How Do We Repair Our Economy?

Financial FAQs

“The time to repair the roof is when the sun is shining. [State of the Union Address January 11 1962]” President John F Kennedy

 

President Kennedy’s maxim at his 1962 State of the Union address—the almost universal truth that the time to ‘repair’ our economy is when times are good—may seem dated today. At one time it was possible, but not for everyone today.

We have record federal debt fueled by a succession of economic blows—sequential tax cuts that didn’t pay for themselves, recessions, the COVID-19 pandemic, high tariffs, and several wars over the past decades.

And foreign investors are fleeing U.S. government bond markets that literally finance one-quarter of our federal debt because of it, driving up interest rates. Our ballooning federal debt is fast crowding out other government spending; maybe even reducing social security benefits in about 10 years.

Now is the time to repair our economic ‘roof’ while times are good. We have soaring financial markets and 3% annual GDP growth rates that have powered economic growth of late to pay down the soaring federal debt that is already at World War II levels as a percentage of our Gross Domestic Product.

Alas, there is no agreement on how to repair our debt problem. This is while another war is creating a 1970’s-style stagflation that will add $trillions more to the deficit.

International Energy Agency (IEA) officials, such as Fatih Birol, say the current Iran crisis is more severe than the oil shocks of 1973 and 1979, and the 2022 Ukraine-war shock, combined.

And businesses are not hiring new workers because of the economic uncertainty. It is fostering what has been called “The Great Hesitation” by the Wall Street Journal.

The WSJ cited the Baker, Bloom and Davis Economic Policy Uncertainty Index, a widely watched measure of policy-related uncertainty, that has surged to levels “typically seen during situations like the 2008 financial crisis (i.e., Great Recession) and the early months of the Covid-19 pandemic.”

Republicans aren’t showing much concern about the expanded deficit on their watch. Firstly, the highest tariff taxes since 1930 at the onset of the Great Depression has sharply raised every day prices. And the Trump administration’s immigrant shutdown is depriving the U.S. economy of enough new workers to replenish our labor force.

This is in part because Trump and the Republican Party have been unable to rein in the blatant racism of its Christian Nationalists’ policy that has branded almost all immigrant as undesirables. It has brought immigration to a trickle that once averaged one million entrants per year.

Yet immigrants have literally been the life blood of our economy and seed of economic growth. Stanford Business School studies have shown that immigrants represent nearly a quarter of the U.S. workforce in science, technology, engineering, and mathematics and more than a quarter of the nation’s Nobel Prize winners.

President Clinton was able to create actual budget surpluses in his last four years—from 1996-2000—by negotiating with congress to limit government spending on the military as well, until GW Bush busted the federal budget once again with Republican tax cuts while borrowing $trillions more to fight his wars on terror after the 9/11 attack.

How naïve President Kennedy sounds today when he said in 1962, “Members of the Congress, the Constitution makes us not rivals for power but partners for progress. We are all trustees for the American people, custodians of the American heritage.”

We need to repair more than the roof to survive as a democracy. But we must first realize we live under the same roof.

Harlan Green © 2026

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

U.S. Economy Is Freezing!

 Popular Economics Weekly

“…while the economy is growing thanks to AI spending, it’s a K-shaped expansion: People who were already affluent are becoming more so, but the less well-off are under severe pressure. For example, there are clear signs that middle-to-low income consumers are struggling: car loan and credit card delinquencies are rising, and grocers report that shoppers are buying cheaper varieties of food. At the same time, the affluent are spending freely: the top 10% of the income distribution now accounts for nearly half of all consumer spending.” Paul Krugman

PBS.org

This was the wrong season for President Trump’s Republicans to freeze Democrats out of the just passed continuing resolution or demolish the East Wing. We already have a record fall freeze hitting the Midwest and southern states.

Americans already feeling the freeze is also a good way to describe the Democrats landslide victories in the November elections. The record government shutdown put the U.S. economy on pause, but in fact much of the damage was already done, says Nobel Laureat Paul Krugman, just as Trump seemed oblivious to the timing of the damage being done to the White House,.

Republicans had been losing in the popularity polls this year because they chose to ignore the signs. So they believed that flying blind by keeping the federal government closed without official economic data on employment and inflation was the better option than knowing the truth.

But there are other data to fill the government void in data collecting that affect how consumers behave. The ADP, for instance, a private sector payment provider said private-sector employers shed an average of 11,250 jobs a week in the four weeks ending Oct. 25.

This hit the “middle-to-low income” consumers particularly hard that Krugman is talking about. What about inflation?

Ordinary grocery prices are climbing, forcing consumers to shop for “cheaper varieties of food.” Grocery prices have risen 18.2 percent since January 2022, making a $100 grocery bill approximately $118 today, per CBS News.

And President Trump is flailing in his attempt to mask the damage his tariff war is causing. Overall consumer inflation is stuck at 3 percent in large part because of the tariffs, so he wants to offer $2,000 rebates to consumers while the Fed is cutting interest rates. This would cost more than the import taxes he has already collected, enlarging the federal debt that has ballooned from his Big Beautiful Bill tax cuts.

And his proposed cuts to legal immigration from the longer term, historical average of one million to 7500 annually, will continue to shrink the workforce, even the number of H-1B work visas for highly qualified workers that are badly needed in the tech sector.

All of this will continue to damage economic growth at a time when worldwide economic growth is being affected by the chaos Trump has generated in tearing up existing foreign trade agreements.

No economy can tolerate such uncertain weather over the longer term. Hence investment decisions remain frozen while consumers find shelter for the coming economic winter. How severe will it be?

Harlan Green © 2025

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

"Mr. President, do not come to Chicago."

 Answering Kennedy’s Call

“So in case there was any doubt as to the motivation behind Trump's military occupations, take note: 13 of the top 20 cities in homicide rate have Republican governors. None of these cities is Chicago. Eight of the top 10 states with the highest homicide rates are led by Republicans. None of those states is Illinois.” CBS News

CBS

President Trump and Republicans have expanded their defacto civil war by invading Democratic blue states, something the original confederacy couldn’t do. He wants to impoverish them just as Republicans have milked their red states for decades.

That’s why Illinois Governor JB Pritzer came out swinging at a press conference when he learned that President Donald Trump was looking at occupying Chicago and Philadelphia next with National Guard troops from some of the red states to combat crime.

“Over the weekend, we learned from the media that Donald Trump has been planning, for quite a while now, to deploy armed military personnel to the streets of Chicago. This is exactly the type of overreach that our country's founders warned against, and it's the reason that they established a federal system with a separation of powers built on checks and balances,” said Governor Pritzer

But there’s more to Trump’s actions. Pritzer wanted Americans to realize that Trump and his Republicans are defunding everything the federal government provides to protect Americans from crime to pay for his tax cuts for the wealthiest. The total is $1,166 billion in cuts to public safety and crime prevention programs, as well as grants to local police departments, said Governor Pritzer.

There are good reasons that blue states are more prosperous and do a better job at protecting their citizens. They have higher minimum wages, fewer restrictions to the right to collective bargain and form trade unions, women’s rights, and better health care than the red states.

And what if red staters understood they only get the leftovers, including less disaster aid when they suffer a disproportionate number of hurricanes, floods and tornadoes, such as happened in Kerrville, Texas?

Everyone loves tax cuts, but not when it creates an almost $39 trillion public debt that endangers the full faith and credit of the U.S. Trump wants to pay for the tax cuts with massive tariff hikes by regressing to a century-ago Gilded Age that enriched the few and corrupted many.

It is the reason for the continuing civil war, I said last week, Republicans trumpet there are more individual rights and freedoms with smaller government and lower taxes.

But it is really to maintain control by preserving as much of the vestiges of the agrarian, slaveholding culture as possible.

By depriving red state citizens of adequate health care in the name of lower taxes and smaller government, they become sicker. By restricting union organizing with right to work laws, workers not only have lower incomes, but less time with their families and for leisure.

And attempting to erase DEI mandates from existing laws and educational institutions is their attempt to resuscitate the Jim Crow laws of racial segregation that took a century to redress.

Won’t cutting government research on healthcare and the climate, slashing funding for the FAA and NOAA make us less safe as well, when the President’s primary job is to protect Americans not harm them?

It looks like a massive dereliction of duty that would fit the definition of a “high crime and misdemeanor.”

Harlan Green © 2025

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

This Inflation Isn't Temporary

Popular Economics Weekly

The Producer Price Index for final demand rose 0.9 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices were unchanged in June and moved up 0.4 percent in May. BLS.gov

 

FREDppi

The Trump administration wants Americans to believe the current inflationary surge is temporary. Why? Because it needs the Fed to lower interest rates to keep economic growth from stalling because of the tariffs. And lowering interest rates in what is still a fully-employed economy is inflationary.

It’s the kind of reverse logic that has characterized so much of the MAGA crowd that wants to believe conspiracies (Epstein?) rather than economic realities.

The Producer Price Index of wholesale goods just out is another unwelcome fact that inflation isn’t temporary because of the tariffs. The tariffs paid by American importers at ports of entry are already showing up in the prices of raw materials producers must pay that will ultimately be passed on to American consumers and businesses.

The PPI is showing July wholesale prices (dark red line) have risen much faster than retail prices (light red line) in the above FRED graph—3.3% vs. 2.7% in a year.

Coffee prices are already up 15%, for instance. Could that have to do with the 50% tariff Trump has levied on Brazil, a major coffee grower, because he doesn’t like its socialist government?

So an unfavorable PPI is another measure of inflation the Trump administration will want to ‘cook’ if their choice for a new head of the Bureau of Labor Statistics is confirmed by the Senate.

 It prices the raw materials and services that go into the retail CPI Index that measures the final consumption of finished products and services. That’s no surprise because material input costs have been rising since April 2 and the announcement of the tariff wars, which belies Trump’s lies that the countries exporting to us will bear the cost of those import taxes for the great privilege of selling to US, yet are ultimately paid by Americans!

All eyes are now on what Fed Chair Powell will say at the Kansas Fed’s Jackson Hole conference this week. Will the 12 Fed Governors that vote at the FOMC meetings decide once again that there is little likelihood of an interest rate cut in September?

They may have to, because the biggest rise in wholesale prices was in the service sector that powers almost two-thirds of consumer activities (leisure, travel, dining out, transportation, and construction).

The index for final demand services moved up 1.1 percent in July, the largest advance since rising 1.3 percent in March 2022. It showed importers are also increasing their profit margins and so passing on the increased costs to consumers and businesses.

Over half of the broad-based July increase is attributable to margins for final demand trade services, which 

And consumers are beginning to notice, according to the University of Michigan’s consumer sentiment survey.

“Consumer sentiment fell back about 5% in August, declining for the first time in four months. This deterioration largely stems from rising worries about inflation. Buying conditions for durables plunged 14%, its lowest reading in a year, on the basis of high prices,” reports survey Director Joanne Hsu.

Though it hasn’t done much damage to retail sales just yet. Retail sales rose 0.5% last month following a nearly 1% increase in June, reports the Census Bureau.

Automobile sales rose for the second month in a row, said MarketWatch’s Jeffry Bartash. Car buyers have been buying vehicles for the past few months to once again avoid anticipated price increases in the coming months as tariffs take full effect.

So the damage is already being done by Donald Trump’s tariffs. Even grocery prices are soaring that depend on what is produced domestically. Now why would grocery prices also be increasing that aren’t taxed by tariffs? Could it be that there are fewer farm workers to harvest the crops this year?? The ICE folks could answer that question!

Harlan Green © 2025

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

 

Republicans Don't Pay Their Bills

 Financial FAQs

“The new law will reduce federal revenues by significant amounts, even after allowing for the impact on economic growth. It will make the distribution of after-tax income more unequal. If it is not financed with concurrent spending cuts or other tax increases, TCJA (Tax Cuts and Jobs Act) will raise federal debt and impose burdens on future generations. If it is financed with spending cuts or other tax increases, TCJA will, under the most plausible scenarios, end up making most households worse off than if it had not been enacted.” Brookings

How times have changed! Republicans during the Eisenhower era paid for the deficits their tax cuts caused. The Brookings Institution analysis of Donald Trump’s 2018 Tax Cut and Jobs Act has US households paying for it because it added some $4 trillion to our federal debt even “if it is financed with spending cuts or other tax increases.”

The 90 percent corporate tax rate and 92 percent maximum personal tax rate of the Eisenhower era paid for the “new hires, new equipment, and product research which are deductible from taxable earnings.”

In other words, the higher tax rates made corporations use their profits to finance their own growth, rather than pay Uncle Sam. Whereas today the TCJA tax cuts will mostly finance corporate stock buybacks.

And Trump wants to renew the TCJA when it expires this year, which the Congressional Budget Office says will add at least another $4 trillion to our national debt.

It doesn’t have to be this way. The Clinton/Gore government downsizing of the 1990s created four years of budget surpluses, because they negotiated with congress to make the cuts, because they were congressionally mandated programs.

“Unlike the current effort, the cutting didn't start until they had gone through a six-month study process and developed a blueprint of how to best reinvent the federal government,” said a recent Newsweek article on the subject. “Government agencies were brought into the process to determine the best ways that efficiencies could be realized. In fact, the effort was led by some 250 federal employees that remained on their agency payrolls.”

The federal workforce was reduced by close to 400,000 employees between 1993 and 2000, or about 17 percent of the total. The cuts made the government the smallest it had been since the Eisenhower administration, according to the Newsweek report.

Who do the Trump tax cuts benefit? Corporations and households in the top 5% — who earn more than $450,000 a year, roughly — are the “biggest winners.” They’d get over 45% of the benefits of extending the Tax Cuts and Jobs Act, according to a July 2024 analysis by the Urban-Brookings Tax Policy Center and would reduce federal tax revenues by $4.4 trillion by 2035.

So why would Republicans want to reduce federal revenues when we have a $36 trillion national budget deficit that is 120 percent of GDP?

It’s because Republicans don’t want to pay their bills rather than provide social services and environmental protection that would benefit all Americans. That’s their history from at least 1980 when President Reagan declared that “government was the problem” and immediately fired the federal air traffic controllers who were striking for higher pay and better working conditions.

We know how that turned out with the latest brouhaha over Musk’s slashing of the already understaffed FAA workforce that regulates airline travel.

President Eisenhower would have turned over in his grave, if he knew this would happen to the Republican Party.

Harlan Green © 2025

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

Trump, the Lucky Loser

 Answering Kennedy’s Call

“Born to a rich father who made him the beneficiary of his own highly lucrative investments, Trump received the equivalent of more than $500 million today via means that required no business expertise whatsoever.”

Random House

In just Donald Trump’s first week in office, it’s becoming obvious that the illusions he lives under will be no different than during his first term as president. He is counting on the American electorate to not believe what they are seeing.

For instance:

Climate change—"drill baby drill” for more fossil fuels when we are experiencing the worst climate disasters in history due to global warming—e.g., horrific wildfires, tornadoes and hurricanes.

Healthcare—Leaving WHOrg that monitors worldwide pandemics, and censoring the CDC and other government healthcare watchdogs’ research while releasing their results only after they have been vetted by his political appointees.

Military preparedness—now allowing military service members not to be vaccinated for COVID-19 and reinstating service members with full pay who were discharged for refusing vaccines.

Immigration—Saying he will deport millions of undocumented immigrants, when it will reduce badly needed workers in low-paying jobs that American citizens aren’t taking.

Tariffs—Asserting he would raise tariffs as high as 50 percent on nations with huge trade imbalances viz the U.S., when economists are saying it will be inflationary, and in Nobel Laureate Paul Krugman’s words, “make us poorer.”

Public education—Wants to abolish Department of Education that supports the 80 percent of students in public schools.

Tax cuts—Just extending his first term tax cut beyond 2025 when it is scheduled to expire and could add as much as $5trillion to the already bloated federal budget deficit, which could cause investors to lose faith in the US Dollar.

President Trump’s real intentions are already becoming clear in his second presidential term in office. He and his Oligarchs want to steal the US Government blind, as I said last week, by keeping Americans and the media as blind as possible to what he intends.

Why does Trump continue policies that will only harm more Americans while enriching himself and his oligarch supporters?

This was highlighted in Pulitzer Prize-winners Russ Buettner and Susanne Craig’s just released book, Lucky Loser that raises a bigger question in a Washington Post review by Bethany McLean about the ‘fake it ‘til you make it’ ethos of modern America. In a world that conflates the ‘trappings of wealth with expertise and ability,’ where ‘fame, detached from any other marketable talent or skill,’ is ‘a highly compensated vocation,’ does it even matter if you never actually make it?”

The outright distrust of truth is a propaganda tool used by autocrats that public media has normalized. This probably tells us best why he was able to take over the Republican Party that has drifted so far from conservative values and was once the environmental party when Republican President Nixon signed the U.S. Environmental Protection Agency into law in 1970.

So will he be more successful in passing his promises in his second term? We should ignore some of his most nonsensical executive orders, such as attempting to amend the 14^th Amendment by decree that guarantees citizenship for anyone born in the U.S. 50 states and territories, which he knows can’t be done by decree or executive order.

But the furor that it and the immediate release of 1500 January 6 Capital attackers from prison, mostly convicted felons, will generate enough attention that it will cloak his real intention; reduce or eliminate as many government programs as possible that make life better for ordinary Americans, such as Medicaid, in order to fund more tax cuts.

He has already rescinded the Biden executive order to cap Medicaid spending on drugs that would save Medicaid $billions in costs.

“In reversing the executive order Biden signed in 2022, Trump halted an effort to cap the copayment for generic medications at $2 for Medicare beneficiaries, along with another program that would see Medicare pay less for drugs that receive accelerated approval from the Food and Drug Administration,” according to MarketWatch’s Jessica Hall.

And there is also the question of what Trump will do with regard to the prescription-drug provisions in the Inflation Reduction Act, which would be substantially more consequential. Under the Inflation Reduction Act, Medicare can negotiate the prices of certain prescription drugs with the aim of making drugs more affordable for older adults and people with disabilities.

He continues to throw bombs at the public media by announcing he will seek retribution from those prosecutors that sought his indictment for the various crimes he committed during his first term, such as January 6, withholding Top Secret documents at Mar-a-Lago and elsewhere, while hoping to erase the Grand Jury indictments in some way.

And he will eventually have to settle the $500 million in awards won by women he defamed. So it’s no wonder that he will use his immense power that is meant to protect U.S. citizens to protect himself instead, at their expense?

Harlan Green © 2025

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

US Budget Deficit Not the Problem

 Financial FAQs

Harvard Economics Professor and former Treasury Secretary Larry Summers said Tuesday during an event staged by the Center for American Progress, a Democratic Party-aligned think tank, that the U.S. budget deficit, which came in at $1.7 trillion in 2023, “is probably a more serious problem than it ever has before.”

Really? We have the fastest growing economy in the developed world—up 4.9 percent annually in the third quarter. But the new Republican House Speaker wants to slash spending in the name of cutting the deficit, which is an attempt to cut back on President Biden’s New, New Deal programs that will modernize the American economy by “paying it forward” in the words of Senator Elizabeth Warren for future generations.

So, this is not the time to worry about the budget deficit, though it’s the highest since World War Two.

Professor Summers had been very good at convincing Presidents Clinton and Obama at reducing budget deficits. So much so that President Clinton had four consecutive years of budget surpluses from 1996-2000. That worked when the Soviet Union broke up ending the Cold War and the US was able to make huge cuts in military spending.

But it’s not good advice today as it wasn’t a good idea to limit FDR’s New Deal spending when our government had to re-arm to win World War II. There are two regional wars today, and we’ve had to spend $trillions just to win the COVID world war.

The massive debt accumulated during WWII was paid down quickly when the technological advances spurred by those wartime investments brought soaring economic growth and post-war prosperity.

FREDdebt/GDP

The same will happen today because the $trillions in debt that is modernizing the US economy, the educational system, and our social safety net is investing in future growth.

We are already seeing the results with soaring Q3 GDP growth and a historically low unemployment rate, but only if the debt is paid down with growth rather than slashing spending prematurely at the time it is most needed.

The current budget battle is over what to spend. Republicans want to raise the retirement age for Social Security and Medicare and cut benefits, as well as slash spending on money already approved to expand IRS operations, which is meant to collect long overdue taxes, thus improving the deficit.

It’s the Repubs backdoor way of cutting federal spending by reducing tax revenues, thus protecting their wealthy donors who have thrived with all manner of tax shelters.

Their initial proposal is to pay for Biden’s war funding by taking $14 billion away from the IRS budget, which budget analysts say will actually cost $40 billion because of lost tax revenues from the reduction of tax collections.

And what about aiding the democracies fighting two wars and winning the climate change battle, just as we needed to win WWII to survive as a democracy?

Our government must also worry about the Fed. The debate is still when the Fed will begin to lower their short-term rates in time to prevent a recession.

Harlan Green © 2023

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

Jobs Still Plentiful!

 Popular Economics Weekly

MarketWatch.com

The Fed Governors should be happy with Friday’s unemployment report—nothing has really changed over the past several months, including record low unemployment, inflation continuing to decline, and average hourly wages holding at 4.4 percent.

“Both the unemployment rate, at 3.5 percent, and the number of unemployed persons, at 5.8 million, changed little in July. The unemployment rate has ranged from 3.4 percent to 3.7 percent since March 2022,” said the BLS press release.

We are in August and still no sign of a recession. Gross Domestic Product is estimated to grow even higher this quarter—as high as 3.9 percent from 2.4 percent in the second quarter, according to the latest Atlanta Federal Reserve GDPNow estimate. And companies are struggling to find more workers.

Why the sudden growth spurt? Even Nobel laureate economist Paul Krugman is calling it a Goldilocks economy.

“Economic policy in 2021 was actually pretty good. In fact, given the dislocations associated with a continuing pandemic, we ran what was in effect a Goldilocks economy, one that was neither too cold nor too hot.”

The sustained low unemployment rate is truly historic. Unemployment has declined to 3.5 percent only two other times—in 1955 during the post-WWII boom and 1969, the year of the first moon landing.

Education & healthcare led the report with 100,000 jobs added, but I like the construction jobs numbers best. This is because they show the effects of the recently enacted Infrastructure and Jobs Act and Inflation Reduction Act that are pouring $$trillions into real projects that are creating high-paying jobs. The problem—finding the workers.

Construction employment continued to trend up in July (+19,000), in line with the average monthly gain of 17,000 in the prior 12 months. Over the month, job growth occurred in residential specialty trade contractors (+13,000) and in nonresidential building construction (+11,000), per the BLS press release.

So why the recession worries at this stage of the recovery? It seems to be because of the much talked about inverted Treasury yield curve when short term rates (such as the 2-year Treasury) yield a rate much higher than the 10-year benchmark Treasury for an extended period of time.

It means credit is tighter, because lenders such as banks tend to lead at rates close to the 10-year benchmark Treasury yield, which is currently around 4 percent, but borrow at the usually lower 2-year rate that is now higher at around 4.8 percent.

When their cost to borrow is higher than what they can earn on their loans, lenders simply have less money to lend, hence tighter credit conditions.

FREDdeficit/gdp

That is happening because of the Fed’s credit tightening moves (that have driven up short-term rates). But the federal government is providing many more $$ to spur the economic renewal. Its current quarterly funding request is for $1 trillion to fund all those government projects that will pay for the future health of our economy.

Then why the credit downgrade by Fitch Ratings that has markets worried? Because debt rating agencies obsess about unmanageable debt. Yet, as the above FRED graph dating from 1930 shows, the actual annual deficit as a percentage of Gross Domestic Product is more important than the actual debt-to-GDP that has grown to 120 percent, because it shows the US can easily pay for said debt. Its ratio today is 5.8 percent and declining.

Dips below the zero-deficit straight line are deficits in the graph. The deficit has come down sharply from the negative -14.9 percent in 2020 because of the pandemic due to our strong economic growth since the pandemic.

Harlan Green © 2023

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

Can We Make a Soft Landing?

 The Mortgage Corner

CBO

Fed Chair Alan Greenspan in early 2000 convinced GW Bush that he could finance GW’s war on terror without raising taxes by borrowing money at ultra-low interest rates. America’s sovereign debt had AAA credit rating at the time, and still does with two of the three major accreditation agencies. Greenspan maintained we could have a “soft landing” if the US economy overheated by tightening credit gradually without causing a recession.

Problem was the Fed under Greenspan held rates down too long with too easy credit as inflation began to rise and the economy overheated, resulting in too much irrational exuberance by banks and lenders that resulted in the Great Recession.

Does that sound familiar? Economists are beginning to wonder if the Fed under Jerome Powell to making the same mistake in financing our recovery from the COVID-19 pandemic.

However, the US economy is in a much better place now to tame economic activity—i.e., can create a soft landing without causing an ensuing recession—if the Biden administration and congress will pay for the investments we are making in our public improvements with the current infrastructure and family plan bills working through congress.

This is in addition to the already passed $trillions to pay for the pandemic. The new legislation will increase productivity by giving Americans earning wages and salaries better working conditions, and families a better education, including paid childcare and family leave that will lift many families with young children out of poverty.

The benefits of putting Americans back on a footing with other developed countries in the 38-member Organization of Economic Co-operation and Development (OECD) are almost incalculable, most of whose citizens work fewer hours for the same or better pay while producing the same amount of goods and services.

The bipartisan infrastructure deal reached by President Joe Biden and a group of senators would not only add to economic growth, but also lower the national debt, according to a new study from the University of Pennsylvania’s Wharton School.

“Over time, as the new spending declines, IRS enforcement continues, and revenue grows from higher output, the government debt declines relative to baseline by 0.4 percent and 0.9 percent in 2040 and 2050 respectively,” said Wharton team as cited by CNBC in June.

The problem has never been what policies would improve the lives on America’s Main Street, but how to pay for them, and it will take additional legislation under the budget reconciliation process to boost taxes. Over the past 40-odd years government-is-the-problem policies instigated in 1980 by conservative Democrats and Republicans had cut taxes and whittled down government programs that would benefit Main Street.

The solution is more progressive taxation enacted that would divert profits from corporations and investors not investing in America’s future to where it will do the most good—in our sadly neglected infrastructure and social safety net.

There are many more safeguards in place that should cushion a soft landing if inflation becomes worrisome because of safeguards put in place since the Great Recession; such as requiring banks and other lending institutions to maintain higher reserves.

The Biden administration wants to pay for future, more equitable economic growth by raising taxes on the wealthiest and corporations, rather than borrowing more that would increase the federal debt. The problem will be to refute the reigning economic orthodoxy that says higher taxes inhibit growth and investment.

However, the lower tax rates since 1980 have increased income inequality rather than boosted long term growth rates,

The best ways to deal with inflation and any possible overheating is to invest in the health and economic security of future generations rather than those of past generations that haven’t done enough to pay for the future.

Harlan Green © 2021

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

Ending Our Economic Civil War—Part II

 Answering the Kennedys’ Call

MarketWatch

President-Elect Joe Biden can call a truce from the ongoing Red vs. Blue states economic civil war with just announced picks of his economics team, including Janet Yellen as Treasury Secretary and the economic advisors.

They are what have been called “progressive” economists because they advocate a national government that works for all the people in red and blue states, including stronger labor laws to protect wages and benefits of the salaried workforce that has been suppressed since the 1980s, causing most of the record income inequality we have today.

Janet Yellen is a UC Berkeley economist known for her labor expertise in advocating policies that combat income inequality. She worked to keep interest rates low when she was Fed Chair and advocated more public investments that the private sector avoided as Obama’s chief economic advisor.

Biden’s other progressive economists include Wally Adeyemo for deputy secretary of the Treasury; Cecilia Rouse as chair of the Council of Economic Advisers; and Jared Bernstein and Heather Boushey as members of the Council of Economic Advisers, all advocates of New Deal, Keynesian economics that cured the Great Depression.

Nobel Laureate Paul Krugman said on MSNBC that the advisors are incredibly qualified--even overqualified for the job—since anyone of them could be Biden’s CEA chair and chief economic advisor.

“It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority,” Yellen said in a speech to a conference on inequality sponsored by the Boston Fed.

In her conference slide show, Professor Yellen showed that after adjusting for inflation, the average income of the top 5 percent of households grew by 38 percent from 1989 until 2013, Yellen said. By comparison, the average real income of the other 95 percent of households grew less than 10 percent.

Federal Reserve

Increasing the income of ordinary Americans will not only increase economic growth with their consumer spending (which even Henry Ford understood), but the concomitant rising tax collections will also help pay down the $1 trillion annual budget deficit engineered by the 2017 Republican tax cuts.

Higher taxes would also help to bring down the deficit. But Republicans that only love budget deficits when it means lower taxes for them, must be convinced that public service projects (e.g., infrastructure) or social programs (e.g, health care) are necessary for a strong economic recovery.

This economy cannot even begin to dig itself out of the COVID-19 pandemic damage to growth and jobs unless massive government aid is injected that includes social programs such as expanded health care that will aid the recovery.

In fact, due to the seriousness of this virus, economists are beginning to discuss the possibility of a ‘double-dip’ recession occurring due to the “dark winter” epidemiologist are predicting ahead for the pandemic.

“Our failure to protect ourselves has caught up to us” said New York Times’ infectious disease expert Donald J. McNeil, Jr. in a recent front-page article. “The nation must endure a critical period of transition, one that threatens to last for too long, as we set aside justifiable optimism about next spring and confront the dark winter ahead.”

He said there are epidemiologists predicting a doubling of the death toll by next March—to more than 500,000, which is approaching the 675,000 deaths estimated to have occurred during the 1918 Spanish flu pandemic.

McNeil also cites a recent U. of Washington study that estimates 130,000 lives could be saved by February if mask use became universal in the US immediately.

Unfortunately, this modern economic war had been caused by one political party’s nostalgia for an illusory past with their attempts to limit government’s role by repealing Obamacare and undermining support needed to conquer this virus, as well as a White House that won’t institute a national mandate to wear masks and socially distance in the name of personal responsibility.

And, “The regions of the country now among those hit hardest by the virus;” continued McNeil, “Midwestern and Mountain States, and rural counties, including in the Dakotas, Iowa, Nebraska and Wyoming; are the ones that voted heavily for Mr. Trump in the recent election.”

A majority of Americans in this election—six million and counting—have said that the income and wealth inequality resulting from owners garnering the lion’s share of income and wealth will no longer be tolerated with their choice of President-Elect Biden.

It has taken natural or human-made catastrophes--such as wars and disease-caused pandemics—to bring Americans together in past times. Let US not lose this opportunity the COVID-19 pandemic presents to end the economic civil war and begin a new economic peace.

President-Elect Biden looks to have picked his economic advisors that will do just that.

Harlan Green © 2020

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

What Happened to Main Street?

Popular Economics Weekly

FRED

The main reason we have suffered from historically slow growth and stagnated wages since the Great Recession is in large part due to so-called trickle-down economics, the fallacy that concentrating most of the largess of economic growth on the private sector, and neglecting public sector growth in health care, environmental protection, education, R&D, and public infrastructure, for starters, means the US economy wasn’t paying forward its benefits for the next generations, as Senator Elizabeth Warren intoned at the beginning of her tenure.

It is the public sector that plants the seed corn for future, sustainable economic growth, which private businesses then utilize to create private sector jobs and profits. The US may have the greatest higher education and research facilities, but our elementary and high schools rank near the bottom in the developed countries.

We also rank much lower in health care and environmental protection, which lowers labor productivity and results in sicker workers. Isn’t it better for our country to improve the health and skills of workers (while paying them more) before we replace them with robots?

The Clinton administration made the most recent steps towards the goal of sustainable growth when it cut military spending and put a 2 percent annual increase limit on government expenditures that balanced the federal budget and actually created a surplus for four consecutive years—1996-2000.

But 9/11 and terrorism put the fear mongers back in charge and military spending surged, while public sector spending declined in those seed-corn sectors we spoke of. The result post-9/11 was that Fed Chairman Greenspan kept interest rates below the existing rate of inflation, which grossly inflated the housing market and resulted in the housing bubble.

GW Bush and Fed Chair Greenspan chose the less sustainable growth path when they cut taxes, reducing government revenues at the same time they had to pay for the wars on terror. Once again, budget deficits surged because government revenues declined, and we embarked on a path that led to the Great Recession.

We have the same lesson today. Conservatives and the Trump administration are lobbying the Fed to lower interest rates to boost stock prices further, inflating stock values that are already at record levels in the hopes that it will continue economic growth in the 11^th year of this record economic expansion.

There were 224,000 private payroll jobs created in June, economic growth last year averaged 3.2 percent, and first quarter GDP was 3.1 percent this year already.

Unnecessarily low interest rates inflate deficits and asset bubbles if not invested wisely. We really need to grow the public sector and Main Street in whatever way it can be done. Gradually boosting the national minimum wage above the less-than-living-wage of $7.25 per hour would be a good start. Boosting Main Street benefits will do the most to create sustainable, enduring growth—by paying it forward to the next generations.

Harlan Green © 2019

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

Will Service Sector Boom Reduce Deficits?

Popular Economics Weekly

Econoday.com

All 18 non-manufacturing industries reported growth in February, according to the ISM’s non-manufacturing index, which gives a monthly overview of service sector activity. This is huge and says the service sector that makes up two-thirds of US business activity will continue to power growth this year.

In fact, a growing US service sector is keeping the trade and budget deficits from worsening at a time when fiscal policy (the tax cuts) and trade policy (the tariffs) are slowing economic growth in 2019.

What is the service sector economy? It’s the financial services, trade, transportation, construction, education and health industries, for starters. It has become the dominant sector because most US consumers and businesses consume manufactured goods now made overseas. Hence the trade imbalance between imports and exports that Trump wants to ‘rebalance’ with his trade wars on allies and adversaries alike.

The trade wars are a dumb way to attempt to correct the imbalance of manufactured products, needless to say, because said ‘imbalance’ is offset by foreign investors eager to buy safe and secure US stocks and bonds. If the Trump administration and Republicans were really serious about rebalancing the trade imbalances, it would seek more trade alliances (such as the Trans-Pacific Partnership) and work to reduce the looming $1 trillion annual deficit, instead of passing the 2017 corporate tax cut.

The non-manufacturing sector’s growth rate rebounded after cooling off in January. Respondents said they are concerned about the uncertainty of tariffs, capacity constraints and employment resources; however, they remain mostly optimistic about overall business conditions and the economy.

“The NMI^® registered 59.7 percent, which is 3 percentage points higher than the January reading of 56.7 percent,” said Anthony Nieves, Chair of the Institute for Supply Management Non-Manufacturing Business Survey Committee. “This represents continued growth in the non-manufacturing sector, at a faster rate. The Non-Manufacturing Business Activity Index increased to 64.7 percent, 5 percentage points higher than the January reading of 59.7 percent, reflecting growth for the 115th consecutive month, at a faster rate in February.”

Particularly robust was the New Orders Index that registered 65.2 percent, 7.5 percentage points higher than the reading of 57.7 percent in January. The Employment Index decreased 2.6 percentage points in February to 55.2 percent from the January reading of 57.8 percent.

What about the manufacturing sector that is made up of durable goods like machinery, computers and transportation; and non-durable goods such as furniture, chemicals and petroleum products? The ISM’s February manufacturing survey reported a 2.4-point drop to 54.2 in February that was above low estimates. There was also a 2.7-point drop in new orders, a 3.2-point drop for employment, and a 5.7-point slide for production.

Council On Foreign Relations

The trade wars have to be part of the problem, since Trump has focused on tariffs for manufactured products only, whereas China is also stealing information technology. Hence the Hauwei networking ban that the US fears might have implanted Chinese spyware.

“Demand remains healthy at the beginning of 2019,” said one respondent. “However, growing concerns for what could be another round of tariffs in March are further escalating price increases of already constrained electronic components.”

The total US trade imbalance was minus $550B last year, with service sector trade showing a net trade surplus of around $250B, since we export much of our information technologies, and approximately $800B net deficit in manufactured goods that are more cheaply made overseas.

“So we can’t “win” a trade war,’ says Nobel economist Paul Krugman. “What we can do is start a cycle of tit-for-tat, and when it comes to trade, America — which accounts for 9 percent of world exports and 14 percent of world imports — is by no means a dominant superpower. A cycle of retaliation would shrink overall world trade, making the world as a whole, America very much included, poorer.”

Therefore it’s not such a good idea to expend too much of our energy in attempting to correct the manufacturing imbalance, when there are better ways to cure deficits that are of our own making.

Harlan Green © 2019

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