Posts Tagged ‘Economy’

The Real Job Creators

We hear a lot out of Washington these days about the “job creators.” We can’t raise taxes on the wealthiest Americans, or on small business, because they are the job creators. Income tax rates are the lowest they’ve been in decades, but that hasn’t resulted in many jobs being created. So, who are the REAL job creators?

The US economy is driven, ultimately, by consumer spending. And more importantly, by middle class spending. When middle class incomes have remained stagnant over the past generation, consumers were faced with the choice of going without or purchasing on credit. But credit purchasing cannot continue permanently. Eventually, the bills must be paid. And when the bill collector comes calling at the same time that housing prices tank, spending on consumer goods grinds to a near halt. It’s not surprising that when credit tightened in the fall of 2008, consumer spending ran off a cliff. And when consumers quit spending, employment fell precipitously as the entire economy contracted.

Businesses won’t resume hiring until they have a market for the goods and services they produce. And consumers can’t resume purchasing until they have money to spend. So, if we truly want to help create jobs, the best and the only solution is to get more money into the pockets of the middle class. We cannot expect the 1% to carry the economy. Sure, they have a lot of money to spend. In fact, they have more money than they can possibly spend. Putting even more money into their pockets won’t have the needed stimulative effect on the economy. Putting more money I to middle class pockets, on the other hand, will create demand for consumer goods. And increased demand will mean more hiring. So, in reality, it’s the middle class who are the real job creators. It’s time that Congress got the message.


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I came across this piece from the Financial Times, which has replaced the Wall Street Journal in many quarters.  In it the author spells out the short-term political advantages for the GOP of “trickle-down” economics that come at the expense of potentially disastrous long-term consequences.  It sheds some light on the current attitudes of some members of Congress who see no problem in the deficits caused by extending the Bush tax cuts while at the same time decrying unemployment benefit extensions.  Do politics trump what’s best for the country and the entire global economy despite what most responsible economists caution?  Seems so.

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The official unemployment rate in the US is 8.5%.  But that figure tells only part of the story.  Back during the recession that occurred early in Ronald Reagan’s first term, the Labor Dept. played what I call “Calvin Ball.”  They didn’t like the way the game was going, so they changed the rules.  Two categories of workers were excluded from the new definition of unemployed.  Under the new rules, workers who had become discouraged and quit looking for those elusive jobs no longer were considered unemployed.  These were people who wanted to work but had been unsuccessful in finding work.  And anyone who was working at all was no longer considered unemployed.  No matter if they had only been able to find part time work and wanted full time work.  They were working.  That means that if you were working 20 hours a week or even 10 hours a week, you were considered “employed.”  No matter that you couldn’t feed your family or keep a roof over your head on that meager part-time job, you were employed and therefore not eligible for unemployment benefits.  Remember, Reagan was also the president who claimed that people were homeless by choice and that ketchup was a vegetable for school lunches.

We know that when Reagan changed the rules of the game, unemployment was over 16%.  That made it politically difficult to justify his voodoo economics, also known as supply-side or trickle-down economics.  But cut that rate in half, and it doesn’t sound so bad on the nightly news.  The problem is that it was smoke and mirrors.  Changing the definition doesn’t change reality.  And that has been characteristic of the way we’ve done business ever since, regardless of which party is in power.

So, if we were to go back to the old way of counting people as unemployed and include those people who want full-time work but can’t find it and include those people who truly want to work but have given up looking in sheer frustration, the REAL unemployment rate is 15.6%.  See this article in the LA Times for more detail.  And do take time to read the comments… including the one from the man who lost his six-figure executive job and is now working for minimum wage.  He’s no longer considered “unemployed” but how many people can honestly say he’s fully employed.   And in some ways, he’s a lucky one — he found someone who was willing to hire him even though he was clearly “over qualified.”

The administration says that unemployment is likely to hit 10% before things begin to turn around.  That means that the REAL unemployment rate is going to be more like 20%.  Remember that during the depths of the Depression, unemployment hit 25%…  So, perhaps this recession is simply a long and deeper than usual one.  Or perhaps it’s really a depression, masquerading as a recession because of the rule change.

[The term Calvin ball comes from the game of ball played between the comic strip characters Calvin and Hobbes.  When Hobbes began to win, Calvin simply changed the rules — generally without telling Hobbes.  Yes, in the case of the unemployment definition, the rule change was announced, but that was nearly 30 years ago, and many people today aren’t aware that the official rate is only a portion of the real rate.]

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We’re learning a bit more about the “unprecedented powers” that President Obama and Sec. Treas. Geithner are seeking to deal with instability that exists in the financial system. But to understand what’s needed going forward, it’s important to see how we got here.

In the 1920s, commercial banks were selling stocks to their customers in addition to making loans and taking deposits.  As stock prices rose, buying on margin became the way to leverage money into larger gains.  For example, you could buy 100 shares of stock, pay a portion and borrow the rest from the bank or brokerage house.  That worked so long as the prices continued to climb.  But as prices started to fall, the banks insisted that buyers cover their loans.  If you didn’t have the cash, you had to sell some or all of your shares, thus forcing the price even lower.  Not only were individuals speculating, but so were the banks themselves, and when the banks were no longer able to cover requests for withdrawals, panic ensued.  There had been previous panics, but nothing like what happened at the start of the Depression. Over 4,000 banks failed. Deposits were not insured.  If your bank failed, you were out of luck.

In 1933, the government passed the Glass-Steagall Act.  It established the FDIC to insure deposits and provide for an orderly take-down and resolution of failing banks.  (Banks pay into the FDIC insurance fund, and the taxpayers make up any overages.) We take the FDIC for granted, knowing that as depositors we will be made whole (currently up to $250,000) if our bank fails.  But that security came with restrictions and regulations for the banks.  To limit speculation, Glass-Steagall also separated financial institutions — commercial banks, investment banks, and insurance companies — based on the type of business they did.

All went well until we forgot the lessons of the Depression, and once again the siren song of laissez-faire economic theory took hold.  The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to merge.  It also gave banks, rather than the Federal Reserve, the power to set interest rates on deposits.  Two years later, the Garn-St. Germain Depository Institutions Act deregulated the savings and loans, and adjustable rate mortgages were allowed.

Within a decade, the savings and loan industry in the United States collapsed.  The cause of individual failures varied, but a common factor seems to have been the combination of reduced regulation, a lack of oversight, and the introduction of new and unproven financial instruments.  Loan underwriting got sloppy, and there were home equity credit cards.  Again, so long as prices climbed, all was well, but when other economic factors caused a slump in real estate prices, those credit cards resembled the margin buying of the 1920s.  The number of savings and loan failures swamped FSLIC, the S&L version of the FDIC, and The Resolution Trust corporation was established to dispose of the failed institution’s assets, i.e., the loans on their books and the bank-owned properties.  Many of these institutions were purchased by banks so that for depositors, life went on.

Despite all this, the pressure for additional deregulation continued.  In 1999, Congress passed and President Clinton signed the Gramm-Leach-Bliley Act.  It repealed that portion of Glass-Steagall that prohibited the mixing of commercial banks, investment banks, and insurance companies.  A series of mergers followed, and a new raft of exotic financial instruments was born.  It was a perfect storm, and the consequences were completely predictable. In fact, Senator Byron Dorgan (D-ND) was eerily prescient at the time, predicting the timing as well as the need for massive government bailouts and putting a lie to any who claim that nobody could have foreseen the current crisis.  One simply needed to remove ideological blinders and look at history.

When word first came that the administration was seeking new regulations, I hoped that they repeal Gramm-Leach-Bliley along with some of the other deregulatory actions and reinstitute Glass-Steagall.  But alas, it seems that the effects of Gramm-Leach-Bliley will be as difficult to undo as are those credit default swaps that sank AIG.

If financial institutions have combined into these new hybrid, uber-institutions, then it makes sense that to have regulations that apply to all aspects of their business.  And it also makes sense that we need a mechanism to ensure an orderly take-down should they fail.  FDIC works well, and it can serve as a model for any new mechanism.  I still hope Congress will re-think the wisdom of permitting a corporation to become so big and so entwined in the financial system that it cannot be allowed to fail.  “Too big to fail” sounds like it is a prescription for taking excessive risk — for looking at short-term, easy money.  While FDIC insures deposits, that’s not to say that the failure of a bank comes at no cost to the taxpayers.  The recent failure of Indy Mac cost the shareholders as well as the taxpayers.  The shareholder losses came as a result of Indy Mac ceasing to exist.  The taxpayers had to pay the administrative costs of disposing of the bad loans and foreclosed properties.

I don’t begrudge some people making more money than others.  But I wonder if anyone is worth 350 times the salary of the average American worker.  And I don’t begrudge bonuses, but shouldn’t there be some relationship between a bonus and performance?  Between a retention bonus and the recipient actually still working for the corporation?  I’m a big fan of stock options as a bonus, especially if there is a time lag between the time they’re awarded and the time they can be exercised (at the stock price at the time of the award).  That time lag ensures that employees will continue to perform; there isn’t much incentive to exercise the option if the stock value has declined.  I’m all for regulating to contain greed as greed (combined with the relaxation of regulation and oversight) was a major cause of the current situation.

Clearly we are part of a global economy; solutions need to to be developed in concert and cooperation with other nations.  And consumers need better protection from the rapacious ways of the economic Masters of the Universe.  These elements are also part of Geithner’s proposal.  There are still powerful forces who, despite the current situation, are disciples of laissez-faire economic theory.  They will fight any and all regulatory attempts.  And because Congress counts on them to fill their campaign coffers, Congress must be reminded that they represent the people, not just corporations.

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For the purposes of argument, let’s accept current AIG CEO Liddy’s argument that the company is contractually bound to pay out the bonuses AND that their employees are the brightest bulbs in the pack — the only ones who can unwind the esoteric financial instruments that sent them into the financial toilet.  Yes, it’s a stretch, but stay with me for a minute.

If both those premises are true, put the bonus money into an escrow account, managed by some independent agent, payable when (and if) these folks have managed to right the AIG ship.  If they can do so, they will have proven that they are in fact deserving of reward.  If not, the company should be forced to sell off its remaining assets, the staff fired, and the escrow monies returned to the taxpayers.  At that point, let them sue — the former AIG will have no assets with which to pay them back, and these so-called experts will have been revealed as frauds, undeserving of bonuses.

Of course, both premises ring hollow.  The government was able to wring concessions from the UAW in exchange for federal loans — changes in a contract.  And loans (a form of contract) can be re-negotiated.  We’re told that the money the Fed and the Treasury (through TARP) gave to AIG is in fact a loan from the government.  So, why can’t concessions from non-union AIG employees be a part of the deal? The second premise — that these executives are the only ones capable of understanding the intricacies of AIG’s finanacing and that if the bonuses aren’t paid, they’ll leave — is also faulty.  Imagine trying to dance around your role in AIG’s failure on a resume or in a job interview!

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As I scanned the news tonight, several items caught my eye.

First was this list of the 15 states having the highest percentage of $200,000 plus earners.  Interestingly, only one of the states listed, Texas, voted for John McCain last November.  The others voted for Obama, even knowing that their taxes would go up should he be elected.  Among these states was New York, home of Wall Street and the investment bankers.  Those of us who’ve been around the block a few times remember the term “limosine liberal.”  It refered to those people who, despite or perhaps because they were wealthy, understood that they had a responsibility to the rest of society.  And that sense of responsibility has consistently tended to indicate a set of political values that can be termed liberal.  One of the favorite epithets used by conservatives towards liberals is “elite” or “elitist.”  I would venture that most people earning more than $200,000 a year probably have a college education.  On the other hand, the GOP traditionally was the party of business.  Yet its influence is more prevelent in those states and those parts of states that tend to have a lower overall level of education — people whose interests are often polar opposite of the monied portion of the population.

Another thing that caught my attention is that the FDIC is reporting its first loss in 18 years.  Hmmmm, what was happening in the banking sector 18 years ago?  Ah, yes, the savings and loan mess — the last time we tried deregulating the financial institutions.  The president behind that was Ronald Reagan and his treasury secretary Don Regan.  I saw the consequences of that up close and personal.  I was working for the Resolution Trust Corporation, specifically dealing with cataloging the records of two failed institutions.  I saw the records of the bad loans the institutions had made, and they were nothing less than shocking.  In many instances there were multi-million dollar loans that were written off as total losses — not one payment had been made on them.  And the same relatively small group of individuals were the recipients of many similar loans.  At the time, such a practice was known as a bust-out, an operation that amounted to robbing a bank but which was legal in that it involved loans rather than an actual heist.

The last item was a report on the CPAC conference.  From the line-up and the issues of concern, it’s clear that the GOP is intellectually completely bankrupt.  They were an anti-Bush, anti-McCain crowd to be sure.  They seemed convinced that Hawaii was not part of the United States in 1961 when Barack Obama was born there, and that Joe the Plumber was the best qualified person to show them the way out of the wilderness.  How pathetic!  The economy of the country and the world is swirling around the toilet bowl and this is what they’re fixated upon?  If it weren’t so horrifying it would be laughable.  We need more than one political party in this country, but if this represents the GOP, it’s not only the party of no but the party of know nothing.

UPDATE: And it continues… this morning I read that John Bolton, that hardest of hardliners, the guy who couldn’t get confirmed as UN Ambassador but who Bush kept in the role as long as possible via other means, “joked” at the CPAC convention about how a nuclear bomb detonating in, say, Chicago, might be instructive to our president’s views on foreign policy.  And as if that weren’t only one more sorry episode in his history of ill-chosen remarks, the room erupted in laughter and applause.  Sick.

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More evidence that our new president is an educated adult.  Not only that, but he thinks we’re adults, too.  When President Obama used that word last night, I whooped with joy. Not only that, but he pronounced nuclear proliferation correctly, without even the hint of a stumble.  So nice to have an adult in charge.

Listening to Gov. Jindal’s pathetic response was painful, not that anyone would have relished going on right after President Obama.  David Brooks got it right.  The Federal Government is the only entity with the resources right now to get us out of our current mess.  To tout smaller government and lower taxes is truly a form of nihilism.  And it does not bode well for the future of the Republican Party.  If that’s the best they can offer, they deserve their fate.

For most of the last three decades, we’ve been force-fed a diet of, “government = bad; taxes = evil.”   We’ve watched as the fabric of the social contract has deteriorated into an attitude of, “I got mine.  You’re on your own”  as the top 1% pushed their way into the life boats and smacked down the rest of us as they pulled away from the sinking ship.  To hear them shriek, you’d think the proposed tax hikes on the top few percent were akin to robbery.  In reality, it represents a return to the tax rates of the Clinton administration — a time when we were all better off than we are now.  We’ve seen the impact of de-regulation on the airline industry, telecommunications, the banking system (twice!), and energy.  And as a nation we are less safe, less efficient, less prepared to compete in a 21st century global economy, and poorer as a consequence.  It is truly time for change.

Yesterday, Capt. Sullinberger, whose skill as a pilot is directly responsible for saving 155 lives, testified that his wages have been cut 40% and that his pension is virtually non-existent thanks to “cost cutting” efforts by his employer.  He uses is off-days, when he should be recouperating from jet lag, to work as a consultant to make up for his pay cuts.  And that all happened before the latest economic crash, during the so-called “good times” of the Bush administration.  Is that the way to attract and maintain skilled professionals — people we entrust our lives to each time we board an airplane?  We see teachers denigrated as part-time workers and paid accordingly.  How many parents do you know who urge their kids to become teachers these days?  Yet they are responsible for educating our kids, the people who are the future of our society.  We are a contradiction as a people.  We want the services that government provides, yet we are unwilling to pay for them.

Last night we listened as our president laid out his plan for the future of this country.  His vision is one where government should be measured, not by the amount of money it spends, but by the results that spending achieves.  No more “off the books” accounting tricks that haven’t really fooled anyone.  Transparency, accountability, responsibility, effectiveness — the qualities we expect from our government but which have been sorely lacking for years by the Congress and the Executive Branch regardless of the party in control.

Perhaps most importantly, he recognizes that there are linkages between seemingly unrelated policy areas that all affect our economic health as a nation.  Education, energy, healthcare, banking, housing, industry, national security — they are all related to our ability to survive our current economic crisis.

He also recognizes that there are things that government does better than do individuals on their own — especially things that require a massive investment of capital.  We’ve seen a decade’s worth of private wealth evaporate over the last six months.  And those with the capital seem intent on spending it on themselves and on a lavish lifestyle, not in those kinds of projects that build or maintain the infrastructure that will serve us well over the coming decades.  Their ideology says that lower taxes and privatization leads to smaller, more efficient government.  But if the past eight years are an indication, the result is more debt, more corruption, almost no accountability or oversight, and less efficiency.  Spare me the discussion of how the Democrats were in control of Congress for the past two years.  The previous 12 had GOP majorities.

President Obama’s call for personal responsibility — including saying that dropping out of high school is doing your country a dis-service — is music to the ears of all Americans, regardless of political party.  But the difference between President Obama’s view and that of his conservative opponents, is that personal responsibility is paired with empathy — another American value.  He understands that if we ignore those in need, we all suffer.

He believes that budgets should and do reflect our national priorities.  He understands that the so-called “movement conservatives” represent a fairly small minority — that when you begin to consider values, most people want government to serve all the people, not just the privileged.

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