American Workers: Hanging on by the Skin of Their Teeth

What's Wrong With This Picture?

by MIKE WHITNEY

After five years of Obama’s economic recovery, the American people are as gloomy as ever. According to a Bloomberg National Poll that was released this week, fewer people “are optimistic about the job market” or “the housing market” or “anticipate improvement in the economy’s strength over the next year.” Also, only 38 percent think that President Obama is doing enough “to make people feel more economically secure.” Worst of all, Bloomberg pollsters found that 68 percent of interviewees thought the country was “headed in the wrong direction”.

So why is everyone so miserable? Are things really that bad or have we turned into a nation of crybabies?

The reason people are so pessimistic is because the economy is still in the doldrums and no one’s doing anything about it. That’s it in a nutshell. Survey after survey have shown that what people really care about is jobs, but no one in Washington is listening. In fact, jobs aren’t even on Obama’s radar. Just look at his record. He’s worse than any president in modern times. Take a look at this graph.

More than 600,000 good-paying public sector jobs have been slashed during Obama’s tenure as president. That’s worse than Bush, worse than Clinton, worse than Reagan, worse than anyone, except maybe Hoover. Is that Obama’s goal, to one-up Herbert Hoover?

Obama has done everything he could to make the lives of working people as wretched as possible. Do you remember the Card Check sellout or the Wisconsin “flyover” when Governor Scott Walker was eviscerating collective bargaining rights for public sector unions and Obama blew kisses from Airforce One on his way to a campaign speech in Minnesota? Nice touch, Barry. Or what about the “Job’s Czar” fiasco, when Obama appointed GE’s outsourcing mandarin Jeffrey Immelt to the new position just in time for GE to lay off another 950 workers at their locomotive plant in Pennsylvania. That’s tells you what Obama really thinks about labor.

What Obama cares about is trimming the deficits and keeping Wall Street happy. That’s it. But the people who elected him don’t want him to cut the deficits, because cutting the deficits prolongs the slump and costs jobs. What they want is more stimulus, so people can find work, feed their families, and have some basic security. That’s what they want, but they’re not going to get it from Obama because he doesn’t work for them. He works for the stuffed shirts who flank him on the golf course at Martha’s Vineyard or the big shots who chow down with him at his $100,000-per-plate campaign jamborees. That’s his real constituency. Everyone else can take a flying fu** for all he cares.

Then there’s the Fed. Most people don’t think the Fed’s goofy programs work at all. They think it’s all a big ruse. They think Bernanke is just printing money and giving it to his criminal friends on Wall Street (which he is, of course.) Have you seen this in the New York Times:

“Only one in three Americans has confidence in the Federal Reserve’s ability to promote economic growth, while little more than a third think the Fed is spinning its wheels, according to a New York Times/CBS News poll….

The Fed has been trying for five years to speed the nation’s recovery from the Great Recession by reducing borrowing costs to the lowest levels on record….

Most Americans, it would appear, remain either unaware or unpersuaded.” (“Majority of Americans Doubt Benefits of Fed Stimulus“, New York Times)

“Unpersuaded”? Are you kidding me? Most Americans think they’re getting fleeced; unpersuaded has nothing to do with it. They’re not taken in by the QE-mumbo jumbo. They may not grasp the finer-points, but they get the gist of it, which is that the Fed has run up a big $3 trillion bill every penny of which has gone to chiseling shysters on Wall Street. They get that! Everyone gets that! Sure, if you want to get into the weeds about POMO or the byzantine aspects of the asset-purchase program, you might detect a bit of confusion, but –I assure you–the average Joe knows what’s going on. He knows all this quantitative jabberwocky is pure bunkum and that he’s getting schtooped bigtime. You don’t need a sheepskin from Princeton to know when you’ve been had.

And that’s why everyone is so pessimistic, because they know that the Fed, the administration and the media are all lying to them 24-7. That’s why–as Bloomberg discovered–”Americans are losing faith in the nation’s economic recovery.” Because they don’t see any recovery. As far as they’re concerned, the economy is still in recession. After all, they’re still underwater on their mortgages, Grandpa Jack just took a job at a fast-food joint to pay for his wife’s heart medication, and junior is camped out in the basement until he can get a handle on his $45,000 heap of college loans. So where’s the recovery?

Nobody needs Bloomberg to point out how grim things are for the ordinary people. They see it firsthand every damn day.

Did you catch the news on Wal-Mart this week? It’s another story that helps explain why everyone’s so down-in-the-mouth. Here’s what happened: Wal-Mart’s stock tanked shortly after they announced that their “inventory growth …had outstripped sales gains in the second quarter…. Merchandise has been piling up because consumers have been spending less freely than Wal-Mart projected….” (Bloomberg)

Okay, so the video games and Barbie dolls are piling up to the rafters because part-time wage slaves who typically shop at Wal-Mart are too broke to buy anything but the basic necessities. Is that what we’re hearing?

Indeed. “We are managing our inventory appropriately,” David Tovar, a Wal-Mart spokesman, said today in a telephone interview. “We feel good about our inventory position.”

Sure, you do, Dave. Here’s more from Bloomberg:

“US. chains are already bracing for a tough holiday season, when sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak, a Chicago-based firm. Wal-Mart cut its annual profit forecast after same-store sales fell 0.3 percent in the second quarter. …

Wal-Mart’s order pullback is affecting suppliers in various categories, including general merchandise and apparel, said the supplier, who has worked with Wal-Mart for almost two decades and asked not to be named to protect his relationship with the company. He said he couldn’t recall the retailer ever planning ordering reductions two quarters in advance.” (“Wal-Mart Cutting Orders as Unsold Merchandise Piles Up”, Bloomberg)

So we’re back to 2009?

Looks like it. When the nation’s biggest retailer starts trimming its sails, it ripples through the whole industry. It means softer demand, shorter hours, and more layoffs. Get ready for a lean Christmas.

The Walmart story just shows that people are at the end of their rope. For the most part, these are the working poor, the people the Democratic Party threw overboard a couple decades ago when they decided to hop in bed with Wall Street. Now their hardscrabble existence is becoming unbearable; they can’t even scrape together enough cash to shop the discount stores. That means we’re about one step from becoming a nation of dumpster divers. Don’t believe it? Then check out this clip from CNN Money:

“Roughly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings, according to a survey released by Bankrate.com Monday. Fewer than one in four Americans have enough money in their savings account to cover at least six months of expenses, enough to help cushion the blow of a job loss, medical emergency or some other unexpected event, according to the survey of 1,000 adults. Meanwhile, 50% of those surveyed have less than a three-month cushion and 27% had no savings at all..

Last week, online lender CashNetUSA said 22% of the 1,000 people it recently surveyed had less than $100 in savings to cover an emergency, while 46% had less than $800. After paying debts and taking care of housing, car and child care-related expenses, the respondents said there just isn’t enough money left over for saving more.” (“76% of Americans are living paycheck-to-paycheck“, CNN Money)

Savings? What’s that? Do you really think people can save money on $30,000 or $40,000 a year feeding a family of four?

Dream on. Even an unexpected trip to the vet with pet Fido is enough to push the family budget into the red for months to come. Savings? Don’t make me laugh.

The truth is, most people are hanging on by the skin of their teeth. They can’t make ends meet on their crappy wages and they’re too broke to quit. There’s no way out. It’s obvious in all the data. And it’s hurting the economy, too, because spending drives growth, but you can’t spend when you’re busted. Economist Stephen Roach made a good point in a recent article at Project Syndicate. He said,

“In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.” (It’s also a) “massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.” (“Occupy QE“, Stephen S. Roach, Project Syndicate)

So the economy is getting hammered because consumption is down. And working people are getting hammered because jobs are scarce and wages are flat. But we live in the richest country in the world, right?

Right. So what’s wrong with this picture?

Back to Recession

From Spring Swoon to the Big Crash
by MIKE WHITNEY


The media is calling it a “Spring swoon”, but it’s really just the next phase of the long slump.

After a strong showing in the first quarter (Q1), the economy is starting to lose steam for the forth year in a row. The main cause for the slowdown is –what Bloomberg calls–”the biggest federal-budget tightening in more than 60 years”. The impact of the budget cuts can already be seen in retail sales, personal consumption and consumer confidence. Eventually, they’ll be felt throughout the entire economy pushing unemployment higher and shrinking GDP by 1.6 percent or more.
Economists warned policymakers not to reduce government spending while the economy was still weak, but Congress shrugged off their advice and cleared the way for another slowdown. Activity is likely to fall off sharply as already over-stretched households try to muddle through on paychecks that are now 2 percent smaller following the restoration of the payroll tax. The deceleration should intensify into the summer months impacting other areas of the economy and, ultimately, widening the deficits due to lower tax receipts. This illustrates the futility of austerity measures, they only serve to make matters worse.

Let’s face it; the economy has never gotten better, not for working people at least. And now it’s getting worse; should we be surprised?

Not at all. The system is performing the way it’s set to perform; providing unlimited sums of money for speculators and moneybags friends of Obama, and table scraps for everyone else. Here’s a blurb from the Wall Street Journal that just confirms what everyone already knows:

“From 2009 to 2011, the average wealth of America’s richest 7% — the 8 million households with a net worth north of about $800,000 — rose nearly 30% to $3.2 million from $2.5 million, according to a Pew Research Center report that analyzed recent Census data. By contrast, the average wealth of America’s remaining 93%, some 111 million households, actually dropped by 4% to $134,000 from $140,000. Wealth is the value of what a household owns minus what it owes.”

So all the money is going upwards, but we’re expected to believe that that’s not what policymakers had in mind to begin with; that it’s all just one big accident?

Uh, huh. As Robert Reich points out, there’s never been a recovery, not really. Here’s how he puts it in his latest blog-post:

“Four years into a so-called recovery and we’re still below recession levels in every important respect except the stock market. A measly 88,000 jobs were created in March, and total employment remains some 3 million below its pre-recession level. Labor-force participation is its lowest since 1979.

Businesses won’t hire and expand unless they have more customers, but most Americans can’t spend more. Last Friday’s retail sales report showed sales down .4 percent in March. Consumer sentiment has fallen to its lowest level in nine months.

The underlying problem is the vast middle class is running out of money. They can’t borrow more — and shouldn’t, given what happened after the last borrowing binge.

Real annual median household income keeps falling. It’s down to $45,018, from $51,144 in 2010. All the gains from the recovery continue to go to the top.” (“Why This is the Worst Recovery on Record“, Robert Reich’s blog)

Okay, so you’ve heard it all a million times before. But it’s about to get worse, so you might want to know some of the details. You see, the economy was already slowing down before

Obama’s budget cuts. Retail sales are off, manufacturing is sputtering, earnings are weak, existing home sales are dropping, and durable goods are in the tank. Here’s more from the WSJ:

“U.S. orders for long-lasting manufactured goods fell sharply in March as businesses cut investment, suggesting that economic growth has cooled since the start of the year.

Durable goods orders decreased 5.7% from the prior month to a seasonally adjusted $216.28 billion, the Commerce Department said Wednesday. Economists surveyed by Dow Jones Newswires expected a 2.9% drop in March orders.

Durable goods are usually big-ticket items designed to last at least three years. Businesses and consumers typically make such purchases when they are confident about the economy….

Wednesday’s report echoes other recent data suggesting solid but slowing growth through the first quarter of the year as consumers and businesses became increasingly cautious.”

Problems in the US are compounded by growing troubles abroad, notably the slowdown in China and the ongoing Depression in Europe. Here’s more from the WSJ:

“Troubles overseas are threatening the U.S. recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

U.S. exports of goods to the European Union are declining outright. Growth in overall U.S. exports has been sputtering for months, after a three-year postrecession surge. And major U.S. companies are reporting increasingly dour overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.”

So, don’t expect any help from overseas–like an uptick in exports–because it ain’t gonna happen. China’s investment-heavy economic model is beginning to crack beneath its prodigious debt-load and the slump in Europe will persist until EU elites achieve their goal, which is to decimate the social model that provides health care, pensions and labor protections for the people in the 17-member Eurozone. That’s what this is all about. Once the EU’s working population has been reduced to third world poverty, then policymakers will return to a pro-growth strategy, but not before. But that’s going to take a while, so don’t hold your breath.

So, what’s in store for the US economy?

First we need to summarize what’s going on right now. Just take a quick look at these charts from analyst Lance Roberts at Street Talk Live in a post titled “Economy In Pictures: Have We Seen The Peak?”

This will help you see the present trajectory of the economy vis a vis wages, consumer spending, output, employment and GDP.

Wages and Salaries

Incomes are the lifeblood of the economy. In order for consumers to consume (which makes up roughly 70% of the economy currently) wages must rise at a rate to support increases in consumption.

Consumer Spending

As state above, personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation. As PCE goes – so goes the economy.

Production and Manufacturing

The chart below is the STA Economic Output Composite Index which is an index comprised of the Chicago Fed National Activity Report, ISM Composite, several Fed regional manufacturing surveys, Chicago ISM PMI, and the NFIB Small Business Survey. This is a very broad measure of the economy.

Employment

The chart below shows both the seasonally adjustment employment levels compared to a 12-month moving average of the non-seasonally adjusted data.

GDP

Do you see any glimmer of light in these charts?

I don’t. The fact is, everything is headed in the wrong direction. And this is just “big picture” stuff. If you wanted to get into the weeds and really dig through the data on other sectors, you’d see the same thing, that is, that things are progressively getting worse. And, of course, Obama’s budget cuts will further intensify the downturn, which appears to be what the politicians really want.

Have you seen this Bloomberg video of Nouriel Roubini explaining what we can expect when the sequester cuts kick in?

Here’s a clip. Nouriel Roubini:

“I’m quite concerned about the US economy. People underestimated how much…the sequester would effect the economy. …fiscal drag of 1.7%….We’re doing the wrong kind of fiscal consolidation. It’s way too frontloaded….will have a drag on consumption…so, US will have subpar growth, below trend..and unemployment will remain high. …The Fed’s QE has already created froth in asset and credit markets that could lead to another significant bubble …So, you’ll have a big party in asset prices for the next couple years, (while rates stay low) followed by a crash bigger than before.” (Bloomberg)

Oh good. So the asset bubbles are already forming, but the economy is still flat on its back. So–chances are–we’ll suffer a meltdown before the anticipated recovery ever takes hold. Doesn’t that sound like a policy that needs to be revisited?

Let’s not kid ourselves, none of this is accidental. This whole permanent Depression-thing is just part of the plan. How could it not be? I mean, is there anyone dumb enough to believe in austerity anymore? Even the right-wing Washington Post has given belt tightening the old heave-ho. Just look at this excerpt from a recent editorial:

”There’s basically no evidence that fast austerity programs, or ones undertaken during economic downturns, are even good at reducing the debt burden. It’s very clear they’re bad for growth. Austerity through spending cuts may help growth in the long run, but so do a lot of things, and if those cuts are to things known to boost growth, like early childhood education or research, they could be counterproductive. But for the time being, austerity is the wrong prescription for advanced economies.”

Even Fox on 15th Street is admitting defeat and running up the white flag. Can you believe it?

But it doesn’t matter how discredited the policy is, the politicians are going to keep ratcheting up the pressure until they get what they want, which is, more privatization of public assets, more busting up federal unions and more dismantling critical safetynet programs. (particularly, SS, Medicare, Medicaid) Present policy has nothing to do with growing the economy or putting people back to work. It’s just plain old class warfare.
So, how bad will it get?

Nobody really knows for sure, but with factory output already dropping, retail sales flagging, existing home sales down, new payrolls flatlining, consumers spending less and saving more, and the global economy on life-support, it’s hard to see how we’re going to get out of the doldrums, especially since the full effect of the tax hikes and budget cuts have yet to be felt. Clearly, the downside risks have increased exponentially, which means that any unexpected shock will push the economy back into recession.

Want to Fix the Economy? Spend More Money

Can't Get No Stimulation
by MIKE WHITNEY


The economy operates on a simple principle: When people spend money, the economy grows. That means the goal of economic policy should be to maintain a level of spending that keeps the economy growing and minimizes the unavoidable peaks and valleys of the business cycle. This can’t be done without government intervention, mainly because free market capitalism tends to be too erratic (spending can fall sharply) and crisis prone. (See: Lehman Brothers 2008). Dramatic fluctuations in the markets, typically result in anemic business investment which leads to higher unemployment, slower growth and weaker demand. This problem was largely solved by British economist John Maynard Keynes. Keynes understood that when private sector spending dropped off, public sector (government) spending had to increase or output would shrink, unemployment would rise, and the economy would begin to sputter.

Interestingly, all of the main players who are currently setting policy in the Obama administration and at the Federal Reserve have some understanding of Keynes’ theories and how they can be used to put the economy back on track. The fact that Keynes remedies have been rejected in favor of unconventional and ineffective theories like QE (Quantitative Easing), suggests that the supporters of these policies are less interested in reviving the economy and putting people back to work, then they are with rewarding powerful constituents. 5 years of experimentation, has resulted in chronic high unemployment, droopy consumer confidence, negative wage growth, sky-high foreclosures and personal bankruptcies, record food stamp usage, and a sharp increase in extreme poverty. At the same time, the 3 main stock indicies have more than doubled in value while financial institutions and corporations are raking in record profits. There’s no doubt that QE has served the interests of the few while hurting the interests of the many.

The reason Keynes theories experienced a “comeback” in 2009 is not hard to grasp. Congress and the White House were afraid that the financial system was about to collapse. That’s why Obama’s team of economics advisors–led by Lawrence Summers–pushed through the $800 billion American Recovery and Reinvestment Act (ARRA), because, when the chips were down, economists turned to the tried-and-true remedies of John Maynard Keynes. And they worked, too, the only drawback was that the amount of the stimulus was too small to produce the recovery that had been promised. (For the latest on the effectiveness of the stimulus, see: “Joe Scarborough’s Attack on Stimulus“, Dean Baker, CEPR)

Critics of Obama’s fiscal stimulus say that “It didn’t work”, but the claim is ridiculous. How could it not work? Stimulus is not some magic elixir that works on one subject and not on another. It’s spending. Spending is activity, spending is growth, spending is demand, spending is hiring, spending is stimulus. Spending is everything. When the government spends money, it has the same effect as when a consumer spends money or a business spends money. Therefore, the stimulus worked.

The economy is not a sentient being. The economy doesn’t care if private citizens do the spending or the government does the spending. It doesn’t care if the money comes from personal bank accounts or budget deficits. The economy doesn’t care if the money is spent on cancer research or pet rocks. It doesn’t matter, because all spending increases activity, strengthens demand, and leads to more hiring. Saving has the opposite effect. While saving may be the necessary and sensible choice for an individual, it’s poison for the economy. When people save, the velocity of money decreases, demand weakens and growth slows. This whole question of saving vs spending is basic to Keynes’ view of how the economy works. Here’s an example which helps to explain:

“Let’s imagine there are only two people in the world, you and your friend…..You make $100 a week by selling milk to your friend at $1 a bottle, and he makes $100 a week because you buy chocolate from him at $1 a bar. The entire income in this economy (its Gross Domestic Product or GDP) is $200, which corresponds to 100 bottles of milk and 100 bars of chocolate.

One day you make a decision to save $20 out of your $100 and hold it in cash. Consequently, my income falls to $80, and the sum income in the economy is now $180, and the economy produces 20 chocolate bars less than before. In the subsequent week, I only have $80 to spend, hence your takings also fall to $80, and you buy a smaller amount of my milk.

In the end, you and your friend’s incomes are smaller and you are producing and consuming less than is potentially possible. Your economy has fallen into recession.

So now we have a recession but how do we get out of it? Well the neoclassical free market thinking is that you simply do nothing and the forex market will correct itself. In our example you will reduce the price of milk until you are selling 100 bottles again. Your friend does the same and he is now selling 100 bars of chocolate again. The recession is over.

However, this doesn’t happen overnight and could take a while, months even years. So Keynes advocates intervention by the state. Say the state printed $20 and bought your unsold produce, then you would be back to a monthly income of $100 and so would your friend because your income is his income. Full production is immediate therefore no recession and no reduction in GDP.” (“The Basics of Keynesian Economics”, etoro.com)

While imperfect, this analogy helps us get a better fix on what’s going on in the economy today. Presently, output is below what it should be by more than $1 trillion per year, thus, unemployment is high and growth is weak. At the same time, personal savings have risen from near-zero in 2007 to almost 4 percent today. The increase in savings has decreased spending which, in turn, has reduced activity and demand. According to Keynes, the state should step in and boost its spending to employ more of the economy’s resources and put more people back to work. Then, as the recovery gains momentum, the state can reduce its contribution and trim the deficits.

The GOP deficit hawks in Congress want to do the exact opposite. They want to want to reduce the deficits by cutting public spending on popular social programs like Medicare and Social Security. This is a mistake that will only deepen the crisis and pave the way for another slump. It is fairly easy to see what’s wrong with this view by looking at last week’s Commerce Department report on GDP. On Thursday, the Commerce Department reported that 4th Quarter growth (2012) had slipped into negative territory due to a sharp reduction in business inventories and defense spending. This sent off alarms across the country. Was the report a “one off” or is the economy really headed back into recession? That’s what everyone wants to know. (A recession is defined as two consecutive quarters of negative growth)

Now many people think that less money going to fatcat defense contractors is a good thing, and I agree. But as we said earlier, the economy doesn’t make value judgements like that. Spending is spending, and when government spending falls (as it did), the economy edges closer to recession. Now apply this same rule to the recommendations of the GOP deficit hawks. The hawks say they want “fiscal responsibility”, but what they’re opting for is another slump because the trillion dollar deficits (which represent $1 trillion of additional government spending) are the only thing keeping the economy from sliding back into recession. (See the breakdown of GDP report here).

So how do we reduce the deficits without pushing the economy back into recession?

Increase personal consumption? That seems like the logical choice, after all, if consumers go on another spending spree, then businesses will hire more workers, the economy will grow, federal revenues will balloon, and the deficits will vanish automatically. Problem solved, right?

The only thing is that–according to the data—personal consumption is just about back to normal now. That suggests that the problem isn’t consumption, the problem is that people are not spending as much as they did during the bubble years when residential construction was at its peak and homeowners were feeling flush due to rising housing prices. That hyper-spending was a result of fictitious equity, lax lending standards, low interest rates and massive fraud. The goal of policy should not be to create those same conditions again, (and increase the probability of another meltdown!) but to look for solutions elsewhere.

So, where do we look if not to more personal consumption? Business investment?

It’s unreasonable to expect businesses to make more products when demand is weak. They’d rather issue bigger dividends or buyback more of their own stock (which they have been doing) instead of building more widgets that will just sit on warehouse shelves.

So if neither consumers nor businesses can fill the gap (and reduce the deficits), then what about the government? In the short-term, that’s the best choice, especially since money is so cheap. Presently, the gov can borrow money at historic low rates–(10-year US Treasuries are currently below 2%). The administration should take advantage of these low rates and deploy more stimulus to kickstart the economy. As the economy gets back to full-steam, the deficits will shrink on their own and policymakers can work on a plan for long-term debt reduction.

So what should Obama be doing?

The Obama administration should launch an aggressive government-funded jobs program aimed at lowering unemployment by rebuilding the nation’s dilapidated infrastructure. The commitment of trillions of dollars in fiscal stimulus to the stated project would push the dollar lower which would reduce the trade deficit (US exports would become more competitive) while increasing domestic national savings. Full employment would put more money in the hands of people who would spent it quickly which would increase activity, demand and growth.

So the way to fix the economy is to use government resources to put people back to work. As Keynes opined in his masterpiece “The General Theory of Employment, Interest and Money”: “I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State… taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital…. will be too great to be offset by any practicable changes in the rate of interest.”

In other words, interest rates and monetary policy alone, won’t get the job done. (Isn’t that obvious after 5 years of zero interest rate policy, ZIRP, and QE??) The government has to take the lead in directing investment to produce a strong and sustainable recovery. That’s what Obama should be doing.

As Predicted, Austerity Policies Send US Economy Downward

Thursday, January 31, 2013 by Common Dreams
As if the lessons of recent European policies weren't enough or a century of proven economics, the US trudges towards stagnation and financial pain... by choice
- Jon Queally, staff writer


Progressives economists who spent much of the last four years warning against the implementation of austerity policies in the US did not share in the surprise expressed by many lawmakers and mainstream pundits when new GDP data released Wednesday showed Q4 growth trending the economy back towards official recession.
No amount of evidence, advice or warning seems capable of moving lawmakers, including President Obama, away from the economic madness of austerity. As warned by experts not cowed by the "deficit hawk" alarmists who dominate the national conversation on the economy, the dip in growth was not the result of "uncertainty" in the private sector or the future demands of public spending obligations, but rather on the contraction of public spending and the tax increases prematurely foisted on low-income and middle class workers in the form of a payroll tax increase that took effect on January 1.

As Washington Post policy analyst Ezra Klein writes:

"The government is hurting the recovery, and badly. But it’s not because it’s spending too much, or because of concerns over future policy. It’s because government, at all levels, is spending and investing too little."

And as Robert Borosage, from the Campaign for America's Future, told the Huffington Post: "Inflicting austerity on a weak economy is ruinous and is likely to drive us back into a recession."

"Those dismissing the downturn as due to an odd drop in government spending should consider that more of these are on the docket," Borosage continued, making reference to further government spending cuts, known as 'sequestration,' that will likely be implemented in March.

And, "It's certainly the case that the disappearance of the payroll tax holiday is a drag on the economy," said Chad Stone of the Center on Budget and Policy Priorities.

Meanwhile, Josh Bivens and Nicholas Finio—analysts at the progressive Economic Policy Institute—said the new GDP numbers were disappointing, but argued the economy wasn't likely to teeter back into full recession. The essential lesson, they said of the report, was an easy and long-established one: when government spending contracts, so does a struggling economy.

"When government spending drops, the economy suffers," they said. "The rest of the economy is simply not growing strong enough to make up for losses in demand due to government spending cuts."

"Wednesday's GDP report, while overstating the current weakness in the economy, clearly illustrates what economists have known since the 1930s: Government fiscal contraction during periods of excess capacity—particularly when interest rates are already near-zero—is exactly the wrong thing to do."

And the Huffington Post adds:

Congress is still driving headlong into the forced austerity known as sequestration, scheduled to take effect in March, which requires across-the-board spending cuts at the Pentagon and among domestic policy programs.

"Today's GDP numbers show the toll that political conflict over fiscal policy is taking on U.S. economic growth," said Adam Hersh, an economist at the Center for American Progress, a think tank closely allied with the Obama administration. "The 0.1 percent economic contraction puts the United States on the precipice of recession. Our economy would certainly have grown at a faster rate last quarter, were it not for political brinkmanship over the debt ceiling and the risk of sharp fiscal contraction in the form of automatic 'sequestration' budget cuts. That contraction is now unfolding."

Warnings about the dangers of austerity have been growing louder in recent months, even from sources that conventionally applaud austerity regimes. In October, the International Monetary Fund issued a report concluding that global policymakers had dramatically underestimated the significance of government spending during a recession. As a result, lawmakers expecting modest drags from austerity instead saw their economies plunge back into a devastating recession. The United Kingdom, where unemployment now stands at 7.7 percent, has experienced a triple-dip recession. In Spain and Greece, unemployment is over 25 percent, with savage humanitarian consequences: HIV infections in Greece are up by over 1,500 percent since the austerity campaign began in 2010.

And Klein concludes his analysis on the situation in the US this way:

So yes, the government is hurting the recovery. But it’s not because of deficits or uncertainty, or at least, it’s hard to find evidence for either theory. The real, provable damage the government has done to economic growth in recent years has been in cutting back on spending and investment since 2010.

Which Way Do We Go? ‘Obama Recession’ or Full Employment?

by Dr. MARGARET FLOWERS AND KEVIN ZEESE


There are lots of interesting economic stories in the last week, but we want to focus your attention on two topics. One shows the only path out of the economic collapse. The other shows the direction that will most assuredly take us into deeper collapse. So far, the bi-partisans in Washington, DC are on the path to an ‘Obama Recession.’

First, the wrong path: austerity. Great Britain has shown the world what austerity will bring – deeper recession. Britain may be going into its third economic collapse in four years with a 0.3% decline in its GDP in the last quarter and its worst year for manufacturing on record. David Cameron was elected on the promise of austerity and he delivered. The result is Britain has the worst economy on record dating back to 1830. That’s right, since the before the reign of Queen Victoria!

Our policy makers could learn the same thing from U.S. history. When FDR came to power, he put in place stimulus programs that directly created jobs. He built a lot of infrastructure that is still with us today employing people in useful work as government employees. In 1936, FDR and Congress thought they had gotten the economy going and started worrying about deficit spending. They decided to cut the funding of the New Deal to decrease the deficit. The result: the Roosevelt Recession of 1937 and 1938. Roosevelt realized his error and started stimulating the economy again and quickly the recession ended and growth returned. Even before the attack on Pearl Harbor the U.S. economy was on the mend.

Lesson to President Obama: Pursue the path of cutting the deficit with cuts to human needs and you are risking an “Obama Recession.” You will have squandered an immense opportunity to get the country on track.

Second, what is the solution to end the economic collapse?  There is one thing that has paralleled deficit spending for decades.  When deficit spending goes up, this is always is going up; and when deficit spending goes down, this has reversed.  As the chart below shows that one thing is unemployment.  If unemployment is high, deficit as a percent of GDP is high. If we reduce unemployment, the deficit shrinks.

Chart from the St. Louis Federal Reserve shows the deficit as a percentage of GDP (red line) vs. the unemployment rate (blue line); for 60 years the pattern has held. When unemployment drops, the deficit as a percentage of GDP drops. When unemployment rises, the deficit rises.

Jobs.  Job creation is the one solution that has not been tried by government. Jobs are the solution to so many economic problems. The deficit, which the bi-partisans in Washington are fixated on, is directly related and the only path to reducing the deficit is moving toward full employment.  Full employment solves so many other problems: poverty and hunger, eviction and foreclosure, personal debt, retirement savings – all are ameliorated by full employment. But, when was the last time you heard any elected official utter the phrase “full employment”?

Other News
There is a lot of news for you to review in our news section which is updated daily: how Geithner left the banking system more concentrated with already too big to fail banks growing bigger and how the solution is public banks or turning banks into utilities; Obama’s appointment to the SEC brings Morgan Stanley’s lawyer through the DC revolving door; reports from Davos show complacency and denial; the continued, precipitous decline of unions while non-union workers organize; the energy mess of tar sands, fracking and worse signs for climate change while billionaires continue to mislead on climate; how single payer is becoming more essential than ever; details on how tax havens operate and how a resignation of a top DOJ official shows there never was any serious effort to investigate or prosecute bankers who collapsed the economy.

Finally, don’t miss two other articles we’ve written: Margaret Flowers wrote in Al Jazeera how top CEOs are planning to loot the economy; and Margaret and Kevin Zeese wrote a must read hidden history of cooperatives and community work and how they relate to social change for Truthout. This history provides lots of clues as to how we can be more effective today.

Unemployment And Marginal Tax Rates

What the Numbers Tell Us
by JOSHUA A. CUEVAS

We, as a nation, are now in our 5th year since the beginning of the greatest recession we’ve seen since the great depression (Federal Reserve Bank of Minneapolis, 2012). Indeed, at least one prominent economist and Nobel Prize winner has made the argument that we are in a second depression (Krugman, 2011). At the same time, perhaps predictably, U.S. school systems have been increasingly under funded with well over one hundred thousand teachers having been laid off nationally, even by the most conservative estimates (Kessler, 2012). But unemployment has been stubbornly high, above 8% for four years running (U.S. Department of Labor, 2012). People are out of work, therefore tax revenues are down, so schools, law enforcement, fire departments, etc. will have to survive on smaller budgets, while they are simultaneously expected to improve their services under increasingly austere conditions. Or so the argument goes. Tax revenues and tax rates cannot be augmented until we have a strong economy once again, so we will have to make due. We cannot possibly consider increasing taxes on anyone during a recession. This is a logical and persuasive argument, or so it would seem, one that many of us have heard trumpeted loudly in recent years.

This argument suggests that the strength of the economy is the driving force that determines the amount of revenue available to fund public services across the country. In other words, a stronger economy will bring in more tax dollars because more people will be employed. Simple enough. Except that for the last three decades, politicians, think tanks, and special interest groups have been making the case that lower taxes will strengthen the economy because it frees up capital for job creators and those in the private sector to then spend, thus keeping businesses thriving and people employed. This argument presupposes a cause and effect relationship. It suggests that low tax rates lead to more money circulating through the system, creating a stronger economy and lower unemployment. To test this claim we can examine, empirically, two essential parts of this equation: We can test the relationship between marginal tax rates and unemployment (with low unemployment acting as an indicator of a strong economy). We can ask the question; do low tax rates correlate with low unemployment and vice versa? If indeed they do, then it would lend validity to the argument that increased tax revenues should only take effect after the economy recovers and unemployment drops.

The Longitudinal Trend in Tax Rates: 1932 – Present

Before we answer this question it is worthwhile to examine recent trends in one part of this equation: marginal tax rates. Pundits, politicians, media personalities, and the person on the street may make the case that current tax rates are “sky high”, suggesting that Americans now pay a higher percentage of their incomes than the historical norms. But does the data support this notion? When we consider the top marginal tax rates since prior to World War II, the answer is an emphatic no (Tax Foundation, 2012). There has been a clear and continuous downward trend in the top marginal tax rates since 1932, and Americans now enjoy the lowest tax rates they have in three generations. The current marginal tax rate for those in the highest bracket is 35%, the same as it’s been for the last decade and the lowest it’s been in 80 years, with one brief exception that we will discuss shortly. When President Clinton was in office the highest bracket was 39.6%. Interestingly, when Reagan was president and tax reduction became a staple of the Republican platform, the highest bracket was 50% for most of his 8 years in office. The two decades prior to that it was 70%, and from 1963 back until 1945 it was 91%. In 1945 it was 94%. So the point is clear when you examine the actual numbers: Taxes have never in modern history been lower in the U.S., except for the following caveat.

There was an interesting anomaly from 1988 to 1992 when the highest tax rate dipped to between 28% and 31% (Tax Foundation, 2012). And what happened to the economy during that time of low taxes? There was a large recession beginning in 1990, one that pales by today’s standards, but a significant one by historical standards (The Economist, 2011). President G.H.W. Bush saw the harm this was doing to the economy and raised taxes, breaking his “Read my lips- no new taxes” pledge. This of course was one of the factors that caused him to lose the election in 1992. Prior to that, in 1982, there was another tax cut (Tax Foundation, 2012) and another deep recession (The Economist, 2011), leading to the two highest back-to-back yearly unemployment rates we have seen since the great depression- 9.7% in 1982 and 9.6% in 1983 (U.S. Department of Labor, 2012). Our latest tax cut went into effect in 2003 and within five years the Great Recession was well underway. It would seem that tax cuts correspond with big recessions. When you subtract the substantial amount of money that wealthy individuals and large corporations contribute to our federal government and the overall economy, bad things tend to happen to that economy.

But while the tax part of our equation shows a clear pattern- a consistent downward trajectory for 80 years, with tax cuts tending to correspond with recessions- the second part is less clear. Since World War II the unemployment rate each year has fluctuated with no discernable pattern to the naked eye, from a low of 2.9% in 1953 to a high of 9.7% in 1982, and a wide variety of levels across the years (U.S. Department of Labor, 2012). So it was determined that inferential statistics would be needed to analyze the relationship between the top marginal tax rates and unemployment since 1948, when the first unemployment statistics where available through the U.S. Department of Labor.

Analysis: Correlating Marginal Tax Rates and Unemployment

The data for the top marginal tax rates (Tax Foundation, 2012) and the unemployment rates for each year (U.S. Department of Labor, 2012) from 1948 to 2011 were compiled. These numbers were entered into a Pearson product-moment correlation analysis, two tailed, to test for the strength and direction of correlation and for statistical significance. The results indicated that there was a statistically significant negative correlation, r(64) = -.31, p = .013, in the relationship between top marginal tax rates and the unemployment rate in the 64 years from 1948 to 2011. This means that when taxes were high, during that same period unemployment tended to be low, suggesting a stronger economy. And when taxes were low, during the same period unemployment tended to be high, indicating a weaker economy. It is important to note that this is not a political argument; it is a mathematical one. This is what the numbers tell us when this statistical analysis is conducted.

Now there are a number of issues to consider in this analysis. First, 64 years is a relatively small sample size (N = 64). With a sample size this small we would often not expect to see a statistically significant correlation. In many cases there simply would not be enough data for the probability to reach .05, much less .013. But even with this relatively small sample size, the association between tax rates and unemployment did prove to be significant, which suggests that longer trend lines, perhaps 80 or 100 years, would reveal a more pronounced relationship between those variables. The more data you have, the clearer the relationship often becomes, as long as that relationship is not due to random chance. And this analysis suggests the relationship between the top marginal tax rates and unemployment is not due to random chance, or at least we are 98.7% certain that it is not.

Another thing to keep in mind is one of the first concepts we teach students in introductory statistics and research courses: correlation is not causation. We cannot make the claim that one variable in this equation causes the other variable, even though they clearly seem to be associated with one another. In fact, we know that unemployment rates do not cause the top marginal tax rates to be what they are at any given time. Top marginal tax rates are set (caused) by the laws implemented by state and federal legislatures. Even if one were to argue that law makers’ decisions on tax policies are influenced by unemployment rates, the election cycle and legislative cycle normally play out over a number of years, sometimes decades, when unemployment often fluctuates a great deal, so it is not reasonable to contend that unemployment rates cause the marginal tax rates to be what they are. However, it is quite plausible that top marginal tax rates have a causal effect on the unemployment rate, particularly since those tax rates have shown a steady and consistent downward pattern and may only change once or twice per decade. In other words, it is possible that the top marginal tax rates may be one of the primary factors that dictate the unemployment rate and the strength of the economy at any given time. But since we are dealing with a correlation, we cannot claim to have isolated that variable as a cause, and it is quite probable that other factors are in play despite the clear relationship between the two variables.

However, a correlation does not rule out causation, of course, and if there is causation in this relationship, then it can only be unidirectional. The unemployment rate cannot dictate tax rates. We know what causes tax rates to be what they are: laws enacted by legislatures. So if there is a cause and effect relationship present, it could only be in the opposite direction, with tax rates influencing unemployment rates. But a critic could legitimately argue that examining tax rates and unemployment rates during the same year is ineffective because if tax rates were indeed affecting fluctuations in the unemployment rate, the impact would not appear until the following year or later. A proponent of the hypothesis that low tax rates allow job creators to expand their businesses could credibly make a case that when tax rates are reduced it takes at least a year or two for the effects to be seen in the unemployment rates, making a year-to-year comparison invalid. Essentially, the possible positive effects of the tax reduction haven’t had a chance to take hold yet in the same year that rates are reduced. The critic could assert that while comparing tax rates to unemployment rates in the same year may show a negative correlation, subsequent years may show a positive correlation once the job creators have had a year or two to put that extra capital back into the system.

For this reason a Pearson correlation was conducted comparing the top marginal tax rates for each year to the unemployment rates the following year for every year from 1948 until 2010 (as of 2012 when the analysis was done, the tax rates for 2011 could not be compared to unemployment rates from 2012 because that data had not been released yet). Put another way, the tax rate from 1948 was compared to the unemployment rate for 1949 and so on until 2010 to account for the possibility that any effect of the tax rates may not appear until the following year. The results again indicated that there was a statistically significant negative correlation between the top marginal tax rate and the unemployment rate the following year, r(63) = -.267, p = .034. Just as in the first analysis, these findings suggest that when top marginal tax rates are low, the unemployment rate the following year tends to be high, and when tax rates are high, the unemployment rate the following year tends to be low.

The question remained as to whether this pattern would hold true if the top marginal tax rates were compared to unemployment rates two years after the fact. In essence, did tax rates appear to influence the strength of the economy two years after those revenues were collected? Based on the initial findings, and to extend the analysis even further, the decision was made to explore the relationship between the top marginal tax rates and the unemployment rates two years, three years, and four years after the fact. When tax rates were compared to unemployment rates two years later, a statistically significant negative correlation again emerged, r(62) = -.259, p = .042. When tax rates were compared to unemployment rates three years later, a statistically significant negative correlation was also revealed, r(61) = -.265, p = .039. For the analysis of four years after the fact, a negative correlation appeared, but in this case it was not statistically significant, r(60) = -.245, p = .059. This final analysis did not meet the criteria for significance for two reasons: First, with each subsequent analysis the sample size was reduced by one year. For instance, for the 2011 tax rates, unemployment figures do not yet exist for two years after that time, so 2011 had to be removed from that analysis and so on for each succeeding analysis.

Likewise, for 2010, unemployment rates do not yet exist for three years after that time. The second and more important reason for the lack of significance in the final analysis is related to the first. With each analysis, when a year was removed for lack of an unemployment statistic to compare it to, the year removed was the next most current one, so the tax data for the years 2011, 2010, 2009, and 2008 were removed with each respective analysis. This was noteworthy because these were all years with historically low tax rates (35%), and when those extremes were removed from the data set the results gravitated towards the historically higher tax rates and the correlation appeared less significant. There is no doubt, however, that when the data for 2012-2017 become available in the coming years and the current low tax rates are compared to unemployment rates for four and five years later from 1948 until the present, there will indeed be a statistically significant negative correlation, just as in the other analyses.

Interpreting the Results

What we see when examining the whole of this data is a consistent pattern: When the top marginal tax rates are compared to unemployment rates for the same year, one year later, two years later, and three years later, nearly identical results emerge. Not only is there a negative relationship in each case, with low tax rates correlating with high unemployment and vice versa, the magnitude of each relationship is nearly identical. So between 1948 and 2011, there appears to be a clear and consistent relationship between top marginal tax rates and the unemployment rate. And since unemployment rates cannot dictate tax rates, any influence must go in the opposite direction, with tax rates influencing the unemployment rates. Because we are dealing with correlations, there is a possibility that a third variable or more variables are also at play, particularly in a dynamic as complex as the U.S. economy. Indeed, it is almost a certainty that other factors are involved. But the unmistakable and highly uniform pattern revealed in the analyses reported here would lead us to believe that the relationship between top marginal tax rates and unemployment is in fact present, even if other factors are also involved.

What we can say with absolute confidence, though, is that there is no evidence here that low tax rates are associated with low unemployment, and by extension, a healthy economy. Similarly, there is no evidence that high tax rates are associated with high unemployment, and by proxy a weak economy. There is simply no empirical basis to make those claims based on this historical data. In fact, everything we see here suggests that just the opposite is true. Low marginal tax rates do not appear to be beneficial to employment rates, and if they are in fact detrimental to employment rates one would be hard pressed to make the case that they are helpful to the economy. In the most basic terms, a healthy economy is one in which the vast majority of citizens who want to work can find that work.

If one were to accept the common contention these days that we must wait until we again have a strong economy before we are able to collect the tax revenues needed to adequately fund public sector services, the data simply does not support that claim. These numbers tell a far different story. They instead suggest that while tax rates remain at historical lows we will continue to have a weak economy and high unemployment. There is no data to suggest that by keeping top marginal tax rates low it will improve the economy or decrease unemployment. For those who insist on low taxes at all costs, it would be worthwhile for them to look at the numbers and realize that pursuing low marginal tax rates, and gutting education and other social services in the process, is not the answer to a weak economy. It may be one of the causes of it, and certainly appears to be a prime factor in the equation. If we continue on the trajectory that we as a country have been on for more than 30 years of demanding lower and lower tax rates in the hopes that it will keep money in our pockets and food on the table, the data tells us we are more likely to have empty pockets and less on the table.

References
Federal Reserve Bank of Minneapolis. (2012). The recession and recovery in perspective [data file]. Retrieved from http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/
Kessler, G. (2012, June 12). Spinning the number of teacher layoffs. The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/fact-checker/post/spinning-the-number-of-teacher-layoffs/2012/06/12/gJQAgAMdYV_blog.html
Krugman, P. (2011, December 11). Depression and democracy. The New York Times, pp. A23. Retrieved from http://www.nytimes.com/2011/12/12/opinion/krugman-depression-and-democracy.html
Tax Foundation. (2011). U.S. federal individual income tax rates history, 1913-2011 [data file]. Retrieved from http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets
The Economist (2011, July 29). Recessions compared. The Economist online. Retrieved from http://www.economist.com/blogs/dailychart/2011/07/american-recessions-and-recoveries
U.S. Department of Labor, Bureau of Labor Statistics. (2011). Labor force statistics from the current population survey [data file]. Retrieved from http://www.bls.gov/cps/prev_yrs.htm/

On the Brink: Fiscal Austerity Threatens a Global Recession

Friday, February 24, 2012 by The Real News Network

Dr. Heiner Flassbeck, Director, Division on Globalization and Development Strategies, UNCTAD: European austerity policies past the point of no return, driving global economy towards deep and lengthy recession.

  More at The Real News

House Republican Budget will cost 700,000 jobs by end of 2012

Monday, February 28, 2011 by The Hill
Economist's Fodder for Dems: $61 Billion Cut Would Cost 700K Jobs
by Eric Wasson

A new report out Monday from Moody’s Analytics economist Mark Zandi estimates that the House-passed seven-month spending bill, which cuts $61 billion in spending, would cost 700,000 jobs by the end of 2012.

Zandi’s report echoes one by the left-leaning Economic Policy Institute, which concluded the GOP bill would cost 800,000 jobs. He predicts that this year the bill could cost 400,000 jobs and run the risk of another recession. Goldman Sachs has found that it could cause as much as a 2 percent loss in economic growth.

Zandi estimates that the CR would reduce real growth in gross domestic product by 0.5 percent in 2011 and by 0.2 percent in 2012.

Congressional Democrats will be sure to cite new estimate as they argue against cuts to spending this year.

House Republicans argue that their bill should become law as part of a “cut and grow” strategy that they say, by removing uncertainty about higher taxes to pay for government spending, would spur spending by businesses.

A spokesman for House Speaker John Boehner (R-Ohio) discredited Zandi.

"The fact that a relentless cheerleader for the failed 'stimulus' - which the Democrats who run Washington claimed would keep unemployment below eight percent - refuses to understand that ending the spending binge will help the private sector create jobs is sad, but not surprising," said Boehner spokesman Michael Steel.

Zandi, who backed the 2009 Obama stimulus plan, also concludes that allowing the spending fight to cause a lengthy government shutdown would do deep damage to the economy.

“The economy is much improved and should continue to gain traction, but the coast is not clear; it won’t be until businesses begin hiring aggressively enough to meaningfully lower the still-high unemployment rate. The economy is adding between 100,000 and 150,000 per month — but it must add closer to 200,000 jobs per month before we can say the economy is truly expanding again,” he argues.

“Imposing additional government spending cuts before this has happened, as House Republicans want, would be taking an unnecessary chance with the recovery,” he states.

Zandi’s report echoes one by the left-leaning Economic Policy Institute, which concluded the GOP bill would cost 800,000 jobs. Goldman Sachs has found that it could cause as much as a 2 percent loss in economic growth.

He argues that long-term deficits need to be tackled, but that government borrowing is not crowding out private investment at this point, so reducing spending would not have the effect of quickly expanding credit for the private sector.

Zandi tells investors that he predicts both sides will find a compromise that cuts less than House Republicans are demanding, and that the economy will be able to absorb that compromise.

Obama names Sperling to top economic job

Obama names Sperling to top economic job

By Agence France-Presse
Friday, January 7th, 2011

US President Barack Obama will on Friday tap expertise polished in the fondly remembered Clinton-era economic boom years with the choice of policy veteran Gene Sperling for a top White House job.

The move will be the latest step in a staff shuffle that has seen Obama refresh his economic and political teams to meet a strong challenge from resurgent Republicans as he prepares to build a 2012 reelection campaign.

Sperling is a veteran of divided government battles with Republicans during then-president Bill Clinton's administration -- and his promotion comes as Obama faces a similar political scenario after November's mid-term elections.

Officials said he would be made director of the National Economic Council -- a post he held in the second Clinton term, at a time of explosive growth, centrist economic policy, balanced budgets and an eventual budget surplus.

Obama will also promote Jason Furman, currently a White House economic aide, to the post of assistant to the president for economic policy and principal deputy director of the NEC, officials said.

Currently, Obama faces a pitched battle with Republicans, who now control the House of Representatives, over a 1.3-trillion-dollar deficit, a slowly recovering economy and unemployment of 9.8 percent.

Obama will make the announcements at a factory that makes energy-efficient windows in suburban Maryland, on a day when officials hope to get good news from December unemployment figures.

Critics accuse Obama of pursuing big-business, corporate economic policies and of harboring a trust of big business -- an impression the administration has taken steps to bolster in recent weeks.

Sperling's credentials also include a period as NEC deputy leader, in Clinton's first term when Republicans seized Congress and took aim at a first-term Democratic president -- a situation with similarities to Obama's.

On the international front, he was a key negotiator in the North American Free Trade Agreement (NAFTA) and was also on the US team that conducted grueling World Trade Organization accession talks with China.

He is renowned in Washington for his work ethic -- he was once dubbed "Gene the Machine" -- and is familiar to sometimes-fazed reporters for his enthusiastic and exhaustive briefings on the trickiest of economic topics.

Sperling, 52, who has been working for Treasury Secretary Timothy Geithner, already has been deeply involved in aspects of Obama's stewardship of the economy, as it battles back from the worst economic recession since the 1930s.

He was a key player in the compromise late last year with Republicans on extending tax cuts passed under the administration of ex-president George W. Bush, in a package including help for the unemployed and stimulatory measures.

Sperling also worked with a presidential task force, now credited with reviving the American auto industry, and has been behind some of Obama's efforts to boost small businesses and spur hiring by a key motor of the economy.

The NEC is one of various bodies that provides economic counsel to the president, ensuring that policy is framed consistent with his wider goals, and is carried out effectively.

He will take over from another Clinton-era veteran, Lawrence Summers, the former Treasury secretary and academic economist who has left the White House after two draining years battling the financial meltdown.

But Sperling will not be without familiar colleagues.

On Thursday, Obama made another member of Clinton's economic team, ex-commerce secretary William Daley, his chief of staff.

Clinton's budget director Jacob Lew meanwhile has taken up the same job for the current president.

In announcing Daley's nomination, Obama stressed his job-creating credentials.

Daley, 62, is seen as a centrist, and his appointment will be viewed as an olive branch to the business community, with which he has had a rocky relationship.

It was immediately welcomed by the US Chamber of Commerce, which has spent two years in an uneasy state of confrontation with Obama.

"Bill Daley is a man of stature and extraordinary experience in government, business, trade negotiations, and global affairs," said the chamber's president and chief executive Thomas Donohue.

But liberals were dismayed that a man who worked for finance giants JPMorgan Chase was now a key player in Obama's team.

How to Earn $900,000 an Hour While Unemployment Soars

The top 10 hedge fund honchos each averaged $1.87 billion in 2009 -- wouldn't you like to know their secrets? Here are a few.
By Les Leopold, AlterNet
Posted on October 18, 2010

WASHINGTON (Reuters) - New claims for jobless benefits unexpectedly rose last week (Oct 14, 2010).

Let's be honest. Wouldn't you like to rake in a cool $900,000 for one hour's work? No? Still have hippie ideals, perhaps? You could work for just 10 minutes and walk off with $150,000. Push yourself to work one entire day and we're talking $7.2 million. Hang in there for a month, and you'll pull in more than the richest athletes make in 10 years -- $256.5 million. And in one year? Well, you'll be earning what the top ten hedge fund honchos each averaged in 2009 -- $1.87 billion. Wouldn't you like to know their secrets? Here are a few:

Step 1: Check your conscience at the door.
You must be able to live with the knowledge that while you were making $900,000 an hour, more than 29 million other Americans had no job at all or were forced into part-time work. Also you'd have to live with the uncomfortable fact that your sector -- high finance -- crashed the economy, leaving eight million Americans jobless in a matter of months.

You're obviously good at math so you'll be able to calculate that it will now take 22.5 million new jobs to bring the economy back to full-employment (an unemployment rate of 5 percent or less). That's the equivalent of creating 630 new corporations the size of Apple Corp. (35,000 employees each). Sadly, you're also a realist, so you know that unemployment is likely to remain at record post-WWII highs for years to come.

Feeling guilty? Don't. Remind everyone again and again that hedge funds like yours didn't get bailed out. You're not too big to fail. You just figured out how to be better at investing than anyone else. You're what capitalism is supposed to reward. You earned your $900,000 an hour fair and square! Suppress all your doubts and just keep telling yourself -- and everyone else -- that you have nothing to do with rising poverty or the fact that nearly 50 million people can't afford health care. You're the solution, not the problem. Conscience be damned!

Step 2: Remember: None of this is your fault!
Yes, a few tiresome critics will keep pointing the finger at you, saying that the financial sector crashed the economy. Ignore them and put the blame where it belongs - somewhere else. When in doubt, seek guidance from the pros on Wall Street. They know exactly who to blame:

• The few bad apples who gave out mortgages like candy
• The greedy Americans who bought homes they couldn't afford (they should have ignored the bankers who told them they could!)
• The politicians who pushed for risky loans for "low-income" buyers (subtext: favoritism for minorities.)
• The Fed, which kept interest rates too low for too long, inflating the bubble
• And, most importantly, American consumers who "lived beyond their means," running up too much debt. (Those people, not you, really need to tighten their belts!)

Assert with the utmost confidence that it's Wall Street billionaires who make our system the envy of the world, so help me god.

Step 3: Proclaim that you are the solution:
It's not enough to dodge the blame. You've got to convince academics and journalists to anoint you as the savior. You see, it's you and your fellow high finance moguls who will save us from ever having to endure a crisis like this again. Fortunately for you, they've already bought the story. For example, in More Money than God, Sebastian Mallaby writes:

How can governments promote small-enough-to fail institutions that manage risk well? This is the key question about the future of finance; and one part of the answer is hiding in plain sight. Governments must encourage hedge funds....The chief policy prescription can be boiled down to two words: Don't regulate." (p 380-81)

Imagine that! Top hedge fund managers who earn $900,000 an hour are the answer to too-big-to-fail bailouts, and you don't even need government regulations to keep them honest! People who suggest that Wall Street billionaires are essentially card counters in a Las Vegas casino? They're just envious. People who question whether the entire casino has any redeeming social or economic value at all? They're just stupid. (For my envious and stupid account, see The Looting of America.)

Step 4: Tell people, "Sure, go ahead and raise taxes on the super-rich!" (wink, wink): 
Because of Wall Street billionaires our income distribution is the most extreme since 1929. By some estimates it's even worse, with the top 1 percent hoarding nearly 50 percent of our nation's wealth. And yet, a recent academic survey suggests that most Americans have no idea things are so skewed. The vast majority actually said they would prefer a wealth distribution more like Sweden's. Heaven forbid!

So -- why on earth would someone like Warren Buffett be offering to pay more taxes? Well, for one thing, there are worse things than higher income tax rates. What you want to avoid at all cost is any reform that might reduce financial industry profits -- like controls on derivatives and financial transaction fees.

As for raising taxes: Just because you say you're willing to pay them doesn't mean you'll actually ever have to. Everyone knows that the moment anyone actually tries to tax the super-rich, a Greek chorus of greed will chant: "Investor confidence will crash! Small businesses will suffer! Jobs will crumble! The recovery will stall!"

So, once you get to be a billionaire, join the cavalcade of gurus who insist they should at least pay the same tax rates as their secretaries. And if those weak-kneed politicians simply refuse to raise your taxes, well, what's a billionaire to do?

Step 5: Count on America's admiration:
Americans may say they want wealth to be distributed much more evenly. But they also have a perpetual love affair with the super-rich. Any effort to rein in billionaires grates against one of our most fundamental values: the right to make as much money as we can, however we can, whenever we can. The very existence of Wall Street billionaires opens up the possibility that we ourselves will become super rich someday.

Fortunately for Wall Street billionaires, Americans tend to view even modest proposals to redistribute wealth as cataclysmic. (Remember Joe the Plumber?) When I propose that maybe we would be better off without Wall Street billionaires, even non-plumbers tell me: "Oh, no. We don't want to live in a socialist society where incomes are flat. Everyone would lose their motivation. And we'd be stuck with only one flavor of ice cream at our dilapidated collectivist food co-op!" In our political culture, there seem to be no mental resting points between North Korean communism and an economy that lets Wall Street billionaires run wild.

However, every once in a while we get pissed off. In 1913 we passed a constitutional amendment to legalize income taxes on plutocrats. From the 1930s to the 1970s we enacted tax rates on the super-rich that hovered between 70 and 90 percent. And long before that Andrew Jackson vetoed the National Bank because, as he said, "the rich and powerful too often bend the acts of government to their selfish purposes." The rigged Bank laws, he argued, "make the rich richer and the potent more powerful, the humble members of society the farmers, mechanics, and laborers, who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. ()

We're still complaining. We get upset at government because it seems to favor the super-rich. Yet in the end we protect our Wall Street billionaires by attacking regulations and taxes on the wealthy.

Step 6: Thank the lord for sex, drugs and rock'n roll: 
Reagan and company may have hated the 1960s youth rebellion, but they sure glommed on to a key feature of it: People wanted to be liberated from society's constraints and from a government that was betraying our nation's ideals. Through either insight or dumb luck, the Reagan revolution successfully melded the idea of accumulating wealth with the idea of gaining freedom from everyone and everything -- the ultimate form of "doing your own thing." (My surfer friend called it "takeoff velocity.")

Few of us who came out of the 1960s trusted government. After all, it had waged an unjust and un-winnable war in Vietnam. Public figures seemed to lie to us on a regular basis -- from Mai Lai to Watergate. You want that kind of government running the economy too?

"Do your own thing" economics also caught on. Free love and free markets may have had a lot in common. Milton Friedman (who also opposed criminalization of drugs) led the way among American economists, arguing that government interference always distorts free markets. Only when markets are left entirely alone can they operate efficiently and create prosperity for all. Friedman's free market philosophy won over the academic and policy establishment. They saw the rise of Wall Street billionaires as a sign of our nation's economic health and prosperity. It wasn't just that their vast wealth might trickle down to the rest of us. It was that the accumulation of such wealth in the first place signaled a strong underlying economy.

According to the free market economists, under our system you can't possibly earn $900,000 an hour unless you produce $900,000 worth of something. So financial industry billionaires must, by definition, have the knowledge, skills, and experience to create that enormous value. Because nobody would cough up that sum of money unless they got equivalent value in return.

Therein may lie the biggest secret of all: Wall Street moguls are confident that Americans will always believe that that the big boys are really worth their money.

But for how long? Will our millions of unemployed workers eventually get fed up? Will the middle class finally get angry at the plutocrats who stole their dreams? Or will our anger continue to focus on government regulations, social spending and taxes instead of on our financial plutocrats? Eventually we'll have to choose or the choice will be made for us: Do we want a $900,000 an hour Valhalla for the few? Or a prosperous America for the rest of us?

Bernanke: The United States is on the Brink of Financial Disaster

Source: EconomicPolicyJournal.com

Published on 10-08-2010

Yesterday, Federal Reserve Chairman Ben Bernanke delivered a speech before the the Annual Meeting of the Rhode Island Public Expenditure Council in Providence, Rhode Island. In the speech, he warned about the current state of the government finances. His conclusion, the situation is dire and “unsustainable”.

It is remarkable that mainstream media has given this speech no coverage. I repeat, the central banker of the United States says in his own words:

Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. Herbert Stein, a wise economist, once said, “If something cannot go on forever, it will stop.”⁹ One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

This is as close as you are ever going to see a central banker admit that his country’s financial situation is so dire that it could breakup at any time.

Here’s more from Bernanke’s remarkable speech:

The recent deep recession and the subsequent slow recovery have created severe budgetary pressures not only for many households and businesses, but for governments as well. Indeed, in the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it–meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.

Now, get this, he warns that it is not only the Federal government that has financial problems, but also states and local governments:

Although state and local governments face significant fiscal challenges, my primary focus today will be the federal budget situation and its economic implications.

Does Bernanke see the tsunami hitting or what?

Then, he put things in historical perspective:

The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time. For comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007, prior to the onset of the recession and financial crisis. The recent deterioration was largely the result of a sharp decline in tax revenues brought about by the recession and the subsequent slow recovery, as well as by increases in federal spending needed to alleviate the recession and stabilize the financial system. As a result of these deficits, the accumulated federal debt measured relative to national income has increased to a level not seen since the aftermath of World War II.

Then, he explains the deterioration and the problems it will create for the entire economy:

For now, the budget deficit has stabilized and, so long as the economy and financial markets continue to recover, it should narrow relative to national income over the next few years. Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk. Over the medium- and long-term, however, the story is quite different. If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.2 Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits. Expectations of large and increasing deficits in the future could inhibit current household and business spending–for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending–and thus restrain the recovery. Concerns about the government’s long-run fiscal position may also constrain the flexibility of fiscal policy to respond to current economic conditions.

Then, he tells us how powerful the negative trends are and how the aging population and Obamacare are going to make things worse:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs. As the health-care needs of the aging population increase, federal health-care programs are on track to be by far the biggest single source of fiscal imbalances over the longer term. Indeed, the Congressional Budget Office (CBO) projects that the ratio of federal spending for health-care programs (principally Medicare and Medicaid) to national income will double over the next 25 years, and continue to rise significantly further after that…he aging of the U.S. population will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits. This year, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3, and it may subsequently fall yet further as life expectancies continue to increase. Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they still present a significant challenge to policymakers.

Then he goes back to warn that the financial mess also exists at the state and local level:

The same underlying trends affecting federal finances will also put substantial pressures on state and local budgets, as organizations like yours have helped to highlight. In Rhode Island, as in other states, the retirement of state employees, together with continuing increases in health-care costs, will cause public pension and retiree health-care obligations to become increasingly difficult to meet. Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009.5 Estimates of states’ liabilities for retiree health benefits are even more uncertain because of the difficulty of projecting medical costs decades into the future. However, one recent estimate suggests that state governments have a collective liability of almost $600 billion for retiree health benefits. These health benefits have usually been handled on a pay-as-you-go basis and therefore could impose a substantial fiscal burden in coming years as large numbers of state workers retire.

Bernanke then breaks the news that the problem is global:

It may be scant comfort, but the United States is not alone in facing fiscal challenges. The global recession has dealt a blow to the fiscal positions of most other advanced economies, and, as in the United States, their expenditures for public health care and pensions are expected to rise substantially in the coming decades as their populations age. Indeed, the population of the United States overall is younger than those of a number of European countries as well as Japan.

Bernanke then re-emphasises, the damage this will do to the overall economy:

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring. In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment. And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. For example, large tax increases that might be imposed to cover the rising interest on the debt would slow potential growth by reducing incentives to work, save, hire, and invest.

He then states that we do not know how much time is left before all hell breaks loose:

It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation’s economy. Perhaps no bright line exists; the costs and risks may grow more or less continuously as the federal debt rises. What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policymakers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term.

From there,Bernanke goes into a bit of wishful thinking by identifying ways Congress can rein in spending and make the tax system more efficient. Good luck with all of that.

The real important part of Bernanke’s speech is the first half where he warns of the financial crisis just ahead.