Popular Economics Weekly

It should be obvious by now that the Romney-Ryan program of fiscal austerity—cutting government spending, while cutting taxes in the hope businesses and their investors will invest more of their wealth—can’t work. Latest evidence is the just out IMF 2012 World Economic Outlook (WEO) report that confirms European austerity policies over the past year have made things worse.

So how can Romney say he will create 12 million jobs during his tenure by cutting government spending while lowering taxes? He has said his blueprint is Paul Ryan’s House passed budget bill that drastically downsizes safety net programs, and cuts some $5 trillion in taxes over 10 years, without specifying where he will raise additional revenues to pay for those tax cuts. Since no expert believes it can be done without removing such favored tax shelters as the home mortgage interest deduction, it will create the same austerity trap Europeans now find themselves in.

For instance, we know from the IMF study Great Britain has fallen back into recession over the past 3 quarters by explicitly following Conservative PM Cameron’s austerity program. Ireland and Greece are also in recession because of draconian spending cuts, with Italy and Spain soon to follow.

Chapter One of the WEO report stated that current European policies that demand a reduction of debt as the path to recovery without job creation programs were wrong. In fact, “…IMF staff research suggests that fiscal cutbacks had larger than-expected negative short-term multiplier effects on output, which may explain part of the growth shortfalls,” said the report.

This only confirms what Keynesian economists such as Paul Krugman have been saying for years. The only path to increasing economic growth is to literally create more jobs. Only then will there be sufficient revenues to grow the economy and thereby reduce debts, both in the private and public sectors.

As Lord Keynes famously said, jobs can be digging ditches and then filling them up again, or, how about repairing some of the $2 trillion in needed U.S. infrastructure repairs being put off, which will only increase their costs? Roosevelt’s New Deal created WPA projects that grew the economy by putting people back to work—such as building Hoover Dam, planting trees and the like.

The reason austerity has been ruling economic policies of late is bond vigilantes have been in control, a relic of Germany’s fears of a repeat of their 1920s inflation rate, and U.S. creditors’ fears of inflation that eats away at bond prices. Republican conservatives have used this argument to demand lower taxes, though it has done nothing to reduce government debt. Republican Presidents Reagan and GW Bush created the largest budget deficits since World War II, as I have said.

In fact, other studies, such as by acknowledged budget experts Peter Diamond and Emanuel Saez, conclude that “the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50-70 percent (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50 percent rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s”.

And does it significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower, said the study. Indeed, according to the U.S. Department of Commerce’s Bureau of Economic Analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68 percent between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23 percent between 1950 and 1980 when top tax rates were at or above 70 percent.

Neither does international evidence support a case for lower growth from higher top taxes, say Diamond and Saez. “There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries.”

It is only recently that historical evidence has been able to examine so-called supply-side economic theory that says lowering taxes promotes growth, which it turns out is just a theory not borne out by the facts.

Harlan Green © 2012

Popular Economics Weekly

The Bureau of Labor Statistics gave markets a shot of good news recently, when it revised the one year March-to-March 2012 jobs totals upward by 32,000 per month. This was huge and showed much better jobs growth than initially forecast by the Labor Dept., with the private sector providing 453,000 additional jobs March-to-March Q1, and a 386,000 net total with government job losses included. We have to wait until this Friday to know if September’s unemployment report more accurately reflects the current unemployment picture.

Graph: Calculated Risk

In fact, we may be seeing the BLS under estimating job formation again this year, as Q2 job growth was less, but all indicators are that it will improve this fall. For instance, weekly initial jobless claims fell a very sharp 26,000 to 359,000 in the week of Sept. 22, while consumers are spending more going into the holidays and the latest manufacturing report was very positive with increased hiring. The largest upward revisions were in Trade, Transportation, and Utilities, followed by Construction, Leisure and Hospitality jobs.

The ISM manufacturing index saw a huge boost after 3 down months to a 51.5 percent reading for manufacturing activity.

Graph: Econoday

Details back the optimism with new orders, at 52.3, showing solid growth. Employment is the big plus in the September report, rising 3.1 points to a 54.7 level that indicates a surprisingly brisk pace of hiring. Negatives include a fourth month of contraction for new export orders, which reflects weak global markets, and a sixth straight contraction in total backlog orders.

Another sign of improving jobs picture was the jump in consumer optimism. The Conference Board’s consumer confidence index showed the consumer mood improved in September, jumping a very strong nine points to 70.3. This was the best reading since February and the third best reading of the whole recovery, said Econoday.

This report stressed the consumer’s improved assessment of the jobs market. Those saying jobs are currently hard to get fell seven tenths to 39.9 percent, which is the best reading since April. Those saying that jobs are plentiful rose, up 1.1 percentage points to a still however very modest 8.3 percent. Backing up these current readings was strength in the consumer’s outlook for the jobs market where more see more jobs ahead and substantially fewer see fewer jobs.

So we have reason to believe both jobs and economic growth will accelerate in the coming months. Then there is the Federal Reserve’s commitment to keep interest rates at historic lows for as long as it takes to bring the unemployment rate down to more acceptable levels, such as 6 percent. This will not be easy, with Bernanke warning that the deadlocked Congress needs to provide some fiscal stimulus as well. We know austerity doesn’t work from the European example.

Harlan Green © 2012

Financial FAQs

Romney’s “Five Point Plan to Grow the Economy” that he touts on his website, is primitive economics almost beyond belief. It returns us to 19th century government of the few by the few with few regulations or insurance against the kinds of events that brought on the Great Depression and Great Recession, for starters.

Conservatives in general and Mitt Romney don’t seem to understand the most basic concept of modern economics–insuring against major disruptions—that is indispensable to run a modern economy. Insurance isn’t only about insuring the many to protect the most vulnerable—whether against physical disasters such as the Midwest drought, or financial disasters such as the Great Depression, or catastrophic illness. It is really about all of our citizens being for one, and one for all. It is why we tax ourselves to pay for a government, because government is really the protector of last resort against the most basic risks in a world grown increasingly complex and uncertain.

Modern economies can’t do without it, yet Romney says he opposes most modern forms of protection in his 5-point plan by continuing to reduce taxes that would starve government of revenues, as well as cap spending on regulation enforcement. He would also repeal the Affordable Care Act that insures 30 million more Americans. Instead he proposes more of GW Bush’s ‘Ownership Society’ which seeks to return us to the era of laissez faire, free, unregulated markets that existed 100 years ago. And we know the damage those institutions which evaded or ignored modern financial regulation did to financial markets.

Then was a much smaller, less complex world where most Americans were still living on farms. But the farming world collapsed in the 1920s when mechanization caused farming prices to plunge, ultimately bringing on the Great Depression. That is when the modern, industrial world came into being, requiring New Deal insurance; including social security, unemployment insurance, and even workman’s compensation to cushion the effects of modern business cycles on the urban unemployed who could no longer return to the farm during tough times. And unions came into being to organize workers so they could bargain for better than minimum wages and benefits.

The centerpiece of Romney’s plan is to continue to cut taxes for both individuals and corporations. This is when corporations have the highest profits as a percentage of GDP in history, while most individual tax cuts have benefited the wealthiest, thus creating the worst income inequality since the 1920s.

Graph: CBPP

And in starving the government of revenues he would  impose a regulatory budget cap, “reform” regulations so that coal-fired power plants would no longer have to control their pollution (thank you, Koch Brothers, for your $millions in contributions), open ANWAR, the Arctic National Wildlife Preserve to oil drilling, and in general continue to support our most polluting, non-renewable energy resources.

Returning the U.S. to an almost primitive society is already happening, of course, with continuing Republican attempts to block Dodd-Frank regulation, privatize Medicare and social security. The Great Recession was a product of Adam Smith’s primitive economic theory that said an ‘invisible hand’ controls markets for the benefit of all.

Really? That hasn’t been the case during the past two GW Bush recessions, including the Great Recession. $Trillions were lost during those recessions that were the result of inflated asset bubbles bursting, as regulations were ignored or evaded which controlled financial risk-taking. The Bush record is not pretty, and that is the most recent record to look at that is the result of primitive economic thinking.

Graph: Calculated Risk

The historical graph of economic growth shows most clearly which policies work to grow the economy—primitive economic policies, or using government as an active participant in growth? In fact, all recent recessions since 1980 have occurred during Republican administrations; from President Reagan’s in 1980, 1983, Bush I in 1991, and GW Bush in 2001 and 2007-09. Policies that starve government of what is needed to govern effectively starves all of U.S. Need we say more?

Harlan Green © 2012

Popular Economics Weekly

The debt ceiling debate is about to begin again, and House Speaker Boehner has said he will continue to press for more tax cuts without raising additional revenues, reviving the possibility of more budget gridlock and credit downgrades. "I believe that raising taxes at this point in our recovery is a big mistake," Boehner told reporters. "At a time when we’re trying to help small businesses create jobs, this proposal would kill jobs."

But it is a mistake to cut taxes without raising revenues. We know GW Bush’s tax cuts enacted in 2001 and 2003 to revive an economy flattened by the dot-com bubble bust have cost plenty. And we know what happened to all that money saved by corporations and individuals.

Not much. Just 3 million jobs were created during Bush’s 8 years, household incomes did not even keep up with inflation, and yet corporate profits are up more than 14 percent as a percentage of GDP—the highest in history.

So most of the money flowed to corporations—who are currently hoarding more than $2 trillion in cash—and the top 1 percent income earners who benefited most from the tax cuts. And since the top 1 percenters spend less of their money than the 99 percenters, much of it is being held in banks that have almost $1 trillion in excess ‘zero sum’ deposits that aren’t being put to work to revive this economy.

Graph: CBPP

Then what would really put all that cash back to work to grow jobs and the economy? We know the answer is to invest more money to grow the future, but how without even more debt? Dr. Robert Shiller of Irrational Exuberance fame, and Cornell Professor Robert Frank have written wonderful New York Times Op-eds on just how to do it.

It’s almost absurdedly simple in principle. Dr. Shiller says that William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Nobelist Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.”

“It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged.”

And Professor Frank disputes austerity proponents who say governments can’t spend beyond their means indefinitely, any more than businesses or families can. He says “It’s a fair statement if we’re talking about the long run. But in the short run, it’s utterly false…Consider an indebted family that must decide whether to borrow $5,000 to install additional insulation in its attic, a project that would reduce its utility bills by an average of $100 a month and require loan payments of $50 a month. In the short run, obviously, the project would increase the family’s indebtedness. But can there be any doubt that the family would be better off, in both the short and the long run, by going ahead with it?”

In other words, one must spend money to make money, and it can be done in a balanced way. That also means it can be done with either public or private monies that gives a public benefit, such as making up the $2 trillion deficit in infrastructure repairs. And if private business won’t invest sufficient funds, as at present, then public monies must be used.

Graph: CBPP

We also know that tax cuts don’t create jobs or spur growth by themselves. The Bush tax cuts are the most current example; in fact helped to cause the Great Recession. For much of the excess profits were spent on market speculation—especially in subprime loans and payday lending to the poorest among us—that caused the housing bubble.

An excellent book by Gary Rivlin, Broke, USA: From Pawnshops to Poverty, Inc. — How the Working Poor Became Big Business, documents that “Poverty Inc. was a roughly $150 billion-a-year industry at its peak, Rivlin calculates, after totting up revenue at pawnbrokers, payday lenders, money-wirers, rent-to-own operators, tax preparers who offer instant tax “refunds,” subprime credit-card providers, subprime-mortgage lenders and all the rest”, according to a Bloomberg News review.

We also know the cost of the Bush tax cuts, which had to be paid for with taxpayer dollars, since they were one of the major causes of the deficit due to the lost revenues at a time we were paying for 2 wars.

Graph: CBPP

It’s more than $3 trillion to date, according to the CBPP, and would cost taxpayers another $3.6 trillion if extended over the next 10 years. In fact, if the Bush tax cuts were allowed to ‘sunset’ this year, the federal budget deficit would stabilize. So it makes no economic sense to advocate tax cuts without revenue enhancers, and there are plenty, from closing loopholes, to certain interest exemptions. So austerity is not the answer—neither here nor in Europe.

Harlan Green © 2012

Popular Economics Weekly

We are seeing what can only be called a war on workers by Tea Party Republicans in particular. Who are workers? The 80 percent of consumers who are wage and salary earners. And they have not done well since the 1970s while corporations have made record profits, as I have been saying.

Graph: EPI

It is the current crop of conservative Republicans, such as Wisconsin Governor Scott Walker, who has even been caught on video declaring Republicans’ strategy of “divide and conquer” on public service workers and teachers, that have declared outright war. Their campaign would essentially wipe out the middle class by blocking all attempts to raise workers’ incomes in both the private and public sectors, and so their standard of living. Yet in doing so, Republicans will destroy the very foundation of our economic strength. Governor Walker’s efforts in particular have put Wisconsin at the bottom of Midwestern states’ job creation list.

Employers have always tried to maximize profits by limiting workers’ pay, but wage suppression today because of Republican efforts to limit collective bargaining is as bad as it was during the Great Depression. And the result has been disastrous for both jobs and economic growth.

For instance, the 40 years from 1961 to 2000, when the White House was shared equally by Republican and Democratic presidents (20 years each), pro-labor rights Democrats had the far superior record both for economic growth, and jobs. This can be found in numerous government data, but summarized by the Currency Thoughts blog. Bush 43’s record (GW Bush) was even worse.

% Per Annum      Democrat      Republican      Bush43

GDP Growth      4.1 percent      2.9 percent      2.2 percent

Employment      2.9 percent      1.7 percent      0.5 percent

Even more convincing proof that Republicans’ ideological war on workers will prolong this recession is their record on job creation. The Wall Street Journal has run articles on this fact. Since Harry Truman, 57.5 million jobs were created during Democratic Administrations, vs. 36.2 million jobs created during Republican Administrations.

President Clinton is the winner with 23.1 million jobs created during his 8 years, whereas President Reagan leads Repubs with 16 million created during his term. There are pundits who say these job totals are not totally accurate because policies created in one administration will affect job formation in the next. But that would have to work both ways, cancelling out any effects of one administration’s policies over another.

We aren’t even counting President Obama’s almost 4 million jobs created to date after our Greatest Recession that followed on the heels of GW Bush’s worst track record of just 3 million jobs created 2000-2008.

Why? This is one of the most basic economic truths, yet conservative Republicans in particular don’t seem to care. They want to believe that lower taxes will stimulate more jobs by transferring more revenue to the private sector. But that hasn’t happened—historically their policies have depressed the jobs and incomes of wage and salary earners that would stimulate more demand for their products.

And this is in spite of record corporate profits, which belies the ideology that greater tax cuts (even abolishing corporate taxes) will bring greater prosperity. In fact, as corporate profits have risen over the past 30 years, workers’ incomes have fallen. A recent New York Times’ article highlighted recent revisions of 2010 and 2011 Department of Commerce data. The new figures indicate that corporate profits accounted for 14 percent of the total national income in 2010, the highest proportion ever recorded. The previous peak, of 13.6 percent, was set in 1942 when the need for war materials filled the order books of companies at the same time as the government imposed wage and price controls, holding down the costs companies had to pay.

‘Employees have always received more than half the total national income, until now,” said the New York Times. (But) “In 2010, the percentage of national income devoted to wages and salaries fell to 49.9 percent, and it slipped a little more to 49.6 percent in the first quarter of this year. That continued decline may help explain the economic worries of many Americans who have jobs but still fear they are falling behind.”

Graph of wages/benefits vs. profits: New York Times

The private sector war is being waged by conservative states with their Right-to-Work laws that say though it can’t be illegal to organize into unions (because it’s federal law), it can make it illegal for workers in individual states to have to join and pay dues to support the unions. Twenty four states in the Midwest and South now have such laws.

This should be a no-brainer, in other words, which is why in not heeding the most basic economic truths—one cannot create demand without more income to support it—Republicans have declared a defacto war on workers. It is the worst kind of blindness. Republicans are also destroying their own economic homeland, the U.S. economy, and our competitiveness in the ever more worldwide economy.

Harlan Green © 2012

“Manufacturing continues to lead U.S. recovery”, said the April ISM manufacturing survey that measures overall manufacturing activity. "The PMI registered 54.8 percent, an increase of 1.4 percentage points from March’s reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month. Sixteen of the 18 industries reflected overall growth in April, and the New Orders, Production and Employment Indexes all increased, indicating growth at faster rates than in March.”

Graph: Econoday

Why is this a surprise? Even exports continued to expand, showing the weak dollar is keeping U.S. products competitive. “Other details show a slight destocking in inventories which is welcome and points to the need for future orders in order to replenish inventories,” said Econoday. “Prices paid do remain elevated which is a negative for manufacturers. But overall, this report points to accelerating conditions and perhaps new leadership for the data.” Manufacturers cannot keep up with demand, in other words.”

The U.S. economy continues to confound its critics, whether those who believe we sink or swim with Europe, or are tied too closely to the Chinese economy, or those who believe austerity is the only answer. But European austerity measures in particular are a failure, as Nobelist Paul Krugman has been saying in columns, such as “Death of a Fairy Tale”, while our Fed continues to provide stimulus with record low interest rates.

So those who criticize economic stimulus measures aren’t looking at the real economy. With retail sales soaring, particularly motor vehicle sales (thanks to Obama’s Detroit auto bailout), the consumer has again been growing the economy. Retail sales are growing at 5 percent plus annually, just like in pre-recession, boom years. Core components excluding gasoline and auto sales showed widespread strength.  Standouts included building materials & garden equipment, furniture & home furnishings, electronics & appliances, and clothing, which tells us home buying might be next on their list.   Declines were seen in miscellaneous store retailers and in health & personal care.

Graph: Econoday

Then what are we to make of the weak GDP numbers, with just a 2.2 percent growth rate, compared to 2011 Q4’s 3 percent? It was due to a huge drop in government spending, thanks to Republicans continued assault on state and local government spending. Wisconsin is just the most obvious example, but the red states with Republican legislatures continue to downsize their governments, restrict or abolish collective bargaining rights, while cutting taxes to their wealthiest and corporations.

Graph: Econoday

This is why job formation has slowed of late. ADP estimates that April private payrolls will rise by only 119,000 in what would be significant monthly slowing vs. a revised 201,000 in March. This compares to Bureau of Labor Statistics’ estimates of 121,000 for private payrolls and 120,000 for total payrolls in Friday’s upcoming unemployment report for April. But remember that the BLS’s JOLTS report shows 3.5million job openings, and growing.

So it’s really Republicans’ efforts to downsize government spending that is holding back more job formation. For instance, 300,000 teachers have lost their jobs in the downsizing of state and local governments, a crime that puts us even further behind other countries’ educational achievements, according to Paul Krugman.

“What should we do to help America’s young? Basically, the opposite of what Mr. Romney and his friends want. We should be expanding student aid, not slashing it. And we should reverse the de facto austerity policies that are holding back the U.S. economy — the unprecedented cutbacks at the state and local level, which have been hitting education especially hard.”

Harlan Green © 2012

Popular Economics Weekly

January’s economic numbers are in, so we can say government stimulus spending has worked; there is just not enough of it. Whereas the views of those Paul Krugman characterizes as “confidence fairies” doesn’t work. Austerity and budget cutting during recessions doesn’t boost growth for the simplest of reasons—consumers and private sector businesses can’t spend the money they don’t have.

The confidence fairies so loved by small government types somehow believe when budget deficits are reduced that businesses and consumers will invest and spend more. But how, when workers are laid off and salaries cut to achieve that result? This results in lower incomes, so lower spending, hence lower demand for the very goods and services that would spur growth.

The U.S. now seems to be entering a virtuous growth cycle just because we didn’t follow the advice of the confidence fairies. Increased stimulus spending has increased hiring, causing in turn increased demand, which then spurs more hiring, and so on. Whereas the Eurozone economies are falling into another recession.

Paul Krugman has been telling Europeans what would happen if EU leaders continued to listen to their confidence fairies: “Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of 00spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.”

So it is our experience with the Great Depression and President Roosevelt’s New Deal that has kept us from following the path of austerity economics, even in the face of continued cries for less government involvement in our recovery. That doesn’t work, as ‘Hoovernomics’ proved. In fact, it was GW Bush’s attempts to follow Hoover’s path that led us into the Great Recession. Bush decided on all those tax breaks, instead of using Clinton’s 4 years of budget surpluses to fix social security and Medicare, resulting in the largest budget deficits since Ronald Reagan, told in telling detail by Bush Treasury Secretary Paul ONeill and Ron Susskind in The Price of Loyalty.

Meanwhile, the U.S. economy continues to grow. Retail sales are one of the best indicators of consumers’ financial health. Excluding autos, retail sales surged 0.7 percent in January after decreasing 0.5 percent in December (due to lower auto sales, said the report). But that may be an anomaly due to a small sampling of auto dealers, because other data show auto sales have been increasing. The Fed’s January Industrial Production report said the output of motor vehicles and parts surged 6.8 percent following an upwardly revised increase of 3.8 percent in December.

Graph: Econoday

Overall industrial production was unchanged in January after a 1.0 percent jump the month before, but the manufacturing component jumped 0.7 percent, following a 1.5 percent comeback in December.  In January, utilities dropped 2.5 percent while mining output declined 1.8 percent, was the reason for overall production being flat. The manufacturing sector was strong in several Fed regions. Both the Empire State (New York Fed), and Philly Fed manufacturing surveys jumped.

Graph: Econoday

These factors also led the index of leading economic indicators to a solid 0.4 percent gain in January following upwardly revised gains of 0.5 and 0.3 percent in the prior two months. Other areas showing strength in January include credit activity and building permits, gains that underscore the improving outlook for the housing and construction sectors.

Graph: Econoday

What makes me think this is really a virtuous growth cycle, rather than another early-in-the-year spurt that might die later is that the nation’s inventories are lean and well managed—meaning there are no headwinds from excess inventories. Business inventories rose a moderate 0.4 percent in December, below the 0.7 percent rise for sales and pulling down the stock-to-sales ratio by 1 tenth to 1.26. That means demand is keeping up with production, since the stock-to-sale ratio hasn’t increased.

Graph: Econoday

“Now the results are in”, says Krugman, “and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.”

“Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.”

Harlan Green © 2012

Financial FAQs

We have austerity in our own country as a result of the Great Recession, but it doesn’t fall equally on all states. In fact, states suffering the most are mainly those in the South, Midwest and manufacturing rust belts.

We also know most of them are red states, and so the most conservative. Yet those states—the poorest, who have lost the most wealth—also receive the most government benefits.

How can that be so when they have spawned the most conservative politicians who decry government benefits of any kind? Dean P. Lacy, a professor of political science at Dartmouth College, is one of several researchers who have identified this anachronism. Support for Republican candidates, who generally promise to cut government spending, has increased since 1980 in states where the federal government spends more than it collects. The greater the dependence, the greater the support for Republican candidates, says his research.

Conversely, states that pay more in taxes than they receive in benefits tend to support Democratic candidates. And Professor Lacy found that the pattern could not be explained by demographics or social issues.

But it can be explained by other factors. One of my earlier columns, entitled “The Have and Have-Not States”, identified several of the factors that differentiate the poorest from the wealthiest states in the U.S., as measured by those states with the highest percentage of passport holders. It comes from a study reported on Grey’s Blog, which shows New Jersey with the highest percentage of passports-68.36 percent-to Mississippi with 19.86 percent of its population having passports.

Grey’s Blog

That factor is openness to outside experience, which is a psychological trait that comes from either having overseas’ relations, or a better education, or a geographical proximity to other cultures. Those states with the highest percentage of passport holders had also the most diverse population, were most educated, most politically liberal, and the wealthiest. Of course, wealth seems to go in hand with education, which shouldn’t be surprising.

Graph: Grey’s Blog

But those same states also had the best public services, most creative workforce and best health care outcomes, as well. Conversely, those states with the fewest passport holders were the least educated, least wealthy, even though they garnered the most governmental services.

Paul Krugman has listed 3 reasons in his own blog why the poorest states tend to elect conservative politicians, who certainly have not enhanced the economic opportunities of their own constituents.

“And what these severe conservatives hate, above all, is reliance on government programs,” says Krugman. “Rick Santorum declares that President Obama is getting America hooked on “the narcotic of dependency.” Mr. Romney warns that government programs “foster passivity and sloth.” Representative Paul Ryan, the chairman of the House Budget Committee, requires that staffers read Ayn Rand’s “Atlas Shrugged,” in which heroic capitalists struggle against the “moochers” trying to steal their totally deserved wealth, a struggle the heroes win by withdrawing their productive effort and giving interminable speeches.”

But he doesn’t mentioning scape-goating, a common tactic used by the most conservative politicians to explain why their own constituents tend to be worse off than those in the blue, more liberal states.

Though Christ’s teaching, “Let he among you who is without sin cast the first stone” should be foremost in the minds of conservative church-goers, particularly, conservative pundits have blamed government and high taxes for their ills, when in fact it has been their own Social Darwinist views that has held back development in the red states.

In fact history has shown that it is during periods of regulatory breakdown, when so-called ‘free market’ ideologies prevailed as during the Hoover and GW Bush eras—i.e. when government oversight was at its weakest—that the greatest economic downturns happened. So it should be no surprise that “Political scientists who use Congressional votes to measure such things find that the current G.O.P. majority is the most conservative since 1879,” says Krugman, “which is as far back as their estimates go.”

That was the era of social Darwinism—when the struggle for survival of the fittest prevailed and made sense to Americans, as we were still struggling to settle and civilize our wildernesses.

But the American landscape is far different today. Modern technology has conquered the means of production, so that we suffer from too much being produced rather than too little. What we cannot or will not domestically produce is easily imported. That is the reason for the succession of burst asset bubbles—from the dot-com market crash, to too- big-to-fail financial institutions, to housing—that Americans have suffered through.

So there is no reason for a regression to 19^th century thought and philosophy that the Republican Presidential candidates seem to be yearning for. There is also no reason for the wide divergence of wealth between states. Research has shown the most prosperous states are the most pro-government, most forward-looking, most open to other cultures and new ideas. What economy (or state) can grow otherwise?

Harlan Green © 2012

Financial FAQs

Why so much surprise in January’s employment report that added 243,000 payroll jobs and dropped the unemployment rate to 8.3 percent? The U.S. has now added an average of 183,000 jobs a month in the past five months, while both the manufacturing and service sectors have been expanding for 30 months, since August 2009. You would think that would be grounds for some optimism this year, but it hasn’t cheered up many, including the Federal Reserve.

Economists and pundits, in particular, seem to have been blinded by everything from the euro’s demise, to slower growth in emerging countries, to an overheating of the Chinese economy had been used to tone down predictions for 2012 growth. Even the Fed’s forecasts have been downgraded, though Fed Chairman Bernanke did say the jobs market “had improved modestly” in his latest congressional testimony.

Some of the surprise was due to a pickup in both residential and non-residential construction, as real estate seems to slowly recovering, in part because of extremely affordable housing prices. Construction employment has added 52,000 jobs over just the past 2 months.

A total of 257,000 jobs were added in the private sector minus 14,000 public sector job losses. And Marketwatch reported that employment rose by an incredible 631,000 in January in the Household survey (that includes the self-employed) after adjusting for the effects of updating the population count. That’s the biggest increase since late 2007. Over the past six months, employment as measured by the household survey has increased by 1.98 million, the biggest increase in more than six years.

But there’s more to the story. The steady stream of irrationally pessimistic stories has until now reinforced the belief that our institutions had failed—from government to financial markets, and the private sector business in general that laid off more than 8 million workers from 2008-10.

The bad news had been drowning out the good news, in other words, had reinforced the stories we all hear in the media and elsewhere that tended to emphasize the negative in any report, in spite of the now 2 years of steady job and overall expansion of economic growth since the June 2009 end of the Great Recession .

Graph: Calculated Risk

This is what Robert Shiller and George Akerlof discussed in Animal Spirits, How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, which further develops famous economist John Maynard Keynes’ thesis that animal spirits, or emotions, drive most financial decisions. It was as much the negative news that permeated the air waves as anything that drove down consumer confidence to it record lows, in other words, and caused consumers and businesses to stop spending.

And we can measure the degree of confidence at any time in the economy, mainly via the two major confidence surveys of the Conference Board and University of Michigan. Confidence plunged to record lows in June, 2009 at the actual end of the recession, but are now returning to more normal levels.

Graph: Inside Debt

This was reinforced by faulty government statistics that said, for instance, there were no payroll jobs created last August—zip, zero—when in fact later revisions added 103,000 jobs in August, and additional jobs in later months.

Small business hiring has been part of the reason for increased employment, in part because of the Obama Administration’s freeing of $32 billion in SBA financing last year. And small business accounts for 70 percent of new jobs. Bank lending has increased 5 percent in the last half of 2011, according to NPR radio’s All Things Considered news program. In fact, stimulus spending over the past year may have contributed at least 1 percent to current growth, says the Center for Budget Priorities and Policies.

Also pushing growth has been large jumps in both manufacturing and service sector activity, via the ISM Purchasing Management surveys. A gigantic surge in employment and almost an equally dramatic surge in new orders headline a very strong ISM non-manufacturing report where the headline composite index jumped to 56.8, well beyond Econoday’s consensus for 53.3 and a strong 3.6 points above December’s upwardly revised 53.0.

Graph: Econoday

New orders jumped nearly 5 points to a 59.4 level that indicates strong monthly growth and points to acceleration in general activity in the months ahead. But the employment index is the eye catcher, up 8 points to 57.4 for by far the strongest reading of the recovery. This index has been lagging improvement in employment data from the government — but not any more.

Graph: Econoday

Moderate and steady growth is the indication from the ISM manufacturing report where readings pretty much match those of December, said Econoday. The January composite index rose to 54.1, safely over 50 to indicate monthly expansion and 1 point over December to indicate a slightly faster rate of expansion (prior revised). A key highlight of the report is the new orders index which rose nearly 3 points to 57.6 to indicate a little bit more than just a moderate rate of monthly expansion. In another positive, backlog orders increased 4.5 points to show a build at 52.5.

Even builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the latest NAHB/Wells Fargo Housing Market Index (HMI). This is the highest level the index has attained since June of 2007, and is why construction spending jumped 1.5 percent in December and has increased some 7 percent in one year.

 

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB). "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide — and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

So we don’t have to be pessimistic anymore. Rising confidence levels lifts all boats, as the saying goes.

Harlan Green © 2012

Popular Economics Weekly

Why so much gloom and tentativeness about U.S. economic growth when all the indicators are looking up for 2012? For instance, the Conference Board’s Index of Leading Economic Indicators again showed positive growth ahead. It rose 0.4 percent with 7 of its 10 indicators positive.

And the Q4 ‘advance’ estimate of GDP growth was 2.8 percent, almost double Q3. Equipment and software, which includes autos and exports, was the largest component. It would be even higher if corporation would use more of their cash hoard for job creation, rather than speculative investments and excessive executive compensation.

Graph: Econoday

Could it be because of the euro’s problems? “This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam,” said Ken Goldstein, a Conference Board economist. “Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe.”

But JP Morgan’s President Jamie Dimon said even the damage from a default of Greek debt would be “negligible”, in a CNBC interview at the Davos, Switzerland economic summit. So what’s the problem? The austerity (meaning deficit) hawks have their hands around the throats of European commerce. Why? In the mistaken belief that more stimulus spending will increase debt without actually causing more growth.

But Professor Robert Shiller, co-author of Animal Spirits with Nobelist George Akerlof, calls it debt delusion. When the private sector, including households, becomes over indebted, they begin to save more and spend less. But if governments do it at the same time, it causes a downward spiral towards deflation and recession or depression. This comes from the belief of fiscal conservatives that public borrowing takes money away from private users.

That, however, isn’t the case, because the private sector has plenty of funds, but is hoarding them (some $2 trillion in cash to date), rather than creating more jobs. So if governments are also hoarding their monies—in the form of trade or currency surpluses, as is happening in most of Europe today, then the bottom falls out of the economy. I.e., if no one is buying and everyone is saving, then no business gets done. This should be self-evident, because such a truth has been known since the Great Depression and New Deal that established our modern safety net, and ultimately put so many people back to work.

What underlies that truth is that Great Depressions and Great Recessions only happen when there is a wrenching transformation of whole economies. It was transformation of a mostly rural economy to manufacturing in the 1920s that brought on the Great Depression, and now it is wholesale migration of manufacturing jobs overseas and transformation to the Information Age, when little needs to be manufactured in the U.S.

Rutgers Econ Professor James Livingston has explained this transformation best in recent papers and articles. The great wealth shift away from wage earners-consumers to corporate profits began during the Great Depression, according to Livingston: “The underlying cause of that economic disaster (the Great Depression of 1929-33, 1937-38) was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production…and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.”

And in a recent New York Times Op-ed, It’s Consumer Spending, Stupid, Livingston expands on the reasons for our current prolonged malaise:

“As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.”

This, to put it mildly, explodes that rationale used by Wall Street and corporations to justify not passing on more of their profits to consumers—80 percent of which are wage and salary earners. The reasoning being that it is their profits that drive growth.

Professor Livingston says, “Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth.”

Not so, says Livingston, “But history shows that this is wrong. Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

“In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.”

Much has been written already about the record profits of both financial and non-financial corporations that have drained consumption, and that is the main reason why average real household incomes have actually declined over the past 30 years. In fact, corporate profits today are highest in history as a percentage of GDP.

Graph: Trading Economics

And this could be actually endangering economic growth by causing rampant market speculation, rather than productive investments, say many pundits, including Professor Livingston: “So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

How to cure the record income inequality that has resulted from so much power going to Wall Street and the corporations? Let us return to the income tax brackets that brought on so much prosperity to the middle class during the 1960s and 1970s. What were they?

The maximum bracket has fluctuated from 91 percent for those earning more than $400,000 in 1960, to the current low of 35 percent for those earning more than $379,150 today. And this has coincided with the astronomical increase in both household and government debt.

So it should be a no-brainer, if we want to see American growth restored to historical levels. Higher taxes have meant more growth, because public revenues are invested in growth-inducing infrastructure, better public safety, and upward mobility inducing education, for starters. Whereas lower taxes mean higher debts, with less growth and more speculative risk-taking to show for it. Why history is so easily forgotten may be a question only psychologists can answer.

Harlan Green © 2012