GW Bush created the largest budget deficits since World War II, as I have said.

In fact, other studies, such as by acknowledged budget experts Peter Diamond and Emanuel Saez, conclude that “the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50-70 percent (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50 percent rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s”.

And does it significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower, said the study. Indeed, according to the U.S. Department of Commerce's Bureau of Economic Analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68 percent between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23 percent between 1950 and 1980 when top tax rates were at or above 70 percent.

Neither does international evidence support a case for lower growth from higher top taxes, say Diamond and Saez. “There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries.”

It is only recently that historical evidence has been able to examine so-called supply-side economic theory that says lowering taxes promotes growth, which it turns out is just a theory not borne out by the facts.

Harlan Green © 2012

It’s Ryancare vs. Obamacare

POPULAR ECONOMICS WEEKLY

Will Ryancare replace Obamacare? Ryancare could become the campaign buzzword with Mitt Romney’s choice of Wisconsin Republican Paul Ryan as his Vice Presidential candidate. Ryancare is bringing budget-cutting austerity that Paul Ryan once called his “Path to Prosperity” budget proposals now endorsed by two Republican-led House majorities, vs. President Obama’s program of stimulus spending via health care, infrastructure repair, and job creation.

Yet history says Ryancare won’t work. It is a battle between almost polar opposites—government austerity vs. government stimulus—when the two must work together to bring back prosperity to the 80 percent of us who are wage earners that have lost out on this recovery.

Romney has come off the fence, in other words, since being Massachusetts’s governor that supported abortion and universal health care. Mitt has said during the campaign that he supported Ryancare, which “will greatly shrink the government, largely undoing the social safety net by shifting more costs onto individuals and essentially converting Medicare into a capped voucher program. It would also alter the progressive income tax system, which, like the safety net, was built through the 20th century under Republican as well as Democratic presidents,” said the New York Times.

So Ryancare is really about more austerity when we know the track record of austerity programs. The latest is England’s Conservative Party program that has returned it into recession with their program to slash government spending while lowering taxes for the wealthy, thus starving the government of revenues during the euro crisis. Only President Clinton was able to slow government spending while balancing the federal budget. He did it by raising taxes back to pre-Reagan rates for the highest income brackets, while slashing defense spending.

In fact, though few economists will admit it, Republican economic policies since 1980 based on slashing tax rates have been disastrous for economic growth and budget deficits, which is why President Reagan had to raise taxes 11 times during his tenure.

While GW Bush helped to create the largest federal deficit since World War II with his tax cuts of 2001 and 2003 that starved the government of revenues at a time when spending soared. The historical fact remains: the recessions, President Bush’s tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years.

Graph: CBPP. Org

“In fact, the deficit for fiscal year 2009 — which began more than three months before President Obama’s inauguration — was $1.4 trillion and, at 10 percent of Gross Domestic Product (GDP), the largest deficit relative to the economy since the end of World War II,” said the Center for Budget and Policy Priorities, a progressive think tank.

So is it just coincidence that the historical record also shows all recessions since 1980 have occurred during Republican administrations? The recession score (gray shadings)—Presidents’ Reagan and GW Bush two recessions, GHW Bush, Sr. one, and Democrats zero.

Graph: Calculated Risk Blog

If austerity in the guise of slashing taxes to shrink government isn’t the answer, then what is? That, also, is no secret to most economic historians, at least. Promote economic growth in both the private and public sectors. It turns out that growth has been greatest when tax revenues were higher, because those revenues also boosted private sector growth. How so? Through almost too many ways to be counted—via boosting spending on education, environmental protection, infrastructure, and Research and Development.

President Clinton proved it with his 23 million jobs created and 4 years of actual budget surpluses. In other words, all those public tax dollars boost growth, while the historical record shows that the Bush and Reagan tax cuts benefited the wealthiest; including those corporate CEO’s whose salaries and benefits have gone through the roof, leaving their own employees with little to spend.

And so does social welfare spending, which should be a no-brainer. Medicare and social security have almost no overhead, so that more than 95 percent of revenues flow to the elderly and health care providers, which boosts job growth in the health care professions, as well as consumer spending.

“Nonpartisan analyses of Mr. Ryan’s proposed income tax cuts reached conclusions much like those of Mr. Romney’s tax proposals in recent weeks’” said the same New York Times column. “The tax cuts in Paul Ryan’s 2013 budget plan would result in huge benefits for high-income people and very modest — or no — benefits for low-income working households,” Howard Gleckman, a senior fellow at the Urban Institute, a policy research organization, wrote in summarizing the findings of the Tax Policy Center.

Thus we have the consequences of Ryancare, or shall we now call it Romneycare, which will provide very little care for most Americans.

Harlan Green © 2012

What Happened to the Bush Tax Cuts?

Popular Economics Weekly

The debt ceiling debate is about to begin again, and House Speaker Boehner has said he will continue to press for more tax cuts without raising additional revenues, reviving the possibility of more budget gridlock and credit downgrades. "I believe that raising taxes at this point in our recovery is a big mistake," Boehner told reporters. "At a time when we're trying to help small businesses create jobs, this proposal would kill jobs."

But it is a mistake to cut taxes without raising revenues. We know GW Bush’s tax cuts enacted in 2001 and 2003 to revive an economy flattened by the dot-com bubble bust have cost plenty. And we know what happened to all that money saved by corporations and individuals.

Not much. Just 3 million jobs were created during Bush’s 8 years, household incomes did not even keep up with inflation, and yet corporate profits are up more than 14 percent as a percentage of GDP—the highest in history.

So most of the money flowed to corporations—who are currently hoarding more than $2 trillion in cash—and the top 1 percent income earners who benefited most from the tax cuts. And since the top 1 percenters spend less of their money than the 99 percenters, much of it is being held in banks that have almost $1 trillion in excess ‘zero sum’ deposits that aren’t being put to work to revive this economy.

Graph: CBPP

Then what would really put all that cash back to work to grow jobs and the economy? We know the answer is to invest more money to grow the future, but how without even more debt? Dr. Robert Shiller of Irrational Exuberance fame, and Cornell Professor Robert Frank have written wonderful New York Times Op-eds on just how to do it.

It’s almost absurdedly simple in principle. Dr. Shiller says that William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Nobelist Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.”

“It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged.”

And Professor Frank disputes austerity proponents who say governments can’t spend beyond their means indefinitely, any more than businesses or families can. He says “It’s a fair statement if we’re talking about the long run. But in the short run, it’s utterly false…Consider an indebted family that must decide whether to borrow $5,000 to install additional insulation in its attic, a project that would reduce its utility bills by an average of $100 a month and require loan payments of $50 a month. In the short run, obviously, the project would increase the family’s indebtedness. But can there be any doubt that the family would be better off, in both the short and the long run, by going ahead with it?”

In other words, one must spend money to make money, and it can be done in a balanced way. That also means it can be done with either public or private monies that gives a public benefit, such as making up the $2 trillion deficit in infrastructure repairs. And if private business won’t invest sufficient funds, as at present, then public monies must be used.

Graph: CBPP

We also know that tax cuts don’t create jobs or spur growth by themselves. The Bush tax cuts are the most current example; in fact helped to cause the Great Recession. For much of the excess profits were spent on market speculation—especially in subprime loans and payday lending to the poorest among us—that caused the housing bubble.

An excellent book by Gary Rivlin, Broke, USA: From Pawnshops to Poverty, Inc. -- How the Working Poor Became Big Business, documents that “Poverty Inc. was a roughly $150 billion-a-year industry at its peak, Rivlin calculates, after totting up revenue at pawnbrokers, payday lenders, money-wirers, rent-to-own operators, tax preparers who offer instant tax “refunds,” subprime credit-card providers, subprime-mortgage lenders and all the rest”, according to a Bloomberg News review.

We also know the cost of the Bush tax cuts, which had to be paid for with taxpayer dollars, since they were one of the major causes of the deficit due to the lost revenues at a time we were paying for 2 wars.

Graph: CBPP

It’s more than $3 trillion to date, according to the CBPP, and would cost taxpayers another $3.6 trillion if extended over the next 10 years. In fact, if the Bush tax cuts were allowed to ‘sunset’ this year, the federal budget deficit would stabilize. So it makes no economic sense to advocate tax cuts without revenue enhancers, and there are plenty, from closing loopholes, to certain interest exemptions. So austerity is not the answer—neither here nor in Europe.

Harlan Green © 2012

The War on Workers

Popular Economics Weekly

We are seeing what can only be called a war on workers by Tea Party Republicans in particular. Who are workers? The 80 percent of consumers who are wage and salary earners. And they have not done well since the 1970s while corporations have made record profits, as I have been saying.

Graph: EPI

It is the current crop of conservative Republicans, such as Wisconsin Governor Scott Walker, who has even been caught on video declaring Republicans’ strategy of “divide and conquer” on public service workers and teachers, that have declared outright war. Their campaign would essentially wipe out the middle class by blocking all attempts to raise workers’ incomes in both the private and public sectors, and so their standard of living. Yet in doing so, Republicans will destroy the very foundation of our economic strength. Governor Walker’s efforts in particular have put Wisconsin at the bottom of Midwestern states’ job creation list.

Employers have always tried to maximize profits by limiting workers’ pay, but wage suppression today because of Republican efforts to limit collective bargaining is as bad as it was during the Great Depression. And the result has been disastrous for both jobs and economic growth.

For instance, the 40 years from 1961 to 2000, when the White House was shared equally by Republican and Democratic presidents (20 years each), pro-labor rights Democrats had the far superior record both for economic growth, and jobs. This can be found in numerous government data, but summarized by the Currency Thoughts blog. Bush 43’s record (GW Bush) was even worse.

% Per Annum      Democrat      Republican      Bush43

GDP Growth      4.1 percent      2.9 percent      2.2 percent

Employment      2.9 percent      1.7 percent      0.5 percent

Even more convincing proof that Republicans’ ideological war on workers will prolong this recession is their record on job creation. The Wall Street Journal has run articles on this fact. Since Harry Truman, 57.5 million jobs were created during Democratic Administrations, vs. 36.2 million jobs created during Republican Administrations.

President Clinton is the winner with 23.1 million jobs created during his 8 years, whereas President Reagan leads Repubs with 16 million created during his term. There are pundits who say these job totals are not totally accurate because policies created in one administration will affect job formation in the next. But that would have to work both ways, cancelling out any effects of one administration’s policies over another.

We aren’t even counting President Obama’s almost 4 million jobs created to date after our Greatest Recession that followed on the heels of GW Bush’s worst track record of just 3 million jobs created 2000-2008.

Why? This is one of the most basic economic truths, yet conservative Republicans in particular don’t seem to care. They want to believe that lower taxes will stimulate more jobs by transferring more revenue to the private sector. But that hasn’t happened—historically their policies have depressed the jobs and incomes of wage and salary earners that would stimulate more demand for their products.

And this is in spite of record corporate profits, which belies the ideology that greater tax cuts (even abolishing corporate taxes) will bring greater prosperity. In fact, as corporate profits have risen over the past 30 years, workers’ incomes have fallen. A recent New York Times’ article highlighted recent revisions of 2010 and 2011 Department of Commerce data. The new figures indicate that corporate profits accounted for 14 percent of the total national income in 2010, the highest proportion ever recorded. The previous peak, of 13.6 percent, was set in 1942 when the need for war materials filled the order books of companies at the same time as the government imposed wage and price controls, holding down the costs companies had to pay.

‘Employees have always received more than half the total national income, until now,” said the New York Times. (But) “In 2010, the percentage of national income devoted to wages and salaries fell to 49.9 percent, and it slipped a little more to 49.6 percent in the first quarter of this year. That continued decline may help explain the economic worries of many Americans who have jobs but still fear they are falling behind.”

Graph of wages/benefits vs. profits: New York Times

The private sector war is being waged by conservative states with their Right-to-Work laws that say though it can’t be illegal to organize into unions (because it’s federal law), it can make it illegal for workers in individual states to have to join and pay dues to support the unions. Twenty four states in the Midwest and South now have such laws.

This should be a no-brainer, in other words, which is why in not heeding the most basic economic truths—one cannot create demand without more income to support it—Republicans have declared a defacto war on workers. It is the worst kind of blindness. Republicans are also destroying their own economic homeland, the U.S. economy, and our competitiveness in the ever more worldwide economy.

Harlan Green © 2012

The Terrible Cost of Bush II’s Deficit

Popular Economics Weekly

It is now becoming evident just how much damage the GW Bush budget deficit has done to the U.S. In part from the tax cuts of 2001 and 2003, which sharply reduced taxes on income, capital gains, and corporations, two wars, and the Great Recession that began halfway through Bush's second term, the deficit now threatens not only our fiscal soundness, but status as the world's economic powerhouse.

It was VP Cheney who maintained that Reagan had said deficits don't matter, but President Reagan raised taxes 11 times during his tenure to save the budget, and economy, as his Budget Director David Stockman described so well in The Triumph of Politics. In other words, President Reagan didn't dare go as far as Dubya and VP Cheney in creating a deficit that siphoned off revenues to the wealthiest 1 percent and raised corporate profits to the highest in history as a percentage of GDP, while almost causing the disappearance of our middle class and endangering Medicare and social security.

So it shouldn't be a surprise that Republican Paul Ryan's 2013 budget proposal passed by the Republican House follows in GW Bush's footsteps. President Obama assailed it as "...a Trojan horse, disguised as deficit-reduction plans," said the president at an Associated Press luncheon in Washington on April 3. "It is thinly veiled social Darwinism."

Obama was referring to the fact that Ryan's plan doesn't really reduce deficits. Because it calls for $trillions in spending cuts without raising revenues, 62 percent of which would come from low-income programs, just as the Bush II budgets did. And both revenue increases and spending reductions are necessary to pay down the budget deficit. In fact, the new tax cuts at the top would dwarf those for middle-and lower-income families, says The Center for Budget and Policy Priorities, a non-partisan think tank. After-tax incomes would rise by 12.5 percent among millionaires, but just 1.9 percent for middle-income households. It's Bushonomics all over again.

What was most unconscionable about the Bush tax cuts was that they occurred during his first recession -- from March to November 2001, caused mostly by the dot-com bubble bust. In fact, he was starving the government of revenues at the same time that he was planning two wars, as has been revealed in several books by Ron Susskind, including The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neil.

Now we have a yawning federal deficit that continues to grow past $15 Trillion. Bush Treasury Secretary Paul O'Neill, who was fired by VP Cheney for advocating that the four Clinton years of budget surpluses be used to put social security and Medicare on a more secure footing, described the result of the debate that led to such a disastrous decision in The Price of Loyalty. It was return government to its 1900 size, the era of William McKinley and the Robber Barons, by reducing government spending enough "to shrink it down to the size where we can drown it in the bathtub", said Grover Norquist once famously, architect of the no tax increase pledge signed by more than 200 Republican legislators.

So we now know what makes up the current $15 trillion federal debt. Most of the deficit was created by the Bush tax cuts, war spending, and the second Great Recession that occurred under the Bush presidency -- from December 2007 to June 2009-- says the CBPP. It resulted in the most anemic recovery since WWII, with just 5 million jobs created, not even recovering from the 8 million jobs lost since 2000, and the median household income decline from $56,000 in 2000 to $52,000 in 2011 dollars, where it was in 1997, according to the New York Times and Moody's Analytics.

Graph: CBPP

That cost of the Bush II deficit is just now becoming evident, because of its growing size and the fact that budget matters are so arcane and hard to understand by the public and politicos alike. But all of the Bush tax cuts contributed to the deficit, because they weren't paid for. GW Bush wouldn't cut back spending to match the loss in revenues because he wanted to pay for his wars, so he borrowed the monies. Whereas during the Clinton era, legislators had agreed to pay-as-you-go rules, where spending cuts had to match tax cuts.

And the Great Recession has continued to grow the deficit. In fact, if just the Bush tax cuts were extended it would increase that deficit by $4.6 trillion over the next 10 years, says Andrew Fieldhouse and Ethan Pollock of the Economic Policy Institute, a labor think tank. That means we are now facing its terrible cost. Republicans have proven their ideology of starving the beast of government ends up starving the economy of growth, except for the 1 percent who are their supporters.

Harlan Green © 2012

Corporate Austerity Not the Answer in 2012

Popular Economics Weekly

Why so much gloom and tentativeness about U.S. economic growth when all the indicators are looking up for 2012? For instance, the Conference Board’s Index of Leading Economic Indicators again showed positive growth ahead. It rose 0.4 percent with 7 of its 10 indicators positive.

And the Q4 ‘advance’ estimate of GDP growth was 2.8 percent, almost double Q3. Equipment and software, which includes autos and exports, was the largest component. It would be even higher if corporation would use more of their cash hoard for job creation, rather than speculative investments and excessive executive compensation.

Graph: Econoday

Could it be because of the euro’s problems? “This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam,” said Ken Goldstein, a Conference Board economist. “Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe.”

But JP Morgan’s President Jamie Dimon said even the damage from a default of Greek debt would be “negligible”, in a CNBC interview at the Davos, Switzerland economic summit. So what’s the problem? The austerity (meaning deficit) hawks have their hands around the throats of European commerce. Why? In the mistaken belief that more stimulus spending will increase debt without actually causing more growth.

But Professor Robert Shiller, co-author of Animal Spirits with Nobelist George Akerlof, calls it debt delusion. When the private sector, including households, becomes over indebted, they begin to save more and spend less. But if governments do it at the same time, it causes a downward spiral towards deflation and recession or depression. This comes from the belief of fiscal conservatives that public borrowing takes money away from private users.

That, however, isn’t the case, because the private sector has plenty of funds, but is hoarding them (some $2 trillion in cash to date), rather than creating more jobs. So if governments are also hoarding their monies—in the form of trade or currency surpluses, as is happening in most of Europe today, then the bottom falls out of the economy. I.e., if no one is buying and everyone is saving, then no business gets done. This should be self-evident, because such a truth has been known since the Great Depression and New Deal that established our modern safety net, and ultimately put so many people back to work.

What underlies that truth is that Great Depressions and Great Recessions only happen when there is a wrenching transformation of whole economies. It was transformation of a mostly rural economy to manufacturing in the 1920s that brought on the Great Depression, and now it is wholesale migration of manufacturing jobs overseas and transformation to the Information Age, when little needs to be manufactured in the U.S.

Rutgers Econ Professor James Livingston has explained this transformation best in recent papers and articles. The great wealth shift away from wage earners-consumers to corporate profits began during the Great Depression, according to Livingston: “The underlying cause of that economic disaster (the Great Depression of 1929-33, 1937-38) was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production…and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.”

And in a recent New York Times Op-ed, It’s Consumer Spending, Stupid, Livingston expands on the reasons for our current prolonged malaise:

“As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.”

This, to put it mildly, explodes that rationale used by Wall Street and corporations to justify not passing on more of their profits to consumers—80 percent of which are wage and salary earners. The reasoning being that it is their profits that drive growth.

Professor Livingston says, “Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth.”

Not so, says Livingston, “But history shows that this is wrong. Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

“In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.”

Much has been written already about the record profits of both financial and non-financial corporations that have drained consumption, and that is the main reason why average real household incomes have actually declined over the past 30 years. In fact, corporate profits today are highest in history as a percentage of GDP.

Graph: Trading Economics

And this could be actually endangering economic growth by causing rampant market speculation, rather than productive investments, say many pundits, including Professor Livingston: “So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

How to cure the record income inequality that has resulted from so much power going to Wall Street and the corporations? Let us return to the income tax brackets that brought on so much prosperity to the middle class during the 1960s and 1970s. What were they?

The maximum bracket has fluctuated from 91 percent for those earning more than $400,000 in 1960, to the current low of 35 percent for those earning more than $379,150 today. And this has coincided with the astronomical increase in both household and government debt.

So it should be a no-brainer, if we want to see American growth restored to historical levels. Higher taxes have meant more growth, because public revenues are invested in growth-inducing infrastructure, better public safety, and upward mobility inducing education, for starters. Whereas lower taxes mean higher debts, with less growth and more speculative risk-taking to show for it. Why history is so easily forgotten may be a question only psychologists can answer.

Harlan Green © 2012