Posts Tagged ‘Great Recession’

John Lanchester on the financial crisis

July 7, 2018

John Lanchester

The financial crash of 2008 was worldwide, and the failure of governments to address the causes of the crash also was worldwide.  Because the same thing happened in different countries under different leaders, the reasons for failure are systemic, not just the personal failings of particular leaders.  The solution must be systemic.  A mere change in leaders is not enough.

John Lanchester, writing in the London Review of Books, wrote an excellent article about the crash and its aftermath.  I hoped to call attention to it in my previous post, but, as of this writing, there has been only one click on the link.

I know people are busy and have many claims on their attention.  If you don’t want to bother reading the full LRB article, here are some highlights.  If you’re an American, bear in mind that, even though so much of what he wrote applies to the USA,  his focus is on British policy.

The immediate economic consequence was the bailout of the banks.  I’m not sure if it’s philosophically possible for an action to be both necessary and a disaster, but that in essence is what the bailouts were. 

They were necessary, I thought at the time and still think, because this really was a moment of existential crisis for the financial system, and we don’t know what the consequences would have been for our societies if everything had imploded.  But they turned into a disaster we are still living through.

The first and probably most consequential result of the bailouts was that governments across the developed world decided for political reasons that the only way to restore order to their finances was to resort to austerity measures.  The financial crisis led to a contraction of credit, which in turn led to economic shrinkage, which in turn led to declining tax receipts for governments, which were suddenly looking at sharply increasing annual deficits and dramatically increasing levels of overall government debt.

So now we had austerity, which meant that life got harder for a lot of people, but – this is where the negative consequences of the bailout start to be really apparent – life did not get harder for banks and for the financial system. In the popular imagination, the people who caused the crisis got away with it scot-free, and, as what scientists call a first-order approximation, that’s about right.

In addition, there were no successful prosecutions of anyone at the higher levels of the financial system.  Contrast that with the savings and loan scandal of the 1980s, basically a gigantic bust of the US equivalent of mortgage companies, in which 1100 executives were prosecuted.  What had changed since then was the increasing hegemony of finance in the political system, which brought the ability quite simply to rewrite the rules of what is and isn’t legal.

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Ten years after the financial crisis

July 6, 2018

Canary Wharf financial district in London. Source: Quartz.

Ten years after the financial crisis of 2008, the U.S. government has failed to do anything necessary to avoid a new crisis.   I just read an article in the London Review of Books that says that the U.K. government’s policies are just as bad.

Like the U.S.-based banks, the British banks engaged in financial engineering that was supposed to create high profit on completely safe investments—which, as experience proved, couldn’t be done.

The British government had to bail out the banking system in order to save the economy.  There probably was no alternative to that.  But it then proceeded to put things back just the way they were before.

John Lanchester, the LRB writer, said there was no attempt at “ring fencing”—what we Americans call firewalls—to split up investment banks, which speculated on the financial markets, and retail banks, which granted small business loans, home mortgages and other services to the real economy.

The UK, like the US, engaged in “quantitative easing”—injection of money into the banking system through buying bonds.  The basic idea was that if banks and corporations had more money to invest, they would invest more, and the economy would grow.

This didn’t happen.  Instead banks and corporations bid up the prices of existing financial assets and real estate, which added to the wealth of the already rich.

Ordinary Britons faced austerity.  Their government cut back on the social safety net and public services.  British life expectancy, like American life expectancy, has actually fallen.

The British, like us Americans, had 10 years to fix their financial system.  Like us, they wasted the opportunity.  Now it may be too late to avert the next crash—even if the UK and US governments wanted to act.

LINK

After the Fall: Ten Years After the Crash by John Lanchester for the London Review of Books.  Well worth reading in detail.  Hat tip to Steve B.

Another financial crash is on the way

April 26, 2018

Another financial crash is coming and it will be as bad or worse than the 2008 recession.

The reason is that all the conditions that existed before the 2008 crash exist now:

  • Growing concentration of wealth, which depresses the mass consumer market.
  • Growing debt, which can’t be repaid.
  • Reckless financial speculation, encouraged by lack of regulation and the expectation of another bailout.
  • A negative balance of trade, and a continuing overall weakness of the U.S. economy.
  • Lack of sufficient firewalls and safety nets to prevent cascading bankruptcies and financial failures.

Rich people on average spend less of their incomes than middle-class or poor people.   Once you get above a certain level, spending more money on yourself doesn’t make you happier.  You instead reinvest it so as to become even richer.

Middle-class people spend most of what they earn in order to maintain a middle-class material standard of living.  They are the ones who sustain the mass consumer market, which is the engine of American prosperity.

Poor people need to spend all they have just to survive.

When incomes don’t rise, middle-class people maintain their material standard of living through borrowing.  But this has limits.

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Qualitative easing and the Obama recovery

March 25, 2016

SPX-10-yr-yield-and-fed-intervention

The Federal Reserve Board’s policy of qualitative easing has helped the stock market recover.  But Americans who work in the real economy are still struggling.

Qualitative easing is the Federal Reserve Board’s policy of creating new money to buy Treasury bonds in order to keep interest rates low.  The greater the demand for bonds, the lower the interest rates, and the interest rate on Treasury bonds is generally the benchmark on all Treasury bonds.

The Fed’s Operation Twist was a sale  of medium-term Treasury bonds and purchase of 10-year bonds.  The Federal Funds rate is the interest rate for overnight loans among banks so they can meet the Federal Reserve’s requirement for reserves.

The chart above shows how QE correlated with the ups and downs of the stock market.  But, as I indicated in a previous post, American corporations did not advantage of low interest rates to invest in their businesses.  Instead they have transferred the gains to stockholders in the form of stock buybacks.

An economic recovery has taken place.  Most Americans are better off than they were at the depths of the crash.  But as economic recoveries go, this one has been weak.

2.household-income-monthly-median-growth-since-2000

The chart shows how important is it to always adjust for inflation.  A dollar in the year 2000 is not the same thing as a dollar in the year 2016.

Although corporate executives did not take advantage of Qualitative Easing to invest in America, there was nothing besides politics holding back the federal government from investing in public works.  There is a lot of urgent work that needs to be done in maintaining and upgrading American’s physical infrastructure, such as upgrading public water systems to get the lead out.

With a lot of public work that needs to be done, a lot of people who need work and financing costs at historic lows, why not put the unemployed and under-employed to work doing what needs to be done?  Fiddling with interest rates and the money supply is not enough.

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If I voted strategically …

February 3, 2016

If I voted strategically, instead of for the candidate I want to win, I probably would vote for Hillary Clinton in the New York Democrat primary and for the Republican candidate in the general election.

The reason is that whoever is President from 2017 to 2021 is going to be blamed for the next stock market crash — unless it happens later in the current year — and it almost certainly will be worse than the 2008 crash.

It will be worse than the one before because nothing has been done to address the abuses that caused the previous crash—neither punishing accounting control fraud, nor breaking up the “too big to fail” banks, or curbing reckless speculation, nor creating good jobs, nor reducing income inequality.

The main thing that is propping up the financial markets is the Federal Reserve Board’s lid on bank interest rates, which drives investors into the stock and bond market, and this cannot go on forever.

If the Presidency is held by defenders of the status quo, it will be easier in 2020 for progressives to make the case for changing the status quo.

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There never was an “economic stimulus”

August 24, 2015
blog_govt_spending_recession

Source: the Wall Street Journal

All the recessions since World War Two were followed by an “economic stimulus”.   The current one is the exception.  As the chart above indicates, government spending—combined local, state and federal government spending—has actually declined.

The idea behind “economic stimulus” was that increased government spending would put people to work and put money in circulation so that the recession would not have a domino effect and develop into a full-fledged recession.

Of course some of this was not intentional.  Spending for unemployment insurance and other safety net programs automatically increases in hard times.

For the idea to work, there has to be deficit spending.  There is no economic stimulus if governments take as much money out of the economy through taxes as they inject through spending.   Keynesian economists think this should be offset by government budget surpluses when the economy is booming and needs to be cooled off.

You could argue about whether this is justified and how much effect it really works.  I personally think that the severity of the Great Recession is due to the long-range decline of American wages in inflation-adjusted terms.

But it is interesting to note that the current recession is the worst since the Great Depression of the 1930s and that it is the only one followed by an actual decrease in government spending.

LINK

Chart of the Day: Here’s Why the Recovery Has Been So Weak by Kevin Drum for Mother Jones.

Public employment fails to keep up

October 14, 2014

EPIpublic-sector-jobs-gapEPIsnapshot-teacher-gap-10-08-2014

My e-mail pen pal Bill Harvey sent me links to articles with the charts shown above, both from the Economic Policy Institute, whcih the seriousness of the current attack on the public sector and the decline of public employment.

Public employment, unlike in previous economic recoveries, is still depressed, especially at the state and local level.  In and of itself, this creates a drag on the whole economy, just like job losses in any other category.

And after a certain point there aren’t enough public employees left to do their jobs adequately.   Teachers with too-large classes teach less effectively.  Firefighters with too-long shifts and too-small crews fight less effectively.  Nurses with too many patients may not be able to keep track of them as they should.  Public roads and public utilities aren’t maintained.

While there can be featherbedding in public employment, this is not the situation now.  Public services in many places are in dire straits.

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The U.S. jobs market has recovered (or has it?)

June 7, 2014

jobs.recovery.am

The number of Americans with jobs has at long last gotten back to where it was before the state of the recession.

As the chart above shows, this has taken much longer than after any previous recession since World War Two.

But this doesn’t mean the U.S. economy is back to normal.  The population has grown since then, and so we still have a higher number of Americans than before who are out of work.

Economists define a recession as two quarters of a year in which GDP (output of goods and services) has fallen, and a recovery as two quarters in which GDP has risen again.

In theory this would automatically mean an increase in jobs.  If the output of goods and services is increasing, then supposedly more people are being put to work to produce these goods and services.  But this time around, there is a disconnect.

The percentage of working-age Americans with jobs is far below pre-recession levels.  Most Americans, based on their personal experience, think the United States is still in a recession.

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Why the economic recovery is so slow

March 6, 2014
Current job losses compared with previous recessions

Current job losses and recovery compared with previous recessions

The chart shows how slow the current U.S. economic recovery is compared to recoveries from  previous recessions.  When and if the number of U.S. jobs returns to the pre-recession level (the 0.0% line on the chart), the jobs recovery will not be complete because the number of working-age Americans will have increased in the meantime.

Why is the current economic recovery so slow?  Here is what I think:

  • Almost all the benefits of economic growth during the past 20 or 30 years have been flowing to a tiny minority of the population — the upper 1% or 0.1% of the population.
  • These segment of the population spends less of their income than most Americans do.  Instead they save their money so that they can become even richer.
  • Contrary to what “supply-side” economists hoped in the 1980s, they have not been investing their money in enterprises that create American jobs.  People don’t invest money just because they have money or just in order to create jobs.  They invest money in a business because they have reason to think there is a market for that business’s products and services.
  • Prior to the 2008 crash, U.S. economic growth depended on the willingness and ability of the American middle class to take on debt in order to maintain their spending power.
  • Since the 2008 crash, banks, wisely, have tightened their requirements for lending.
  • Since the 2008 crash, middle class Americans, wisely, have been paying down their debts rather than taking on more.
  • These leaves us with the situation that John Maynard Keynes wrote about — an economy that does not grow because people have no money to spend, and people without money to spend because the economy is not growing.

I don’t believe in government spending money for the sake of spending money, but there are a lot of things that need to be done that in the long run will add to US economic strength, and this would be a good time to start.  One useful way to increase jobs is for governments at all levels to start to repair our deteriorating bridges, water mains and other physical infrastructure.

LINKS

FORGET THE 1% by J.D. Alt for New Economic Perspectives.

Inequality and the Weak Recovery by Joe Weisenthal for Business Insider.

Americans Shut Out of Home Market Threaten Recovery by Pashant Gopal and John Gittelsohn for Bloomberg Business News.

An economics lesson from a kangaroo

August 19, 2013

australia.minimum.wage

This is true, although in terms of purchasing power, the Australian minimum wage for fast-food workers is more like $12 in the United States. Click on Australia minimum wage for details from the Real News Network.

Many economists say, without any empirical evidence, that an increase in the minimum wage will automatically result in increased unemployment.  This is because it is a basic principle of economics that if you increase the price of something, people will buy less of it, and so it is with wages.

Under certain conditions, that would be true.  Fewer people would be hired for minimum wage jobs if, say, the U.S. minimum wage was raised to $72.50 an hour.  But there is no evidence that any of the actual increases in the minimum wage have had any adverse measurable effect on U.S. employment.  Indeed, the number of minimum wage and near-minimum wage jobs has increased dramatically since 2007-2009, when the minimum wage was increased from $5.15 to $7.25 an hour.

The basic concept of economics—that the law of supply and demand describes how people respond to economic incentives—is true as far as it goes.  This concept has such beauty and explanatory power that it is easy to forget the other dimensions of human behavior.   Economists who forget this wind up like the physicist in the joke, who could infallibly predict the outcome of horse races, provided there were spherical horses racing in a vacuum.

Good advice from Iceland (with caveats)

July 5, 2013

iceland

I like and agree with this statement.

I like it even though Iceland’s politicians weren’t necessarily as brave and far-seeing as the statement implies.

Banks were allowed to go hog-wild in the United States and Europe in the years leading up to the 2008 financial crisis, but Iceland’s banks were wild and crazy even by Wall Street and City of London standards.   They collected money from depositors all over the world, and lent out money at high interest rates without thinking about the high risk.   Investors in the United Kingdom, the Netherlands and other countries bought into this risky behavior without considering that there would be a day of reckoning.

When the crash came, it wouldn’t have been possible for Iceland to bail out its banks even if it had wanted to do so.  The banks’ liabilities were equal to eight times Iceland’s GDP (its annual economic output).

Iceland did suffer severely from the recession, and it isn’t out of the woods yet.   Individual Icelanders are struggling economically, Iceland has a big trade deficit and the country is going to take another economic hit when the government lifts exchange rate controls on the Icelandic kroner.   In the last election, Icelanders voted in the political parties whose policies led to the financial crash, which is hard for me to understand.

Still Iceland’s recent history shows that it is possible to give relief to the honest citizen and prosecute the crooked financier, and still survive to tell the tale.

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Obama and the economic recovery

November 3, 2012

JobLossesAlignedOct2012

The October jobs report shows the U.S. economy continues to recovery, but, as this chart from the Calculated Risk web log shows, at a much slower rate than previous post-war economic recoveries.

Since the 1970s, each economic recovery has been weaker than the previous one, with slower growth in jobs and hourly wages at a lower rate than in the previous recovery.   But in my opinion, the reason the 2007 recession is so much worse is the 2008 Wall Street crash, signaling the unsustainability of an economy based on debt and speculation rather than borrowing.

Here are some more charts, also from Calculated Risk, which show the state of the U.S. economy in the light of the latest job report.

UnemployRateOct2012

EmployPopOct2012

The lower chart, which shows the proportion of the population in the labor force and the proportion with jobs is probably a better measure of the employment situation than the unemployment rate, which is the percentage of the population looking for jobs who can’t find jobs.   You should notice that the bottom line on the chart is not zero, which means that the variation at first glance seems greater than it really is.

The job losses in the recession were mainly well-paying, middle-class jobs, and the job gains are mainly low-paying, less desirable jobs.   And while any increase in jobs is good news, the rate of job growth is barely enough to keep up with growth in the population.

I think President Obama deserves some credit for the fact that things are not even worse than they are.  I think his stimulus program helped, and, while I disagree with the way the bank bailout was handled, I think the recession would have been far worse if the administration had stood idly by and let nature take its course.   Here is another Calculated Risk chart, which compares the current U.S. recovery with the Great Depression of the 1930s in the United States and with other nations which have gone through financial crises in the past few decades.

JoshOct2012

What this chart shows is that the financial crisis in the United States could easily have been much worse than it was.

Unfortunately, the Obama administration failed to take action to prevent a future financial crash.  It declined to prosecute for financial fraud nor to restructure failed financial institutions, as was done in the aftermath of the savings-and-loan crisis.  Obama’s administration worked pro-actively to prevent legislation that would break up the too-big-to-fail banks or to take meaningful action to limit speculation with federally-insured bank deposits.  As a result, the Wall Street financiers who were responsible for the financial crash, except for the executives of Lehman Brothers, wound up better off than they way before.

The predictable result of this will be another financial crash, a bigger and worse one than the 2008 crash.  I am not smart enough, or foolish enough, to say when this will be, but when it happens, it will be a political disaster for whatever political party happens to be in power at the time.

The broader problem is that the United States has slower economic growth than in the 1950s and 1960s, and an increasing share of the benefits of that growth are going to a tiny minority of the population.  I think both trends are the result of the globalization of the national economy.   To some extent, slower economic growth and wage stagnation are the result of the leveling of the playing field between American workers and workers in Latin American and eastern Asia.  I don’t complain about this.  It would be shameful to try to maintain my high material standard of living by trying to keep people in other nations poor.

The other aspect of globalization is that the world’s economic elite have the means to escape regulation and taxation, and that international economic institutions—the World Trade Organization, the International Monetary Fund, the European central bank—operate to protect the interests of financial institutions and the economic elite from national governments.  I can imagine an alternate globalization in which international institutions work to raise labor and environmental standards, but at present workers and scientists are not in charge.

I wouldn’t expect Barack Obama to be able to change the situation all by himself, although I think a President is in a good position to raise awareness of the problem.  Nor do I think that Mitt Romney offers a better alternative.   His Bain Capital is part of the problem.  Change, if it comes, will have to come from an aroused public opinion.

Click on Calculated Risk: October Employment Report for a more complete analysis of the latest Bureau of Labor Statistics report.

Click on Modest Jobs Growth in Latest Economic Report for a more readable and less technical analysis by the New York Times.

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I don’t see how this can possibly end well

September 28, 2012

The Federal Reserve System has the power to create money, which it puts into the U.S. economy by buying Treasury bonds or other financial assets.   The chart above, which comes from the Federal Reserve Bank of St. Louis, shows how the money supply has more than tripled since Barack Obama was sworn in as President.

Recently Ben Bernanke, the chair of the Federal Reserve Board, announced that the Fed will spend $40 billion a month to buy mortgage-backed securities (aka toxic assets) until employment is back to normal.

The theory behind this is that putting more money into circulation will stimulate economic activity, because banks will increase their lending to American small businesses and consumers.  As economist Michael Hudson (shown in the video in my previous post) pointed out, this hasn’t happened.  The big Wall Street banks have more profitable things to do with their money.  What the Fed’s action does is to relieve the big Wall Street banks of the consequences of the 2001-2007 house price bubble and set the stage for a new bubble.

Another of the Fed’s policies has been to hold down interest rates to virtually zero.  The theory behind this is that Americans will borrow more and this will stimulate economic activity.  The actual result has been to artificially stimulate the stock market by driving money out of bank savings accounts.

Taking myself as an example, I get virtually no interest on my bank account.  This means that as a result of inflation, which is low but not zero, my savings are worth less in real terms than they were at the beginning.  This creates an incentive to venture out into the financial markets.  But since stock prices are being lifted by something other than the perceived value of the companies issuing the stock, there is bound to be a fall.

One cause (or definition) of inflation is too much money chasing too few goods.  During the past three years, the Federal Reserve System has more than tripled the amount of U.S. dollars, but this has not gone into increased production of U.S. goods.  Inflation is low in historic terms, but there is no guarantee this will continue.  I don’t see how this can possibly end well.

Click on QE Forever for analysis by Robert P. Murphy in The American Conservative.

Click on QE3: Another Fed Giveaway to the Banks for analysis on the naked capitalism web log.

The “monetary base” is spendable money, including cash and coins, bank accounts and money market funds.  There are other measures of the money supply, which include bank savings certificates, Treasury bonds and certain other kinds of financial assets.

Benchmarking the U.S. employment recovery

September 26, 2012

Double click to enlarge.

Double click to enlarge.

I’ve posted a number of charts like the one at top showing how much worse the current employment recovery is than the recoveries following previous recessions since World War Two.   But the second chart provides another and maybe more meaningful comparison—the U.S. recovery versus employment recoveries in foreign nations following financial crises.  The current U.S. recovery is not out of line with the experience of foreign nations.

The most significant comparison, though, is with the current U.S. recovery, shown by the thick red line, with the aftermath of the 1929 stock market crash, shown by the dotted black line.  What it indicates to me was that the United States was on a slide toward another Great Depression, like that of the 1930s, but that the slide was prevented by the bank bailouts and the Obama stimulus plan.

I’ve criticized the Obama administration for failing—really, not seriously attempting—to put anything in place that would prevent a repetition of the recent financial crash.  The Obama administration has blocked prosecution of financial fraud and meaningful legislation to regulate or break up the “too big to fail” banks, while the Federal Reserve Board, through its Qualitative Easing programs, has given money to the big Wall Street banks at near-zero interest rates without any requirement that the money be lent in the real American economy.  I think the United States is on track for a bigger crash and a bigger bailout, if indeed a bailout is possible the next time around.

But give credit where credit is due.  The swift action of the Bush administration, the teamwork of the Bush and Obama administrations during the transition, and Obama administration’s follow-through prevented a collapse of the financial system, and the Obama stimulus plan also helped shore up the economy.   I can’t prove this.  There is no way to turn back the calendar and see what would have happened with no bailout and no stimulus, but I think the Hoover administration’s experience after 1929 provides a good indication of what would have happened.   But now that the collapse has been averted, the U.S. government and banking system is busy recreating the circumstances that led to the collapse in the first place.

Click on Does this graph prove the recovery has been impressive, after all? for the thoughts of Ezra Klein on the Washington Post’s Wonkblog.

Click on Checking In on Financial Crisis Recoveries for the source of the chart in a report by Josh Lehner of the Oregon Office of Economic Analysis.

Obama’s stimulus: a new New Deal?

September 24, 2012

While I’m critical of President Obama’s overall record, and do not intend to vote for him, I do think he deserves credit for the economic stimulus program he pushed through Congress in the early days of his administration.

While the economic recovery is strong in the stock market and weak in the jobs market, the United States averted the complete economic collapse which seemed to be imminent in early 2009.  I think the Obama stimulus program helped stop the downward spiral, and also put in place some things that will be important for the economic future.

I don’t think a President Hillary Clinton would have done better, and I think a President George W. Bush, John McCain or Mitt Romney would have done a whole lot worse.

I just got finished reading The New New Deal: The Hidden History of Change in the Obama Era. by Time reporter Michael Grunwald.  He told me things about Barack Obama’s stimulus program that I hadn’t known and that hadn’t fully registered.  He left me with a better opinion of the President and the stimulus program than I’d had.

Grunwald argued that the stimulus prevented the Great Recession from becoming much worse that it was, and that it put in place efforts, especially the DARPA-E program for green energy, that are important to the long-term economic growth of the United States.  He also argued that, given the political realities, what President Obama did was probably as much as could reasonably be expected.

He said the the Obama stimulus program in itself pumped more money into the U.S. economy, in inflation-adjusted dollars, than President Franklin Roosevelt’s entire New Deal.  It is true that the United States is a much richer country, in inflation-adjusted dollars, than in the 1930s, but Grunwald also said that Obama’s stimulus program absorbed a greater fraction of the U.S. gross domestic product than the New Deal in any one year.  This is astonishing.  I hadn’t known this.

Given that fact, I agree that it is not reasonable to complain that the stimulus was not even bigger than it was.  My criticisms of President Obama’s economic policies are on other grounds—his administration’s failure to address the causes of the financial crash, his shielding of Wall Street speculators from prosecution for financial fraud, his willingness to use Social Security and Medicare as bargaining chips.

Obama has in some ways a tougher challenge than FDR.  The New Deal of the 1930s was intended to restart a stalled economy.  With the hollowing out of U.S. manufacturing during the past few decades, it is necessary not only to restart but to repair.

The American renewable energy industry was on the verge of collapse when Obama took office, Grunwald wrote.  The Obama administration has revived it by investing in innovative companies, by creating a market for renewable energy by starting to convert the government to green energy and by grants for energy research through the new Advanced Research Projects Agency for energy.

Not all the investments turned out well.  The Solyndra solar panel company is an example of a failed investment (not of corruption), but other initiatives are turning out well, according to Grunwald.  The use of renewable energy in government buildings and vehicles creates a market for green energy, in which the same way that military purchases of semiconductors or granting of air mail contracts in past eras helped the U.S. develop a semiconductor and aviation industry.

ARPA-E is modeled on the successful Defense Advanced Research Projects Agency which promoted innovation with military applications.  It actually was formed during the George W. Bush administration, but greatly expanded after Obama took office.   Gov. Mitt Romney supports ARPA-E, so this is one innovation not likely to be rescinded.

Grunwald wrote a good bit about the struggle to create high-speed passenger trains in the United States.  As a matter of national pride, this would be nice to have, but as a matter of economic benefit, I think we should recognize that, in the United States, the rail system is mainly for moving freight and people travel mainly by highway and by air.  As part of the stimulus program, the Obama administration started a program for replacing track, straightening out curves and eliminating bottlenecks on the rail system.  I think that was the right priority.  For highway transportation, the administration gave priority to maintenance and repair over new construction, and I think that was the right priority, too.

Grunwald pointed out other nuggets in the program—use of information technology for medical records, for example, and extension of broad-band Internet to under-served rural areas, in the spirit of the New Deal’s rural electrification program.

I don’t agree with the Obama administration’s Race to the Top education program, which was part of the stimulus bill.  Grunwald thinks Race to the Top is a program to encourage educational innovation.  Until somebody can show me an example of successful innovation that has come out of the program, I will continue to think that it is a plan to scapegoat school teachers and impose on them a dysfunctional corporate management philosophy.

While I largely agree with Grunwald’s favorable view of the stimulus program, I don’t think the Obama administration overall record reflects the spirit of the New Deal.  President Obama, like President Franklin Roosevelt, is an inspirational leader who can touch the idealism of the American people.  But his record does not match FDR’s.

A real new New Deal would (1) defend Social Security and Medicare instead of making them bargaining chips in a tax deal, (2) break up the too-big-to-fail banks and restore the Glass-Steagal act, (3) prosecute financial fraud and (4) enact the Employee Free Choice Act (aka “card check”) to protect the right of workers to join unions.

Grunwald wrote that Obama achieved as much as can be expected, given the requirement of 60 votes to get a bill through the Senate.  Someone like me who wants more is a “whiner.”  But the 60-vote requirement is simply a procedural rule which can be changed.

The important difference between Obama’s situation and FDR’s is that there is no aroused public opinion forcing the President to do more, as there was in the 1930s.  Until that changes, President Obama’s policies will be the limits of the possible.

Click on The New New Deal for an interview with Grunwald about his book by David Plotz of Slate.

Click on “Everything People Think They Know About the Stimulus Is Wrong” for an interview of Grunwald by Ezra Klein of the Washington Post.

Click on The ‘Silent Green Revolution’ Underway at the Department of Energy for an interview of Grunwald by Ross Anderson of The Atlantic.

Click on Don’t Tell Anyone, But the Stimulus worked for a New York Times report.

Click on Obama’s Green Revolution for an article by Grunwald on President Obama’s energy program.

Click on Michael Grunwald | TIME.com for an archive of his recent articles.

Hat tip to Bill Elwell for suggesting Grunwald’s book.

Recession over? Not for working people

September 12, 2012

The Economic Policy Institute, a non-profit research organization which studies trends in wages and employment, has just issued its latest State of Working America.  Its facts and figures show that conditions were not good for wage-earners even before the Great Recession, and that, even though the recession is officially over, the United States has a long way to go before working people recover lost ground.

The Great Recession was by far the worst in the United States since the end of World War Two.

Double click to enlarge.

And while there has been recovery in economic output, and in the financial markets, the United States is a long way from getting back to a full employment economy.

Click to enlarge.

There has been some improvement in jobs, perhaps partly because of President Obama’s stimulus program, maybe partly because of the natural turn of the economic cycle, but not to pre-recession levels.

I believe that the reason the Great Recession was so bad and the recovery is so weak is that it is more than a routine downturn in the economic cycle.  I believe the United States has reached the limits of creating spending power by substituting credit for income, and we Americans need to somehow recreate an economy based on production rather than finance.

I think President Obama’s economic stimulus program kept things from being worse than they otherwise would have been.  I don’t think Mitt Romney’s and Paul Ryan’s economic philosophy, which is essentially make rich people richer and poor people poorer, would help.  But I do criticize Obama for giving free rein to the too-big-to-fail banks whose fraud and follies were the immediate cause of the crash, and thereby setting the stage for a new and bigger crash.

Click on Economic Policy Institute for the EPI home page.  Click on The State of Working America to read the digital edition of the EPI report.  A print edition is scheduled for publication in November.

Click on Did the stimulus work? for summaries of 15 economic studies by Dylan Matthews of the Washington Post’s Wonkblog.  Matthews’ scorecard is that 12 studies said the stimulus was beneficial, two said it was useless and one said the effect is uncertain.

Click on Obama, Romney and the Low-Wage Future of America for an article by Dan Froomkin for Huffington Post Nieman Reports on the lack of a plan from either candidate for a full-employment, high-wage economy.

America’s low-wage recovery

September 4, 2012

When and if employment in the United States gets back to what it was before the recession, American working people will still be worse off than before, because on average they’ll be working in lower-paying jobs.

The National Employment Law Project, a liberal think tank, reported that about three out of five of the new jobs gained during the current economic recovery were in low-wage occupations, with median pay less than $13.52 an hour, or $28,122 for someone working full-time, year-round.   But about four out of five of the jobs lost during the recession were in occupations with median wages above that level.

There is good growth in occupations such as retail clerk, kitchen worker, laborer, freight handler, waiter and waitress, home health aide, office clerk and customer service representative.  The low-wage occupations would provide $15,621 to $28,121 a year to someone working full-time year-round.

The moderate-wage jobs would pay $28,142 to $42,973 a year.  They’re mostly in construction, information industries and banking, insurance and real estate.

Median wages in the high-wage jobs would be $42,994 to $110,906 a year.  A relatively small number of these jobs were lost during the recession, but the loss hasn’t been made up.

The NELP researchers said the shift reflects a hollowing out of the middle level of the U.S. economy which has been going on for a long time, plus layoffs of government workers during the recession.

Back in April, the Economic Policy Institute, a labor-oriented think tank, issued a report predicting that 28 percent of American workers will be in low-paid jobs in 2020, about the same as in 2010.  The EPI defined a low-paid job as one insufficient to keep a family of four above the poverty line.  In 2011, that was $23,005, or $11.06 an hour for someone working full-time year-round.  In yet another report, NELP researchers estimated that one in four American workers currently has a job that pays less than $10 an hour.

What all this shows is that economic stimulus is not enough to bring about prosperity.  Unless we Americans are resigned to growing steadily poorer, we have to figure out not just how to restart, but how to rebuild, our economy.

Click on The Low-Wage Recovery and Growing Inequality PDF for the NELP report.

Click on Majority of New Jobs Pay Low Wages, Study Finds for a summary of the NELP report in the New York Times.

Click on The Future of Work: Trends and Challenges for Low-Wage Workers PDF for the EPI report.

Click on Welcome to Your Low-Wage, Temp Work Future for a summary of the EPI report in Forbes.

Click on Obama, Romney and the Low-Wage Future of America for an article by Dan Froomkin of Huffington Post on the failure of either President Obama or Governor Romney to address this issue.

Hat tip to Think Progress.

An economic parable by Ruben Bolling

August 29, 2012

Double click to enlarge.

Click on Ruben Bolling – Boing Boing for more cartoons.

Is the recession the fault of people like me?

July 10, 2012

Why hasn’t the government of the United States done more to end the recession?  According to an economist named Steve Randy Waldman, it is my fault—or rather the fault of people like me, old retired people who’ve saved their money and don’t want anything to happen that would affect the value of our savings.

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives. … …

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer.  Their overwhelming priority is to protect the purchasing power of incumbent creditors.  That’s it.  That’s everything.  All other considerations are secondary.  These preferences are reflected in what the polities do, how they behave.  They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary.  The same preferences are reflected in what the polities omit to do.  They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation.  They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation.  The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation.  The purchasing power of holders of nominal debt must not be put at risk.  That is the overriding preference, in context of which observed behavior is rational.

via interfluidity.

I don’t see it.  I am fortune enough to have savings, which I have invested conservatively, and I don’t think that either the federal government or Wall Street is acting in my financial interest.  If it were, I would be able to earn interest on my bank account or my money market fund.  No, the U.S. government, the German government and the international financial institutions are operating in the interests of the big banks and investment firms.  They are acting to preserve the value of their assets, not my savings.

True, many Tea Party members are in my economic class, and they are much more worried about inflation and government debt than they are about unemployment and public services.  But the Tea Party rank and file don’t run things.  The average Tea Party supporter is as opposed to the Wall Street bailouts as I am.

True, economic policy is tilted toward averting inflation, which isn’t a serious problem at present, rather than bringing down unemployment, which is.  I think that reflects the policies which serve the interests of financial institutions, whose priority is to maintain the value of currencies and financial assets, and over the interests of the producers of tangible goods and services, whose priority is to maintain the level economic activity.

I don’t think governments should intentionally adopt a policy of inflation, but I do think they need to recognize that inflation is not the main concern right now.  Right now continued recession, with the strong possibility of another financial markets crash, is a greater threat to my savings than inflation is.

Click on Depression is a choice for Steve Randy Waldman’s full comment.

Medicine for an economy sick with debt

July 9, 2012

Ratio of total U.S. debt to U.S. economic output

Our great recession is due to the bursting of a debt bubble, and not just the normal ups and downs of the economic cycle.  We had an economy in which many and maybe most Americans were unable increase their earning power, but maintained their material standard of living by going deeper into debt.  As long as the real estate bubble and the stock market bubble lasted, they were able to keep on borrowing.  Now that the bubble has burst, and it is time to pay up.

The old Keynesian medicine doesn’t seem to work.  As long as the government pumps money into the economy, there is some recovery, but noy enough to keep going when the government stimulus ends.  Paul Krugman proposes a stronger stimulus.  If deficit spending can spark sustained economic growth, he says, that growth will make it possible to pay down the debt in the long run.  Very true, but what if it doesn’t?  What if deficit spending just adds to the deficit and nothing more?

“Austerity” doesn’t work either.  Cutting necessary government services — schools, road maintenance, public health — just creates a different kind of deficit, if you look at things that way.   This “saving” is going to have to be made up by much more spending in the future.

Meanwhile we’re stuck.  As Sarah Jaffe of AlterNet put —

The student loan debt alone is going to be a trillion dollars sometime in the next couple of months. That’s a trillion dollars that we’re all paying in interest to Sallie Mae, to Citibank—mine was with Citibank for several years—to Wells Fargo, to Discover Card Services, which bought a bunch of student loan debt recently, and to the federal government. But we’re not paying that into our local businesses. We’re not paying this into the corner store. We’re not paying this to the farmer’s market. We’re not paying this to anything. We’re not buying a home because we have student loans or we’re not going back to school because we have a home loan.

Debt has been a substitute for wage increases in this country for about the last thirty years, give or take.  Real wages haven’t gone up in a really long time.  We’re mortgaging our future on credit cards and home equity.  And when the housing bubble popped, and the credit markets froze, we suddenly realized exactly how little we had that wasn’t promised to somebody else already.  It becomes a drain on the future. 

via n + 1: Debt.

Inflation is one historic method by which nations have made their debts go away.  We don’t want to go that route.

The other historic way to address the debt problem is to “restructure” the debt—have people pay what they can afford, so much on the dollar, and chalk it up to experience.  The creditors learn to be more careful in the future when they lend money.  The debtors find that it is much more difficult to borrow money.  Both are able to move on to new things.

During the 2008 election campaign, there was talk of something called “cramdown”—giving federal bankruptcy judges the authority to restructure mortgages in hardship or legally cloudy cases.  Various proposals have been advanced for giving relief on student debt.  Internationally, government debt crises almost always result in a restructuring of debt, but usually after a period of “austerity” in which the public is subjected to higher prices, lower wages, higher taxes and denial of essential government services.

I think that when you borrow money, you have a moral obligation to make a good-faith effort to pay back the money.  But when a borrower is honestly unable to repay a loan, it means both the borrower and the lender have acted unwisely (or are the victims of bad luck), and they both should suffer.  The lender suffers by taking a loss; the borrower suffers by having to pay up to the limit of what they can and by not being able to borrow in the future.  But you cut short the agony.  You make it possible to start fresh.

Click on n + 1: Debt for a panel discussion of debt by David Graeber, author of Debt: the First 5,000 Years; Mike Konczal of the Roosevelt Institute; Brian Kaltenbrenner of Occupy Student Debt; and Sarah Jaffe of AlterNet.

Click on Okay, Folks, Let’s Put Aside Politics and Look at the Facts for useful charts and information from Henry Blodget of Business Insider.   Blodget is a Wall Street guy who thinks the answer to the federal budget deficit is a combination of tax increases and cuts in Social Security, Medicare and Medicaid.  My problem with this is that Social Security (contrary to the propaganda) is solvent and Medicare delivers health insurance more efficiently and at lower cost than for-profit health insurance systems.  It is true that Medicaid spending is a problem, but I think a solution needs to be something other than denying essential medical care to poor people.  That said, Blodget provides a great deal of good information.

Click on Hubbert’s Third Prophecy for more useful charts and information from ClubOrlov.  The post concludes with an argument against banking as such, which I don’t understand and with which I probably would disagree if I did understand it.  That said, there is a lot of good information, as well as food for thought about exponentially increasing debt in a world that cannot sustain exponentially increasing economic output.

Click on Parsing the Data and Ideology of We Are the 99% for an analysis by Mike Konczal of the demands of the people on the “We Are the 99 Percent” Tumblr page.  His conclusion was that their basic demands were debt relief and the means of basic economic survival.

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Recovery still has a long way to go

May 4, 2012

This chart shows how much worse job losses have been in this recession compared to other recessions since World War Two.

Mike Konczal, who posts on the Roosevelt Institute web site, pointed out that unemployed Americans are dropping out of the labor force at a faster rate than they are finding jobs.  Click on Rortybomb for his post.

Heidi Shierholz, of the Economic Policy Institute, said the outlook is probably better than the figures indicate, because of seasonal factors, but the outlook is still grim, including for new college graduates.  Click on Economic Policy Institute for her analysis.

Click on Calculated Risk for the source and explanation of the chart above, and more charts.

The success and limits of economic stimulus

February 28, 2012

New unemployment insurance claims

It is a fact that economic recovery began after President Obama took office.  I believe that the recovery was helped by his economic stimulus program and by programs already in place such as food stamps and unemployment insurance.  These helped cushion the effects of the recession and allow recovery to take place.  I can’t prove this.  There is no way to go back in time and run another scenario in which the government stood aside and allowed events to take their course.

The problem is that the recovery is so slow, and that even when and if economic conditions get back to the way they were before.  During the supposed expansion preceding the 2007 recession, wages were declining (in terms of buying power), American manufacturing was being eroded and poverty was increasing.

Below are some charts which illustrate the weakness of the current economic recovery.

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Obama’s jobs plan: is it enough?

September 12, 2011

President Obama surprised his progressive critics by proposing a $450 billion stimulus plan—about $150 billion larger than what most had predicted.  And he surprised and pleased them once again today by announcing that he proposes to pay for the plan by raising taxes on people with incomes over $200,000 a year.

The proposed American Jobs Act appears to have something for everybody.  Kevin Drum of Mother Jones gave this useful breakdown of what’s in the President’s proposal.

  • $250 billion in tax breaks.  Most of this is a payroll tax cut, but the plan also includes 100% expensing of business investment, tax credits for hiring unemployed workers, and a few other things.
  • $100 billion in infrastructure spending.  About half of this is for new projects, and the other half goes to an infrastructure bank, a program to fix up vacant and foreclosed homes and businesses, and a program to fix schools.
  • $100 billion in other stuff, including extension of unemployment benefits, direct state assistance to hire cops and firefighters, a mortgage refinancing program, and a few other smaller items.

via Mother Jones.

The consensus of economists is that President Obama’s jobs plan, if enacted as proposed, would lower the unemployment rate would fall by a percentage point or so, and increase the economic growth rate by a percentage point or so.

We don’t know what would happen after the stimulus runs out.  Would employment and economic activity start to rise on their own?  Or would they stop growing, as happened after the original stimulus program was enacted?  In a normal economic cycle, a stimulus of this size would be enough to boost the economy into growth.  I think the current economic crisis is much more than that.

Devoting more than half the stimulus to tax cuts is not good policy, and may not even be good politics.  Most Americans are so deep in debt that, if they get a little extra money, they will pay their current bills rather than increase their spending.  Tax credits aren’t going to spark business activity unless there is demand for the goods and services that businesses provide.

Much of the original stimulus consisted of tax cuts, but many Americans don’t check their withholding taxes, and don’t believe that President Obama reduced taxes.  It is doubtful that he would get any more political benefit from a second round of tax cuts.

Cutting payroll taxes for Social Security is a bad idea, even though the difference would be made up out of general revenue, because it breaks down the barrier between the Social Security trust fund and the general government budget and weakens the taboo against tampering with Social Security.

I’m glad to see provision in the plan for repair of bridges, dams and other infrastructure, but any meaningful project will take years.  There are very few meaningful “shovel ready” infrastructure products except repaving roads.  Unfortunately I think the economy still will be in the doldrums when the bigger infrastructure projects are underway.

One thing that would help the economy would be to give Americans debt relief.  Some have proposed a “cramdown” plan, to give federal bankruptcy judges the authority to restructure mortgage debt so that the property-owner could pay.  I would favor something similar with student loans.

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This time it’s different—and worse

September 12, 2011
Double click to view

Click on Anatomy of a soft economy for the original version of the chart in Fortune magazine.

Click to view

Click on American Idiots: How Washington is destroying the U.S. economy for the article by Alan Sloan, Fortune magazine’s senior editor-in-chief, that went with the second chart.

I have to say that I like the charts a lot more than I do Sloan’s article.   He thinks that the economic crisis is primarily a result of federal budget problems, and that it can be fixed by tinkering with the tax code and chipping at Social Security and Medicare.  As the chart itself shows, the problems are much more fundamental than that.

Hat tip to The Big Picture.

The top 1% and the U.S. economy

August 9, 2011

This Al Jazeera report puts a lot of significant information into fewer than 30 minutes.