Trumponomics 2.0--What To Expect?

 Financial FAQs

George Will, the conservative pundit, gave the best description of Trump’s incoherence in a Washington Post Op-ed: “It is urgent for Americans to think and speak clearly about President Trump’s inability to do either. This seems to be not a mere disinclination but a disability. It is not merely result of intellectual sloth but of an untrained mind bereft of information and married to stratospheric self-confidence.”

This was a leading conservative writer’s prediction of what did happen in President Trump’s first term as President—chaos. Trump’s second term should be a rerun if he succeeds in getting most of his initial cabinet picks confirmed by (or rammed through) the U.S. Senate.

Huffington Post

Many have no qualifications for those jobs, just as in Trump’s first term when most were lobbyists with blatant conflicts of interest, which resulted in many having to resign when their corruption was uncovered. Such dysfunctional behavior was a reason President Trump lost the House of Representatives to Nancy Pelosi and the Democrats in 2018, and Trump lost to President Biden in 2020.

Sadly, the incoming all-Republican congress will probably give him the tax cuts, inflationary tariffs and the mass deportation of undocumented immigrants that will be a repeat of Trump’s first term. And many in the working class who voted for him will suffer again, and as they have throughout Trump’s working life.

A 2016 USA TODAY article catalogued more than 3,500 lawsuits filed by or against Donald Trump over his business career. Many were filed by small businesspeople and firms that Trump refused to pay for work done on his various real estate holdings.

“Donald Trump often portrays himself as a savior of the working class who will "protect your job." But the USA TODAY NETWORK analysis found he has been involved in more than 3,500 lawsuits over the past three decades -- and a large number of those involve ordinary Americans, like the Friels, who say Trump, or his companies have refused to pay them."

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

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

I wrote then, “The greatest nightmare of 2017 may be the record income inequity that was exemplified in the just-passed tax cuts that are to be paid for with up to $3 trillion in added federal debt plus spending cuts to Medicare and Medicaid over the next ten years, which will impoverish the poorest among us.

Professors Thomas Piketty and Emmanuel Saez were the first to examine 100 years of income tax returns that highlighted the wide swings in income inequality. They found that income inequality rose substantially between 1979 and 2002 because the top 10 percent of the income distribution took 91 percent of the income growth during that period. As the real incomes of the top 10 percent soared, the incomes of the bottom 90 percent stagnated..

With nothing to replace the economic destruction that will follow Trump’s policies, other than the “Drill baby Drill” for more fossil fuels, we will be poorer with predictions for an additional $5 trillion added to the national debt. As in his first term, I do not foresee a happy two years ahead, at the least.

It turns out very few of us need a tax cut. MarketWatch economist Rex Nutting calculated that those in the 60 percent middle-income brackets—from $32,000 to $140,000 per year—pay just an average 2.5 percent in income taxes. It’s only the richest 0.1 to 1 percent income earners that pay more, and so want the huge tax cuts congress and the Trump administration are proposing.

“A bill that cuts federal income taxes for middle-class families makes absolutely no sense, except as a sad way of camouflaging the real intent of the bill: Giving millions of dollars to the very wealthy, who happen to be the only people who are really benefiting from our uneven economic growth,” said Nutting.

It was Trump and his family that profited most from his first term in retaining ownership of his assets rather than either divesting or putting them in a blind trust, blatantly ignoring the emoluments clause of the constitution that forbid profiting from foreign governments seeking his favor.

Donald Trump suffered no consequences for his lawless behavior as has former Brazilian President Jair Bolsonaro, who is banned from running again until 2030 for casting doubt on Brazil’s 2022 election outcome that voted him out of office.

The greatest chaos may come from his pick of Pam Bondi for Attorney General, who is replacing Matt Gaetz. She has sworn revenge for perceived weaponization of the Justice Department by weaponizing it even more to persecute his perceived enemies.

“When will the 2017 nightmare end?” I wrote in 2017. “Maybe in 2018, if most Americans realize the fantasy world the current administration and congress has created is not theirs. Americans desire a world in which life, liberty and the pursuit of happiness is available to all, not just the few.”

That is what happened in Trump’s first term. Must it get even worse before it gets better?

Harlan Green © 2024

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

Let's Make America More Equal Again!-Part 2

 Answering Kennedy’s Call

Piketty-Saez

Why did our record income inequality begin to worsen in 1980, as can be seen from the above graph? The Arab-OPEC oil embargo of 1973 was the first indication that Big Business under the newly created Business Roundtable of corporate executives wanted more of the national income pie.

No one liked the long gas station lines and fears America could run out of oil, so it was relatively easy for fear mongers to push through economic changes that lessened the incomes of working folk and increased the incomes of Big Business.

The fossil fuel industry needed more money to find new oil sources, and create new technologies such as fracking, so they wanted a larger income share of the national income, which was achieved by suppressing wages and cutting taxes without cutting spending. and it became a national security priority with the ongoing cold war and arms race that followed.

The Reagan administration ran up the first $400 billion federal budget deficit during his eight years in part because tax rates for the wealthiest were slashed. The highest personal income tax rate was first reduced from 70 to 50 percent in 1981, then down to a 28 percent maximum personal tax rate in 1986 when he was re-elected.

Because most of the income gain went to the top 10 percent, the Reagan tax cuts became known as ‘trickle-down” economics. It could also be called “stealth economics,” because Wikipedia cites at the time, “people weren't substantially informed about the tax cuts, as an ABC News Poll in September 1986 showed that 63% of Americans didn't know enough about the Tax Reform Act of 1986 to say if it was good or bad.”

Republicans sold it to the public with an unproven theory. A Doctoral student named Arthur Laffer in the 1970s had convinced conservative Republicans with a diagram on a napkin (the so-called Laffer Curve) that lower taxes gave people the incentive to work harder and earn more, whereas higher taxes discouraged work.

It's hard to believe such a theory today because the federal budget deficit only grew under the Republicans’ trickle-down theory. GW Bush created the first $1 trillion deficit, and Donald Trump’s added another $5 trillion to the federal budget deficit with his tax cuts. That’s as good proof as any that lower taxation rates didn’t increase tax revenues enough to pay down the extra debt as promised.

Perhaps the most shameful result of the redistribution of Americans’ wealth, the richest country in the world, was we now had the worst income inequality of developed countries, as measured by the CIA’s authoritative World Factbook.

It measures the income inequality of countries with what is called the Gini Index coefficient of families that calculated the percentage of wealth held by a country’s different socio-economic brackets. A higher percentage means a larger share of a nation’s income is held by the wealthier segment of its population.

“The more nearly equal a country's income distribution, the lower its Gini index, e.g., a Scandinavian country with an index of 25,” says the World Factbook. “The more unequal a country's income distribution, the higher its Gini index, e.g., a Sub-Saharan country with an index of 50. If income were distributed with perfect equality the index would be zero; if income were distributed with perfect inequality, the index would be 100.”

The latest US Gini index Coefficient of family income was 39.8 percent, which is even higher than Russia’s, and close to that of African and South American Third World countries, whereas the European Union averaged 30.8 percent in its most up-to-date report.

That is why two out of three Americans are dissatisfied with the way income and wealth are currently distributed in the U.S. This includes three-fourths of Democrats and 54 percent of Republicans, according to a Gallup poll, I said last week.

It is also why much of that inequality is in the Midwestern rust belt states that lost blue-collar manufacturing jobs during the globalization and multi-nationalization of US corporations that President Trump promised to bring back again.

It is also why an election-denier even won one term as President and can endanger our Democracy with a Supreme Court majority now giving him a helping hand.

The most efficient way to right the inequality is to bring back tax rates that prevailed during Americans’ most prosperous times, the 1950s to 1970s when the maximum personal tax rate was 70 percent, or even higher.

The maximum tax rate was 92 percent during President Eisenhower’s administration because we were building the nation’s post-WWII infrastructure and modern technologies, as well as going to the moon.

President Eisenhower was reputed to have said, “Because high corporate tax rates create incentives for big business to spend on things like new locations, new hires, new equipment and product research and development which are deducted from taxable earnings, in other words, it’s better to spend a majority of earnings on expansion than to horde it and pay Uncle Sam 90% of it.”

No one likes higher taxes, of course. And much of the middle class bought into Reagan’s myth of trickle-down economics that brought on its demise and poverty levels we have today. But if Americans won’t pay the bill for modernizing the US economy, rather than put off payment with more borrowing, America’s record income inequality will not improve.

Harlan Green © 2024

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

What Is the New Normal?

 Popular Economics Weekly

FREDcpi

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

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2022

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

What is a Living Wage?

Answering the Kennedys Call

The Washington Post published a recent interview with new Democratic House Member Alexandria Octavia-Cortez in which she said, “I think it’s wrong that a vast majority of the country doesn’t make a living wage, I think it’s wrong that you can work 100 hours and not feed your kids. I think it’s wrong that corporations like Walmart and Amazon can get paid by the government, essentially experience a wealth transfer from the public, for paying people less than a minimum wage.”

Is it true that most Americans don’t make a living wage? Actually, that is not the right question we should be asking, which has been the subject of endless debate, anyway. What constitutes a living wage has to be different for each individual. Wouldn’t someone born and raised amid extreme wealth, say, have what they consider a far different living wage than a religious ascetic?

That’s an extreme example, but why not concentrate on what I believe Congresswoman Cortez is really talking about—fair play for the majority of Americans? There are maybe 25 percent who live at or below the poverty line that must work more than 40 hours per week to even make ends meet, depriving them of family, or enough leisure time to enjoy themselves. Europeans seem to have conquered the problem in countries like Denmark and the Netherlands, where the average workweek is 34-36 hours, with four weeks' paid vacation and universal health care for their citizens.

Meanwhile, American conservatives have worked to lower taxes on the wealthiest, while enhancing the monopoly powers of corporations since at least 1980. It has resulted in the greatest income inequality in the U.S. since 1928, the wealthiest country in the world, as illustrated by this well-known Piketty-Saez graph.

WashingtonPost-Piketty-Saez

The result has not been good for a participatory democracy. The American electorate has become polarized, which has brought out the worst in human nature—including anti-immigrant racism, white nationalism, and the tearing down of government regulations that safeguard health and the environment. The consequence is a much reduced middle class that once maintained civility in political discourse.

Even conservative Barron’s Magazine editor Randall Forsythe mentions a 2017 Federal Reserve Consumer Finance study that showed the huge wealth disparities during the recent federal government shutdown—four in 10 Americans would have difficulty in meeting a $400 emergency expense—while the top 1 percent of income earners now own 50 percent of stock holdings.

www.pewresearch.org.

PEW Research in a 2018 report, reports that year-over-year average hourly earnings have been rising at 2 to 3 percent. “After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.”

We are seeing the results of the singular focus on private profits rather than public welfare spending that should include adequate healthcare, improved infrastructure, and educational facilities that would elevate America back into the pantheon of western countries, instead of becoming an outlier that is withdrawing from the developed world.

Maybe we are also seeing how the word socialism is beginning to scare the wealthy to return some of their newly-begotten wealth to bring back a democracy that benefits the majority of Americans.

Harlan Green © 2019

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

Why Slowing Retail Sales?

Popular Economics Weekly

Graph: Econoday

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

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

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

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

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

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

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

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

Harlan Green © 2018

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

A Greater Lawlessness—Self Interest vs. The Common Interest

Popular Economics Weekly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2017

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

Who Killed Our Middle Class?

Popular Economics Weekly

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

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

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

Graph: Fortune Magazine

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2016

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

What Happened to Link Between Profits and Productivity?

Popular Economics Weekly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2016

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

The Political Consequences of Inequality

Financial FAQs

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2014

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

IMF Report—Europe Is Becoming Japan

Financial FAQs

The International Monetary Fund doesn’t want to say it outright, but its latest World Economic Outlook shows more stagnation of the European and Japanese economies, and the possibility of a third EU recession since 2008.

Could the EU become another Japan with its 20 years of downward spiraling deflation and slow economic growth that caused its economy to fall from second to forth in size, behind the U.S., Euro area, and China? We think so, if its austerity policies aren’t reversed. Instead of reducing deficits, more public spending should be allowed when private sector businesses and households are saving more and spending less.

EU GDP growth shrank -0.7 and -0.4 percent in 2012, 2013 respectively and the Euro Area is projected to grow just 0.8 percent in 2014. IMF chief economist Olivier Blanchard said in his blog that “Growth in the euro area nearly stalled earlier this year, even in the core.  While this reflects in part temporary factors, both legacies (ie, debt), primarily in the south, and low potential growth, nearly everywhere, are playing a role in slowing down the recovery.”

Trading Economics

And “Japan is growing, but high public debt inherited from the past, together with very low potential growth going forward, raise major macroeconomic and fiscal challenges,” said Blanchard. Japan’s economy grew 1.5 percent in 2012 and 2013, and is projected to grow 0.9 percent in 2014, according to the IMF. This is when U.S. GDP is projected to grow 2.2 percent in 2014 and 3.1 percent in 2015, according to the IMF.

Why the stagnation when Europe and Japan are now the second and fourth largest economies in the world, as we said? Much of it has to do with their own economic policies that underestimated the depth of their respective asset bubbles causing major recessions when they burst. And so both economies suffered in their own way from misplaced austerity policies.

Japan’s malaise has been ongoing since 1995, due in large part to its kieretsu system of interlocking industry ownerships that kept policymakers from writing down bad debts in a timely manner. Good money was thrown after bad debt in an attempt to rescue ailing companies and industries. This resulted in decades of downward spiraling deflation that only now is being addressed by their new Prime Minister Abe with massive public spending that is finally curing the deflation, at least.

Yet the EU has still not reversed their austerity policies of public spending cuts, though EU Central Bank head Mario Draghi has announced a program of Quantitative Easing, much like the Fed’s QE programs.

As Nobelist Paul Krugman said on the Bill Moyers Show ( and many other times),“ “The only obstacles to putting people to work, to having those lives restored, to producing hundreds of billions, probably 900 billion a year or so of extra valuable stuff in our economy, is in our minds. If I could somehow convince the members of Congress and the usual suspects that deficit spending, for the time being, is okay, and that what we really need is a big job creation program, and let’s worry about the deficit after we’ve had a solid recovery, it would all be over. It would be no problem at all… All the productive capacity is there. All that’s lacking is the intellectual clarity and the political will.”

That is of course what happened with the New Deal, though it took World War II to put everyone back to work. But European policymakers seem to have ignored the lessons of the Great Depression, and the truths in Thomas Piketty’s Capital in the Twenty-First Century, in which he opines that the wholesale transfer of wealth to the wealthiest that has been ongoing over the past 30 years is a major reason for the slow recoveries. The top 1 percent spend very little of their record earnings, and wealth taxes have been severely reduced, limiting governments’ ability to spend on public necessities and create more jobs.

The U.S. Federal Reserve is doing the right thing in staying the accommodative path, according to just released FOMC minutes of last month’s meeting. It agreed to keep the wording that interest rates would stay low “for a considerable time” as forward guidance, and sure enough, stocks had a huge rally after the announcement.

As if to echo the IMF report, the Guardian’s Economics Blog also announced that the experiment – German designed, German engineered and German exported – with austerity has failed. “The eurozone is not cutting its way back to prosperity. It is cutting its way towards being the new Japan.”

Harlan Green © 2014

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

Why Have a Higher Minimum Wage?

Popular Economics Weekly

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

Graph: Trading Economics

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

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

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

Graph: Trading Economics

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

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

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

Graph: St. Louis Fed

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

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

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

Harlan Green © 2014

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