Tag Archives: aggregate demand

Can’t Sleep In The Beds They Make, May Not Be Able To Sleep In Their Own Either

The median hourly wage of a housekeeper or maid in Nevada’s “traveler accommodation” sector is $15.71.  [DETR] We know what medians are — half the wage earners are above this level, the other half below.  So, if our median wage earning housekeeper works 40 hours per week, for 50 weeks per year the gross earnings would be $31,420.  The actual median annual income is reported as $32,680. [DETR] Again, we know that half are earning below this amount.  Let’s compare these numbers to the living wage required in the community most likely to employ housekeepers — Las Vegas.

A single person with no dependents would need to earn $20,036 to make the living wage level in Las Vegas.  A person supporting one child would need annual earnings of $43,001. [MITedu] The median annual earnings of a housekeeper in Las Vegas obviously don’t reach this level.  Why are we looking at these numbers?

Because — the Economic Policy Institute released a report yesterday demonstrating that people working in the accommodations sector can’t afford to sleep in the beds they’re making.  At one point, back in the 1960′s and 1970′s a housekeeper could afford a room, but the current wage stagnation in the sector now means that the housekeeper can only afford 78% of the average room cost ($106/day).   Once more, why does this matter?

It’s not like the Department of Labor hasn’t been trying to tell us, ” A review of 64 studies on minimum wage increases found no discernible effect on employment,” but the myth remains that raising minimum wages cuts jobs is still recited like a mantra among business interests in spite of every solid study to the contrary — and there’s another study rejecting the mythology this morning.

“In April, the Paychex/IHS survey, which looks at employment in small businesses, found that the state with the highest percentage of annual job growth was Washington — the state with the highest minimum wage in the nation, $9.32 an hour. The metropolitan area with the highest percentage of annual job growth was San Francisco — the city with the highest minimum wage in the nation, at $10.74.” [WaPo]

Harold Meyerson’s analysis repeats what advocates of increasing minimum wages have been saying all along:

“What critics of a higher minimum wage ignore is that, by putting more money into the pockets of the working poor — a group that necessarily spends nearly all its income on such locally provided basics as rent, food, transport and child care — an adequate minimum wage increases a community’s level of sales and thereby creates more jobs.” [WaPo]

But, but, but… sputter the opponents of any increase in the minimum wage, Singapore has no minimum wage and look how well those people are doing.  Easy now. That evidence comes with some significant caveats.  First, their budget provides public funds to subsidize private company worker’s pay, and secondly the Singapore government is the largest shareholder in Singaporean companies, to the tune of some 54% ownership. [AXW]  I’m not at all assured that U.S. companies would be eager to adopt a system in which in exchange for wage subsidies the company would agree to make the government a major shareholder.

Another reason for looking at minimum wage and living wage issues is the recent action by the House Appropriations Committee which would slash HUD funding for housing assistance.

“The House Appropriations Committee this week approved a fiscal year 2015 funding bill covering the Department of Housing and Urban Development (HUD) that makes disproportionately deep cuts in housing assistance for low-income families.” [CBPP]

Here’s a graphic representation of what this would mean for low income families.

Housing cutsNot to put too fine a point to it, but the House appears determined to cut programs for low income families while they are singularly unresponsive to any and all calls for closing tax loopholes and gimmicks for the upper 0.01% or eliminating subsidies for the Oil and Gas Giants.

Meanwhile, the housekeepers cleaning up after the Memorial Day weekend revelers in Nevada, continue to try to make financial ends meet, as the House of Representatives pursues more ways to make life even more difficult for struggling American families.  If this pursuit continues our housekeepers may not only be unable to rent a motel room — they may not be able to sleep in their own beds.

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Filed under Economy, Nevada economy

One man’s expense is another man’s revenue

It’s difficult to fault them for their effort, but the right wing think tank, NPRI, toes the Friedman Line on minimum wage theory and embraced it wholeheartedly in 2010. [NPRI]

“Nevada voters don’t escape responsibility, either. They put a thoroughly destructive minimum-wage law in the state constitution by a voter initiative in 2006. Thus on July 1 of this year the state minimum wage increased to $8.25 an hour for laborers without health insurance.

Siding with demagogues and ignoring wiser counsel, voters no doubt believed they were helping low-income workers earn a higher wage. But in reality, minimum-wage laws mandate fewer job opportunities for low-skilled workers. Nobel Prize-winning economist Milton Friedman nailed it when he called the minimum wage “a law that is most properly described as: employers must discriminate against people with low skills.” [NPRI]

Unfortunately, there’s no There here.  Leaving the loaded language (demagogues) aside, this has been the corporate complaint since June 25, 1938 when the Fair Labor Standards Act was signed by Franklin D. Roosevelt.  In 1973 Friedman gave an interview with Playboy magazine (the one all the guys bought for the articles) in which he opined “I’ve often said the minimum-wage rate is the most anti-Negro law on the books.” [HuffPo]  Huh? Worse than the Fugitive Slave Act of 1850?   However, herein we have the origins of the mythology so ardently adopted by the radical right.

The mantra, to be recited ad nauseam, is “Minimum wage laws damage the prospects of young, minority, and unskilled workers.” That there is no substantial evidence to support this contention is dismissed because at some ethereal theoretical level the assertion is held to be “common sense.”

Yes, minimum wage level workers tend to be young, under 25, but as noted previously, they certainly aren’t all teens.  A 2012 EPI report debunks this but of ideology concisely:

“One common misconception about minimum-wage workers is that they are mostly teenagers, working part time. In fact, of the roughly 1.4 million low-wage workers who will benefit from Jan. 1 minimum wage increases in eight states, roughly 80 percent are at least 20 years old and 78 percent work at least 20 hours per week. The percentage of affected workers who fit the false stereotype of teenage, part-time workers is a mere 12 percent.”

The second fly in the ideological ointment is that somehow the labor “market” is the best determinant of the value of an employee, without any guidance from government.   At worst, this is a call to return to those wonderful old days when a carpenter in New York could expect to earn $3.49 per day or a machinist in Maryland might expect to average between $2.32 and $2.55 per day. [NBER pdf]

Most of us have a memory of our first, usually minimum wage, job and the attitude of our initial employer — who would have paid us less, but surrendered to the mandate of having to pay us at least the minimum.  Chris Rock spoke for all of us: “I used to work at McDonald’s making minimum wage. You know what that means when someone pays you minimum wage? You know what your boos was trying to say? “Hey if I could pay you less, I would, but it’s against the law.” [GoodReads]

Lost in the rhetoric of the minimum wage dispute is the upward pressure on wage levels by having set a floor beneath which wages cannot be legally justified. Cut through the weeping and clothes rending of those decrying the employment state of minorities and teens, and we’d see the corporate agenda, one in which there is less pressure for higher wages for more experienced or better educated workers because there would be no minimum below which an employer could not retreat.

Further down the drain hole, the loss of a minimum wage level ultimately means that labor is solely an input into the calculation of product or service cost.  Pious speeches about the dignity of labor, the edification of work, or the ‘value’ of our employees are reduced to the simple insertion of an expense in a spread sheet.

Speaking of ad nauseum, how many times has this blog offered the First Law of Personnel Management?  There is NO reason to hire anyone unless the staffing level is such that the demand for goods or services cannot be met with an acceptable level of customer service.  The reduction of an employee to an expense on a spread sheet demonstrates a focus on only one side of the tally.  We could as easily argue that one man’s expense provides another man’s revenue.

The continuation of that thought is simple — and does make demonstrable sense — there can be little or no economic growth without consideration given to the Demand side of the equation.  That which depresses demand decreases the level of growth.  And, what decreases demand? Poverty.

Federal Poverty Guidelines 2014Now, let’s see what this means for some workers in Nevada.  The minimum wage in Nevada is $8.25 per hour, or $7.25 per hour if the employer provides, and the employee receives, health insurance benefits. [BL]

A fast food cook in Nevada, working in our accommodation and food service sector, has a median hourly wage of $9.27.  The median annual wage for this job is $19,280.  A glance at the chart above shows that the wage earner can’t support a family of three — he or she is below the official poverty line.  The average monthly rental lease for an apartment in Las Vegas now stands at $781 per month, or $9,372 or 48% of a fast food cook’s annual median wage.

A department store security guard position has an annual median wage of $24,950, or $12.00/per hour.  This level puts the wage earner on the cusp of the poverty line for a family of four.  A person working as a home health care aide can expect median wages of $12.33 per hour, or about $25,640, insufficient to escape poverty if there are three children to support.  Running the dishwasher in a retail operation? That will yield a median wage of $12.49 for some hot sweaty work, or approximately $25,990 per year. Again, the wage earner can barely support a family of four, and five sinks the ship.

Notice that none of these examples are necessarily of minimum wage paying jobs — the nature of the median being what it is — some are earning above the level reported, and the other half below.  Now, imagine a setting in which there was no floor beneath the wage levels for these common jobs.  If the median annual earnings of a salesperson in a Nevada clothing store stands at $22.430, or about $10.78 per hour — what happens if there is no minimum below which the “labor cost” cannot go?  Our “median salesperson” cannot support a family of four, and is on the edge for a family of three.  Basic utilities in Las Vegas will average $151.21 per month [Numbeo] add that to the average apartment/housing expense and there’s precious little to expend on groceries, transportation, medical, and other household budget items.

A person would have to be singularly obsessed with the expense side of the ledger not to notice that our median salespersons, dish washers, security guards, and fast food cooks, aren’t contributing as fully to the “one man’s expense is another man’s revenue” formula as much as they could were their wages increased.

Not only is the argument that minimum wages “hurt” workers regressive and foolish, but it’s also counter-productive in terms of overall economic growth.

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Filed under Economy, Politics

Gaps and Gaping Holes

You’d never believe it because of  all the noise  from the Something For Nothing Crowd, those “over-taxed, over regulated” denizens of the right wing wailers club on talk radio, and LTEs, BUT “Federal Income Taxes on Middle Income Families Remain Near Record Lows.”  For those who aren’t inclined to accept the proposition — there are numbers to back this up from the Brookings Institution in chart form.  Thus the “Taxed Enough Already” assemblage are essentially bellowing that they would prefer to have their public services like military protection and transportation systems paid for by someone else, anyone else, everyone else.

OK, if Burdensome Income Taxes aren’t holding back the recovery from the 2007-8 Recession back, how come the economy feels sluggish? There’s an interactive map which shows which states are still struggling, hint — Nevada’s in a deep green, and in this instance that’s not a good sign.

Nevada’s down 6.4% in terms of employment since December 2007, Arizona is down 4.8% in the same time period, New Mexico is off 4.6%, Mississippi is down 4%, and Alabama is down by 5%.  Nevada and Arizona have the dubious distinction of being a member of the Sand States which experienced a housing bubble. which also serves to explain why Florida’s employment is 2.4% off of December 2007 levels.

Let’s assume, once again, that capitalism works, and we might further agree on the notion that making things matters.  Manufacturing creates the goods which we exchange with one another; someone is paid to make the products, someone is paid to transport the goods, someone else is paid for wholesaling them, and someone is paid to sell them.  There is a glimmer of hope in this sector given the last report from FRED.

Future Capital ExpendituresThe line represents the percentage of manufacturers who expect to make capital expenditures (read expand) their capacity, and as of now the number stands at 31.63%.

Of course, all this depends on the pesky little intrusive concept of Aggregate Demand.  How many people need or want ‘stuff’ and are willing and able to pay for it to keep this merry-go-round moving? One of the factors which may very well be keeping the situation sluggish is the Aggregate Demand Gap.  What we do know is that demand lines track with the unemployment rate.

We can play with numbers related to regulation levels, or to taxation, or to labor quality concerns until B0ssie comes home to be milked, but the most consistent tracking between aggregate demand and sales figures is, was, and will be, employment and wage levels.

Here’s where the economic inequality factor comes into play.  Income inequality isn’t a left wing conspiracy theory about the rich getting so rich the other 99% need income redistribution to reduce the inequities.  It’s about generating the aggregate demand necessary to sustain and grow our economy.

For example, in Nevada the average income between 1979 and 2007 grew by 8.6%.   Income for those categorized in the top 1% increased by 164% while the incomes for those in the lesser brackets actually declined by 11.6%.  What we’ve ended up with is a state economy in which the average income of the top 1% is some 29.5 times greater than the remaining 99%. [EPI]  In fact, Nevada is among the top five states in which the income gap has widened, joining Alaska, Wyoming, Michigan, and Arizona. [MSN]  These facts would be meaningless without some context that serves to describe what they mean in terms of aggregate demand.

The last year for which online data is available by state (pdf) from the IRS is 2007.  During that filing year there were 1,280,234 tax returns filed by Nevadans.  Of those returns 841,451 or 65.7% were filed by people reporting $50,000 annual income or less.  189,079 were filed by those earning between $50,000 and $75,000 (14%), and another 105,870 reported earnings between $75,000 and $100,000 (8.27%). 108,548 reported income between $100,000 and $200,000 annually (8.48%) and 35,339 reported income over $200,000 (2.76%).   Here’s where the income gap rubber meets the aggregate demand road.

Some 79% of Nevadans were earning $75,000 annually or less.  If we add in those making between $75,000 and $100,000 the percentage is 87.97%.  When between 79% and 88% of the income earners in a state are looking at potential income declines the aggregate demand drops accordingly.  If income for the majority of earners can be expected to decline by about 2.41% each year over a 28 year period, then the aggregate demand gap should come as no surprise.

The generalized “1%” becomes 2.76% of Nevada’s income earning population.  Their income increased to almost 30 times the income of the remainder, by about 164%.  It’s a fine thing they are doing well, but there aren’t enough of them to sustain and grow the commerce necessary for long term, state wide, economic growth.

Thus we have a situation in which middle income earners in the Silver State are paying less in federal income taxes, but are hardly in a position to expect significant economic growth in a state in which income increases are being siphoned off to the top 2.76%.  How much more elevated might the line in the capital expenditures graph be if more people could afford more goods? Especially in those ‘sand states’ which were hardest hit in the last Great Recession?

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Filed under Economy, Politics, tax revenue, Taxation

Marching Down The Aisle With Capitalism

The Nevada Progressive nails it in Marco’s Masquerade.  We should have seen this coming, the Republican answer to poverty in America is (drum roll please) Marriage.  Not necessarily marriage for members of the LBGT community, but that good old fashioned march to the altar for the right people.

The Numbers Don’t Add Up

First, if we buy into the Republican stereotypical person in poverty the individual in question would be a single mother and member of an ethnic minority community, which goes absolutely nowhere toward explaining that of the 20% of Nevadan adults who have earnings below the poverty line the gender categories are almost identical. [Kaiser FF] There’s 1% difference.

Secondly, 22% of Nevada citizens living in poverty do not have children, while 17% do.   There is something to the ethnic minority figures.  Of the people in Nevada living with below poverty line earnings 15% are white, 34% are African American, and 29% are Hispanic. [KFF]  However, a better correlation might be established if we were to consider educational attainment levels.   The unemployment rate for those with less than a high school diploma stands at 12.4%,  High School diploma 8.5%, and a professional degree at 2.1%. [BLS]

And the unwed mother mythology?  In 1990, unmarried white women accounted for 57.5% of the births to unmarried women, and unmarried African American women accounted for 39.1%.  By 2008 the numbers had changed with the rate for white women increasing to 67.7% and the number for African American women dropping to 27.9%.  [Census pdf]

Finally, when we look at the numbers, a hard cold fact sets in.  “There are more married parents with incomes below the poverty line than there are never-married ones, and more food-insecure adults live in households with children headed by married couples than in ones headed by just a man or woman.” [CPER]

In short it is more common for adults caring for children on incomes below the poverty line to be married (43% married, 6% separated) than in the homes of 40% of adults earning poverty level wages who have never been married.

Married PovertyNoticing the Obvious — the major cause of poverty is not having enough money.

Yes, young people do tend to be well represented among those paid minimum wages.  Those under 25 years of age make up about 20% of our workforce, but constitute about 50% of those earning minimum wages.  However, that information is only 50% of the story.

49.4% of our hourly wage earners over the age of 25 are working for minimum wages. [BLS]  15% of men over 25 years of age are working for minimum wages, compared to 30% of women in the same age group.  [BLS Table 1]

The cherished myth is that people who start out earning minimum wages in their teens go on by dint of Horatio Alger-like effort (remembering, of course, that he married the boss’s daughter) to Do Great Things.   This is such a good story one hates to diminish it, however reality kicks in all too quickly.  The Council of Economic Advisers (pdf) cautions:

“While the United States is often seen as the land of economic opportunity, only about half of low- income Americans make it out of the lowest income distribution quintile over a 20-year period. About 40 percent of the differences in parents’ income are reflected in children’s income as they become adults, pointing to strong lingering effects from growing up in poverty.”

Capitalism Works, and We Should Let It

The corporate think tanks and their media cohorts are fond of repeating the mantra that raising the minimum wage would be a Disaster, A Disaster I Say, for American capitalism.  Employment will decline! [Forbes]  Except for one nitpicky litte detail — there’s no hard evidence this happens.    The Forbes article cited above goes to great length to offer gloom and doom predicated on the assumption that the corporation must recoup any and all losses to its bottom line (read profitability) by adjustments in productivity.  Interestingly enough nowhere in the article does its author mention the bloated executive compensation packages which somehow do not need to be adjusted to improve corporate profitability.

Forbes opines: ” The Law of Demand always works:  the higher the price of anything, the less that will be taken, and this includes labor.”  Yes, it does. However, a person should be careful here to differentiate between micro and macro economics.   If our hypothetical worker, and that seems to be the main form workers take in financialist-land, works for the Acme Widget Company, and the “cost of her labor increases,” Acme may have to adjust, but Acme isn’t where she shops for groceries.  Or, where she purchases her car. Or, where she buys clothing and furniture.   The increased wages (or, increased labor costs) become part of our old friend Aggregate Demand.

Firms cannot pay a worker more than the value the worker brings to the firm.  Raising the minimum denies more low skilled workers the opportunity to get a job and receive “on the job” training.” [Forbes]  Yes they can, and they do.   One of the prime reasons employers are anxious NOT to have high levels of employee turnover is that training is relatively expensive.   No worker, from the bottom to the top, is worth on day 365 what he was worth on day 1.  If the firm is managed rationally, then it is assumed that experienced personnel are more valuable than the rookies, and therefore more valuable — and they all started out as rookies.   Interesting, this “worker value” argument never seems to emerge when Wall Streeters speak of executive retention bonuses?

If it did, we might hear some business pundit say the unimaginable, “We can’t give more executive retention bonuses because this will deny less experienced or skilled people the opportunity to receive on the job training.” I’m not holding my breath waiting to hear that one on some business cable channel.

Capitalism could work very nicely.  If we’d let it.

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Filed under Economy, Politics, poverty

Back to Economic Basics

There are sane voices among economic writers, some even participate in Tweet-sanity: Click Here and you’ll see this:

Businesses Hire Tweet

Bingo! And, now we’re back to reality and that old favorite First Law of Rational Human Relations — There is no reason to ever hire anyone to do anything unless present staffing levels cannot provide an acceptable level of customer service.  Or -

“As another former CEO, Nick Hanauer, says: “Everyone who’s ever run a business knows, hiring more people is a course of last resort for capitalists. It’s what we do if and only if rising consumer demand requires it.” [Angry Bear]

But, but, but sputter the corporate apologists, if corporations make higher profits they’ll hire more people.  Once more, back to our Sane Tweeter:

“Repeat after Mike. And keep repeating it to anyone who will listen. The “higher-corporate-profits = jobs” meme is perhaps the most pernicious falsehood in political economics. [Angry Bear]

Sankowski supplies a real world example of how a highly profitable company decided to generate more profit and eschew getting bigger.   So, why doesn’t that falsehood fade away and disintegrate in a quiet corner of a landfill?  It isn’t even supported by some old classic concepts like “Marginal Revenue Product.”

“Marginal revenue product is an economic theory that helps a company determine the amount of money or value earned from producing an additional unit. Economically speaking, companies will set their production output where marginal revenue equals marginal cost. Past this point, the company will lose money on producing additional units. This theory also helps companies calculate the best use of limited economic resources. Using too many resources to produce units indicates high economic waste, driving down the marginal revenue product for goods produced.” [WiseGeek]

Simplified version: If you hire too many people production costs will go up and eventually become problematic when there isn’t enough demand for those “additional units” (widgets, tricycles, paper plates…whatever) being produced.  And yet the myth remains.

If we’d just let the rich (especially rich corporations) get richer then we’ll all be better off?  If this were true what would we infer from the following graph of after tax corporate profits?

Corporate Profits to 2013If corporate profitability were the prime mover in hiring more employees there should be few individuals attending job fairs these days.

Unemployment 1960 to 2013What do we have here?  Corporate profits are at record highs, but the unemployment rate is still at 7.3% and we are nowhere near the rates before the Housing Bubble collapsed, rates of 4.6% to 5% during 2007. [BLS]  While the graphs offer a superficial inverse relationship between unemployment and corporate profits, the problem with that over-simplified correlation is that we have to factor in elements like consumer confidence, aggregate demand, and household indebtedness into the mixture.  In short, we have to take DEMAND into consideration.

But, but, but what about the shareholders! Another sputtering point among corporate apologists.   The profit = hiring myth slides into the sanctimony of shareholders mythology espoused by the corner office crowd.  Hey, we have to have those high profits for our esteemed shareholders!  As is shareholders were the only “units” having a stake in the system.

Naked Capitalism explains this phenomena:

“Today, however, the dominant ideology is that a corporation should “maximize shareholder value.” At the most basic level, the rationale for this ideology is that shareholders own the company’s assets, and therefore have exclusive claim on its profits. A more sophisticated argument is that that among all stakeholders in the business corporation only shareholders bear the risk of getting a positive return from the firm, while all other participants receive guaranteed returns for their productive contributions. If society wants risk-bearing, so the argument goes, firms need to return value to shareholders.”

And then provides a succinct rejoinder:

This argument sounds logical – until you question its fundamental assumption. Innovation, defined as the process that generates goods or services that are higher quality and/or lower cost than those previously available, is an inherently uncertain process. Anyone who invests their labor or their capital in the innovation process is taking a risk that the investment may not generate a higher quality, lower cost product. Once you understand the collective and cumulative character of the innovation process, you can easily see that the assumption that shareholders are the only participants in the business enterprise who make investments in productive resources without a guaranteed return is just plain false.

In order to justify the “shareholders only” mythology one would have to assume a static economy, one without the innovation which by definition requires the efforts of an educated, or at least well informed labor force, with a stake in the action.  Speaking of innovation — there’s a looming problem for U.S. based research and development that’s related to the sequestration of federal funding given a full treatment by Brad Plumer in WaPo.

If we truly want free market capitalism to work, then cavalierly dismissing the underpinning of the structure — aggregate demand, and twisting the concept of investor risk into the pretzel logic of financialism is a counter-productive exercise.

So, let’s get back to basics — “Businesses hire when they are swamped with demand, not when they have high profits.”

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Filed under Economy, Politics

Nevada Jobs and Corporate Welfare Part 2

NV low income jobs fam 4The list in the chart above shows jobs in Nevada which are projected to have 5,000 or more persons employed as of 2020, and the average wages assuming full time employment at 40 hours per week for 50 weeks per year.   All information comes from Nevada’s DETR.

One other assumption is that the family of four includes a head of household wage earner, and three dependents.  The optimists among us may assume that if there are two wage earners the family will avoid being eligible for SNAP (pdf) and other benefits.  However, this rosy view doesn’t take into consideration the possibility of a single parent family.  Nor, does it assume the “pro-family” ideal of the male head of household being able to support his family on the proceeds of a single job.   In short, of the common jobs available — or projected to be available by 2020, ten of the categories show average wages which are insufficient to keep an average family of two adults and two children above the income level at which they would be eligible for SNAP benefits.

One glance at the chart should demonstrate why there is conversation about increasing the minimum wage to $15.00.  Notice that those occupations in which individuals can earn $15.00 or more per hour don’t fall into the generalized category as eligible for SNAP (food stamp) benefits.

Obviously, there are two ways to cut the SNAP benefit rolls.  The first is simply to slash the funding, raise the requirements, and tell potential and current beneficiaries to wing it as best they can.  Ideologues may cheer the removal of government support which in turn should induce the “Lazy and Shiftless” to take on more work and seek “economic freedom” from “government intrusion.”   However, as evident in the chart, a single income from a low wage job is insufficient to put food on the table for an average family at present.  Two low income jobs (fast food work, stocking shelves, etc.) may serve to maintain minimal living standards — are the Ideologues recommending three or more jobs?  At this point we’re perilously close to Janis Joplin’s rendition of the lyrics “Freedom’s just another word for nothing left to lose.”

The second option is to raise the minimum wage to $15.00.   There’s an economic benefit to this: “Economists generally recognize that low-wage workers are more likely than any other income group to spend any extra earnings immediately on previously unaffordable basic needs or services.” [EPI]

The economics of this are simple — as lower income families spend more for goods and services previously unattainable the DEMAND for those goods and service increases. The greater the aggregate demand, the more hiring to satisfy that demand — remembering the First Rule of Human Resources: The only reason to hire additional personnel is because  staffing is inadequate to satisfy current demand with an acceptable level of customer service.

Even the Chicago Federal Reserve offers modest applause for this thinking: “We are skeptical that minimum wage hikes boost GDP in the long run,” Aaronson and French wrote. “Nevertheless, we do find evidence that putting money into the hands of consumers, especially low-wage consumers, leads to predictable increases in spending in the short run.”  In fact, an increase in the minimum wage to $9.00 was projected to add an overall 0.3% increase in the GDP. [MMA]  In short, we can see some economic growth by raising the minimum wage, or we can continue to offer public assistance to the employees of highly profitable corporations so that their “shareholder value” (bottom lines) are at record levels.

“New research shows more than half of low-wage workers at fast-food restaurants rely on public assistance to survive – a rate double that of the overall workforce. According to researchers at the University of California, Berkeley, low wages in the fast-food industry cost American taxpayers nearly $7 billion every year – that’s more than the entire annual budget of the Centers for Disease Control and Prevention. A companion report by the National Employment Law Project found McDonald’s alone costs Americans $1.2 billion annually by paying its workers insufficient wages. Last year the top 10 largest fast-food companies alone made more than $7.4 billion in profits.”  [DN]

Then there are the landscapers, the stock clerks, the dishwashers, the customer service clerks, the security guards, and the retail sales clerks.  A 2009 ASPE study tells us a bit more about these people.   As of 2001, approximately 58.9% were female, only 17.3% of all low wage workers were under 20 years old, and 64% were White.  Only 14.4% were divorced or separated, 39.1% were married, 46.5% had never married. {Exh.2}

The bottom line concerns the bottom line.  If free market capitalism is the way we are supposed to be conducting business, then public assistance subsidies would be unnecessary IF the private sector paid wages which enabled the generation of sufficient aggregate demand to grow the economy.

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Filed under Economy, Politics

The Crisis Factory goes Dancing With the Debt Fetish

Marathon DancersOne of the little problems with the Politics of Hyperbole is that eventually someone may notice not every minor annoyance constitutes an emergency.  Not even every major issue is an emergency.  However, nothing has prevented the radicals from manufacturing crisis after crisis in order to monopolize the conversation and distract this country from some very real issues we need to address.

The Distractions

Pillar OnePeople are in imminent danger of becoming dependent upon government.   Hogwash. Only the most extreme social libertarian would contend that having police, fire, and emergency medical personnel creates “dependency,” and how foolish does a person have to be to argue that we don’t need public health inspectors?  Further, if we allow for the old saws that two “heads are better than one,” and “many hands make light work,” then we know there are many tasks at which we do much better when we work together: Building roads, dams and bridges; Conducting relations with foreign countries; Protecting our citizens from or responding to natural and man-made disasters; Promoting our national economy.  And the list goes on.  Or, to introduce yet another well known concept:

“No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.
As well as if a promontory were.
As well as if a manor of thy friend’s
Or of thine own were:
Any man’s death diminishes me,
Because I am involved in mankind,
And therefore never send to know for whom the bell tolls;
It tolls for thee.” — John Donne (1572-1631)

Pillar Two: People are burdened by an unconscionable level of federal debt.   This argument is extremely convenient for those who have another agenda — cutting spending on domestic programs with which they are in fundamental disagreement.  The proposition requires adopting a variation on the White Queen’s belief in “six impossible things before breakfast.”

The United States is the most powerful nation, with the most powerful economy in the world.  China’s GDP is $8.227 trillion; U.S. GDP is $15.68 trillion.  Therefore, it is necessary to manufacture PERIL in order to substantiate the claims that we are burdened by indebtedness such that we cannot afford to (fill in the blank with the program one wishes to dismantle).   There are some real issues, just not the ones usually cited in the conservative press.  For example:

The Trifflin Dilemma Peril:  “He pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, and thus cause a trade deficit.”  Translation – The stronger the nation the more likely other nations are to want to invest in it, and the more other nations invest in it the more vulnerable the nation becomes to foreign influences on its economy.

A variation on the Trifflin Dilemma often shows up in the conservative media in the form of a new version of the old obnoxious  Yellow Peril argument — What if China called in its investments?  They could OWN us.  Instead of rewriting the posts, this topic has been discussed at more length in “The Republican Debt Wish” (2006), “Something to Think About,” (2008) and “When Willful Ignorance Meets Economic Reality,” (2011).

One one of the consequences of paying attention to the debt, as opposed to focusing on the economic growth which facilitates the repayment of those obligations, is dangerous in itself, as explained by Nobel Prize winning economist Joseph Stiglitz:

“The fundamental problem is not government debt. Over the past few years, the budget deficit has been caused by low growth. If we focus on growth, then we get growth, and our deficit will go down. If we just focus on the deficit, we’re not going to get anywhere.

This deficit fetishism is killing our economy. And you know what? This is linked to inequality. If we go into austerity, that will lead to higher unemployment and will increase inequality. Wages go down, aggregate demand goes down, wealth goes down.” [HuffPo]

Pillar Three: The free market will cure all ills.   When pressed to explain why, for example, the Affordable Care Act, is so onerous, the right is often moved to propose that the “free market” could have solved all the problems associated with health care insurance situation in the United States.

The first question we need to ask in regard to this contention is: Are we using the right tool from the box?  Consider your utensil drawer in the kitchen.  Does it contain at least one table knife, bent at the tip because it was pressed into service as a screw driver or as a lever?  Like the trusty table knife, the free market is an excellent tool for delivering the goods and services we require, but there are some tasks for which is it simply not the best implement to apply.

We could apply the free market to our transportation system by privatizing all our now public roads and charging tolls for their maintenance and use — however, we need to calculate the cost to our economy of raising costs for the factors in our transportation sector.  In this instance, the cost to the trucking industry is a negative factor in economic growth, and it is better policy to “subsidize” the industry by providing well maintained roads and functional bridges to secure the benefits of our economy.

Since we accept that corporations should operate for a profit, then in the realm of health care insurance it makes good free market sense for the company to insure only healthy persons (certainly not those with pre-existing medical conditions, or those who are elderly) and to keep those medical loss ratios at the lowest possible level.  In short, if we allow the free market to function in its purest form in the delivery of health care, then we should rationally expect that the least costly services will be provided, to those who need the least service.  Sometimes it’s really not about the money.

We can quantify the economic contribution of a father or mother in the family, but that doesn’t determine his or her value.  We don’t calculate a cost-benefit analysis in order to decide on marriage. We can quantify the economic contribution of roads, bridges, and airports, but that alone doesn’t determine their value to us.  We can quantify the benefits of education in terms of test scores, but we can’t determine how a person will synthesize information accumulated from the arts and from engineering to determine the best design for a marketable household appliance.

Focus Please

There are issues we need to address, most of which have profound implications for our economy. Among these are:

#1. Global climate change.  This isn’t “lib’rul hype;” this is about living on a planet capable of sustaining human life. Yes, if we foul our nest, the planet will probably last another 6 billion years, but WE won’t.   The 2007 University of Maryland study (pdf) projects economic impacts in terms of agriculture, energy, and transportation; in terms of our eco-system; and, in terms of water and infrastructure elements.   The fifth assessment from the IPCC released recently should convince all but the most delusional that WE are the problem.

The conservatives continue dancing with the Debt Fetish

#2. Student Loan Indebtedness.  If we’d really like to have young people start contributing to our economy, especially in regard to consumer spending, then it would be nice if they had more unencumbered income with which to do just that.  The Wall Street Journal calls the current situation the “Student Loan Straitjacket.”

The conservatives continue to dance with the Debt Fetish, but “What of the debt for our grandchildren?”  Flash Dispatch to the conservatives — These ARE our grandchildren.

#3. Infrastructure issues.  It isn’t like the American Society of Civil Engineers haven’t been trying to get our attention.  The National Report Card is not pleasant or reassuring reading — but it should be read, and we should be paying attention.

The conservatives continue to dance with the Debt Fetish.  How do we pay off any portion of the debt if our physical infrastructure is so dilapidated as to impede the progress of our distribution systems?

#4.  Employment. Of all the associated issues this is the most central.  We could be putting people in the construction sector back to work if we could enact funding for infrastructure projects.  We could be putting people to work in alternative energy projects… We could be putting people back to work in new jobs in new manufacturing sectors.  However, we are still dancing with the Debt Fetish…

…and like the marathon dancers of the Depression Era we will proceed having put a great deal of effort into endeavors promising very paltry results.

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The Great Balancing Act: US on the high wire

High Wire ActThe previous post was, in essence, a set up for this one.  Those looking for illustrative examples of radical economic philosophy will find none better than the musings of Nevada Representatives Amodei (R-NV2) and Heck (R-NV3).   When radical economics combine with radical politics the resulting admixture is toxic, and dysfunctional.  Witness the 12% approval rating for the Congress. [HuffPo]

So, why is the economic theorizing beloved by our two Tea Party darlings from the Silver State to be categorized as “radical?”

#1. It turns classical economic theory on its head.  Traditional economic theory asserts that an equilibrium price, and optimal market function,  can be determined when supply and demand for goods or services converge.  To give undue attention to one side or the other of the equation is asking for trouble.  Since the perpetration of the Supply Side Hoax, the “job creators” (corporate executives) have been attended to like medieval monarchs, with the Congress bowing, scraping, and otherwise engaging in obsequious behavior before members of the CEO class.   In sum, the Supply Side economics offered by the radical Republicans of the 21st century is little more than a political agenda masquerading as an economic theory. (1)

#2.  It eviscerates the guiding principal set forth in the founding documents of this nation which contends that we do better as a country when we take an interest in our communal welfare, and economic interests.  The preamble to the U.S. constitution notes that one of our foundational principles is the notion we should “promote the general welfare,” not that we should promote the interests of the rentier class, or any other specific class for that matter.  One of the first charges leveled at King George III was that he had “refused his asset to laws, the most wholesome and necessary for the public good.”  (Declaration of Independence) Note that the criticism wasn’t that the monarch had not attended to the good of “some” but of “all.”

In order to make this country work politically, as well as economically, we need to balance the needs and interests of business and labor.  Capital and commerce. Consumers and manufacturers.  When things get out of balance, things go wrong.  Achieving a balance between competing interest demands compromise.  However, when the Republicans in Congress assert their demand that they will not enact any modifications to the debt limit until the President and the Democrats in the Senate agree to repeal the Affordable Care Act and Patients Bill of Rights, accept the Ryan Budget, and privatize Medicare — the unwillingness to compromise produces nothing but manufactured gridlock.  Those who advocate no comprise in the face of opposition to their own exclusive agenda are functioning as anarchists — promoting no government as a solution to any governance.  (2)

Radical Theory Applied to Practical Reality Yields Poor Results

I’ve lost count of the number of times I’ve used the term “aggregate demand” in economic related posts.  However, when the situation becomes unbalanced and the needs of the top 1% of the American public are given greater consideration than those of the other 99% we have a situation in which there are few positive long term results.

Unalleviated promotion of the demands of the 1%, especially in the financial sector, helps to create economic consequences such as an increase in income disparity.  This is NOT to argue for some scheme of income re-distribution imposed by the federal government, but for a market based re-distribution based on the traditionally accepted principles of standard economics — including attention to the necessity of increasing our aggregate demand.

Increasing income disparity means that fewer households control more wealth, and hence have more spending “power.”  It is possible to have a warehouse load of vehicles, BUT the U.S. annually  manufactures some 15,797,864 cars and trucks (as of 2012) [WardsAuto  XL download] and 1% of the population obviously isn’t going to make a dent in this inventory without some significant assistance from the middle class.   The American middle class is less able to contribute to the aggregate demand than it was prior to the last Recession:

“Median household income in the country is nearly $4,000 less than what is was back in 1999. Things have gone from great to terrible since then, and this change has certainly played out in the nation’s median household income number. In September of 1999, the national unemployment rate was 4.2%; in September of 2011, the national unemployment rate was 9.1%.” [Manuel.com]

There are all manner of explanations for this situation, from various positions on the political spectrum.  For the radical right the explanation is to be found in the “high” corporate tax rates and regulation of financial transactions (the politics of prosperity for some and austerity for all).  For the left the explanation often incorporates the nefarious influence of the 1%.  Easy rationalizations miss an essential question.

What does our allocation of interest, energy, and resources tell us about our attention to our economic health?

There is one sector of our economy which has experienced significant growth — finance.  The NBER published a paper in 2007 offering an explanation for this increase:

“The share of finance in U.S. GDP has been multiplied by more than three over the postwar period. I argue, using evidence and theory, that corporate finance is a key factor behind this evolution. Inside the finance industry, credit intermediation and corporate finance are more important than globalization, increased trading, or the development of mutual funds for explaining the trend. In the non financial sector, firms with low cash flows account for a growing share of total investment. [...] I find that corporate demand is the main contributor to the growth of the finance industry, but also that efficiency gains in finance have been important to limit credit rationing. Overall, the model can account for a bit more than half of the financial sector’s growth.”  (emphasis added)

Some definitions are in order, for example what’s “credit intermediation?”   The simplest way to describe this is to say that intermediation is the transfer of funds from the ultimate source to the ultimate user.   Our banks “intermediate credit” when they borrow from depositors to make loans to creditors.

Corporate finance runs a gamut of fiscal operations.  However, the standard expression relates to how does a corporation manage its capital investment decisions?  Decisions would be made such as should the company raise funds by the equities route, by issuing debt (bonds), and so forth.

If the NBER report is essentially correct, then the increasing transfers of funds, and the increasing role of corporate finance transactions are driving the increase in the growth of the financial sector.  So what?

The “so what” question may be answered, at least in part, by observing the increasing role of securitization of assets (Remember: One man’s debt is another man’s asset), and manufacturing of financial products in the “intermediation” process.   There’s a cautionary note from a 2009 IMF report (pdf)

“Mobilizing illiquid assets and transferring credit risk away from the banking system to a more diversified set of holders continues to be an important objective of securitization, and the structuring technology in which different tranches are sold to various investors is meant to help to more finely tailor the distribution of risks and returns to potential end investors. However, this “originate-and-distribute” securitization model failed to adequately redistribute credit risks, in part due to misdirected incentives. Hence, it is important in restart ing securitization to strike the right balance between allowing financial intermediaries to benefit from securitization and protecting the financial system from instability that may arise if the origination and monitoring of loans is not based on sound principles.”

What the polite phrasing of the IMF document is trying to say may very well be — “all the fancy ways the investment houses tried to reduce the risk to investors in various schemes aren’t going to be much help IF the underlying assets aren’t very good in the first place.” So, why did the system freeze up in 2007-2008?  Insert “avarice,” or good old fashioned “greed” in the place of “misdirected incentives,” and we have a situation in which all the financial products dreamed up by the “market makers” couldn’t erase the hard cold fact that many of the mortgages and other credit instruments which were securitized into ever more elaborate packages weren’t any good in the first place.

If we’re spending too much of our attention, energy, and finances on manufacturing financial products which are supposed to spin dross into gold for investment houses and major banks,  then we’re not paying attention to the sectors of our economy which need more attention, more energy, and more financing.

All analogies break down at some point, but for illustrative purposes only contemplate what might happen to an individual who owns a home with a set of broken steps to the front porch.  These steps are a risk for the homeowner.  However, instead of fixing the broken stairs the homeowner buys an extra insurance policy to offset his risk, then the benefits of the policy may be securitized, the security may be further offset with hedges, bets, and other derivatives — and in all the revenues generated and all the fees and commissions collected everyone appears to forget that the entire financial contraption is built upon a set of broken stairs.   When the steps collapse, as they inevitably must, the policy must pay out, along with those who bet against the policy being paid out and those who bet on the policy in favor of the  benefits being paid…. and so it might go.

The moral of this hypothetical is that if we are paying more attention to devising ways to mitigate risk, and manufacturing more financial products to do so, and we are not attending to correcting the faulty underlying assets — then we ought not complain when the house of cards falls in a heap at our feet.

Further, if we are studiously attending to generating revenue from the transfer of risk among credit intermediaries and corporate finance offices, then we are consequently paying less attention to our education system, our infrastructure, our manufacturing and business lending operations, and our fundamental  banking soundness.  Further, as more finance is sucked into the Shadow Banking system, the very real one is in danger of being neglected.

Worse still, according to the Economic Policy Review, the emphasis on the shadow system isn’t leveling off:

“Looking ahead, the authors contend that despite efforts to address the excesses of credit bubbles, the shadow banking system will likely continue to play a significant role in the financial system for the foreseeable future. Furthermore, increased capital and liquidity standards for traditional banking entities are “likely to increase the returns to shadow banking activity” partially because reform efforts have done “little to address the tendency of large institutional cash pools to form outside the banking system.”

This really doesn’t give much hope that financial institutions and major corporations will be excited about investments in manufacturing, infrastructure, or work force concerns, at least not in the foreseeable future.

Increasing aggregate demand, and thereby increasing our GDP, requires more earning power in the wallets of more residents and citizens.  The shadow banking system is not designed to take into consideration the credit needs of American car buyers — only to securitize and minimize (and then bet on) the credit worthiness of the underlying loans.   If banks made “good” home and auto loans then there would be less need to offset risks — which need not stop the shadow system from continuing to bet on the prospects of default anyway.

Finance and The Family Wallet

Looking back at the mess created by the Mortgage Meltdown of ’08, several observers were wont to ask — Why did the banks make those shaky loans in the first place?  And, no, it wasn’t because they “had to” because of the consumer finance laws — they made them because the loans could be originated quickly then securitized even faster. Once securitized the financial sector could manufacture  products to paper over the risks to the bankers — here came the hedges, bets, derivatives, swaps, etc. — and if the revenue generated from the manufacturing of those paper products could be greater than the loss from the loan default — then where was the incentive to make good and proper loans?  Someone wasn’t looking at those faulty front porch steps?

That was then, this is now and those who are playing derivative games with the underlying assets originally residing the family wallet aren’t taking kindly to being regulated, to being required to be more transparent, to being litigated against because of their manipulations.  Some more attention needs to be paid to that crucial line from the IMF report: “Hence, it is important in restarting securitization to strike the right balance between allowing financial intermediaries to benefit from securitization and protecting the financial system from instability that may arise if the origination and monitoring of loans is not based on sound principles.”

Balance

There’s that word again — we need some balance between competing interests (capital and commerce, labor and ownership) and balance requires — demands — compromise.  Those standing on the ramparts of their own idiosyncratic battlements of ideological purity, refusing to compromise with the dreaded Other, are jeopardizing not only the political life of this nation but the economy of the country as well.

(1) For more on this topic see: The Trickle Down Hoax, AmericanThinker, July 15, 2012.  The Political Genius of Supply Side Economics, Financial Times, July 25, 2010. (registration required) Supply Side Economics Explained, Reign of Error, September 23, 2005.  The Six Biggest Hoaxes in History, Huffington Post, May 23, 2013.

(2)  See also: Gridlock and Harsh Consequences, New York Times, July 7, 2013.  Gridlock in Congress, CNN, May 21, 2012.  Five Reasons Gridlock Will Seize Congress Again, Washington Post, January 4, 2013.   Congress Shows Few Signs of Ending Gridlock, Bloomberg News, July 8, 2013.

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Economic and Financial Under the Radar News

Occupy Wall Street bankersNevada’s DETR posted the May 2013 employment numbers late last month and the state’s unemployment rate dropped from 9.6% to 9.5% (seasonally adjusted).  [DETR pdf] Good news.  Well, sort of: “this represents a gain of only half the full-time positions lost since pre-recession levels. The number of part-time jobs in Nevada is still trending near all-time highs, although they have leveled off and fallen a bit with the slow improvement in the economy and corresponding rebound in full-time positions…

For those inclined to be optimistic, perhaps it’s time to prescribe some “cautious” optimism.  One of the key phrases in the DETR press release from June 21 is “slow improvement in the economy.”  That would be the REAL economy.

Now, why would the economic recovery be slow?   Maybe we should start with some assumptions.

Assumption One:   American Capitalism works best when there is an increase in aggregate demand  This is old territory on this blog, but for those who might be first timers, let’s review:

“Aggregate Demand (AD) = C + I + G + (X-M) C = Consumers’ expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.”  [Investopedia]

If this looks suspiciously identical to the formula for the Gross Domestic  Product, there’s a reason for that … it is.   Did you notice the “G” in the formula?  Government spending?  Radical conservatives really don’t get to have it both ways.  Government spending is NOT intrinsically wasteful and excessive.  We cannot, by the very way we define aggregate demand/GNP, decrease government spending and logically expect to see an increase in the GNP.

The last report from the Bureau of Economic Analysis (June 26, 2013) was a bit disheartening for those seeking improvement in the REAL economy:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the “third” estimate released by the Bureau of Economic Analysis.  In the fourth quarter, real GDP increased 0.4 percent. [...] The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased.”  (emphasis added)

Translation: When government spending is down, there is a “negative” contribution, i.e. subtraction from the GDP.  So how does this relate to those employment numbers in Nevada (or several other states)?

Assumption Two: American Capitalism works best when we approach full time employment for as many citizens as possible.   As Nevada dribbles along, cutting the unemployment rate by modest reductions, it’s reasonably clear that the current employment recovery rate is insufficient to create a significant recovery.  Witness the analysis of the Economic Policy Institute:

The average growth rate for the previous 12 months was 169,000, so the current rate is an improvement. However, the current pace of job growth is still slower than what’s needed for the economy to return to full employment any time soon. At this pace, it will be more than five years until we get back to the prerecession unemployment rate.

As economist Paul Krugman points out, this constitutes a “low grade depression.”   Rather like having a “low grade economic fever” for the next five years.

Assumption Three:  There can be no significant recovery in our Aggregate Demand/GDP without an increase in the capacity of employed workers to accumulate funds to spend and invest.   Now that we’ve hitched the horse and cart together, they should point toward some positive end.  So, we should ask again — What’s slowing us down?

(1) Financialism:   This isn’t new territory for this blog either, but it bears repeating that the improvements in wealth and income have been concentrated in the upper tiers of American income earners.  The Brookings Institution provides a chart (pdf)

Concentration of WealthThis is NOT a pattern or trend most likely to increase the capacity of most Americans to make significant contributions to our Aggregate Demand (GDP).    So, what does this have to do with “financialism?”

We should note that of the top 1% income earners, 31% are managers, supervisors, and executives, another 15.7% are in medical fields, and the third component is made up of the 13.9% in the financial sector. [NYUedu]

Thus, if the major gains in income during the post recessionary period have been largely the preserve of those who have vested interests in the creation and manipulation of financial instruments, and those concerned primarily in the increasing value of those investments, then the rest of the economy must slog along compliantly while incomes increasingly concentrate in the hands of the few, at the expense of the many — including most of the American middle class.

(2) Public policy which defers to the needs and desires of the financial sector at the expense of other sectors of the economy.   First, it should be demonstrated that someone has “paid the expense.”  In this instance it’s the middle class, the bulwark of American consumerism.

About five months ago this chart in the Washington Post was getting a bit of online notice:

Job losses by segmentNotice that higher income occupations have  recouped the employment losses, and lower income jobs (perhaps those part time positions mentioned in the Nevada statistics) have “boomed” since Wall Street blew up their housing bubble — but, mid-wage occupations lag far behind the top and bottom in terms of restoring the buying power of the American middle class.

Why the American middle class has been hollowed out since 2001 is controversial.   Pick one — trade liberalization, automation and technological advances, the decline of organized labor, the declining value of the statutory minimum wage, the need for retraining the American workforce, the student debt burden of those seeking retraining and additional education — and you’ll find some institution or economist ready and fully willing to agree with you.

What is much more difficult to find are too many individuals willing to assert that by catering to the needs of the financial sector we have lost sight of the REAL economy, the one not measured by the DJIA or the S&P.  The one we measure by looking at the Aggregate Demand for American goods and services.

What public policies of late have catered to the financial sector?

Example One -  Wall Street would love to drive some tractor-trailer sized loopholes into the regulation of derivatives trading.   Can we say “extra-territoriality?”  This, from June 12, 2013:

 On Monday, the U.S. became the first country in the world to require mandatory clearing of many derivatives contracts, a crucial protection in these previously unregulated markets.  But even as this crucial protection takes effect, Wall Street is mobilizing to create a back door escape route. Its goal is to prevent U.S. regulation of derivatives transactions by U.S. companies that are conducted overseas.

This loophole could strike at the foundations of financial reform. Almost every major financial scandal involving derivatives – from the collapse of Long Term Capital Management’s Cayman Island operations in the 1990s, to the bailout of AIG’s London-based trades in 2008, to JP Morgan’s recent “London Whale” trading losses – has involved derivatives transactions conducted through a foreign entity. Wall Street banks routinely transact more than half their derivatives through foreign subsidiaries. Through numerous avenues, including an important Congressional vote today, Wall Street is trying to create an “extraterritorial” loophole in derivatives regulation. [USNews]

The efforts were successful in the U.S. House of Representatives:

“In June, the House passed a bill that would completely exempt from U.S. oversight derivatives sold through the nine most popular foreign derivatives jurisdictions. The legislation is occasionally derided as the “London Whale Loophole Act” on Capitol Hill — a reference to the overseas trades that cost JPMorgan Chase more than $6 billion in 2012. London was the epicenter of much of the derivatives trading by U.S. financial firms leading up the 2008 crash, including AIG’s infamous Financial Products division. If banks can simply route trades through loosely regulated overseas affiliates, financial reform advocates warn, the most critical aspects of Dodd-Frank will be effectively nullified.”  [HuffPo]

Simple really, just do all your derivatives trading from overseas desks and avoid the clearing process and American regulation.   So, what the financial sector wants is MORE leeway to do precisely that trading which has gotten them into crashes and slashes since the collapse of LTCM — what could possibly go wrong?

The House passed the “Swaps Jurisdiction Certainty Act” on June 12, 2013 on a 301 to 124 vote.   Nevada Representatives Amodei (R-NV2), Heck (R-NV3) and Horsford (D-NV4) voted in favor of the bill; Representative Titus (D-NV1) voted no.  Good for her.

If the London Whale Loophole Act doesn’t cause you alarm, try the CFTC’s nod to the financialists in its rules for swap pricing.

Example Two -  This gets into the weeds a bit, but suffice it to know that what the CFTC leadership had in mind five years ago was that if investment firms wanted “swaps” they had to get five quotes before entering into a “swap.”  “The proposal was intended to increase price transparency and encourage wider participation beyond the small number of dominant dealers in a bid to diffuse risk and lower prices for institutional investors and companies that purchase swaps to offset risk.”  [HuffPo]

Increase the transparency of these transactions? Encourage wider participation?  The Big Banks Clutched Their Pearls, and staggered towards their fainting couches.

The CFTC caved in.  “In the final rule, swaps buyers will be able to solicit only two prices through swap execution facilities trading platforms for the first year after the rule is in effect, with the minimum requirement increasing to three quotes thereafter, officials said.”  [HuffPo]

Example Three -  The old Supply Side Mythology is still driving the deregulation bus.   Consider the instance of a reduction in business loans and the sleight of hand with headlines.  Do we look at the following chart and see a reduction in lending or borrowing?

Business lendingPerhaps we’d want to pause and give the following analysis some thought:

The idea that the problem’s on the supply side is pervasive, and false or at least wildly overblown. Lending rates are at historic lows. But the credit-crunch storyline gives very effective aid and cover to the financial industry in justifying its inordinate size and power.  [Asymtosis]

No, the sky isn’t falling.   There’s no huge credit crunch going on, and unless you want a student loan the rates are at all times lows — so, we’d probably want to consider the “business lending down” caption a tip of the hat to the time honored myth of Supply Side ascendancy.   Lending rates from the FED are, as noted in a previous post, almost ludicrously low — and the profits for the major financial institutions are equally positive for their ample bottom lines.

The question remains, will Nevada and 49 other states limp along with diminished expectations for economic recovery over the next five years, or will someone — somewhere — notice that while the financial institutions have been raking in the profits, and concentrating yet more wealth into the hands of fewer people, the REAL economy and the battered middle class could use some assistance too?

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Okun’s Law and Sequestration

GDP formula

This isn’t rocket science.  For anyone wondering why Austerity doesn’t produce Prosperity, the answer lies in this simple formula.  We measure our economic growth in terms of the gross domestic product, the GDP.

Investopedia explains:

“GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy – transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation’s productivity, which is unrelated.”

In short, we can critique the use of the GDP as a measure of our economic well being for not including bartered transactions, or private sales in which sales taxes aren’t applied, or we can note that the notions of productivity and economic health aren’t necessarily related.  However,  what we can’t do is dismiss the utility of the formula, nor can we argue it isn’t one of the most commonly used (and understood) metrics applied as an economic description.

So, why is this formula plastered on this blog for the umpteenth time?  Because when Uncle Fester brashly opines that “We’ve got to cut government spending and get the economy back on track,” he’s offering up a classic demonstration of his ignorance about how we measure our economic situation.

Consumers buy things.  That’s the C in the formula. Companies and corporations buy things.  That’s the I in the formula.  Governments buy things. That’s the G in the formula.  We sell things to other countries, and we buy things from other countries. Those are the X and the M in the formula.  The greater the DEMAND for goods and services (aggregate demand in some explanations) the more wealth is generated.

Now let’s bring this down to Uncle Fester’s level by considering the life of the lowly paper clip.  Consumers buy paper clips, which are mostly used to hold sheets of paper together, or may find themselves altered to perform other tasks like being poked in the little hole in the electronic gadget to “reset” the thing, or to hang Christmas ornaments, or whatever a person might think to do with a piece of bent wire.  Businesses buy paper clips.  And, yes, various levels of government purchase paper clips.  In fact, there are about 11 billion paper clips sold in the U.S. every year.  [WSJ]

Now, imagine the impact of taking one part of the formula out of the whole.  What if government cut backs caused agencies to scale back on the purchase of office supplies?  This is the point at which the artificial demarcation between enterprise and government breaks down.  If the government manufactured it’s own paper clips there would be no need to put the G in the formula, but it doesn’t.  The federal government, like the consumers and the companies, gets its paper clips from one of two domestic producers of bent wire clips. [WSJ]

Here comes the obvious.  When the government scales back purchase orders for office supplies (like our lowly paper clip) that represents a decline in demand.  And, guess what! The formula for Aggregate Demand is exactly like the formula for the GDP.  [Investopedia]

“The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as “total spending”.  [Investopedia]

To see an example of the classic aggregate demand (AD) curve click here.   The FRED graph for our GDP to date looks like this:

GDP Chart to 2012

The gray area shown on the chart is the recent Recession.  The blue line graphs the trajectory of our GDP to date, and the thinner red line is more technical. It’s the “Nominal potential gross domestic product,” [CBO 2001 pdf]  which assumes that the line would show what happens if everyone who wanted a job had one, and all resources were being used efficiently.  [See also: KCFED, pdf] Frankly, this one is a bit technical for Uncle Fester, so let’s keep it simple.

If the demand for paper clips is reduced, when consumers, businesses, and governments stop purchasing, the micro-graph for the subcategory of office supplies and the sub-classification of paper clips,  would mirror the overall aggregate demand.  And, the bottom line?  That which reduces the aggregate demand also reduces the GDP.

This simple, but basic, proposition from classical economics is precisely why austerity measures never produce prosperity — which we measure by using the gross domestic product.

If we can hold Uncle Fester’s attention this long, perhaps we can introduce Okun’s Law.   Okun’s Law observes that for every 1% decline in unemployment there’s a 3% increase in the GDP.  There are some issues with the “law” the first of which is that it’s not really a law, but an observable component of the United States’ economy; and, it’s a bit funky when we add in some other variables like productivity.   That said, for all its imperfections, when we reduce unemployment in the United States the GDP moves up.   This isn’t just common sense — it’s an observable and quantifiable fact.

Now we get to the meaty part.  If Uncle Fester is adamant about reducing federal spending because it’s a drag on the U.S. economy, then we can respond by saying if we lose 700,000 jobs as a result of the sequestration austerity measures, then according to Okun’s Law we will see a reduction in the U.S. gross national product.

A reduction in federal purchasing means a reduction in demand for goods and services.  Each decrease in demand means layoffs or reduction in production or offering of services and in turn means a reduction in the gross national product.   This is probably the point at which Uncle Fester will want to change the subject to something like “wasteful government spending.”

This recitation doesn’t assume that all government spending is productive.  The Pentagon has already said it doesn’t want some items Congress is enthusiastic about procuring.

“In February, the Pentagon released a budget that began the process to cut at least $487 billion in defense spending over the next 10 years. This included terminating the Global Hawk, which the military estimated would save $2.5 billion over five years; the C-27J, at a savings of $400 million; M1 Abrams updates, saving hundreds of millions of dollars; and cutting roughly 5,000 positions from the Air National Guard and reducing that agency’s budget about $300 million.”  [Military.com]

Since the cutbacks in these examples would come from Ohio, it’s predictable that Ohio representatives in Congress would revert to Okun’s Law and decry the loss of jobs in their districts.

“The budget is expected to be finalized after the November election, though the struggle over continued funding could extend long beyond that. Grant Neeley, professor of political science at University of Dayton, called this a “collective action problem.”

“(Legislators) need to cut the budget but (won’t) take those jobs in our state. Especially in an election year in a battleground state,” he said. “They’re going to provide rationale, but at the end of the day, it’s about protecting jobs in their district. If they have the choice between making a cut in their district and making a cut somewhere else, which one do you think they’re going to choose?” [Military.com]

What we can’t do is proclaim austerity begets prosperity calling for wider and deeper cuts in government spending — which turns the aggregate demand, the GDP measurements, and Okun’s Law upside down — while at the same time demanding that jobs not be cut from corporations and businesses within Congressional districts because of what will happen to aggregate demand and the local GDP and assuming Okun’s Law is still applicable.

Let’s guess that this is the point at which Uncle Fester pontificates that 25% of our federal budget goes to foreign aid.  In the fact based universe this isn’t the case: “Since the 1970s, aid spending has hovered around 1 percent of the federal budget. International assistance programs were close to 5 percent of the budget under Lyndon B. Johnson during the war in Vietnam, but have dropped since.”  [WaPo] OK, it’s not foreign aid, then it has to be “welfare.”

The total spending for Temporary Assistance to Needy Families program uses up a grand total of o.7% of our entire federal budget. [Klein]  “But, but, but,” squeals Uncle Fester, “There are more Takers than Makers…” whatever that means.  What it doesn’t mean is that there is an upward trend in the number of people participating in the TANF program.

tanf participitation

Nor does it mean there’s an upward trend in Food Stamp program participation and costs.  (SNAP)

SNAP

In our factually based universe, all federal programs for those in poverty comprise about 7% of the total federal budget. [MJ]  Yes, this is where Uncle Fester breaks in with the anecdote that he saw someone at the Food Bank who was driving a newer pickup than his.

However, all the mis-information, mis-conceptions, and anecdotal observations don’t repeal the basic rules of capitalism, and its basic understanding of Supply and Demand.  Nor, do they discredit the veracity of Okun’s Law.

We do need to reduce unnecessary spending, and we do need to increase revenue by closing loopholes which only serve to place more of the taxation burden on the middle class for the benefit of the top 0.1%.  What we do not need to do is torture the rules of American capitalism into a contortion which renders them risible and unrecognizable.  Okun’s Law is still functional, and as we see from the unfortunate examples in the Eurozone, austerity doth not begat prosperity.

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