Nevada’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)
This 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:
Notice 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?
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?