Reports from the Economic Front

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.

At one time economists argued that our shift to a service oriented economy would encourage employment stability.  The argument was that since firms could not build up a big inventory of services (like they could with parts and components), private sector service employment could be expected to be relatively recession proof. Well that seems to be changing.

The table below shows “the total private-sector employment loss in each of the last four recessions, the decline in jobs in the goods-producing and in the private service-providing sectors, and the share of each in the total loss.”  In contrast to past recessions, service sector employment has taken a big hit this recession; in fact this sector accounts for more than fifty percent of total private sector job losses.

Is it safe anywhere?

[Click on table for easier view]

It may seem puzzling—the stock market and profits are recovering while living and working conditions for the majority continue to decline.  Well, it is not so puzzling. In fact, worker losses are an important reason (along with government bailouts) for capitalist gains.  Yes, it is that kind of world.

Here is what a Business Week article had to say:

The signs [for corporate earnings] look good, and last month’s employment data are part of the reason. Through the third quarter, businesses continued to slash labor costs at rates not usually seen even in past severe recessions. In fact, for the past six quarters, companies have cut employees’ overall hours worked by far more than they have pared output. The result: a striking 2.8% annual rate of growth in productivity, a rare pace during a recession. Productivity gains averaged only 0.8% annually during the previous nine downturns. . . .

The September payroll numbers showed that overall hours worked in the third quarter fell at a 3% annual rate from the second quarter. If economists are correct in expecting about 3% growth in real gross domestic product for the quarter, then productivity may well post its second consecutive quarterly advance of about 6%. That would mean unit labor costs, or pay adjusted for productivity, are set to plunge for the third quarter in a row. In fact, unit labor costs, which are a key factor in determining profit margins, appear to have posted the largest three-quarter decline since quarterly data began in 1947 [see chart below].

Said differently, businesses have been able to boost profits in the face of poor demand conditions by slashing labor costs.  The profit rise was weak in the first and second quarters of this year because sales actually fell in both quarters.

The third quarter (July-September) was different.  Overall demand rose (thanks in large part to the stimulus) while labor costs continued to fall (which means fewer people worked harder for less).  The result: significant gains for business and a stock market rally.

However, as Business Week also noted: “Of course, these are not long-run productivity gains: Businesses cannot slash and burn their way to prosperity.”

One wonders if they have a different long term plan?  And if not, whether workers do?

Below are two charts that come from the Federal Reserve Bank of Minneapolis–they help put the current recession in historical perspective.   Of course–this recession has not yet been officially declared over.

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Below are two charts that come from the Federal Reserve Bank of Minneapolis–they help put the current recession in historical perspective.   Of course–this recession has not yet been officially declared over.

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.”

City budgets are only now feeling the weight of the recession.  Overall city revenues declined in fiscal 2009 for the first time since 2002 (see chart below).

As bad as the last fiscal year was–with overall city revenues down 0.4% while expenses were up 2.5%–the Wall Street Journal reports that “city officials expect steep drops in tax collections in the next two years, making for the worst outlook in the 24 years the [National League of Cities] has been surveying its members. Western cities were particularly downbeat.”

The article goes on to add that “Because employee wages, health care and pensions are a major component of municipal budgets, two-thirds of the cities reported hiring freezes or layoffs.”

It is getting pretty hard to know what policy makers and economists mean when they speak of economic recovery.

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.