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

The truth behind those unemployment figures

As we all know, the world economy recently endured a precipitous tumble. Even five years after the near-depression ‘s onset, unemployment remains high and economic growth is constipated. The financial crisis opened up a sinkhole in which millions of Americans lost their jobs. No one has been more affected by the debacle than young people.

To the average American, the unemployment rate is the indicator to which they pay the closest attention. As well they might, when you consider that unemployment is the black mark on the American economy .

The August headline unemployment rate dropped from 7.4 to 7.3 percent and 169,000 new jobs were reported, but that was fewer than expected. Unemployment is at its lowest rate since December 2008, but the rate fell for the wrong reason: another 312,000 Americans stopped looking for work and are no longer counted as unemployed.

These people essentially become nonexistent, usually a sign of an ailing economy, not a recovering one. If the economy were growing, the unemployment rate would decline because people found jobs, not because they quit looking.

From a broader perspective, current views of the labor market can roughly be divided into two groups. One argues that the weak labor market is the result of a shortfall in aggregate demand and argues for continuing an aggressive monetary policy known as quantitative easing, whereby the U.S. Treasury buys up billions of dollars of debt.

The other group notes that structural factors such as the rise of technology are the major challenges for the labor force. That means firms have jobs but can’t find qualified workers. For this crowd, greater emphasis must be placed on programs such as job training and mobility assistance.

It is generally believed that 250,000 new jobs are needed every month to keep pace with population growth and people entering the workforce for the first time. In addition to the anemic August jobs report, the federal Bureau of Labor Statistics also revised its June and July figures sharply downward.

It turns out that June’s job growth was not 188,000 as previously reported, but only 172,000. July’s numbers got knocked down all the way from 162,000 to 104,000. Does this suggest a correction next month to the August increase of 169,000jobs?

Labor participation, the percentage of Americans over 16 who have jobs or are looking for them, declined slightly from July to August and is at a 35-year low. BLS reports that 90 million eligible workers are sitting on the sidelines who don’t count as unemployed. The recent decline in the unemployment rate reflects reduced labor force participation, not increased employment.

The labor market is worse than government numbers reflect. Businesses are not hiring because of stagnant demand, and sales are not growing because consumers have less money. Consumers have less money because stagnant demand means businesses are not hiring full-time employees. It’s a classic Catch 22.

Many subgroups, especially the young, less educated and minority groups, are facing unemployment rates well into the double digits. Young workers have been the hardest hit. The recession and weak recovery have sharply reduced opportunities for entry-level workers in virtually every industry. The August unemployment rate for Americans under 25 was 15.6 percent, more than two and halftimes the rate for those 25 and older.

This may explain why young people are so pessimistic about the future; perhaps they fear they will be part of a “lost generation.” Many of these future leaders are sitting on the sidelines, having trouble finding full-time work that will help them develop the skills they need to transition to higher paying employment. They are struggling to pay off massive student loan debts and living with their parents because they can’t make the loan payments while living on their own.

The jobless economic recovery and the absence of bright, young people in the labor market do not portend well for our country. Instead of buying homes and creating new households, more young people are becoming dependent on government benefits, not paying taxes and creating a new underclass that will endanger America’s future.

originally published: September 21, 2013

America needs jobs

America is stuck in the worst economic, political and social crisis since the Great Depression. Despite the unemployment rate dropping 2.5 percentage points from its peak in October 2009, the labor market remains bleak and it is becoming ever clearer that the federal government needs to act aggressively to fix the problem.

The drop in the official unemployment rate is partly due to people who have stopped searching for a job. If a person has not worked or looked for work in the past 12 months, he or she is no longer included in the official government statistics.

The recession officially ended in June 2009, but job growth has remained painfully slow. It took 15 months after the 1990-1991 recession and 39 months after the 2001 recession for employment to recover to precession levels. At the recent pace of job creation, it will take years for employment to recover from the Great Recession that started in 2007.

The President’s Council on Jobs and Competitiveness has estimated that we will need more than 20 million jobs by 2020. The American economy has never created jobs at that rate in peacetime.

The Commerce Department says the American economy grew at an annualized rate of only 1.8 percent in the first quarter of 2013. Gross Domestic Product needs to grow by 3 to 4 percent annually to reach its productive potential. The economy is failing to generate enough jobs to support sustainable growth.

About 150,000 new jobs have to be created each month just to absorb new entrants to the labor force. Left to current market forces, America faces a serious job deficit that will last for at least the rest of this decade.

Frustrated with the slow American recovery from the recession, the Federal Reserve has kept interest rates near zero since late 2008 and is currently buying $85 billion in Treasury and mortgage bonds each month. The efforts are meant to increase spending, investment, hiring and overall growth.

But the Fed has done almost all it can with monetary policy. The American economy needs fiscal stimulus to restore a satisfactory level of employment and income.

The first order of business is to pick the low-hanging fruit to jump-start job growth and compensate for the pressures to outsource American jobs that leave society to pick up the cost of unemployment.

For starters, offer private firms tax benefits for hiring new workers. Right now, those firms receive tax benefits for buying new plant and equipment – even if it replaces existing workers – but no tax benefits for hiring. So fiddle with the tax code to change these tax regulations 180 degrees.

Experts from all quarters agree on the importance of investing in America’s physical and communications infrastructure. This is about as controversial in economics as antibiotics are to doctors. Such investments in income-producing capital assets, not consumption spending projects, would yield positive economic returns and create jobs for years to come. Financing these investments by borrowing is no different than a business building a new plant or a family building a new house. If nothing else, such investments will remove constraints on infrastructure capacity that currently depress economic growth by making it more expensive to move goods and services.

Finally, the military can help solve the shortage of workers with technical skills that businesses often cite. The armed forces have infused technology into nearly every aspect of their operations, and they should train people- who would be paid as federal employees during training- for private sector jobs. The military has a distinguished record of preparing and certifying individuals across a full spectrum of occupational specialties that are in demand by the private sector. It should also be empowered to contract with community colleges for the additional space and instructor capability needed to accommodate the increase in trainees.

How do you detect a society in real trouble? One sure-fire sign is persistently high unemployment. America needs an aggressive, comprehensive strategy to bring employment back to pre-recession levels and prepare workers for 21st-century jobs.

originally published: July 16, 2013

Unemployment rate ignores the millions who have stopped looking

The employment rate is the key measure of Main Street’s economic health and the Labor Department’s April 5 report was weak and discouraging at best. After adding more than 200,000 jobs per month since last November, American employers added only a paltry 88,000 jobs in March, less than one-third the number created during February.

The country needs about 250,000 new jobs each month for five years just to get back to the headline unemployment rate we had in 2007. What’s more, this recent report found stagnant wage growth. We are not exactly witnessing a revival of breadwinners’ jobs.

Job creation was at its slowest pace since last June, totaling less than half the number economists had expected. The headline unemployment rate stands at 7.6 percent, shockingly high for a recovery that is nearly fours years old. This is not even remotely close to the pre-recession 4.7 percent rate in 2007.

Unemployment would be even higher if not for the large numbers of working-age people who have simply dropped out of the job market. Nearly 500,000 people just plain gave up looking for work and are no longer counted in the official employment numbers. Where they have disappeared to is anyone’s guess.

As a result, the labor participation rate fell to 63.3 percent, the lowest since 1979, which was before women entered the labor force in large numbers. If you count this exodus of Americans from the labor force as well as those still counted as unemployed and the involuntary part-timers, the true, actual joblessness rate is closer to 13.8 percent. Our friends in Washington, D.C., are stuck in the tar sands of an old paradigm continuing to focus on the “official” unemployment rate, but this masks the true crisis in the labor market.

Last December 12, Ben Bemanke, the fourteenth chairman of the Board of Governors of the Federal Reserve system, said the Fed would keep running the printing presses and thereby keep interest rates ultra-low for as long as the unemployment rate remained above 6.5 percent as long as its official forecast for inflation does not surpass 2.5 percent.

A jobless rate that low is not valid if it is predicated on a shrinking labor force. By only counting people who actually tried to find work within the previous four weeks, the unemployment rate ignores the millions of Americans who have stopped looking. The result? A falling official unemployment rate is not always a good economic omen.

We want the unemployment rate to go down because more people are getting jobs, not because they are giving up. During an economic recovery, an expanding economy usually brings people back into the labor market. This time, many are staying on the sidelines and more are joining them.

What happens if the real world economy regains its footing and starts to show signs of life? Many of these discouraged workers will probably resume their job searches.

But this will actually increase the size of the active labor force and cause the official unemployment rate to increase as well. This is good news hidden behind seemingly worst statistics. But it is really an admission of how bad things have been all along.

Alternatively, if the  conomy is facing a long twilight of no growth, maybe the Federal Reserve believes these people who have stopped looking for work will never return to the hunt; in this case, the headline unemployment rate will continue to decline as American workers remain on the sidelines.

Of course, this will result in the continuing growth of transfer payments such as unemployment benefits and food stamps, with the average worker leaning on government for relief, and flirting with poverty. They wouldn’t have far to go.

originally posted: April 27, 2013

The Federal Reserve and paper money

A couple of weeks ago, the Federal Reserve announced that it will continue printing money to keep interest rates near zero until the headline unemployment rate drops below 6.5 percent, provided inflation does not rise above 2.5 percent. The Fed expects to continue this policy until the end of 2015.

The Fed is focusing on job creation by putting its foot on the monetary accelerator to spur consumer spending and housing purchases. Last month’s jobless rate was 7.7 percent, down from previous levels but still high by historical standards. Even though the recession officially ended in December 2009, unemployment has not been below 6.5 percent since September 2008.

The headline unemployment rate to which the Fed has attached itself actually declines as more people abandon hope of finding a job. The unemployment rate dropped to 7.7 percent in November because about 351,000 people left the workforce. lf the same percentage of adults were in the workforce as four years ago, the headline unemployment rate would be 11.1 percent.

To further accelerate hiring, the Federal Reserve also announced that it would continue its monthly buying binge of $85 billion in long-term Treasury bonds and mortgage-backed securities. To do this, you have to print a whole lot of money.

The Fed’s objective is to push long-term interest rates even lower. It’s not easy, considering that the 10-year Treasury bond is trading at 1.8 percent – less than inflation, which has averaged 2.3 percent over the last four years. Years after moving interest rates to near zero in December of 2008, the Fed is still redistributing income from savers and to borrowers.

The Fed’s catechism is that this will reduce already-low mortgage interest rates, which will help spur a housing recovery, which will lead the economy out of its doldrums. So much for claiming the government doesn’t pick winners and losers in the economy.

Sure, the housing market is on a slow road to recovery. But tight credit is standing in the way of a more robust housing recovery. Too many potential homebuyers cannot access interest rates that are at nearĀ­ historic lows. Potential buyers need pristine credit to get a mortgage because banks are afraid of owning the loan again if a borrower defaults.

If the federal government were serious about fixing the housing market, it would arrange massive refinancing at today’ s low interest rates for those who owe more on their homes than the structure is worth. That would give millions of homeowners more spending cash to lift the economy. We did, after all, spend more than 700 billion taxpayer dollars to bail out the banks without nailing any hides on the shed door.

The Fed’s near-zero interest policy also masks the real cost of financing trillion-dollar annual deficits that have become the norm. Low interest rates are an incentive for the federal government to continue borrowing at record levels. If the Federal Reserve were serious about getting the Obama administration and Congress to address the debt and enact fiscal policies to stimulate the economy, it would not keep enabling them with cheap money.

The flood of money from all over the world has helped push down the interest rate the U.S. Treasury pays to 50-year lows. But this ability to borrow enormous sums at incredibly low interest rates cannot and will not last forever, even if no one can say exactly when the day of reckoning will arrive.

Even the mighty U.S. government cannot assume it will always be able to cheaply borrow whatever it needs. Future Americans sending an unprecedented chunk of their incomes overseas to pay down debt means spending much more on our past than on our future. We should invest in education, R&D, infrastructure and addressing the job-skills deficit, not in robbing future generations of the opportunities we enjoyed.

originally published: December 27, 2012

The American Dream is now a nightmare

With national unemployment still stubbornly high four years after the start of the economic crisis, the time has come to ask whether the American Dream of opportunity and increasing prosperity is now out of reach for the average worker. Economists and academics haven’t reached consensus about the underlying causes of long-term sluggish job creation, but technological change and globalization are leading candidates.

There are still 12.1 million unemployed Americans; 23 million when you add those who are working fewer hours than they’d like or are too discouraged to look for work. Include these workers and the unemployment rate remains stuck at 14.7 percent as we continue to slog through the slowest economic recovery since World War II.

Perhaps worst of all, 4.8 million have been unemployed for six months or more; over half of them have been out of work for more than a year. These people suffer not only financial hardship, but also psychic trauma.

Adding insult to injury, about 2 million long-term unemployed Americans will lose their federal benefits at the end of the year if we go over the impending “fiscal cliff.” The $600 billion package of mandatory spending cuts and tax increases that will take effect at year’s end if no deal is reached to avert it eliminates federal benefits. These benefits provide 14 weeks of additional support beyond state unemployment benefits of26 weeks and up to 33 weeks beyond that in states with especially high unemployment.

Genuine understanding of persistent unemployment is more than a numbers game. The unemployed suffer from depression, anxiety and poor self-esteem, as well as the strains financial problems place on family relations. Those with jobs worry that they could be let go at any moment.

The technological revolution has created employment opportunities for many high-skill workers. But at the same time, those who perform more routine activities have been increasingly displaced. This is one reason why there are more than three million job openings in America even as we continue to suffer through high unemployment. And as the cost of technology decreases, firms have an incentive to substitute capital equipment for labor.

Globalization has also created opportunities for some workers but displaced others. Middle-skill jobs are especially subject to this type of labor competition. Inexpensive overseas labor is a temptation many firms cannot resist.

Ironically, some firms that moved production overseas are now bringing it back to America because advanced technology is making it cheaper to produce locally. The result is rising manufacturing output without a corresponding increase in the middle-skill jobs that are the foundation of the middle class.

Taken together, globalization and the technology revolution have wiped out many middle-class jobs and replaced them with positions that demand skilled human capital. The result is increasing pay for higher-skilled workers and decreasing pay for those in the middle. As the labor market becomes more polarized, income inequality rises.

These changes may represent a tectonic shift in the nature of employment in America. As Washington resumes its conversations about how to avoid the fiscal cliff and deal with pressing economic and fiscal challenges, officials may want to give some thought as to how to train Americans for the 21st century.

If we do nothing, we might as well discard Labor Day as a national holiday. If the labor market becomes even further polarized into low- and high-income jobs, we might as well do the same to the American Dream.

originally published: December 11, 2012

Congress must not ignore key route to recovery

Economists regard the unemployment rate as a “lagging indicator” because it tends to move well after other gauges of economic strength. But unemployment is the indicator to which normal people pay the most attention.

One could reasonably argue that it’s economists who are the real lagging indicators. We are in the midst of the biggest economic crisis since the Great Depression. It began as a recession in December 2007, but it took almost a year for economists to agree that a recession had even begun.

Today, debate has shifted from when the recession began to how to get out of it. Given the politics in Washington, it is a fair guess (actually a certainty) that enacting the long-term policies needed to grow the economy will wait until after the November elections.

But sidestepping the polarizing debate about austerity versus growth, one immediate straightforward  step Congress can take is to pass the surface transportation bill before the current extension expires June 30.

Our economist friends estimate that every billion dollars invested in transportation infrastructure yields 25,000 jobs.

Early this month, the Bureau of Labor Statistics reported that only 69,000 new non-farm jobs were created in May, about one-third the average monthly gain for the first three months of the year. Mainstream economists were expecting something on the order of 150,000 new jobs.

There is no putting a gloss on it. These numbers are miserable. We added the smallest number of workers in a year, causing the unemployment rate to tick upward to 8.2 percent from 8.1 percent in April. That makes 40 consecutive months of unemployment over 8 percent.

To make matters worse, job growth figures originally reported for March and April were lowered by 49,000 and the number of workers unable to find jobs for 27 weeks or more rose from 5.1 to 5.4 million. The broadest measure of unemployment, the number unable to find full-time work or too discouraged to look for a job, now exceeds 23 million, up from 14.5 to 14.8 percent of the workforce.

This may be the most significant measure of joblessness, since many part-time and discouraged workers experience the same negative psychological and social impacts as those who are totally unemployed.

The economic impact of so many unemployed workers exerts a severe drag on the nation. Workers and their families who must struggle to make ends meet on unemployment benefits are no longer able to participate fully in the nation’s consumer economy. Consumer spending accounts for some 70 percent of gross domestic product, and their enforced spending curtailments further reduce GDP and hold back recovery. It is an economic multiplier effect in reverse.

That’s not all. A whole generation of fresh college graduates can’t begin the careers they’d hoped for because of the moribund job market and may have to settle for jobs that are much less valuable to America’s future.

Consumer spending requires consumers to have income. This month’s survey and the revisions to recent labor reports show that hours worked are down, and wages and payroll are down and not keeping up with inflation. GDP was revised down to 1.9 percent for the first quarter.

So forget nation-building in Afghanistan, balancing the federal budget, or taming the Wolves of Wall Street. These are obviously important, but they all vie for second place to the overriding challenge of putting Americans back to work. This must be the federal government’s No. 1 priority for the foreseeable future.

The nation needs to add 250,000 jobs per month, every month, for five years to get back to the 5 percent unemployment rate we had in 2007. How are we going to achieve that? State transportation departments have been operating on short-term extensions of the last surface transportation bill since September 30, 2009. The current extension, which is the ninth, is set to expire June 30. Maintaining and improving our highway and transit systems is important. So are the thousands of jobs that will be lost if Congress does not move on a highway and transit bill.

originally published: June 15, 2012