What Should Yellen’s Fed Do?

Popular Economics Weekly

The big question hovering over the markets (both stocks and bonds), is whether the Federal Reserve will finally begin to raise short term interest rates at next week’s FOMC meeting. Markets are uncertain, and only a few economists are saying anything. Why? Because of a tremendous (and artificial) fear of higher inflation, which shouldn’t be fearsome at all.

Nobelists Joseph Stiglitz and Paul Krugman say there is absolutely no reason to begin to raise the rock bottom interest rates yet. There’s still too many out of work—so much so, that wages and salaries are barely rising.

“If the Fed focuses excessively on inflation, it worsens inequality,” says Professor Stiglitz, “which, in turn, worsens overall economic performance. Wages falter during recessions; if the Fed then raises interest rates every time there is a sign of wage growth (a major effect on inflation), workers’ share will be ratcheted down, never recovering what was lost in the downturn.”

And much income has been lost, as Professor Krugman and the EPI have pointed out for years.

Graph: EPI

“Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economy-wide productivity,” say the EPI authors. “In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7 percent, or 0.20 percent annually, over this same period, with essentially all of the growth occurring between 1995 and 2002.”

The question is why the Fed is even discussing the possibility of higher rates with so many still out of work. There has to be some kind of mismatch in this picture, as a record 5.8 million job openings (yellow line in graph) were just reported in Labor Department’s Job Openings and Labor Turnover Survey.

The number of hires and separations edged down to 5.0 million and 4.7 million, respectively. Within separations, the quits rate was 1.9 percent for the fourth month in a row, and the layoffs and discharges rate declined to 1.1 percent. This means that

There were 2.7 million quits in July, little changed from June. Although the number of quits has been increasing overall since the end of the recession, the number has held between 2.7 million and 2.8 million for the past 11 months. Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs.

So what is Chairperson Yellen and the Fed Governors to do? Their goal is to maximize the purchasing power of consumers that power most economic growth. If consumers can’t or won’t spend more, then economic growth is stuck.

Year-on-year wage growth is 2.2 percent, slightly higher, but inflation is falling, which means there are still too many out of work. The only way to increase wage growth is to allow a tighter labor market, which means keeping rates low as long as possible, without causing excessive inflation.

In fact, even 4 percent inflation would be preferable as a way to boost both jobs and economic growth. But will policy makers even allow such a thing? That’s the real (political) problem—the misconceptions about inflation.

Harlan Green © 2015

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

It’s Time For the 30-hour Week

Popular Economics Weekly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2015

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

Where’s the Outrage, Mr. President?

Financial FAQs

Where’s the outrage, Mr. President, when the New York Times just reported that at least 250 Disney World employees have been discharged, with many forced to train their own foreign replacements that have temporary H-IB work visas? Those are visas that are supposed to supply foreign workers where no American workers can be found. Yet Disney discharged those supposedly ‘irreplacable’ American data managers, in order to replace them with foreign workers.

Where’s the outrage when this is not even a “loophole” as characterized by the NYTimes, but flagrant violation of federal guidelines for the H-1B visas? And this during a jobless recovery from the worst depression since the Great Depression?

The Times reported the legal requirements for eligibility of such work visas.  According to federal guidelines, the visas are intended for foreigners with advanced science or computer skills to fill discrete positions when American workers with those skills cannot be found.

Their use, the guidelines say, should not “adversely affect the wages and working conditions” of Americans. Because of legal loopholes, however, in practice, companies do not have to recruit American workers first or guarantee that Americans will not be displaced.

“The program has created a highly lucrative business model of bringing in cheaper H-1B workers to substitute for Americans,” said Ronil Hira, according to the Times article, a professor of public policy at Howard University who studies visa programs and has testified before Congress about H-1B visas.

As if to compound the hurt for American workers, former employees said “many immigrants who arrived were younger technicians with limited data skills who did not speak English fluently and had to be instructed in the basics of the work.”

This is not the first time you didn’t speak out for American workers, Mr. President. You were also conspicuously silent during the reelection of Wisconsin Governor Scott Walker, when he turned Wisconsin into a right to work state and banned collective bargaining of public workers, which has reduced union membership drastically.

This is even though Wisconsin was one of the first states to establish unions and the right to collective bargain, which should be the right of every worker employee.

So when will you finally begin to lead the support for working Americans whose incomes haven’t really risen since the 1970s (when inflation factored in), and wealth virtually destroyed from the busted housing bubble?

“Many American companies use H-1B visas to bring in small numbers of foreigners for openings demanding specialized skills, according to official reports,” said the Times. “But for years, most top recipients of the visas have been outsourcing or consulting firms based in India, or their American subsidiaries, which import workers for large contracts to take over entire in-house technology units — and to cut costs. The immigrants are employees of the outsourcing companies.”

You should be lauded for Obamacare, and the many other programs you support for the poorest Americans, but what about skilled American workers that are still losing their jobs through no fault of their own?

And now you want U.S. workers to trust your word that the Trans-Pacific Partnership trade agreement will be good for American workers, not just American corporations?

Harlan Green © 2015

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

Housing Construction Surge—Sign of Better Times?

The Mortgage Corner

U.S. housing starts jumped to their highest level in nearly 7-1/2 years in April and permits soared, hopeful signs for an economy that is struggling to regain strong momentum after a dismal first quarter. And that is exciting economists that say it could mean better economic growth ahead.

The strength in housing stands out from the weakness in consumption, business spending and manufacturing, which have prompted economists to lower their second-quarter growth estimates and raised doubts that the Federal Reserve will raise interest rates before the end of the year.

Of course lower interest rates were the main factor, as housing affordability has been increasing this year, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

In all, 66.5 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,800, said the report. “This is up from the 62.8 percent of homes sold that were affordable to median-income earners in the fourth quarter.

Groundbreaking for new construction surged 20.2 percent to a seasonally adjusted annual pace of 1.14 million units, the highest since November 2007, the Commerce Department said on Tuesday. The percent increase was the biggest since February 1991. March's starts were revised up to a 944,000 unit rate instead of the previously reported 926,000 unit rate.

Graph: Calculated Risk

And privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,143,000. This is 10.1 percent above the revised March rate of 1,038,000 and is 6.4 percent above the April 2014 estimate.

"The rebound in permits points to solid starts and construction in the months ahead. After the weather-related weakness in starts during Q1, we think the April data are consistent with housing activity returning to normal," wrote Barclays economists.

For the second straight quarter, Syracuse, N.Y. remained the nation’s most affordable major housing market, as 95.6 percent of all new and existing homes sold in the first quarter of 2015 were affordable to families earning the area’s median income of $68,500. Whereas San Francisco-San Mateo-Redwood City, Calif. was the nation’s least affordable major housing market. Just 14.1 percent of homes sold in the first quarter were affordable to families earning the area’s median income of $103,400.

So where are the signs of higher economic growth ahead? The one statistic showing strength, with the latest downturns in consumer confidence, industrial production, and retail sales is Weekly Initial Unemployment claims. These state reports aren’t guesses or projections, but actual reports from state unemployment departments.

Graph: Econoday

Jobless claims are way down and are easily sending out the strongest positive signals of any indicator, employment or otherwise, claims Econoday. Claims data go all the way back to 1948 and have rarely been this low. Initial claims were last this low back in March and April 2000 when they averaged 272,500.

The current 4-week average out to May 9 is at 271,750, this at a time when the civilian labor force, at 157.1 million, is 10 percent larger than it was back in 2000. Continuing claims tell the same story, at a 15-year low of 2.229 million. The unemployment rate for insured workers is very low, at only 1.7 percent, and overall unemployment rate for nonfarm payroll workers has fallen to 5.4 percent.

So consumers have to be saving more of their increased earnings, at present. And since stocks and bond returns seem to have topped out from their multi-year rally with little room for more growth, housing has to be the one area that can play catchup.

One sign of this is evidenced by investors making more all cash purchases, of late.

And Canaccord Genuity equity strategist Tony Dwyer made a similar point Tuesday in a note to clients, writing that the "acceleration in the number of millennials turning 30 over the next six years,” in a recent CNBC interview. “... could ramp household formations," particularly given the "positive employment outlook" and "low household debt service ratio."

What is the catalyst? Housing formation is recovering, which is largely due to Millennials moving out of their parents homes, or higher education venues. Based on unusually low household formation numbers, "there's a ton of people living in basements," Fundstrat Global Advisors' Tom Lee said in a recent interview with CNBC's "Trading Nation." "Two quarters of pretty decent household formation isn't getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million."

Graph: CNBC

Household formation had dipped as low as 360,000 per annum in recent years, due to the housing bust. Is this another sign that the housing market is finally into a sustainable growth pattern? This selling season should tell.

Harlan Green © 2015

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

Higher Minimum Wage Strengthens Labor Unions

Popular Economics Weekly

Unions may have been weakened by Republican efforts to abolish labor’s collective bargaining power, (in order to weaken their support of Democratic Party policies), but that may be changing as unions have found a new cause—working to raise minimum wages.

Los Angeles is the latest city to raise the minimum wage—to $15/hour in 5 years. Los Angeles is the fourth city, and by far the largest, to enact a $15 minimum in the past year, reports the New York Times. The others are Seattle, San Francisco and Emeryville, Calif. (near San Francisco). A $15 minimum has been proposed in New York City, Washington, D.C., and Kansas City, Mo.

And labor unions in the service industries are behind the push. This is exactly what unions are good at—encouraging higher wages in non-union businesses to match union benefits, such as at MacDonalds, Walmart, and even Facebook. The vote by the Los Angeles City Council was 14-1 in favor. This means it is now on the national agenda.

The $7.25/hour national minimum wage was last set in July 2009. And, according to the University of California Davis Center for Poverty Research, in 2013:

• Five Southern states (Louisiana, Mississippi, Alabama, Tennessee and South Carolina) have no minimum wage laws.
• Four states (Wyoming, Minnesota, Arkansas and Georgia) have state minimum wage rates that are lower than the federal rate, so the federal minimum wage applies.
• Twenty states have laws that set the minimum wage at the federal rate.
• Twenty-one states and the District of Columbia set their rates higher than the federal rate. Currently the state of Washington has the highest minimum wage rate at $9.32 per hour.

Unions had been stymied by outright banning of collective bargaining, or even the requirement that members don’t have to pay dues when joining a unionized shop in many of the right to work states—25 at last count, all controlled by Republican legislatures. It is a I win-You lose bargain that Republican legislatures have made with workers in their own states. The outright suppression of workers’ wages only weakens economic growth, and indeed the reddest states with the strongest anti-union laws are also the poorest.

Several other cities, including San Francisco, Chicago, Seattle and Oakland, Calif., have already approved increases, as we said, and dozens more are considering doing the same. In 2014, a number of Republican-leaning states like Alaska and South Dakota also raised their state-level minimum wages by ballot initiative.

The 67 percent increase from the current California state minimum will be phased in over five years, first to $10.50 in July 2016, then to $12 in 2017, $13.25 in 2018 and $14.25 in 2019. Los Angeles businesses with fewer than 25 employees will have an extra year to carry out the plan. Starting in 2022, annual increases will be based on the Consumer Price Index average of the last 20 years. The LA City Council’s vote will instruct the city attorney to draft the language of the law, which will then come back to the Council for final approval.

Graph: EPI.org

This can only strengthen collective bargaining efforts in other states, a plus for union organizing efforts. Household incomes for most Americans have been declining since 1979. The above columns show real annual income growth from 1947-79 (blue) , and from 1979 to 2015(red) . It highlights the tremendous income inequality for the poorest Americans since then, partly due to the current national minimum wage of $7.25/hour.

“The effects here will be the biggest by far,” said Michael Reich, an economist at the University of California, Berkeley, who was commissioned by LA city leaders to conduct several studies on the potential effects of a minimum-wage increase. “The proposal will bring wages up in a way we haven’t seen since the 1960s. There’s a sense spreading that this is the new norm, especially in areas that have high costs of housing.”

The groups pressing for higher minimum wages said that the Los Angeles vote could set off a wave of increases across Southern California, and that higher pay scales would improve the way of life for the region’s vast low-wage work force.  Actually, it is already happening nationally, and popular even in the right to work states that have suppressed workers’ right for so long.

The push for a $15-an-hour minimum wage is not confined to populous coastal states, said the New York Times. In Kansas City, Mo., activists recently collected enough signatures to put forward an August ballot initiative on whether to raise the minimum wage to $15 by 2020. The City Council is deliberating this week over how to respond and could pass its own measure in advance of the initiative.

Of course, there is an additional bonus to state budgets for raising the minimum wage. It takes many of those income earners at the bottom off state assistance programs like Medical, food stamps, and even welfare rolls. Why shouldn’t everyone support such a grand bargain?

Harlan Green © 2015

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

Still No Signs of Inflation, Or Higher Growth

Financial FAQs

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

Graph: Econoday

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

Graph: Business Insider

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

Graph: Trading Economics

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

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

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

Harlan Green © 2015

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

Germany’s Failed Austerity Policies

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.

Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

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

Expanding Social Security – Decreasing Inequality

Popular Economics Weekly

What, you say? We should expand, not shrink, social security benefits in the face of horrendous budget deficits of late? Elizabeth Warren put into the Senate Budget proposal for 2015 an amendment to protect social security, and even increase its benefits, when conservative pundits and pols have been chanting for years that it would drive the federal budget into bankruptcy. (Her amendment was defeated by the Republican majority, of course.)

And now potential Republican candidates such as Chris Christie are finding other ways to downsize social security, when social security isn’t the problem, and when record income inequality is getting worse during the recovery, not better.

No, what has driven the budget deficits have been concerted efforts by Republicans since R Reagan to cut maximum tax rates from 70 percent to the current 35 percent, while cutting government programs that would boost growth and productivity, such as public infrastructure spending, education, and even Research and Development.

All have proven records of increasing productivity—from our national freeway system, to DARPA’s funding of the Internet. Republicans have even gone so far as to cause a downgrade of sovereign treasury debt from its historic AAA rating by shutting down the government briefly in 2012.

Warren's recent effort was the product of a long progressive campaign that preceded her election. Pundits, such as the Huffington Post and the New York Times’ Paul Krugman have been pushing for the expansion of retirement benefits for years. In the past decade, left-of-center policy wonks became increasingly worried about retirement security for Americans. Corporate pension plans—many of which offered decent and secure retirement payments—were going the way of the dinosaurs. In 1980, about 40 percent of private-sector workers received such pension payouts; by 2006, that number had dropped to 15 percent.

In general, many retirement plans had shifted to private 401(k) accounts, and these often were woefully inadequate for supporting retirees in a climate of stagnating wages and scant savings. And the recent Wall Street collapse ravaged pensions and personal investments, illustrating that 401(k)s were a shaky foundation for retirement. Progressives and retirement policy wonks began looking for another option. The obvious answer was expanding Social Security.

In March 2012, the AFL-CIO called for "changing the terms of debate by focusing on the crisis of retirement security." Over the next year and a half, progressives policy shops and activists answered the call to arms. In April 2013, the New America Foundation, a progressive think tank, published a plan to expand benefits. "Our main purpose in doing that was to move the goal posts," says Michael Lind, a cofounder of the New America Foundation. Around the same time, two Democratic senators, Tom Harkin of Iowa and Mark Begich of Alaska, introduced bills to expand benefits.

Yet in November 2013, the Washington Post editorial board slammed the expansion push as "liberalism gone awry." It noted that "even the rich have finite resources; government can only go to that well so many times…Unchecked entitlement spending for the elderly crowds out spending" on young Americans and other priorities,” said the Post.

This is utter supidity. The Washington Post is now defending the rich? What “finite” resources we have created have all gone to the wealthiest since the end of the Great Recession. They garnered 90 percent of the income to be precise, while the 90 percent’s income bracket actually declined, mainly because wages and salaries have declined while the financial markets rallied for investors.

Graph: Seeking Alpha

The result has been anemic growth for the past 2 decades, far below historic growth rates. “In the last two decades, like in the case of many other developed nations, its growth rates have been decreasing,” said Trading Economics. “If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.”

That’s what happens when all income gains go to the top income brackets, and actual laws prevent wage and salary earners from even bargaining for more, such as Wisconsin’s banning of collective bargaining for its public employees that include teachers and health care workers.

There is good reason to expand social security benefits. There just has to be the political will to pay for it, and given the gains of those who can most afford to, we should be worrying more about growing the economy than a budget deficit that is the result of decades of anti-growth policies.

Harlan Green © 2015

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

A Lousy Jobs Report?

Popular Economics Weekly

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

Graph: WSJ Marketwatch

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

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

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

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

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

Graph: Trading Economics

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

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

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

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

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

Harlan Green © 2015

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A Ted Cruz Presidency?

Financial FAQs

Texas Senator Ted Cruz is about to announce his candidacy for the 2016 presidential campaign. What would his presidency look like, if he were elected? “Mr. Cruz has also begun championing a message of economic populism,” said the NYTimes on his announcement of candidacy, “denouncing income inequality and borrowing the “two Americas” metaphor used most famously by former Senator John Edwards in two unsuccessful campaigns for the Democratic presidential nomination.”

Let’s start with his silliest proposal to abolish the IRS. It tells us how he really views income inequality. There would then be no means to collect the taxes that pay his Senator salary. So he would have to work for nothing. Is that how he will tackle the scourge of income inequality afflicting those Americans that work for little or nothing?

We also know what his presidency might look like from another far right Tea Party favorite and potential candidate’s agenda; Wisconsin Governor Scott Walker. Walker’s first priority has been to downgrade union organizing and education funding in Wisconsin, in order to deprive Democrats of union support, as well as dumb down his own electorate. The result has been the lowest job creation and growth rates of all neighboring states.

Senator Cruz’s programs would have a similar result—would in fact increase income inequality—as he has opposed every economic program that would better ordinary Americans’ lives, including raising the minimum wage. “If you raise the minimum wage, the inevitable effect will be, number one, young people will lose their jobs or not be able to get their first jobs,” he said in 2013 in reaction to President Obama’s inauguration speech that included a call to raise the national minimum wage to $9 per hour.

But history has shown just the opposite effect. Where ever the minimum wage has been raised—such as in Seattle, Washington where it is $15/hr., or the state of Minnesota, where it will be $9.50/hour for large employers in 2016, employment is thriving. Seattle’s unemployment rate is now under 5 percent, and Minnesota’s unemployment rate has dropped to 3.6 percent, the lowest in 13 years.

He also opposes any climate change legislation that would reduce our dependence on carbon-creating fossil fuels, including his support of the Keystone XL Pipeline, and more offshore oil drilling. Yet even the Pentagon has documented the extreme economic costs, including future wars, of ignoring the effects of Global Warming.

And how about his call for greater liberty? He also opposes all forms of amnesty for Illegals, or ‘undocumented’ immigrants, though he’s the son of a Cuban-born immigrant. This would greatly restrict the freedom of those immigrants to become American citizens, of course.

Cruz has particularly stressed his opposition to President Obama’s executive actions on immigration, said the PBS Newshour. The Texas senator filed a bill blocking the president’s actions, which allow more undocumented residents to gain legal status, including the administration’s waivers for young people brought to the U.S. as children. Cruz argues that those actions encouraged increased illegal immigration.

And how about his call to dissolve the Affordable Care Act? Killing Obamacare would increase the poverty of the poorest and sickest among US that cannot afford, or would be ineligible for private health care insurance.

No, Senator Cruz’s presidency would neither create more liberty, nor better the lives of the poorest that suffer most from income inequality. Those liberties have been under steady assault by Tea Party members, in particular, with their no compromise positions on even the most basic poverty alleviating programs.

So his words don’t match his actions. Isn’t that called pandering, when a politician will say anything to win votes?

Harlan Green © 2015

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Celebrating Our Great Society

Popular Economics Weekly

We are in the midst of celebrating the 50^th anniversary of President Johnson’s Great Society, enacted for the most part from 1964-66, perhaps the greatest legislative achievement of any president since FDR and the New Deal.

We know how FDR’s New Deal improved the lives of millions, literally preventing tens of thousands from starving to death during the Great Depression, and giving millions more a useful and productive public service job when there were none to be had in the private sector.

But the results of the Great Society are perhaps more mixed. That’s only if we wonder what might have happened if the U.S. economy was an ideological utopia, which didn’t go through its cycles of boom and bust, or the Vietnam War, or an Arab Oil Embargo, or 5 recession since 1980—the housing bubble and Great Recession being the latest examples.

Many of the programs were stymied by those events that took money away from social programs; in particular the Office of Economic Opportunity that funded many public programs similar to the Depression’s WPA. Conservatives’ ire is particularly directed at the spending for anti-poverty programs that were supposed to eliminate poverty, but were in fact meant to give the poorest a ‘leg up’ in their race to escape poverty.

Spending to help the poor doubled from 1965-68, and within 10 years the percentage of Americans living below the poverty line declined to 12 percent from 20 percent. Those were also the years of highest economic growth of the middle class. The rate has fluctuated greatly in the past 50 years. According to the census, 15.9 percent of Americans lived in poverty in 2012, which is just a couple of points lower than where the Census estimates it stood in 1965.

We really don’t know, for instance, how many jobs were created by the Office of Economic Opportunity. Those were also boom years when President Johnson dropped the top marginal tax rate from 91 to 71 percent. More than 4 years of 6 and 7 percent Gross National Product growth followed, employing anyone that wanted a job. The U.S. Gross National Product (Since 1991 the U.S. has used Gross Domestic Product as a more accurate measure of US output.) rose 10 percent in the first year of the tax cut, and economic growth averaged a rate of 4.5 percent from 1961 to 1968, says Wikipedia.

Johnson's tax cut measure triggered what one historian described as "the greatest prosperity of the postwar years," according to the Washington Post. GNP increased by 7, 8 and 9 percent in 1964 to 1966, respectively. The unemployment rate fell below 5 percent. But the OEO did much more, as did most of the Great Society programs.

Do we really have to be reminded of the Clear Air and Water Acts that have kept our water and air cleaner than they would have been otherwise?  Or the Civil and Voting Rights Acts that banned discrimination and abolished the blatant ban on African Americans voting in the South?  Or the enactment of Medicare and Medicaid that has reduced the poverty rate of seniors from 1 in 7 living below the poverty line in 1965 to 1 out of 3 in 2013? 

We also now have consumer protection laws such as the Cigarette Labeling and Advertising Act requiring labeling of dangerous chemicals in cigarettes, and the National Highway Safety Administration setting safety standards for our highways.  Almost all of the Great Society programs have saved or improved the lives of millions of Americans.

That is something that can only be measured in non-economic ways. Head Start, for instance, has served more than 31 million children from birth to age 5 since 1965. In 2012-13, 1.13 million children and pregnant women were served by Head Start, according to the program. The vast majority – 82 percent – were children ages 3 and 4.

And how do we measure the value of its cultural contributions, such as PBS, the Public Broadcasting System that has 987 stations nationwide – most locally owned and operated – that broadcast NPR programming?

The Great Society also led to the fruition of the John F. Kennedy Center for the Performing Arts in Washington and created the National Endowment for the Humanities, which is one of the largest arts and culture funders in the United States.

These institutions and programs of the Great Society have in fact given a national voice to our hopes and dreams, because a nation that doesn’t care for its citizens’ hopes and dreams is a nation that has no future.

Harlan Green © 2015

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Labor Force Participation Improving

Popular Economics Weekly

One lament by Fed Chairperson Janet Yellen and others has been the low labor participation rate of the prime-age workers—those 25 to 54 year-olds that have dropped out of the labor force, or are working part time.  But that may be changing, as we get closer to full employment.

The Atlanta Fed has just published an optimistic study that says they might be coming back to work. Atlanta Fed President Dennis Lockhart commented on it in a recent speech:

“Over the last few years, there has been a worrisome outflow of prime-age workers—especially men—from the labor force. I believe some of these people will be enticed back into formal work arrangements if the economy improves further.”

Graph: Atlanta Fed

The decline in the "shadow labor force"—the share of the prime-age population who say they want a job but haven’t been looking (i.e., are not technically counted as unemployed)—demonstrates the cyclical nature of the labor market, says Lockhart. For the last year and half, the share of these individuals in the labor force had been generally declining (see the chart).

But now the ability of the prime-age shadow labor force to find work is improving at the same time that the Labor Force Participation rate of the prime-age population is stabilizing. Taken together, this trend is consistent with improving job market opportunities and further absorption of the nation's slack labor resources, says the Atlanta Fed.

What might be enticing them back into the labor force? Rising wages and salaries, of course. About 70 percent of U.S. companies indicate that wages are starting to outpace inflation, according to a recent Duke University study of 500 CFOs. Wage growth should be at least 3 percent in tech, services and consulting, manufacturing and health care.

"The U.S. is finally entering a new phase in the economic recovery," said John Graham, a finance professor at Duke's Fuqua School of Business and director of the survey. "The first few years of recovery were 'jobless' and, even as job growth picked up over the past year, wages remained stagnant. Finally, we are starting to see wage growth for employees that outstrips inflation. Given that CFOs expect continued strong employment growth, it is surprising that wage pressures are not even greater."

But wage growth will remain subdued at about one-third of companies that indicated employee pay will not outpace inflation in the survey. In particular, employees in retail/wholesale, transportation/energy and communications/media should expect pay hikes of less than 2 percent. The primary reasons are weak company financial performance, intense product market competition that keeps a lid on wages (because of need to keep production costs lean?), and minimal labor market pressure in these industries.

And we said last week that analyzing about three decades of census data—from 1980 to 2012—the  Federal Reserve’s 2013 Survey of Consumer Finances found that on average, young workers are now 30 years old when they first earn a median-wage income of about $42,000, a marker of financial independence, up from 26 years old in 1980.

Graph: fivethirtyeight.com

But with increasing employment and wage pressures, the financial well-being of younger workers should improve. It isn’t just the millennial generation of 18 to 36 year-olds that has suffered from the Great Recession, in other words.

Harlan Green © 2015

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Good Jobs Report for Many

Financial FAQs

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

Graph: Marketwatch

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

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

Graph: Calculated Risk

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

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

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

Graph: Truthout

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

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

Harlan Green © 2015

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The Political Consequences of Inequality

Financial FAQs

Paul Krugman recently highlighted the dangers of Europe’s austerity policies and the growing inequality of the developed world, the worst since the Great Depression. The result then, as now, has been the growing strength of right wing parties in Europe, such as Marine Le Pen’s National Front in France, and Hungary’s Jobbik Party; all rascist, anti-immigration parties calling for some form of independence from the European Union.

“Look at France, where Marine Le Pen, the leader of the anti-immigrant National Front, outpolls mainstream candidates of both right and left. Look at Italy, where about half of voters support radical parties like the Northern League and the Five-Star Movement. Look at Britain, where both anti-immigrant politicians and Scottish separatists are threatening the political order.”

And now we have upcoming Greek elections that threaten to derail the euro as the EU’s currency, or if the favored Syriza party wins, Greece will demand at the very least to renegotiate its austerity agreement with the EU.

“And the devastation in Greece is awesome to behold,” says Krugman. “Some press reports I’ve seen seem to suggest that the country has been a malingerer, balking at the harsh measures its situation demands. In reality, it has made huge adjustments — slashing public employment and compensation, cutting back social programs, raising taxes. If you want a sense of the scale of austerity, it would be as if the United States had introduced spending cuts and tax increases amounting to more than $1 trillion a year. Meanwhile, wages in the private sector have plunged. Yet a quarter of the Greek labor force, and half its young, remain unemployed.”

These austerity policies are keeping Eurozone unemployment still in the double digits, with France’s rate still above 10 percent, (whereas Germany’s is 5 percent), and that is unacceptable to growing nationalist movements in particular that want to break away from the European Union.

The results are a growing income inequality that the World Economic Forum’s Global Agenda Councils name the top threat to global stability in 2015.

“While wealth is rapidly increasing in developing nations, and advanced economies struggle with stagnation, there is great concern about rising economic inequality in all parts of the world, particularly in Asia, according to the Global Agenda survey. The Outlook 2015 report suggests renewed focus on improved education, tax policy and job creation as ways to alleviate the problem.”

It turns out that much of the nationalists’ support is coming from Vladimir Putin’s push to destabilize Europe for its opposition to his annexation of Crimea and parts of Southern Ukraine. But don’t blame it on Putin, who is just taking advantage of European policymakers protecting their own economies, instead of the overall EU economy. Rather than spend more money to stimulate growth, as the U.S. Federal Reserve has done with its QE purchases, they want to balance their budgets and thus favor the creditors, when it is Europe’s debtor nations that need relief, if they want to break out what could become a deflationary spiral.

It’s the old story that Thomas Piketty has retold in his Capital in the Twenty-First Century—the tendency of profits from capital in western, free market economies to rise to the top of the wealth ladder when government policy making is weakened and financial regulations ignored, as happened during the Great Recession.

Europe is now suffering the same fate, with conservative governments in control and the debtor nations such as Greece still being punished, while Germany flourishes as it protects its own interests rather than that of the EU as a whole.

Harlan Green © 2014

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The Economic Consequences of Too Much Inequality

Financial FAQs

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

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

Graph: The Spirit Level

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

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

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

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

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

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

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

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

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

Harlan Green © 2014

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Republicans Just Don’t Get It--II

Financial FAQs

Why don't Republicans get it? The 11 million illegal immigrants who have lived and raised families in the U.S. is the latest millstone around their necks that derails any hope of a Republican presidency. Last year a bi-partisan Senate passed a bill on a 68 to 32 vote that would eventually allow them citizenship, but John Boehner refused to bring it up to a House vote.

And so President Obama just issued a directive that will defer 5 million illegals from any legal action, which polls show 85 percent of Hispanics support. And we are a country founded by immigrants with every ethnic and racial group protected by our constitution.

Republicans haven’t really gotten it since the 1970s, when they supported policies to maximize profits at the expense of jobs and household incomes by weakening government oversight and regulations. It is a well-documented story of poor job creation and middle class income reductions that enabled the massive transfer of wealth (and power) to business owners and corporate CEOs—the investor class—and away from their employees that has continued today.

Forbes.com

Yet a country is only as strong and able to care for and protect its citizens as its government. That’s been the history lesson that today’s Republican leaders have forgotten—the lessons that earlier Republicans knew. It was Republican Presidents, such as Eisenhower that built our freeway system (when the maximum income tax rate was 92 percent), and President Nixon signed the Clean Air Act with a unanimous Senate.

The 1970s soon changed such cooperation. Republicans and their business interests began creating policies that made government more business friendly and less middle class friendly. Maybe it was the Arab Oil Embargo and the realization of how vulnerable we were to a disruption of energy supplies. It was also the era of so-called stagflation that lasted until 1980 with its sky high inflation and devalued assets.

We saw the growth business friendly lobbies, such as the Business Roundtable that began to spend heavily to influence elections and ease trade restrictions. That’s when President Reagan sounded the death knoll for unions (and collective bargaining) with the firing of Air Traffic Controllers in the PATCO strike. Corporations suddenly found it easier to terminate their employees and export those jobs and manufacturing plants overseas.

Household incomes began to shrink forever after, as President Reagan pushed through cuts in the maximum income tax rates for the wealthiest that had enabled Presidents Eisenhower to build our public infrastructure (when the maximum income tax rate was 92 percent), and Johnson to finance the Great Society that lowered poverty rates.

It was the beginning of President Reagan’s Trickle Down economic policies that his Budget Director David Stockman (in The Triumph of Politics) soon realized created horrendous budget deficits, with very little trickling down to the middle classes and below.

It made the conservatives credo of self-sufficiency a lie, as Republicans now blocked any attempt to raise the minimum wage. For how could families be self-sufficient and live on a minimum wage, unless they held two and three jobs, thus harming their families, and children of any chance for a good education?

Republicans have continued their all-out assault on government with their attempts to defund Obamacare that how insures tens of millions for the first time at lower costs, while continuing their efforts to privatize social security and Medicare.

Even public safety has been compromised with their refusal to help states rebalance their budgets that resulted in the loss of so many public employees during the Great Recession, such as police and teachers.

There is in fact no area that Republicans haven’t weakened the public commonweal. Every one of the Democrats’ infrastructure and job creation bills since 2011 have been blocked by either Senate or House Republicans in the name of paying down the public debt. Yet the productivity improvements and increased tax revenues generated by those jobs and an upgraded infrastructure are the only way to pay down that debt. And Republicans backed by their conservative lobbyists will no doubt continue to do so, until our road and bridges are no longer drivable.

It is a sad state of affairs when Republicans are no longer the wealth creators, but have become the party of no. Instead of finding ways to increase our productive capacity and boost household incomes, which are the real wealth creators, they continue to benefit the few at the top of the food chain, most of whom are only interested in enriching themselves.

PS—In an update of the 2012 jobs chart shown above, more net jobs have been created under Obama — 5,142,000 as of the August jobs report — than under George H.W. Bush — 2,637,000 — and George W. Bush — 1,282,000 — combined, according to the Federal Reserve Bank of St. Louis.

Harlan Green © 2014

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Yellen’s Fed is Full Speed Ahead

Financial FAQs

Is it possible? The Federal Reserve is now more interested in creating wealth for the many, rather than fighting inflation for the wealthiest worrying about their bond prices, as it has in the past? This may seem counterintuitive, since inflation hurts everyone. But when there’s so little inflation at present, it makes more sense to focus on building the assets of those who have the least.

Graph: Econoday

The condition of lower-income families in America is “sobering” even as the economy recovers, Federal Reserve Chairwoman Janet Yellen said in a speech she prepared for delivery at a conference sponsored by the Corporation for Enterprise Development.

“We have come far from the worst moments of the crisis and the economy continues to improve, but the effects of the recession are still being felt by many families, particularly those that had very little in savings and other assets beforehand,“ said Yellen.

This followed one day after the release of FOMC minutes from the last meeting, which reiterated their decision to maintain low interest rates “for the forseeable future.”

There is another reason for maintaining low interest rates. Housing sales need to pick up. There were 670 thousand total housing starts during the first eight months of 2014 (not seasonally adjusted), up 8.6 percent from the 617 thousand during the same period of 2013 (red column on graph).  Single family starts are up just 3 percent, and multi-family starts up 23 percent, because rental housing is in such demand. There are still too many households that cannot afford to buy in this market, especially new generation millennials and first-timers.

Graph: Calculated Risk

But some good news is that the Federal Reserve just published its Q2 Flow of Funds report that showed total household net worth has surpassed pre-recession levels. Net worth previously peaked at $67.9 trillion in Q2 2007, and then fell to $55.0 trillion in Q1 2009 (a loss of $12.9 trillion). Household net worth was at $81.5 trillion in Q2 2014 (up $26.5 trillion from the trough in Q1 2009).

And even though the Fed estimated that the value of household real estate increased to $20.2 trillion in Q2 2014, the value of household real estate is still $2.3 trillion below the peak in early 2006.

So the Fed must continue its efforts to help Americans build assets, she said. The financial crisis showed that many American families are economically vulnerable, with few assets to fall back on in times of distress. Families with assets are able to deal with unexpected expenses as bumps in the road but “families without these assets can end up, very suddenly, off the road,” Yellen said.

For most Americans building up assets means building up equity in their homes, so with $2.3 trillion in value to make up, it will take more patience by the Fed in holding down interest rates.

Harlan Green © 2014

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Who Are the Real Takers?

Popular Economics Weekly

We have been there before. The Census Bureau reported that the poverty rate fell in 2013, the first drop since 2006. It fell to 14.5 percent, down from 15 percent in 2013, but 45.3 million people are still living at or below the poverty line, which for a family of four was $23,834.

Then who are the real "takers" that have held up economic growth and more jobs? It's can’t be the 47 percent that conservative polemicists and many of the 2012 presidential candidates maintained didn't pay federal income taxes. Three-quarters of entitlement benefits written into law in the United States go toward the elderly or disabled. That's according to the Center on Budget and Policy Priorities.

And it’s more than 90 percent of entitlement benefits when working households are included. Only about 9 percent of all entitlement benefits go toward non-elderly, non-disabled households without jobs (and much of that involves health care and unemployment insurance)

We should really be looking at those whose incomes have soared due to their success in slashing their own tax bills during difficult economic times, while blocking government job creation that would employ more of the 47 percent. The top 1 percent has taken 97 percent of income growth since the end of the Great Recession.

This is the first statistically significant decline in poverty since 2006 (and only the second since 2000). But the rate remained well above its 12.5 percent level in 2007 and even further above its 2000 level of 11.3 percent. At last year's rate of improvement, we would need to wait until 2018 for it to fall to or below the 2007 pre-recession level, and until 2020 to fall below the 2000 level, according to the Center For Budget and Policy Priorities.

Why do we have such a high poverty rate 5 years after the end of the Greatest Recession since the Great Recession? Who are the real takers that have not only created the greatest income and wealth inequality since the Great Depression that has created such dire poverty, but weakened our economy and power to maintain democratic values in the world?

FDR in his second inauguration speech said, “The test of our progress is not whether we add more to the abundance of those who have much, it is whether we provide enough for those who have too little.”

For starters, the red states controlled by Republicans have fought to downsize almost all government funded programs such as Medicare, food stamps, and Obamacare, yet they receive the largest share of government benefits, says Wallet Hub, a consumer finance blog.

For instance, South Carolina receives $7.87 for every $1 it pays in taxes. Mississippi and New Mexico, two of the most Red states, are ranked 40 out of 50 states in receiving the most in federal benefits, yet consistently vote for conservative policies that seek to limit government spending and benefits. And that includes badly needed spending on education, deteriorating infrastructure, and environmental regulation, all of which would provide more jobs in the underemployed U.S. economy.

This is an issue of our time, as we come severely weakened out of the Greatest Recession since the Great Depression. The takers are those who want it all, and the evidence is there for all to see—a weakened economy and a government lacking the powers to “stop evil and do good”.

“Nearly all of us recognize that as intricacies of human relationships increase,” said FDR in 1936 at the height of the Great Depression, “so power to govern them also must increase—power to stop evil; power to do good. The essential democracy of our nation and the safety of our people depend not upon the absence of power, but upon lodging it with those whom the people can change or continue at stated intervals through an honest and free system of elections.”

And so the real takers are also those who support ALEC, the American Legislative Exchange Council, or the Koch Brothers’ Americans for Prosperity that boilerplate legislation that has restricted voters’ rights by passing voter ID laws, restricting voting hours and anti-union collective bargaining, which are fundamental rights in any democracy.

It is mainly those conservative polemicists and presidential candidates who damn government in order to better their own financial position. And they have succeeded in lowering the maximum marginal tax rates from 92 percent during the Eisenhower presidency to its current low of 39 percent.

They have been so successful in taking from the wealth created by the many that the richest 10 percent now control some 50 percent of U.S. wealth, and most of the incomes growth since the end of the Great Recession, as we said.

Thomas Piketty, in his best-seller, Capital in the Twenty-First Century, perhaps said it best in attempting to explain why income and wealth inequality has worsened so much, brought about by lower taxation of the wealthiest.

“…the spectacular decrease in the progressivity of the income tax in the United and States and Britain since 1980, even though both countries had been among the leaders in progressive taxation after World War II, probably explains much of the increase in the very highest earned incomes,” he said.

Why lower taxation? Piketty explains it thusly. “Our finding that skyrocketing executive pay is fairly explained by the bargaining model (lower marginal tax rates encourage executives to bargain harder for higher pay) and does not have much to do with higher marginal productivity.”

There are several ways such record inequality slows growth. Firstly, growth is powered by what is called aggregate demand, the demand for goods and services that consumers, government, and investment generates. And since consumers power some 70 percent of economic activity and governments another 20 percent, when their spending declines, so does economic growth.

It is this record inequality that was the main cause of both the Great Depression and Recession, as declining incomes and cutbacks in government spending drastically reduced the demand for those goods and services. The years 1929 and 2010 were the years of greatest income inequality and greatest economic instability, according to Piketty and research partner Emmanuel Saez.

And economic growth has been steadily declining over the past 3 decades. It has averaged just 2 percent since the end of the Great Recession in 2009. There are numerous studies, including by the International Monetary Fund and Nobelist Joseph Stiglitz among others, that affirm the negative effect on growth of such inequality.

In fact, a recent IMF report said that “inequality can undermine progress in health and education, cause investment-reducing political and economic instability…which tends to reduce the pace and durability of growth."

So if we want to preserve our democracy, and help other countries towards greater democracy (instead of breeding more terrorism), we can no longer afford to allow the real takers to continue to take it all. The world has become too dangerous.

Harlan Green © 2014

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