The mean teeth of he Great Depression still have bite

To paraphrase T.S. Eliot, the only major British poet born in St. Louis, September 2008 was the cruelest month. As America marks the sixth anniversary of the financial meltdown which began that month and drove the global economy off the cliff and into the worst economic crisis since the 1930s, the damage it did is still being felt. Last year, middle-income families earned 8 percent less, adjusted for inflation, than they did in 2007.

But not everyone was so profoundly affected. Commuter helicopter traffic at the East Hampton airport this summer increased by close to 40 percent over last year. Yet while there is a pretense of recovery and conditions are marginally better, most Americans are still living in the mean teeth of the Great Recession. The U.S. economy is facing many challenges, especially the rising financial inequality between the top 1 percent and everybody else.

You would be right to conclude that the fed’s attempts to deal with the Financial Apocalypse of 2008, reminded you of the note your grade school teacher scrawled on too many report cards: “Could have done better.” To help put this in perspective, here’s a chronology of key events in September 2008.

On Sept. 7, the Federal Housing Finance Agency, backstopped by the Treasury Department, placed Fannie Mae and Freddie Mac into conservatorship. A week later, Merrill Lynch avoided oblivion by hastily selling itself to Bank of America. In the early hours of Sept. 15, Lehman Brothers CEO Dick Fuld, aka the gorilla of Wall Street, announced that his firm was seeking bankruptcy protection after the feds refused to step in and provide financial assistance.

Within hours of the Lehman bankruptcy, the feds rushed forward with an initial $85 billion in taxpayer cash to bail out the giant insurance company American International Group (AIG), essentially nationalizing the firm. AIG had mismanaged itself to the verge of bankruptcy by stuffing its portfolio full of derivative products whose value had collapsed.

Then on Sept. 16, the shares in the world’s oldest money market fund fell below $1 because of losses incurred on the fund’s holdings of Lehman commercial paper and medium-term notes.

To help stabilize the financial system, on Sept. 21 the feds declared Morgan Stanley and Goldman Sachs to be bank holding companies. Five days letter, in the biggest bank failure in American history, the government seized the assets of Washington Mutual, the nation’s sixth largest bank, and its banking operations were sold to JP Morgan Chase.

As the month mercifully wound down, the House of Representatives on the 29th voted down the Bush administration’s Troubled Assets Relief Program (TARP), which would have invested 700 billion taxpayer dollars in troubled banks by purchasing their distressed assets. Needless to say, the stock market reacted with panic to this “failure of democratic government” and suffered one of its worst single-day price declines, with the S&P 500 Index plunging a horrendous 8.8 percent.

Finally, rattled by the market’s obvious panic, Congress passed the Emergency Economic Stabilization Act of 2008 on Oct. 3, which included a cosmetically revamped version of TARP.

The financial markets were still in turmoil over the ensuing weeks. In terms of sheer dollar losses, the “fall of 2008” (along with the fall of many other illusions) was probably the greatest financial disaster in world history. Throughout the world, its cost in terms of shattered wealth and wrecked lives is still being calculated.

The fallout even reached Iceland. The country’s entire banking system collapsed in October when it became apparent that its bank portfolios were stuffed full of American-made toxic derivatives that had little value.

The collapse led to the following exchange on a late-night TV talk show: “What is the capital of Iceland? About $25, give or take.”

Sadly, Iceland was hardly alone.

originally published: September 27, 2014

Extreme wealth inequality threatens the nation

One of the salient characteristics of the last 20 years has been the unprecedented growth in income and wealth inequality, and the extent to which both have flowed to the proverbial1-percenters.

Market capitalism has generated enormous wealth, but the distribution of the spoils of capitalism has gone awry. While there are many ways to measure inequality, consider that in today’ s Gilded Age, the wealthiest 1 percent of American households enjoy a higher total net worth than the bottom 90 percent and the top 1 percent of income earners receive more pretax income than the entire bottom half.

Since 1979, 36 percent of all after-tax gains went to the 1-percenters; over 20 percent of those gains went to the top one-tenth of 1 percent of the income distribution.

The increasingly unequal distribution of income and wealth threatens not only the social fabric of American society but the economy as well. The mega-rich cannot spend enough to offset the lost demand that results from a shrinking middle class, which slows economic growth.

Growing inequality is making a lie of the American promise that this is a country where if you work hard, you can make it into the middle class. We are witnessing the hollowing out of the middle class; it is being mothballed like an old Navy ship. The last time that income inequality in the land of plenty was as profound as it is now was immediately before the 1929 stock market crash.

Right now, more than 8.4 million Americans are collecting either state or federal unemployment benefits and one out of every seven depend on food stamps, the highest share of the population ever to do so. A shrinking few claim a disproportionate share of the nation’s wealth at the expense of everyone else.

If we could identify a single culprit to blame for this mess, it would make for a good television drama. But the story of rising income inequality is more complex. None of the major explanations are exhaustive or definitive, and making sense of them is no easy task.

Some blame globalization, a process of closer integration between different countries and peoples made possible by falling trade and investment barriers, tremendous advances in telecommunications and  drastic reductions in transportation costs that have forced American workers to compete against the huge supply of low-cost labor in the developing world and contributed to the declining influence of labor unwns.

Others point to new labor-replacing technologies that threaten both unskilled and skilled workers, while they increase demand for a select few with highly specialized skills. They argue that American public education does not provide children with the advanced skills they need to compete in this new world.

Stated differently, the pace of technological advance has outstripped the educational system’s ability to supply students with the skills they need to utilize this technology, leading to outsized earnings gains for those who have such skill. This is the so-called college wage premium.

Over the past few decades, people in developed economies who were educated enough to take advantage of the technological advances won higher wages. Others got left behind.

Finally, there are those who contend that immigration policy worsens inequality. The mass influx of low-wage workers probably reduces global inequality at the same time it increases inequality within America by reducing the wages of hard-working, semi-skilled Americans.

Many pundits contend that we can reverse the deterioration of the middle class with a series of policies such as revising the tax code, making free trade fair, investing in America’s infrastructure, rethinking training and education and strengthening labor unions.

Perhaps America can deal finally with the divisive issue of inequality after having spent decades ignoring it, but hope is not a strategy. The only thing we can be certain of is that there are no quick fixes or easy solutions, and the longer it takes to address the problem, the more painful the cure will be.

originally published: November 30, 2013

The offshoring of the American Dream

By all accounts, Americans continue to experience the worst economy since the Great Depression. Unemployment remains unacceptably high, many of the jobs that produce real income have been offshored and the middle-class earnings are stagnant. Looking ahead, it’s likely to get worse before it gets better.

Yet corporate profits are doing just fine, thank you. Today they make up about 12.5 percent of  America’s gross domestic product. Just two years ago, they reached their largest percentage of GDP since the 1950s. On the other hand, wages and salaries, which accounted for 47 percent of GDP in 1985, are currently at around 42 percent.

Among the reasons for the combination of lower wages and high corporate profits in a weak economy is that American firms have discovered the advantages of exporting manufacturing and service jobs to countries with an abundance of productive, low-wage workers. Firms substitute cheap foreign labor for American workers. All the while, those Americans are told that offshoring is part of free trade and globalization.

Early offshoring was focused on manufacturing, but in recent years, U.S. firms have taken advantage of modem communication technology to outsource service activities. This trend cuts across all industries and occupations, ranging from lower-skilled manufacturing jobs to those requiring more skill and education, including those in the information technology sector. Put bluntly, they are exporting jobs to countries where wage rates are low, causing higher unemployment and lower living standards in the U.S.

Cheerleaders for offshoring argue that the money companies save will, in the long term, create new and better domestic jobs. These jobs must be disguised in the employment statistics; very well disguised, indeed. Moreover, they argue that when firms save money, consumers benefit from lower prices. So while free trade causes some dislocation, the benefits outweigh the costs. This pitch has become a totem of belief among free-trade advocates but it’s cold comfort for those whose jobs have been exported.

It was reported last month that IBM now employs more people in India than it does in the U.S. Its Indian workforce has grown from 3,000 in 2002 to about 112,000 last year. The reason is simple: The cost of labor in India is only a fraction of what it costs to employ the equivalent workers in the U.S. The average annual salary for an IBM employee in India is $17,000 compared with $100,000 for a senior American IT specialist.

Given such wage differentials, it’s not surprising that we are now witnessing the great migration of white-collar American service jobs. While India is the largest destination, the jobs have also gone to Eastern Europe, the Philippines, China and Mexico.

The offshoring of jobs may be one of the underlying reasons why Great Recession job losses look quite different from those of past recessions. American unemployment is becoming structural rather than cyclical and may worsen over time no matter how much public stimulus is provided.

So we have finally figured out how to make income redistribution happen on a global scale: American workers have to be less rich so their overseas counterparts can be less poor. Offshoring increases income levels in developing countries and the theory is that with greater wealth, those people will be able to demand and receive better treatment. The question is whether these interests should outweigh the interests of American workers.

Maybe jobs will return when American wages are as low as those of our foreign competitors and corporations decide to come home to exploit cheap labor. But it seems they first have to impoverish domestic workers so those workers can become rich again in the future.

originally published: November 6, 2013

Middle-class America holds no influence over Congress  

The rest of the world watched the latest game of chicken over the U.S. government shutdown, which stretched on for more than two weeks and threatened to result in financial default, all of which again raised the question of whether the world’s leading power has lost the capacity to govern itself. Congress has not passed a proper budget since 2009.

The first government shutdown in 17 years ended when the Senate and the House of Representatives reached another 11th hour deal to avoid a financial default and get the government running again late on the evening of Oct. 16. The president signed the legislation early the next day. The bill approved funding the government until Jan. 15, 2014 and suspended the nation’s borrowing limit of $16.7 trillion until Feb. 7.

Of course, Congress could not resist larding the legislation with pork. Senate Minority Leader Mitch McConnell, who was instrumental in ending the crisis, got $2.9 billion for a dam in his home state of Kentucky. Congress also awarded the widow of the late New Jersey Sen. Frank Lautenberg $174,000, the equivalent of one year’s salary. In 2012, the Capitol Hill publication Roll Call named Lautenberg one of the 50 richest members of Congress with a net worth of about $56.8 million.

The threat of a government default is off the table for now. But instead of resolving underlying disputes, the short-term deal only pushed the hard choices off to another day. It gives the parties some time to  cool off and negotiate a broader spending plan.

Brace yourself for another cliffhanger that resembles a bad daytime soap opera. America will continue its habit of governing by crisis after crisis after crisis. In this troubled political environment, is it any wonder that businesses are sitting on their cash rather than investing in new factories, equipment, and more workers?

As part of the recent deal, the House and Senate will appoint members to a bipartisan group tasked with hammering out an agreement by Dec. 13 on a blueprint for tax and spending policies over the next decade, that may include tax increases and structural reforms to entitlement programs such as Medicare something the two parties have not agreed on in years.

Given the recent track record, the chance that this new forum can deliver by its deadline, in time for Congress to act by Jan. 15, on funding to keep the government open, is slim to none.

Can the U.S. recover its tarnished image? Is the recent dysfunction in Washington now behind us, or is it destined to become part of the permanent bleak political landscape?

Conventional wisdom holds that the deal made in Washington guarantees another shutdown and debt ceiling fight early next year. In other words, Americans will soon be witnessing another psychodrama being played out with politicians again acting badly, more divided than ever, and pulled apart by two different conceptions of government.

If you believe the political roosters on Capitol Hill can be counted on to stop squawking, bridge the gap between competing visions of the role of government and reach agreement on critical problems ranging from employment to energy to entitlements to education, then you have every confidence in the full faith and credit of the U.S. government.

The average hard-working, middle-class family is coming to recognize that they don’t have a shred of influence and that our leaders in Washington seem to care only about those who write the checks that allow them to stay in power. Nobody wants to have to say it, but Americans need to read it to begin to understand that campaign contributions are politicians’ favorite form of catnip.

originally published: November 2, 2013

The Fed takes middle-class to the cleaners

Despite all the talk about the progress made over the last four years, the jobless recovery is eating away at the American economy like a swarm of termites invisibly consuming a house from the inside out, widening income inequality and undermining Americans’ belief in upward mobility.

The economic growth rate has fallen to less than 2 percent and the only reason the headline unemployment rate has declined to 7.3 percent is because so many people – especially middle and lower class Americans- have stopped looking for work or are working part-time. Job creation can’t even keep up with population-related growth in the labor force.

It is anticipated that under Janet Yellen, the likely successor to Federal Reserve Chair Ben Bernanke, current monetary policy will remain in place and the government will continue to pump trillions into the financial system, keeping interests rates near zero to offset the drag of current fiscal policy. When considering the feasibility of any future quantitative easing, government speak for printing money, the Fed would be wise to consider the policy’s adverse effects on savers and retirees and their interest income.

According to economics textbooks, reducing interest rates and the cost of credit is supposed to spur lending; encourage spending on big ticket items like cars and houses; and boost business investment in inventories, plant, equipment and hiring.

Sure, credit is the most important and most direct channel through which the Fed’s polices affect the economy, but the transmission lines through which cheap money flows are clogged. Despite sitting on an astonishing $2.3 trillion in capital available for lending, banks remain reluctant to extend credit to all but households with the highest credit scores. If you don’t need money, you can get all you want. And by dropping its short-term lending rate to near zero, the Fed allows banks to borrow, for example at 0.10 percent and invest the proceeds in Treasury bonds. Nobody in their right minds wants to own the 10- year Treasury bond at a 2.5 percent interest rate, but banks are doing it because they can borrow at nearly interest-free and earn a spread of 2.40 percent.

The good news is that the Fed’s policies have boosted the stock market. Chairman Bemanke has said that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

But while a rising stock market has helped market participants like financial institutions and large firms, it has done little to improve economic growth and reduce unemployment. The median amount of wealth middle-income families have is about $20,000. By contrast, the family that earns $90-$100,000 annually has about $424,000 in financial wealth.

The spoils of the recovery have not been equally shared. The boost in asset prices is likely to disproportionately benefit the wealthy and increase income inequality. Unemployment is still high by historical standards, economic growth is anemic, and real wages adjusted for inflation have not improved.

One of the overlooked consequences of the Fed’s rounds of monetary stimulus and reducing interest rates is to rob hardworking, average American savers and retirees of income and spending power, because the interest they earn on their savings isn’t enough to keep up with inflation. This dramatically reduces their spending, which hurts businesses, leaving them unable to hire. Consumer spending is critically important because it accounts for more than 60 percent of the nation’s gross domestic product.

But then who said the Fed was responsible for the equitable distribution of wealth, income or credit? After all, they have their hands full minimizing unemployment and inflation. Nowadays the average American doesn’t have much carry with a Fed whose policies are taking the middle class to the cleaners.

originally published: October 19, 2013

Reasons for hope in Detroit’s bankruptcy

Once the symbol of American industrial power, Detroit filed for bankruptcy last month. The causes of the largest municipal bankruptcy in American history are clear, but there are also reasons for hope.

The federal government is unlikely to bail the city out, as it did for financial institutions and the big three automakers, because the fallout from Detroit’s bankruptcy is not expected to affect other cities and states. Detroit, unlike American banks, is not too big to fail. But bankruptcy offers the city an opportunity to nullify ridiculous labor contracts and reform pension and health care agreements.

Detroit was once the center of an economic miracle. In the 1950s it was one ofthe nation’s wealthiest cities and by the early 1960s automobile manufacturing accounted for half of Michigan’s gross domestic product.

But by 2008, automobile manufacturing’s share of Michigan’s GDP had declined to less than 5 percent. Detroit, the cradle of the automobile industry, developed with its expansion and also suffered as a result ofthe industry’s  decline.

The scale of the city’s decline is amazing. Detroit, which had 1.8 million residents in 1950, currently has about 700,000. The property tax base has been gutted. Large parts of the city consist of abandoned residential buildings and industrial sections that resemble war zones. Many of the remaining residents are essentially deprived of many basic public services like police and fire protection.

What set Detroit on the path to extinction? By the late 1960s, management at the big three automakers had become insulated and more interested in maximizing their own value than delivering value to customers. The 1973 OPEC oil embargo resulted in increased fuel prices and provided an opening for Japanese automakers to flood the American car market with cheaper, fuel-efficient alternatives. Many Americans soon became convinced that Toyota, Honda, and other Asian-based manufacturers offered better quality for their dollar than did domestic vehicles.

In an effort to preserve profitability in the face of a dramatic loss of market share, the big three’s less­ than-sure-footed managers evolved defensive business models that emphasized selling fewer vehicles at higher profit margins. This increased their dependence on SUVs, high-performance cars, light trucks, and similar gas-guzzlers that faced less Asian competition. As long as gas prices remained relatively stable, as they did through the 1980s and 90s, their strategy seemed viable.

But beginning in 2001, rising gas prices again cut the legs out from under the big three’s business models. Demand for fuel-gulping vehicles plummeted and sales started falling. This trend was compounded by the financial crisis in the fall of 2008. When the global recession took hold that fall, sales plunged, including a 32 percent drop in October alone, to the lowest level in 25 years. The big three had to depend on multibillion dollar taxpayer assistance to survive.

But it was not just the auto industry’s collapse that killed Detroit. Decades of mismanagement, fiscal and political ineptitude, municipal corruption and racial tensions exacerbated middle class flight, sending the city into a death spiral. Anyone who could get out did; since 2000, Detroit has lost a quarter of its inhabitants.

Detroit has also long been governed by a Democratic machine controlled by the city’s powerful labor unions, which mustered voting blocks big enough to ensure that only Democrats got elected. The result is that almost half of the city’s $18 billion in debt consists of unfunded pension obligations and retiree health benefits.

But there are hopeful signs. The automobile industry is again profitable. Businesses are slowly moving in and the city is becoming more attractive to entrepreneurs. Young people are returning to live downtown. Developers are buying office buildings and large tracts of land and turning them into living, office and retail spaces. The downtown sports teams sell out and firms such as Blue Cross/Blue Shield, Quicken Loans and others have recently arrived.

Building on these signs will require both city and big three leaders to resist the temptations they succumbed to in the past. Instead of quick profits and machine politics, the focus must now be on giving middle-class families a reason to return.

originally published: August 17, 2013

America, and its problems, make it hard to love

The United States is a hard country to love right now. Economic growth has been anemic, too many Americans are looking for work, others are watching their real incomes fall, and the middle class is seeing its purchasing power decline. Income inequality is at historic highs; the ever-widening gap between low wage earners and the few who earn millions has been amply documented.

And if you pay even the slightest attention to the news, between now and the end of the year you will hear the term “fiscal cliff’ until you are numb. The term describes several big events set to occur at the end of this year. But even an agreement to keep us from heading over the cliff won’t do anything about the worst problems plaguing our country.

The end-of-year events include expiration of the Bush-era tax cuts- including current lower tax rates on capital gains, dividends, income and estates- and of stimulus measures, such as the payroll tax cut and extended unemployment benefits. Taken together, more than $600 billion of automatic spending cuts  and tax increases will take place if the President and Congress fail to reach a deal before the end of the year.

Spending cuts are scheduled to kick in automatically in January 2013 as a result of the deficit reduction super committee’s 2011 failure to reach agreement. To make matters worse, the nation’s $16.4 trillion debt limit will once again need to be raised early next year.

Failure to find a broad, bipartisan plan to address these issues would throw the economy back into deep recession. The Congressional Budget Office, expressing concern, edged with panic, says that falling off the fiscal cliff will result in gross domestic product falling by 4 percent. With an economy that is only growing about 2 percent annually, a 4 percent cut is nothing to sneeze at. The economy will start down a slope that will lead to a jump in unemployment, increase income and wealth inequalities, and increase  the already record number of Americans living in poverty.

With that in mind, the President has been meeting with Congressional, business and labor leaders to develop a consensus over the fiscal impasse and avoid the fiscal cliff.

The short story is that the President wants to raise marginal tax rates on high earners, those Americans making an annual salary of $200,000 or couples bringing in $250,000, and close loopholes. Speaker John Boehner has said he is open to more tax revenues, but not from higher tax rates. He wants to close loopholes and make serious spending cuts. Who knows, maybe they’ll even consider Mitt Romney’s proposal to limit income tax deductions.

We have seen this play before where politicians regale us with lots of rosy rhetoric. In 2011, those same politicians could not reach an agreement to raise the debt ceiling without a broader agreement to cut the deficit and put our fiscal house in order.

So they agreed on the Budget Control Act of 2011, extending the Bush era tax cuts that were due to expire Jan. 1, 2012 and generally kicking the can down the road. The result was the loss of our AAA bond rating with one of the credit rating agencies. If dysfunctional behavior were a crime, American prisons would be overflowing with elected officials.

The President has a strong hand despite the Republican control of the House of Representatives. He can allow the Bush-era tax cuts to expire, the marginal tax rate on ordinary income to increase to 39.6 percent and the maximum capital gains tax rate to rise to 20 percent at the end of the year.

He can then tum around and propose cutting taxes for those earning less than $200,000. After all, raising taxes on high earners was a cornerstone of the President ‘s campaign, and Republicans in Congress are unlikely to vote against tax cuts.

One thing is certain: even though a majority of Americans want their benefits left untouched, they will have to endure cuts in popular expenditures like defense and entitlement programs.

Ad hoc solutions may address the debt and deficit problems, but they don’t do anything about unemployment, wage stagnation and narrowing the gap between winners and losers in American society. Until those problems are addressed, the United States will remain a tough country to love.

originally published: November 24, 2012

The political chasm between the rich and working class

We’re often told that the typical third world country is characterized by a small percentage of the population hogging a huge share of wealth and power. Everyone else, the story goes, lives in varying degrees of penury and has little political influence.

For a long time, Americans liked to think of their country as the antithesis of this cliche, but socioeconomic trends over the past three decades are changing that.

It’s generally understood that we live in a time of growing inequality. We now know, for example, that there is a large and growing gap between rich and poor. And money has corrupted our political system so it only benefits a privileged few, resulting in the concentration of political power at the top.

The presidential debates should focus on this subject, but both candidates are too busy shoring up their bases and trying to ingratiate themselves to the precious undecided voters who tip the scales in tight elections. These gladiatorial contests ignore rising inequality and the erosion of the middle class, ambiguously defined as households making an average annual income ranging from $30,000 to $90,000.

Since the mid-1970s, we have seen the living standards of most Americans stagnate. Average wages have remained flat or declined.

Today, the wealthiest 1 percent of American households has a higher total net worth than the bottom 90 percent combined. That same top 1 percent also has more pretax income than the bottom 50 percent.

Income inequality has reached the highest level since the Great Depression and shows no signs of moderating. During the first full year of tepid recovery from the most recent recession, the top 1 percent of earners realized 93 percent of all income gains.

The fruits of our economy flow increasingly to a tiny minority of corporate CEOs, top-tier symbolic analysts in the legal and financial professions, sports stars and entertainment-industry celebrities who can leverage their market power into membership in a new class of super-rich.

Meanwhile, most American families are trying to keep body and soul together, seeing little or no improvement in their living standards, despite the fact the both parents are often working. This is crazy in an economy in which consumer spending is an important source of economic growth.

New research indicates that the growing gap between rich and poor may retard future growth, shortening economic expansions by as much as one third.

The increasing concentration of income has spawned a second Gilded Age. With it comes the ever­ greater ability of the new super-rich class to buy political influence through contributions to increasingly costly election campaigns, endowments for issue-oriented think tanks and control of advertising media.

It all translates into special tax breaks, such as allowing the hedge fund manager who makes millions to treat his or her income as capital gains, or the major corporation making billions in profits to have little or no tax liability. Both are egregious examples of corporate welfare that results from the unholy marriage of big corporations and big government.

Occupy Wall Street and the Tea Party crowd share a common resentment of how big government and corporate America are in bed with each other. They see the fat cats running the show, while they’re getting hammered.

We are told that’s the way the cookie crumbles in an age of international competition, rapid technological advances and the relentless drive to cut short-term costs. Sure, capitalism is unrivaled in its ability to produce material well-being. But no economic recovery is sustainable unless we can distribute its fruits more widely.

Growth is important, but recovery is little more than an illusion unless the economy can produce a more equitable distribution of wealth. That’s why we should insist that the presidential candidates give us practical proposals to help the middle class share in any future economic recovery.

originally published: October 20, 2012