Thursday, December 29, 2011

2012 Will Be Better

Popular Economics Weekly

The elements seem to be in place for a better 2012 economy, despite the euro worries, budget deficits, and 8.6 percent jobless rate. Why?  Banks are lending again, and it was the tight bank credit after bursting of the housing bubble that basically stopped businesses from growing.  Banks stopped lending because of their losses from the Great Recession, which finally ended in June 2009.

After three years of Scrooge-like underwriting following 2008's financial crisis, banks have turned on the spigot, boosting lending at annual rates as high as 8.2 percent since July, according to Federal Reserve statistics.

Lending had fallen from mid-2008 through this year's second quarter, deepening what became the worst recession since the Great Depression. The data seem to allay fears that making banks keep more capital on their books as a cushion against future downturns and loan losses will take away the cash flow businesses need to keep the recovery moving.

Even small businesses have seen a difference, says Bill Dunkelberg, chief economist of the National Federation of Independent Business. In a monthly NFIB survey, only 3 percent of small-business owners say lack of credit is their most important problem, trailing taxes, regulation and still-sluggish demand, and small business accounts.

Then the Conference Board’s Index of Leading Economic Indicators continues to show 3 percent plus GDP growth for the next 6 months.


Graph: Wrightson ICAP

The LEI is a weighted gauge of 10 indicators designed to signal business cycle peaks and troughs. Among the 10 indicators that make up the LEI, seven made positive contributions in November. The index rose a very solid 0.5 percent following October's 0.9 percent surge. The leading positive is the rate spread which reflects the Federal Reserve's zero interest rate policy, said its press release. The second positive is building permits which appear to be building steam in what is very good news for the construction sector.

Consumer expectations are also a big positive in the month and judging from this month’s consumer sentiment report look to be a big positive for December. Another positive that's likely to extend through this month is the November improvement in jobless claims which gave the fifth strongest contribution to the month's 0.5 percent gain.

The sharp decline in weekly initial unemployment insurance jobless claims means fewer workers are being fired. Layoffs are on a steady decline in what is good news for the jobs market and for the December employment report. Initial claims fell for a third week in a row, down 4,000 to a much lower-than-expected level of 364,000 (prior week revised to 368,000 for a 17,000 decline). The four-week average is also down for a third week in a row and down for six of the last seven, declining 8,000 to 380,250 which is the lowest level of the recovery.


Graph: Econoday

Both the University of Michigan and Conference Board sentiment surveys continue to improve. The U. of Michigan reading implies a very strong 72.1 over the last two weeks which points to momentum for January. The bulk of the gain is centered in expectations, at 63.6 in December for a more than eight point monthly gain that points further to momentum in the New Year. The assessment of current conditions, likely held down by bad news out of Europe, rose only two points in the month to 79.6.


Graph: Inside Debt

The New York-based Conference Board said that its December Consumer Confidence Index rose almost 10 points to 64.5, up from 55.2 in November. The surge builds on another big increase in November, when the index rose almost 15 points from the month before.

One likely positive for sentiment is improvement in the jobs market as well as the stock market which has been on the recovery, said Econoday. Another positive may be gasoline prices which, despite $100 oil, are on the decline. One-year inflation expectations eased one tenth in the month to 3.1 percent with five-year expectations unchanged at 2.7 percent.

Small businesses are important because they account for 70 percent of new jobs. Though slack demand is still making entrepreneurs wary of borrowing, says NFIB chief economist William Dunkelberg: Only 12 percent think business will be better in 12 months than it is now. “Two-thirds of business owners say, “Who wants a loan?” says Dunkelberg, who is chairman of a small Pennsylvania bank. “In thirty years, I’ve never seen anything like it. The banks all have money to lend, but there’s a shortage of eligible customers coming in.”

Small businesses are the key, so we know the recovery will become sustainable if they can continue to borrow. Increased bank lending is a sign of increased demand for products and services in 2012, a good sign for all businesses.

Harlan Green © 2011

Tuesday, December 27, 2011

Greater Equality is Good For Democracy

Financial FAQs
A recent Gallup poll said 82 percent of respondents thought economic growth “extremely”, or “very” important, while just 46 percent said reducing the income and wealth gap between rich and poor was extremely or very important.
Yet there is growing evidence that the two are inextricably linked, because new research shows that inequality breeds all the evils that we see in societies—from high crime rates, poor health and educational institutions, to declining environmental quality. An even worse outcome may be a drop in democratic and rise of authoritarian institutions.
Paul Krugman has worried about this—specifically, the European austerity programs leading to so much economic suffering in Europe are also leading to a rise in intolerance and extremist organizations, even governments. “Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.
“Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April,” said Krugman. “And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.”
“Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.”
“Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues,” worries Professor Krugman.
We can also see it in the U.S. with the rise of right wing activism, such as the Tea Party with its anti-immigrant, anti-government credo. This is not anti-democratic on its surface, but it’s credo contains much that is undemocratic, such as government invasion of private choice in wanting to control abortion and gay marriages.
Richard Wilkinson’s TEDx lecture and book with Kate Pickett, “The Spirit Level” is the best exposure of the dire effects of income inequality on the quality of life. The most important factor, and a sign of dire consequences when inequality has approached the level of the Great Depression, is our violent crime and incarceration rates, which Wilkinson discusses at length. The U.S. is by far the most violent country in the world—worse than any other developed country.
So why aren’t such quality of life indicators discussed with economic growth? Part of it is misconceptions—that economic growth and equality aren’t compatible. The conservative position espoused by 1970s Economist Arthur Okun  was that greater equality meant less market efficiencies to produce and so fewer incentives for greater wealth, since leveling the playing field meant leveling out the opportunity for large profits. But he also advocated more progressive taxation, and various other social safety net programs to alleviate the effects of income disparities on the quality of their lives.
But that was before the decline of centralized planning in socialist and communist countries. The abilities of capitalist, market-driven economies to produce more and better products is no longer disputed. In fact, the various asset bubbles of recent years show a propensity for markets to overproduce. It also produces more pronounced income inequality, which leads more than ever to unequal opportunity for those at the bottom of the wealth ladder.
Studies have shown that the greatest periods of economic growth occurred during Democratic administrations, when equality was greatest, and government was not the problem.  In fact, greater equality is a necessity if we want peace and prosperity between nations, as well as within our own.
Harlan Green © 2011

Wednesday, December 21, 2011

Will Younger Generation Rescue Real Estate?

The Mortgage Corner

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 685,000, which combined with increasing builder sentiment is a sign that children of the baby boomers—the so-called Boomerang or echo boomer generation—may finally be venturing out from their parents’ homestead. This is 9.3 percent above the revised October estimate of 627,000 and is 24.3 percent above the November 2010 rate of 551,000.

Household formation is the big uncertainty. It hit record lows during the Great Recession, as the offspring of baby boomers stayed at home longer, rather than buy or rent their own living space. But population pressures are building as the echo boomers outnumber their parents—some 86 million who will eventually live separately.

U.S. home prices won’t recover until the economy improves enough to boost the number of households and clear an oversupply of properties, said economist Karl Case, co-founder of the S&P/Case-Shiller home price index.

“Normally, the way we’ve cleared the market is we’ve had more household formation,” Case, a retired Wellesley College professor, said in an interview today with Tom Keene and Ken Prewitt on Bloomberg Radio’s “Surveillance.” Lackluster economic growth has encouraged people to move in with friends or family, meaning “demand is not going anywhere,” he said.

The number of U.S. households, a key determinant in home sales, grew by 600,000 this year, less than half the 1.5 million pace of 2006, when prices reached a record, according to IHS Global Insight Inc. This year’s pace isn’t enough to absorb the so-called shadow inventory of distressed properties poised to come on the market, said Patrick Newport, an economist with the Lexington, Massachusetts-based research firm.

Whereas something like 750,000 and 1 million new households were predicted in 2011, predicts UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport, according to a recent Bloomberg article. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.

Most of the increase this year has been for multi-family starts, but single family starts are increasing too. Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.


Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes also edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, just released. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Existing-home sales might also pick up, because of the fire-sale prices. Foreclosures and short-sales now make up some 30 percent of existing-home sales, according to CNBC’s Diana Olick. But that number might change with the new revisions of existing-home sales since 2007 by NAR. As it is, existing sales jumped 4 percent in November. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.


Graph: Calculated Risk

So who is right, Karl Case or Patrick Newport? Even 600,000 new households is a doubling of last year’s new households. And that is why we are seeing more housing construction. Much of it has to be rentals, but the pressure to build will continue as more of the echo boomers find jobs and leave their parents’ homes.

Harlan Green © 2011

Friday, December 16, 2011

Consumers Regaining Financial Health

Popular Economics Weekly
Consumers are spending for the holidays. Retail sales in particular have rebounded to almost pre-recession levels. Overall retail sales in November grew 0.2 percent, following a 0.6 percent boost in October (originally up 0.5 percent) and a 1.3 percent spike in September (previously up 1.1 percent). Retail sales in November rose 6.7 percent annually, compared to 7.5 percent in October. Excluding motor vehicles, sales were up 6.6 percent on a year-on-year basis, compared to 7.5 percent the month before.
Graph: Inside Debt
So once again, as with jobs, the numbers were higher than initially reported. Overall components were largely favorable. The strongest component was for electronics & appliance stores which jumped 2.1 percent in November, followed by nonstore retailers (up 1.5 percent) and auto dealers (up 0.5 percent). Also seeing gains were furniture & home furnishing, clothing & accessory stores, sporting goods & hobby, and general merchandise.
The Labor Department’s Job Openings, Layoffs, and Turnover Survey (JOLTS) report also looked good, with 3.27 million job openings. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in October was 1.2million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 35 percent since the end of the recession in June 2009.
Graph: Wrightson ICAP
But will consumer spending hold up in 2012? Since consumer confidence is rising from the mid-year pessimism of congressional gridlock, Japanese Tsunami, and S&P credit downgrade, it looks like that will happen—in part because real incomes are rising again with declining inflation. Consumer spending has in fact been increasing 7 percent annually since March 2010.
It is particularly hard to understand why we are still in a disinflationary environment, when energy and food prices fluctuate so much. The largest factor is almost no increase in labor costs. This is because wages and salaries—which make up 80 percent of personal incomes and two-thirds of product costs—are barely rising, while housing prices are still falling. And corporations are hoarding some $2 trillion in cash, banks have $1.8 trillion in excess reserves they are not spending or lending. With so little money in circulation—whether from wage earners or corporate spenders—then prices cannot rise appreciably.
Payroll jobs in November advanced a relatively strong 120,000 after gaining a revised 100,000 in October (originally 80,000) and increased a revised 210,000 in September (previously 158,000).  So look for upward revisions once again.  Private payrolls (less government layoffs) gained more than overall, up140,000, following a 117,000 increase in October and 220,000 rise in September.
The stronger employment numbers are corroborated by weekly initial claims for unemployment insurance. Back to back declines of 19,000 in initial jobless claims are signaling sudden strength in the labor market. Claims in the December 10 week came in at 366,000, far below expectations for 390,000 and compared to 385,000 in the prior week (revised 4,000 higher). The 366,000 level is the lowest since May 2008. The four-week average is down 6,500 to 387,750 for the lowest level since July 2008. The average, in a convincing sign of strength, has been down in 10 of the last 12 weeks, said Econoday.
That is the main reason economists are revising growth estimates upward to 3 percent plus in 2012. Consumers are spending—and borrowing again.
Harlan Green © 2011

Sunday, December 11, 2011

2011—The Year That Wasn’t

Popular Economics Weekly

What do we make of this year’s economy, with its ups and downs that have confused even the ‘experts’; and what to make of 2012? Believe it or not, the congressional gridlock that caused the S&P Treasury debt downgrade may actually boost growth. Because the Bush-era tax cuts are scheduled to expire end of 2012, which would put them back to the Clinton-era tax brackets. And we know what happened during Clinton’s Presidency—22.7 million jobs created, and 4 consecutive years of budget surpluses were paid for with the combination of higher income tax brackets and reduced government spending.

Firstly, we should understand that the experts overestimated economic growth at the beginning of 2011, then underestimated it by midyear—which means that we were never in danger of a second recession. The best example is our unemployment numbers. From June onward, both private payrolls and the self-employed have been increasing at more than 200,000 per month, which is close to pre-recession levels.

The household survey component of the jobs report including the self-employed – an actual headcount of working Americans – has shown a gain of 1.28 million over the past four months alone, whereas initial payroll formation showed zero or almost zero job growth in August-September before it was upgraded. And that—with the S&P credit downgrade and euro worries—is what set off new recession talk.


Payroll jobs in November advanced a relatively strong 120,000 after gaining a revised 100,000 in October (originally 80,000) and increased a revised 210,000 in September (previously 158,000).  So look for upward revisions once again.  Revisions for September and October were up net 72,000. Once again, private payrolls (less government layoffs) gained more than overall.  Private nonfarm payrolls gained 140,000, following a 117,000 increase in October and 220,000 rise in September.


Then we had the so-called congressional Supercommittee not being super at all. They couldn’t agree on what budgets to cut, or revenues to raise. But as Paul Krugman has said, that may be a good thing—

“The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?”

In fact, such a budget deficit during the worst recession since the Great Depression is necessary to fund vital public services and keep the economy running, until private business begins to invest again. And that won’t happen until consumer spending picks up, as we have said in past columns. The deficit will improve as the economy continues to grow, in other words, but won’t pick up if more jobs are cut—whether from the private or public sectors.

Consumer spending has barely held up during the various crises. It is best measured by consumer credit. Strength in consumer spending is confirmed by a build in outstanding consumer credit, up $7.6 billion in October following a revised $6.9 billion increase in September. The increase is once again centered in non-revolving credit, which reflects strength in vehicle sales. But a steady increase is now appearing for non-revolving credit, up $0.4 billion for a second consecutive month and offering evidence that consumers are once again, at least to a limited extent, using their credit cards.


That means it is real estate that is still holding up a stronger recovery. Despite headwinds, the latest pending home sales report indicates that housing may be back on a modest uptrend—at least for sales, according to Econoday. Low prices and low interest rates appear to be creating traction as the pending home index, which is a measure of contract signings for sales of existing homes, jumped 10.4 percent in October, following a 4.6 percent decline the prior month.


But the real measure of housing health is existing-home sales, which have been stuck in the 5million range since 2008, due to the large number of foreclosures and distressed sales.


Housing prices are just now beginning to recover from a more than 30 percent plunge, as measured by the Case-Shiller Home Price Index. Housing construction is also showing some strength for the first time since 2009, which will add to GDP growth. Why? Household formation is picking up, as the so-called echo boomers—children of baby boomers—finally begin to leave their parents’ home. Household formation should double this year to 1 million from last year’s 500,000.

That is probably why construction spending in October advanced 0.8 percent after rising an unrevised 0.2 percent in September. The October increase was led by a 3.4 percent boost in private residential outlays, following a 0.6 percent rise in September.  Construction outlays have risen three months in a row and in six of the last seven months.  The level of activity is still subdued but it now appears to be growing and adding to overall economic growth, as we have said.  It is not an “engine” like manufacturing but it is in better shape than even less than a year ago.


The latest report from the Institute for Supply Management also added to growth estimates as the manufacturing sector is regaining momentum.  The ISM manufacturing index moved further into positive territory, rising 1.2 points in November to a reading of 52.7. The gain in the index was led by a 6.5 point jump in the production index to 56.6.  Importantly, the new orders index was up a very strong 4.3 points to 56.7, above 50 to indicate monthly growth and pointing to continuing momentum.


Lastly, Gross Domestic Product estimates, the best measure of overall growth, are being revised upward to 3 percent plus next year by economists, after the mid-year scare. So this also means more job creation if those forecasts are fulfilled.


Graph: Calculated Risk

The bottom line is that many difficulties lie ahead, but it doesn’t look like congressional gridlock can do much more to limit growth. In fact, if the Bush tax cuts of 2001, 2003, and 2006 were extended past 2012, it would increase the deficit by $3.7 trillion over the next decade, according to CNN. Whereas letting the cuts expire on December 31, 2012 would reduce the federal deficit by 40 percent over just the next five years.

So, if both progressives and conservatives would step out of their idelogical strait jackets, they would see that government doing nothing at the moment might be the best road to a recovery. One caveat—Wall Street can’t be allowed to again do business as usual. They are still lobbying ferociously to weaken regulation of derivatives’ trading under Dodd-Frank, which will also reveal just how much risk they are still taking with Other People’s Money—i.e., their investors. Until such reporting requirements are made law, over-the-counter derivatives’ trading, which totals some $600 trillion, according to the New York Times, will continue to endanger our overall economy.

Harlan Green © 2011

Thursday, December 8, 2011

Equality is Good for Everyone

Popular Economics Weekly

President Obama might have found his voice in jumping on the Progressive bandwagon with his Osawatomie, Kansas speech about income inequality. The small farm town of Osawatomie was where Teddy Roosevelt gave his now famous “New Nationalism” speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

That is what such groups as #OccupyWallStreet are calling for in renewing the cry that we are all in this together. Yet equality is more than a moral issue of what is fair, or even the core American value of everyone’s right to the pursuit of happiness. It is in fact the future.

For in an era where technology is replacing workers making the necessities of life at an ever accelerating rate, more Americans will have more leisure time to pursue their own interests. And more importantly, the ever increasing productivity of those machines will be able to lift all boats—that is, provide more necessities, as well as amenities to improve lives—rather than go only to the profit makers. That is to say, more Americans will be able to live off the fruits of technology.

In giving his Kansas speech, President Obama was going back to a time when Robber Barons ruled, having made enormous wealth from the founding of the railroads, banks, oil and steel industries in the 19th century.

It was still the beginning of the Industrial Revolution, when most of America was rural and Oligarchs ruled government and business. Sound familiar? That has happened once again with the enormous fortunes created via deregulation and the digital revolution. And once again 99 percent of American households are suffering from the excesses of modern oligarchs who want to abolish the safeguards that were established to protect householders from those excesses.

“The American people are right in demanding that new Nationalism without which we cannot hope to deal with new problems,” said Roosevelt. “The new Nationalism puts the National need before sectional or personal advantage. It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representative.”

President Obama seems to be finally realizing that the common good is as important as the profit motive. In fact, one doesn’t work without the other. One cannot prosper if there are no rules, such as protections against predatory behavior provided by financial regulations. Congress abolished the Glass-Steagall Act that prevented banks from trading against their own clients, which created conflicts of interest. How could banks’ clients now be sure that their investments hadn’t been set up to fail, such as happened with Goldman Sachs and many other banks during the subprime bubble?

Much of the Great Recession and slow recovery is due to widespread ignorance of economic fundamentals that actually depend on social welfare. For no economy can prosper if educational and environmental standards are ignored, which enable good health and social mobility. It is also an ignorance of what is in our national interest. Raising educational and environmental standards, restoring our aging infrastructure, and creating a truly universal health care system make us more competitive globally.

Teddy Roosevelt obviously knew this when he saw the results of too much wealth in too few hands—the monopolies and cartels of his era. That was why the Federal Reserve was created in 1913. It was to protect our currency from too much speculation, just as today we need stronger institutions that protect our stock market from too much risk taking.

Obama’s speech mainly targeted the reasons for so much income equality. The theory of “trickle down economics,” which holds that greater wealth at the top generates jobs and income for the masses below, drew some of Obama’s harshest criticism, according to the Washington Post: “It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work,” Obama said of supply-side economics, drawing extended applause. “It’s never worked.”

It is obvious why it hasn’t worked, because ‘trickle down’ Reaganomics’ believers maintain that because government is the problem, lower taxes are the answer. The problem is that public services suffer which are so necessary in our modern, already overcrowded world. More knowledge—including financial knowledge—is required to live in our complex society, just as we need safeguards against increasing pollution and crime created by increasing populations. And wealth doesn’t really trickle down, anyway. That’s why there has been so much income inequality over the past 30 years.

Don’t take my word for it. Lord John Maynard Keynes saw the consequences of increasing abundance in his famous 1930 essay, Economic Possibilities for our Grandchildren: “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

Professor Robert Shiller also discusses its consequences in his recent book, “The New Financial Order, Risk in the 21st Century”, in which he lays out what our new information technologies will be able to do. In it, “Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions--risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies”, says the publisher, Princeton University Press.


It will do all this by leveling the playing field in order to create a greater transparency of markets, as financial information in particular will be available to all. Therefore much of the risk in one’s profession, or housing value, or even health, will be able to be insured against unexpected events, such as recessions, or loss of career, or debilitating illnesses because of the new information technologies..

In other words, there is no longer any reason to be ignorant of how the modern world works. It will become more difficult for those who profit from such ignorance to accumulate excessive wealth. Or, as Teddy Roosevelt knew, we will continue to repeat our past mistakes.

Harlan Green © 2011

Friday, December 2, 2011

Budget Austerity (That) Doesn’t Work

Financial FAQs

It should be obvious that austerity doesn’t work, when it means tax cuts for the wealthy but spending (and so income) cuts for the rest of US. But austerity does work when applied to the wealthiest who have used their wealth to create more instability, rather than creating jobs.

Great Britain is the best current example. The budget cuts of its ruling Conservative Party have brought economic growth to a halt, whereas U.S. growth is returning to a more normal 3 percent rate because of U.S. government stimulus programs. Britain is much more socialized, yet if it had taxed the wealthiest to support their programs instead of giving them even more tax breaks, it would have paid down debt without taking the earning and spending power away from government workers and unions (a lesson that we have only partially learned). Then such a slowdown would have been averted.

Paul Krugman brings this out in a recent blog, stating that “…what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.”

Their economic thinking is not quite medieval but certainly from the 18th century, when Adam Smith’s invisible hand theory was first used to rationalize conservatives’ ideology that government is unnecessary. We now know that cutting spending doesn’t lead us out of recessions, or worse. Budget deficits during bad times are necessary to prime the pumps of private employers, until they loosen their own purse strings and begin to invest the $trillions from record profits that they have instead used to buy back their stock in order to boost executives’ incomes.

Most of the economic damage is being done in the government sector, as our own Labor Department’s November employment report shows. The increase in hiring took place entirely in the private sector, with employment rising by 140,000. Governments cut 20,000 jobs last month to put the total loss over the past two years at around 600,000. In other words, states and municipalities have been forced to reduce staff to balance their budgets as required by local law.


Graph: Wrightson ICAP

And hiring in October was revised up to 100,000 from 80,000 and the job gains in September were revised up to 210,00 from 158,000, which shows private employers are having to hire more payrolls to keep up with consumers demand during the holidays. So the damage to employment is being done to precisely the workforce targeted by conservatives in both England and America—government workers.

The expansion in the Institute for Supply Management’s manufacturing survey also buttressed our stronger growth prospects, which increased in almost all areas. The new orders index for November is up a very strong 4.3 points to 56.7, above 50 to indicate monthly growth and well above October. This index had been stuck at slightly sub-50 levels in prior months which now are forgotten. Helped by new orders, the ISM composite index is up 1.2 points to a 52.7 level that compares with the Econoday consensus for 51.5. November's level is the best since June.


And it may not be a lot (coming from a low base) but it is starting to look like the construction sector is incrementally adding to overall economic growth. Construction spending in October advanced 0.8 percent after rising an unrevised 0.2 percent in September. Analysts had forecast a 0.3 percent boost for October.


The October increase was led by a 3.4 percent boost in private residential outlays, following a 0.6 percent rise in September. Private nonresidential construction spending also posted a gain, rising 1.3 percent, following a 0.1 percent dip the month before. Once again public outlays declined 1.8 percent after a 0.3 percent increase the prior month, illustrating the damage those pushing for more austerity is doing to economic growth. On a year-ago basis, overall construction outlays improved to down 0.4 percent in October from down 0.6 percent in September.

Construction outlays have risen three months in a row and in six of the last seven months. The level of activity is still subdued but it now appears to be growing and adding to overall economic growth, said Econoday. It is not an "engine" like manufacturing but it is in better shape than even less than a year ago.

So we see the result of austerity policies during recessions. They do not bring on recoveries, period. And that’s why the situation in Europe is so much worse. Krugman’s warnings have been realized: “How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!

“But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.”

The real result of austerity during hard times is really that it falls on necessary public services such as education, police and fire departments, and even environmental regulation. These are the essential services needed by all, rich or poor. Cutting back on those services not only prolongs any downturn, but makes it more severe that it needs to be.

Harlan Green © 2011

Thursday, December 1, 2011

Elizabeth Warren’s Teach-in

Popular Economics Weekly

What better way to understand Elizabeth Warren’s bid for Massachusetts Senator to replace Scott Brown that conduct a Teach-in, much as the OccupyWallStreeters are doing. She stands for what we all need, after all, more knowledge on how to combat the huge levels of social and economic inequality that have arisen over the past 30 years from a corporate and Wall Street culture that glorified profits over social responsibility, or even honesty.

Professor Warren’s specialty at Harvard is contract and bankruptcy law, after all, so she has seen firsthand the damage that fine print in mortgage contracts and wholesale deregulation of financial oversight can do. A New York Times profile spelled out some of her agenda. “Ms. Warren talks about the nation’s growing income inequality in a way that channels the force of the Occupy Wall Street movement but makes it palatable and understandable to a far wider swath of voters,” said the Times. “She is provocative and assertive in her critique of corporate power and the well-paid lobbyists who protect it in Washington, and eloquent in her defense of an eroding middle class.”

But it’s more than that. She is a teacher, and so teaching the public why the middle and lower classes have lost so much of their wealth is a priority. In fact, their loss of wealth is why economic growth has been slowing historically. Part of it has to do with the massive deregulation of industries begun by President Reagan in his war against government; waged on the promise it would raise everyone’s prosperity level. But the result instead was it took away the income and wealth of ‘everyone’ and gave it to the wealthiest on the thinnest of rationalizations—that they were the real job creators, not the consumers who bought their products.

Does that mean we are helpless victims who have to be protected by Big Government, unable to take care of ourselves? No, in “All Your Worth: The Ultimate Lifetime Money Plan” written with daughter Amelia Tyagi, she spells out her beliefs on individual responsibility. “You can't count on good old-fashioned hard work the way your parents did. Go to school, get a good job, do your work, don't go crazy with spending, and everything will work out, right? Not anymore. That advice may have worked in your parents' day, but today you have to be smart with your money. Not just a little smart, but super smart. You have to learn the new rules -- the rules nobody told you and nobody talks about. And you have to learn them fast.”

And that in fact is what her teach-ins are about—learning the new rules, as well as working to change them to be more consumer friendly. What are they? Firstly, a major rule change was abolishing usury laws that have enabled national banks to charge as much as 30 percent on credit card debt. In another bestseller with her daughter, “The Two-Income Trap”, they spell out why the middle class has lost ground. Deregulation has allowed banks to write their own rules, with no concern for their own customers’ welfare.

For instance, the 2005 bankruptcy laws have means testing—only those with below median incomes for their states can file for Chapter 7 Bankruptcy, which abolishes all unsecured debt. So struggling households saddled with catastrophic health care costs (because health care costs aren’t controlled), have to sell everything they own to even file for bankruptcy.

“That puts women trying to collect domestic support obligations and credit card companies in direct competition for the ex-husband's resources,” said Ms. Tyagi in a 2004 Mother Jones interview. “Credit card companies can hire lawyers and develop extensive debt collect departments, something that is really tough for women. When the credit industry controls the bankruptcy rules, women lose.”

That is the real reason the standard of living of all but the top 1 percent has fallen. And it hurts all of us. Richard Wilkinson has spelled it out in a recent TEDS conference, and his book with Kate Pickett, “The Spirit Level”. Countries and states with the highest income inequality have the highest crime rates, illness outcomes, and most environmental degradation—you name it—as well as least social mobility that would allow greater opportunities to improve themselves.


Graph: TED Conference

Why such a shift from equal opportunity back to an era of Social Darwinism in just 30 years that was capitalism in its earliest form? It is in part due to the huge amount of wealth we have amassed. Former Fed Chairman Alan Greenspan has said: “It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.”

Wealth generates its own temptations, in other words, and so removing the barriers to its acquisition can overwhelm even common sense when dealing with severe financial crises.

Harlan Green © 2011

Wednesday, November 30, 2011

Housing Picture is Better Than We Know

The Mortgage Corner

There have been some developments that tell us housing prices could stabilize and new home construction pick up in the New Year. This is even thought the continuing fall in housing prices has stymied any growth prospects, as well as the foreclosure mess that has kept banks from loosening their credit standards enough to encourage more home buying.

For instance, a recent press release from the National Association of Homebuilders said the number of improving housing markets continued to expand for a third consecutive month in November, rising from 23 to 30 on the latest National Association of Home Builders/First American Improving Markets Index (IMI).

And single-family housing starts rose 3.9 percent to a seasonally adjusted annual rate of 430,000 units in October, according to the U.S. Commerce Department. This is while single-family permits also posted a measurable gain of 5.1 percent to 434,000 units in the latest report, which is their fastest pace since December of 2010.


Sales of new single-family houses in October 2011 also rose slightly, to a seasonally adjusted annual rate of 307,000 ... This is 1.3 percent above the revised September rate of 303,000 and is 8.9 percent above the October 2010 estimate of 282,000.


The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties. And so we have the ‘distressing gap’ between new and existing-home sales, according to Calculated Risk.


Low prices and low interest rates appear to be creating traction in the housing market with pending home sales the latest report to show strength. The pending home index, which is a measure of contract signings for sales of existing homes, jumped 10.4 percent in October to 93.3. This is after pending home sales index fell 4.6 percent in September with declines split about evenly across regions. September's decline was unusually steep, following declines of 1.2 percent in August and 1.3 percent in July.

The gain points to strength in final sales of existing homes for November and December though cancellations, tied to low appraisals that keep buyers from selling their own homes and to restrictions to credit access, have been cutting into the proportion of contracts that make it to closing.

Harlan Green © 2011

Consumers Feel Better

Popular Economics Weekly

Black Friday, or the day after Thanksgiving, was an eye-opener. Sales jumped 7 percent, a record, and Monday’s cyber-sales followed its lead. How can consumers be spending so much with incomes that aren’t rising as much?

One clue is that consumers have paid down so much debt, while disposable income, as well as wages and salaries, have been growing at 2 percent—not great, but enough to keep things bubbling. In fact, it’s been enough to boost the Conference Board’s consumer confidence survey, at least, about future conditions. For instance, those seeing better job prospects in 6 months increased from 5.8 to 12.9 percent, while the proportion that sees jobs as hard to find dropped from 42.1 to 24.1 percent.


Graph: Inside Debt

Consumer confidence has surged this month, in other words, with improvement centered in employment. The Conference Board's measure jumped more than 15 points to 56.0 from an upward revised 40.9 in October. November is the best reading since the debt-ceiling debacle and cut of the US credit rating in August.

This is while consumer credit expanded $7.4 billion in September benefiting once again from strength in nonrevolving credit. Nonrevolving credit outstanding, reflecting strong vehicle sales, rose $8.0 billion in the month to $1.66 trillion.

September brings in third quarter data which shows consumer credit expanding at a 1.6 percent annual rate, down from the second-quarter rate of 3.5 percent. Revolving credit during the quarter contracted at a 3.2 percent annual rate, more than reversing the second-quarter rate of plus 1.5 percent, said Econoday.


Another eye-opener was the surge in ADP private payrolls employment. ADP today reported that employment in the U.S. nonfarm private business sector increased by 206,000 from October to November on a seasonally adjusted basis. The estimated advance in employment from September to October was revised up to 130,000 from the initially reported 110,000. The increase in November was the largest monthly gain since last December and nearly twice the average monthly gain since May when employment decelerated sharply.


So, can it be true that consumers’ optimism is well-grounded? The Conference Board’s survey said those saying jobs are currently hard to get fell nearly five percentage points to 42.1 percent. Another key reading is a sharp improvement in income expectations over the next six months with more, 14.9 percent, seeing an increase and fewer, 13.8 percent, seeing a decrease. This is the first time since April that optimists have outnumbered pessimists.

Other positives in today's report include an improvement in buying plans for both homes and appliances and a three percentage point decline in 12-month inflation expectations to 5.5 percent. It is of course the holiday season when shoppers like to shop, but this could be a turning point. Optimism leads to increased consumer spending, and we know it is consumer spending that drives economic growth.

Harlan Green © 2011

Monday, November 21, 2011

What Decline of Western Civilization?

Financial FAQs
It’s hard to say whether Harvard Historian Niall Ferguson means what he says in his new book, “Civilization: The West and the Rest”; that the western world’s 500 years of predominance are over, thanks to growing debt problems in the U.S. and Europe, and dwindling populations. He obviously believes it’s not a good thing.
Well, maybe not, but why worry about western predominance when so many Americans are suffering from the misdeeds of our own governance that has piled debt upon debt, all in order to make the wealthiest even wealthier?
It is true United States position in the world has declined—not as a military power, but in almost all the measures of social and economic well-being. This is reflected in studies just now coming out by sociologists and psychologists, as well as economists. Richard Wilkinson is one such researcher who has managed to bring together a huge amount of research—especially on how income inequality affects citizens’ well-being.
We have discussed how income and education disparities have affected individual states in past blogs that have divided them into Blue and Red states politically, but never socio-economic misery on a national scale. The list is long. The U.S. has highest prison incarceration rate of any country, combined with the highest per capita income, as well as sub-par educational standards accompanied by an income inequality level next to Bulgaria’s.
So, it’s true that the rest of the world is catching up to the developed West, and want what we have. For instance, the U.S. with 5 percent of the world’s population can no longer count on corralling 25 percent of its resources. Our military—a major source of budget deficits—is already stretched thin, for one thing, and can’t afford to invade another Iraq for its oil resources. In fact, those deficits are a major price we have had to pay to maintain our military dominance.
And we know from the #OccupyWallStreet protests and economic historians that the growth in income inequality has reached its limit. Americans are finally becoming aware, in a word, that they have made an enormous sacrifice—the 99 percent whose incomes stagnated because they didn’t benefit from the tax cuts, loopholes and such that have also elevated corporate profits as a share of GDP to the highest in history.
So the U.S. will continue to decline if we continue on the path of Oligarchy, where a few at the top have most of the wealth, and the rest of us have to borrow to maintain our standard of living. Then wealth will continue to be transferred to the developing giants who are willing to lend us money—China, India and Brazil with their young and growing populations.
But Dr. Ferguson’s theme isn’t new. Root causes of the rise and fall of civilizations were earlier explored by UCLA Professor Jared Diamond in his books “Guns, Germs, and Steel”, and “Collapse” in far more convincing fashion. Our technological superiority was enabled by having major resources such as oil, benign climates that allowed cultivation of the major foodstuffs, and domesticated animals that gave us immunity to the major diseases that have wiped out native populations where such animals didn’t exist.
It follows then that the huge debt loads are a symptom of the underlying illness, economic class warfare over the past thirty years that has taken away much of the wealth of the middle class. Governments can easily pay for public services if wages and salaries continue to grow. But there has been diminished income growth for the majority of Americans—the wage and salary earners who make up 80 percent of consumers.
We know where much of that wealth has flowed—to higher corporate profits, for one, as corporations cut back on employee payrolls and benefits. And those excess profits have created greater market instability, and so retarded economic growth rates. In his New York Times Op-ed, “It’s Consumer Spending, Stupid”, and various blogs, economic historian James Livingston says what has been known to most modern macro economists—consumer and government spending have driven economic growth over the past century, not corporate profits.
The great wealth shift began during the Great Depression, according to Livingston: “The underlying cause of that economic disaster (the Great Depression of 1929-33, 1937-38) was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production…and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.”
So we know Niall Ferguson has taken the opposite tack. His glorification of empires has made him blind to the results. The west’s predominance was at the expense of exploiting underdeveloped countries, and when they began to want more of what we have, our privileged position began to decline.  Isn't that what we want?  To be an island of privilege among a sea of poverty does not make for a stable, or more peaceful world.
Harlan Green © 2011

Monday, November 14, 2011

How Do We Put Americans Back to Work?

Financial FAQs

It’s becoming evident that rather than the political gridlock, such as the congressional supercommittee’s obsession with spending cuts, we need to worry about economic growth and jobs. And there are some very good ideas on how to do that, such as in President Bill Clinton’s newest book, “Back to Work”. And economists such as Christina Romer, former Chairman of Obama’s Council of Economic Advisors, in a recent New York Times Op-ed are pleading with the Fed’s Ben Bernanke to actually target a growth rate that will both create jobs and keep inflation within a manageable range.

What? You mean the Federal Reserve’s QE-1, 2, and 3 buying of securities wasn’t doing just that? Well, no. It has accomplished the goal of keeping both short and long term interest rates low, but that hasn’t done anything for setting expectations of higher growth. In fact, the Fed just downgraded its own predictions of future growth. If anything, such low interest rates reflect deflationary expectations, which is the real problem. Companies won’t hire if they can’t raise prices, while consumers’ incomes fall in such an environment, stifling demand.

Dr. Romer and other major economists are beginning to insist the Fed should actually set what is called ‘nominal’ (i.e., before inflation accounted for) Gross Domestic Product growth target at the long term growth rate of around 5 percent. That way, expectations are raised for economic growth, without abandoning an inflation target of say, 2 percent, the current Fed inflation target.

How else can we boost demand for goods and services that is the actual driver of economic growth? We have discussed in a prior column how necessary it is for consumers—who power 70 percent of growth—to spend more, which in turn creates greater demand, which in turn creates more jobs in a virtuous circle. They won’t if their confidence remains low, which surveys show causes them to spend less.

Former President Clinton has much more to say in “Back to Work” that directly addresses how to put Americans back to work, and he should know. “..during my administration we had four surplus budgets and began to pay down the national debt,” he says; “we eliminated sixteen thousand pages of federal regulations; we cut taxes on the middle class, working families of modest means, and income from capital gains; we reduced the size of the federal workforce to its lowest level since 1960, and the economy produced 22.7 million new jobs.”

How did he do it? By emphasizing cooperation rather than competition between government and the private sector. “I believe the only way we can keep the American Dream alive for all Americans and continue to be the world’s leading force for freedom and prosperity, peace and security,” said Clinton, “is to have both a strong, effective private sector and a strong, effective government that work together to promote an economy of good jobs, rising incomes, increasing exports, and greater energy independence.”

Why is strong government so important? It is what engenders both business and consumer confidence, which are still at record lows. And without that confidence, consumers won’t spend to keep up demand, as we said, and businesses won’t hire in anticipation of higher growth.


Confidence from both the Conference Board and University Michigan surveys has remained at recession levels since 2008, really. And we know major reasons for such low confidence are both political gridlock, and the S&P downgrade of U.S. Treasury bonds to AA+. This is what it means to lose confidence in our institutions, readers. Also, the subprime debacle that brought on the housing bubble caused a major loss of confidence in our Too Big To Fail financial institutions, which were allowed to gamble with their investors’ monies, and then be bailed out by taxpayer money.

But the confidence measures have stood in contrast to strength in consumer spending. If recent gains for confidence can be extended in the weeks ahead, the economic outlook as well as expectations for holiday shopping will improve. Some thawing in the jobs market may be helping with sentiment, says Econoday.

So confidence has to be restored in all of our institutions if we want to bring back economic growth. “What’s the smart, effective way to do that?” asks Clinton. “With a strong economy and a strong government working together to advance shared opportunity, shared responsibility, and shared prosperity? Or with a weak government and powerful interest groups who scorn shared prosperity in favor of winner take all until it’s all gone?”

Studies have shown that only by sharing prosperity can we really create strong economic growth. And right now we rank near the bottom ranks of nations in income inequality, according to the much cited CIA World Factbook.  So there is a lot of work to be done to restore confidence in Americans’ future.

Harlan Green © 2011

Saturday, November 12, 2011

Employment Report Means Holiday Cheers!

Popular Economics Weekly

Not only were the employment numbers for the past 3 months much higher than originally estimated, but job openings are growing. All we need now is for consumers’ credit conditions to ease to bring back their confidence.

Much of the pessimism and predictions of a second recession were based on faulty data, and that has caused lenders to pull back. For instance, instead of 0 job growth in August that scared the markets, more than 104,000 jobs were created after ‘revisions’ to the seasonal adjustments that we have discussed in past columns. In fact, payroll jobs in October posted a gain of 80,000 after rising a revised 158,000 in September (originally 103,000).  So revisions for August and September were up net 102,000.

In fact, consumers are spending for the holidays as if the Great Recession is finally over, in spite of still uncertain income and credit conditions. The caveat: It took 23 months for consumption per person to return to its pre-recession level in earlier recessions. At 42 months, personal consumption has not yet returned to 2007 pre-recession levels, though some of that consumption was fueled by the housing bubble and may not be desirable, says Kevin Lansing of the San Francisco Federal Reserve.


Graph: Calculated Risk

Firstly, the number of job openings in September was 3.4 million, up from 3.1 million in August. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in September was 1.2 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 38 percent since the end of the recession in June 2009, which tells us growth is picking up. We should therefore see 3 percent plus GDP growth for the rest of this year, at least, contrary to the Federal Reserve’s downwardly revised forecasts.


The consensus expected unemployment to be stuck at 9.1 percent instead of dropping to 9 percent in the Labor Department’s October household report, which tracks self-employeds as well.  The unemployment rate declined largely on a sizeable 277,000 boost in household employment which has posted significant increases for three months in a row.  The increases in August and September were 331,000 and 398,000, respectively.

And there is additional favorable news in the household survey.  Part-time employment for economic reasons is down and the duration of unemployment declined in October.  In nonagricultural industries, the number of those employed part time instead of full time for economic reasons dropped 328,000, says Econoday.

By downgrading its growth estimates, the Fed is leaving the door open for additional ease with the emphasis on significant downside risks remaining. For real GDP, the central tendency forecast for 2011 is now a 1.6 to 1.7 percent versus the prior range of 2.7 to 2.9 percent.  The large downgrade likely is due to a large downside miss to second quarter growth.  (But we believe growth will also be upgraded in coming months.) For 2012, forecast growth is 2.5 to 2.9 percent versus June’s 3.3 to 3.7 percent.   For 2013, forecast growth is 3.0 to 3.5 percent versus June’s 3.5 to 4.2 percent.   The Fed doesn’t see sustained growth until 2014—a range of 3.0 percent to 3.9 percent.


And early data for October on actual purchases by consumers indicate that this sector is doing better than suggested by surveys on the consumer mood, as we said.  Thanks to the one area where credit is easing, unit new motor vehicle sales rose 1.2 percent in October after surging 8.0 percent the month before. October’s sales pace was 13.3 million units annualized, compared to 13.1 million in September.


The bottom line is that credit is still being tightened in most areas, according to the Federal Reserve’s October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices. Fewer domestic banks eased standards and terms on commercial and industrial (C&I) loans over the third quarter compared with recent quarters, particularly on loans to large and middle-market firms, said the survey. And all of the domestic and foreign respondents that reported having tightened standards or terms on C&I loans cited a less favorable or more uncertain economic outlook as a reason for the tightening.

And so consumers will have to be patient, if they want to see credit standards easing for such as home loans. We hope the HARP II loan modification program that allows lowered payments and shortened payoff terms Fannie Mae and Freddie Mac-owned mortgages, though no principal reduction, will spur refinances and thus many to move out of their homes to find new jobs to be helpful.

The bottom line is that consumers are borrowing again, but for longer term purchases and still reducing their credit card debt, in part because banks are still restricting credit card use. Consumer credit expanded $7.4 billion in September benefiting once again from strength in nonrevolving credit, said the Federal Reserve’s latest Consumer Credit report. So-called installment loans outstanding, reflecting strong vehicle sales, rose $8.0 billion in the month to $1.66 trillion. This offsets another contraction in revolving credit, down $0.6 billion to $789.6 billion outstanding.

Harlan Green © 2011

Thursday, November 3, 2011

Dear Supercommittee: “It’s Consumer Spending, Stupid!”

Financial FAQs

“With only about a month remaining before its recommendations are due, lawmakers on the congressional supercommittee charged with finding savings from the federal budget wrestled with cuts to defense, foreign aid and other programs on Wednesday”, said Bloomberg Marketwatch.

But the historical record tells us that finding “savings” in government spending will shrink, not expand economic growth. And so finding savings that aren’t spent elsewhere on stimulus programs won’t in fact reduce the federal deficit, which depends on increased growth. So once again as Paul Krugman has said, “And those who are determined to forget the past run a high risk of reliving it — which is why we’re in the state we’re in.”

At the risk of stealing the title from a New York Times Op-ed by economic historian and Rutger’s Professor James Livingston, “It’s Consumer Spending, Stupid”, we now have historical data verifying that consumers and government spending have driven economic growth over the past century, not corporate profits. This should not be surprising given that consumer spending now makes up 70 percent of economic activity.

Professor Livingston’s apostasy is letting us in on the “best kept secret of the last century: private investment—that is, using business profits to increase productivity and ouput—doesn’t actually drive economic growth. Consumer debt and government spending actually do”.

This is blasphemy to the classical orthodoxy, needless to say, but a truth that the #OccupyWallStreet protests recognize. Livingston says, in fact “…corporate profits are…just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”


Graph: Congressional Budget Office

This also tells why this recovery has been so frustratingly anemic. It isn’t consumer debt, as much as the lack of income that has prevented consumers from spending enough to boost economic growth. There has been almost no household income growth above inflation since the 1970s, mainly because so much wealth was siphoned off to the wealthiest via tax loopholes and less progressive tax rates, according to the latest CBO study on income inequality.

It should no longer be a surprise to anyone that the share of income going to higher-income households rose, said the CBO study, while the share going to lower-income households fell. But it’s nice that the CBO is also providing more evidence, to whit:

  • The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
  • Most of that growth went to the top 1 percent of the population.
  • All other groups saw their shares decline by 2 to 3 percentage points.

How do we know that it isn’t corporations reinvesting their profits that spurs growth? After all, between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent.

We know because net business investment declined 70 percent as a share of G.D.P. over that century, says Professor Livingston. In 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. In other words, corporations decided to spend their profits elsewhere. “The architects of the Reagan revolution tried to reverse these trends as a cure for the stagflation of the 1970s, but couldn’t, said Livingston. In fact, private or business investment kept declining in the ’80s and after. Peter G. Peterson, a former commerce secretary, complained that real growth after 1982 — after President Ronald Reagan cut corporate tax rates — coincided with “by far the weakest net investment effort in our postwar history.”

So even cutting corporate taxes, the cry of conservatives today, hasn’t encouraged corporations to invest in future growth. Professor Livingston has done a great service in what may be a first—actually exploding the myth that profits drive growth. It also explodes the myth that corporations have their customers’ best interests at heart. For their customers are consumers in the main, and consumers’ incomes have not even kept up with inflation. The huge jump in labor productivity has not been shared by their employees, in other words.

On the other hand, it is the investor class that profited immensely from the myth that business investment creates jobs. Even though the historical record shows it merely bloated the financial sector from 8 percent to more than 20 percent of GDP over the past decade, which led to excessive speculation. It was excessive investments in new technology, for instance, that caused the dot-com bubble and market crash in 2000. Then came the housing bubble that resulted from overbuilding of housing, fuelled by too easy credit conditions.

“Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term,” says Professor Livingston. “If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)”.

We don’t need the traders and the C.E.O.’s and the analysts — the 1 percent — to collect and manage our savings. Instead, we consumers need to save less and spend more in the name of a better future. We don’t need to silence the ant, but we’d better start listening to the grasshopper, says Professor Livingston. 

So when will consumers—you and I, that is—wake up to the fact that the future is ours for the taking? 

Harlan Green © 2011

Friday, October 28, 2011

Who Will Benefit From HARP II Modifications?

The Mortgage Corner

Who will benefit from HARP II, the latest attempt at loan modification? President Obama announced in Las Vegas that Fannie Mae and Freddie Mac would loosen their loan modification rules, which could enable up to one million homeowners with Fannie or Freddie-owned loans to reduce their interest rate and/or “accelerate the reduction of principal”.

Since it’s estimated there are up to 11 million homeowners that are ‘underwater’ (have negative equity in their homes), who will this really help? Firstly, it will spur more refinance activity, which means many homeowners might finally be able to sell their homes and move to better job locations. Part of the reason for the 3.1 million job openings according the Labor Department’s JOLTS report is that employers can’t match their skill requirements to the local applicant pool.

Secondly, it will help the banks that are holding the underwater mortgages by giving more certainty to valuations in their mortgage portfolio. And lastly, it should lower default and foreclose rates, which have been a major reason for RE values continuing to fall.


Graphs: Calculated Risk Blog

The delinquency rate has been declining from its peak of almost 12 percent in 2009 to 8.13 percent in August 2011, but foreclosures are stuck in the low 4 percent range, whereas historical delinquency and default rates were in the 4 and 1 percent range, respectively. Fannie and Freddie’s default and foreclosure rates, on the other hand, have remained within historical levels because of their stricter qualification requirements that have always required income and asset verification.

Calculated Risk’s take is, “What this program does do is remove many of the stumbling blocks to refinancing Fannie and Freddie loans (eliminate reps and warrants, reduce or eliminate fees, automatic 2nd subordination, minimal qualifying). These were all deal killers for HARP, and hopefully these changes will smooth the refinance road.”


Then questions remain on what to do with all the non-agency, or private label securities (PLS). They are where almost all of the subprime mortgages originated by the likes of Countrywide, Bank of American and Wells Fargo remain, and where most of the foreclosures occur.


One solution being worked out by the State Attorneys General, as reported by Jon Prior’s Housing Wire, is a reduction in the principal of the existing mortgage. “As part of the negotiations, the AGs are working to force servicers to refinance current borrowers into lower-rate mortgages,” said Prior. “A source said last week principal reductions were also very much a part of the talks, which some states began to split from, including foreclosure heavy California and New York…”The settlement negotiation is also going to be focused on significantly accelerating the reduction of principal," Department of Housing and Urban Development Secretary Shaun Donovan said Monday.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

How does one find out who qualifies for the HARP II loan modification? The first step is to find out if the borrower has a Fannie or Freddie-owned mortgage. Homeowners can use mortgage “look-up tools” to determine if Fannie or Freddie owns their loan.

Homeowners can also contact their current lender or loan servicer, to find out if the loan is backed by Fannie or Freddie. It’s a key requirement for HARP 2.0 and will likely remain in place throughout 2012, says the Home Buying Institute.

“Put those three programs together: HARP refinance for GSE loans, a HARP like refinance program as part of the mortgageclip_image007 settlement for many non-GSE loans, and an REO dispositions program that keeps many occupants in place as renters and I think that will help,” said Calculated Risk.

Harlan Green © 2011