Record Inequality = Record Debt

 Answering Kennedy’s Call

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

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

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

FREDdebt/gdp

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

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

Graph: Last Tech Age

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

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

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

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

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

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

Harlan Green © 2024

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

Consumers Are Still Solvent?

 Popular Economics Weekly

FREDretailfoodservices

My recent blogs have been questioning how long consumers can keep shopping for good reason; their debts have been piling up, which seems to mean they have been able to borrow enough to stay in the game.

I occasionally quote Roosevelt’s very smart Federal Reserve Chairman Marriner Eccles who made an apocryphal statement on debt during the Great Depression—which in essence explained why it became the ‘Great’ Depression and explains every recession since then.

“The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”

The credit of most Americans ran out when their banks failed in the 1930s because they didn’t yet have federal deposit insurance or today’s capital requirements, and 25% were jobless.

It was also the end of the last Gilded Age, when the Morgans, Rockefellers, and Vanderbilts held most of the wealth and labor unions were much weaker.

We may not be in as much danger today though four large banks have already failed that carried too many deposits not insured by the FDIC, or other guarantors. And cracks are appearing in the credit markets where the loan default rates of lower income folk are rising who tend to spend most or all their incomes.

We are living in another Gilded Age with record income inequality and ordinary Americans having to pay higher tax rates that most of the millionaires and billionaires since the 1980s.

Retail and food sales are a good indicator of consumer health, and is subject to large fluctuations. That’s why just reported July retail sales jumped +1.0%, up from a -0.2% decline in June. (It also plunged -1.1% earlier this year in January.)

I  believe the current and sudden jump in sales might be because of consumers’ hubris, a bit of irrational exuberance, because they feel their jobs remain safe and the US economy has been fully employed for the past two years, so they are saving very little of their income.

But full employment may not last much longer, and consumers might be sensing this in consumer confidence surveys. Consumer sentiment picked up slightly for the first time in five months, say the latest headlines.

But according to the latest University of Michigan survey, “For the second straight month, consumer sentiment is essentially unchanged. July’s reading was a statistically insignificant 2 index points below last month, well within the margin of error. Although sentiment is more than 30% above the trough from June 2022, it remains stubbornly subdued.”

The Conference Board’s confidence survey said as much: “Compared to last month, consumers were somewhat less pessimistic about the future. Expectations for future income improved slightly, but consumers remained generally negative about business and employment conditions ahead.”

So, the question remains how much longer can consumers keep spending as they have?

The unemployment rate has been steadily rising from its low in January 2023 of 3.4 percent to 4.3 percent in July 2024. And annual hourly wage increases have declined to 3.6 percent.

I said of last month’s unemployment report that it was alarming because most new jobs were in the lower paying service sector that had 80,000 of the 114,000 jobs total, mostly in Leisure activities, Education & health care.

This is where consumers spend most of their Dollars and so it means job growth is still dependent on consumer spending, and consumers have had to borrow like crazy to keep spending, which can’t go on forever.

That is why financial markets are now betting the Fed will begin to cut interest rates at its September FOMC meeting.

Retail inflation has dropped below 3 percent for the first time since 2022 as measured by the U.S. Consumer Price Index (CPI). It has had two months of zero price increases, which could have been predicted because consumers have known for months that stores were discounting and shopped more at big box retailers like Target, Walmart and Costco.

So there seems to be some cognitive dissonance between what consumers are doing (i.e., continuing to spend) and what they are saying in confidence polls. Is that a danger sign? Might they suddenly stop spending, because “the game will stop” in Fed Chair Eccles words?

It depends on the health of our banking system as well. We’ll have to wait and see.

Harlan Green © 2024

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

Has the Recession Begun?

Popular Economics Weekly

Wikipedia

It might not matter when the so-called infection curve begins to flatten, or the epidemic “washes away”, as President Trump has said. The economic damage has already been done, due in part to the lack of preparedness by the White House, our broken health care system, and weak recovery from the Great Recession.

This recession probably began in March, said former Fed Vice-Chairman Alan Blinder recently. The first economic indicators affected by the coronavirus pandemic have plunged, including February's retail sales and Empire State manufacturing index.

It is what happens when companies are shut down and workers are quarantined in what has become a just-in-time economy. This is an economy in which workers are hired ‘just’ when they are needed, and parts aren’t stockpiled, but ordered to arrive ‘just’ in time to be used—mostly from China and other low-cost Asian countries these days.

We are in this fix because corporations now think short time—i.e., about their quarterly profits rather than longer term growth prospects. It wasn’t always that way. Until the 1980s and the politicization of economic theory (i.e., trickle-down economics) corporate bosses didn’t earn that much more than their employees.

Today, the Boss is always right, and workers have lost their bargaining power to stockholders and management that want to see a quicker return. The result is corporations have become so efficient there is no inventory or backlog of parts for automobiles, airplanes, or whatever else is still assembled in the U.S. of A.


Perhaps the first sign of what now seems inevitable—the next recession—is in retail sales that plunged 0.5 percent in February and declined to a 4 percent annual growth rate, per the above FRED graph.

Manufacturing is already in recession.  Activity has been contracting for the past six months.  The Empire State’s (New York) February survey to manufacturing activity literally tanked, to use a non-economic term.  It posted its biggest one-month decline on record, falling 34.5 points to an 11-year low of (-21.5). The six-month outlook index was as bad, falling almost 22 points to its own 11-year low. 

The U.S. Treasury Bond market even seemed to seize up last week, which panicked the financial markets.  So the New York Fed just announced that it may buy up to $1.5 trillion in U.S. Treasury bonds awhile dropping their short term rates to zero, injecting more money into the general economy.

The lowest-paid workers suffer the most, as in past downturns, while this recession could turn into a Greater Recession, or even another Great Depression. 

Why?  We currently have an income inequality that matches that in 1928 before the Great Depression.  And it was this level of inequality that caused workers to borrow on the easy credit terms prevalent then.  But when said borrowers couldn’t borrow any more to meet rising living costs, the U.S. economy crashed.

The Brookings Institute reported in the United States, 53 million people must get by on low wages, with median hourly earnings of $10.22. Based on a normal 40-hour week, that comes to just $21,258 annually before taxes.

It about equals the 2020 federal poverty level (FPL) income numbers of $21,720 for a family of three that is used to calculate eligibility for Medicaid and the Children's Health Insurance Program (CHIP).

Many of these workers aren’t earning enough for decent housing; so much so that 30 percent of the homeless are such workers.  That’s why we are seeing a repeat of homeless encampments last seen in the 1930s.

The so-called Hobo Jungles were a feature of the Great Depression memorialized vividly in songs such as Woody Guthrie’s, “I’ve been havin’ some hard travelin’, I thought you knowed...”

“The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing,” said Marriner Eccles, the Federal Reserve Chairman during the 1930s, “When their credit runs out the game will stop.”

We are at even greater debt levels today.  A recent NYTimes Op-ed by Morgen Stanley’s chief global strategist, Ruchir Sharma, highlighted the role of too-highly leveraged Zombie companies—companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.

“Hidden within the $16 trillion corporate debt market are many potential trouble-makers, including the zombies,” said Sharma, “that account for 16 percent of all publicly traded companies in the U.S.” 

 There are fiscal remedies coming from congress that may provide some relief—including Democrats’ $830B proposal for outright cash payments supported by the White House, aid for the airline industry, and a range of other ideas, including President Trump’s emergency declaration that frees at least another $50B. 

 But more will be needed. The Troubled Asset Relief Program (TARP) approved by Congress in 2008, which made available $700 billion to the Treasury Department to buy deeply depressed assets from banks, and Obama’s $840B American Recovery and Reinvestment Act (ARRA) of 2009 wasn’t enough to bring back prosperity for most Americans.

Harlan Green © 2020

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

JOLTS Report Suggests Workers Holding Out for Higher Pay

Financial FAQs

 

 Graph: Econoday

“For the first time in nearly 20 years of existing records, the number of job openings, at 6.698 million in April, is exceeding the number of unemployed actively looking for work, at 6.346 million in April (subsequently falling in last week's employment report to 6.065 million in May),” said Econoday on Tuesday’s release of the Labor Department’s JOLTS report.

Also, the gap between openings and hires in the JOLTS report, at 1.120 million, is the second largest on record next only to March's 1.147 million, reported Econoday.  It suggests employers are having a hard time finding people to fill the jobs. That is the understatement of the year. There are still 6 million working adults not happy; who are either looking for work or who work part time but want fulltime work, as I reported in the May Unemployment Report.

It means in fact employers will have to pay more to fill those job vacancies. The full name of the JOLTS report is Job Openings and Labor Turnover Survey, which also measures the Quits rate, the percentage of workers voluntarily leaving a job. And that is at the high end in this cycle, which means more are quitting and probably finding better-paying jobs.

Average hourly earnings are still rising just 2.7 percent per year, when they should be in the 3 to 4 percent range at this late stage of the recovery. That’s barely above the Fed’s preferred Personal Consumption Expenditure price inflation figure of 2 percent. Workers’ wages are barely keeping up with rising prices, in other words, hence they are extremely stretched and borrowing more than they are spending.

Hence, the record job openings. Those openings aren’t enticing enough to bring more workers back into the workforce. And that is of major concern; as tax revenues aren’t even close to covering the added federal debt of more than 2.2 trillion over the next 10 years according to the latest analysis of the recent tax cuts.

Consumer spending on consumer goods in April is picking up for a second straight month, pointing to a pickup in the U.S. economy in the spring. Spending jumped 0.6% after a revised 0.5% gain in March, the government said Thursday. But that is at the cost of drawing down their savings to dangerous lows.

Several Wall Street firms upped their GDP forecasts due to the spending uptick, but consumers’ personal savings rate dropped to 2.8 percent, only the third time since 2009 to drop below 3 percent.
Amherst Pierpont Securities raised its estimate of second quarter GDP growth to 4.5 percent from 4.2 percent. Macroeconomic Advisers increased its forecast to 4 percent from 3.6 percent. Barclays also upped its estimate, but it was near the low end of forecasts, raising its Q2 target to 3.3 percent from 3 percent.

GDP has only topped 4 percent three times since the end of the Great Recession in mid-2009; mostly due to the very poor growth in household incomes since its end in mid-2009. Why don’t corporations raise their workers’ wages enough to fill some of those job openings, even with the recent huge tax cut windfall? That’s a story for another time.

But we know what causes recessions, and depressions. Roosevelt’s Fed Chairman Marriner Eccles spelled it out in the 1930s:

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Harlan Green © 2018

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

Is Happiness That Important to Americans?

Popular Economics Weekly

What a strange question to ask Americans! We are the wealthiest country in the world, right? But a recent survey claims to show that wealth accumulation is not the first priority for most of the world. In fact, the 2017 United Nation’s World Happiness Report compiled by Gallup says that Americans’ pre-occupation with wealth gets in the way of being happy.

This conclusion results from a survey of 155 countries, and shows USA is now ranked 19^th in being happy, due to our national preoccupation with what money buys now, rather than in the future.

Norway is ranked number one; no surprise with its oil wealth. But, “by choosing to produce its oil slowly,” says the survey, “and investing the proceeds for the future rather than spending them in the present, Norway has insulated itself from the boom and bust cycle of many other resource-rich economies. To do this successfully requires high levels of mutual trust, shared purpose, generosity and good governance, all factors that help to keep Norway and other top countries where they are in the happiness rankings.

The USA, however, hasn’t shielded itself from boom and bust cycles. The Great Recession is just the latest in a string of recessions since 1980—two under R Reagan, one during Bush I, and two under son GW Bush. And that has led to the greatest income equality since 1929 that was the beginning of the Great Depression, and also the cause of just-ended Great Recession.

We have not been good at investing in our future, and that has led to a very low savings rate and very little put aside for retirement. This is in part because our social safety net is profoundly inadequate. We have no universal healthcare, for starters, and Republicans are threatening to repeal Obamacare, and maybe even Medicare.

This is while we have a huge public debt because Congress has refused to raise enough taxes to pay for all the spending that has supported the ongoing wars as well as tax loopholes afforded corporations, and high net-worth individuals.

Why has such record income inequality led to recessions? As Marriner Eccles, FDR’s renown Federal Reserve Chairman once said about the Great Depression: “…a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Credit had again run out for most Americans in 2007 due to a failed financial system and busted housing bubble. And it is just that uncertainty that is in the way of happiness. For how can anyone be happy, unless they can count on a predictable future?

“The USA is a story of reduced happiness,” said the Gallup study. “In 2007 the USA ranked 3rd among the OECD countries; in 2016 it became 19th. The reasons are declining social support and increased corruption and it is these same factors that explain why the Nordic countries do so much better.”

And the lack of such social support has resulted in poorer health outcomes for all Americans—such as declining longevities, significantly higher disease rates, and higher infant mortality. The study lists the main factors that support happiness: caring, freedom, generosity, honesty, health, income and good governance.”

In sum, the United States offers a vivid portrait of a country that is looking for happiness “in all the wrong places,” says the study. “The country is mired in a roiling social crisis that is getting worse. Yet the dominant political discourse is all about raising the rate of economic growth. And the prescriptions for faster growth—mainly deregulation and tax cuts—are likely to exacerbate, not reduce social tensions. Almost surely, further tax cuts will increase inequality, social tensions, and the social and economic divide between those with a college degree and those without.”

America has become a less caring and generous country because of its single-minded pursuit of wealth, in other words. How to re-develop those traits that Americans have historically been noted for?

Creating a quality educational system available to all, would be a start. The share of Americans receiving a college Bachelor’s Degree or better is stuck at 36 percent when a more technically savvy workforce is needed more than ever. And the educational divide between Haves and Have-nots has been increasing, which increases the political polarization.

“Clinton won 17 of the top 18 states, while Trump won 29 of the bottom 32 states,” said Gallup. And, “The deep social and economic divisions according to educational attainment seem to be similar to the dynamics of the Brexit vote and other anti-migrant parties in Europe, which find their base among voters with lower educational attainment.”

Why is greater equality, and the concept of a safety net for all Americans taking so long to achieve when it has already been achieved in all other advanced countries and economies?
One hint: Why haven’t we elected a female president when every other major western economy has? And women, because they are used to nurturing and caring for children, are much better at planning for the future

Harlan Green © 2017

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

Why The Years of Slow Growth?

Popular Economics Weekly

Pundits have decried it. Donald Trump has criticized the ‘lousy’ U.S. economy in many of his Tweets, and economists have lamented the 2.4 percent GDP growth rate since 2000, at the time of the dot-com bubble bust. This is when prior recoveries have averaged 3-4 percent growth—at least in the early years.
The agonizingly slow pace of recovery from the Great Recession is easy to explain, say most economists. The Economic Policy Institute (EPI), a labor think tank, recently said it best. It is the result of austerity policies championed by Republican policymakers at the federal and state levels.

“Like every other postwar recession before it, the Great Recession was caused by a shortfall in aggregate demand, meaning that the spending of households, businesses, and governments was not sufficient to keep the economy’s resources fully employed,” said the EPI.

Graph: EPI

Per capita government spending in the first quarter of 2016—27 quarters into the recovery—was nearly 3.5 percent lower than it was at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3 percent higher than at the trough; 23 quarters following the early 2000s recession (a shorter recovery), it was 10 percent higher; and 27 quarters into the early 1980s recovery, it was 17 percent higher.

What is aggregate demand, and how is it increased? FDR’s incredibly intelligent Fed Chairman Marriner Eccles explained it in his memoir Beckoning Frontiers (1951):

“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

He understood our U.S. economy was entering the era of mass consumption, and unless consumers plus businesses plus government spent and/or invested enough money in it, there would be little or no growth. If fact, it was the severity of the contraction in spending that caused both the Great Depression and Great Recession.

And because there was record income inequality in 1929—only equaled again in 2007—consumers ran out of money to spend, which meant in turn businesses stopped investing. So it had to be government that injected sufficient demand into the U.S. economy to keep it from collapsing completely. That was the reason for the New Deal that employed millions in government-paid jobs, as well as social security, unemployment insurance and all the social programs that enabled US to win WWII.

The pickup in government spending in the early 2000s recession and 1980s recovery were during Republican administrations (i.e., during GW Bush and Reagan presidencies), which meant they had no problem spending public monies to boost economic growth. But when it came to Obama’s term, every attempt was made by the mostly Republican House in particular to cause him to fail.

It began with the election of some 80 Tea Party members to the House in 2010, then government shutdown in 2011 when they refused to ok a budget, so that the U.S. government almost ran out of operating funds, resulting in the first loss of AAA rating for U.S. debt by a bond rating agency in modern history.

That is why real annual GDP growth during Reagan’s term peaked at 7.3 percent, and GW Bush’s term at 3.8 percent. The highest modern growth rate was achieved during FDR’s New Deal and WWII, which boosted U.S. growth to a peak of 18.9 percent in 1942. Real GDP growth (i.e,, after inflation) has been downhill ever since.

Graph: CBS

As CBS News recently wrote in a report entitled, Obama May Become First President Since Hoover Not to See 3% GDP Growth: “The last year that real GDP grew by 3.0 percent or more, according to BEA, was in 2005, when it grew by 3.3 percent. Since then, the United States has gone a record ten straight years (2006-2015) without a year in which the growth in real GDP was at least 3.0 percent.”

So in fact without government spending to boost demand during slow times our economy has suffered. And now President-elect Trump has proposed a $1 trillion infrastructure spending plan that is sure to boost growth again.

“Despite the Great Recession being the sharpest and longest on record since World War II,” wrote the EPI, “and despite monetary policy reaching its conventional limits to boost spending early in the recession, policymakers made damaging decisions to limit public spending following the recession’s trough in 2009. This growth has been historically slow relative to other business cycles even as the economy needed substantially faster-than-average growth to mount a full and timely recovery.”

So let the record show, government has never been the problem when Republicans needed to boost growth, only when Democrats do. What is wrong with this picture?

Harlan Green © 2016

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