Are Consumers In Danger?

 The Mortgage Corner

Total consumer credit rose $40.8 billion in December, after a $5.4 billion decline in the prior month, the Federal Reserve said last Friday. In percentage terms, it is the biggest gain since June 2022.

FREDconsumercredit

Will consumers lose their mojo? They shopped until they dropped during the holidays, which is why retail sales were up 3.9 percent in December as well. To do this consumers were spending more than they were earning. The question now is when will consumers run out of savings, and stop shopping? That will in fact determine economic growth in the New Year.

Revolving credit, typically credit-card debt, made up most of the increase, rising at a 20.2% annual rate. That follows a 12.1% drop in the prior month. Nonrevolving credit, mainly auto and student loans, rose at a 5.8% rate after a 2.7% rise in the prior month.

That’s the fine line the Fed’s Chair Powell is attempting to walk at their semi-annual congressional update this week. He didn’t say outright that the tariffs that President Trump has announced will cause inflation to spike so they can’t drop interest rates any lower, in answering questions.

"We are in a pretty good place," Powell told the Senate committee - citing tariffs, immigration, fiscal and regulatory policy as the key variables the Fed will "try to make sense of".

Therefore we won’t actually know the future until we see that happens when the new tariffs on imports kick in and those countries retaliate with their own tariffs on U.S. exports.

So January will be another story as consumers must begin to spend less to replenish their savings. A sign of their hurt is that the delinquency rate has risen, with some 3.5% of card balances past due by 30 or more days and 1.8% of accounts delinquent. Both figures are more than double the post-pandemic lows recorded in 2021, said Bloomberg.

Another hint on future consumer behavior is how small businesses are feeling. The NFIB Small Business Optimism Index fell by 2.3 points in January to 102.8. This is the third consecutive month above the 51-year average of 98. The Uncertainty Index rose 14 points to 100 – the third highest recorded reading – after two months of decline.

“Overall, small business owners remain optimistic regarding future business conditions, but uncertainty is on the rise,” said NFIB Chief Economist Bill Dunkelberg. “Hiring challenges continue to frustrate Main Street owners as they struggle to find qualified workers to fill their many open positions. Meanwhile, fewer plan capital investments as they prepare for the months ahead.”

Speaking of hiring challenges, Goldman Sachs put out a graph that shows just how important ‘unauthorized’ workers are to the U.S. economy. They make up approximately half of the jobs native-born Americans won’t take.

GoldmanSachs/MarketWatch

“The key risk is probably not a scenario in which annual deportations reach into the millions, but one where an immigration crackdown creates a climate where employers are afraid to employ unauthorized immigrants or unauthorized immigrants are afraid to go to work, potentially leading many to stay out of the workforce or even to leave the U.S. on their own,” said Goldman Sachs of their survey.

And we have just learned that inflation may be on the rise again, with the retail Consumer Price Index above 3 percent. The financial markets are reacting because of the news. It isn’t a good time to be imposing tariffs, in other words.

Harlan Green © 2025

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Record Inequality = Record Debt

 Answering Kennedy’s Call

“Never spend money before you have earned it.” Thomas Jefferson

Thomas Jefferson may not be the best person to quote on the dangers of debt—His slaves weren’t freed upon his death because his estate owed too many debts. And my Italian economics history professor lectured on the cause of the fall of the Roman Empire. Its empire collapsed when it was bankrupted because its armies had run out of territories to invade and loot.

Might our American empire might end up in a similar situation? We have transferred as much of our national wealth as possible to the top 10 percent of American households by lowering their taxes. The other 90 percent of American households are tapped out, having accumulated massive debts as household incomes have stagnated since the 1970s.

FREDdebt/gdp

The FRED graph dating from 1980 shows when our debt-to-gdp ratio began to bulge—in 1980 from 31% to 51% of GDP creating the first $400 billion national debt total.

Our national debt has now ballooned to 121 percent of GDP since because we can’t agree on how to pay for it. We may soon lose our last Aaa rating from Moody’s Investors Services who has already warned it is in danger because “Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” as quoted by Barron’s Randall Forsyth.

Graph: Last Tech Age

But the real debt culprit is what the political polarization has led to—our record income inequality, worst in the developed world and many of the developing countries. It is mainly because majority Republican congresses have managed to push through successive tax cuts without the means to pay for them.

The U.S. was in 106th place of the 149 countries in income inequality as ranked by the CIA’s World Factbook with a Gini inequality index of developing countries like Peru and Cameroon when I first wrote about it. Whereas Finland and the Scandinavian countries are at the top of equality rankings, Germany and France are 12th and 20th, respectively. The higher the index, the greater the gap between wealthy and poorer citizens of a country’s population.

Is our bankruptcy immanent? It is becoming increasingly difficult to pay our bills with increasing deficits, since much of the deficit is funded by other countries investing in U.S. Treasuries because the US Dollar is a world currency. But it will become increasingly expensive as foreign investors in US Treasuries will demand higher bond yields for the increased risk of default, as Moody’s Investor Services has warned.

Defaults happened in 1932, when national markets collapsed causing the Great Depression. Americans had borrowed too much and in the words of Roosevelt’s Federal Reserve Chairman Marriner Eccles, “The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”

Part of the solution would be to restore the tax rates for the highest income earners that prevailed before President Reagan cut them to downsize government and enrich his Big Business supporters. The first tax cut (Economic Recovery Tax Act of 1981), cut the highest personal income tax rate from 70% to 50% and in the second tax cut (Tax Reform Act of 1986) to 38.5% among other things, per Wikipedia.

But most of the taxes would have to be paid by those he enriched, maybe even a tax on the wealth they had accumulated, i.e., the wealthiest 10 percent that benefited from all those tax cuts since 1980. Is that possible when the incoming administration wants even more tax cuts?

Harlan Green © 2024

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It's the Consumer, Stupid

Answering the Kennedys Call—Part II

New York Times’ economic writer Neil Irwin in a recent Op-ed is not seeing a very robust future for global economic growth. “…what the last few months have made clear is that the forces that have held back the global economy for the last 11 years are not temporary, and have not gone away…The low-growth world was not just a phase. It’s the new reality beneath every macroeconomic question and debate for the foreseeable future.”

Really? Much of such pessimistic forecasting is based on a faulty understanding of economic history. I am paraphrasing the title of a controversial and little noticed 2011 New York Times Op-ed by Rutger’s history professor James Livingston, at a time when recovery from the Great Recession was still in doubt.

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

And yet most Americans still apparently buy the conservatives’ line that lower corporate and personal income taxes generate more jobs and growth, which hasn’t panned out for the latest Republican reduction in personal and corporate tax rates, either.

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

And that is why we have congresswoman Alexandria Octavio-Cortez’s call for a 70 percent maximum income tax rate and Presidential candidate Senator Elizabeth Warren’s just announced proposal for a wealth tax on the richest Americans with accumulated net wealth of more than $50 million.

“Warren herself hasn’t issued many details of her plan,” said the LA Times on her announcement, “But according to UC Berkeley economists Emmanuel Saez and Gabriel Zucman, who advised her on the proposal, the tax would be 2 percent on net worth above $50 million and another 1 percent on net worth above $1 billion. They say it would affect about 75,000 U.S. households, or less than 0.1 percent of the total, and raise $2.75 trillion over 10 years. That’s about 0.1 percent of gross domestic product per year.”

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 and wealth inequality in U.S. modern history, as illustrated by this Urban Institute graph.

Urban Institute

The result has not been good for a participatory democracy, as I said last week. But returning $2.75 trillion to federal government coffers over 10 years would be good for democracy, whether it can be put to use to implement more social programs like paid family leave, some form of private/public universal health care program, at least $1 trillion in repairs and upgrades of our ageing infrastructure, more education spending on preschoolers, and paying down some of the outstanding $1 trillion in student debt.

All of these items would vastly improve economic growth, both today and for future generations. So there is no need to believe Neil Irwin’s lament that the world can’t escape its “low growth, low inflation rut.”

We have not been paying attention to economic history, but condemned to repeat what hasn’t worked, says Professor Livingston.

“So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

That’s why it’s time to begin to put some of America’s accumulated wealth to better use than has been the case in recent decades.

Harlan Green © 2019

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Does Lower Inflation Mean a Goldilocks Economy?

Popular Economics Weekly

Graph: Calculated Risk

Consumers are being helped by consumer prices that are barely rising. The Consumer Price Index is up just 2.7 percent, and core CPI without food and energy prices up 2.2 percent in 12 months. This has kept interest rates at historic lows since the Great Recession and is the reason for an economy that is neither too hot nor too cold.

Just how long it will last is an enduring question for economists. One infallible feature of an incoming recession is sharply rising interest rates. But historically low interest rates over an extended period can also mean most consumers aren’t earning enough to boost their buying power, which in turn ‘powers’ higher prices and inflation—a sign of intractable income inequality.

The Great Recession was largely caused by Alan Greenspan’s Fed raising interest rates 16 consecutive times—a total of 4 percent—that caused all the ‘liar’ loans with negative amortization and no real income or asset verification to become unaffordable to lower-income borrowers and homeowners.

That isn’t the case today—yet. The wealthiest 10 percent—what is basically left of the middle class that has profited since the Great Recession—has a very high savings rate. But not the ‘other’ 90 percent, so that average annual incomes are rising at 2.7 percent; also the consumer inflation rate today.

Households carried a record $13.3 trillion in debt at the end of June, Federal Reserve records show. That tops the prior peak of $12.7 trillion in 2008 during the middle of the Great Recession. High debt levels, especially in mortgages, contributed to the 2008 financial panic and the severity of the recession, as I said.

But low interest rates and inflation are keeping delinquencies very low at the moment, and lending standards remain quite stringent in the post-crisis era, according to a recent Moody’s study reported by MarketWatch. As such, there’s less danger of another housing market collapse.

That is the catch. Interest rates and inflation must remain very low for delinquencies to remain ‘very low’, and that won’t last much longer with wage pressures growing, fewer workers available for hire, and the Federal Reserve saying it will continue to raise short-term rates.

Business confidence is soaring as well, thanks to the economic ‘porridge’ being neither too hot nor too cold. The NFIB Small Business Optimism Index soared to 108.8 in August, a new record in the survey’s 45-year history, topping the July 1983 high-water mark of 108. The record-breaking figure is driven by small business owners executing on the plans they’ve put in place due to dramatic changes in the nation’s economic policy.

And small businesses create most of the jobs. “Today’s groundbreaking numbers are demonstrative of what I’m hearing every day from small business owners – that business is booming. As the tax and regulatory landscape changed, so did small business expectations and plans,” said NFIB President and CEO Juanita D. Duggan. “We’re now seeing the tangible results of those plans as small businesses report historically high, some record breaking, levels of increased sales, investment, earnings, and hiring.”

So how long can such goldilocks growth last? It is the ideal condition economic planners work for, but lasts only very briefly until debt levels rise to unsustainable levels, given the inherent fluctuations and dynamism in any economy. Vigilance in looking for signs of higher interest rates and slower growth is therefore a major requirement to stay ahead of those fluctuations.

Harlan Green © 2018

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

Why Aren't Wages Growing Faster?

Popular Economics Weekly

Graph: FRED

Interest rates are far too low for this late in the recovery from the Great Recession. We know this because the Treasury Yield Curve has been falling that measures the difference between the 10-year and 2-year Treasury bond yields. The difference is just 1 percent, when it has been around 2 percent during other prosperous times, as the FRED graph shows. It last was this low just before the last 2 recessions (gray columns in graph).

Why are interest rates still low? The simplest answer is there isn’t sufficient demand for what is being produced that would cause more borrowing, thus causing interest rates to rise. And though the Republican tax cuts have juiced profits of corporations and their stock holders, it hasn’t boosted the wages of ordinary consumers that power two-thirds of economic activity.

Consumers’ personal incomes are rising at the inflation rate on average, which means they don’t have sufficient income or savings that would cause them to increase their spending habits. It’s a difficult and maybe counter-intuitive concept. If prices are rising as fast as incomes, then consumers are also playing catchup in what they need to maintain their standard of living.

That is why economists worry that such low long term interest rates in particular could be a sign of another incipient recession. Banks cannot lend as much when their profit on loans is the difference between their cost of money and what they can lend at longer-term loan rates (such as mortgages and installment loans). So it means a shrinkage in the available credit.

The good news is that job openings are still soaring in the Labor Department’s JOLTS Report, which should boost wages. It is a survey of available jobs, vs. how many jobs have been created in June.
There were 6.662 million in June vs. an upwardly revised 6.659 million in May, reports the BLS.

Year-on-year, the number of job openings was up 8.8 percent. The number of hires remained well below job openings at 5.651 million in June, down from May's 5.747 million, while separations, which includes quits, layoffs and discharges, rose to 5.502 million from 5.419 million.

 

Graph: Econoday

That means there were more than 1 million jobs that remained unfilled, which has to put more pressure on employers to boost wages. So will inflation behave enough to allow an increase in real wages, which should be rising above the rate of inflation this late in the recovery from the Great Recession?

That has been the problem since the 1970s, really. The Fed wants to keep inflation low, so it raises interest rates whenever there is a sign that workers’ wages are rising faster than inflation. But this puts a damper on consumer spending, which in turn keeps economic growth in the 2-3 percent range, which isn’t enough to either pay down personal or government debts.

And social security trustees calculate the $3 trillion social security trust fund will be depleted by 1934, which would mean taxes must be raised to maintain current benefits before then. Does anything believe Congress will allow said benefits to shrink, with voting seniors just daring them to cut their benefits?

It’s much easier for the Fed to allow inflation to rise above its 2 percent target range before raising their interest rates to allow faster wage growth, which in turn boosts tax revenues. The social security trustees use a mid-range GDP growth rate of approximately 2.6 percent to calculate longevity of the SS trust fund.

GDP growth has averaged 3.5 percent since the 1930s, including the Great Depression. Why have inflation hawks at the Federal Reserve so slowed growth since the 1970s by boosting interest rates at the slightest hint of higher inflation, which in turn has kept GDP growth below its long-range potential?

The real answer is that pro-business, pro-corporate administrations since 1980 have severely limited collective bargaining and other pro-labor laws in the name of globalization, thus limiting wage growth.

That’s why such policies are called trickle-down economics. Very little of the national wealth created since then has trickled down to the 80 percent that are the real wage earners.

Harlan Green © 2018

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

Boom Times For Consumers In 2017?

Popular Economics Weekly

Here are more signs that economic growth will increase in 2017. There’s a large increase in revolving credit, one of the largest of the cycle, reports the Federal Reserve, a sign that retail sales are booming (with retails sales report due out Friday). And the National Federation of Independent Business reported its small business optimism index soared 7.4 points in December to 105.8, the highest reading since December 2004.

Graph: Econoday

Revolving credit jumped $11.0 billion in data for November to indicate that consumers are increasingly running up their credit-card debt. Non-revolving credit, up $13.5 billion, is also positive, here reflecting demand for vehicle financing and student loans (which are tracked in this report). Total credit rose $24.5 billion in the month, well above the consensus of economists. Retail sales for December, to be posted Friday as we said, will offer more definitive data on the strength of holiday spending.

The outsized increase in small business optimism far exceeds expectations and follows a robust 3.5-point rise in November. NFIB said business owners who expect better economic conditions accounted for about half of the overall increase, with a net 50 percent of respondents expecting that the economy will improve, a 38 point leap up from November. 

And even more importantly for small businesses, plans to increase capital spending jumped 5 points to 29. An increase in capital expenditures usually means increased productivity, a plus for increased economic growth. Earnings trends were also up 6 points, but remained in negative territory at minus 14, which is why more capex spending is so necessary to boost small business profits.

Graph: Calculated Risk

And lastly, the Labor Department just released its JOLTS report, the Job Openings and Labor Turnover Survey, which showed Jobs openings increased in November to 5.522 million from 5.451 million in October. Quits rose to 3.1 million (a sign more workers are finding better jobs), and new hires rose to 5.2 million.

This tells us the actual size of the U.S. jobs market that ‘churns’ so many millions of jobs every month, and which gives US the best picture of employment. The above graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Over the month, hires and separations were also little changed at 5.2 million and 5.0 million. It is the difference between hires and separations that determines the actual number of new jobs created, says the Labor Department’s Bureau of Labor Stats (BLS).

The number of job openings (yellow) are up 6 percent year-over-year. This is big and says and says our economy continues to expand, but there aren’t enough skilled workers to fill those jobs. Quits are up 7 percent year-over-year. These are voluntary separations, as we said, and are the reason incomes are now rising faster than inflation.

What should we take away from this? No wonder it is so difficult to forecast future job trends. But with 300,000 more Job Openings than actual Hires, U.S. businesses must find more ways to train and promote their own workforce.

Harlan Green © 2016

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

Record Low Rates Spur Consumer Debt, But Not Spending

The Mortgage Corner

Consumer credit rose a very large $17.2 billion in February with January revised higher to $14.9 billion, says the Federal Reserve. Nonrevolving credit, which are gains for vehicle financing and student loans, rose $14.2 billion and revolving credit, where credit-cards are tracked, rising the smallest amount as usual with a gain of $2.9 billion. Total consumer borrowing, which does not include mortgage debt, is now $3.57 trillion.

Graph: Econoday

This seems to contradict recent weak retail and consumer spending data that shows consumers saving more and spending less. So what are consumers up to? The lack of gains for revolving credit is good in the sense that it points to consumer wherewithal but negative relative to short-term consumer spending, says Econoday.

The Commerce Department reported consumer spending has been tepid the past 2 months. Income rose a soft 0.2 percent in February with wages & salaries slipping 0.1 percent for the first decline since September and, as it turned out, underscoring the lack of earnings punch in the employment report. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent.

Graph: Econoday

And consumers continue to put money in the bank as the savings rate, in perhaps a sign of consumer defensiveness, is up 1 tenth to 5.4 percent for a 3-year high. This is while year-over-year income growth is near a two-year low and spending well under the growth during 2014. This softness isn't helping vehicle sales which in an ominous sign for the March retail sales report (released next week) fell 5.1 percent in data released on Friday. The annualized unit rate of 16.6 million is the lowest since February last year.

So what is the problem, with jobless claims at record lows, pointing to a lack of layoffs and ongoing strength for the nation's labor market? Initial claims fell 9,000 in the April 2 week to a slightly lower-than-expected 267,000. Consumers continue to pile up debt, but are spending less on day-to-day needs paid with credit cards.

Could it be due to plunging stocks and geopolitical uncertainty, synonymous with the recent terrorist attacks and weak growth in other major economies, like the EU and China?

We have no real answer, but continue to hope real estate will somehow fill the growth gap, with record low interest rates, and the Fed showing no signs of raising interest rates further. Purchase applications for home mortgages declined by 2.0 percent in the April 1 week, but refinancing, boosted by lower rates, increased by 7 percent. The average rate for 30-year conforming loans ($417,000 or less) dropped by 8 basis points from the prior week to 3.86 percent. (But conforming fixed mortgage rates are now as low as 3.25 percent in California for 1 origination point.)

Year-on-year, the purchase index was up 11 percent, still strong but a far cry from early March levels when it was more than 30 percent higher than year ago levels. But last week's construction spending report for February showed spending for new single-family homes rose 1.2 percent month-to-month and multi-family homes 0.9 percent. And, the 11 percent year-to-year rise in the purchase index is in line with February's year-to-year 10.7 percent increase in residential construction spending, and these are still quite impressive.

So when and how will we know what consumers are really up to, more savings or more spending? Probably not until the spring housing season kicks in sometime in May. We should also have a better picture of 2016 GDP growth by then.

Harlan Green © 2016

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

Why Slower Q4 Growth?

Gross domestic product — the value of everything a nation produces — expanded at a 0.7 percent annual rate from October to December. That’s a big markdown from 2 percent growth in the fall and 3.9 percent last spring. The economy expanded at a 2.4 percent clip last year, the same as in 2014, the Commerce Department said. Alas, the U.S. hasn’t topped 3 percent growth since 2005.

But those numbers may be revised higher, as more data on imports/exports and inventories for December come in. Hence there are two more revisions to the Q4 GDP estimate put out by Commerce. Softer consumer spending, falling exports and a smaller buildup in business inventories were largely the cause of the fourth-quarter slowdown, fresh government data showed.

Graph: Marketwatch

However, the biggest drag on growth was in industrial production. Though the drop in industrial production in the fourth quarter was concentrated not in manufacturing, per se, but in mining and utilities, mostly due to falling energy prices, says Marketwatch’s Rex Nutting.

“Manufacturing output slowed in the fourth quarter, but it did grow, at an anemic annual rate of 0.5 percent. Meanwhile, mining output (mostly petroleum and other fossil fuels) plunged at a 15.5 percent rate and utilities (hurt by the warmer-than-usual fall) saw seasonally adjusted output drop at a 15.4 percent annual rate.”

On the other hand, spending on services was higher, adding 0.9 percentage points, as was spending on goods, at plus 0.5. Residential investment, another measure of consumer health, rose very solidly once again, contributing 0.3 percentage points. Government purchases added modestly to growth.

Inflation fell again, but personal consumption is holding up, as is consumer sentiment. And next week’s December unemployment report will tell us if January growth might pick up, since strong employment tends to boost consumer spending.

Graph: Econoday

Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says the Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

The assessment of the current jobs market is favorable with only 23.4 percent describing jobs as hard to get. This is a low percentage for this reading and down more than 1 percentage point from December. But improvement here is offset by a dip in those describing jobs as currently plentiful, down 1.4 percentage points to 22.8 percent.

The bottom line is economic growth has slowed due to a decline in energy and commodity prices that hurts some industrial sectors, but it helps consumers. And consumers account for some 70 percent of economic activity these days. So look for increased government spending (state and national) on public works, as well as more new home construction to keep us out of a recession in 2016. This activity is all domestic, which isn’t affected by what is happening in China, Europe, the Middle East, Russia, and other third world countries.

Harlan Green © 2016 

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Fed Chair Yellen Still Dovish, Economy Still “Sluggish”

Popular Economics Weekly

Federal Reserve Chairperson Yellen wants to keep interest rates as low as possible for at least the “next couple of FOMC meetings”, even as there are signs that economic growth is accelerating. This is in the face of the newly Republican-dominated Congress threatening to curb its powers, because their deficit hawks want to raise rates sooner, and we know what happened in Europe and Japan when this happened—their 2^nd and 3^rd recessions since 2008.

Why? Because raising rates too soon could stop many consumers from spending, because income growth is poor and consumers are only beginning to feel confident enough to spend. Whereas the deficit hawks see inflation where there is none at the moment, since they are mainly creditors that see any deficit as endangering the value of the debt they hold.

Yellen said inflation measures still show inflation too low to sustain growth, and wage pressures are still not enough to sustain higher household incomes, which is the main driver of inflation. Or, in her words, the Fed doesn’t want to raise rates “until the economy is fully healed”

However, “If economic conditions continue to improve,” said Dr. Yellen, “as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. …However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings.”

The most recent measures do show accelerating growth. For instance, the Chicago Fed National Activity Index (CFNAI), a proxy for nationwide growth, edged up to +0.13 in January from –0.07 in December. It is one of the broadest measures of economic activity, outside of the Gross Domestic Product quarterly report. Three of its four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

Graph: Calculated Risk

Too low inflation still remains a problem, you say? Yes, and is the main reason Yellen wants to keep interest rates at their lowest level. It’s now negative for the first time in the year, and even since 2009. There was another huge drop in energy prices. Overall consumer price inflation fell sharp 0.7 after declining 0.3 percent in December. Energy plunged 9.7 percent after dropping 4.7 percent in December.

Gasoline plummeted 18.7 percent, following a 9.2 percent fall in December. Food prices were unchanged, following a rise of 0.2 percent in the previous month. Core inflation excluding food and energy was just 0.2 percent after a modest 0.1 percent rise December, and is up 1.6 percent in a year.

Graph: Trading Economics

That is the main reason the Fed wants to keep rates low as long as possible. Low interest rates boost both housing prices and sales, lower debt levels, and higher valuations enable more homeowners to sell, refinance, and move, if necessary. So Yellen’s last two days of testimony should encourage those fence sitters, as well as give all consumers more confidence in their future economic well-being.

Harlan Green © 2015

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

Lower Household Debt, Housing, Now Boosting Growth

The Mortgage Corner

In another sign that this could be a better growth year, builder confidence in the market for newly built, single-family homes rose two points to 55 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, and housing starts surged. This third consecutive monthly gain brings builder optimism to its highest level since January, and housing starts to the highest level in 8 months.

And housing has been the missing component of GDP growth since the end of the Great Recession, which is another sign that 3 percent plus GDP growth is in the cards for the rest of this year and maybe next year as household formation (mainly the millennial generation of 18 to 36 year-olds finally leaving home) returns to normal levels.

Graph: Wrightson ICAP

All three HMI components posted gains in August. The indices gauging current sales conditions and expectations for future sales each rose two points to 58 and 65, respectively. The index gauging traffic of prospective buyers increased three points to 42.

"Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring," said NAHB Chief Economist David Crowe. "Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand."

Based in part on the strength in the NAHB index last month, Wrightson ICAP, a leading financial market data provider, expects a third straight solid increase in single-family building permits in today’s July report. Today’s NAHB data suggest that the uptrend in permits will continue into August.

And sure enough, U.S. housing starts jumped 15.7 percent in July, hitting the highest level in eight months. The 1.09 million annual rate of new housing starts topped economist expectations of 975,000. And permits for new construction, a sign of future demand, rose 8.1 percent to an annual rate of 1.05 million from 973,000 in June.

Some lenders are getting around the tight lending conditions and higher risk fees imposed by the Fed on conventional mortgages guaranteed by Fannie Mae and Freddie Mac, in particular. For instance, they are beginning to offer interest only mortgages again, though borrowers have to be qualified at the fully amortized interest rate, rather than the lower interest only payment.

And, the July 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand. “Although many banks reported having eased standards for prime residential real estate (RRE) loans,” said the report, “respondents generally indicated little change in standards and terms for other types of loans to households.”

However, a few large banks had eased standards, increased credit limits, and reduced the minimum required credit score for credit card loans. Banks also reported having experienced stronger demand over the past three months, on net, for many more loan categories than on the April survey.

The good news, though, was that many of the new Quality Mortgage standards imposed by the CPFB (i.e., 43 percent maximum debt-to-income ratios, no interest only provisions) don’t apply to GSE guaranteed mortgages, if they meet the stricter conforming underwriting criteria.

What all this means is that banks are willing to lend again, which should put some of that cash savings’ hoard back to work that is held by banks and wealthy individuals. Market Watch’s Rex Nutting has reported on this extensively.

Graph: Marketwatch

“The majority of Americans are doing their patriotic bit, spending nearly everything they earn,” writes Nutting. “ A recent report from the Fed showed that little more than a third of families are able to save any money at all after they pay their bills each month. More than 60 percent say they couldn’t come up with $400 in an emergency without borrowing or pawning something.”

The bottom line is that most people are saving next to nothing, while just a few are saving a large amount of their personal disposable income (i.e., after taxes). A recent bankrate.com survey found that the top 1 percent save some 36 percent of their income, whereas the overall personal savings rate for all Americans is still not much more the 5 percent at present.

It speaks to the unequal income distribution since the end of the Great Recession, with lower and middle class income earners actually losing income—in part due to the housing bust—and those able to profit from the rise in financial markets garnering almost 100 percent of the income gain since then. Those who do save are saving a ton — more than $1.2 trillion a year of the $10.8 trillion held in financial assets, rather than investing in productive capacity.

Harlan Green © 2014

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

What is Yellen’s Real Unemployment Rate?

Financial FAQs

Fed Chairwoman Janet Yellen spoke with IMF President Christine Lagard at an epoch-making conference yesterday. It was epoch-making (with luminaries such a ex-Fed Chair Paul Volcker in attendance), because Ms. Yellen told us which unemployment rate she and the Fed Governors looked at to determine when they should begin to raise interest rates.

Though payrolls have averaged 231,000 additional jobs this year, the so-called U6 unemployment rate that includes people who can only find part-time work, including those who recently gave up looking, barely improved to 12.1 percent in June from 12.2 percent.

Yellen has said several times that it was specifically the long term unemployed that she wanted back to work before the Fed would seriously begin to tighten credit. The number of long-term unemployed (those jobless for 27 weeks or more) declined by 293,000 in June to 3.1 million, said the report. These individuals accounted for 32.8 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has decreased by 1.2 million.

Graph: Marketwatch

This is when today’s June unemployment report was terrific, with the rate falling to 6.1 percent from 6.3 percent, and 288,000 payrolls jobs were created. There was hiring across the board. Even governments hired 26,000 additional employees.

Professional jobs increased by 67,000, just 15 percent of which were temp positions, said the report. Retailers hired 40,200 workers and restaurants added 33,000. Health-care providers, another source of steady hiring, created 21,000 new positions. Manufacturers took on 16,000 additional workers. Even the finance industry, which has lagged in hiring since the financial panic in 2008, created 17,000 jobs in June. That’s the largest increase in 27 months.

There is one other factor that Yellen, et. al., are looking at.  Wage and salary levels aren’t increasing faster than inflation, and the average workweek was unchanged at 34.5 hours. Hours worked tend to rise when an economy strengthens, but there’s been little change for months.

Average hourly pay rose 6 cents, or 0.2 percent to $24.45 in June. Over the past 12 months, wages have risen 2 percent. But wages are rising at just two-thirds the normal rate and the recovery is unlikely to be more robust unless workers start to receive bigger paychecks.

So Yellen and the Fed Governors are saying don’t tighten credit prematurely, as FDR did in 1937, which dragged the 30’s economy back into the Great Depression. There are still too many signs of weakness, including excessive long term unemployment and insufficient demand to warrant raising interest rates, or otherwise worry about inflation.

Graph: Marketwatch

Banks and Wall Street always worry about excessive inflation, because they are the creditors, and inflation reduces the value of their debt. But that benefits consumers, as it also reduces the value of their debt, and excessive consumer debt has been the main drag in this recovery.

So we will not see a real recovery that puts even the long term unemployed back to work, until the mountain of private debt is reduced. And that can’t happen until we create employment policies that continue to create more jobs on Main Street, rather than worry about and abet the policies of Wall Street.

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

Losing Fannie and Freddie—A Terrible Idea

Financial FAQs

There was a reason Fannie Mae (Federal National Mortgage Association) and Freddy Mac (Federal Home loan Mortgage Corporation) were government created entities, before they became private corporations in the 1970s.  They encouraged homeownership at a time when owning a home was only for the wealthiest.  Though Fannie Mae—the  Federal National Mortgage Association—was created in 1938 as part of the New Deal, it became important after WWII when the most basic 50 percent down payment on a 15-year fixed rate loan was available.  Payments were prohibitively expensive for those just entering the middle class.

Fannie Mae and Freddie Mac, Government-Sponsored Enterprises, or GSEs, filled the void with 30-year fixed rate mortgages, loans that private banks thought too risky.  Banks have always preferred short-term construction loans, or lines of credit that shortened their risk profiles.

And so the federal government created hybrid agencies that set up strict standards for so-called conventional, conforming mortgages.  These were mortgages that conformed to stricter underwriting standards set up by Fannie and Freddie.

And now some in Congress want to abolish them altogether, and replace them with what is basically a privately-funded secondary market mechanism for packaging and selling guaranteed mortgages with sky-high capital requirements that will raise interest rates, putting even more consumers out of the housing market.

Firstly, the only problem with the GSEs in their current form was that they were undercapitalized.  And because they were undercapitalized they suffered the same fate as all the undercapitalized major banks bailed out by TARP funds.  The only difference was that they were made wards of the government, which is what they were prior to the ‘70s, anyway.  And they are now pouring $billions back into the US Treasury, some $203 billion to date since the recovery, when they were lent $188 billion.

So there is no reason to dissolve them and every reason to keep them as viable GSEs.  This is mainly because their underwriting criteria have been the gold standard for borrower qualification, requiring income and asset verification, and assessing the likelihood this condition would continue, as we said.

That is why their default rates have about returned to historical levels, while so-called Private-Label mortgages—those originated by banks that don’t meet the stricter conforming standards—have default rates still in the 6 percent rage, 3 times the Fannie/Freddie rate.

The latest proposal, by committee chairmen, Tim Johnson, a Democrat from South Dakota, and Mike Crapo of Idaho, the ranking Republican, have come up with a compromise that provides an explicit government guarantee for mortgages, but only after private investors have taken the first losses. The plan would set up a new federal regulator, called the Federal Mortgage Insurance Corporation, to provide the guarantee and regulate the system.

Having private investors take first losses, in lieu of Fannie and Freddie’s current stockholders, is a terrible idea because banks are much more risk averse.  That’s why Fannie and Freddie currently originate some 60 percent of all residential mortgages since the end of the Great Recession.

Graph: WSJ/Inside Mortgage Finance

The new agreement would establish the Federal Mortgage Insurance Corporation as the insurer of last resort, but would require 10 percent private capital reserves, which is the rub. The guarantee, provided for a fee equivalent to 0.1 percent interest, would not kick in until the private reserves were wiped out. Fannie and Freddie would have remained solvent during the housing crisis if they had kept 4 percent of their capital in reserve.

The bill would create a single platform to standardize mortgage-backed securities, which are investment vehicles created by bundling mortgages and then selling off pieces of the bundle to spread the risk of default.

The bill would also set a minimum down payment of 5 percent, except for first-time home buyers, who would have to put down 3.5 percent for the mortgage to qualify for the guarantee. Some advocates have said they would prefer that the down payment amounts be left to the new regulator, who could adjust them in response to economic conditions.

The increased capital requirements and the government guarantee would raise the cost of borrowing for homeowners, said economist Mark Zandi, because the risks of the system would no longer be borne by all taxpayers. He estimated that interest rates would increase by 0.4 to 0.5 percentage points. 

This would put Fannie/Freddie fixed rate conforming mortgages at or above 5 percent at rates that prevailed on the runup to the housing bust, when households hadn’t lost so much income and accumulated record debts.  That is not the case today, for most Americans, needless to say.

The bill could therefore eliminate the affordable housing goals that governed Fannie and Freddie, which required them to make a certain number of loans to people with low incomes but which some advocates said were easily gamed and worked to discourage lending in particularly expensive markets.

John Taylor, president and chief executive of the National Community Reinvestment Coalition, said he had been assured that lenders would be encouraged to offer loans to low-income families through incentive pricing or would be required to do so by the regulator.

Really?  It depends on the types of “encouragement” given to banks.  They don’t have public service goals unless required to, such as the Community Reinvest Act, that combatted red-lining, because lenders tended to avoid lending in lower-income neighborhoods.  This is because they are required to maximize their profits, and affordable loans are by their nature very low profit margin entities.

So if not allowed to return as private corporations with stockholders bearing the risk, then at least keep them under some form of government control—there are many forms this can take, including strict regulations to protect their underwriting standards.  But there has to be enough capital, as is the lesson learned with commercial banks, as well.

Harlan Green © 2014

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

JOLTS and Decline of Household Debt

Financial FAQs

There is a direct correlation between the increase in job openings announced in the Labor Department’s JOLTS (Job Openings and Labor Turnover) report, and declining household debt. How so? The increase in job opportunities—the number of job openings (yellow in graph) is up 7.6 percent year-over-year compared to January 2013, and that is enabling more households to pay down their debts.

Graph: Calculated Risk

This is while the Quits number decreased in January but is up about 3 percent year-over-year. These are voluntary separations, and mean workers are seeing more job opportunities that make them willing to leave their current job. (Light blue columns at bottom of graph is trend for "quits").

Graph: Calculated Risk

And household debt, as measured by the Federal Reserve’s Household Debt Service Ratio of mortgage and consumer loans to Disposable Income, has been declining steadily, and is now below 1980 levels. This is freeing up consumers’ incomes to spend more, needless to say, and a sign of better economic growth for 2014.

Sure enough, employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, said the Labor Department last Friday. The unemployment rate, however, rose to 6.7 percent from a five-year low of 6.6 percent as Americans flooded into the labor market to search for work.

This is even though 601,000 people could not get to work because of the winter weather, the highest level for February since 2010. Some economists said job growth in February would have been as high as 200,000 if not for the weather.

And the smaller survey of households from which the unemployment rate is derived showed 6.9 million people with jobs reported they were working part-time because of the weather. That was the highest reading for February since the series started in 1978.

So even the winter weather isn’t slowing down appreciable growth. And consumers now have more money to spend. So watch out, trendsetters and economic forecasters, when the Spring thaw sets in!

Harlan Green © 2014

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

Existing-Home Sales Slow in January

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 5.1 percent to a seasonally adjusted annual rate of 4.62 million in January from 4.87 million in December, and are 5.1 percent below the 4.87 million-unit pace in January 2013.

Last month’s level of activity was the slowest since July 2012, when it stood at 4.59 million, and signals the effect of low inventories and rising interest rates that have cut mortgage applications to their lowest level in a year.

Total housing inventory at the end of January rose 2.2 percent to 1.90 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, up from 4.6 months in December. Unsold inventory is 7.3 percent above a year ago, when there was a 4.4-month supply.  But both rates are far below the  6-month inventory level in more normal times.

Graph: Calculated Risk

Meanwhile, mortgage applications are down for the year.  The MBA’s weekly mortgage applications refinance survey is down 70 percent since May, and its purchase index is down 8 percent in a year.

Graph: Calculated Risk

This is even though 30-year fixed conforming rates are down to 4.0 percent since the latest signs of slowing factory activity and job creation over the past 2 months.

But the slowdown may be temporary, as the NY Fed’s just released Q4 Household Debt and Credit Report said consumers are paying down their debts while spending more.  The report showed that total household debt is 9.1 percent below the Q3 2008 peak. Mortgage debt is down 13.4 percent from the peak, and Home Equity revolving debt is down 25.9 percent.

Calculated Risk

Does this mean the household deleveraging of debt that has held down consumer spending since the Great Recession is over?  Are consumers opening up their wallets finally, and will this boost 2014 housing sales? 

We believe so, because of the tremendous pent up demand generated by 5 years of subpar housing construction that has reduced inventories, much lower delinquency rates, and a growing population that is boosting housing demand.

Harlan Green © 2014

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

Consumer Debts Returning to ‘Normal’

Popular Economics Weekly

The NY Fed released their 2013 Q4 Household Debt and Credit Report. The report showed that total household debt is 9.1 percent below the Q3 2008 peak. Mortgage debt is down 13.4 percent from the peak, and Home Equity revolving debt is down 25.9 percent.

This is even though aggregate consumer debt increased by $241 billion in the fourth quarter, the largest quarter-to-quarter increase since 2007, said the NY Fed report. More importantly, between 2012:Q4 and 2013:Q4, total household debt rose $180 billion, marking the first four-quarter increase in outstanding debt since 2008.

Calculated Risk

Does this mean the household deleveraging of debt that has held down consumer spending since the Great Recession is over? Are consumers opening up their wallets finally, and will this drive increased consumer spending and so GDP growth this year?

Barron’s Gene Epstein and Applied Global Macro Research (AGMR) economists believe so. AGMR projects 4 percent in economic output this year and next, arguing that future demand for housing will also boost consumer spending by creating jobs in the many ancillary industries that service housing. This is far above the Fed’s FOMC prediction of 2.8 to 3.4 percent GDP growth through 2015. It also means unemployment has to fall below 6 percent, and the Fed will begin to raise their overnight rate to 0.25 percent from its current 0 percent.

But AGMR’s report doesn’t take into account the sharp decline in federal and local government spending, which has been a drag on growth since 2009. It would have to pick up as well, in my opinion. This is happening in states like California, whose budget is now in surplus, but not at the federal level, in spite of the $1.1 trillion budget agreement for the rest of this fiscal year.

As net household borrowing resumes, it is interesting to see who is driving these balance changes, and to compare some of today’s patterns with those of the boom period. This will help to determine how sustainable is such consumer spending, and so economic growth and job creation.

Auto and student loans have led the way and been growing for some time, while overall debt continued to fall. But in 2013, the increased credit card and mortgage debt among the young and the riskless has led to a turnaround in the trajectory of overall debt. This was the case in the comparison in debt with 2005, and is still the case today. It is the under 30-year olds that are borrowing and spending the most.

 

Graph: NY Federal Reserve

And we believe it is the below-30 cohort that will comprise most of the increased demand for housing, as household formation is predicted to pick up above 1 million per year for the rest of this decade, according to the 2013 Harvard Joint Center for Housing Studies’ State of the Nation’s Housing report.

“With rising home prices helping to revive household balance sheets and expanding residential construction adding to job growth, the housing sector is finally providing a much needed boost to the economy,” says Eric S. Belsky, Managing Director of the Joint Center for Housing Studies. “But long-term vacancies are at elevated levels in a number of places, millions of owners are still struggling to make their mortgage payments, and credit conditions for homebuyers remain extremely tight.”

So as always, the key will be pent-up demand for housing and consumer goods that has been constrained since 2009, due mainly to the mountain of debt that has now been reduced to more manageable levels. But government has to be included in any growth projections, and any boost in government spending is still in question.

Harlan Green © 2014

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

Post-WWII Lessons—How to Reduce Debt?

Financial FAQs

There is a productive way to pay down the federal and consumer debt loads instead of the austerity policies currently in vogue both here and in Europe (i.e., that cut taxes and government spending). It’s means implementing policies that will increase average household incomes; and tax revenues in the case of governments. We know this works because it happened after World War II with its record 120 percent of GDP debt load that was reduced to as low as 31.7 percent in the 1974.

But the debt has climbed back to 100 percent of GDP today (including $5 trillion owed to the social security trust fund) for a variety of reasons; including spending for the 2 Wars on Terror + an extensive domestic security apparatus that wasn’t paid for, regressive tax policies, the decline in household incomes, and the Great Recession itself.

Graph: Trading Economics

The last 4 years of Clinton’s presidency also gave us 4 federal budget surpluses. This was because of a slightly higher maximum federal income tax rate while capping government spending, mainly because of the post-cold war drop in military spending during the longest growth cycle (10 years) in U.S. history.

The fallacy is to believe that it can’t happen today. Because, the story goes, only the immediate post-WWII society had lots of savings so that Eisenhower’s sky-high maximum income tax rate of 92 percent didn’t harm private spending and investment. That was why consumers could afford all those new consumer goods, fund a new freeway system and travel to the moon.

But there is as much wealth saved today. Only it has become very concentrated. Those with the wealth today—such as the top 1 percent that hold some 23 percent of our total wealth—also have very high savings rates. According to research from American Express Publishing and Harrison Group, the savings rate of the wealthiest 1 percent soared to 37 percent in the second quarter 2013. That's up from 34 percent in the second quarter of 2012—and more than three times their savings rate in 2007. And it contrasts with the current 4.2 percent personal savings rate for all consumers.

Studies in fact show that increasing the maximum tax rate to as high as the 80 percentage wouldn’t harm consumption, the main driver of domestic economic growth. Today, the richest 1 percent of Americans pay a top federal rate of 29 percent, according to Emmanuel Saez, an economist at the University of California, Berkeley. That’s because almost a third of their income derives from capital gains and dividends — which are now taxed at around 20 percent rate — while the rest is ordinary income taxed at a top marginal rate of 39.6 percent.

Today, people earning over $200,000 a year capture more than a third of national income. In fact, three decades of tax cuts may have gilded the pockets of the rich, but they didn’t provide much economic juice, says one study. Among developed nations, incomes per person grew no faster in countries like the United States and Britain that slashed their top tax rates than in countries like Spain, Germany or Denmark, which did not.

There is even evidence that higher tax rates encourage growth. For instance, reducing inequality through higher tax rates on the wealthy may promote wealth creation. What’s the mechanism? Bowles and Jayadev claim to have identified one element of it: inequality leads to conflict and tensions, and society has to waste resources dealing with those conflicts and tensions.

The people at the top have to spend a lot of time and energy keeping the lower classes obedient and productive. So-called “guard labor” is one such waste, says the study. Some estimates say that 1 in 4 Americans are employed to keep fellow citizens in line and protect private wealth. This waste includes corporate IT monitoring, CCTV at work, and mobilizing police forces to protect property.

Graph: Center For American Progress

And the above figure shows that there is no correlation between cuts in U.S. top tax rates and average annual real GDP-per-capita growth since the 1970s. Countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark.

How to increase household incomes is more difficult, as many right-to-work states have limited both collective bargaining and union membership for middle class workers that have prevented their incomes from even keeping up with inflation. But there are movements to increase the minimum wage, as well as strengthen collective bargaining laws for better wages and benefits. The ongoing economic recovery and increasing employment will also boost both incomes and tax revenues.

So there are many good reasons to support policies that increase tax revenues and household incomes, and no longer valid reasons for austerity policies that actually increase deficits, as well as depress household incomes.

Harlan Green © 2013

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