In Search of a Moral Economy

Financial FAQs

vox.com

Vermont Senator Bernie Sanders defined a moral economy in a recent Duke University dialogue with the Reverend William Barber II: “A moral economy is one that says, ‘In the wealthiest country in the history of the world, all our people should be able to live with dignity and security.’”

We don’t have to quote the very progressive U.S. Senator to know what a moral economy should look like. One has only to study the history of income and wealth redistribution since 1980 when demand-side economic theory—the Keynesian economics of English Lord John Maynard Keynes that guided Roosevelt’s New Deal—was replaced by so-called supply-side policies—under the conservative but never validated premise that enhancing the wealth of holders of capital with lower taxes and regulations would maximize production, while suppressing the rights and wages of their workers.

History since then has borne out the immorality of what came to be called trickle-down economics—record income inequality in the American workforce. Its rationale came from a diagram on a napkin that then White House Chief of Staff Dick Cheney took to heart as the mantra that guides conservative Republicans even today.

It’s an absurd equation. President Reagan at the time believed that lower taxes would motivate workers to work harder and produce more. The problem was reducing everyone’s taxes would stymie government programs that helped to level the opportunity table. It was the wealthiest that benefited most with reduced personal tax rates that were as high at 92 percent in the Eisenhower administration, which financed the federal highway system, sent us to the moon, and instigated many of the public programs that have made America so productive.

It’s hard to know where this thought process came from. History shows that people work just as hard—sometimes even harder—when they receive a smaller share of their paycheck; especially when a portion goes to insure future benefits like workman’s compensation insurance, social security, Medicare and Medicaid.

But conservatives latched onto several Austrian economists who hated almost any form of authority; so much so that they advocated limiting the powers of democratically elected governments to care for their own citizens. Such was the fear of centralized authority by economists like Fredrick Hayek in his book, The Road to Serfdom, called any regulations to tame capitalism a form of enslavement without recognizing that raw, unregulated capitalism meant serfdom and exploitation of those workers.

Graph: metroscan.com

We do now have a better understanding of how capitalism—the worst economic system, except for all of the others (to paraphrase Churchill)—works for Main Street as well as Wall Street.

It means in part returning to the much more progressive personal tax rates of earlier U.S. administrations—before President Reagan made the immoral tax cuts that even underfunded the military at the time, and initiated the massive federal debt burden we carry today.

All the public programs funded by governments enhance prosperity and productivity in some way—whether it’s to upgrade our infrastructure, fund new health discoveries, strengthen the public insurance and pension programs; and protect the environment, without which no Americans can prosper over the long term.

Then we can afford to protect those most in need. That is what a moral economy looks like.

Harlan Green © 2018

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

Dr. Robert Shiller--Why the Weak Recovery?

Popular Economics Weekly

Nobelist Robert Shiller, winner of the Nobel for his research in Behavioral Economics, or the psychology that drives economic behavior, has come up with the latest reason this economic recovery has been so weak to date. GDP growth has averaged just 2 percent since the end of the Great Recession.

It has to do with what Lord JM Keynes called ‘animal spirits”, or the psychological fact that fear breeds more fear, so that it can grip a whole country, as it did during our Great Depression, and perhaps is doing so again.

“The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots,” said Dr. Shiller. “Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further. The downturn deepens, and a vicious circle of despair takes hold. Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion.”

In fact, over the last two decades, like that of many other developed nations, US growth rates have been decreasing. In the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent. But it is much more due to the fact household incomes have declined for most Americans after inflation, and so now spend more than they save to even maintain their current standard of living.

Doctor Shiller’s answer is to restart our vision of going to the moon and beyond; that is, using public spending on national projects that both inspire our body politic and restore our leadership in the sciences.

“Government-funded space-exploration programs around the world have been profound inspirations,” says Dr. Shiller. “Of course, it was scientists, not government bureaucrats, who led the charge. But such programs, whether publicly funded or not, have been psychologically transforming. People see in them a vision for a greater future. And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress.”

But he doesn’t go into what may be behind the fear—what economists now call consumer confidence or sentiment. We measure confidence in particular to gauge just how Main Streeters feel about their future economic prospects for jobs and financial security. And the main determinate of their current still low confidence level has to be the fact that most Americans have not seen any change in their financial conditions for decades.

The result is record economic inequality that is plaguing growth as it did in 1929, the real cause of the Great Depression. The result of that inequality is money not flowing to where it can be spent productively and so do the most good—to consumers or government that will spend and/or invest in productive enterprises, rather than put it into tax shelters for their heirs, as most of the wealthiest seem to be doing today.

Graph: Business Insider

This is evidenced by the personal savings rates of the different income brackets. For instance, the wealthiest 1 percent now save more than 50 percent of their income, whereas the poorest 20 percent save none.

What do they do with their savings? Mostly hoard it. According to the new Billionaire Census from Wealth-X and UBS, the world's billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires' holding an average of 19 percent of their net worth in cash.

"The apparent safety of cash, reinforced by the painful psychological experience of the 2008-09 global financial crisis and the subsequent troubles within the European Monetary Union, likely reinforces the tendency to favor this cautious allocation strategy," said Simon Smiles, chief investment officer for Ultra High Net Worth at UBS Wealth Management.

And House Republicans are once again proposing repeal of the inheritance tax, now for the $5million in inherited wealth and above set that still have to pay it. The Center for Budget Policies and Priorities tells us the effect of this loss in taxes:

· Cost $269 billion in reduced revenues over 2016 to 2025, according to the Joint Committee on Taxation (JCT), adding $320 billion to deficits when counting additional interest on the national debt.

· Do nothing for 99.8 percent of estates. Only the estates of the wealthiest 0.2 percent of Americans -- roughly 2 out of every 1,000 people who die -- owe any estate tax. This is because of the tax's high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015. Repeal would bestow a tax windfall averaging over $3 million apiece, or more than a typical college graduate earns in a lifetime, on the roughly 5,400 wealthy estates that will owe the tax in 2016.^[2] The 318 estates worth at least $50 million (some of which are worth hundreds of millions of dollars) would receive tax windfalls averaging more than $20 million each.

· Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show.^[3] Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top. Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country's wealthiest estates, who also tend to have very high incomes.^[4]

It’s sad that we even need to have this argument on whether such inequality is a bad thing, given Dr. Shiller’s worries that we are re-experiencing what happened during the Great Depression.

Harlan Green © 2015

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

Germany’s Failed Austerity Policies

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.

Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

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

Econ Robert Shiller’s Nobel Prize a Big Win

Popular Economics Weekly

Although much of what Yale economist Robert Shiller writes is about the importance of financial markets, he won the Nobel Prize in Economic Sciences for studying how financial markets misbehave. He is a pioneer in the new field of Behavioral Economics, or behavioral finance, as he has sometimes calls it.

“Mr. Shiller, 67, later introduced an important caveat to the idea that markets operate efficiently, finding that stock and bond prices show greater predictability over longer periods,” said the New York Times, in commenting on the award to Dr. Shiller, Eugene Fama, and Lars Peter Hansen. “Mr. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making, and instead reflect the irrational behavior of market participants.”

His recognition will ultimately swing the pendulum of economic thought away from the so-called Austrian school of free market economics that conservatives have long worshipped to justify their belief that small government and little taxes were the most “efficient” way to distribute wealth. We know the result of those theories—Inequality For All, to paraphrase Robert Reich’s latest book and film now in theatres.

He also boosted Keynesian economics with Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, written with Nobelist George A. Akerlof in 2009, which documented how financial behavior is tied to the vagaries of human nature, a clear tribute to John Maynard Keynes and his theory of animal spirits—today termed a greater or lesser confidence in an unknown future.

His biggest claim to fame comes from his 2000 book, since revised, Irrational Exuberance, which predicted the dot-com bubble bust. In it he looked at the empirical behavior of stock prices over the past 100 years. It showed that S&P price-to-earnings ratios had soared to unsustainable levels—as much as 44 to 1, almost double that of the Black Monday stock market collapse at the beginning of the Great Depression.

“The high recent valuations in the stock market,” said Shiller in Irrational Exuberance, “have come about for no good reasons. The market level does not, as so many imagine, represent the consensus judgment of experts who have carefully weighed the long-term evidence. The market is high because of the combined effect of indifferent thinking by millions of people, very few of whom feel the need to perform careful research on the long-term investment value of the aggregate stock market, and who are motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom.”

He also specialized in real estate and wrote books such as The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, and with Karl Case set up the S&P Case-Shiller Home Price Index that tracks national same-home sale prices for 10 and 20 metropolitan districts.

But I predict that he will become known for an even greater contribution to economic thought. It is for his book, The New Financial Order, Risk in the 21^st Century, Princeton U. Press (2003). In it, he uses his empirical knowledge and Big Data to tell us how to create hedging and insurance mechanisms that protect against major risks that have pummeled the financial markets.

“…the insights of finance have been applied in only a limited way,” says Professor Shiller in his introduction. “Finance has substantially neglected the protections of our ordinary riches, our careers, our homes, and our very abilities to be creative as professionals. We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart”.

And that will continue to be is his real contribution to a world where equality is good for everyone. Understanding how markets misbehave will rip the shroud away from those who have been able to profit from the public’s lack of knowledge about how financial markets actually perform.

Harlan Green © 2013

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

Austerinomics, the Anti-Growth Orthodoxy

Financial FAQs

The Federal Reserve Open Market Committee has just said it in the press release from its latest committee meeting in an otherwise ‘moderately’ upbeat announcement: “Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

Austerinomics, or the policy of starving the beast of government by cutting both its revenues and spending doesn’t work at a time when 7.6 percent of those looking for work cannot find jobs, and some 4.7 million have been unemployed for more than 6 months. In fact, austerinomics is really starving most Americans of their wealth, as well as necessary public services and safeguards.

We know the restraints are across the board sequestration spending cuts on top of the $1.6 trillion in spending cuts enacted in 2011. The results, says the Congressional Budget Office are the loss of up to 750,000 jobs and up to 1.5 percent in GDP growth in 2013.

The real beef of Keynesian economists such as Paul Krugman, Joseph Stiglitz and a host of other Nobelists is that the advocates of austerity in both U.S. and Europe won’t acknowledge the evidence. Austerinomics hurts economic growth. The evidence is really overwhelming, both in Europe that is back in recession and the weak U.S. recovery. Cutting government spending and other stimulus measures during recessions, and consequent recoveries makes no economic sense, because it reduces the demand for more goods and services.

Austerinomics isn’t based on any economic theory (nor is Laffernomics, the theories of Arthur Laffer who predicted that lower tax rates would increase growth). It hasn’t happened, as GDP growth has been slowing since the 1970s rather than speeding up as tax rates have been slashed.

For what drives growth is both public and private spending, not just spending of the wealthiest few. Consumers spend less and investors invest less when unemployment is high and incomes are low, period. Even GW Bush understood this, which is why he refused to cut government spending after his first recession and 9/11 attacks.

Unfortunately, most of that spending was to finance 2 wars and tax cuts for the wealthiest individuals. But it did bring back full employment, until the housing bubble burst.

So what is the real goal of the advocates of austerinomics? It is the continued transfer of wealth to the wealthiest. Representative Paul Ryan’s budget proposals provide the blueprint, and Bush’s Brain Senior Advisor Karl Rove provided the rationale for re-creating the cartels and monopolies of President William McKinley’s time—1897-1901. Rove believed Republican principles and power would reign supreme for generations, if Republicans and their supporters accumulated enough wealth.

But that has never stuck with Americans. Vice President Teddy Roosevelt initiated the progressive era upon McKinley’s assassination, battling the monopolies and cartels of that era. The result was what he called the “New Nationalism”, a government that functioned for all the people, in his famous 1910 Osawatomie, Kansas speech.

“The new Nationalism puts the National need before sectional or personal advantage. It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representative body shall represent all the people rather than any one class or section of the people.”

We cannot turn the clock back to the beginning of the 19^th century, in other words, even if some people want to.

Harlan Green © 2013

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

David Stockman’s Crony Capitalism

Popular Economics Weekly

Paul Krugman is being too gentle with David Stockman, whose recent New York Times ‘rant’ glorifies the gold standard and denigrates government for standing in the way of putting “free markets and genuine wealth creation back into capitalism”.

“…like so many in his camp, Mr. Stockman misunderstands the meaning of rising debt,” writes Krugman. “Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less.”

In fact, Stockman would return us to an earlier era of crony capitalism, before any form of financial regulation, such as by the Federal Reserve. The result then as now is huge income and wealth inequalities that have been the main cause of the Great Depression and major recessions—the last five just since 1980 during administrations that advocated deregulation and a similar opposition to financial regulation.

And then as now, there is an answer to the Oligarchies that ruled Big Business, as corporate monopolies have again concentrated their power today. President Obama gave a speech in Osawatomie, Kansas on December 6, 2011 about that earlier era. Osawatomie was the small town where Teddy Roosevelt gave his now famous “New Nationalism” speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property, because we were at a similar historical juncture. Corporate interests again control 2 branches of government—Congress and the Supreme Court—as they had in the early 1900s.

“At the turn of the last century, when a nation of farmers was transitioning to become the world's industrial giant, we had to decide,” said Obama. “Would we settle for a country where most of the new railroads and factories were being controlled by a few giant monopolies that kept prices high and wages low?... Because there were people who thought massive inequality and exploitation of people was just the price you pay for progress.”

Greater equality of opportunity is what economists such as Nobel Laureate Joseph Stiglitz are calling for today, in renewing the cry that we are all in this together. “There are four major reasons inequality is squelching our recovery,” says Stiglitz. “The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle — who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators — have lower household incomes, adjusted for inflation, than they did in 1996.”

Yet greater economic opportunity is more than a moral issue of what is fair, or even the core American value of everyone’s right to the pursuit of happiness. It can be inevitable if modern technology is allowed to fulfill its promise for all, rather than have it benefits be monopolized by the few.

For in an era where technology is replacing workers making the necessities of life at an ever accelerating rate, more Americans will have more leisure time to pursue their own interests. And more importantly, the ever increasing productivity of those technologies can lift all boats—that is, provide more necessities, as well as amenities to improve lives—rather than go only to the profit makers.

In giving his Kansas plea for a new nationalism of the common good, President Obama was going back to a time when Robber Barons ruled, having made enormous wealth from the founding of the railroads, banks, oil and steel industries in the 19^th century.

It was the beginning of the Industrial Revolution, when most of America was rural and Oligarchs ruled government and business. Sound familiar? That has happened once again with the enormous fortunes created via deregulation and the digital revolution. And once again the majority of American households are suffering from the excesses of this modern revolution that has outdistanced the safeguards that were established to protect householders from those excesses.

“The American people are right in demanding that new Nationalism without which we cannot hope to deal with new problems,” said Roosevelt. “The new Nationalism puts the National need before sectional or personal advantage. It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representative.”

Actually, much of the Great Recession and slow recovery is due to widespread ignorance of economic fundamentals that depend on the public’s welfare. For no economy can prosper if educational and environmental standards are ignored, which enable social mobility and good health. It is also an ignorance of what is in our national interest. Raising educational and environmental standards, restoring our aging infrastructure, and creating a truly universal health care system make us more competitive globally.

Don’t take my word for it. Lord John Maynard Keynes saw the consequences of increasing abundance in his 1930 essay, Economic Possibilities for our Grandchildren: “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

And we are beginning to see that abundance, as well as the means to share it more fully, if the Stockman’s of the world would stop glorifying self-interested behavior. Professor Robert Shiller discusses how this can happen in his recent book, “The New Financial Order, Risk in the 21^st Century”, in which he lays out what our new information technologies will be able to do, just as the Industrial Revolution ultimately benefited most Americans.

“Right now we are witnessing an explosion of new information systems, payments systems, electronic markets, online personal financial planners, and other technologically induced economic innovations, and consequently much in our economy will be changed within just a few years. Almost all of our economy will be transformed within just a few decades. This new technology can do cheaply what once was expensive by systematizing our approach to risk management and by generating vast new repositories of information that make it possible for us to disperse risk and contain hazard.”

It will do all this by leveling the playing field in order to create a greater transparency of markets, as financial information in particular will be available to all. Therefore much of the risk in one’s profession, or housing value, or even health, will be able to be insured against unexpected events, such as recessions, or loss of career, or debilitating illnesses because of the new information technologies.

That is the real revolution happening today. Who will benefit from such modern information technologies--the few or the many? Because it will become more difficult for those who profit from such ignorance to accumulate excessive power. Stockman is wrong in believing we should turn back the clock. Or, as Teddy Roosevelt knew, we will continue to repeat past history.

Harlan Green © 2013

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

The Decline of the West

Popular Economics Weekly

Berkeley Prof Brad Delong has posted a very sobering essay on his website. Because the deficit hawks and austerity advocates now hold sway in both Europe and North America, we could be in for a very prolonged “Lesser Depression”, as he calls it.

“I had always thought that policy makers well understood the basic principle of macroeconomic management,” said this Economics Professor. “It was that the government's proper role was…to tweak asset supplies so that there were sufficient liquid assets, enough safe assets, and enough financial savings vehicles that the economy as a whole did not feel under pressure to deleverage, and so push production below potential output.”

 

“This principle has gone out the window. The working majority of the Federal Reserve believes it has extended its aggressive expansionary policies to if not beyond the bounds of prudence. The working majority in the U.S. Congress is taking its cues from the Saturday Night Live character "Theodoric of York, Medieval Barber". It believes that what the economic patient needs is another good bleeding of rigorous austerity, and that is putting further downward pressure on employment and production.”

Why do not policymakers in the West understand that it is in our best interests to prod economic activity enough to create robust growth, until enough revenues are generated to pay for keeping up with the rest of the world? Who are the deficit hawks that choose not to understand basic economics? Paul Krugman has called them out countless times.

“And why are we shortchanging the future so dramatically and inexcusably? Blame the deficit scolds,” said Krugman, “…whose constant inveighing against the risks of government borrowing, by undercutting political support for public investment and job creation, has done far more to cheat our children than deficits ever did.”

The scolds are mostly Republicans, in this case, who have become the protectors of the wealthiest among US, as they siphon ever more public funds away from public investments to their own profits.

Professor Krugman continues, “Fiscal policy is, indeed, a moral issue, and we should be ashamed of what we’re doing to the next generation’s economic prospects. But our sin involves investing too little, not borrowing too much — and the deficit scolds, for all their claims to have our children’s interests at heart, are actually the bad guys in this story.”

How do we escape the political gridlock that has trapped US between the past the the future? Part of the answer can lie in history. We had a similar situation at the beginning of the 20^th century, when robber barons ruled, and we needed a JP Morgan to finance World War I.

Teddy Roosevelt came along with an answer, which he called the “New Nationalism”. He made sure more wealth flowed to the less wealthy by busting monopolies that ruled the new industries of that day, and advocated laws and institutions to regulate them.

We are now at the beginning of the Digital Revolution, where technology is replacing workers making the necessities of life at an ever accelerating rate. So more Americans will have more leisure time to pursue their own interests. And more importantly, the ever increasing productivity of those machines will be able to lift all boats—that is, provide more necessities, as well as amenities to improve lives—rather than go only to the profit makers.

That is to say, more Americans will be able to live off the fruits of technology, if policymakers will listen to our smartest economists. Much of the Great Recession and slow recovery is due to widespread ignorance of economic fundamentals that actually depend on social welfare, as Professor Delong says. For no economy can prosper if educational and environmental standards are ignored, which enable greater social mobility and good health. It is also an ignorance of what is in our national interest. Raising educational and environmental standards, restoring our aging infrastructure, and creating a truly universal health care system make us more competitive globally.

Don’t take my word for it. Lord John Maynard Keynes saw the consequences of increasing abundance in his famous 1930 essay, Economic Possibilities for our Grandchildren: “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

Professor Robert Shiller also discusses its consequences in his recent book, “The New Financial Order, Risk in the 21^st Century”, in which he lays out what our new information technologies will be able to do. In it, “Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions--risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies”, says the publisher, Princeton University Press.

It will do all this by leveling the playing field in order to create a greater transparency of markets, as financial information in particular will be available to all. Therefore much of the risk in one’s profession, or housing value, or even health, will be able to be insured against unexpected events, such as recessions, or loss of career, or debilitating illnesses because of the new information technologies.

So the Digital, ‘Big Data’ Revolution that is upon us gives no reason to be ignorant of how the modern world works. It will become more difficult for those who profit from such ignorance to accumulate excessive wealth. Or, as Teddy Roosevelt knew, we will continue to repeat the mistakes of past centuries.

Harlan Green © 2013

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

Taxes Shouldn’t Be the Main Worry

Financial FAQs

Economist and British Lord John Maynard Keynes opined in the 1930s that in the end we are all dead, so why worry too much about anything else? Well, this particular election year there is something else worrying both parties—taxes.

Taxes shouldn’t be our main worry.  Creating more jobs should take precedence in the debate over growth.  In fact, recent surveys have found it’s the lack of sufficient demand for goods and surveys that is holding up faster growth, not taxes, or regulations, or too big government.

“Data from the U.S. Department of Labor indicate the employers infrequently cite government regulations and intervention as the reason for layoffs. According to the most recent quarterly data on layoffs lasting more than 30 days, employers said business-demand problems were behind more than 40 percent of separations, followed by seasonal factors, financial issues and organizational changes, among other factors. Employers cited governmental regulations/intervention for less than 1 percent of layoffs.”

Republicans worry about inheritance (i.e., death) and capital gains taxes in particular, since so much of their wealth is either invested or inherited. It is reputed by Senate Speaker Harry Reid and others that Mitt Romney pays very little in taxes, and would like even to pay less in his 5-Year Economic Plan to Grow the Economy.

Democrats worry about overtaxing the middle consumer class, but not the upper class. But cutting taxes to anyone means lower tax revenues, which shrinks government at a time when the private sector isn’t expanding enough on its own.

The real problem with both approaches is that neither will pay down our humongous federal budget deficit, unless economic growth picks up and no one as yet is providing a realistic plan to do it. It’s no secret what that is. Someone has to start spending money to make money that creates jobs and so stimulates greater demand for goods and services.

Even our ‘Government is the Problem” President Reagan knew this when he raised taxes 11 times to bring us out of the 1980 and 1983 recessions, mainly spending those revenues on defense. He knew that government had to provide the funds for growth when record interest rates had choked off private credit in the early 1980s.

Graph: CBPP

And President Obama’s $830B American Recovery and Reinvestment Act spending pulled us out of the Great Recession. The Recovery Act was designed to boost the demand for goods and services above what it otherwise would be in order to preserve jobs in the recession and create them in the recovery, says the CBPP.

The Congressional Budget Office finds that GDP has been higher each year since 2009 than it would have been without the Recovery Act (with the largest impact in 2010 when GDP was between 0.7 and 4.1 percent higher than it otherwise would have been). The economy is still benefiting from the Recovery Act, although as expected that effect is diminishing as the economy grows; CBO estimates that GDP in the third quarter of 2012 will be between 0.1 and 0.7 percent larger than it would have been without the Recovery Act.

So how to create more government revenues with which to simulate growth? A starter would be to allow all the Bush tax cuts to expire, bringing us back to Clinton-era taxes that created budget surpluses and 23 million jobs. This would save US about $3.6 Trillion in debt over the next 10 years, according to CBPP. And when estimating the revenue gained by just raising taxes on high-income groups, the Joint Center on Taxation and Treasury find that modest increases in the top marginal tax rates would also raise significant revenue. For example:

• Treasury estimates that allowing the cuts in income taxes for high-income households (those with adjusted gross incomes above $250,000 for married filers and $200,000 for single filers) and estate taxes that were enacted in 2001 and 2003 to expire at the end of 2012 would save a $968 billion over the next ten years.

The ‘real’ jobs numbers I spoke about in June are beginning to show up in July, as jobs added, and 9,000 government jobs lost. The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

Graph: CBPP.Org

This points to further employment growth ahead. Why? Incomes are increasing, as are hours worked, which means increased demand for products and services in the fall; ergo, increased hiring. Although employers began to add jobs in 2010, the economy has recovered only about 4 million of the 8.7 million jobs lost between the start of the recession in December 2007 and early 2010, says the Center For Budget and Policies Priorities. As a result nonfarm payroll employment was 3.4 percent (4.7 million jobs) lower in July 2012 than it was at the start of the recession.

So the economy still faces a long and difficult climb out of the jobs hole created by the recent recession. The private sector created, on average, about 157,000 jobs a month in the past 29 months — a pace somewhat faster than population growth. That has contributed to a decline in the unemployment rate, but much faster job growth will be needed to restore normal labor force participation.

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

Government Has to Work—or Else

Financial FAQs

We can no longer afford to listen to those conservatives who believe government is the problem, since there is no viable recovery from the worst recession since the Great Depression without government investment in sectors that will grow our future economy—particularly in education, infrastructure and the Research and Development of new technologies such as jump-started the Internet.

So say more economists, such as Nobelist and former chief World Bank economist Joseph Stiglitz in his most recent Vanity Fair article, “The Book of Jobs” that details how we recover from the Great Recession, and which sectors will prosper and expand. This means a “wrenching transition” of our whole economy, as happened in the 1930s, which means government has to be part of the solution.

“The problem today is the so-called real economy,” says Dr. Stiglitz. “It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.”

And so just as with the Great Depression, government has to be part of the transition. Those who advocate little or no government—such as Libertarian candidate Ron Paul who would abolish just about all government—do not seem to realize it would be a return to the beginning of the Industrial Revolution so well documented by Charles Dickens—when there were no child labor laws, for instance.

Or a return to the Great Depression (really two, back-to-back) that lasted almost 10 years when there was no social security, unemployment insurance, or government investments that modernized the industrial sector for World War II.

“It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery,” said Stiglitz. “The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.”

So, surprise-surprise, the Great Recession wasn’t really the fault of anyone in particular but a cascade of events that are driving us hell-bent out of the industrial, blue-collar era of factory jobs into the White Collar Service and Information Age. And we cannot do this without public-sector investments that must ease the transition; otherwise we are doomed for a “much longer long slump than necessary,” in Stiglitz’s words.

It was small government conservatives like Presidents Reagan and GW Bush that had been wasting taxpayers’ monies to pay for foreign wars and tax cuts since 1980, rather than paying down the deficit or even shoring up social security and Medicare. GW Bush wasted 4 consecutive budget surpluses of the Clinton era. And the low interest rates engineered by Fed Chairman Alan Greenspan for that purpose in turn inflated the housing bubble, lending a sense of false prosperity.

The result of such small government policies was the Fed then took away the punch bowl in 2006 and raised interest rates 17 consecutive times that in effect burst the bubble by raising all those teaser and liar loan interest rates too high for borrowers who shouldn’t have qualified for them in the first place. But that only hastened the inevitable rush away from Industrial to the Information Age. Factory jobs and salaries had already begun to decline in the 1970s along with household incomes for most Americans.

“Today we are moving from manufacturing to a service economy,” says Stiglitz. “The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology.”

“What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.”

In other words, we need to put public monies where it will do the most good. Corporate profits today are the highest in history as a percentage of GDP—more than 14 percent—yet their CEOs haven’t been investing it wisely. Most of their profits have been either hoarded, invested overseas, or used to buy back stock to increase the stock options held by corporate executives. It has lined their own pockets, rather than that of their employees and therefore the economy as a whole.

And that is where today’s right and far right wing conservatives want even public monies to flow—into their supporters’ already full pockets—when they won’t allow the Bush tax cuts to expire that have bloated the federal deficit. This will only hasten the decline of America already suffering from record high income inequality, low rates of social mobility, record high violent crime rates, and a government they don’t want to work for the future of all Americans.

Government has to work—or else.

Harlan Green © 2011

How Do We Boost Economic Growth?

Popular Economics Weekly

There is a tremendous misunderstanding of how to boost economic growth, and this is hurting the recovery. Conservative politicians want to cut taxes and government services, while progressives want to use government to boost growth. Yet it really doesn’t matter who does the boosting. The results are the same.

The best way to understand growth is with a concept used by economists, aggregate demand, that we have mentioned in past columns. Aggregate demand can be thought of as income and assets earned by consumers, private business, the financial sector and government. And said income and assets can be either hoarded in mostly MZM accounts (Money at Zero Maturity—i.e., earning 0 interest), as it is now, spent on things, or invested in facilities that produce more things.

Our economy has become seriously skewed during the past 10 years because corporate profits zoomed, while household incomes have not even kept up with inflation.

This is not the column to discuss the whys, including why so much income has migrated to the top 1 percent income bracket. But the result has been that most corporations haven’t invested in their employees. Which is why aggregate demand—the source of economic growth—has suffered mightily.

We know that consumers make up 70 percent of GDP growth, for example. So because their incomes were stagnant, they had to borrow to maintain their standard of living. And because they indebted themselves so heavily while their incomes remained stagnant, most have not been able to boost their spending during the recovery.

So business spending, which makes up the other part of aggregate demand (along with government spending) hasn’t been expanding because of so much excess industrial capacity. We know that excess capacity is still a problem today, as evidenced by the latest industrial production numbers.

Overall capacity utilization is improving, rising to 76.0 percent in December from 75.0 percent in November.  It is at its highest since a reading of 77.9 percent for August 2008, but is still far below the 82 percent long term average.

Industrial production posted a healthy 0.8 percent gain in December, following a 0.3 percent rebound in November.  However, the boost was led by a monthly 4.3 percent surge in utilities output, following a 1.5 percent increase in November.  By market groups, strength was widespread.  Production of consumer goods increased 1.0 percent in December; business equipment, 0.6 percent; nonindustrial supplies, 0.1 percent; and materials, 1.0 percent.

And because most profits have not been flowing back to average consumers, employers are not seeing enough demand for their products and services to warrant hiring more workers. That is the major reason for the entire government stimulus—to boost aggregate demand. The $787 Billion American Recovery and Reinvestment Act (ARRA) was in fact not enough to bridge the so-called lost output gap between potential and actual GDP growth over the past 2 years. The Fed’s purchase of government securities has held down interest rates, enabling businesses to borrow cheaply, and preventing real estate values from going into free fall.

Then what is the answer on how to create sustainable aggregate demand? The major push should be reestablishing the middle class that has been so decimated by lost jobs and much of its wealth—both in stocks and real estate. New York Times’ David Leonhardt is one of the few pundits to voice this concern in his most recent column, “In Wreckage of Lost jobs, Lost power,” in which he laments the loss of labor’s bargaining power.

Whereas employment in most other developed countries, including Japan and Russia, is much higher than in the U.S., corporate profits are lower. This is because U.S. domestic workers’ bargaining power has been severely diminished, in part because of laws that give employers the advantage in hiring and firing. And Germany and Canada, who barely had a recession, encourage companies to cut work hours for all during slowdowns—called ‘short work’—rather than lay off some, so that the pain of reduced incomes is spread over the entire workforce.

There are many other ways to cure insufficient aggregate demand, such as more progressive taxation. For instance, the top income tier during the Eisenhower years had a 95 percent tax rate on its top income bracket. This had the effect of siphoning off money from the wealthiest who spend the least percentage of their income, and putting it into the more productive use of building infrastructure, such as the interstate highway system, or education, or into more research and development.

Also, a better-run health care system would reduce health costs, which are double per capita in the U.S. vs. other developed countries. This would have several benefits, including increasing the competitiveness of U.S. made products, while boosting workers’ benefits and incomes.

There is still almost $3 trillion in lost output—the difference between actual and potential GDP growth caused by the recession, as we said. But unless we get over the conservative-progressive divide on how to bridge that gap, we won’t be able to generate sufficient aggregate demand that will bring back the jobs and salaries lost during the worst downturn since the Great Depression. U.S. workers don’t care which sector generates their jobs, so neither should politicians.

Harlan Green © 2011

Redistributing Wealth—Not a Zero Sum Game

Popular Economics Weekly

No one wants to talk about the elephant in the room during this election season, wealth redistribution. Yet that is guiding policy makers on both sides of the political spectrum. Democrats are trying to restore middle class incomes by preserving the so-called middle class Bush II tax cuts for those incomes below $250,000, for example. Repubs meanwhile want to preserve all of the tax cuts, including for the wealthiest.

That is just one example of the mentality of both sides. In their minds, this economy is a zero-sum game, and so why discuss it? It is an I Win-You Lose world, in other words, which is fueled by the fear that many will miss out on a barely recovering economy. Yet that doesn’t have to be so.

Wealth redistribution should be discussed, since most income segments have seen a decline in their real (after inflation) incomes since the 1970s—except for the top one percent income bracket. And we cannot afford such growing income inequality, now the greatest since 1929, since economists are discovering that it was a main cause of the 2007-09 Great Recession as well.

The largest share of the nation’s income now goes to the wealthiest households. For example, according to the Center on Budget Policy and Priorities, between 1979 and 2007:

• The top 1 percent’s share of the nation’s total after-tax household income more than doubled, from 7.5 percent to 17.1 percent.
• The share of income going to the middle three-fifths (or 60 percent) of households shrank from 51.1 percent to 43.5 percent.
• The share going to the bottom fifth of households declined from 6.8 percent to 4.9 percent.
• The share going to the bottom four-fifths (80 percent) of the population declined from 58 percent to 48 percent.

Yet overall, the long term, historical personal income rate of increase is 5.6 percent per year. So the I win-You lose mentality is a fallacious (and even specious) economic argument. In fact, modern economic theory says just the opposite—when income is more fairly distributed via progressive taxation and other wealth equalizing policies (including universal health care).

Put more money into consumers’ pockets (i.e., the lower and middle class income brackets that spend the most), and we all win. Mainstream economic theory states that it creates greater aggregate demand for all—i.e., demand for not only more goods and services, but investments that create jobs. And demand can be created from either the public or private sector.

This win-win policy is a well-known truth most explicitly formulated by John Maynard Keynes, the economic theorist most reviled by conservatives who oppose most forms of government spending—except for defense, of course.

Conservatives don’t like social security or universal health care either, of course, because conservatives wish to preserve their wealth—won over many years of hard fought battles with unions and progressive liberals under President Reagan’s “government is the problem” mantra. And with Ayn Rand disciple Alan Greenspan running the Federal Reserve during this time, the floodgates were opened to allow the so-called ‘free market’ rewards to flow to those most able to exploit its opportunities.

Of course the call to more individual freedom that Ayn Rand espoused has to be enabled by smaller government, which also meant lesser regulation. President Reagan’s mantra is good for a world of entrepreneurs in a Darwinian dog-eat-dog world of global competition, in which the lowest wage earning companies and countries with least environmental safeguards end up being the producers, while the rest of us become consumers.

The problem with producing less and consuming more, however, is that consumers also have to make a decent living if they are to spend more, which is impossible with declining wage and working standards. Only those at the top—the most educated and entrepreneurial, in a word—are able to exploit those opportunities. Clinton-era Labor Secretary Robert Reich has explored this in his, “The Future of Success”, and subsequent books.

There is another disadvantage to such growing inequality, as well. It leads to more severe recessions, as we have said. The greatest periods of income inequality, 1928-9 and 2007-08, also led us into the severest economic downturns—the Great Depression and Great Recession. There is no good economic or political reason for such inequality to continue, if we want more sustainable—and predictable--growth.

Harlan Green © 2010

Where is Harry Truman—Part II?

Popular Economics Weekly

What is the case for not providing more additional stimulus spending to boost economic growth? Harvard Econ Prof Gregory Mankiw, former Bush White House economic advisor, gave this rather bizarre prediction for the future behavior of employers on his Blog. It seems that more stimulus spending creates more debt, ergo raises the prospect of higher taxes.

So, “businesses may be reluctant to invest in an economy that they expect to be distorted by historically unprecedented levels of taxation in the future,” he says.  “The more the government borrows, the higher taxes will need to go, the more distorted the future economy will be, and the less attractive is investment today.”

Yes, it is true that debt levels figure into both investment and spending decisions, but no one has been able to quantify how much. Consumers, for instance, are still paying down debt in record amounts. So much so that the personal savings rate has risen to 4 percent, from zero in the past decade. But consumer spending has also ramped up to almost 4 percent, which means incomes are increasing. Therefore, it doesn’t look like anyone is yet worried about higher future taxes.

Consumer credit contracted a sharp $9.1 billion in May with April revised to show an even more severe $14.9 billion contraction, as we said last week. Revolving credit contracted $7.4 billion and contracted $8.3 billion in April. Non-revolving credit shows a $1.8 billion contraction in May on top of a $6.5 billion contraction in April. Neither category is likely to show much improvement in June given indications from retail sales and last week's soft unit vehicle sales.

So, what’s going on—are consumers retrenching?  That might be part of the story.  Outstanding consumer credit can decline either due to consumers paying balances down or because banks and finance companies are charging off bad credit. But the charge offs are actually a positive for consumer spending—more discretionary income is freed.  The big picture is that the consumer is still cautious, says Econoday.

So why would such a reputable economist as Dr. Mankiw advance an unproved hypothesis? Some of it has to do with discredited economic theories that say our economy is a zero-sum game. When the government spends money, it takes away investment from the private sector. Households seem to operate that way, for instance. There is only so much money to go around, right?

But what happens when businesses hoard their cash, as they are doing now? The $1.8 trillion being held by the S&P 500 largest corporations are not being used—either in R&D that would create future products and services, studies show, or increasing their production capacity.

And so economic activity stagnates. Money sits at basically zero interest, earning zero returns—unless government steps in to borrow that money to directly create jobs, as it has been doing in green technologies, or to retain jobs with infrastructure investments.

That is the real debate. Conservatives want government to shrink spending, in order to shrink the amount of debt. This is because too much debt devalues the debts of creditors, which mostly reside on Wall Street. Whereas Keynesian economists believe in stimulating demand by putting more money into consumers’ hands that will stimulate more revenues going into the coffers of both government and private industry.

Year on year, personal income growth for May posted at 1.6 percent, easing from 2.6 percent in April. It became positive again in July 2009, at the end of the Great Recession. Year-ago headline PCE inflation edged down to 1.9 percent from 2.0 percent. Year-ago core PCE inflation firmed down to 1.3 percent from 1.2 percent in April. Falling prices might be the reason consumers remain cautious buyers.

But overall, the consumer sector is slowly gaining strength in terms of spending power, thanks in large part to government stimulus programs. Purchases have been a little erratic due to off and on auto and home buying incentives. But the consumer sector took one step forward in May, helping the recovery continue.

So what is the lesson from “give ‘em hell, Harry” that we asked last week? Econ Professor and columnist Paul Krugman thinks most who oppose government stimulus oppose government in general. President Truman believed in the New Deal, and the need for government support during tough economic times.

Those who worry about too much debt are worrying about the wrong debt. Stimulus spending creates short term debt that will come down when economic activity picks up. But longer term debt that will be carried by future generations comes from entitlements like social security and Medicare, which are projected to grow exponentially with retiring baby boomers. How to pay for those entitlements is a decision which should be faced by the present generation, rather than passed on to their children and grandchildren.

Harlan Green © 2010

The Debt Fallacy

Financial FAQs

The European debt crisis has re-triggered the debate over budget deficits, and even whether Europe’s problems could trigger a ‘double-dip’ return to recession in our own economy. The contention is that Europe will be burdened with debt for years to come, which slows their economic growth.

What has Europe to do with our own economy? It is mainly the relationship between currencies. When the euro is high, then our exports are cheaper, helping manufacturing employment in particular. So the reverse case boosts European exports and reduces ours. And the euro’s value has plunged as investors fled to dollar denominated investments.

But a more general debate is whether governments should incur additional debts to cure such financial crises as we are now weathering. Keynesian economists say that government stimulus spending is crucial to any recovery, since it boosts demand for new products and services. But that only happens if it is directed to consumers—who account for up to 70 percent of economic activity.

So-called supply-side policies boost the producers by giving tax cuts directly to investors and businesses, in the hopes that it will induce businesses to expand and create more jobs. However, that didn’t happen during the last recovery. The 5 million jobs created from 2000-08 was the lowest total since WWII.

Nobelist and New York Times columnist Paul Krugman came up with an interesting conclusion on just that subject. Were we better off under the supply-side policies of President Reagan in the 1980s who wanted to funnel more money to the supply-side, or of Clinton in the 1990s who wanted it to go to consumers, was his question.

“Here’s what I think,” said Krugman, “inflation did have to be brought down — and Paul Volcker, not Reagan, did what was necessary. But the rest — slashing taxes on the rich, breaking the unions, letting inflation erode the minimum wage — wasn’t necessary at all. We could have gone on with a more progressive tax system, a stronger labor movement, and so on.”

The stimulus spending is definitely working. The Congressional Budget Office reported the latest results of the $787 billion American Recovery and Reinvestment Act (ARRA) under this headline:

New CBO Report Finds ARRA has Preserved or Created up to 2.8 Million Jobs

While the report focuses primarily on the first quarter of 2010, CBO also includes new projections of the Recovery Act’s jobs impact through 2012. It finds that in the current quarter (the second quarter of 2010), there are 1.4 million to 3.4 million more jobs in the economy because of ARRA, and it predicts that ARRA’s jobs impact will peak this fall, when there will be 1.4 million to 3.7 million more jobs because of the legislation.

This is in line with the latest unemployment report, which showed 290,000 payroll jobs created in April, following a revised 230,000 advance in March, and 39,000 rise in February. April's boost topped the market estimate for a 200,000 gain. Net combined revisions for March and February were up a 121,000-including turning February from negative to positive. But the key number is private payrolls as Census hiring added 66,000 to April's jobs, compared to adding 48,000 the prior month. Private nonfarm employment increased 231,000, following a 174,000 rise in March.

The real key to refuting the ‘debt fallacy’ is the benefit government stimulus does for consumers’ pocketbooks, and that is also looking better. Consumers are getting healthier— at least financially, as income gains enable them to spend and save more, with inflation almost non-existent. The headline PCE price index was unchanged in April-easing from up 0.1 percent in March. The core rate also was soft, gaining only 0.1 percent and matching both March and the consensus forecast.

Personal income posted a solid 0.4 percent increase for April, matching the gain the month before. The April figure came in slightly lower than the market forecast for a 0.5 percent boost. Importantly, the latest increase is in what really counts as the wages & salaries component advanced 0.4 percent after rising 0.3 percent in March.

The good news is that consumers are finding more greenbacks in their wallets and this should support additional spending and the recovery. The consumer on average is now pulling its weight in the recovery, while inflation remains benign.

What about paying back the $11 trillion in public debt? We can follow the post-WW II scenario, when it was 120 percent of GDP. That debt was paid down quickly in the post-war recovery. Today it is approaching 90 percent, because this was the worst downturn since the Great Depression. So once again the key to a recovery is keeping consumers healthy with more jobs and higher incomes.

Among ARRA’s most effective provisions for saving and creating jobs, according to CBO’s estimates, are direct purchases of goods and services by the federal government, transfer payments to states (such as extra Medicaid funding), and transfer payments to individuals (such as increased food stamp benefits and additional weeks of unemployment benefits). CBO’s estimates indicate that tax cuts are less effective job producers, and tax cuts for higher-income people and corporations have very low bang for the buck.

Harlan Green © 2010

The Case for Sustainable Economics-II

Financial FAQs

Behavioral Economist Robert Shiller said in a recent New York Times Op-ed said, “We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience—and not efficient-market economics.”

Dr. Shiller is one of many economists decrying the lack of sustainable financial institutions that have led to so many recessions, including the current Great Recession—sustainable institutions that build communities rather than destroy them. Their lack has been mainly because they targeted the wrong economic goals—productivity over sustainability, or efficient markets (i.e. markets with minimal oversight) over markets that attempt to sustain longer-term economic growth.

We seem to have mastered the means of production, as economist John Maynard Keynes predicted in his 1930 treatise, “Economic Possibilities for our Grandchildren”, yet not how to put such growth on a sustainable path that benefits future generations rather than indebting them. As the originator of an economic theory that advocated government support during the Great Depression, Keynes believed that markets did not cure themselves without widespread suffering. The “animal spirits” of a populace that was discouraged by prolonged unemployment had to be boosted by governmental job creation measures in order to boost economic growth, if private sector employers weren’t hiring.

In other words, most modern economic theory has concentrated on producing the maximum amount of goods and services (hence emphasis on efficient markets), but ignoring their social welfare aspects. I.e., how sustainable is such a system that venerates individual effort (i.e., self-interest), but ignores its results? When whole communities are destroyed by a succession of bursting asset bubbles—it was first the dot-com bubble in 2000, then real estate bubble, and now the credit bubble bursting that has almost destroyed our banking system—then it is time to begin looking for a more sustainable economic system that preserves assets for our grandchildren.

Economists, sociologists and psychologists in particular are beginning to look at systems that capture the “richness of human experience” advocated by Dr. Shiller. One pioneer is economist Hazel Henderson, who helped to found the Calvert family of eco-friendly mutual funds. She also created the Calvert-Henderson Quality of Life Indicators (at http://www.calvert-henderson.com) that helps to measure what makes up a better quality of life. Its education component highlights why U.S. elementary education has flagged—the U.S. is ninth in the list of eighth grade math and science scores, for instance—behind nos. 1 and 2 Singapore and Taiwan, and what should be done to remedy it.

The research of behavioral economists such as Dr. Shiller are also debunking the efficient markets’ economists who generally advocate privatization (and deregulation) of financial institutions in the belief that individuals are the best regulators of their own behavior. Behavioral economists find that most people either do not have the time or knowledge to make intelligent financial decisions without some regulation to govern errant behavior. Former Fed Chairman Alan Greenspan once famously said,

“It is not that humans have become any greedier than in generations past. It is that the avenues to express greed had grown so enormously.”

Though private enterprise is the foundation of capitalism, and its source of wealth, we now know it only enriches the few without adequate regulation and governmental oversight.

And so Lord Keynes concludes, “The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”