No Art of the Deal?

 Financial FAQs

“It’s 100 days into the Trump Presidency and looking more and more like President Trump is no more effective at running the country than his business interests. His book, The Art of the Deal was meant to tout his negotiating skills, but the results were never very successful.” 2017

Huffington Post

I wrote this Huffington Post piece in April 2017 after President Trump’s first 100 days in office, and nothing has changed in Trump 2.0. There was no significant legislation then and nothing has been accomplished in 2025 to date, other the Trump’s initiation of a worldwide tariff war, while Republicans are attempting to renew the Tax Cuts and Jobs Act (TCJA) that was his sole accomplishment in Trump 1.0.

Why? Because Trump’s negotiating skills have been overblown, as evidenced by his countless business failures and multiple bankruptcies. But he has been able to disguise his weaknesses, such as his inability to stay focused his need for attention, thanks in large part to his first biographer, Tony Schwartz, in Trump: The Art of the Deal, who created the myth that he was a skilled wheeler-dealer.

But it wasn’t real, Schwartz said later to New Yorker Magazine’s Jane Mayer in a famous 2016 interview.

“I put lipstick on a pig,” he said. “I feel a deep sense of remorse that I contributed to presenting Trump in a way that brought him wider attention and made him more appealing than he is.” He went on, “I genuinely believe that if Trump wins and gets the nuclear codes there is an excellent possibility it will lead to the end of civilization.”

Trump with all his weaknesses—his lies, self-aggrandizement, and short attention span—is now getting a second attempt to destroy the U.S. economy.

Renewing the TCJA, even though Moody’s downgraded U.S. Treasury debt to Aaa because the renewal won’t pay for itself, is endangering the “full faith and credit” of the U.S. Government.

The Penn Wharton Business School model predicts it would add at least $4.5 trillion to the federal debt. Cuts to Medicaid, food stamps and clean energy programs would save $1.6 trillion. But this is more than offset by the incomes of the wealthiest 1 percent and 0.1 percent.

The result is that today we have a wanna-be autocrat in charge of an economy “that creates an environment in which corruption and bribery are necessary to gain access to the ruler and either win his favor or avoid his wrath,” writes Barron’s columnist Lewis Braham.

Sound familiar with Trump’s Meme-coin investments and solicitation of $billlions from Middle east potentates?

There is a tremendous amount of research on the decline of sustainable economic growth in autocratic regimes. MIT economist Daren Acemoglo won his Nobel Prize for researching the superior growth of “inclusive” (more democratic) vs. autocratic (exploitive) governments.

“The good news is that democracy can be rebuilt and made more robust,” says Professor Acemoglo.

“The process must start by focusing on shared prosperity and citizen voice, which means reducing the role of big money in politics...The task of remaking democracy thus falls to center-left forces. If Trump’s victory serves as a wake-up call for the Democrats, then he may have inadvertently set in motion a rejuvenation of American democracy.”

In fact, we have little choice but to rebuild our democracy if we want to preserve the most basic freedoms it’s taken centuries to win.

Harlan Green © 2025

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

Greater Lawlessness Causes Great Recessions

 Financial FAQs

I began writing about Republicans’ disregard for laws in 2012 after the Great Recession of 2007-09, in which as many as 8 million jobs were lost. But not the Republican Party’s lawlessness itself, though it has always been the party of the wealthiest oligarchs fighting for lower taxes and downsizing of the IRS that monitors their tax shelters.

There were always lawbreakers in both political parties, but I never thought it possible that Republicans would allow a convicted felon to take over their party, who is now their presidential candidate, and who advocates programs that could cause another Great Recession.

Larry Summers, former treasury secretary under the Bill Clinton administration who also has served as the top White House economic adviser for former President Barack Obama, told The Atlantic as cited in MSN.com, of economic policies Trump wants to enact that could increase inflation, if re-elected, and perhaps lay the groundwork for another recession.

"These included compromising the independence of the Federal Reserve Board, enlarging the federal budget deficit by extending his 2017 tax cuts, raising tariffs, rescinding Biden policies designed to promote competition and reduce 'junk fees,' and squeezing the labor supply by restricting new immigration and deporting undocumented migrants already here," The Atlantic wrote in an article published last Sunday.

But that is just the beginning. Trump wants to weaken regulatory oversight by appointing more political appointees if elected that would carry out his agenda who could neutralize officials and whole departments that enforce regulations, a major cause of the Great Recession under President GW Bush.

There were many causes of the Great Recession, but front and center were the GW Bush administration appointing officials who consciously downgraded governmental powers of enforcement so that regulators such as the SEC looked the other way when Goldman Sachs, for instance, sold funds to their investors that they then secretly bet against would fail.

Real laws were broken then -- from conflicts of interest to outright fraud that were never prosecuted. The 2010 congressional hearings unveiled much of the double dealing that was rationalized by Goldman Sachs' buyer-beware code -- its clients should be sophisticated enough to know that Goldman would try to maximize its own profits, before those of its clients.

But even more damage was the disregard of basic economic safeguards by successive Republican administrations. It was really the attempt of Big Business to unravel the economic safeguards of the New Deal, first spelled out in Paul Krugman's The Great Unraveling, by advocating massive budget deficits to pay for a Pax Americana -- with especially severe consequences for the old and poor. The Bush administration then ran up the first $1 trillion federal deficit.

Saez/Piketty

A culture of greater lawlessness can be traced back to the early 1980s when President Ronald Reagan trumpeted that government was the problem and more private enterprise the solution for greater prosperity.

The number of convicted criminals in those administrations tells part of the story. President Reagan's administration was marked by multiple scandals, resulting in the investigation, indictment, or conviction of over 138 administration officials, the largest number for any U.S. president.

And Salon.com had documented 34 incidents of law-breaking in just the first 4 years of G.W. Bush's Presidency, the most blatant being unmasking covert CIA operative Valerie Plame, and its fabricated claims that Iraq had weapons of mass destruction.

Former President Trump is the latest example with dozens of convicted felons in his administration that he pardoned while still President.

"Deficits don't matter" was the infamous chant of Bush VP Dick Cheney. At a time when economic inequality had risen to levels last seen in the 1920s, these administrations wanted to divert attention from a vanishing social safety net by proposing the ago-old Darwinian solution -- the free market. For only the fittest will survive in a world ruled by self-interest, rather than laws and regulations.

The United States, beginning in the 1980s once again became the most ardent advocate and practitioner of the oldest form of capitalism, now a primitive relic of 18th century enlightenment. This is but one part of our aging democracy that U.S. hegemonists put up as the model for western civilization. But it is a very imperfect model for the rest of the world as well.

A 2002 survey of 38,000 people in 44 countries by the Pew Center for the People and the Press found what they think of our American Way. "Since 2000, favorability ratings for the U.S. have fallen in 19 of the 27 countries where trend benchmarks are available ... pluralities in most of the nations surveyed complain about American unilateralism," says the study. They think we disregard their interests in pursuit of our own self-interest.

Few dispute that our capitalistic economic system has won the day. It produces great wealth, particularly for those at the top of the wealth pyramid. Robert Reich's book, The Future of Success said it best: "By the end of the (20th) century, the richest 1 percent of American families, comprising 2.7 million people, had as many dollars to spend after taxes as the bottom 100 million."

It is also no coincidence 25 states have now passed anti-union Right to Work laws that are also the poorest states with the highest income inequality, lowest educational achievement, and receive the most in public subsidies. Taking incomes and wealth away from those states' workers can only make them poorer in relation to other states and regions that is a continuing drain on public finances.

It is the real lesson of our greater lawlessness. By choosing to break laws and regulations that govern economic activity, some region are being pushed back to levels of past centuries, including holding the minimum wage at $7.25 per hour. Workers will only produce more and better products and services when they have the incentive to do so.

In the end, such greater lawlessness means a disregard for everyone but one's own clan or tribe, a greater selfishness. No country can remain prosperous with such a breakdown in social welfare. That is the lesson learned from the Great Depression and Great Recession. Policies that ignore economic as well as civil laws and well-being, that continue to divert incomes and wealth to the wealthiest, impoverish all of US.

Harlan Green © 2024

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

Bad News for Workers = Worsening Economic News!

Popular Economics Weekly

Personal incomes have been increasing just 2.5 percent on average for several years. But that doesn't boost GDP growth enough to pay down the $10 trillion in worldwide debt that’s been issued since 2008 to get us out of the Great Recession.  We need at last 3 percent GDP growth, which is closer to the long term average; or raise taxes, which this administration won't do.

So where have all the profits gone that were generated since 2009 for corporate execs and their stockholders? Executive Pay Watch, in a report conducted by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). Last year, CEOs were paid 335 times the average worker. The average production and non-supervisory worker earned $37,600 annually in 2016. “When adjusted for inflation, the average wage has remained stagnant for 50 years,” the report said.

That’s not a formula that will pay down the $10 trillion accumulated since 2009 by central banks. The conundrum is why so much debt with so little economic growth, and the US at near full employment? With the Federal Reserve finally becoming serious about selling some of its $4.5 billion hoard of excess reserves, we could see a serious slump in economic growth coming.

“When looking for the next financial crisis, it’s hard to escape from the fact that we’re seemingly in the early stages of the ‘great unwind’ of global monetary stimulus at the same time as global debt remains at all-time highs following an increase over the past decade—at the government level at least—which has been unparalleled in peacetime history,” wrote Deutsche Bank strategists led by Jim Reid in an 88-page study entitled, “The Next Financial Crisis,” and cited by Marketwatch.

Why? Interest rates will finally begin to rise (i.e., less money in circulation), and less money also means credit tightening when weak household income growth has already stretched budgets.

A recent employer survey tells us exactly why personal incomes haven’t grown with corporate profits; still at record levels as a percentage of GDP. Corporations have been able to successfully resist their employees’ demands for higher wages. The top 1 percent have garnered 96 percent of all income generated since the Great Recession, since most of their profits have come from cheap money printed by the central banks. It has only enriched the banks and Wall Street, in other words.

Marketwatch reported on the Aon survey, recently: “Pay raises for U.S. employees are not expected to improve next year, according to a survey released Monday by global professional services company Aon, based on a survey of over 1,000 companies. Base pay is expected to rise 3 percent in 2018, up slightly from 2.9 percent in 2017. Spending on variable pay — incentives or bonuses — will be 12.5 percent of payroll, low levels not seen since 2013. This suggests a “pessimistic view of corporate performance in the coming year,” Ken Abosch, a strategy and development analyst at Aon, said in a statement.

Ah, but not for the CEOs of these companies that have used most of those profits to buy back their stock, and so enhance their earnings. CEO pay spiked 19.6 percent last year, before inflation.
The median total compensation for CEOs at S&P 500 companies totaled $11.5 million last year, an 8.5 percent increase from the previous year and the largest increase since 2013, according to a joint report by the Associated Press and the executive pay data firm Equilar released earlier this year. 

So, we could be seeing a growth slowdown next year, or worse, unless we can reverse the huge redistribution of wealth that has occurred since 2009. But that would mean raising the nationwide minimum wage from its current $7.25/hour, last set in the 1990's, for starters.

And, then stopping the Trump administration and Republican congress from cutting taxes of the already wealthy, and cutting spending that supports the poorest and elderly in the new tax and budget proposals.

Their most blatant attempt to increase their profits further, while hurting those in most need, has been the repeated attempts to repeal Obamacare (another tax cut for them). Otherwise, all that stimulus has gone for naught, and we could see this Great Recession turn into another Great Depression.

Harlan Green © 2017

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

Where Are Badly Needed Infrastructure Improvements?

Financial FAQs

It’s really incredible that Republican leaders of both the House and Senate can’t see that Trump’s $1 trillion infrastructure proposal would boost growth. It's the one item that would stir us out of the 2 percent growth doldrums.

The all-Republican congress and White House are making a serious mistake in letting politics and ideology get in the way of economic growth. Does anyone seriously believe their attempts to repeal Obamacare would work with so many of their red state constituents dependent on Medicare?

And now they want to tackle a regressive tax reform plan in which, according to the Tax Policy Center, 76.1 percent of the net tax cuts would flow to the richest 1 percent of households in 2017.  And by 2025, essentially all of the net tax cuts — 99.6 percent — would go to the top 1 percent. That doesn’t even pass the smell test.

However, we have to remember Republicans have always hated the idea of another New Deal, because it would bust their bubble that government investment can’t work; because it did work to build our highways, Internet, shots to the Moon, educational system, a cleaner (and more productive) environment, and so forth.

President Trump’s infrastructure proposal would work, even if partially funded with $40 billion from Saudi Arabia and its allies. But Trump is now toxic with the business community after his Charlottesville racist fiasco. His 34 percent voter base, (or maybe now 24 percent in more recent polling) that continue to support him, even if he shoots someone on Fifth Avenue, won’t keep him in power, as he believes.

But higher economic growth would make him more popular. Marketwatch’s Jeff Bartash has highlighted what it would take to take US out of the doldrums. “Lackluster business investment is one of the chief reasons the U.S. continues to bob along at about 2 percent annual growth, less than two-thirds the historic average. Investment is what spurs new inventions, makes it easier for workers to do their jobs and allows the economy to expand at a faster rate.”

A souped-up economy in turn generates higher profits, fatter dividend payments and bigger paychecks for workers, says Bartash. “Whatever hope businesses may have had earlier in the year, however, has been clouded by the failure of a flailing Trump White House to push through tax cuts, more spending on public works and other measures to aid big and small companies alike.”

It’s so foolish.  President Trump and Republicans won’t accomplish anything, if Trump can’t renounce his neo-nazis, white nationalist and Ku Klux Klan supports.

Harlan Green © 2017

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

Jobless Rate Falls to 5.8 Percent—Why be unhappy?

Financial FAQs Weekly

Nonfarm payroll jobs advanced 214,000 in October after gaining 256,000 September and 203,000 in August. Net revisions for August and September were up 31,000. The unemployment rate dipped to 5.8 percent in October from 5.9 percent in September. So why were voters Tuesday so pessimistic about the economy and jobs?

Graph: Marketwatch

Job creation in October marked the ninth straight month the economy has added 200,000 jobs or more, a feat last accomplished in 1994. The U.S. has created some 2.3 million jobs this year and is on track for the biggest gain in almost a decade. What’s more, job openings recently hit a 13-year high while layoffs have fallen to the lowest level since the turn of the century, says Marketwatch.

The unemployment rate, meanwhile, fell again as more than half a million people found work, according to a survey of households. And another 400,000-plus joined the labor force, a good sign because it means people think more jobs are available.

But wages are still rising 2 percent per year, which is just keeping up with inflation. And the U-6 measure of so-called underemployed is still 11 percent, which includes not just those who are unemployed, but those who are “marginally attached” to the workforce as well as those who want a full-time job but can only work a part-time job.

These are some of the reasons that voters were unhappy at last Tuesday’s election. Exit polls after Tuesday’s midterm elections showed that just one-third of Americans think the economy is getting better, and an even larger number believe the U.S. is headed in the wrong direction.

Goods-producing jobs increased 28,000 in October after a 36,000 gain the month before. Manufacturing employment increased 15,000 in October, following a rise of 9,000 in September. Motor vehicles and parts rebounded 3,000, after slipping 1,000 the month before. Construction advanced 12,000 after a gain of 19,000 in September. Mining edged up 1,000 in October, following an 8,000 rise in September.private service-providing jobs gained 181,000 after a 208,000 boost in September. Strength again was seen in professional & business services and retail trade.

The question is why when several times since the 2009 end of the Great Recession, Republican anti-government policies almost drove us back into recession. In 2011, Republicans took the government to the brink of default on its debt (and S&P downgrade of U.S.) , which led to an agreement with Obama, Harry Reid and Nancy Pelosi to cut spending, by automatically sequestering funds if necessary.

A year ago, the Republicans again forced the issue with a 16-day partial shutdown of the federal government, which led to another agreement with the Democrats on spending cuts.

So now that they control both the House and Senate, and new Senate Majority Lead Mitch McConnell says they will no longer be shutting down government, they will have to find a way to work with the Democrats to lose their ‘no compromise’ past.

The problem is Republicans have been wrong on every economic issue that would improve lives—from budget deficits to health care, from tax cuts to public infrastructure spending, environmental safeguards, Dodd-Frank financial regulation; not to speak of their war on contraception, voters’ rights, and collective bargaining that would raise workers’ income—you name it.

They have literally been wrong on every issue that keeps this economy afloat. It is an abysmal record of economic ignorance. How will they change their ways?

Harlan Green © 2014

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

Bullies, Not Government Is the Problem

Financial FAQs Weekly

Even though the U.S. economy grew by a 3.5 percent annual rate in the third quarter, boosted by a surge in exports and the biggest jump in federal spending in five years, Democrats don’t seem to be taking credit for it.

Why? The bullies are in control, whether they are Republican Tea Partiers that refuse to compromise on any legislation that won’t downsize government programs, the Koch Brothers who fund any candidate or cause that cuts environment regulations, or the NRA, lobbying arm of the gun industry that capitalizes on gun violence to boost weapons sales; they control Washington’s agenda these days.

And it has almost wrecked our economy several times since the 2009 end of the Great Recession. Republicans dare not take credit for it, either. “Anyone who trusts the Republicans hasn’t been paying attention to what their economic policies have been. Instead of focusing on full employment and higher wages, the Republicans have doubled down on the trickle-down policies that have failed so miserably over the past 30-plus years,” says Marketwatch economist Rex Nutting.

In fact, several times since the 2009 end of the Great Recession, Republican anti-government policies almost drove us back into recession. In 2011, Republicans took the government to the brink of default on its debt (and S&P downgrade of U.S.) , which led to an agreement with Obama, Harry Reid and Nancy Pelosi to cut spending, by automatically sequestering funds if necessary.

A year ago, the Republicans again forced the issue with a 16-day partial shutdown of the federal government, which led to another agreement with the Democrats on spending cuts.

Why do we call them bullies? Because they have been able to get away with it. And because it looks like Republicans might gain control of the Senate, it’s Democrats who have been willing to compromise, when their economic agenda has brought the unemployment rate down to 5.9 percent, and economic growth above 3 percent over the last 2 quarters.

The problem with dealing with such bullies that say it’s ‘my way or the highway’, is that they take any sign of compromise as a sign of weakness. So when Vice President Biden says, ““[L]ook, we’re — we’re ready to compromise,” bullies see it as a sign of weakness, that they have already won the battle of this midterm election, so there is no need to compromise.

“Going into 2016, the Republicans have to make a decision whether they’re in control or not in control,” the vice president told CNN’s Gloria Borger. “Are they going to begin to allow things to happen? Or are they going to continue to be obstructionists? And I think they’re going to choose to get things done.”

Unfortunately, that is not how to deal with the bully mentality that has pervaded much of today’s politics, as well as our schools. It only happens when there is a leadership vacuum, when strong leaders refuse to step forward that know how to oppose bullies. Yet we know how--history has told US. That’s how we defeated the biggest bullies of all; Hitler and Emperor Hirohito, and even Stalin. Just stand up to them, and only compromise when the bullies are willing to compromise.

Harlan Green © 2014

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

We Need Some Inflation!

Financial FAQs

How much inflation is too much inflation? Germany thinks any inflation is too much, based on their 1920s inflation experience when burning money for fuel was cheaper than burning wood. It has led to the EU’s draconian austerity policies, such as calling for spending cuts during deflationary times that has kept the EU in and out of recessions since 2008.

Trading Economics

Yet the US deficit hawks—mostly Republicans these days—continue to believe that deficits are evil and the Fed should begin to tighten now, rather than wait for 2015 when economic growth is more sustainable. This is even though the unemployment rate is 12.1 percent when the 3.1 million long term unemployed and part timers are included, and we have too little inflation.

Graph: Tim Duy

So how much is too much inflation? The easy answer is that rising prices become inflationary when supply can no longer meet the demand for goods and services over a prolonged period, thus raising prices. This last happened in the 1970s, when oil embargos were rampant, the rest of the world wasn’t yet industrialized and producing too much of everything, and trade barriers were higher than they are today.

In fact, we are in a world of generally falling prices with the Asian Tigers exporting most of what they produce, hence the huge surpluses. So maybe we should be looking at regional or worldwide prices and production capacities, instead of individual countries’? That seems to be Germany’s mistake, extrapolating its own past history to the EU as a whole.

Budget deficits don’t feed inflation during ‘zero-bound’ episodes (when interest rates are at, or close to 0 percent), such as after Great Recessions when all the Fed can do is try to prevent deflation, as occurred in Japan for two decades.

This is basic Economics 101 that many economists don’t understand, because they have little knowledge of liquidity traps—which is when money is no longer circulating, but being hoarded rather than invested. How could they, since it’s only happened twice in modern times—during the 1930s and now.

Budget deficits in fact prevent said deflationary episodes, which are episodes when wages are stagnant or falling and there is little or no economic growth, if the monies are spent wisely on longer term projects, because government spending puts more money into circulation. This should be easy to understand, but the inflation hawks are squawking again because the Fed now has some $4 trillion in reserves on its books, yet there is no inflation even on the horizon.

Calculated Risk has started an interesting discussion about when inflation might become a problem, using the US example. And it turns out that even US capacity utilization doesn’t give us a good measure. For instance, from 1992 to 2001 during the longest economic expansion in our history, when more than 20 million jobs were created and capacity utilization was as high as 84 percent of capacity, CPI prices averaged less than 3 percent. Maybe the Fed’s inflation target should be 3 rather than 2 percent, which has accompanied mostly weak growth.

Graph: Calculated Risk

So maybe we should be looking at the world’s production capacity when looking for the ideal inflation rate? Because China, Korea, and the other Asian Tigers continue to produce more than they consume, more ways should be found to boost demand, i.e., which in the majority are from mostly middle class incomes.

Oh wait a minute. That’s what we should be doing in the US as well. Maybe raising the Fed’s inflation target would boost demand, or are we as traumatized by the 1970’s era of stagflation as the German’s were in the 1920’s?

Harlan Green © 2014

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

Greenspan’s Greed and The Federal Deficit

Popular Economics Weekly

The deficit this year is expected to be $514 billion— just 3 percent the size of the economy and significantly less than the $1.4 trillion deficit Congress ran up when it pumped stimulus into the economy in 2009.

“Although the deficit in the Congressional Budget Office’s baseline projections continues to decline as a percentage of GDP in 2015, to 2.6 percent, it then starts to increase again in 2016, reaching 4.0 percent of GDP in 2024,” said the CBO. “That figure for the end of the 10-year projection period is roughly 1 percentage point above the average deficit over the past 40 years relative to the size of the economy.”

Why do we have such a large federal budget deficit today, in spite of the current reductions of CBO projections? It now totals $17 trillion counting the US Treasury’s own debt to itself—when we had 4 consecutive annual surpluses in the Clinton years of 1997 to 2001, and an overall budget deficit reduced to $3.2 trillion in privately-held debt.
The answer in a nutshell is unrestrained human greed, something that even Alan Greenspan recognized, though he wouldn’t admit it was the result of his own laissez faire market ideology of lower taxes and less market regulation.

''It is not that humans have become any more greedy than in generations past,” he famously lamented in 2002 testimony before the Senate Banking Committee. “It is that the avenues to express greed had grown so enormously.”

That quote was not only fatuous—humans have always become more or less greedy depending on those so-called opportunities for greed—but it was his decision to back GW Bush’s deficit spending that erased the Clinton budget surpluses.

Graph: FactCheck.org

There were of course 2 recessions—in 1991 and 1997, plus the wars on terror, plus TARP and the Bush era tax cuts. But it was then Fed Chairman Alan Greenspan’s testimony that enabled the Bush/Cheney record deficits of those and subsequent years such as on January 26, 2001 Senate testimony:

"Continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer term fiscal policy issue of whether the federal government should accumulate large quantities of private -- more technically, nonfederal – assets,” he said at the time. “At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. ... This development should factor materially into the policies you and the administration choose to pursue."

In fact, it was the unregulated greed of Wall Streeters that Greenspan had in fact encouraged in opposing regulation of derivatives—used by regulated banks, as well as unregulated hedge funds—that led to the Great Recession that bankrupted millions.
The Clinton surpluses had almost balanced long-term federal debt, and first Bush Treasury Secretary John O’Neill lost the debate on what to do with that surplus. He had wanted the surplus to strengthen social security, Medicare, and other government spending programs. O’Neill was fired for his opposition to the Bush tax cuts.
In other words, Greenspan gave Bush the cover he needed after 9/11 to use that surplus to finance tax cuts on capital in particular—including abolishing the inheritance tax, lowering capital gains and dividend taxes almost 50 percent—that mainly benefited Wall Street and its investors, rather than Main Street.

“Why did corporate governance checks and balances that served us reasonably well in the past break down?” he asked. “At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community.”

We have you to thank, Dr. Greenspan, for those "opportunities for avarice" that resulted from of your unbridled enthusiasm for such policies at that time. It also brought on the Great Recession and record deficit we have today.

Harlan Green © 2014

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

Where Are The Brave Ones?

Popular Economics Weekly

Now that China has replaced 1980s Japan as the economy that might surpass us, can we find one brave policy maker, (including President Obama), that’s willing to sound the alarm? China now has a robot roaming the moon, and various predictors say it could surpass the U.S. as the world’s largest economy in a matter of years. China is even predicted to lead the world in technological innovation within 40 years.

Yet no one in Washington seems to be concerned. We would rather obsess over debt than the main reason the U.S. is falling behind—the huge cutback in government research and infrastructure spending that would keep us competitive in world markets, as well as remain the world’s most sustainable democracy. And sustaining our democracy is really the main job of government, which means protecting the welfare of its citizens at home should be at the top of the policy list.

Government cutbacks are also the main reason for our soaring inequality and social immobility, as domestic austerity policies have endangered the social safety net while conservative state governments inhibit collective bargaining, voters’ and women’s rights.

There is no question that government research and development is the main driver of technological innovation; from the moon landing to development of the Internet to genome discoveries, yet research spending has been declining for years. It’s a sad picture, highlighted by what was really a worldwide Great Recession. Because we sneezed, the rest of the world caught our cold.

Harvard economist Jeff Sachs is one of a small number of economists brave enough to sound the alarm, and pronounce ways to increase government’s role in bringing back sustainable economic growth in a recent New York Review of Books article:

“A majority of public opinion favors action on the issues I have outlined: more taxation of the very rich, and more spending on education, clean energy, and job training. The public wants a smaller military and less meddling overseas. The problem is not with public opinion but with the narrow self-interest and social outlook of powerful corporations, interest groups, financial lobbyists, and large investors.

He also excoriates President Obama for allowing those very same lobbyists and special interests to vitiate his own progressive goals of creating jobs and alleviating poverty.

“Rather than taking on the problem of inflated health care costs, he (Obama) brought in the health care industry to support the expansion of health coverage. Rather than taking on the egregious tax abuses of the corporate sector and the very rich, he settled in January 2013 for an almost symbolic rise in taxes for those with incomes above $400,000. Rather than reforming the budget, he pursued a deficit-financed two-year stimulus that provoked the Republicans, piled up public debt, and achieved next to nothing for the long term.”

One can say that Republicans would have been provoked, no matter what he proposed, but certainly maintaining a strong economy and more progressive taxation policies (that would have reduced the record inequality) wasn’t at the top of President Obama’s goal list until now. But the hope is it will become a center piece in his upcoming State of the Union speech on Tuesday.

An American University blog piece catalogues China’s growth in research spending. By 2011, China had already become the world’s second highest investor in R&D. Government research funding has been growing at an annual rate of more than 20 percent. At the end of 2012, for example, 7.28 billion yuan was spent on promoting life and medical sciences, nearly 10 times the 2004 level. Even more troubling (for the United States), in 2011, 21 percent of the applications were supported, and for young scientists, the application success rate was 24 percent, both of which were higher than the U.S. level. It was predicted that if the U.S. federal government R&D spending continues to languish, China may overtake the U.S. to be the global leader in R&D spending by 2023.”

Need we say more about the priorities that are not at all conflicting? Less income and wealth inequality leads to stronger economic growth, higher tax revenues, and lower budget deficits. It even led to 4 years of budget surpluses under President Clinton. And the paths to more opportunity are now well-known. So where are the brave policy leaders that will show the rest of U.S. how to get there?

Harlan Green © 2014

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

Beware of the Taperians!

Popular Economics Weekly

Now that the Fed has begun to reduce its QE3 securities’ purchases $10B per month in January, what will that do for growth? My answer is it’s too soon to say. Firstly, beware of the ‘Taperians’, those who would end QE3 too soon. As outgoing Fed Chairman Bernanke explained in his most recent speech, without QE3 we might have regressed back into a recession.

“"Skeptics have pointed out that the pace of recovery has been disappointingly slow, with inflation-adjusted GDP growth averaging only slightly higher than a 2 percent annual rate over the past few years and inflation below the Committee's 2 percent longer-term target," Bernanke said at the American Economic Association annual meeting in Philadelphia. "However, as I will discuss, the recovery has faced powerful headwinds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support. For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery."

Then there are the political ‘headwinds’. Will the next 2 years’ budget agreement mean no more budget fights for a while, or will opponents to Obamacare continue to throw up roadblocks to its implementation in the 35 states that wouldn’t set up their own health care exchanges? This would make it more expensive and wasteful of government resources, needless to say.

Yet it seems at least one Fed Governors has been sounding the need to end QE3 before its time—Richmond Fed Governor Jeff Lacker. Lacker has been most vocal in wanting to rein in QE3 almost from its start last fall, and one who most consistently voted against continuing it at subsequent FOMC meetings. The reason? He’s an inflation hawk, or ‘inflationista’ (P Krugman’s term), as well as deficit hawk that fears all those bonds bought by the Fed will create runaway inflation (and deficits), once they are sold back into the economy.

In other words, he belongs to the ‘confidence fairy’ camp (another Krugman term) that believes business confidence is the key to growth, instead of consumer demand for their products, and businesses will lose confidence when interest rates and debt servicing costs rise, increasing budget deficits. But what about consumer confidence, when consumers are currently spending at a 4 percent annual rate, which is the largest component of overall demand?

“Businesses also appear to be quite reticent to hire and invest,” said Lacker in his most recent report. “A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked about the single most important problem they face, the most frequent answer in the latest survey was "government regulations and red tape." This observation accords with reports we've been hearing from many business contacts for several years now. They've seen a substantial increase in the pace of regulatory change and a substantial increase in uncertainty about the shape of new regulations. Both are said to discourage new hiring and investment commitments.”

Graph: DShort

However that is not all survey results show in the December 10 NFIB report reported. “The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent. Fifteen percent still cite weak sales as their top business problem, but it is the lowest reading since June 2008. The net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.”

In fact, the lack of consumer demand for their products is still the chief problem, not federal regulations or high taxes, as shown by their lack of need for more credit. “…only 2 percent of NFIB members cite credit and interest rates as their top business problem, and a record 66 percent expressed no interest in a loan, obviously due to their dismal view of the future of the economy. It’s not a problem of credit supply; it’s a lack of credit demand due primarily to poor economic prospects.”

What does Lacker say about consumer demand, the largest driver of economic growth, as we said? That consumer sentiment is still depressed because of economic ‘uncertainty’. “Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend. Consumer spending trends are likely to depend on whether the dramatic events of the last few years are only a temporary disturbance to household sentiment or if they instead represent a more persistent shift in attitudes about borrowing and saving. At this point, I am inclined toward the latter view (i.e., that household sentiment remains depressed).”

Once again he talks about sentiments, rather than real income and wealth, which are the main determinants of consumer spending. It is their actual wealth that determines consumers’ spending habits, much more than what they feel about future prospects, research has shown.

So it’s true consumers are still being cautious, but several factors are improving consumer confidence. For example, said Bernanke, “notwithstanding the effects of somewhat higher mortgage rates, house prices have rebounded, with one consequence being that the number of homeowners with "underwater" mortgages has dropped significantly, as have foreclosures and mortgage delinquencies. Household balance sheets have strengthened considerably, with wealth and income rising and the household debt-service burden at its lowest level in decades.

If in fact Fed Governor Lackey believes consumer and business uncertainty is still too high, he should not be supporting an early end to the QE3 taper. Consumers and businesses are still facing an uncertain future. Is this the time to be taking away the credit ‘punch bowl’, with the private sector holding back?

So beware of those Taperians which cite the shortcomings of governments, rather than their own policies that hamper future prosperity.

Harlan Green © 2013

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

The Great Divergence

Popular Economics Weekly

The so-called “minimalist” budget deal just reached by Congress is another illustration of the great divergence in wealth distribution of recent years that has eclipsed the middle class. The Great Divergence is not a term usually associated with inequality, but a term coined my historian Samuel Huntington to explain Europe’s explosive economic growth in the 19^th century that left the rest of the world behind. But today, it best explains what has reduced domestic economic growth and job formation over the past 30 years.

Until 1970 wealth had been fairly evenly distributed so that the rising tide of economic growth lifted most boats, but then something happened. The middle class began to disappear, with wealth flowing upward, so what was left was either the poorest or richest among us.

The results of such a ‘divergence’ of wealth from what was its distribution since World War II has not been well documented, and ultimately resulted in the Great Recession (which some have called the Lesser Depression). Middle class consumers in particular saw their accumulated wealth disappear with the busted housing bubble, and income growth that did not keep up with inflation. Both household and government revenues declined to record lows as a percentage of overall economic activity.

What happened since then is conservative economic policies begun under Presidents Carter and Reagan, have gradually shifted most of U.S. wealth created to the wealthiest individuals and corporations, resulting in money flowing to those who either hoard it (such as record corporate cash assets of more than $2.2 trillion), or play the financial markets, causing speculative bubbles that have resulted in 5 recessions since 1980.

There has also been a gradual reduction in economic growth since then, with GDP growth averaging 2.5 percent, whereas it averaged 3.5 percent up to 1980, including the Great Depression. It is even worse today, averaging 2 percent since the end of the Great Recession, with the unemployment rate stuck at 7 percent.

This is not new news. It has been well documented by such as Professors Thomas Piketty and Emmanuel Saez’s research on income inequality, and Robert Reich in his book and movie, Inequality for All. But we are now just beginning to understand its effects.

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1 percent of Americans grew by an average of 275 percent. During the same time period, the 60 percent of Americans in the middle of the income scale saw their income rise by 40 percent. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392 percent and their average tax rate reduced by 37 percent. In 2009, the average income of the top 1 percent was $960,000 with a minimum income of $343,927

And now, the brutal cuts to federal spending known as the sequester have wreaked havoc on important programs for mostly the poor, cutting off hundreds of thousands from Head Start and low-income housing assistance, setting back scientific research and environmental protection, and costing more than a million jobs. Getting rid of the sequester for domestic programs was a high priority for Congressional Democrats, yet very little was achieved in a budget deal reached last Tuesday to right this great divergence of wealth from the have-nots to the haves.

Lowering the maximum income tax rates for the wealthiest to 36 percent from as high as 48 percent during the Reagan era, lowering capital gains, inheritance tax rates, as well as giving energy companies and major corporations huge tax loopholes to drive through, has transferred most of the wealth created since then to the top 1 percent, while corporations have amassed record amounts of cash reserves, much it held overseas where most growth has occurred for the multinational corporations.

And corporations have used their increased economic power and profits to cement their economic dominance; by suppressing collective bargaining, minority voting rights, and a great number of environmental regulations in state legislatures via ALEC, the American Legislative Exchange Council that actually writes the legislation for conservative state legislatures.

The result is that most of the productivity gains enabled by both technology and globalization (i.e., relaxed trading regulations and oversight) have gone to corporations and their investors, abetted by the reduced tax base.

This is while middle class incomes and retirement accounts have been depleted, and governments have been starved of funds to even keep up with outmoded infrastructure maintenance, while reducing educational spending, environmental enforcement that pay forward benefits for future generations.

The Great Divergence is once again a fact, but a fact that highlights the decline of western economies due to the increasing concentration of wealth. It should raise alarms in Europe as well, where austerity programs are at work impoverishing their middle class.

Harlan Green © 2013

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

Equality Is Good For Everyone!

Popular Economics Weekly

It looks like some states are beginning to take the equality issue seriously again. Massachusetts just raised their minimum wage to $10 per hour, California is raising it to $8.25 over 2 years, with New Jersey and other states to follow.

And just last week, the Center for American Progress launched the Washington Center For Equitable Growth, which aims to deepen the economic critique of inequality. It is being set up by Berkeley economist Emmanuel Saez, among others, who is known with his partner Thomas Piketty, as the first economists to historically research the history of income distribution over the past 100 years.

Their results show that we have the worst income distribution in the developed world; as bad as in 1929 that resulted in the Great Depression. Such inequality was again the case in the run-up to the Great Recession.

It was declining household incomes that led the Bush administration and Federal Reserve to create the housing bubble. It used very easy credit conditions and lax loan qualification standards to boost economic growth. But those declining incomes caused consumers to use up all their available credit and savings to maintain their standard of living, thus causing the Great Recession.

As the mission statement of the Center says:

“New research suggests that growing inequality in the United States may have broad social and economic effects — by reducing stable demand for goods and services, dampening entrepreneurialism, undermining the inclusiveness and responsiveness of political and economic institutions, limiting access to education, and stunting individual development.  Yet our understanding of how these mechanisms interact with the broader economy is limited.”

In December 2011 I wrote a column entitled, Equality Is Good For Everyone, when there was hope that maybe the Great Recession was finally over, and households might regain their financial footing from the busted housing bubble.

Alas, that wasn’t to be because Congress become locked in the battle over a higher debt ceiling and government spending cuts, just as the Europeans were going through their own austerity budget cuts. And so similar budget cuts were agreed to by President Obama and Congress that has reduced economic growth by as much as 1 percent per year, according to leading economists.

President Obama had just given a speech on income inequality that December at Osawatomie, Kansas, the site of Teddy Roosevelt’s “New Nationalism” speech, which signaled the beginning of the progressive era that culminated in FDR’s New Deal.

Teddy Roosevelt had given his now famous speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

“The new Nationalism puts the National need before sectional or personal advantage,” said Roosevelt. “It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that of the representative.”

Sound familiar? Obama said the Republican ideology of laissez faire, small government, free markets that existed when Teddy Roosevelt made his Osawatomie speech had resulted in too much graft and unlimited corporate power.

“It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work. It’s never worked.”

Berkeley Professor and former Clinton Labor Secretary Robert Reich has been most vocal on the growing divide between Haves and Have-nots that has resulted from the decline in equality with his film and book, Inequality For All. He also highlights the resultant distortions—among them a declining quality of life for most Americans, and financial markets becoming more susceptible to boom and bust cycles.

Harlan Green © 2013

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

Are Consumers Losing Confidence in Housing??

The Mortgage Corner

The unanswered question to date is how the debt ceiling impasse and government shutdown has affected economic activity.  Both the industrial and service sectors have shown stronger growth, according to the Institute of Supply Management (ISM).  But real estate is another story.  Pending home sales in the NAR’s Pending Home Sale Index doesn’t look good. The index that measures home sales under contract, but not closed, has been declining for 4 months, a sure sign that housing sales, at least, are faltering.

This is in part because consumer confidence is faltering, as consumers lose confidence in government’s ability to function.  The shutdown endangered much more than 800,000 furloughed defense workers.  Combined with huge cuts in food stamps, no farm aid bill, and a not yet functioning Affordable Care Act, the shutdown and debt ceiling impasse has spooked consumers big time.

Graph: Econoday

Year-on-year, the index is down 1.2 percent for the first negative reading in nearly 2-1/2 years. The National Association of Realtors (NAR), which compiles the report, cites as a major factor the government shutdown which it says pushed government workers and contractors to the sidelines of the housing market.

NAR chief economist Lawrence Yun wasn’t optimistic about the near future, either. “Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity’” he said. (But) “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”

The government shutdown really weighed on confidence indexes.  The Conference Board’s confidence index fell to 71.2 from a revised 80.2. With an 11 point drop, the dip is the largest since 12 points in January, a month that was also hit by a fiscal standoff in Washington.

Graph: Econoday

But the drop was mainly in expectations, which could reverse if some agreement is reached on a new federal budget by the December 15 deadline.  The component for present situations continued to show much less volatility, at 70.7 versus 73.5 for what is a 4th straight reading over 70—“a trend that is consistent with steady and soft month-on-month growth for the economy,” said Econoday. 

A negative on the present situation side was a sharp 2.2 percentage point rise to 35.8 percent for those that said jobs fewer jobs were available. This suggests another month of weakness for monthly payroll growth.

Consumer confidence powers much more than home sales, of course.  Retail sales are also growing just 4 percent per annum with the holiday season approaching, when 6 to 8 percent is the normal sales’ rate if consumers feel more confident.  Retail sales don’t adjust for inflation, so ‘real’ retail sales after inflation are rising just over 2 percent. This has to mean government dysfunction is definitely affecting consumer spending overall that powers some 70 percent of economic activity.

Harlan Green © 2013

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

Fed Chairman Yellen Will Boost Economic Growth

Financial FAQs

If we need any more evidence that Janet Yellen should be the next Federal Reserve Chairperson, it was the decision by the Fed Governors to continue their easing at the conclusion of their September 18 FOMC meeting, just 3 days after Larry Summers withdrew his candidacy for Fed Chairman.  Their action was basically an endorsement of Yellen’s policies as the Fed’s current Vice Chairperson that confounded the pundits who were sure the Fed would begin it’s ‘taper’ of bond purchases in September. 

In a word, Dr. Yellen has always been pro-job creation, and that is the big change in economic policymaking that should make this economic recovery self-sustaining, as opposed to Republican Paul Ryan’s latest budget proposal that is in fact anti-jobs. Instead, he wants to focus on reducing the budget deficit by cutting entitlement benefits for the elderly in return for lifting some of the sequester (i.e., Budget Control Act) spending cuts. 

But that doesn’t reduce the current debt or boost hiring directly, although lifting spending cuts and ending the government shutdown will bring back all those furloughed workers.  Labor’s share of national income has been steadily falling, which reduces the buying power of consumers who power 70 percent of economic activity, and so the overall demand for goods and services.

Graph: Economix

           Economist Jared Bernstein said as much in a recent New York Times column, illustrated in the Economix graph from 1995 to Q3 2012:  “In fact, as many inequality watchers have noticed, profits as a share of income are at or near record highs while the compensation share is around a 50-year low.” And as Robert Samuelson also reported in the Washington Post, “…labor’s share has plunged in the past decade. In 2013, it’s 57 percent (vs. 63 percent in 2000). This shifts about $750 billion annually from labor to capital.” 

The so-called supply-side policies of smaller government and lower taxes that have favored producers over employees are out of touch with the real economic problems today.  It is mainly a lack of demand, rather than the supply of goods and services that has stunted this recovery.  We are in fact awash in cheap goods produced globally.

The best sign that we have a demand problem that no longer requires lowest taxes for the producers and corporations is almost no sign of inflation and record low worldwide interest rates.  These indicators signal the sluggish circulation of money and so reduced demand.  Most of it is being saved, or hoarded.  Banks have almost $1 trillion in excess reserves that would normally be loaned out or invested, while corporations have more than $2 trillion in cash and cash ready reserves not being invested.

Why?  Because labor has been left out of the recovery as almost everyone knows.  Thomas Piketty and Emmanuel Saez have documented that 95 percent of the wealth created since 2009 have gone to the top 1 percent, while household incomes have fallen.  That is why debt is even a problem.  Simply put, debt can’t be paid down unless tax revenues increase.  Paul Ryan and the Tea Party stalwarts have it all wrong.  Cutting back on government spending directly translates to fewer jobs and less tax revenues, as the current shutdown illustrates.

How to right the imbalance in order to boost growth?  Raise the minimum age for starters, as I’ve said in past columns, and raise some of the tax rates. Or, close those tax loopholes that have the wealthy such as Mitt Romney and Warren Buffet with lower tax rates than their employees. Our policymakers and politicians have enough choices, if they choose to act.

But until such happens, we have only the newly nominated Janet Yellen to rely on to keep interest rates low enough to create a sustainable recovery.

Harlan Green © 2013

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

It’s Not About Obamacare!

Financial FAQs

We know the federal government’s shutdown isn’t really about Obamacare. We know this because Tea Party Republicans have been trying to shut down government since the 2010 election, as MSNBC’s Rachel Maddow and others have pointed out. The uncertainties around such a major new social program as Obamacare has become the issue they are using to shut it down.

It’s even in their campaign promises. "We're very excited," Rep. Michele Bachmann (R-Minnesota), one of their leaders, told the Washington Post after the shutdown. "It's exactly what we wanted, and we got it."

"President Obama can't wait to get Americans addicted to the crack cocaine of dependency on more government health care," she said. "All they want to do is buy love from people by giving them massive government subsidies."

Who are the Tea Partiers? The New York Times stated in a 2010 poll that the 18 percent of Americans who identify themselves as Tea Party supporters tend to be Republican, white, male, married and older than 45.

So why shut down all of the federal government then? Many of its constituents live in those Red States with lower incomes that depend so much on government programs like social security, Medicare, and now the Affordable Care Act for insurance coverage. In fact, the 26 states who have rejected the Medicaid expansion for poorest Americans have about half of the population, but 60 percent of the uninsured, says the New York Times. These are the so-called ‘have-not’, mostly Republican-led states in the Midwest and south.

Wikipedia states the Tea Party is not a political party, but a movement named after the Boston Tea Party. “It is an American decentralized political movement that is primarily known for advocating a reduction in the U.S. national debt and federal budget deficit by reducing U.S. government spending and taxes.”

This is the Adam Smith philosophy from his The Wealth of Nations, written in 1776, of all years. And that has been the credo of conservatives since then. The problem is that most of the national debt and budget deficit was caused by Republican administrations who espoused Adam Smith's philosophy of lower taxes without cutting government spending.

The resultant record income inequality that helped to cause the Great Recession has left the rich and powerful free to accumulate as much wealth as they can, but not pay for the services that enabled them to do so, as was so clearly said by Senator Elizabeth Warren in a famous campaign talk.

"You built a factory out there? Good for you," she says. "But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

"…you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

So it is really about a much earlier economic system I’ve called medieval economics in past columns, which had a very different social contract. It was the philosophy that protected the privileged who were thought to be divinely protected in Adam Smith’s day. The less privileged were to be protected by an “invisible hand” of enlightened self-interest. That is, it should be in the interest of the powerful to take good care of their constituents. But that hasn't happened with the Tea Partiers, at least, who don't want to finance programs that aid the under privileged.

This is also the core Tea Party philosophy that believes the U.S.Constitution protects those privileges. Indeed, during its formation, this country was governed by the privileged who wrote the Constitution—those albeit enlightened white males who owned land. And that is the medieval system the Tea Party wants to restore, whether they realize it or not.

Harlan Green © 2013

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How To Lower That Household Debt?

Financial FAQs

Here is the underlying reason our economy isn’t growing faster, hence creating more jobs. Household debt hasn’t even declined to early 2000 levels, mainly because household incomes haven’t risen above 2000 levels, after inflation is factored in.

Mortgage debt in particular still totals some $8 trillion, for example, whereas it was some $5 trillion in 2003 before housing prices really took off. Then how can households adequately service that debt, and increase their overall spending? They can’t, and so there is very little increase in the demand for goods and services, hence little increase in growth and jobs.

Graph: WSJ Marketwatch/Federal Reserve NY

Household debt is declining, but ever so slowly. In Q2 2013 total household indebtedness fell to $11.15 trillion; 0.7 percent lower than the previous quarter and 12 percent below the peak of $12.68 trillion in Q3 2008, said the New York Federal Reserve in its latest Household Debt and Credit Report.  Mortgages, the largest component of household debt, fell $91 billion from the first quarter.

“Although overall debt declined in the second quarter, households did increase non-housing debt, led by rising auto loan balances,” said Andrew Haughwout, vice president and research economist at the New York Fed.  “Furthermore, households improved their overall delinquency rates for the seventh straight quarter, an encouraging sign going forward.”

This graph from Ezra Klein’s WaPo blog illustrates how much household incomes have fallen, as well. Back in 2007, for instance, median household income was $55,438. That’s declined to $51,404 in February 2013. Those numbers are pretax and adjusted for inflation and seasonal factors. The red line is median household income and blue line the unemployment rate, which is still 7.4 percent.

Graph: Ezra Klein

We can also understand why lowering the budget deficit has been such a problem. It’s not only because government unemployment benefits increase during recessions and their aftermath, but government tax revenues decline precipitously. Even there the effects of reduced household income is obvious. Private sector businesses don’t see increasing demand, so it’s hoarding some $2 trillion plus in cash from record profits, but isn’t hiring many new workers. Meanwhile, banks hold $1 trillion plus in excess reserves, rather than increasing lending.

That leaves only one way to increase household incomes; by borrowing from those excess funds held by the private sector to create more public sector jobs, such as in infrastructure repair, better educational programs, and research and development of new products. The consequent increase in tax revenues then pays down that debt, as it did in the 1950s to 1070s after the record 120 percent World War II federal deficit. So we can see that until more jobs are created, household incomes can’t growth; or households even begin to pay down their debts to pre-recession levels.

Harlan Green © 2013

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

Deflation and Our Plunging Deficit

Popular Economics Weekly

The federal budget deficit is shrinking rapidly, says Goldman Sachs Chief Economist Jan Hatzius. And that is not such a good thing at the moment, since the private sector isn’t spending enough. It means this very weak recovery will continue, with deflationary tendencies still in the air.  And we do not want even lower inflation right now, as it depresses both incomes and economic growth.

President Obama’s new budget proposal doesn’t really help, since he wants to cut entitlement spending, which takes money out of circulation when more money in circulation is needed.

Deflationary tendencies are showing up in the Producer Price Index for wholesale goods, which has been close to zero since the end of the Great Recession. The annual rate in March just dropped to 1.1 percent from 1.8 percent in February (seasonally adjusted). The core rate held steady at 1.7 percent.

 

Graph: Econoday

The federal budget deficit is a subject Hatzius has been following for some time....”[I]n the 12 months through March 2013, the deficit totaled $911 billion, or 5.7 percent of GDP,” he said in a research note. “In the first three months of calendar 2013--that is, since the increase in payroll and income tax rates took effect on January 1--we estimate that the deficit has averaged just 4.5 percent of GDP on a seasonally adjusted basis. This is less than half the peak annual deficit of 10.1 percent of GDP in fiscal 2009.”

So it’s not hard to understand what caused the March plunge in retail sales of 0.4 percent, versus the 1 percent increase in February. Some of it was due to bad weather and the payroll tax increases, but most was due to shrinking private and government spending.

Personal incomes are fluctuating wildly due to the payroll tax increases, so my take is, it ain’t the weather as some pundits are saying! Sure personal income rebounded 1.1 percent in February after a drop of 3.7 percent in January and a 2.6 percent jump in December, as we said last week. But it’s not enough to boost demand. Consumer spending just isn’t holding up, the main reason for government to keep spending.

Graph: Econoday

Personal spending jumped 0.7 percent after rising 0.4 percent in January. Strength was in nondurable goods, but that was mostly higher gasoline prices. Consumer outlays are up 3.3 percent annually, but if prices aren’t rising then that’s not enough to boost overall growth.

Government spending has already decreased 4 percent in the past 2 years, the largest amount since demobilization of the Korean War. For then important spending priorities can be met—such as infrastructure, research and development, as well as hiring back some of the 600,000 teachers let go because of state budget shortfalls.

What about the mounting debt? Rutgers Economic Historian James Livingston has an answer. Bring corporate taxes back to the levels during the Eisenhower era, when they were taxed at a 52 percent rate and made up some one-third of tax revenues, instead of the much less progressive payroll tax that burdens most of us. Corporate taxes now make up just 9 percent of revenues, according to Professor Livingston.

So where there’s the will there’s a way, as the saying goes. We know how to climb out of the debt trap. Lessen the burden of taxing personal incomes and increase it for corporations that have record-breaking profits and are hoarding some $4.25 trillion in cash, according to the St. Louis Federal Reserve. It is a case of some good history repeating itself, for a change.

Harlan Green © 2013

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

What Inflation?

Financial FAQs

We have seen this before during past budget battles. How much spending is necessary to create future economic growth and more jobs, without higher inflation? This is important because the amount of inflation will probably determine how long the Federal Reserve’s current easy credit policy can continue without creating too much future inflation.

So is inflation rising or falling? Is it a danger, or is inflation necessary for growth? This is what the whole deficit-debt debate is really about. How much inflation hurts economic growth by eroding spending power (and the value of debt), vs. how much inflation is needed for companies to raise their prices, hence profits.

Graph: WSJ Marketwatch

The Federal Reserve prefers the Personal Consumption Expenditure inflation index, because it measures the widest basket of goods and services purchased by consumers when the Commerce Department calculates the total amount of their personal expenditures.

And it has been less than 2 percent for more than one year. Why? Because consumers cannot afford to spend more when household incomes have barely kept up with inflation. Wages and salaries have become stagnant, in other words, as household earning power has eroded. And since consumers power 70 percent of economic activity, their spending power is the main determinate of overall prices.

Graph: Econoday

But what about raw material costs, such as for oil? Those costs are also dependent on the demand for the finished products they make, whether it is gasoline or animal feed, or plastics, hence also largely dependant on consumer demand.

The inflation debate is really about Federal Reserve policy for the moment. The Fed has said that as long as inflation remains moderate, then it can keep interest rates at record lows. It in turn increases the demand for loans, since cheap money encourages borrowing, and borrowing encourages both spending and investment.

This has boosted vehicle sales, in particular, and brought back Detroit’s Big Three. Motor vehicle sales have been very strong the last four months, above a 15 million annual unit rate compared to low 14 million rates through much of last year.

Graph: Econoday

So we don’t have to worry much about inflation, or the Fed tightening credit too soon at at the moment. This is why they have focused on the unemployment rate being 6.5 percent or lower before tightening begins. Another correlation of higher inflation has been with full employment, and historical unemployment fell to between 4 to 5 percent before that happened.

In fact, past administrations have tolerated up to 8 percent inflation rates in order to bring back full employment.  Today,  5-6 percent could probably be tolerated without much damage to consumers’ spending power.  And it should be tolerated, if that gets US back to full employment.

Harlan Green © 2013

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