What if No Brexit Deal?

Popular Economics Weekly

Equalitytrust.org

We know why the UK voted to exit the EU—UK working class anger at not gaining many of the benefits from joining the EU, while experiencing its downside with the influx of eastern EU citizens that displaced domestic workers. But leaving the EU without a negotiated treaty will make it even worse for all Brits, rich and poor. It could spell another recession like the Great Recession, or even worse.

Both the Great Depression and Great Recession were caused by excessive speculation in the financial markets that created massive asset bubbles—whether in overpriced stock values or housing—which then burst. And middle and lower income- earners suffered the most.
But there was another reason. Record income inequality underlay both Great Downturns when these earners continued to borrow beyond their means to spend.

There are no asset bubbles at present, but a high level of debt exists because of the various QE programs that kept interest rates low to enable consumers to keep borrowing. So European and U.S. stock markets aren’t anywhere near Great Depression or Great Recession P/E ratio levels. And there’s no housing bubble caused by excessive overbuilding (Too few dwellings being built—so much so that California’s new governor, for instance, has pledged to add 3.5 million residences to California’s housing stock during his term).

However, the EU’s Great Recession was made worse by misplaced austerity policies that cut welfare spending and taxes when it should have increased public subsides as Ben Bernanke’s Federal Reserve did in 2009 that mitigated some of its effects, and enabled a quicker U.S. recovery.

Can you imagine what could happen if the UK doesn’t beat an orderly retreat from the EU? The UK chancellor, Philip Hammond, has warned of a “bad-tempered scenario” in which neither side acts in their own best economic interests, said the Guardian recently:

“Many Europeans regard the dispute over money not as an early round of bargaining but as a matter of good faith. If the Brits cannot be trusted to settle their past promises, why bother striking future deals? Walking out could therefore be treated as a legal default, with litigation in the international courts and even asset confiscation. Never mind free trade talks, such an atmosphere could make it impossible to agree a replacement for all manner of existing arrangements governing travel, immigration and customs.”

This is while the UK and EU economies are already slowing, and President Trump’s looming trade wars with allies and enemies alike will cut back growth even further.

So it’s vital that the UK and EU find an amicable divorce. What would it look like? The Guardian reports that Brexiters believe the UK can use WTO rules to trade perfectly successfully with Europe, as does Britain when trading with non-EU members. Though WTO tariffs are high for food and cars, most manufactured goods would see little change in export duties. “Over time, the hope is that Britain could return to the negotiating table to agree on rules that would facilitate EU trade in services and find other ways to compensate for lost agricultural markets by looking to faster-growing markets abroad,” says the Guardian

But there is so much more to cross-border agreements, such as custom unions, citizenship barriers, and the like. The real lesson is that U.S. and European economies are too fragile to allow anything but an amicable Brexit divorce; or better yet, no divorce at all.

Tradingeconomics.com

How do we judge the fragility of any economy? By its underlying growth factors. The EU and UK are both suffering serious slowdowns, with just 0.2 percent GDP growth rates in the latest quarters. The Euro area’s overall unemployment rate has declined to just 8 percent since the end of the Great Recession, with Italy’s unemployment stuck at 10 percent and Spain’s at 14 percent.

Then question is how much support would US give to the UK, if UK economy collapses, and the EU is unable or unwilling to come to their aid?

Harlan Green © 2019

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

Brexit and the Politics of Fiscal Austerity

Popular Economics Weekly

https://www.washingtonpost.com

The case can now be made that Briton’s vote to leave the EU was because of wrong-headed fiscal policies in the aftermath of the Great Recession. The housing bubble affected Europeans almost as much as Americans after 2008, busting their asset bubbles with stock market crashes and large job losses. And the UK’s response was draconian; raise taxes while cutting back on social welfare programs that benefited the not so wealthy.

This was to be achieved by a combination of UK public spending reductions and tax increases amounting to £110 billion, which made their downturn worse than that of the U.S., because U.S. Fed Chair Ben Bernanke and the Democratic congress advocated easing credit and spending some $787B to boost infrastructure repairs and depleted state budgets in the American Recovery and Reinvestment Act of 2009 (ARRA).

The Tory government of John Cameron did the opposite with a vengeance; beginning in 2010 to brutally slash £21 billion from its welfare budget that took away essential benefits from a large number of UK citizens; who then voted for the Brexit referendum in 2016. Tories used the standard conservative trope that public spending took away from private sector investments that could revive the economy by creating new jobs.


That is not a proven economic theory, however, as conservatives have never wanted to admit that corporations and other private businesses tend to hold back a large part of their profits to buy back stock and thus boost the incomes of stockholders and CEOs, rather than invest it into further growth and more jobs. Instead, austerity became the conservatives’ excuse for shrinking government services at the wrong time.

This is documented by the results of research from a University of Warwick economist, Themo Fetzer: “These reforms activated existing economic grievances,” said Fetzer. “Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.”

It has also been the case with U.S. programs that were put into place when the Tea Party took over Republican politics and began the series of austerity measures in 2011 that included a prior government shutdown and caps on public spending.

The result in both countries was that it increased income inequality, which enraged the newly disenfranchised, non-college educated males, in particular, that were most affected by the Great Recession. Brexit advocates blamed the EU for it budget woes, claiming that withdrawal would bring home all those revenues that went to support less prosperous members of the EU, while a huge influx of Poles and other Eastern European citizens flocked into the UK and took away less-skilled jobs that many Brits believed they depended on.

Nobel Economist Paul Krugman in a 2015 Guardian article wrote perhaps the best known critique of austerity programs that were enacted throughout much of the developed world as a result of the Great Recession: “Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Republicans, blaming the Great Recession on a bloated federal budget and too many regulations, attempted to cut almost all welfare spending, and even  abolish Obamacare when they controlled the House and Senate during the Obama administration 

But now that Repubs have all the political power? They are creating record budget deficits and national debt with their tax and regulation cutting policies. That tells us austerity was just an excuse to redistribute even more wealth to the corporations and Wall Street; rather than Main Street.


The Brexit Leave campaign, in other words, is the result of misplaced ideologies rather than tried and true economic policies.

Harlan Green © 2019

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

Why Is Mortgage Lending Still Restricted?

The Mortgage Corner

We can thank the Great Recession for most of it. Banks have become much more conservative, and builders are building approximately 50 percent fewer residences vs. the 2 million housing units at the height of the housing bubble.

And the very Great Recession was in some ways worse than the Great Depression, when FDR’s New Deal created jobs for those that couldn’t find work. Whereas conservative economic ideologies have triumphed since President Reagan under austerity policies (such as the 2011 government shutdown over raising the budget cap), which have restricted government spending at a time when the private sector has refused to reinvest in productive growth, even though corporate profits have soared to record levels as a percentage of GDP.

The Urban Institute has dug even deeper into the causes of tight credit. Since private sector lending dried up after the Great Recession, government GSEs, such as Fannie Mae, Freddie Mac, FHA and VA; all with some form of government guarantee, have had to step in to revive the housing market. So they account for more than 80 percent of all residential lending.

And because the US Treasury completely appropriated all the assets and profits of Fannie and Freddie in 2012, which account for 60 percent of all residential loans, they have imposed additional fees on any but the best credit risks to protect taxpayers. This in effect raised the cost of qualifying, which in turn reduces the pool of eligible home buyers and borrowers.

How much, asks the Urban Institute? “According to our estimates, an additional 1.25 million loans would have been made in 2013 if the cautious standards of 2001, rather than the severe standards of 2013, had been in place. Between 2009 and 2013, the number of “missing” loans grew from 0.50 million to 1.25 million annually, for a total of more than 4 million missing loans over the five years.”

Behind all this data lies another, more sobering fact—the record income inequality that occurred since the 1970s and was the major cause of the Great Recession. Incomes have flowed so fast to the upper income tiers since its end in 2009 that 96 percent of all income gained since then has gone to the top 1 percent.

This is in part because of the stock market rebound and loss of all those homes from the housing bust. It resulted in some $4 trillion in lost housing assets for middle-class homeowners in the main, the main source of their wealth.

It’s a phenomenon named Monopsony by economists, or the increasing monopoly power of Big Business in particular to control labor costs due to marked lack of competition. This is explained in lucid detail by Kate Bahn, an economist at the Center For American Progress, a progressive think tank.

“While overall the labor market looks fairly solid, it’s still lacking on measures of competitiveness that are giving employers outsized ability to set low wages,” says Prof Hahn. “They can reap higher profits by exploiting their workers who don’t feel confident enough to leave their current job in search of a better one. (It’s evidenced) by the historically low rates of people moving across geographies.”

Graph: BLS/Econoday

The Labor Department measures it as the quits rate in their JOLTS report (Job Openings and Labor Turnover Survey) that tabulates the number of Hires and Separations each month. There was a 1 tenth downtick in the quits rate to 2.1 percent, “a subdued reading that points to lack of movement between jobs and lack of wage pull for employees,” said Econoday. The separations rate also fell, down 1 tenth to 3.5 percent.

The gap between openings and hiring first opened up about 2 years ago signaling that employers are having a hard time finding people with the right skills, said Econoday. The current spread between openings and hirings is 429,000, the widest since September. But remember, the US economy is so large that more than 5 million jobs are created and lost per month.

One would think the high number of available jobs means higher wages for all, as employers bid up salaries to attract them, but not so; just for the highly skilled. Those blue collar and service jobs that require less skill don’t have the competitive advantage of higher education and training that would boost their salaries.

And that is why the credit and housing markets have skewed towards the highest income earners, and will remain so, unless more New Deal-type programs (such as promised infrastructure spending, universal health care, stronger labor laws) help to bring back the middle class.

Harlan Green © 2017

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

Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

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

Why Did Brexit Happen?

Popular Economics Weekly

The shortest answer is the Great Recession and austerity policies of EU policymakers. The result will be a Lessor, or Little Britain, which was inevitable given the austerity policies holding sway in the EU. What austerity policies? In the UK’s case, it was raising taxes in 2010 while cutting government spending in an attempt to pay down debt incurred during and by the Great Recession. In doing so it has kept the UK close to recession level growth ever since 2008.

But standard economic theory tells us the opposite is needed. A recession or economic downturn of any kind is when private business (and consumers) begin to hoard (i.e., save more, and spend less), which the Great Depression and (WWII) taught US means governments have to spend more to preserve jobs and productive capacity, which will ultimately bring a more robust recovery and the means to pay down that public debt.

Nobelist Paul Krugman has been one of austerity’s most vocal critics. “By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets.”

Graph: Trading Economics

But the Brits did just the opposite, with predictable results—near zero GDP growth since 2008. “I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere,” said Krugman. “George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world.”

This led to the scapegoating by demagogues quick to take advantage of diminishing economic prospects of working class whites in (formerly) Great Britain, and that Donald Trump is taking advantage of in the U.S. as well. Hence the Brits came to blame immigrants for taking away lower and mid-level jobs, when it was Cameron’s government that was downsizing itself at the same time of diminished private spending.

The scapegoating of Mexican and Muslim immigrants is really the only way Trump knows how to scare those people that don’t have another way to understand their predicament after his anti-Obama birther movement failed. I once wrote about the reason for the Tea Party supported by many of those same middle-aged US white voters who felt disenfranchised with a fast changing economy.

The Ted Cruz-led rebellion and 2011 government shutdown (while holding the confederate battle flag) brought in those still fighting the Civil War 150 years later. Big Government to them was the Northern Yankees bullying the Southern, more conservative states.

The EUs overall predicament has been the same, as ours—which is a poor growth record due to the austerity policies of political elites—both in Europe and unfortunately, the U.S. as well, where the Obama administration also allowed taxes to rise and government spending cut after the 2011 shutdown and consequent spending sequester that downgraded the U.S. sovereign debt rating.

Such policies have prevented the massive spending and investment programs that occurred during President Roosevelt’s New Deal, a New Deal that employed those many who could not otherwise have had the dignity of work during the Great Depression.

The result of our own austerity policies has been our failing schools, highlighted in Michael More’s latest film, Where To Invade Next, and Detroit’s toxic drinking water, the result of Michigan’s cutback in government services—which in Detroit’s case meant taking over control of Detroit’s government and replacing its elected officials with a state-appointed ‘manager’.

So can anyone blame the Brits wanting to become Little Britain again; or so many Americans that want to close our borders in order to Make America Great Again, because their predicament has been ignored for so long by those same Austerians?

Unfortunately, it is a lesson lost to European elites and even most American politicos, it seems, so a history of wall-building is on the cusp of repeating itself. Only this time, we have to find a better way than another World War to rescue our economies (and break down those walls).

Harlan Green © 2016 

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

Why Has It Taken So Long?

The latest Federal Reserve press releases—firstly, the minutes of last FOMC meeting, and also its reduced projections of expected inflation—tell us the Fed is still in austerity mode, due to a fear of non-existent inflation.  And it is that unjustified fear that puts the brake on growth, since even the fear that the Fed will tighten credit conditions via its control of short term interest rates affects business investment.

Graph: Marketwatch

The just released FOMC minutes reveals there was hardly a consensus in raising the Fed Funds rate to 0.5 percent from 0.25 percent.  Why?  Because many of the Fed Governors don’t believe inflation will rise at all this year from the present 1.3 percent annual Personal Consumption Expenditure index rate it favors.

This is while Nobelist Joseph Stiglitz has been decrying the lack of concern over the slow recovery from the Great Recession; lest we forget has grown more slowly than during the Great Depression.  And the Fed hasn’t been as proactive as I could be.

But what can duplicate the conditions that led to President Roosevelt and the New Deal programs (which were created by a woman, Labor Secretary Francis Perkins, by the way) that gave enough benefits to workers and trade unions so they could ultimately negotiate for a living wage and working conditions?

“In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise,” said Stiglitz. “Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.”
            We needed another New Deal, in other words, but there was neither a Roosevelt with the experience and political savvy to push through the job creation programs of the 1930s, nor such a loss of faith in capitalism that prevailed then.  Let’s not forget that Herbert Hoover lost his job precisely because private industry ran for the exits, refusing to create jobs, so government job programs such as the CCC, and WPA employed those millions left jobless and became the bulwark that saved the US economy during that time.

Now we sadly have history repeating itself.  “The economics of this inertia is easy to understand,” continues Stiglitz, “and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.”
            History has repeated itself in several ways.  Income inequality was this high in 1929, as well as a stock market bubble.  A six-year drought in the Midwest created the Dust Bowl, and made millions homeless.  And credit was too easy then as well and consumers overspent, believing that stock values would never fall. 

John Steinbeck described those times the best in A Primer on the '30s' by John Steinbeck, 1960, pgs. 17-31: “I remember the Nineteen Thirties, the terrible, troubled, triumphant, surging Thirties. ... I remember '29 very well ... the drugged and happy faces of people who built paper fortunes on stocks they couldn't possibly have paid for. ... In our little town bank presidents and track workers rushed to pay phones to call brokers. Everyone was a broker, more or less. At lunch hour, store clerks and stenographers munched sandwiches while they watched stock boards and calculated their pyramiding fortunes. Their eyes had the look you see around a roulette wheel ...”

Why is it important that we remember those times?  Why is it so important to learn from history, you say?  Because the Great Depression led to WWII in direct ways.  Hitler rose out of a Germany shamed by its failed economy, and so chose dictatorship.

“[I]n the Thirties when Hitler was successful,” continued Steinbeck, “when Mussolini made the trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith, Father Coughlin, Huey Long, Townsend - each one with plans to use the unrest and confusion and hatred as the material for personal power.”

And today we have blatantly racist Republican presidential candidates like Donald Trump and Senator Ted Cruz doing the same. 

Professor Stiglitz says we know what to do: “…some of the world’s most important problems will require government investment. Such outlays are needed in infrastructure, education, technology, the environment, and facilitating the structural transformations that are needed in every corner of the earth.

Therefore, “The obstacles the global economy faces are not rooted in economics, but in politics and ideology. The private sector created the inequality and environmental degradation with which we must now reckon. Markets won’t be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed.”

There is a price we pay for ignoring the lessons of history, in other words. 

Harlan Green © 2016

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

Can Economy Grow With Higher Interest Rates?

The Federal Reserve’s Open Market Committee announced it is raising short term interest rates by ¼ percent. But can this economy continue to grow with higher interest rates, as Fed Chairwoman Yellen has promised?

That depends on several mundane factors, such as cheap gas and energy prices that have been helping to hold down consumer and producer costs. And since most consumer and many producer products are imported, the more expensive dollar exchange rate has made them cheaper. Hence the very low inflation rate these days.

Graph: Econoday

An early sign of continued growth is the Conference Board’s Index of Leading Economic Indicators (LEI). The 12 leading indicators it tracks predict “moderate” future growth. And Congress’s new era of cooperation has resulted in the passing of two very important spending bills—the $305 billion Surface Transportation bill, and $1.14 Trillion federal budget.

Boosted by yesterday’s strong showing for housing permits (housing will be another area of strong growth next year), the LEI rose a solid 0.4 percent in November on top of October’s very strong 0.6 percent rise. Other positives include the interest-rate spread, specifically low short-term rates, and also gains for the stock market.

“The U.S. LEI registered another increase in November, with building permits, the interest rate spread, and stock prices driving the improvement,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Although the six-month growth rate of the LEI has moderated, the economic outlook for the final quarter of the year and into the new year remains positive.”

Congress on Friday passed far-reaching legislation funding the government through next September plus passing tax breaks for business and low-income families. It was a compromise that helped the GOP, also, as the bill lifts a 40-year-old ban on oil exports.

The legislation pairs two enormous bills: a $1.14 trillion government-wide spending measure to fund every Cabinet agency through next September, and a $680 billion tax package extending dozens of breaks touching all sectors of the economy, making several of them permanent and tossing the entire cost onto the deficit.

President Barack Obama is expected to sign the legislation today. The bill cleared both chambers easily, first in the House, which passed it 316-113, followed by the Senate in a 65-33 vote.

The biggest reason this benefits economic growth is that another spending sequester was avoided, a sequester that limited spending across the board, hurting all segments of the economy. There was not even a spending cap, which means governments can function again without the interference of the Austerians, those conservatives that have been trying to restrict government spending on everything, including research and development. The $1.14 trillion spending bill avoids a shutdown next week, when the government’s current funding was scheduled to expire at 12:01 a.m. on Dec. 23.

Refunding the Highway Trust Fund that has run out of funds will be the biggest beneficiary of the $305 billion surface transportation bill. Called Fixing America’s Surface Transportation Act, or the FAST Act, it fixes and replaces badly degraded railroads, highways and bridges, hence it benefits those industries that depend on surface transportation.

One big benefit of the bill is the creation of programs to focus federal aid on eliminating bottlenecks and increasing the capacity of highways designated as major freight corridors. The Transportation Department estimates the volume of freight traffic will increase 45 percent over the next 30 years, which gives a tremendous boost to productivity.

The five-year FAST infrastructure bill is the longest reauthorization of federal transportation programs that Congress has approved in more than a decade, ending an era of stopgap bills and half-measures that left the Highway Trust Fund nearly broke and frustrated local governments and business groups. President Obama will sign the bill into law, as it fulfills his long-running push for lawmakers to pass an infrastructure bill even though it is significantly less than the $478 billion he sought in his own plan earlier this year.

Graph: Econoday

Lastly, and perhaps the best reason interest rates won’t have much effect on future growth—at least through next year—is hourly earnings are finally rising above the very low inflation rate, which means we are reaching full employment. That’s why consumers have become more upbeat, hence are spending more. Average hourly earnings in the last unemployment report rose 2.3 percent annually, whereas the core PCE inflation index favored by the Fed has risen just 1.3 percent.

In fact, that is a major reason the Fed raised short term rates at this time, in the teeth of holiday spending. Wages and salaries are finally showing signs of life—of rising faster than inflation. Fed Chair Yellen has said many times it is a precondition for raising short term rates, which mainly influence consumer spending via credit card and auto loan rates.

So as long as inflation stays low and wages continue to increase the U.S. economy will continue to grow. And with Iran about to join the oil markets, energy prices should remain at the low end, with some analysts predicting oil prices could drop as low as $20 per barrel next year. So what’s to worry about? The Fed really can now sit on the sidelines, until and if inflation again catches up with wage and salary growth.

Harlan Green © 2015

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

Don’t Count On Inflation Moving Federal Reserve

Popular Economics Weekly

The Federal Reserve didn’t raise interest rates today at the close of their FOMC meeting. In fact the 9-1 vote against raising rates wasn’t even close. So don’t count on inflation to save the day for the deficit hawks demanding that the Fed must raise interest rates.

Inflation is not imminent or even possible in today’s low demand, slow growth, and world-wide economies. It ain’t going to happen. Inflation won’t happen, not only because the Asian tigers are overproducing and under pricing everything—hence China’s problem—or that many economists now believe in the so-called ‘new normal’ of slower economic growth model, due to slowing population and labor productivity growth.

Here is the U.S. CPI, or retail inflation rate. It’s basically zero or negative, and has been since January 2015.

Graph: Trading Economics

The eurozone’s inflation rate is no higher, in spite of their Austerians’ (read German) insistence that it’s right around the corner (if only growth would increase). It experienced its second recession in 2011, and growth hasn’t really recovered with an 11 percent plus average unemployment rate throughout the eurozone, except in Germany.

Graph: Trading Economics

Because it’s as much due to misguided government policies by the modern Austerians that have stopped eurozone growth by demanding draconian cuts in government spending and budget deficits that would create growth. But U.S. austerity advocates have damaged our growth, as well, with measures such as our current sequester agreement that caps government spending.

The result is very little investment in the areas that increase future growth, such as modernizing public infrastructure, increasing educational opportunities, and Research & Development that got us to the moon and created the Internet.

Yes, it is those politicians and the economists supporting them that are destroying our seed corn that nurtures future growth. There is no incipient inflation, nor will there be for years to come. The disinflationary spiral world economies are currently experiencing are due as much to misplaced policies and ideologies that don’t create growth as to slower population growth in the developed economies.

How then will those that want to continue the trickle down economic policies that say only the wealthiest are able to create more growth with their $Trillions, to justify transferring so much of the nation’s wealth to those overpaid CEOs and hedge fund managers?

Harlan Green © 2015

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

What Would Save the Euro?

Popular Economics Weekly

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

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

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

Graph: Trading Economics

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

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

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

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

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

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

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

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

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

Harlan Green © 2015

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

It’s Time For the 30-hour Week

Popular Economics Weekly

Don’t look now, but we should soon have the 30-hour work week as the standard, instead of the 40-hour work week last enshrined during FDR’s New Deal. Why, when Americans now work more hours than any other developed country?

There are a number of good reasons, and they have little to do with the ACA, or Obamacare, which has decreed that 30 hours per week is considered to be full time employment for large businesses that are required to offer insurance coverage to their employees.

But it has a lot to do with the labor slack in our job market that Fed Chair Yellen has been talking so much about, and the declining health and welfare of American workers. Thanks to the tech revolution and huge productivity gains of those past 30 years, fewer workers are needed to do the same amount of work in the digital world. So if fewer workers are needed to do the same work, then why are more employees working overtime?

Maybe because no one in America has thought through the consequences. What would it mean to share the workload with more people? The Germans certainly have done something about it. Rather than fire employees when times were tough in Germany’s last recession, firms hit hardest by the reduction in demand reduced their employees’ working hours to spread the pain.

And, the four-day workweek is nearly standard in the Netherlands, especially among working moms, according to a CNN Money article. Overall, the entire workforce averages around 29 hours a week -- the lowest of any industrialized nation, according to the OECD.

Some 86 percent of employed mothers worked 34 hours or less each week last year, according to Dutch government statistics, as reported by CNN. Among fathers, about 12 percent also worked a shortened workweek. Denmark is close behind with a 33 hour average work week and five weeks of paid vacation.

“Dutch laws promote a work-life balance and protect part-time workers,” said the report. All workers there are entitled to fully paid vacation days, maternity and paternity leave. A law passed in 2000 also gives workers the right to reduce their hours to a part-time schedule, while keeping their job, hourly pay, health care and pro-rated benefits.

Whereas in a U.S., a Gallup survey last summer found that the average for full-time employees was actually 47 hours—or 46 if you isolate those workers with just one job. Either way, that's almost the equivalent of an extra business day on top of the usual five-day workweek. And it’s affecting our health and longevity.

Of the more than 1,200 adults surveyed by Gallup, 21 percent said they worked 50 to 59 hours while 18 percent said they worked 60 or more. Another 11 percent estimated 41 to 49 hours. It is an insanity that American workers have become such workaholics at the expense of their health, their families, and their own sanity.

The Centers for Disease Control and Prevention cites studies that found "a pattern of deteriorating performance on psycho physiological tests as well as injuries while working long hours."

It also cited four studies that found "that the 9th to 12th hours of work were associated with feelings of decreased alertness and increased fatigue, lower cognitive function, [and] declines in vigilance on task measures."

Wouldn’t this be the least painless way for workers to catch up to the incomes of their bosses that now earn on average 303 times their average employees’ income, according to a recent EPI study? Where have most of the productivity profits since the late 1970s gone, as illustrated by the BLS graph? To those executives and their stockholders, as this graph illustrates.

It’s no longer a secret that America is the most over-worked country in the developed world, according to the Center For American Progress, a progressive think tank. It is the only developed country with no mandated vacation, sick leave or parental work leave allowances, which even many third world countries like Afghanistan and Ethiopia have.

In fact, it is already beginning to happen among high tech firms that allow flex hours and even work at home. A 4-day -- or compressed -- workweek is offered as an option to at least some employees at 43 percent of companies, according to the Society for Human Resource Management. But only 10 percent of those companies make it available to all or most of their employees.

And there are roughly two dozen local union contracts that include a compressed workweek option for public-service employees working in municipalities, universities and institutions such as prisons, according to the American Federation of State, County and Municipal Employees.

So there is no good reason America, the richest country in the world, should remain an underdeveloped, overworked country anymore.

Harlan Green © 2015

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

A Lousy Jobs Report?

Popular Economics Weekly

At first glance it looks like a lousy jobs report. It’s true the labor market has softened in several aspects. Payroll jobs increased just 126,000 in March after increases of 264,000 in February and 201,000 in January. January and February were revised down a net 69,000. Market expectations for March were for a 247,000 increase. And the unemployment rate held steady at 5.5 percent. The labor force participation rate edged down marginally to 62.7 percent from 62.8 percent in February.

Graph: WSJ Marketwatch

It is a 15-month low, say economists, that could be because of a number of factors. Winter is still freezing out the midwest and east, while the oil and mining industries have already lost 30,000 jobs in 2015 due to plunging oil prices. And governments have added back just 128,000 of the 630,000 jobs lost during the recession.  But overall wages are now rising faster than inflation—0.3 percent—and 3.1 million jobs were created in the past 12 months.

So it’s still a hopeful report, given the circumstances. This should mean Janet Yellen’s Federal Reserve will not be so hasty to raise interest rates in June. Not while inflation is still negative in Europe, close to zero in the U.S., and falling in other parts of the world.

There are still too many workers out of work, in other words, and most of the jobs being created are in the service sector, the lowest paying jobs in general. The professional and business services sector was the big jobs winner with 40,000 jobs added in March. This is not surprising, given that the largest businesses are in the computer and software industries—such as Facebook, Microsoft, Apple (now the largest corporation in stock valuation in the world), and so forth.

Actually the professional, scientific, and technical services sector is now our fastest growing business sector, comprising establishments that specialize in performing professional, scientific, and technical activities for others, such as attorneys, accounting, bookkeeping, and payroll services; architectural, engineering, and specialized design services; computer services; consulting services; research services; and other professional, scientific, and technical services, says the U.S. Bureau of Labor Services.

But low inflation is still a problem, particularly in Europe with its ongoing austerity policies that has kept the unemployment rate in the 11 percent range, and Greece still threatening to leave the Eurozone.

Graph: Trading Economics

The Eurozone is suffering from falling prices, and so the expectation of growth. This hurts the 25 percent of U.S. exports that flow to Europe. It is a situation Europeans have brought on themselves, as their policy makers refuse to infuse more economic stimulus spending, while their budget deficits soar. They are still in full-blown austerity mode, in other words, protecting themselves from non-existent inflation that cuts off government revenues and increases budget deficits.

And low wages are still a problem for U.S. workers, but that may be about to change, says Nobelist Paul Krugman in his latest NYTimes Oped: “On Wednesday, McDonald’s — which has been facing demonstrations denouncing its low wages — announced that it would give workers a raise. The pay increase won’t, in itself, be a very big deal... But it’s at least possible that this latest announcement, like Walmart’s much bigger pay-raise announcement a couple of months ago, is a harbinger of an important change in U.S. labor relations.”

“Suppose that we were to give workers some bargaining power by raising minimum wages, making it easier for them to organize, and, crucially, aiming for full employment rather than finding reasons to choke off recovery despite low inflation. Given what we now know about labor markets, the results might be surprisingly big — because a moderate push might be all it takes to persuade much of American business to turn away from the low-wage strategy that has dominated our society for so many years.”

For it is such low wage increases, and economic policies that have discouraged collective bargaining in the 29 right to work states (red states with the poorest economies), that have held down economic growth and spawned theories of a ‘new normal’, slower growth, economy.

That doesn’t have to be, if our austerians would only wake up and realize that giving employees the same rights as their employers will create more prosperity for all.

Harlan Green © 2015

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

Good Jobs Report for Many

Financial FAQs

The stock market plunged on news total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5 percent, the U.S. Bureau of Labor Statistics reported today.

Graph: Marketwatch

Why did stocks plunge on the BLS release when it was an extremely strong report with all sectors adding jobs? Because the financial markets mistakenly believe it will push up the Fed’s schedule for raising interest rates, and higher rates mean less excess liquidity to invest in the stock market.

But Janet Yellen’s Fed isn’t focused solely on the rate of job formation or jobless rate, as she has said countless times, if the U.S. isn’t closer to full employment. And there wasn’t good news on wage growth; though January’s report had showed a slight improvement. The BLS report said: "In February, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.78. Over the year, average hourly earnings have risen by 2.0 percent."

Graph: Calculated Risk

This is the real reason the U.S. economy has taken so long to recover. There are still more workers out of work, or looking for work than available jobs that pay a living wage. And the unemployment rate shrank from 5.7 to 5.5 percent only because 178,000 left the workforce, because they stopped looking for work.

Why no wage growth after adjustment for inflation (now slightly under 2 percent)? A Federal Reserve study reported that the greatest demand for workers since the Great Recession has been in the poverty-level, minimum wage-paying service industries, and the lowest demand is for midlevel workers who once comprised the vast majority of the middle class.

A April 2014 report by the National Employment Law Project provided details supporting the Federal Reserve study. During the recession, low-wage jobs, those paying less than $27,700 per year, had both the lowest percentage of losses and the highest percentage of gains. Twenty-two percent of the total job losses were in the low-wage category, but 44 percent of new jobs were in that category.

Graph: Truthout

Mid-wage jobs, those paying between $27,700 and $41,600 (i.e., middle class jobs), had the lowest percentage of new jobs created, 26 percent, but the second highest rate of job losses, 37 percent. High-wage jobs, those paying more than $41,600, had the highest rate of losses, 41 percent, but a higher rate of new jobs created, 30 percent, than the mid-wage category.

So Janet Yellen may not even be ready to raise interest rates in June, or sooner, as the financial markets fear. There can be no sustainable recovery, the Fed’s stated goal, until there is enough income growth to prevent another fallback into recession as happened to the Japanese and Eurozone economies because of premature credit tightening.

Harlan Green © 2015

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

Governor Scott Walker vs. Education

Financial FAQs

It is hard to believe, but prospective presidential candidate Wisconsin Governor Scott Walker’s main platform seems to be his antipathy towards education, and higher education, in particular. He has obfuscated his near hatred of higher education to date by getting his Republican-Controlled Legislature to first ban public union collective bargaining, especially unions for teachers and public health nurses.

But the veil that has obscured his anti-education agenda is lifting. His latest salvo is directed at the University of Wisconsin. He proposes not only to cut its budget, but proposed downsizing its mission from that of higher education to supply workers, whoever they might be. Walker’s new budget proposal would slash $300 million from the University of Wisconsin system over the next two years. That’s a 13 percent reduction in state funding.

That might be explained by the poor performance of the Wisconsin economy since he took office—an economy now ranked below all other comparable Midwestern states.

A harbinger of what Walker might face came in an immediate uproar on social media this month after his staff proposed changing the university’s focus on the pursuit of truth, known as the “Wisconsin Idea,” to a grittier focus on “workforce needs.”

"Inherent in this broad mission are methods of instruction, research, extended training and public service designed to educate people and improve the human condition," is part of the University of Wisconsin's mission statement.

What is wrong with that mission, you ask? It speaks to a well-educated mind, is Walker’s problem, apparently. If Walker gets his way, that sentence, along with "Basic to every purpose of the system is the search for truth," would be entirely cut from the charter. Walker also seeks to cut statements reinforcing the university's commitment to working with out-of-state institutions and its prioritization of "programs with emphasis on state and national needs."

In its place, Walker proposes language stating Wisconsin only provides a state education because it is constitutionally required and among its top priorities are meeting "workforce needs." So the U. of Wisconsin should be down-sized to a trade school?

On reflection, Walker’s anti-education agenda fits right in with the current Republican Party’s prejudice against modern education in general, scientific knowledge and empirical facts in particular, such as the denial of global warming. Republicans have even proposed abolishing the Department of Education, a cabinet position, which helps to keep their supporters in the poorer red states literally ignorant of those facts that would better their lives.

It was in 2011 that Walker pushed through a law, Act 10, that slashed the power of public employee unions to bargain, and cut pay for most public sector workers.  As a special slap to teachers, Walker exempted the unions of police, firefighters and state troopers from the changes in collective bargaining rights but not educators. 

Teachers protested for a long time, closing schools for days, but the law passed, and the impact on teachers unions in Wisconsin has been dramatic: according to this piece by Washington Past columnist Robert Samuels. The state branch of the National Education Association, once 100,000 strong, has seen its membership drop by a third, and the American Federation of Teachers, which organized in the college system, has seen a 50 percent decline.

Graph: Wisconsin Budget Project

The effect on Wisconsin’s economy has been even more dramatic. The latest comprehensive state employment data from the U.S. Bureau of Labor Statistics and the Quarterly Census of Employment and Wages (QCEW) reveals that Wisconsin continues to lag both the national rate of job growth as well as the rates of employment gain in most other states. Between December 2012 and 2013, Wisconsin gained 26,816 jobs, posting an annual employment growth rate of 0.98 percent, significantly trailing the national job growth rate of 1.75 percent during the same period.

Thus, Wisconsin’s year-over-year job growth in fourth quarter of 2013 was just slightly over half the national rate – a level of underperformance that has been consistent since 2011. Overall, Wisconsin ranked 37th among the 50 states in the rate of total employment growth between December 2012-13. Wisconsin trailed every single neighboring Midwestern state (Illinois, Indiana, Iowa, Michigan, Minnesota, and Ohio) in year-over-year employment growth between December 2012-13.

Walker is destroying Wisconsin’s economy, in other words. Right now he is pushing to demolish union organizing once and for all with his proposal to make Wisconsin a Right to Work state, which will further depress its economy. And this man wants to run for President of all 50 states?

Harlan Green © 2015

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