Popular Economics Weekly

Please don’t blame our Democracy, old as it is—in fact, the oldest in the modern world—for the slowness of this recovery. Winston Churchill on hearing his Labor Party had been defeated in 1947, said in the House of Commons, "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."

In fact, our Democracy is working, as economic growth is predicted to rise above 3 percent for the rest of the year, and job growth will get better, in spite of the worst downturn since the 1930s. Even real estate is showing signs of life with new housing construction up 14 percent in June.

The Conference Board’s index of leading indicators rose 0.3 percent in June on top of May’s outsized gain of 0.8 percent, which equates to approximately 3 percent growth for the rest of the year. The top factor for June was an increase in money supply with the second factor once again the yield spread between long rates and short rates with the latter being kept near zero by the Federal Reserve. And the larger the spread between short and long term rates—a so-called ‘steep’ yield curve—the more profit for banks and other lenders willing to extend credit.

Housing construction is continuing to move up—but from near rock bottom, says Econoday.  Housing starts jumped 14.6 percent in June, following no change in May.  And this actually helps growth, since it means more jobs. June’s annualized pace of 0.629 million units came in higher than the consensus projection and is up 16.7 percent on a year-ago basis. The boost in June was led by a 30.4 percent surge in the multifamily component.  The single-family component rose 9.4 percent after gaining 0.7 percent the prior month.

Sure, Republicans and Democrats are locked in a struggle that mirrors the eternal struggle between the old and the new. Republicans want every tax break they can get for their wealthiest constituents, while Democrats want every benefits’ break for all the other income classes plus the elderly. And this is preventing both the private and public sectors from stimulating more than tepid growth, in spite of record corporate profits since the end of the Great Recession.

The problem is neither party can agree how to pay for those benefits. Democrats want to close tax loopholes, while Republicans believe putting more money into the pockets of investors and the largest corporations by lowering tax rates further will somehow generate more growth, without spelling out how that might happen. The tax cuts in fact increased the federal deficit in both the Reagan and Bush Administrations

And preserving those Bush tax cuts has increased the deficit some $3 trillion, and will increase it another $7 trillion by 2017, according to the non-partisan Center for Budget Policies and Priorities, if not allowed to lapse.

Even “Read My Lips: No New Taxes” Grover Norquist, leader of those Republicans who have signed his Taxpayer Protection Pledge—which says that he or she will vote against all tax increases—said in a recent New York Times’ Op-ed it doesn’t mean opposing sunset clauses that allow the Bush tax cuts to expire in 2012. “If there were no vote in Congress and taxes rose automatically,” said Norquist, “then no politician would have voted for higher taxes, and no elected official would have broken his or her pledge.”

New York Times Op-ed columnist Charles Blow cited a recent Pew Research poll that said a thin majority of whites are now registered Republicans, while a majority of minorities such as Blacks and Hispanics are registered Democrats. So the line between the past and future is being drawn ever more sharply for the upcoming 2012 presidential election.

As we now know, the debate isn’t really about the deficit, as we said last week, which occurred largely under GW Bush. Else Republicans would be interested in paying down the deficit, which can only be done by closing the tax loophole that have increased the deficit. The federal deficit has been broken down by many, including the non-partisan Center for Budget and Policy Priorities.

New Bush Administration policies accounted for $5.07 trillion of the $14 trillion in Federal debt, while Obama Administration policies such as ARRA accounted for $1.44 trillion. The rest has come from lost revenues of the 2 recessions since 2001. We are now at the lowest level of revenues as a percentage of Gross Domestic Product since WWII.

That is why the debt ceiling agreement has to be ‘balanced’ between cost-cutting and deficit-cutting—i.e., slowing the growth of government programs while closing the tax loopholes that are taking monies away from projects that would stimulate higher growth rates.

Harlan Green © 2011

Financial FAQs

We were wondering why June’s unemployment report looked so bad—a net 18,000 nonfarm payroll jobs created, according to the Bureau of Labor Statistics? Well it looks like the BLS got it wrong this time. And understanding why may help to understand some of the pervading pessimism that is hurting economic growth—both for consumers and employers. The U.S. economy has become too complex to be understood by one set of statistics—such as the monthly jobs report. And that exaggerates the wild swings in monthly statistics that can only unnerve the general public—and even decision-makers less versed in economic terms.

Some economists are scratching their heads, because retail sales are growing 8 percent annually, both manufacturing and the service sector employment continues to expand, and another private payroll survey—the ADP Report—showed some 157,000 new private payroll jobs in June. Some of the poor report was due to Japan’s earthquake-Tsunami disruptions, of course. It turns out that lots of electronic as well as auto parts manufacturing was disrupted in Japan. But there’s more.

But it also has to do with the Bureau of Labor Statistics Seasonal Adjustment factor. That is an adjustment made to compare same month seasonal variations over several years. I.e., if hiring normally surges during June by 1 million new jobs (from lots of student entrants into the summer job market, for example), then the U.S. Bureau of Labor Statistics only counts the number above 1 million as new jobs when seasonally adjusted!

Econoday’s Sr. Economist R. Mark Rogers was one of the first to notice this anomaly. The difference, as the Econoday graph shows, is approximately 1 million jobs between not-seasonally adjusted vs. seasonally adjusted nonfarm payrolls. In fact, the not-seasonally-adjusted payrolls rose 376,000 in June, following a 631,000 jump in May, according to Econoday. So why not publicize that number, instead of the paltry 18,000 jobs number (57,000 private jobs created less 39,000 government jobs lost)?

Because economists in particular want to see the yr-to-yr differences in seasonal fluctuations. It is not difficult to see the problem. During the recession and soft recovery years of 2008, 2009, and 2010, the seasonal factors used by the BLS were significantly smaller—minus 927,000, minus 949,000, and minus 927,000, because of the Great Recession.  If last year’s seasonal factor were used for this June’s data, for instance, the overall payroll number would have been 135,000 higher and would have topped expectations, according to Dr. Rogers.

This is a serious difference. Then why were 1,060,000 ‘seasonal’ jobs subtracted in June—a number closer to the pre-recession June 2007 level, vs. the June 2010 level of 927,000 from the actual total of new jobs? And why are seasonally adjusted numbers used for the general news reports, anyway? It is calculated with an algorithm created by the Labor Dept. The fact that, say, 1 million more jobs are usual in June because schools are out can mean signs of substantial growth when it happens during an economic recovery. And it is being masked by the seasonal adjustment.

So it does look like Labor Dept. economists overestimated the June job surge, which in turn underestimates real jobs growth when some sectors like housing are still in recession! And that can cause real confusion about the direction of this economic recovery—if one isn’t an economist.

Backing up the suspicion of a faulty seasonal adjustment are the weekly initial jobless claims. They continue to fall, and would have been below 400,000 in the latest week, if Minnesota had not laid off so many state workers because of their budget standoff. This is when average weekly claims below 400,000 have historically been a sign our economy is in recovery.

Incidentally, would it make a difference if we knew the payroll report only shows the net job creation numbers? In fact, more than 4 million jobs are actually lost and created every month in the U.S. It is the difference between the two that constitutes the nonfarm payroll number. The just released May BLS Job Openings and Labor Turnover Survey (JOLTS) survey shows this. Approximately 2 million employees were laid off in May, the last month surveyed, while 2 million quit their jobs. With the May seasonal adjustment (SA), a total 4,011,000 jobs were added in JOLTS (with its smaller sample amount).

And, the number of job openings in May was 3.0 million, as the Calculated Risk graph shows, unchanged from April. The number of job openings in May was 862,000 higher seasonally adjusted than in July 2009 (the series trough) yet remains well below the 4.4 million openings when the recession began in December 2007. Of course, the JOLTS report is one month behind the unemployment report.

So which number do we believe? It may be necessary for economists to make such a distinction, but does that make sense to the general public? This probably means the economy is doing better than the pundits are saying, but it takes a very savvy reader to know the difference, and it’s certainly no confidence builder—which doesn’t help the rest of us trying to plan for the future.

Harlan Green © 2011

The Popular Economics Weekly

It should be obvious from today’s horrid June Bureau of Labor Statistics unemployment report—just 18,000 net nonfarm payroll jobs added and the Unemployment Rate up to 9.2 percent—that we are still in some sort of a disinflationary spiral. Yes, I said disinflation, which means the rate of inflation is falling, not rising, as the holders of debt would have us believe. And because employers find it difficult to raise their prices, they won’t create more jobs.

And that is the Federal Reserve’s greatest fear.  So we will probably see a ‘QE3’ round of Fed stimulus this fall.  There is just not enough demand, folks, to create any sustained sustained hiring, and the Fed is now the only entity willing to provide more stimulus, it seems, with Obama and the Congress locked into downsizing government further. 

Their fear?  A Japanese-style deflation that has plagued Japan since its twin  real estate and stock bubbles burst in 2000. 

As Nobelist Paul Krugman noted this in his latest blog, “Let me emphasize that last point. My bottom line on the inflation-deflation issue has always been to look at wages; you can’t have a wage-price spiral if wages ain’t spiraling. And they aren’t, to say the least.”

We are in fact facing the opposite problem of the 1970s, a wage-price disinflationary spiral, at the moment, although most economists won’t call it such. Wages and salary earners that make up 80 percent of our workforce haven’t seen a real wage increase since the 1970s.

The last wage-price inflationary spiral occurred in the 1970s with inflation spiking at some 14 percent, while today we saw a brief spike of the Consumer Price Index to slightly above 3 percent, when it was above 5 percent at the height of the bubble. To most wage and salary earners it feels like inflation, because their real incomes have stagnated since the 1970s, which means not risen in relation to inflation. Real stagnant wages plus rising energy and food prices smells like inflation to those who with limited incomes.

At last, we are seeing the effects of the supply side revolution of the 1980s to date; the “reverse Robin Hood” effect mentioned by Reagan Budget Director David Stockman in a past blog. It was a revolution that said ‘government is the problem’, when it wasn’t governments that caused inflation in the 1970s. Its major causes were rising oil prices from the formation of the OPEC oil cartel and 2 oil embargos as the Vietnam War was winding down.

Another sign that we are fighting falling prices are the rock-bottom interest rates. Interest rates rise in tandem with inflation, and conversely fall with declining prices. The 10-year Treasury Bond just dropped below 3 percent again. This St. Louis Fed graph highlighted by Krugman charts the relationship of interest rates with jobs.

“ It’s important to realize, by the way, that stagnant wages are NOT good for recovery; all they do is ensure that the burden of debt relative to income remains high,” said Krugman, “keeping demand and employment down. The situation cries out for aggressively expansionary monetary and fiscal policy. Instead, however, all the political push is in the opposite direction.”

The supply-side revolution was, and still is, a cover for cutting taxes. So-called Reaganomics didn’t cut government spending, yet sought to suppress the wages and salaries of the middle class in a number of ways. Tax exemptions allow U.S. Corporations to shelter their overseas profits from U.S. taxes until repatriated, for starters, thus encouraging them to export jobs overseas. And now Republicans are attempting to take away the collective bargaining rights of government unionized employees, just as they did for private industry in the 1980s and 90s.

All of this suppresses household incomes, without lessening household debt. So we are approaching a level of income inequality close to that of Mexico and other so-called Third World countries. Any long term solution to our budget deficit has to recognize that fact. Unless real incomes begin to rise again, there is no chance of paying off our debts—neither private nor public debts.

Harlan Green © 2011

Popular Economics Weekly

Bloomberg Businessweek recently highlighted under the banner, “The Most Feared Man in Washington is…” a profile of Grover Norquist, the chief “Enforcer” of the no new taxes pledge taken by 233 of the 240 House Republicans crafted during House Speaker Newt Gingrich’s era of the Contract for America. The pledge binds all of its takers to oppose “any and all efforts” to increase marginal income tax rates and to protect tax deductions and credits, according to Businessweek.

But in fact this pledge has not succeeded in its stated goal of lowering government spending. In fact, it has mainly succeeded in starving the main engine of economic growth, consumers. For each time Republican administrations have cut taxes in the name of shrinking government, it has instead shifted wealth from the lower and middle income classes to the top income brackets, which lowers the overall demand for goods and services.

As former Reagan Budget Director David Stockman said in a April 25 New York Times Op-ed, “While not the stated objective of policy, this reverse Robin Hood outcome cannot be gainsaid: the share of wealth held by the top 1 percent of households has risen to 35 percent from 21 percent since 1979, while their share of income has more than doubled to around 20 percent.

Why hasn’t the no new taxes pledge succeeded? Because Republicans are no better at cutting government spending than Democrats—in fact worse. Republican administrations since Reagan have chosen to borrow to pay for their hot and cold wars, rather than sharing the sacrifice, driving us ever deeper into debt.

There are other reasons for slower growth, of course. A slower growing population with more seniors, saturated consumer markets (more than 2 cars in a garage?), are two of the reasons. But during the period 1951-63, when marginal rates were at their peak—91 to 93 percent—the American economy boomed, growing at an average annual rate of 3.71 percent.  The fact that the marginal rates were what would today be viewed as essentially confiscatory, says New York Times’ pollster Charles Blow, did not cause economic cataclysm—just the opposite: “Whereas during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.”

Which brings us back to the federal deficit, the reason we are debating methods to starve the beast of government spending in the first place. It was caused first and foremost by the Bush-era tax cuts to the highest marginal tax rates, and on dividends and capital gains earned by the investor class. This in addition to the 2 wars has cost us more than $3 trillion in borrowed money to date, and the reason our deficit is still growing.

Grover Norquist, a Harvard MBA business degree graduate, has chosen to do his economic jousting without even the most basic knowledge of economics, it seems. Economic demand theory teaches that taking money from the pockets of those who spend most of it and transferring it to those who save most of it doesn’t increase demand for products.

Economic historians in particular know that tax cuts without sending cuts do not lower deficits, period, since it chokes off the revenues needed to pay down the deficit. The two largest expansions of debts as a percentage of GDP were during the Reagan and Bush Presidencies—from a low of 47 percent in the 1970s to its current some 80 percent. They were also the administrations that did the most tax cutting, without comparable spending cuts.

Nor do tax cuts—particularly to the highest marginal tax rates—stimulate more growth. In fact, we have seen a historical drop in GDP growth since the decline in highest marginal rates (of 93 percent) that prevailed during the Eisenhower administrations. The only time we have seen a real decline in the federal budget deficit was during the Clinton Presidency, when Clinton and Congress agreed to maintain Pay as You Go budget rules that said spending had to match revenues. The highest marginal tax rate was raised to 39 percent while government spending as a percentage of GDP fell during the Clinton era, so that the annual deficit was actually erased from 1997 to 2001.

Alas, President Reagan wanted to outspend the Russian military, while the GW Bush wanted to invade Iraq without spreading the pain. Instead, he made the call after 9/11 for everyone to go shopping. The problem was that shifting so much wealth to the wealthiest shortchanged consumers, who had to borrow beyond their means to take his advice.

When will we learn the lessons of history? Grover Norquist may be “the most feared man in Washington…” only because we are doomed to repeat our historic mistakes, if we do not now understand how and why the federal deficit was created.

Harlan Green © 2011

Popular Economics Weekly

The jobs recovery continues, despite the doom and gloomers. This was highlighted in the JOLT Survey we put up last week. New job openings totaled 3.1 million this April, up from the low of 2 million in 2009 at the beginning of the recovery.

The hiring is in all sectors, with industrial production leading the way. But retail has picked up, and even construction is beginning to show some life. But first quarter Gross Domestic Product has slowed. The Commerce Department’s second estimate for quarter GDP growth was unrevised at up 1.8 percent annualized and came in lower than the consensus forecast for 2.1 percent. The first quarter remains notably softer than the 3.1 percent growth in the fourth quarter.

Unfortunately, final sales of domestic product were revised to an annualized 0.6 percent from the initial estimate of 0.8 percent. Why care about it? The downward revision to final sales was mainly in personal spending, which is consumer expenditures and makes up 70 percent of GDP activity. It is now up 2.2 percent instead of the initial 2.7 percent for the first quarter.

The good news was that corporate profits in the first quarter expanded to $1.450 trillion annualized-up from $1.369 trillion in the fourth quarter, up an annualized 25.6 percent. Corporate profits are up 5.8 percent on a year-on-year basis, compared to up 11.4 percent in the fourth quarter. This means business has more room to expand and probably means a better looking second quarter for growth.

The current headwinds are due both to higher gas prices that have cut consumption and the Japanese Tsunami, that has cut auto production. So Industrial production has slowed, until the production of Japanese vehicles picks up again.

The Conference Board’s Index of Leading Economic Indicators shows a temporary slowdown. The weakest factor is initial jobless claims which sliced off 0.33 percentage points from the index’s growth, but that could be temporary due to reduced auto production. Also negative are building permits and the factory workweek. But improved employment should make it positive next month.

More good news was that new homes are beginning to sell again. April sales of new homes added to March’s gains, jumping 7.3 percent to a higher-than-expected annualized rate of 323,000. Strong sales drew down supply to 6.5 months from 7.2 in March and 7.9 in February. In a useful signpost for how deeply the residential sector has contracted, only 175,000 new homes are up for sale for the lowest total in data that goes back to 1963!

The improved jobs picture is boosting incomes. And income growth continued to support the consumer sector in April. Spending was moderately strong but largely due to higher prices. Notably, inflation is still on the warm side. As the report’s biggest positive, personal income in April posted a 0.4 percent gain equaling the pace in March and matching analysts’ forecast. Importantly, the key wages & salaries component increased 0.4 percent, following a boost of 0.3 percent in March.

Year on year, personal income growth for April posted at 4.4 percent, compared to 4.8 percent the prior month. PCEs growth rose a year-ago 4.8 percent, up from 4.4 percent the prior month. The good news is that income growth remains moderately strong. The bad news is that inflation has eaten into those earnings and has restrained real spending. The slowing in real spending may be transitory (a recently favorite word among Fed officials) but softer inflation and healthier income growth are needed, which will only come with businesses using some of their cash hoard to create more jobs.

Harlan Green © 2011

Popular Economics Weekly

Neither party seems to want to tackle the unemployment problem head on. Why? Conservatives have succeeded in shifting the debate to taming the budget deficit, when any improvement in the deficit depends on creating more jobs. It is not enough to shrink government spending, in other words, because that results in more lost jobs. Nor can the debt load shrink without growing tax revenues—either in absolute terms or as a percentage of Gross Domestic Product— and tax revenues do not grow unless employers hire more employees.

The lack of focus on job creation is unfortunate, as more than 15 million are still looking for some kind of full time work, and the labor participation rate of eligible workers has dropped below 60 percent, 6 percent below the norm. What has created more jobs to date? It has mostly been the manufacturing sector exporting to other countries due to the cheaper dollar exchange rate, and the dollar won’t remain so cheap once U.S. growth kicks into high gear.

Yet domestic spending is finally beginning to grow this year, even though banks are still reluctant to lend and wages and salaries are growing less than 2 percent, as opposed to more than 4 percent during good times. Auto companies have been the biggest booster to domestic spending as they continue to sell more vehicles, which has brought retail sales close to pre-recession levels. And that only happened with the government aid to GM and Chrysler. Government spending has never been the problem, in other words, with trillions of unused dollars being hoarded in corporations and banks.

Although a large part of retail sales come from higher gas and food prices, overall retail sales on a year-ago basis in April were steady at 7.6 percent. Excluding motor vehicles, sales were up a year-ago 6.9 percent, compared to 6.8 percent in March. Strength was led by food & beverage stores (up 1.2 percent), nonstore retailers (up 1.0 percent), and miscellaneous store retailers (up 0.9 percent). Leading on the down side were electronics & appliance stores (down 2.2 percent), sporting goods, hobby, book & music stores (down 1.9 percent), and furniture & home furnishing (down 1.1 percent).

Another sign that consumer demand is increasing was the drop in business inventories which lag business sales, indicated by the stock-to-sales ratio which fell another tenth to what is a new record low of 1.23. This reading indicates that inventories are too low. But rising sales point ahead to rising production, rising inventory build, and rising employment as well.

In fact, the softer growth in the first quarter was largely due to a sharp upturn in imports, says Econoday (Import totals are deducted from exports as part of the GDP calculations.), some deceleration in personal consumption, a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports. They were partly offset by a sharp upturn in private inventory investment, as businesses seem to be anticipating more demand growth.

The Bureau of Labor Statistics’ monthly JOLT Survey gives us the best employment picture. It shows a steady increase in Job openings (yellow line in graph) from the low of 2 million in 2009 to 3.1 million in April 2011. The total number of monthly Hires is also above 4 million. It is the positive 200,000 plus average monthly difference in Hires vs. Layoffs plus Quits this year that tells us payroll jobs have been trending up.

In fact, consumer spending, which makes up almost 70 percent of GDP spending, is now leading the recovery as we said last week. This is because personal income is growing again (thanks in part to those manufacturing jobs), up 0.5 percent, following a 0.4 percent gain in February.  And the wages & salaries component also rose a moderate 0.3 percent, softening a little from 0.4 percent in February.

Consumers are seeing some erosion in spending power because of higher food and energy prices—the main reason for higher import totals.  Real hourly earnings are average hourly earnings deflated by the Consumer Price Index, and on a year-ago basis, real hourly earnings were down 1.2 percent, compared to down 0.7 percent in March.  Indeed, real wages swing significantly as energy costs rise or fall sharply.  We saw a large gain in real wages in 2008 on the plunge in oil prices but the reverse is currently true.  In recent months, basically, consumer spending has been driven by pent up demand and job growth.  Individual spending power has fallen on average but aggregate earnings are up on higher employment.

The good news may be that as the dollar is appreciating again, consumer spending will pick up the slack in activity. So a higher dollar exchange rate while crimping exports, will moderate retail prices—especially oil and gas prices. Will this embolden the private sector to start spending some of their hoarded $trillions? There will be no significant deficit reduction until private investment picks up further. Since the focus on cutting government spending is in full swing, we have to hope that energy and food prices continue to soften, so that consumers can continue to recover.

Harlan Green © 2011

Popular Economics Weekly

Can we finally say jobs are returning? Nonfarm payroll employment rose by 244,000 in April, and the unemployment rate edged up to 9.0 percent, but only because more people were looking for work, according to the U.S. Bureau of Labor Statistics. This is while the change in total nonfarm payroll employment for February was revised upward from +194,000 to +235,000, and for March was revised from +216,000 to +221,000.

With commodity (oil, gas, and food) prices still sky high, the Mideast having its own revolutions, and Bin Laden dead, consumers are beginning to shop again, businesses are hiring, and even new-home construction may awaken from its coma.

This means the private sector is finally beginning to put people back to work, and it will create a virtuous cycle. Jobs = more purchasing power = more jobs = etc.

Gains were seen in goods-producing and service-providing sectors. Goods-producing jobs posted a 44,000 boost, following a 37,000 rise in March. For the latest month, manufacturing jobs increased 29,000 after a 22,000 gain in March. Even construction expanded though with a modest 5,000, following a 2,000 uptick the prior month. Mining jumped 11,000 in April.

This is while governments continued to lose jobs. Government jobs fell 24,000, following a 10,000 dip in February, while the private sector added 268,000 jobs. Private service-providing jobs increased 244,000 after a 194,000 rise in March. Trade & transportation was up 71,000 in April with 57,000 coming from retail trade. Other notable gains included professional & business services, up 51,000; health care, up 37,000; and leisure & hospitality, up 46,000.

The unemployment rate ticked up to 9.0 percent from 8.8 percent in March in the Household survey, however, because more began looking for work (+205,000). So are we finally turning the corner on unemployment? All signs point to higher growth ahead. Increased tax revenues have already pushed the debt ceiling deadline back another month, and increased tax revenues are what is needed to bring down the actual deficit as a percentage of Gross Domestic Product.

We know the economy slowed during the first quarter of 2011. However, the detail shows moderate forward momentum. First quarter GDP growth eased to a 1.8 percent annualized pace, following a 3.1 percent boost in the fourth quarter.

It was largely due to a sharp upturn in imports, says Econoday (Import totals are deducted from exports as part of the GDP calculations.), a deceleration in personal consumption, a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports. They were partly offset by a sharp upturn in private inventory investment.

Nonetheless, relative strength was seen in personal spending, investment in equipment & software, and inventory investment.  Exports also continued to rise although not as rapidly as earlier.  Weakness included a drop in government purchases, nonresidential structures, and residential structures. 

The good news is that consumer spending, which makes up almost 70 percent of GDP activity, is now leading the recovery, taking over from the manufacturing sector. This is in part because personal income has been increasing. Wages & salaries rose a moderate 0.3 percent in March, softening a little from 0.4 percent in February, while spending is growing at almost 5 percent annually. 

Harlan Green © 2011

Financial FAQs

Conservatives love to repeat their mantra that economic growth and higher taxes are incapatible.  But a very good recent Op-ed by New York Times pollster Charles Blow gave the best description of the result of non-progressive tax policies. The historical picture shows that a lower the tax rate for the richest among us—the so-called highest marginal tax rate—coincided with a lower overall growth rate of our economy. This refutes the tax cutters justification for reducing government services—that the private sector is best engine of growth. In fact, a certain amount of government services are necessary for decent economic growth.

“The spurious argument that cutting taxes for the wealthy will somehow stimulate economic growth is not borne out by the data,” says Mr. Blow. “A look at the year-over-year change in G.D.P. and changes in the historical top marginal tax rates show no such correlation. This isn’t about balancing budgets or fiscal discipline or prosperity-for-posterity stewardship. This is open piracy for plutocrats. This is about reshaping the government and economy to benefit the wealthy and powerful at the expense of the poor and powerless.”

There are other reasons for slower growth, of course. A slower growing population with more seniors, saturated consumer markets (more than 2 cars in a garage?), are two of the reasons. But during the period 1951-63, when marginal rates were at their peak—91 percent or 92 percent—the American economy boomed, growing at an average annual rate of 3.71 percent. The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm—just the opposite. Whereas during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.

Why is there a correlation between slower overall economic growth and a shift in wealth towards the top? The richest invest less of their incomes in either consumption or investments, for starters. This has been shown in many studies. But also, the more unequal wealth distribution was a direct cause of both the Great Recession, and the Great Depression, which had almost identical wealth shifts to the top. The middle and lower class incomes declined at the same time that Wall Street and the banks—proxies for the interests of the wealthiest—agitated for fewer financial controls. In both cases, reduced regulation and the easy credit engineered by the Federal Reserve enabled consumers to borrow beyond their means to keep up their standard of living.

The lower marginal tax rates were also a reason for the burgeoning deficit, and further market instability. So curing the budget deficit is really a common sense matter. We must grow our economy by boosting everyone’s income, in other words, not just that of the wealthiest, while holding our expenses. We did it in the 1990s. That can only happen with increased job formation, and a fairer tax code.

There are many causes of slower economic growth, but only a few ways to boost a recovery in growth. The historical record shows just cutting taxes or lowering the highest marginal tax rate that funnels more money into the pockets of the wealthy, but downsizes public funding for research and development, programs that develop new talent by nurturing educational opportunities, and debases a regulatory environment that prevents excessive risk-taking by Wall Street, leads to slower growth.

Harlan Green © 2011

Financial FAQs

We are having the wrong budget debate. Washington is not talking about paying down the federal debt, which now totals some $9.5 trillion held publicly. Budget deficits are created when revenues don’t equal spending. So when the focus is only on cutting taxes and public spending by downsizing government and so public services—such as in protecting our health, the environment, education—and not increasing those revenues, then it doesn’t cure our budget problem. In fact, it just aggravates the problem, while putting more people into poverty.

The best example is the last time we had a balanced budget—in 1999. It was a time when Congress agreed to the Pay-as-you-go rules. Spending increases had to be balanced with revenue increases. And only when our economy was booming—21 million jobs were created during those years, and the highest income tax bracket was raised to 39 percent—were there enough revenues to pay down the debt. The debt that had been built during the 1980s by cutting taxes didn’t disappear by cutting spending, in other words.

This is obvious to the average household. Consumers know that, unless they pay down their debts the debt doesn’t go away. They are careful not to accumulate more debts, of course. But the real problem is how to shrink the debt by putting more of their income into paying it down, while spending less. Shrinking their incomes to pay down the debt doesn’t work, period.

Governments have had to do the same. Our largest public debt as a percentage of the economy was the 120 percent of GDP accumulated from WWII. It took the massive spurt in growth during the 1950s and 60s to pay it down to below 40 percent of GDP in the 1970s. It was accompanied by massive public spending on infrastructure (e.g., highways, education) that raised everyone’s standard of living—not just the wealthiest.

This was paid for by taxing the wealthiest among us, whose top tax bracket was 91 percent under Republican President Dwight Eisenhower. And by raising everyone’s standard of living, our economy prospered since prosperous consumers meant more demand for goods and services, hence more jobs.

The 1920s were a similar period of inequality as we have today. The top 1 percent income bracket controlled 23.5 percent of national income as now, when there was no unemployment insurance, deposit insurance, and social security to protect the savings of average consumers and the elderly.

Roosevelt’s New Deal corrected that problem and brought on the post-war prosperity by guaranteeing that most Americans could prosper.

As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47 percent of the debt held by the public of $9.49 trillion and 32 percent of the total debt of $14.1 trillion (that includes the social security trust fund). The largest holders were the central banks of China ($1.1 trillion) and Japan ($885 billion). The share held by foreign governments has grown over time, rising from 25 percent of the public debt in 2007 before the Great Recession.

One would think, therefore, that paying down debt should be the first priority of any U.S. administration. But the debate has been skewed by those who profit most from cutting taxes, without growing public revenues—Big Business, Wall Street, and their investors who have corralled 40 percent of the wealth of this country. It is obvious they care little about the debt, since they advocate cutting public spending without raising revenues needed to pay down the debt.

We know how the current federal debt was accumulated since 2000. The largest percentage—more than $3 trillion—came from the Bush tax cuts of 2001 and 2003, which reduced not only the highest income tax brackets from the Clinton era 39 percent to 35 percent, but reduced long term capital gains and dividend taxes that mainly benefit the wealthy to a maximum 15 percent. Then the Iraq and Afghanistan wars cost another $1 trillion of borrowed money. The Great Recession accounts for most of the rest of the deficit. So all this happened while reducing the income needed to pay for that debt.

Curing the budget deficit is really a common sense matter. We must grow our economy by boosting everyone’s income, in other words, not just that of the wealthiest, while holding our expenses. We did it in the 1990s. That can only happen with increased job formation, and a fairer tax code. Just cutting taxes that funnels money into the pockets of the wealthy, but cuts funding for research and development, programs that develop new talent by nurturing educational opportunities, and a regulatory environment that prevents excessive risk-taking by Wall Street, can only lead to more debt, not less.

Harlan Green © 2011

Popular Economics Weekly

Nonfarm payroll employment increased by 216,000 in March, and the unemployment rate was little changed at 8.8 percent, the U.S. Bureau of Labor Statistics reported today. It is a start, but we have a long way to go to have a sustainable recovery. The economy is in recovery mode—both manufacturing and the service sectors are expanding, in other words—but with lots of slack demand and empty facilities yet to fill.

Overall Gross Domestic Product is now back to producing what it did in 2007—that is, with 7.1 million fewer workers. Those unemployed mainly belong to the 80 percent of wage and salary earners who are actually earning less than before the Great Recession—if they even have jobs. The most difficult task will be to find decent jobs for the part timers and long term unemployed—those out of work for more than 6 months—if we are to bring back the sectors still lagging; real estate, construction and their corollary industries (insurance, building supplies, mortgages, etc). Real estate itself has shrunk to about 2 percent of GDP, when it averaged 7 percent over the last decades.

The last three months of job creation averaged about 160,000 payroll jobs per month. That is more than enough to keep up with the growth in the labor force, but it will only push the unemployment rate down slowly. Private payrolls were a little better at an average of 188,000 per month, as state and local governments continued to lay off workers.

In fact, economists say even if we are to maintain a 200,000 per month net job gain, it will still take until 2016 to get us back to anywhere near full employment. The decline in the unemployment rate from 8.9 to 8.8 percent was good news, though the participation rate was unchanged at 64.2 percent. This is the percentage of the working age population in the labor force, and is still below the 67 percent participation rate over the past 20 years.

And so we still have to rely on manufacturing and booming exports for any growth at all. New orders, export orders and backlog orders slowed during March in an otherwise solid ISM manufacturing report. The composite headline index, which got a big lift from a slowing in supplier deliveries and from continued strength in production and employment, edged back only two tenths to a still very strong 61.2 that indicates month-to-month growth in overall activity at roughly the same level as February.

Government jobs fell 14,000, following a 46,000 drop in February.  For the latest month, state & local government declined 15,000 with 9,200 in local government education. The biggest negative in the employment report was for wages. The earnings picture in March is disappointing as average hourly earnings for all workers were flat, matching February. On a year-ago basis, wages were up only 1.7 percent, equaling the February pace, when earnings expand at 3 percent during good times.  Earnings clearly are lagging headline retail (CPI) inflation.

But we are seeing very little overall inflation in overall Personal Consumption Expenditures, even with exploding oil and food prices, which have more to do with the Mideast worries and droughts than longer term demand factors. On a year-ago basis, PCE prices are up just 1.6 percent in February—up notably from 1.2 percent the month before.  Core inflation nudged up to a 0.9 percent year-on-year pace versus 0.8 percent in January, still below the Fed’s target range of 1.5 to 2 percent.

Why so little inflation? Because two-thirds of product costs are labor costs, and incomes are barely keeping up with living expenses, as we said. We will know when there is sufficient demand to push up overall prices, when consumers stop looking for bargains and are willing to pay for higher prices in other than the necessities. And that won’t happen until most of those 7.1 million have found work again.

Harlan Green © 2011