Why Is Inflation Still a Problem?

 Financial FAQs

The Fed’s preferred inflation gauge, Personal Consumption Expenditures Index (PCE) isn’t declining because consumers continue to spend more than they earn. Why?

BEA.gov

Such spending gave a boost to retail sales and so made holiday shoppers happier. But it also highlighted the underlying problem, inflation is still too high.

The June to December BEA graph shows the difference between income (blue bar) and spending, or outlays (orange bar). It has been this way for at least one year. The declining black line in the graph measures consumers’ personal savings rate, which is back down to 3.8 percent from almost 5 percent in June 2024 because of it.

Why do consumers keep spending more than they make? One clue is that most of the spending is for housing, utilities, transportation and gasoline—necessities. It must be that consumers are not earning enough to keep up with rising prices for their basic needs.

But it also shows a bit if irrational exuberance—a form of excessive optimism that former Fed Chair Greenspan warned about in the ‘90s—and is happening in the financial markets today, which are at record highs.

“The numbers look good. Maybe even surprisingly good—and that’s not a word I throw around willy nilly,” said Barron’s Magazine’s Jack Hough recently about the financial markets.

Stubborn inflation tells us why it became the backbreaker for Democrats in this election cycle. It confirms the most basic of economic laws—the Law of Supply and Demand. The American economy as well as imports are not supplying enough goods and services to satisfy the demand for them.

Most of the inflation surge was in the service sector, as I said, and consumers want more and better services most of all. Hence personal expenditures (blue line in second graph) is hovering around 2.8 percent—too high for the Fed that wants 2 percent inflation.

Inflation in the Fed’s PCE price index for December increased 2.6 percent in one year. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago.

This picture tells us the real problem—the slow recovery from the COVID-19 pandemic isn’t producing enough. World supply has not caught up with the world demand for goods and services. It is also due to so much geopolitical unrest, including the Mideast and Ukraine conflicts.

And the Trump administration wants to deport those undocumented immigrants that mostly work in the services industries, which means more worker shortages; as well as raise tariffs on many countries, which could cut GDP growth by some 1 percent, according to the Peterson Institute, a non-partisan research organization.

It will make everything that American consumers want even more expensive. And that might keep the Federal Reserve from dropping interest rates further, as they hinted in their just concluded January FOMC meeting. How about that?

There was also some good news. The U.S. economy grew at a mild 2.3% annual pace in the final three months of 2024, and the details of the report showed an economy on strong footing that was being handed over to the Trump administration. GDP grew at 3% and 3.1% in the two prior quarters.

It’s still not a good time for excessive optimism, in my opinion.

Harlan Green © 2025

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

On Preserving Freedom

 Popular Economics Weekly

Random House

Freedom is not just an absence of evil but a presence of good.

Timothy Snyder in the introduction of On Freedom, the sequel to his best-selling On Tyranny, tells us why we have a sociopath bordering on psychopathy as the Republican Party candidate for President of the United States of America.

“Deep into a century that was the stuff of dreams in the 1970s, and the subject of confident predictions in the 1990s, we find ourselves at a turning point. Whether we will be free will depend on us—not just on what we do, but on why we do it: our ideals.”

We will need to return to those ideals that are the basis of our democracy to counter the nihilism displayed by a political party and candidate that is a product of the past 40 years of wealth concentration in an economic system that has led to many Deaths of Despair in the Midwest and rustbelt.

It’s a sad commentary that one of our political parties chose a leader that wants to tear down those institutions that have preserved our democracy; even attack the Capital on January 6 to overturn the 2020 election results.

I lived that ‘stuff of dreams’ in the 1970s in public service as a Peace Corps Volunteer, with Cesar Chavez’s United Farm Workers Union, the US Environmental Protection Agency and serving in my own community. I experienced the heady optimism and can-do spirit that prevailed and supported my efforts.

It was because I believed in the Peace Corps motto, Service Above Self, that its first President Sergeant Shiver adopted from Rotary International.

But citizens without that spirit have turned to leaders that promise they will serve them, if they obey the leader's rules, says Dr. Snyder.

What happened to those enduring ideals we lived by and are the foundation of our democracy? Nationalism, a relic of the past, is finding favor because many have lost faith in their democratic institutions that haven’t done enough for those that have felt disenfranchised. They no longer trust their institutions.

They have lost faith in those ideals as well, yet having faith in ideals enables one to fulfill them.

Snyder uses Russia as an example of what America could become if we don’t reaffirm our ideals this November. “In Russia, we see the transitions from the definition of freedom as the lack of barriers to a politics of fascism in which there are no barriers to the Leader’s whims.”

He faults what has happened to the American economy. “American capitalism has been driven toward monopoly, wealth concentration and decadence. Without ideals, it is impossible to be a realist. If you forget about freedom, you misunderstand the world and change it for the worst.”

Nobel laureate Joseph Stiglitz has said as much: “The rise of authoritarian populism has been most pronounced in countries where governments have done too little (to address poverty, inequality, insecurity, and so forth), not where they have done too much.”

Dr. Snyder’s antidote to the rising authoritarianism is live by our enduring values that all Americans hold—Life, Liberty and the Pursuit of Happiness—rather than succumb to the fears and prejudices that divide us.

On Freedom is an expanded sequel to On Tyranny because he tells us not only how to recognize tyranny but how to protect and expand the freedoms we already enjoy because we live in a democracy whose institutions protect fact from fiction, truth from lies; which Dr. Snyder labels as positive freedom vs. negative freedom; the value of values, vs. just the absence of barriers; a sense of togetherness rather than partisan divide.

Positive freedom is the most important value of all.

Nobel Prize-Winners Daren Acemoglu and Simon Johnson, in their new book, Why Nations Fail, have studied which countries grow and nurture a greater equality of opportunity for its citizens. It is because they have strong democratic institutions.

Jakob Svensson, chair of the Committee for the Prize in Economic Sciences, in awarding the latest Nobel memorial prize in economics to them, and Simon Johnson, said “Reducing the vast differences in income between countries is one of our time’s greatest challenges. The (Nobel) laureates have demonstrated the importance of societal institutions for achieving this."

It is a case of the exploiters; wealthy individuals who would limit freedoms to prevent the sharing of their wealth equitably, vs. those who want to expand equal opportunities for all.

Weakening those constraints on the wealthiest is how the Reagan administration and Big Business in 1980 began the deregulation of whole industries as well as financial markets. The wall was breached between commercial FDIC guaranteed banks and much more loosely regulated investment banks that enabled sophisticated investors to gamble with federally insured deposits.

Government oversight was so weakened that another Republican administration failed to carry out its core mandate of protecting Americans. The GW Bush administration failed to anticipate the 9/11 Twin Towers attack and the Great Recession that followed in the same decade.

Republican economic policies have performed badly because they have lobbied for weaker institutions; particularly in the red states they govern; as well tax cuts that have created massive budget deficits with little to show for it. These states have restricted many freedoms, such women’s right to make decisions about their own body, union organizing and minimizing health care benefits for their poorest citizens.

In fact, Republican administrations have attempted more than 30 times to repeal Obamacare, the only health care law that makes health insurance available to all Americans, regardless of preexisting conditions.

That is why “We need government to build the architecture of the American Dream, whether it be autonomous and public universities or functional public roads,” says Snyder.

Our government needs to do more to protect the constitution and our laws than we have done in the past, that Americans thought were not needed in less dangerous times.

We are at a turning point because such a ‘hands off’ attitude towards laws and regulations is allowing a Republican presidential candidate who said he admires Hitler’s generals, Vladimir Putin as a ‘genius’, and was labeled by former Chief of General Staff Mark Milley, “fascist to the core” to possibly become President again.

We need a government and laws representative of its citizens that is strong enough to make the American Dream available to all Americans for democracy to work. When it has been weakened by those wanting an autocracy over democracy, we have the partisan divide of today that is tearing Americans apart.

Concentrating all power in the hands of the few is the goal of authoritarian governments, and the purpose of weak democratic governments. It is what happened to the American economy over the past 40 years when it chose to ignore the guardrails that protected Americans.

We are at such a turning point today, says Dr. Snyder. “My kids have a chance. We all do. This world can be ever so much better.”

We can make the American Dream we believe in work for all, not the few.

Harlan Green © 2024

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

Consumers Lead Growth, and Business Investment

Financial FAQs

The U.S. economy grew at a faster 3.7 percent annual clip in the second quarter, up from the initial estimate of 2.3 percent, the Commerce Department said Thursday. Why was that a surprise to those short sellers afraid of Chinese market contagion, now that the DOW and all stock indexes have soared over the past 2 days?

It’s a repeat performance of the past 2 years. Those severe winters stopped growth in the first quarters of 2014 and 2015, which then snapped back once the Polar Vortex deep freeze melted away. Q1 GDP grew just -0.9 and + 0.6 percent, respectively during those winters. But the Q2s rebounded to 4.6 and 3.7 percent, respectively, once Spring came. So China’s economic ups and downs have had very little effect on U.S. growth.

Graph: Trading Economics

Economists had forecasted gross domestic product would be revised up to 3.3 percent, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again. There were no ‘confidence fairies’ worried about budget deficits, in other words.

Consumer spending, always the main engine of U.S. economic activity, led the way. Spending was revised up to 3.1 percent from 2.9 percent in the second quarter after a sluggish 1.8 percent gain in the first three months of the year. No wonder, when eastern and Midwestern shoppers could barely venture from their homes during the deep freeze.

And newly revised figures from the Commerce Department show that businesses invested at a faster rate. Businesses increased investment by 3.2 percent increase instead of a drop of 0.6 percent, with spending on structures such as office buildings rising by 3.1 percent instead of an initial drop of 1.6 percent.

This is huge for real estate, in part due to lower interest rates holding down construction costs. But there was also a large build in retail inventories in anticipation of back to school and holiday shoppers. The value of inventories, which adds to GDP, increased by $121.1 billion in the second quarter instead of a previously estimated $110.0 billion.

In fact, it was real (after inflation) final sales to private domestic purchasers up 3.3 percent, a measure of activity without inventories, that did the most to boost GDP growth.

The bottom line is that consumer confidence is soaring to new heights, as we said yesterday. An enormous improvement in the current labor market (e.g., rock bottom initial unemployment claims) drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report.

Why is this a surprise? With the unemployment rate down to 5.3 percent, and more than 8 million jobs created since 2008, maybe consumers are finally convinced the U.S. economic growth is for real. The gain for this confidence reading lifts the present situation component, a near term confidence reading, to 115.1 for a more than 11 point increase over July that points to consumer power for August (and maybe September, October, then into the holidays).

Graph: Econoday

With consumer spending soaring, corporate profits continue to surge, hence the increase in business investment. Just reported profits in the second quarter came in at $1.824 trillion, up a year-on-year 7.3 percent.

So let’s not forget that gas prices are closing in on $2 per gallon in many parts of the country, which holds down inflation, which in turn boosts incomes. So consumers are beginning to show they are the real beneficiaries of lower oil-energy prices, no inflation pressures, and rising incomes.

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

A Good Jobs Report

Financial FAQs

Should we push back the first Fed rate hike to the presidential election year of 2016, because of June's softer-than-expected employment report? Nonfarm payroll growth came in at 223,000 vs expectations for 230,000 and above. It included downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000), said the Bureau of Labor Statistics report.

I doubt the Fed will wait that long, as the most recent economic data shows boom times—from rising home prices, as well as construction spending, and manufacturing activity on the rise again. This could be a temporary softness, in other words, as the US economy approaches full employment.  And it is a good jobs report, given all the uncertainties affecting economic growth these days.

Softness in payroll growth was combined with softness in wage pressures with average hourly earnings unchanged in the month and the year-on-year rate moving down to 2.0 percent from 2.3 percent. But that can be deceptive. Median household wages are now rising 3 percent, which means the income ‘bar’ for 50 percent of the families doing well is rising faster than inflation.

Graph: Marketwatch

But there is still a lot of labor slack in our job market that Fed Chair Yellen has been talking so much about. This is most evidenced by part-timers who would rather work fulltime, according to the BLS. Their numbers are declining, from 6.65 million to 6.51 million in one month, but would still have to drop by one-third to return to the range that prevailed from the 1970s until the start of the Great Recession in this Calculated Risk graph.

Graph: Calculated Risk

And the labor force participation rate just declined to 62.6 percent, from its historical 67 percent in the Calculated Risk graph that dates from 1960. Economists are not sure of the reasons. It may be the working age population is not growing as fast—just 0.5 percent, instead of historical 1 percent, according to the latest census figures, but that shouldn’t affect the participation rate of those actually looking for work.

It could be that while more of the older workers are dropping out, the newest generation aged 16 to 35 years, now the largest segment, is just entering the work force. This is why the actual unemployment rate fell to 5.3 percent. More dropped out of the labor force (432,000 seasonally adjusted) than were newly employed, according to the household survey that also tracks the self-employed.

So look for a Fed rate increase before the end of 2015—but only one—maybe in September. That means 2016 might be a wild year, with both economic growth and politics dependent on so many factors—such as the dollar strength, inflation, the price of oil, the Eurozone, and even geopolitical uncertainty.

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

Why Lower Growth, but Higher Corporate Profits?

Popular Economics Weekly

First-quarter economic growth wasn’t as bad as expected, yet corporate profits were much better than expected. So what are corporations doing with their profits, rather than investing in future growth?

The second revision to first-quarter GDP came in at minus 0.2 percent. Exports were near the top of the negative side, reflecting the strong dollar's negative effect on foreign demand. A rise in imports was the quarter's biggest negative, and consumer spending on services the biggest positive. Personal Consumption (PCE) grew 2.1 percent annually, reflecting happier consumers, and residential investment surged to 6.5 percent, as growing new and existing-home sales show the housing market in recovery.

Graph: Econoday

This is while corporate profits continued their record ways, up 9 percent annually. So where are the profits going, with most Fortune 500 corporations paying much less than the nominal fed tax rate of 35 percent? Analyst estimates show total S&P 500 capex (i.e., capital expenditure) spending could dip 11 percent to $641.6 billion in 2015 from actual 2014 spending of $718.1 billion, marking the lowest level since 2011's $591.5 billion, according to Thomson Reuters data.

Graph: Econoday

“U.S. corporate spending on capital projects could fall this year to the lowest level since 2011, with steep reductions by the energy industry and companies in other sectors cutting spending amid broad concerns about global growth,” said the Thomson Reuters report. That could translate to lower job growth and weakness in the technology and industrial companies that typically benefit from capital spending.

So then what do corporations do with their excess cash? S&P 500 companies still have record levels of cash on their balance sheets—somewhere between $3.5 to $5 trillion from 2012 to 2014, according to the St. Louis Fed—as spending on stock buybacks and dividend payments has come at the expense of capex for many companies.

Graph: St. Louis Fed

In fact, this has been to the detriment of both profits and growth of those companies that have hoarded their cash reserves, according to a Deloitte LLP report, The Cash Paradox: How Record Cash Reserves Are Influencing Corporate Behavior . “Critically, a divergence in share price between the cash hoarders and the spenders has emerged,” says Iain Macmillan, partner and head of M&A and New Growth for Deloitte LLP in the U.K.

“Since 2000, the share price performance of the small cash holding companies has outperformed their large cash holding counterparts, growing by an astonishing 632 percent compared to 327 percent for their larger cash holding counterparts. Remarkably, the gap widened even more after the financial downturn. This suggests that in the long run, the markets are rewarding companies that take a more bullish attitude toward growth.”

Graph: Deloitte LLP

That should be a no-brainer for corporate heads (large corporation growth is red line on graph). So it seems that cash buybacks and dividend payments are not the way to spend profits to increase market share and overall growth. Corporate CEOs now make on average 300 times their employees’ average income, much of it in stock options that tend to increase in value with stock buybacks and increased dividends.

It is no longer a secret that CEO compensation has reached stratospheric levels. The AFl-CIO Union website catalogues those compensation levels—with the majority from stock holdings, rather than outright salaries. JP Morgan Chase CEO Jamie Dimon earned a $1.5 million salary in 2014, but more than $20 million in stock compensation, for example.

The Economic Policy Institute revealed Monday that the average total compensation of CEOs at the 350 largest firms was $16.3 million in 2014, roughly 303 times the average pay of their workers, reports CNN. The divide between CEO and worker pay has increased every year since 2009, when CEO salaries dropped to 196 times the average work, according to the report. While CEO pay has risen 997 percent since 1978, the average employee pay has grown 10.9 percent.

So why not raise their employees’ wages and benefits with some of the cash hoard—for instance, retirement and healthcare benefits? Then, instead of enriching themselves, those CEOs would see an increase in demand for their products and services.

This is standard aggregate demand theory, and once again obvious to those concerned with our poor economic growth record, economic growth that has been steadily declining since 1980. Consumers make up some 70 percent of economic activity these days, ergo if corporate CEOs paid their employees more, consumers wouild spend more, thereby further enhancing corporate balance sheets, needless to say!

Harlan Green © 2015

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

Still No Signs of Inflation, Or Higher Growth

Financial FAQs

We still see no signs of inflation, in spite of the oil price hikes. The latest sign is the wholesale Producer Price Index (PPI) of wholesale goods. It is down and continuing to fall, in a word. Producer prices for total final demand fell 0.4 percent in April which is far below the Econoday low estimate for minus 0.1 percent. And this isn’t a good omen for higher growth this year.

Graph: Econoday

It also means the Fed may be in no hurry to raise interest rates this year at all. Or, or to sell any of the $4 trillion in securities it has purchased to keep more $$$ in circulation. Unfortunately, these $$$ are going nowhere, since they end up with those that need money the least, the top one percent income earners. The savings rate of the wealthiest is now above 50 percent, whereas that of the poorest 20 percent Quintile among US is basically down to 0 percent—that’s right, they are unable to save at all.

Graph: Business Insider

So now we know why the easy money Fed policies haven’t had more effect on boosting our GDP growth rate above 2 percent. In the last two decades, like that of many other developed nations, US growth rates have been decreasing. In the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent, in large part because household incomes have declined for most Americans that now spend more than they save to even maintain their current standard of living.

Graph: Trading Economics

Excluding food & energy, PPI producer prices fell 0.2 percent which is below the low estimate for no change. The overall year-on-year reading is at a record low of minus 1.3 percent. So there is little US demand for the raw materials that make up PPI components, including oil and gas, at the moment. So called Final energy demand fell a steep 2.9 percent in April with the year-on-year rate at minus 24.0 percent. Gasoline prices fell 4.7 percent in the month.

Final demand for food extended its long negative run, at minus 0.9 percent with the year-on-year rate at minus 4.2 percent. Final demand for services is down 0.1 percent with the year-on-year rate one of the few readings in the plus column, at 0.9 percent which nevertheless is well below the Fed's general inflation target of 2.0 percent.

Is this just from the winter freeze and tornadoes that have hit the South and Midwest? Or, will it be necessary to find other ways to put some of those savings to work to repair our ageing infrastructure that would boost our growth rate, and keep government solvent?

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

Enslavement of the Middle Class

Financial FAQs

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

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

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

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

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

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

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

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

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

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

Graph: CEA Report

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

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

Harlan Green © 2015

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

The Economic Ruination of Greece

Popular Economics Weekly

It is now beyond a reasonable doubt that Germany and its austerity cohorts want to drive Greece out of the Eurozone by insisting that it adhere to its agreement to pass most of its meager budget surplus to service its foreign debt, rather than invest it back into the Greek economy. It is insisting that Greece cut government spending enough so that it carries what is called a huge ‘primary’ budget surplus of 4.5 percent (a surplus before its bills are paid—ie, largely interest to its creditors).

The EU, led by Germany, had crafted several agreements that gave Greece large loans to service that debt, while forcing it to submit to severe austerity and wage cuts.

“The results have been catastrophic, said the Guardian in a 2013 article: “cumulative economic contraction approaching 25 percent, adult unemployment at nearly 30 percent, youth unemployment close to 65 percent, unprecedented poverty, destruction of the welfare state and humanitarian crisis in the urban centres. Greek debt, meanwhile, is currently higher than in 2010, standing at €321bn and, since the economy has collapsed, its ratio to GDP approaches an exorbitant 180 percent. This is the background to the current debate.”

But to do so would in effect drive Greece even further into its depression, since it means lower tax revenues, which means even more debt. The consequence is the layoff of more workers and further reduction of average household incomes. Paul Krugman put up a graph of the cutbacks in spending that in turn have made Greece’s debt burden worse, compared to other countries that agreed to the EU’s austerity terms.

 

Greece has already paid the piper, in other words, while Germany now has the largest budget surplus of all western countries. “Greece has done a lot more austerity than those countries cited as supposed success stories,” says Krugman, “(which is another issue — success being defined as “not total collapse, and slight recovery after years of horror” — but that’s a different story).”

Graph: Trading Economics

So Greece has little choice but to exit the euro currency, unless some last minute compromise with the EU is possible. Its unemployment rate is currently 25.8 percent, the worst in the Eurozone (slightly more than Spain’s 23.7 percent), as it has been in a deflationary spiral, further depressing its economic activity.

Graph: Trading Economics

Although Greece mostly lived up to the terms of the bailout, the promised growth never materialized. As Greek Prime Minister recently said: "We are not negotiating the bailout; it was cancelled by its own failure.” Calculated Risk tabulated the difference between the forecasted results of its austerity cutbacks and the actual result.

Greece: Annual GDP, Forecast and Actual

Year Promised      Actual

· 2009 -2.0            -4.4

· 2010 -4.0            -5.4

· 2011 -2.6             -8.9

· 2012 +1.1             -6.6

· 2013 +2.1             -3.9

The only choices are to allow Greece to run a smaller primary surplus (currently 1.5 percent), leaving more of its revenues to benefit its own citizens, or for Greece to leave the Eurozone and default on all their debt. What will it be?

Harlan Green © 2015

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

Republicans Are the Real Socialists

Popular Economics Weekly

The new Republican Congress is exposing a not surprising fact. Its first actions are attempts to water down The Dodd-Frank Wall Street and Consumer Protection Act, and repealing Obamacare—which will pass the risks of financial meltdowns and medical catastrophes back to us, the taxpayers.

In economic parlance, it is socializing the costs of doing business in order to maximize the profits of business. The attempts to weaken financial regulations are “Kicking Dodd-Frank In the Teeth”, said Gretchen Morgenson in her most recent New York Times Sunday Oped.

“The 114^th Congress has been at work for less than a week, but a goal for many of its members is already evident: a further rollback of regulations put in place to keep markets and Main Street safe from reckless Wall Street practices.”

The story of Republicans opposition to Obamacare is no different. By attempting to roll back the eligibility of millions of uninsured Americans with the Repubs various challenges to the federal health exchange, Republicans will return the cost of maintaining health care once again to taxpayers; by putting those sickest Americans back in hospital emergency rooms, or on government welfare rolls, thus maximizing health costs (which have been declining since Obamacare kicked in). This is even though medical bankruptcies now outnumber all other bankruptcies.

Why don’t Republicans get that this flies in the face of their own ideals of self-sufficiency? Even more egregious for working Americans are their attempts to lower wages and salaries by weakening unions and the collective bargaining of government employees in states like Wisconsin. The result of Wisconsin Governor Scott Walker’s efforts has been slower growth, a larger budget deficit, and less incentives for government employees to increase productivity.

Even California Republican Ron Unz knew this with his initiative to raise the California minimum wage to $12 per hour, which would take many minimum wage-earners off the welfare rolls, yet California Republicans have even opposed that!

It is socialism in a big way that Republicans have always accused Democrats of—putting the cost of running the U.S. on government, rather than individuals and private industry.

It’s something President Roosevelt knew and voiced during the Great Depression. “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

And until Republicans understand this, they will continue to be the minority party.

Harlan Green © 2014

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

Fed’s Yellen—No Inflation In 2015?

Popular Economics Weekly

Fed Chair Janet Yellen has given us a very good holiday gift. that boosted stock and bond prices.  She announced at her post-FOMC meeting press conference that Fed Governor’s see little or no inflation next year. In fact, if falling prices continue in the rest of the world, the Fed may be tempted to not raise interest rates at all next year.

That is a startling conclusion, but she made particular mention of the effects of falling oil prices. They will of course help consumer spending in the developed countries, but the oil exporting countries will be hurt. And lower oil prices also mean less oil is being used, so there is less worldwide demand for energy-based products and services, which means less business activity in general.

“At this point we think it unlikely that it will be appropriate that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization,” Yellen said at the press conference. The bank’s policymakers meet next in late January again in mid-March, and at the end of April. Most pundits and forecasters say the Fed isn’t likely to change policies until their April meeting, at the earliest.

Graph: Econoday

Consumer price inflation turned down in November on sharply lower gasoline prices plus dips in some core subcomponents. Overall consumer price inflation fell 0.3 percent after no change in October. Energy dropped 3.8 percent, following a 1.9 percent decline the month before. Gasoline plunged 6.6 percent in November after a 3.0 drop in October.

Excluding food and energy, consumer price inflation posted at 0.1 percent in November easing from 0.2 percent in October. The Fed’s own target inflation rates were lowered to 1.0 to 1.6 percent in 2015. Within the core, the shelter index rose 0.3 percent, and the indexes for medical care, airline fares, and alcoholic beverages also rose. In contrast, the indexes for apparel, used cars and trucks, recreation, household furnishings and operations, personal care, and new vehicles all declined in November.

There are others of the same opinion that rates may not rise at all next year. Nobelist Paul Krugman, for instance, has said, “Basically, while (U.S) growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

“Add to this troubles abroad — the direct spillover from Russia or even Europe is fairly small, but the rising dollar means that good news on manufacturing may not last — and there is a real risk that any rate hike will turn out to have been a mistake. And it’s a mistake that would be very costly, because it could all too easily set the stage for a Japan/Europe style long-term low-inflation trap (yes, at this point I think we can put the euro area in the same category).”

We also have record high consumer sentiment, which is boosting retail sales, for one.  The expectations component that offers an indication on confidence in the outlook for jobs and income, is up 3 tenths from mid-month and up a very strong 6.5 points from final November. Inflation expectations are very soft reflecting the downdraft underway in oil prices with both the 1-year and 5-year outlooks at 2.8 percent. Today's report will be especially pleasant reading for the nation's retailers.

That should also mean longer term mortgage rates could remain low next year, bringing even more buyers into the housing market (read younger millennial buyers currently renters) and so contributing to the housing recovery.

Harlan Green © 2014

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Conference Board’s Leading Economic Indicators Near Highs

Financial FAQs

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6 percent in November to 105.5 (2004 = 100), following a 0.6 percent increase in October, and a 0.8 percent increase in September.

It is a further sign of strong U.S. growth in the months ahead, maybe as high as 4 percent over the next 2 quarters. GDP growth has already averaged 4.25 percent over the last 2 quarters.

Graph: Trading Economics

“The increase in the LEI signals continued moderate growth through the winter season,” said Ken Goldstein, Economist at The Conference Board. “The biggest challenge has been, and remains, more income growth. However, with labor market conditions tightening, we are seeing the first signs of wage growth starting to pick up.”

Graph: Econoday

“Widespread and persistent gains in the LEI point to strong underlying conditions in the U.S. economic expansion,” said Ataman Ozyildirim, Economist at The Conference Board. “The current situation, measured by the coincident economic index, has been improving steadily, with employment and industrial production making the largest contributions in November.”

Graph: Calculated Risk

Much of the better job numbers come from industrial production that increased 1.3 percent in November after edging up in October. Manufacturing output increased 1.1 percent, with widespread gains among industries. Factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

Janet Yellen’s Federal Reserve also helped to boost growth prospects with her post-FOMC press conference in which she said that the Fed’s rates would not increase until long term job and wage growth showed a sustained pickup.

Nobelist Paul Krugman believes the Fed might wait even longer to raise their rates. “Basically, while growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

“In fact, the opposite is happening. Domestic and worldwide inflation continues to fall, largely because of falling oil prices, which signals less use of petroleum products, ergo slowing business activity in other parts of the world. The U.S. seems to be the exception, in what we have come to call a ‘goldilocks economy’—growth without overheating.”

So we seem to have returned to a goldilocks economy much like that the 1990s that sustained high job and economic growth with little or no inflation, thanks to plentiful oil supplies that are projected to last for several years, at least.

Harlan Green © 2014

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Retail Sales Portend +4 Percent GDP in 2015

Popular Economics Weekly

We have said that the prospect of higher interest rates next year may spur some extraordinary growth over the next few quarters, and just out holiday retail sales seem to be fulfilling that prophecy.  Consumer spending is returning to pre-recession levels, and this is without the boost from housing refinance that drove the housing bubble.

Retail sales are soaring even with lower gasoline prices (since retail prices not adjusted for inflation), up 5.1 percent YoY. This put sales back to pre-recession levels. Sales in November posted a 0.7 percent boost after rebounding 0.5 percent in October. Autos in particular jumped a huge 1.7 percent after gaining 0.8 percent in October. And retail sales ex-plunging gasoline prices increased by 6.0 percent on a YoY basis.

Graph: Calculated Risk

Couple that with the highest U. of Michigan consumer sentiment since before the Great Recession, and we can see why consumers are spending more. It can’t be only falling gasoline prices creating more optimism. Payroll jobs are now increasing some 300,000 per month, which heartens householders’ future financial prospects.

Graph: Calculated Risk

Sentiment surged to 93.8 for the mid-month December reading vs an already strong 88.8 in final November and 89.4 in mid-month November. This is the strongest reading since January 2007. The current conditions component is up 3.0 points from final November to 105.7 in a gain that signals month-to-month strength in consumer activity this month. The expectations component, though lagging at 86.1, is up a very sharp 6.2 points to signal rising confidence in the outlook for income and jobs, as we said.

Graph: Econoday

The prospects for faster growth over the next 2 quarters at least may also have to be due to the possibility of higher interest rates next year, as we have been saying. But we still have severe price-cutting in many retail areas, and wholesale prices have been flat for several months.

And the Fed is worried about falling prices at both the wholesale and retail levels, rather than inflation at the moment, so don’t look for Janet Yellen’s Fed to begin to raise their short term rates, until prices have firmed and begin to climb again.

Harlan Green © 2014

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

The Economic Consequences of Too Much Inequality

Financial FAQs

A new report released by the World Economic Forum, ranks rising inequality as the top trend facing the globe in 2015, according to a survey of 1,767 global leaders from business, academia, government and non-profits, many of whom convened recently in Dubai.

Its effects are barely known to economists, much less politicians. The U.S. has far and above the greatest income inequality in the developed world, as well as the highest crime and prison incarceration rates. Yet even economists such as Nobelist Paul Krugman can’t agree that this has had a measurable effect on economic growth!

Graph: The Spirit Level

Then what economic growth are we discussing when so many working age men (and women) are in prison, 2,300,000 at last count, the minimum wage is still $7.25 in most states, and we have had 5 recessions since 1980? Economists can’t be looking at the 90 percent of Americans that haven’t experienced any economic growth since 2009, and the recovery from the Great Recession.

The soaring inequality today matches that of 1928 before the Great Depression, and it is causing irreparable damage to our economy. Yet very little has been done about it, other than the American Recovery and Reinvestment Act’s $835 billion stimulus package of 2009 that saved or created some 3 million jobs according to the Congressional Budget Office, but whose effect petered out quickly in 2010 and reduced GDP growth to 2 percent until recently.

Economic growth has resumed with 321,000 nonfarm payroll jobs created in November, but 8 million jobs and at least $6 trillion in economic output were lost during the Great Recession, and . And with a Republican congress taking over in January, economic forecasters such as Macroeconomic Advisors are not optimistic about more job creating programs in the works due to a resumption of the budget battles soon to come, in spite of Republican protestations from new Senate Majority Leader Mitch McConnell that there will be no more government shutdowns.

Joel Prakken, a Macroeconomic Advisors co-founder, cited the effect further budget battles could have on growth in the New York Times. Past fights and the ensuing downgrade of U.S. government debt has cost approximately 1 percent in economic growth, which means instead of the 2.15 GDP growth average since Republicans took over the House in 2011, we could have had 3 percent plus growth and many more jobs.

How does inequality most affect growth? The classic answer is that since consumers power some 70 percent of economic activity, their spending power must be the driver of growth, and they cannot spend or save more with declining incomes, as the graph should make abundantly clear.

But it must be a quality of life issue, as well. How can we continue to live well in the most violent society in the developed world, with outmoded public infrastructure and educational facilities?

Richard Wilkinson and Kate Pickett’s The Spirit Level, a 30-year study of the effects of inequality, has said it best.

“Research has shown that greater inequality leads to shorter spells of economic expansion and more frequent and severe boom-and-bust cycles that make economies more vulnerable to crisis,” say Wilkinson and Pickett. “The International Monetary Fund suggests that reducing inequality and bolstering longer-term economic growth may be "two sides of the same coin". And development experts point out how inequality compromises poverty reduction.”

The consequences of growing inequality are too great to ignore.  We now know from history what they are—two great economic downturns that can only be corrected with a return to the values that have made the U.S. great—economic justice for all.

Harlan Green © 2014

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