Archive for the ‘Recession’ Category
Paul Krugman, a leading proponent of the deficit spending side, puts it like this:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. . . .
The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
There is no doubt that the European experience has put those supporting austerity on the defensive. As the New York Times explains:
Britain has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far. Britain is now in its second recession in three years. . . .
In a packed British Parliament, Prime Minister David Cameron had to defend his austerity drive against critics like Ed Miliband, head of the opposition Labour Party, who called the economic numbers “catastrophic.”
The raucous scene was the latest manifestation of growing popular frustration with the strict fiscal diet that has been prescribed by the European Central Bank and German leaders in response to the euro zone’s sovereign debt crisis. While Britain is not a member of the euro zone, its economic fortunes are closely linked with those of the currency union.
The discontent was on view in French elections last weekend and played a role in the collapse of the Dutch government on Monday. Greece, Spain and Italy have been the scene of mass demonstrations for months, but the turmoil now seems to be spreading to countries that were not seen as being at the heart of the crisis. Britain joined Belgium, the Czech Republic, Greece, Italy, the Netherlands and Spain in recession.
Of course, as Krugman notes, that doesn’t mean that the austerity defenders have given up. Here is the solution to the crisis put forward by Mr. Draghi, head of the European Central Bank, as reported by the New York Times:
He urged national leaders to take steps to promote long-term growth even when it is politically difficult. Some leaders have raised taxes or cut infrastructure projects, when instead they should be reducing government operating expenses, Mr. Draghi said.
Tragically, those in Mr. Draghi’s camp continue to blame Europe’s crisis on too much government spending when its roots lie far more in the collapse of speculative bubbles driven by private financial interests and German austerity policies. Of course, this understanding would require taking a critical stance against dominant capitalist interests; far easier to make the working class pay.
However, we should also be careful about assuming that the bankruptcy of the austerity strategy proves the wisdom of relying on deficit spending to solve our economic problems. The fact of the matter is that spending to stimulate growth will not solve our problems. The reason is that existing economic structures operate to generate what the United Nations Development Program has called “savage growth.” Savage growth refers to a growth process that enriches the few at the expense of the many. In other words, a process that is neither desirable nor sustainable. Therefore, unless we change the nature of our economy, deficit spending will just temporarily postpone the start of a new crisis.
Here are two charts from an Economic Policy Institute report that highlight the workings of savage growth in the United States. The first shows a sharp divergence, beginning in the mid-1970s, between productivity and hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). In other words, the owners of the means of production have basically stopped sharing gains in output with their workers. This wedge between productivity and compensation helps explain both the growth in inequality and the need for debt to sustain consumption.
The second provides a closer look at post-1973 trends. A key point: median hourly compensation basically stopped growing starting early in the 2000s, even though the economy continued to expand for several more years, and it continues to fall despite the end of the recession.
In sum, if we are serious about improving economic conditions we need to move past the austerity-deficit financing debate and begin pressing for adoption of trade, finance, production, and labor policies that strengthen the position of workers relative to those who own the means of production. Anything short of that just won’t do.
The news is filled with reports of positive economic trends–supposedly we are making slow but steady progress in recovering from the Great Recession. The Great Recession ended in June 2009, which means we have been in economic expansion for almost 3 years. So, how seriously should we take these reports?
One indicator worth looking at is median household income. Unfortunately its trend suggests little reason for cheer. In January 2012, median household income was $50,020. That was 5.4% lower than it was in June 2009. Even worse, as the chart below reveals, after a brief uptick it headed back down again.
It is true that employment is finally growing, a development reflected in the decline in the unemployment rate (see above). Unfortunately, this has done little to boost wages. In fact, real wages actually fell in 2011. The first chart below highlights the downward turn. The second chart reveals just how far per capita earnings remain below historical trend.
This situation helps to explain why growth has been so anemic. As the Wall Street Journal wrote:
Many economists in the past few weeks have again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012. The economy expanded just 1.7% last year. And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate.
Without a dramatic change in median household income, growth will remain slow and even the limited employment gains we currently celebrate will likely prove impossible to sustain. Given the current political climate, it is hard to see how this expansion will be either long lasting or bring meaningful improvements in majority living and working conditions.
The economy has officially been in recovery since June 2009, but it is only wealthy individuals and corporations that are celebrating. For example, real wages fell by almost 2 percent in 2011. At the same time corporate profits hit a record high in the third quarter of 2011. Businessweek explains how corporations continue to enjoy profits in the face of declining wages as follows:
Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services. The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.
“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.” While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.
“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”
In other words, as far as business is concerned, things are pretty good. Economic conditions enable them to suppress wages while tax cuts and social spending ensure sufficient demand. So goes “the recovery.”
Working people increasingly understand that the system is not working for them; their sacrifices are translating into corporate gains, gains sufficiently satisfying to those at the top that business and political leaders have no interest in pursuing change. Here and there successful resistance has taken place. But to this point, popular pressure has not been great enough to really shake business or government leaders out of their complacency.
What will it take? We can learn an important lesson from the recent WikiLeaks publication of over 5 million emails taken from the servers of Stratfor, a so-called intelligence/information company, by Anonymous. As explained by a Yes Men blog post:
The emails, which reveal everything from sinister spy tactics to an insider trading scheme with Goldman Sachs (see below), also include several discussions of the Yes Men and Bhopal activists. (Bhopal activists seek redress for the 1984 Dow Chemical/Union Carbide gas disaster in Bhopal, India, that led to thousands of deaths, injuries in more than half a million people, and lasting environmental damage.)
Many of the Bhopal-related emails, addressed from Stratfor to Dow and Union Carbide public relations directors, reveal concern that, in the lead-up to the 25th anniversary of the Bhopal disaster, the Bhopal issue might be expanded into an effective systemic critique of corporate rule, and speculate at length about why this hasn’t yet happened—providing a fascinating window onto what at least some corporate types fear most from activists.“
[Bhopal activists] have made a slight nod toward expanded activity, but never followed through on it—the idea of ‘other Bhopals’ that were the fault of Dow or others,” mused Joseph de Feo, who is listed in one online source as a “Briefer” for Stratfor.
“Maybe the Yes Men were the pinnacle. They made an argument in their way on their terms—that this is a corporate problem and a part of the a [sic] larger whole,” wrote Kathleen Morson, Stratfor’s Director of Policy Analysis.
“With less than a month to go [until the 25th anniversary], you’d think that the major players—especially Amnesty—would have branched out from Bhopal to make a broader set of issues. I don’t see any evidence of it,” wrote Bart Mongoven, Stratfor’s Vice President, in November 2004. “If they can’t manage to use the 25th anniversary to broaden the issue, they probably won’t be able to.”
Mongoven even speculates on coordination between various activist campaigns that had nothing to do with each other. “The Chevron campaign [in Ecuador] is remarkably similar [to the Dow campaign] in its unrealistic demand. Is it a follow up or an admission that the first thrust failed? Am I missing a node of activity or a major campaign that is to come? Has the Dow campaign been more successful than I think?” It’s almost as if Mongoven assumes the two campaigns were directed from the same central activist headquarters. Just as Wall Street has at times let slip their fear of the Occupy Wall Street movement, these leaks seem to show that corporate power is most afraid of whatever reveals “the larger whole” and “broader issues,” i.e. whatever brings systemic criminal behavior to light. “Systemic critique could lead to policy changes that would challenge corporate power and profits in a really major way,” noted Joseph Huff-Hannon, recently-promoted Director of Policy Analysis for the Yes Lab.
Thus, what those with power really fear is not popular outrage at a particular injustice, or even financial penalties in response to that injustice, but rather that somehow people will come to see an overall pattern of behavior that ties together these injustices, revealing an underlying exploitative class system. Said more plainly, those with power fear that an aware populace will come to understand the need to challenge and transform capitalism. No doubt that is why they fear the Occupy movement. And that is why we need to ensure that our organizing and resistance efforts are conducted in ways that help promote this understanding.
As growing numbers of countries face renewed austerity pressures, there is a tendency to explain the trend by searching for specific policy failures in each country rather than considering broader structural dynamics. Key to the credibility of those who argue for a focus on national decisions is the existence of countries that people believe are performing well. Thus, the argument goes, if only policy makers followed best practices their people wouldn’t find themselves in such a bad place. Recently, German has become one of these model countries.
Here is a typical framing of the German experience:
At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labor market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardized unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago.
In other words, Germany seems to be doing things right. Despite suffering a deep decline it actually enjoyed a lower unemployment rate. So, how did it do it? Often cited are recent German policies which have increased labor market flexibility. But are these the best practices that should be adopted elsewhere? One way to answer that question is to look at what these changes have meant to German workers. A Reuters report concluded:
Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs”.
The number of full-time workers on low wages – sometimes defined as less than two thirds of middle income – rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labor Office.
Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector. . . .
Data from the Organization for Economic Co-operation and Development shows low-wage employment accounts for 20 percent of full-time jobs in Germany compared to 8.0 percent in Italy and 13.5 percent in Greece.
New categories of low-income, government-subsidized jobs – a concept being considered in Spain – have proven especially problematic. Some economists say they have backfired.
They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.
Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.
One out of five jobs is a now a “mini-job”, earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.
“Regular full-time jobs are being split up into mini-jobs,” said Holger Bonin of the Mannheim-based ZEW think tank.
And there is little to stop employers paying “mini-jobbers” low hourly wages given they know the government will top them up and there is no legal minimum wage.
This development was far from accidental. It was the result of policy changes implemented in the early 2000s by then Chancellor Gerhard Schroder. In 2005, Schroeder proudly announced at the World Economic Forum in Davos, Switzerland, that “We have built up one of the best low wage sectors in Europe.”
The New York Times described the German employment miracle as follows:
But hidden behind the so-called German economic miracle is an underclass of low-paid employees whose incomes have benefited little from the country’s stability and in fact have shrunk in real terms over the last decade, according to recent data.
And because of government policies intended to keep wages low to discourage outsourcing and encourage skills training, the incomes of these workers are not likely to rise anytime soon.
That, in turn, means they are likely to continue to depend on government aid programs to make ends meet, costing taxpayers billions of euros a year.
The paradox of a rising tide that does not lift all boats stems in part from the fact that Germany has no federally set minimum wage. But it also has its roots in recent German politics, which have favored measures to keep unemployment low and win support from employers. . . .
The Confederation of German Employers’ Associations says the introduction of a minimum wage would push up labor costs and lead to more unemployment. Jobs would simply move out of Germany and to Eastern Europe or Asia.
These new labor policies have not only taken a toll on German workers, they have also greatly contributed to the growing crisis in Europe. The low wages and insecure employment conditions have both enabled German employers to boost exports and limited imports. Global Employment Trends 2012, an ILO report, highlights this connection. According to an article summarizing its contents:
“The rising competitiveness of German exporters has increasingly been identified as the structural cause underlying the recent difficulties in the Euro area,” the report said. Crisis countries had not been able to export enough of their goods to Germany as domestic demand there was not strong enough because of low wages.
The ILO said German policies to keep down wages had created conditions for a prolonged slump in Europe as other nations on the continent increasingly saw only even harsher wage deflation as a solution to their lack of competitiveness.
The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.
As the chart below shows, German wages have been stagnating for over a decade.
No wonder that Germany has been exporting so successfully and that other economies in Europe have found it difficult to compete. While German politicians blame these other economies for their problems, the fact is that German growth has depended on the high consumption and borrowing in these other countries. As one analyst noted:
Germany, remember, accounts for 28% of the whole Eurozone economy. It is not fanciful to imagine that imbalances in the German economy are capable of driving — or at least amplifying — imbalances within the entire region. Indeed Germany’s capacity to buy from Europe is even more limited than its stagnating wages would suggest. Because on top of this Germany has experienced a sharp increase in inequality. This means wealth has been redistributed from poor, who tend to spend, to the rich, who tend to save.
In short, if we are going to meaningfully address our economic problems we need to begin looking critically at how capitalist accumulation dynamics actually work. Trying to emulate so-called success stories is not the way to go.
The Federal Reserve Bank recently released 1,197 pages of transcripts of its 2006 closed door meetings. As the Wall Street Journal comments: “The transcripts paint the most detailed picture yet of how top officials at the central bank didn’t anticipate the storm about to hit the U.S. economy and the global financial system.”
Federal Reserve officials suspected that housing prices were peaking (see chart below). But since they didn’t believe that prices had been driven up by a well entrenched bubble, they were not very concerned that they were coming down.
The Financial Times described the general Federal Reserve stance as follows:
Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment but expected that to offset strength elsewhere in the economy, leading to continued growth overall.
“Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.” . . . .
Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy. “As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years — and doing so is unavoidable if we want to correct the sector,” said Thomas Hoenig, then president of the Kansas City Fed, at the September 2006 meeting of the FOMC.
The transcripts show that the Federal Reserve was so confident that the economy was on solid footing that many officials were, according to the Wall Street Journal:
offering praise for outgoing Fed Chairman Alan Greenspan, who attended his final Fed meeting in January 2006. Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.” . . . .
The transcripts also suggest that Fed officials misgauged the potential for housing problems to spill over into the broader economy.
“Our recent financial-market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward,” Mr. Geithner said at a meeting in December 2006.
So how did the best and the brightest get it so wrong. Perhaps the major reason is because it served their interests to pretend there was no housing bubble. The recovery from our 2001 recession was driven by consumption and that consumption was supported directly and indirectly by the housing bubble. In other words stopping the bubble would have revealed the weakness in our economy and the need for serious structural change. It was far easier and more lucrative for those at the top to just let the bubble go on expanding and pretend that it didn’t exist.
The following chart from the New York Times puts the movement in housing prices highlighted above into a longer term perspective, revealing just how strong speculative pressures were in the housing market.
As Dean Baker, one of the very few economists to warn about the dangers of the bubble, explains:
First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.
By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.
This was a huge problem – because this bubble was driving the economy. It drove the economy directly by creating a boom in residential housing construction. We were building housing at near record pace in the years 2002-2006. This was in spite of the fact that we had an ageing population and record levels of vacancies at the start of that period.
The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than US $8tn in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.
In reality, a lot of the consumer spending driving growth was financed by home refinancing, which helped many housholds compensate for stagnant wages and weak job creation at the cost of a sharp rise in debt. As a Wall Street Journal blog post pointed out, “From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.”
As we now know only too well, the collapse of the housing bubble reverberated through the economy, including the financial sector, triggering the Great Recession. Tragically, many of the “best and brightest” remain in leadership positions today, still arguing for the soundness of economic fundamentals.
Good old Ireland—according to the leaders of France and Germany, things would be a lot better in Europe if all the countries were like Ireland. Their reason: the Irish have generally accepted their austerity “medicine” quietly while workers in other countries (like Greece and Spain) have been in the streets protesting.
The problem with being the “good” country is that while austerity helps ensure that the Irish government is able to make payments to the country’s international investors (especially French and German banks), the Irish people are suffering and their economy is close to sinking back into a new recession. Some deal.
Not so long ago Ireland was known as the Celtic Tiger. Ireland’s recent economic rise, which began in the 1990s, was fueled by multinational corporate investment, much of it from US high-tech firms. As Andy Storey explains:
Ireland, accounting for a mere 1% of Europe’s population, managed to attract 25% of all US greenfield investment into the EU in the early 1990s. US investment in Ireland, at $165 billion, is greater than US investment in Brazil, Russia, India and China combined. Multinationals, the majority of them from the US, account for 70% of Irish exports.
The attraction: Ireland’s extremely low tax rates and tariff-free access to the EU.
Unfortunately for Ireland, the 2001 collapse of the US high-tech bubble meant the end of US investment in the country. Ireland was “saved,” however, by a debt-driven housing boom. Sound familiar?
Irish banks were able to borrow cheaply thanks to the country’s 1999 adoption of the Euro. And with manufacturing in a slump, they aggressively and profitably pushed loans to Irish home buyers and builders. Storey highlights the importance of real estate activity to the Irish economy as follows:
Investment in buildings accounted for 5% of output in 1995 but for over 14% in 2008. By 2006/07, the construction industry was contributing 24% to Irish income (compared to the Western European average of 12%), accounting (directly and indirectly) for 19% of employment (including high levels of migrant labor) and for 18% of tax revenues (property transaction taxes have now collapsed as construction activity has nosedived).
Just like in the United States, this housing boom temporarily masked the fact that the country’s industrial base and public infrastructure was decaying, overall job growth was slowing, and household debt was soaring. When the global crisis hit in 2008, triggered by the collapse of the US housing market, it was the end for Irish growth as well. Irish banks lost access to foreign credit at the same time as their own real estate loans went bad. The Irish financial sector was on the ropes and unable to repay its creditors.
So, what did the Irish government do? In September 2008 it announced that it would guarantee all deposits and payments to foreign creditors. Thus, the people of Ireland found themselves taking on all the debts of the Irish financial sector. Not surprisingly, government debt as a share of GDP greatly increased.
The main beneficiaries of this policy were the country’s foreign lenders, including French and German banks. No wonder the French and German governments view Ireland as a good nation and role model for Europe. This history challenges the notion, widely pushed by the leaders of France and Germany, that the region’s crisis was caused by out-of-control government spending.
Of course, with low tax rates and an economy in recession the Irish government was in no position to pay the private debts it had taken over. The answer, supported by European elites, was austerity. The Irish government slashed spending on public sector projects and workers as well as social programs to free up funds. But even that was not enough. The Irish government had to borrow as well, an action that further increased the country’s national debt.
The foreign creditors got paid, all right. But the austerity only made things worse for Ireland. The cuts drove the economy deeper into recession, again driving down revenue, and forcing the government to seek new loans. However, foreign lenders could see the handwriting on the wall and were unwilling to substantially increase their lending to Ireland. Instead of renouncing or renegotiating the debts, the Irish government went to the IMF and EU for help. It was ”rewarded” with a major loan of approximately $90 billion in December 2010, at the cost of yet more austerity involving higher sales taxes and sharply reduced spending on social programs.
And the consequences of this strategy for the Irish people? As the New York Times reports:
“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”
Ireland’s GDP fell by 3.5 percent in 2008, another 7 percent in 2009, and a further 0.4 percent in 2010. The economy grew 1.2 percent the first half of this year but even this weak expansion will likely be short-lived. According to the New York Times:
The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to under 1 percent. It cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.
In fact, the Irish government announced in November that it will be forced to raise taxes and cut spending again in 2012. The reason: despite all its efforts the size of the national debt continues to growth. The budget deficit is projected to hit 10 percent of GDP this year, still sizeable even though down from 32 percent of GDP in 2010. The government fears that without drastic action it will be unable to continue paying its debts.
Perhaps not surprisingly, the Irish people are beginning to say “enough is enough.” The New York Times highlights one indicator of the change:
On a recent frosty night in Dublin, David Johnson, 38, an I.T. consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank. “This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”
The December 3rd Spectacle of Defiance and Hope in Dublin, captured in the video below from Trade Union TV, is another.
The following charts published in the New York Times highlight some of the trends discussed above.
Ireland’s road to debt and austerity is illustrative of the general situation in Europe. Working people are being squeezed to protect profits and ensure the stability of existing economic relations. Significantly, the leaders of France and Germany have just announced their long term plan for ending Europe’s crisis: adoption of tough new limits on government borrowing. Clearly this is a desperate attempt to head off any meaningful challenge to the existing system. At some point, and one hopes sooner rather than later, working people throughout Europe will see through this game, recognize their common interests, and take up the difficult but necessary job of economic restructuring.
An April 2011 Gallup poll found that 29% of Americans thought that the U.S. economy was in a depression. Another 26% thought it was only a recession. This is scary since according to the National Bureau of Economic Research we have been in an economic expansion since June 2009.
Why would so many Americans feel this way you might ask. Here is one reason. According to recent Census Bureau data, during the recession, which lasted from December 2007 to June 2009, inflation-adjusted median household income fell by 3.2%. Between June 2009 and June 2011, a period of economic expansion, inflation-adjusted median household income fell by 6.7%. This decline is illustrated in the New York Times chart below.
. . .
I recently appeared on the Alliance for Democracy’s “Populist Dialogue” TV show to talk about our economic crisis and possible responses to it. You can watch the show here or below.
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A growing number of analysts are taking seriously the possibility that the U.S. economy is heading back into recession. No wonder President Roosevelt’s 1933 first inaugural address is getting heavy internet circulation. Here is a snippet:
Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources. . . .
Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.
These are the lines of attack.
Sadly our government appears to have no interest in directly “recruiting” people and putting them to work meeting the needs of our country. In fact, most Republican and Democratic party leaders refuse to support a substantial fiscal stimulus even if it would be used to encourage private production.
Right now, the only governmental body committed to expansionary policy is the Federal Reserve, the body that determines our country’s monetary policy. However, it appears that the banking sector opposes even that effort and it remains to be seen how successful they will be in getting their way.
Our Federal Reserve System is an odd creation. It was created in 1913 and consists of a seven member Board of Governors and twelve regional federal reserve banks located in different cities throughout the United States.
As the Federal Reserve itself explains:
The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.
Sounds pretty straight forward. The odd part is the system of regional federal reserve banks.
Each regional bank has a president who serves a five year term and may be reappointed. The president is chosen by the bank’s board of directors–and here is where the issue of who gets to sit at the table of power becomes important.
Each regional bank’s board of directors consists of nine members selected from three “classes,” A, B, and C. The three Class A directors are chosen by the private banks operating in the region to represent the interests of the member banks. The three Class B board members are also chosen by the private banks; they are supposed to represent ”the public.” The three Class C board members are chosen by the Board of Governors and are also supposed to represent the public.
In short, private bankers are structurally placed to dominate the selection of the presidents of the twelve regional federal reserve banks, and through them, influence the direction of the country’s monetary policy.
Monetary policy is made by the Federal Reserve Open Market Committee (FOMC). The voting members of the FOMC include the seven members of the Board of Governors and five of the twelve federal reserve presidents (on a rotating basis). Thus, representatives of the banking sector are legally empowered to sit at the table where decisions about monetary policy and our economic future are made.
If you are wondering if this is wise, you are not alone. Barney Frank, Congressman from Massachusetts, has long worried about this. As he said this September:
The Federal Reserve (Fed) regional presidents, 5 of whom vote at all times on the Federal Open Market Committee, are neither elected nor appointed by officials who are themselves elected. Instead, they are part of a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the President and confirmed by the Senate.
For some time this has troubled me from a theoretical democratic standpoint. But several years ago it became clear that their voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve. In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate — specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.
In 2009, I asked staff of the Financial Services Committee to prepare an analysis of FOMC voting patterns. It confirmed two points. First, the great majority of dissents, 90 percent — from FOMC policy before 2010 — came from the regional presidents. Second, the overwhelming majority of those dissents were in the direction of higher interest rates. In fact, vote data confirmed that 97 percent of hawkish dissents came from the regional bank presidents and 80 percent of all dissenting votes in the FOMC over the past decade were from a hawkish stance.
One day before Frank issued his statement, the FOMC voted to modestly lower long term interest rates in an attempt to boost investment. The decision was supported by a 7-3 vote. At present there are only five voting members of the Board of Governors; two seats remain open. As Dean Baker explains:
What was striking about this vote was that all 5 governors voted for this measure obviously feeling that the potential benefits in the form of stronger growth and lower unemployment outweighed any risks of higher inflation. However, 3 of the 5 voting bank presidents opposed the measure, apparently viewing the threat of inflation as being a greater concern than any possible growth and employment dividend.
This raises an obvious question about the interests being represented by the bank presidents. Inflation is especially bad news for banks because it reduces the value of their assets. On the other hand bankers may not be very concerned about unemployment. They have jobs, as is probably the case for most of their friends as well.
It is hard not to wonder whether the bank presidents voting against further steps to spur growth and reduce unemployment were acting in the best interest of the country as a whole or whether they were representing the banks in their districts. If the latter is the case, then it is reasonable to ask why we are giving the banks a direct role in setting the country’s monetary policy. There is no obvious reason that they should have any more voice in determining monetary policy than anyone else.
In April, Barney Frank introduced H.R. 1512, which would eliminate the voting power of the regional bank presidents. This seems like a good step. We might want to go further and restructure the way in which bank presidents are elected; we shouldn’t be relying on bankers to decide who represents the public interest.
The Census Bureau just published new data revealing trends in living standards as of 2010. The trends are troubling to say the least.
Median household income (adjusted for inflation) fell to $49,445 (see below). That means that the median household now earns less than it did a decade ago. This marks the first decade since the Great Depression without an increase in real median income. According to Lawrence Katz, a labor expert and Harvard economist,
“This is truly a lost decade. We think of America as a place where every generation is dong better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.”
The percentage of Americans living in poverty hit 15.1 percent, the highest percentage since 1993 (see below). There are now 46.2 million people living below the poverty line, the greatest number ever recorded by the Census Bureau. Child poverty stood at 22 percent.
Things are unlikely to get better this year. State and local governments are slashing employment and programs and the federal government is now moving into cutting mode itself.
This depressing situation is not simply a recession phenomenon. As the New York Times reports, the expansion period of 2001 to 2007 “was the first . . . on record where the level of poverty was deeper, and median income of working-age people was lower, at the end than at the beginning.”
Of course, while the great majority of people are struggling, a small minority have been doing very well. One consequence, as the chart below highlights, is a strong growth in inequality (as measured by the Gini coefficient with higher numbers reflecting greater inequality). As I noted in a previous post, over the years 2002 to 2007, the top 1 percent of households captured 58 percent of all the income generated.
So, in brief, there is a small minority that is doing very well and a great majority that is struggling, with a significant number in free fall. Corporations understand what is happening and they are responding. In brief, they are letting go of the middle class as a market and restructuring their offerings to appeal to the top and bottom of the income distribution.
Here is an enlightening five minute discussion of this new business strategy on Daily Ticker video.
The Wall Street Journal, highlighting Procter & Gamble, also reports on this development:
For the first time in 38 years . . . the company launched a new dish soap in the U.S. at a bargain price.
P&G’s roll out of Gain dish soap says a lot about the health of the American middle class: The world’s largest maker of consumer products is now betting that the squeeze on middle America will be long lasting. . . .
P&G isn’t the only company adjusting its business. A wide swath of American companies is convinced that the consumer market is bifurcating into high and low ends and eroding in the middle. They have begun to alter the way they research, develop and market their products. . . .
To monitor the evolving American consumer market, P&G executives study the Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person. In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.
“We now have a Gini index similar to the Philippines and Mexico—you’d never have imagined that,” says Phyllis Jackson, P&G’s vice president of consumer market knowledge for North America. “I don’t think we’ve typically thought about America as a country with big income gaps to this extent.”
Such a response may well strengthen corporate bottom lines, at least for a while. Unfortunately for the great majority of us, it may also reinforce existing downward trends in income.
The mainstream media works hard to convince us that Republicans and Democrats are locked in heated battle, with each side advocating dramatically different economic policies. Although there are differences between the two sides, members of both parties generally share common ground in opposing any fundamental changes to the workings of our economy.
A recent International Monetary Fund report on the U.S. economy sheds light on why this is so. The report includes the following four color-coded charts which compare economic recoveries (including our current one) according to various criteria.
As you can see from the red boxes in the first chart (the one titled “Real GDP and components”), our last two recoveries have been quite weak compared with previous recoveries in terms of growth in GDP, personal consumption, and investment in nonresidential structures. This indicates a growing problem with our economic fundamentals.
The red boxes in the second chart (“Households and employment”) indicate that our last two recoveries have also not been kind to working people as measured by the growth in nonfarm payrolls, unemployment, and disposable income.
However, things look quite different in the last two charts. The green boxes in the third chart (“Business sector”) make clear that the last two expansions have generally been good for nonfinancial corporations. And the dark green boxes in the fourth chart (“Financial”) highlight the enormous gains made by financial corporations in the last two expansions, and especially the current one.
The take-away from these charts is that business leaders experience our recent recoveries very differently than do the great majority of people. Despite the fact that growing numbers of workers find it hard to distinguish our expansions from our recessions, business profits keep climbing. And that is what matters to business. Not surprisingly, then, our corporate leaders are lobbying our political leaders hard not to change existing economic arrangements. If some austerity is needed to maintain stability–so be it. And, this lobbying has proven successful.
The connection between deteriorating economic and social conditions and high corporate profitability deserves careful study as does the question of whether this is a stable relationship. Regardless, these charts provide important insight into our national policy-making nexus. As long as our large corporations are prospering we should not expect our political process to produce meaningful change. The problem isnt a lack of good ideas for how to strengthen our economy and generate jobs, it is the lack of interest on the part of our elected leaders to seriously consider them. It appears that meaningful economic change will have to await either a further unraveling of our economic and social infrastructure or the rise of a powerful social movement with a new economic vision.