Reports from the Economic Front

The following is an Economic Policy Institute [EPI] “snapshot” written by Algernon Austin:

Many of the 8.1 million jobs lost during the current recession, have been good jobs. EPI defines a good job as one that pays at least 60% of the median household income and also provides health care and retirement benefits. By that measure, American men are losing ground. The figure shows that the share of male workers employed in good jobs dropped from 46.5% in 1979 to 31.3% in 2008. Of the major racial and ethnic groups, Hispanic men experienced the largest percentage-point decline although in 1979, they already had the lowest rate of employment in good jobs. In 1979, 30.8% of Hispanic men were employed in a good job. By 2008, only 15.3% were in good jobs.

As policymakers consider ways to create more jobs to reverse the longstanding rise in unemployment, which stands at 10.2% nationwide, they should also focus on creating the kinds of jobs that pay more than poverty level wages. The federal minimum wage is currently $7.25 per hour and pays $15,080 annually, based on a 2,080-hour work year. That wage is below the poverty level for a family of four. By contrast, the 2008 “good job” wage was $14.51 per hour, or $30,180 a year – twice as much.  Without a national agenda to create good jobs, more fulltime workers will struggle to pay for basic necessities.

A recent article by economist Rick Wolff highlights one of the many serious challenges facing the country–the growing fiscal crises that are hitting our states and municipalities.  He presents the following table from the work of the Center on Budget and Policy Priorities, which shows the gap between the fifty states’ tax revenues and expenditures during the last (2001) and current (2007-?) recessionary periods.

As the chart makes clear, while a recession generates a budgetary shortfall, the shortfall extends for years after the recession is over.   In particular, the expected shortfall over the next two years will be very large–some $360 billion.   This shortfall will have to be closed through some combination of revenue increases or expenditure cuts.

The CBPP has studied state responses to current budget shortfalls and reports the following:

• 27 states have reduced health benefits for low-income children and families

• 25 states are cutting aid to K-12 schools and other educational programs

• 34 states have cut assistance to state colleges and universities

• 26 states have instituted hiring freezes

• 13 states have announced layoffs

• 22 states have reduced state workers’ wages

With fiscal problems set to grow we need bold action.   If we do nothing budget cuts will only further weaken our economy (by reducing demand)  and worsen living and working conditions for the great majority of citizens.

Oregon is no exception.  In fact, according to a story in the Oregonian, a Pew Center on the States report “names Oregon as one of 10 states at greatest peril of following California over a state budget cliff.  Even though the national economy has started to rebound, Oregon is likely to have a harder time coming up with enough money to pay for schools and other public services — or finding enough places it can cut back its spending — than it did when patching together a balanced budget for 2009-10 said Susan Urahn, managing director of the Pew Center.”

One part of any rational response to this situation has to be increasing revenue by raising taxes on the wealthy and our large corporations.  Oregon is trying to do just that with Measures 66 and 67.  These measures–passed by the legislature but put on the January ballot by opponents–deserve our support.

Obviously significant national action is also needed to address what is a major structural problem.  One obvious response: cut military spending (which continues to grow) and channel some of the savings to state and local governments.

More generally, we need a government-directed, integrated industrial and employment program.  For example, our government owns large holdings in major auto and finance enterprises.  Rather than remain passive owners, we should take control over the firms we own and redirect their activity.  We should start producing mass transit vehicles and require that the banks direct needed funds at reasonable rates to support that production.  And we should direct federal transportation spending to state and local governments so that the new vehicles can be purchased.

We should do the same for the production of needed technology and equipment to develop and expand alternative energy sources like wind and solar power.

At present, federal stimulus money is being used to encourage private firms to retrofit buildings to improve energy efficiency.  Instead, we should encourage the establishment of local publicly owned enterprises to carry out this work, with the profit earned from the work redirected back to local government budgets to support desired social programs.  And all publicly organized production should guarantee living wages and encourage democratic unionization.

Much more could be done—including the cancellation of so called free trade agreements which encourage capital flight and the pitting of workers in one country against another.

The point is that we need a dramatic rethinking and reorganization of how our economy works.  There are plenty of good ideas available—at issue is the political organization and will.

We are in quite the fix.  According to some experts the 3.5% growth in GDP last quarter (July-September) is proof that all is now well.  Unfortunately most of that growth was driven by very temporary government spending.

For example, key to last quarter’s growth was a 22.4% increase in car sales, a consequence of the government’s temporary Cash for Clunkers program.  This increase in car sales accounted for 42.0% of the entire quarter’s growth!

Consumption as a whole (which includes auto sales) grew at a 3.4 percent annual rate.  Take out the auto sector and consumption grew at only a 1.0 percent annual rate.  For more details see here.

Since the Cash for Clunkers program is now over, and disposable income continues to fall (because of continued job losses and declining wages and hours), next quarter is bound to show quite limited growth at best.

The sad reality is that the government’s response to this crisis has been far from adequate.  Most of its direct stimulus spending, hundreds of billions of dollars,  has been designed to be short-term in nature.  It has spent far more, trillions of dollars in fact, to save the financial system.  But again it has made no attempt to ensure that the money would be used to promote a fundamental restructuring of our economy.

It might be comforting to know that Lloyd Blankfein, Goldman Sach’s chairman and chief executive, believes that he is doing “God’s work,” but the fact is that the financial system we saved with our tax dollars continues to refuse to make loans.

Look at the following two tables taken from a blog post on Mish’s Global Economic Trend Analysis.  The first table shows that “Total bank credit is in uncharted territory at -5%. The series has never gone below 0 before.”

So what are banks doing with the money?  The second table shows that that the money is piling up as excess reserves.

Why aren’t banks lending?  Mish’s blog post provides the following four answers:

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

While all of the above are probably true, the post concludes that “Number three above is the most critical one.”

The “bottom line” here is that our economy remains weak and far from any serious recovery.  And it will remain that way unless we get far more aggressive government action to ensure a meaningful increase in jobs that pay a living wage and produce needed goods and services.

Oregon faces a severe fiscal crisis.  In short, the state is just not taking in enough money to fund all the services needed by people.  In response the 2009 Legislature passed two measures (66 and 67) that will raise $733 million in new revenue in the 2009-11 biennium.  While not a solution to the crisis, this extra money will help reduce cuts in spending on education, health and public safety.  These measures also help produce a more equitable tax structure.

In brief, Measure 66 raises taxes on high income Oregonians—couples earning over $250,000 a year and individuals earning over $125,000 a year.  Measure 67 raises taxes on profitable corporations. (More details on both measures here).

Perhaps not surprisingly, there are those that oppose any tax changes, even ones as important, needed, and justifiable as these.  They succeeded in putting these measures on the January ballot, hoping to get voters to reject them.

One of their arguments is that the tax increases are unfair.  But really what is unfair is the unbalanced nature of our existing tax system (see table below).  For example, as the Oregon Center for Public Policy explains:

Today, low-income Oregonians pay a larger share of their income in state and local taxes than wealthy Oregonians. In fact, the highest-income Oregonians pay the lowest share of their income in state and local taxes. . . . After accounting for the deduction of state income taxes on federal tax returns, the lowest-income Oregonians currently pay 8.7 percent of their income in taxes, the highest share among all income groups. Middle-income Oregonians pay 7.9 percent. The wealthiest 1 percent — households with income in excess of $410,000 and averaging over $1 million — pay only 6.1 percent of their income toward state and local taxes.

The passage of Measure 66 will help move things in a more equitable direction:

The lowest-income Oregonians will still pay the same 8.7 percent of their income in state and local taxes, but the share will increase for those at the highest levels of the income scale. For the wealthiest 1 percent, for example, state and local taxes will increase from 6.1 to 6.6 percent of their income. For the next highest 4 percent of taxpayers, taxes will increase from 7.0 to 7.1 percent of income. These slight changes for those at the top 5 percent of the income scale constitute a small but important step toward making our tax system better based on ability to pay.

Other opponents are calling these measures “job-killer tax increases,” especially Measure 67.  The recently established Oregonians Against Job-Killing Taxes (OAJKT) argues that “Oregon government doesn’t even need the new taxes. They already have the money sitting in bank accounts.”  Their website says that if the measures are defeated “no services have to suffer.”

In a recent Oregonian column, Steve Duin examines those behind the OAJKT effort to overturn Measures 66 and 67.  He concludes as follows:

As Chuck Sheketoff at the Oregon Center for Public Policy noted, these riffs are necessary because only 3 percent of Oregonians will pay higher taxes if Measures 66 and 67 pass. . . .

Tis the season. I’ll end with this. The OAJKT website insists that “the most damaging” tax increase for business would require that a C-corporation with $25 million-$50 million in Oregon sales will now pay a gross sales tax of $30,000.

That’s all? Less than one-tenth of 1 percent? For many companies that, for years, have paid the $10 minimum? Who in the world considers that unreasonable?

A number of economists teaching and working in Oregon have recently published a statement in defense of Measures 66 and 67.   You can read it here.

Discussions of health care always seem to involve cost calculations that suggest we really cannot afford meaningful change.  Yet somehow our national obsession with the cost of health care reform never extends to spending on the military or a discussion of the trade offs between spending on health care and the military.

Want to get a quick look at our ever escalating military spending—check out the cost of war web site. 

The US now accounts for between 42 and 48 percent of total global arms spending (depending on definitions and sources).  Here are the top ten spenders as of 2008 (in billions of dollars) according to the Stockholm International Peace Research Institute.

1. United States — 607.0
2. China — 84.9
3. France — 65.7
4. United Kingdom — 65.3
5. Russia — 58.6
6. Germany — 46.8
7. Japan — 46.3
8. Italy — 40.6
9. Saudi Arabia — 38.2
10. India — 30.0

The growing militarization of our budget is strangling all other priorities.  For example, between 2001 and 2008, the federal budget grew by 28%.  Over that same period, grant funding for state and local governments (which are now in crisis and slashing spending) rose by only 14% while spending on the military grew by 41%.  And this calculation is based on a very conservative definition of military spending—it does not include spending on veterans’ health care needs or interest payments due to past military generated budget deficits.

The Supplemental Appropriations Act of 2009, signed into law by President Obama on June 24, 2009, added $45.5 billion in spending for the war in Iraq and $39.4 billion in spending for the war in Afghanistan—for a 2009 fiscal year total of $84.8 billion.  This brought total war-related spending for Iraq to $687 billion and for Afghanistan to $228 billion–a total war cost of $915.1 billion.

We are talking real money here–enough to finance real social change.  And again these numbers do not capture the full extent of our spending on the military.

We have to turn the spotlight on our foreign policy and fully engage the debate over what defines our national interest.

It is often hard to know how our fellow Oregonians are doing — for a good look check out “Survey shows how recession has hit Oregon households” by Richard Read in The Oregonian, September 17, 2009.

The articles makes clear that there is a lot of suffering going on in Oregon, even more than in the nation as a whole.  Some highlights:

• “Almost a third of Oregonians polled recently say they or a family member in their household have been laid off or lost a job in the past year.”

• “Forty-one percent say they or a family member at home have had work hours cut during the recession. Nearly a third have housed a family member or friend because of money.”

• “In other responses, 40 percent of Oregonians interviewed say they worry all or most of the time that their total family income will not be enough to meet expenses. That’s 6 percentage points higher than nationally and 9 points higher than last year, when the question was asked in Oregon during a similar survey.”

• “More than a quarter of Oregonians say they or a household member have had problems paying for necessities such as mortgage, rent, heating or food during the past 12 months. Fifty-six percent say that if they were suddenly unable to pay for necessities, they wouldn’t know where to go for help from the government or a charity.”

There are danger signs pointing to the real possibility of a double dip recession—a short “recovery” followed by another recession.  One of the most important is the terrible labor market conditions (little job creation and short hours and low pay for those with jobs).  Unfortunately, while public employment had helped to offset the collapse in private hiring, a crisis in state government financing is forcing major cutbacks in the public sector as well.

Facing huge budget deficits, states are laying off growing numbers of workers and furloughing even more. This not only makes it difficult for people to get needed services, it also threatens to undermine any (stimulus driven) recovery impulses—you know those famous green shoots.

As the Wall Street Journal reports:

The furloughs, which basically act as salary cuts for state workers, are the latest response to plunges in tax revenue because of the recession. State legislatures have struggled to cover shortfalls that have ballooned to $168 billion, or 24% of their general-fund budgets, for the current fiscal year, which for most began July 1, according to a report released Thursday by the left-leaning Center on Budget Policy Priorities.

State governments have cut some 33,000 jobs over the last year with more to come.  Furloughs, where workers are told to stay home for several days a month without pay—resulting in significant wage cuts—are growing even faster.  Hundreds of thousands of workers are currently affected, more than 200,000 in California alone.  Slashing the public sector may help balance the budget in the short run, but such a strategy only intensifies our long term economic and social problems.

The chart below (taken from the above cited WSJ story) highlights the size of the problem.

It is easy to be confused about the state of the economy.  However, if we stop trying to figure out turning points, when a recession ends and an expansion begins, and start thinking about longer terms trends, things become a bit clearer.

Consumption accounts for about two-thirds of U.S. Gross Domestic Product (GDP).  What kept GDP growing over the last expansion (2001-2007) was rising consumption, and what kept consumption growing was debt.  The result was an ever shakier foundation that has now collapsed.   The reason the expansion was built on debt was that despite the growth in GDP, real wages and household income trended downward.  If we are going to have a healthy economic future we must ensure that structures are in place to reverse that trend.

The following chart, taken from the blog Mish’s Global Economic Trend Analysis shows just how critical consumption gains have been to economic recovery.

So, where are we today?  The answer is not very promising.  According to Bloomberg News:

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.  Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed.

Without higher wages and income there won’t be any sustained increase in consumption, which means business investment will remain weak, and . . . well, you probably get the picture, no meaningful economic recovery.

Of course employment is also important (individual wages might not go up significantly but an increase in total employment could still generate an increase in total spending), but the news is no better on this front.  In a previous post I highlighted (check out the chart) the fact that the private sector has almost stopped creating jobs.   I quoted the business analyst Michael Mandel as follows:

Between May 1999 and May 2009, employment in the private sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.

And of course this doesn’t even speak to the quality of the jobs; for example, involuntary part-time employment has soared.

Sadly, there is very little reason to expect any significant near term decline in unemployment.  In fact, as a recent post at Mish’s Global Economic Trend Analysis noted: “If [past business cycle patterns] hold, unemployment will rise until 2011 or beyond. . . . Odds of a double dip recession similar to 1980-1982 are high after whatever inventory rebuilding and bottom fishing in housing ends.” [Check out the chart below from the same source–it shows how the past two expansions, unlike the previous seven, are marked by continuing increases in the unemployment rate.]

So—don’t confuse stabilization with recovery, and keep your eye on real fundamentals—majority living and working conditions.

There is a new attack on social security.  As you may remember, before the recent collapse of the economy, conservative forces claimed that the social security system was headed for crisis and offered privatization as the solution.

The truth was that there was never a real crisis; it was manufactured.  The health of social security is determined using models to predict economic trends over the next 75 years.  The social security crisis was the result of the assumptions used in the modeling—these assumptions assumed rates of growth that were lower than during the 1930s.  If one made growth assumptions that were more in keeping with historical trends, there was no crisis.  The aim of the conservatives was to push money into the stock market where private interests could make millions managing it.  Thank goodness this privatization push was resisted.

But the same forces are hard at work again.  The Associated Press recently ran a story calling social security a “giant federal Ponzi scheme” that will soon collapse because of a lack of money.  The Washington Post recently warned us that social security is one of “the primary drivers . . . of the nation’s financial problems.”

This is all silly.  Social Security is still running surpluses.  Moreover, even using its conservative assumptions, the social security administration is forced to admit that the current system will have plenty of money to meet all its obligations through 2037.  The Congressional Budget Office puts the date at 2043.

Would you give up a program working as intended because of predictions that SOME 30 YEARS FROM NOW it might not have sufficient money to cover all its promises?

Actually, even if the social security administration’s prediction is accurate, we still don’t face a crisis.   Right now social security taxes are paid on all labor income up to $106,800.  Earnings above that ceiling are not taxed.   Why is this important?  As the Wall Street Journal explained in a recent article titled “Pay of Top Earners Erodes Social Security”:

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year. . . .

Lifting the earnings ceiling could result in higher Social Security benefits payments to higher-income individuals, since benefits are based on a worker’s highest 35 years of earnings. But the additional tax revenue would have decades to earn a return, thus offsetting the cost of the additional payments.

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

You are reading that right—even using the most conservative estimates about future economic trends, the social security system would remain fully operational if we just removed the earnings ceiling on the wealthy.

So, what is class power?  One measure of class power is the ability to shape public discussions in such a way that attention is focused on what you want to talk about and away from what you don’t want to talk about.  The rich want social security privatized, not saved.  So the media obligingly give us story after story about the crisis in social security and the need to drastically change the system.

The rich don’t want to talk about the growth in inequality and its negative social consequences.  Thus, simple reforms that would strengthen the system are never discussed (except by publications like the Wall Street Journal which are largely read by an audience that fully understands its class interests).

When will we recognize and promote our own class interest?

On Monday (August 10), Labor Radio–a weekly program that airs on KBOO radio (90.7 FM)–played an interview of me by hosts Deborah Schwartz and Al Bradbury.  We discussed a variety of topics, including the effectiveness of the stimulus, the outlook for the economy, the alleged social security crisis, and the need for structural change in our economy.

You can hear the interview (followed by another that was done by the hosts with Henry Huerta, Campaign Director of the CLEAN Car Wash Campaign, about the unionization efforts of more than ten thousand Los Angeles car washers) at:  http://kboo.fm/node/15826

You can hear an extended (and unaired) version of my interview at: http://kboo.fm/node/15788