U.S. economy stinks because of greedy corporations?

Blodget accurately uses the word "greedy" and "short term" to describe how U.S. corporations are acting -- by cutting back staff, freezing most workers' wages, and buying back stock. 

Yet there's another way to look at these trends: from an orthodox business perspective. Indeed, in my finance course in business school, we were taught that corporate decisions such as buying back shares and issuing big dividends may be popular among investors; yet such actions must also be eyed skeptically by long-term investors, since they are a signal that the corporation can currently find no better use of its profit, such as R&D or capital investment.

 Now jump to the "job creators" myth, and you'll understand why this is relevant: every time Wall Street cheers these short-term gains in stock price, U.S. workers are losing out again, because either somebody's not getting hired or somebody's not getting a raise. And this means less consumption and economic activity (about 70 percent of U.S. GDP).  

And this gets back to the idea of depressed aggregate demand, and why the "job creators" myth is bullshit, because the capitalists (people with money) and the corporate owners (shareholders) and officers, when acting rationally in a system where their customers don't have as much money as they once did to buy their products, stop investing and producing as much, because this seems like the sensible thing to do. And they all do this at once. They are prisoners in the same system that wage-earners and consumers inhabit; they're not divorced from it, at least not in the long term. 

So this idea that job creators, if government would only get out of their way and/or cut their taxes, would behave much differently than they are now, is totally bogus and irrational, because although they are at the top, they are not the commanders of the system, nor do they stand apart from it. 

In fact, as Paul Krugman pointed out back in 2010, and just about every business survey since then has supported, lack of demand (sluggish sales) is the key business problem, not taxes or regulation or general "uncertainty."  

Why Does The Economy Stink? Because America's Owners Are Greedier Now Than Ever Before

By Henry Blodget

August 19, 2014 | Business Insider

Business Insider, St. Louis Fed

GDP growth.

The U.S. economy is still sputtering. (See GDP growth chart above.)

Why is growth so slow and weak?

One reason is that average American consumers, who account for the vast majority of the spending in the economy, are still strapped.

The reason average American consumers are still strapped, meanwhile, is that America's companies and company owners — the small group of Americans who own and control America's corporations — are hogging a record percentage of the country's wealth for themselves.

In the past five years, American corporations have boosted their profits and share prices by cutting costs (firing people) and buying back stock. As a result, unemployment remains high. And wage growth for the Americans who are lucky enough to be working has been pathetic — the slowest since World War II.

Meanwhile, America's corporations and their owners have never had it better. Corporate profits just hit another all-time high, both in absolute dollars and as a percent of the economy. And U.S. stocks are at record highs.

Even Scrooge would be appalled.

Many people seem confused by this juxtaposition. If corporations and shareholders are doing so well, why is the economy so crappy?

The answer is that one company's wages are other companies' revenues. Americans save almost nothing, so every dollar we earn in wages gets spent on products and services (including, in some cases, those of the companies we work for). The less that American companies pay their workers, the less American consumers have to spend. And the less American consumers have to spend, the slower the economy grows.

This isn't a complex concept. We're all in this together. People make it complicated by casting it as a political issue and inflaming partisan tensions. But it has nothing to do with politics.

Importantly, it doesn't have to be this way.

There's no "law of capitalism" that says that companies have to pay their employees as little as possible. There's no law of capitalism that says companies have to "maximize short-term profits." That's just a story that America's owners made up to justify taking as much of the company's wealth as possible for themselves.

Ironically, this short-term greed on the part of America's owners is most likely reducing their long-term wealth: Companies can't grow profits by cutting costs forever, because their profits can't grow higher than their revenues. At some point, revenue growth needs to accelerate. But that won't happen until companies start sharing more of the wealth they create with the folks who create it — their employees.

Let's go to the charts ...

1) Corporate profit margins just hit another all-time high. Companies are making more per dollar of sales than they ever have before. (Some people are still blaming economic weakness on "too much regulation" and "too many taxes." That's crap. Maybe little companies are getting smothered by regulation and taxes, but big ones certainly aren't. What they're suffering from is a myopic obsession with short-term profits at the expense of long-term value creation.)

Business Insider, St. Louis Fed

Profits as a percent of the economy.

2) Wages as a percent of the economy just hit another all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" represent spending power for consumers. And consumer spending is "revenue" for other companies. So the profit obsession is actually starving the rest of the economy of revenue growth.

Business Insider, St. Louis Fed

Wages as a percent of the economy.

In short, our obsession with "maximizing profits" is creating a country of a few million overlords and 300+ million serfs.

Don't believe it?

Krugman reviews Geithner's book 'Stress Test'

I don't care much about Tim Geithner or his financial memoir Stress Test. But Krugman's review of the book features many teachable moments so the review is well worth reading, especially as revisionist historians would like to distort what really happened.  Here's the first one:

Quite early on, two somewhat different stories emerged about the economic crisis. One story, which Geithner clearly preferred, saw it mainly as a financial panic—a supersized version of a classic bank run. And there certainly was a very frightening panic in 2008–2009. But the alternative story, which has grown more persuasive as the economy remains weak, sees the financial panic, while dangerous in its own right, as a symptom of something broader and deeper—mainly a large overhang of private debt, in particular household debt.

Krugman obviously and correctly goes with the latter story. The overhang of private debt -- particularly mortgage debt among the middle and lower class, and more recently, student debt, now about $1 trillion -- is the real anchor weighing down our economy today.

Next, Krugman points out that the FIRE sector is not synonymous with the U.S. economy, something that CNBC and Wall Street types seem to forget sometimes [emphasis mine]:

Whatever the reasons, however, the stress test pretty much marked the end of the panic. ...[S]everal key measures of financial disruption—the TED spread, an indicator of perceived risks in lending to banks, the commercial paper spread, a similar indicator for businesses, and the Baa spread, indicating perceptions of corporate risk. All fell sharply over the first half of 2009, returning to more or less normal levels. By the end of 2009 one could reasonably declare the financial crisis over.

But a funny thing happened next: banks and markets recovered, but the real economy, and the job market in particular, didn’t.

That's because the Great Recession wasn't just a mega run on banks that the "confidence fairy" could restore, via cheap money for banks from the Fed. Rather, the Great Recession was a problem of too much private debt dragging down aggregate demand and hence economic growth, in a vicious cycle:

The logic of a balance sheet recession is straightforward. Imagine that for whatever reason people have grown careless about both borrowing and lending, so that many families and/or firms have taken on high levels of debt. And suppose that at some point people more or less suddenly realize that these high debt levels are risky. At that point debtors will face strong pressures from their creditors to “deleverage,” slashing their spending in an effort to pay down debt.  But when many people slash spending at the same time, the result will be a depressed economy. This can turn into a self-reinforcing spiral, as falling incomes make debt seem even less supportable, leading to deeper cuts; but in any case, the overhang of debt can keep the economy depressed for a long time.

And here's where we get down to the brass tacks of the federal government's response, and the Fed's position (Geithner's) on that response:

Unlike a financial panic, a balance sheet recession can’t be cured simply by restoring confidence: no matter how confident they may be feeling, debtors can’t spend more if their creditors insist they cut back. So offsetting the economic downdraft from a debt overhang requires concrete action, which can in general take two forms: fiscal stimulusand debt relief. That is, the government can step in to spend because the private sector can’t, and it can also reduce private debts to allow the debtors to spend again. Unfortunately, we did too little of the first and almost none of the second.

Yes, there was the American Recovery and Reinvestment Act, aka the Obama stimulus, and it surely helped end the economy’s free fall. But the stimulus was too small and too short-lived given the depth of the slump: stimulus spending peaked at 1.6 percent of GDP in early 2010 and dropped rapidly thereafter, giving way to a regime of destructive fiscal austerity. And the administration’s efforts to help homeowners were so ineffectual as to be risible.

And Geithner, who was in the middle of Obama's inner circle of trusted economic advisers, opposed both stimulus and debt relief, notes Krugman:

Geithner also makes some demonstrably false statements about the public debate over stimulus. “At the time,” he declares, “$800 billion over two years was considered extraordinarily aggressive, twice as much as a group of 387 mostly left-leaning economists had just recommended in a public letter.” Um, no. A number of economists, including Columbia’s Joseph Stiglitz and myself, were warning that the package was too small; so was Romer, internally. And that economists’ letter called for $300 to $400 billion per year. The Recovery Act never reached that level of spending; even if you include tax cuts of dubious effectiveness, it only briefly grazed that target in 2010, before rapidly fading away.

And then there’s the issue of debt relief. Geithner would have us believe that he was all for it, but that the technical and political obstacles were too difficult for him to do very much. This claim has been met with derision from Republicans as well as Democrats. For example, Glenn Hubbard, who was chief economic adviser under George W. Bush, says that Geithner “personally and actively opposed mortgage refinancing.”

Krugman takes exception to Geithner's victory dance on ending the crisis and the Great Recession:

To the rest of us, however, the victory over financial crisis looks awfully Pyrrhic. Before the crisis, most analysts expected the US economy to keep growing at around 2.5 percent per year; in fact it has barely managed 1 percent, so that our annual national income at this point is around $1.7 trillion less than expected. Headline unemployment is down, but that’s largely because many workers, despairing of ever finding a job, have stopped looking. Median family income is still far below its pre-crisis level. And there’s a growing consensus among economists that much of the damage to the economy is permanent, that we’ll never get back to our old path of growth.

There's more to this story that Krugman forgivingly overlooks, such as why Geithner was so solicitous to Wall Street banks and not Main Street Americans. After all, Geithner "met more often with Goldman Sachs CEO Lloyd Blankfein than Congressional leaders, including the Speaker of the House and the Senate Majority Leader," in his first few months in office.  Why??

Does He Pass the Test?

By Paul Krugman

June 10, 2014 | The New York Review of Books

URL: http://www.nybooks.com/articles/archives/2014/jul/10/geithner-does-he-pass-test/

Stiglitz: Tax fairness can eliminate U.S. debt and grow the economy

My main bearded liberal Nobel economist Joe Stiglitz gives a clear and hopeful message: we can fix our tax system, fix the debt and grow our country all at the same time.

This is a message the MSM will not tell you; they say we can only, and must, cut Social Security, Medicare and welfare programs for the poorest Americans in order to cut the national debt.

It's a corporate media lie!  There is another way.

Full Show: Joseph E. Stiglitz Calls for Fair Taxes for All

May 30, 2014 | Moyers & Company

A new report by Nobel Prize-winning economist Joseph E. Stiglitz for the Roosevelt Institute suggests that paying our fair share of taxes and cracking down on corporate tax dodgers could be a cure for inequality and a faltering economy.

This week on Moyers & Company, Stiglitz tells Bill that Apple, Google, GE and a host of other Fortune 500 companies are creating what amounts to “an unlimited IRA for corporations.” The result? Vast amounts of lost revenue for our treasury and the exporting of much-needed jobs to other countries.

“I think we can use our tax system to create a better society, to be an expression of our true values.” Stiglitz says. “But if people don’t think that their tax system is fair, they’re not going to want to contribute. It’s going to be difficult to get them to pay. And, unfortunately, right now, our tax system is neither fair nor efficient.”

Part 1: http://vimeo.com/96870248

Part 2: http://vimeo.com/97472534

Part 3: http://vimeo.com/97486045

Baker: Stimulus worked, but it was too small

Two-fisted liberal pride!  Don't ever back down!  The GOP watered down the stimulus with 1/3 tax cuts and cut the overall amount from more than $1 trillion that was required to about $700 billion.  

Sums up Dean Baker: "In other words, we were trying offset a loss of $1.4 trillion in annual demand with a stimulus package of $300 billion a year. Surprise! This was not enough."

Even so, the stimulus helped avoid a second Great Depression.  

My progressive comrades: don't ever apologize, don't ever make excuses. THE STIMULUS WORKED.  The fact that it couldn't do more is entirely the fault of Republicans.

Now read below to get the numbers.

Why the stimulus just couldn't do it

By Dean Baker

February 20, 2014 | CNN

When President Obama proposed his stimulus in January 2009, the economy was in a freefall, losing more than 700,000 jobs a month. The immediate cause of the plunge was the freezing up of the financial system after the collapse of Lehman Brothers, but the deeper cause was the loss of demand after the collapse of the housing bubble.

The bubble had been driving the economy both directly and indirectly. The unprecedented run-up in house prices led to a record rate of construction, with about 2 million homes built at the peak in 2005.

In addition, the $8 trillion in housing equity created by the bubble led to an enormous consumption boom. People saw little reason to save for retirement when their home was doing it for them. The banks also made it very easy to borrow against bubble-generated equity, which many people did. As a result, the personal saving rate fell to 3% in the years 2002-07.

The bubble also indirectly enriched state and local governments with higher tax revenue. And there was a mini-bubble in nonresidential real estate, but that came to an end in 2008 as well.

The economy had already been in recession for nine months before the collapse of Lehman because the bubble was deflating, but the Lehman bankruptcy hugely accelerated the pace of decline. This was the context in which Obama planned his stimulus package before he even entered the White House.

At that point, most economists still did not recognize the severity of the downturn, just as they had not seen the dangers of the housing bubble that had been building over the previous six years.

The Congressional Budget Office projections, which were very much in the mainstream of the economics profession, showed a combined drop in GDP for 2008 and 2009 of 1%, before the economy resumed growth again in 2010. This is with no stimulus. By contrast, the economy actually shrank by 3.1% in those years, even with the stimulus beginning to kick in by the spring of 2009.

Given this background, it was easy to see that the stimulus was far too small.  It was designed to create about 3 million jobs, which might have been adequate given the Budget Office projections. Since the package Congress approved was considerably smaller than the one requested, the final version probably created about 2 million jobs. This was a very important boost to the economy at the time, but we needed 10 million to 12 million jobs to make up for jobs lost to the collapse of the bubble.

The arithmetic on this is straightforward. With the collapse of the bubble, we suddenly had a huge glut of unsold homes. As a result, housing construction plunged from record highs to 50-year lows. The loss in annual construction demand was more than $600 billion. Similarly, the loss of $8 trillion in housing equity sent consumption plunging. People no longer had equity in their homes against which to borrow, and even the people who did would face considerably tougher lending conditions. The drop in annual consumption was on the order of $500 billion.

The collapse of the bubble in nonresidential real estate cost the economy another $150 billion in annual demand, as did the cutbacks in state and local government spending as a result of lost tax revenue. This brings the loss in annual demand as a result of the collapse of the bubble to $1.4 trillion.

Compared with this loss of private sector demand, the stimulus was about $700 billion, excluding some technical tax fixes that are done every year and have nothing to do with stimulus. Roughly $300 billion of this was for 2009 and another $300 billion for 2010, with the rest of the spending spread over later years.

In other words, we were trying offset a loss of $1.4 trillion in annual demand with a stimulus package of $300 billion a year. Surprise! This was not enough.

That is not 20/20 hindsight; some of us were yelling this as loudly as we could at the time.  It was easy to see that the stimulus package was not large enough to make up for the massive shortfall in private sector demand. It was going to leave millions unemployed and an economy still operating far below its potential level of output.

We are still facing the consequences of an inadequate stimulus. The reality is that we have no simple formula for getting the private sector to replace the demand lost from the collapse of the bubble.

Contrary to what Republican politicians tell us, private businesses don't run out and create jobs just because we throw tax breaks at them and profess our love.  If the government doesn't create demand, then we will be doomed to a long period of high unemployment -- just as we saw in the Great Depression. The government could fill the demand gap by spending on infrastructure, education and other areas, but in a political world where higher spending is strictly verboten, that doesn't seem likely.

The one alternative, which has been successfully pursued by Germany, is to reduce the supply of labor through work sharing. Companies reduce all their employees' hours and pay so everyone keeps their jobs. The government then pays the workers part-time unemployment benefits -- cheaper than paying someone full-time unemployment.

Germans have used this route to lower their unemployment rate to 5.2%, even though their nation's growth has been slower than ours.

Some bipartisan baby steps have been taken in this direction; we will need much more if we are to get back to near full employment any time soon. In a world where politics makes further stimulus impossible, work sharing is our best hope.

Reich: 2013 saw huge wealth redistribution

Trickle-down economic theory vs. trickle-up economic fact.

I can't say it any better than this. Read the whole thing and get back to me with any questions!

The Year of the Great Redistribution

By Robert Reich

January 5, 2014 | Huffington Post

One of the worst epithets that can be leveled at a politician these days is to call him a "redistributionist." Yet 2013 marked one of the biggest redistributions in recent American history. It was a redistribution upward, from average working people to the owners of America.

The stock market ended 2013 at an all-time high -- giving stockholders their biggest annual gain in almost two decades. Most Americans didn't share in those gains, however, because most people haven't been able to save enough to invest in the stock market. More than two-thirds of Americans live from paycheck to paycheck.

Even if you include the value of IRA's, most shares of stock are owned by the very wealthy. The richest 1 percent of Americans owns 35 percent of the value of American-owned shares. The richest 10 percent owns over 80 percent. So in the bull market of 2013, America's rich hit the jackpot.

What does this have to do with redistribution? Some might argue the stock market is just a giant casino. Since it's owned mostly by the wealthy, a rise in stock prices simply reflects a transfer of wealth from some of the rich (who cashed in their shares too early) to others of the rich (who bought shares early enough and held on to them long enough to reap the big gains).

But this neglects the fact that stock prices track corporate profits. The relationship isn't exact, and price-earnings ratios move up and down in the short term. Yet over the slightly longer term, share prices do correlate with profits. And 2013 was a banner year for profits.

Where did those profits come from? Here's where redistribution comes in. American corporations didn't make most of their money from increased sales (although their foreign sales did increase). They made their big bucks mostly by reducing their costs -- especially their biggest single cost: wages.

They push wages down because most workers no longer have any bargaining power when it comes to determining pay. The continuing high rate of unemployment -- including a record number of long-term jobless, and a large number who have given up looking for work altogether -- has allowed employers to set the terms.

For years, the bargaining power of American workers has also been eroding due to ever-more efficient means of outsourcing abroad, new computer software that can replace almost any routine job, and an ongoing shift of full-time to part-time and contract work. And unions have been decimated. In the 1950s, over a third of private-sector workers were members of labor unions. Now, fewer than 7 percent are unionized.

All this helps explain why corporate profits have been increasing throughout this recovery (they grew over 18 percent in 2013 alone) while wages have been dropping. Corporate earnings now represent the largest share of the gross domestic product -- and wages the smallest share of GDP -- than at any time since records have been kept.

Hence, the Great Redistribution.

Some might say this doesn't really amount to a "redistribution" as we normally define that term, because government isn't redistributing anything. By this view, the declining wages, higher profits, and the surging bull market simply reflect the workings of the free market.

But this overlooks the fact that government sets the rules of the game. Federal and state budgets have been cut, for example -- thereby reducing overall demand and keeping unemployment higher than otherwise. Congress has repeatedly rejected tax incentives designed to encourage more hiring. States have adopted "right-to-work" laws that undercut unions. And so on.

If all this weren't enough, the tax system is rigged in favor of the owners of wealth, and against people whose income comes from wages. Wealth is taxed at a lower rate than labor.

Capital gains, dividends, and debt all get favorable treatment in the tax code - which is why Mitt Romney, Warren Buffet, and other billionaires and multimillionaires continue to pay around 12 percent of their income in taxes each year, while most of the rest of us pay at least twice that rate.

Among the biggest winners are top executives and Wall Street traders whose year-end bonuses are tied to the stock market, and hedge-fund and private-equity managers whose special "carried interest" tax loophole allows their income to be treated as capital gains. The wild bull market of 2013 has given them all fabulous after-tax windfalls.

America has been redistributing upward for some time -- after all, "trickle-down" economics turned out to be trickle up -- but we outdid ourselves in 2013. At a time of record inequality and decreasing mobility, America conducted a Great Redistribution upward.

MB360: Americans back to spending on credit

Any economist, pundit or politician who tells you that our economy would get better if we could only increase access to credit (debt) or "incentivize" poor people to work while cutting their food stamps and the minimum wage, is either a charlatan or an idiot.

What happens when Americans, as a nation, start saving and stop spending on credit is economic stagnation or recession. So we must increase Americans' household incomes, and/or lower their household expenses to allow them to continue spending. After all, the well-off can buy only so many houses, yachts and luxury goods. Yes, they can save and invest in stocks and other securities... but their investments won't translate into U.S. jobs and economic growth if there is no market (consumer demand) to drive it. 

Indeed, the Dow just hit a record high, corporate profits and U.S. workers' productivity are at all-time highs, and yet... nobody is doing an economic endzone dance right now. Working class Americans feels more economically insecure than ever.

And that's why Obamacare is so necessary, among other federal programs.  

According to a 2013 study by the AARP, over the past 10 years, health care spending for average middle-income households increased 51 percent, compared to only 30 percent growth in household income. Over that same period, healthcare inflation increased three times the rate of growth for all other products and services; and per capita expenditure on health care increased 72 percent! 

We must cut our per capita expenditure on health care while protecting average Americans from treatable illness and medical bankruptcy. Only the Democrats are proposing real solutions to do that.  Republicans keep dawdling while Americans are dying and drowning in debt.  

Under President Obama, the rate of healthcare inflation has finally slowed and is projected to slow further. Coincidence?

The average American is broke and buying things they cannot afford with debt again. Debt based consumer financing again filling the gap of a shrinking middle class.

Posted by mybudget360 | December 1, 2013

URL: http://www.mybudget360.com/holiday-spending-debt-auto-sales-up-on-auto-loans/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+mybudget360%2FQePx+%28My+Budget+360%29

Bankrate: Americans still struggling to pay debts

Ordinary Americans are still de-leveraging after the Great Recession. Their continued debts are hurting consumer demand, which in turn is hurting employment and investment because companies don't want to produce or sell what people don't have the money to buy.

What can politicians do to ease the pain and get our economy going again?  Republicans' knee-jerk reaction is to cut taxes. Yet... the same folks struggling to pay their bills are the same "47 percent" of "entitled" moochers who already pay little or no income tax. And corporations are more profitable than ever, with billions of cash on hand. Meanwhile, Republicans urge fiscal austerity -- mainly by cutting "welfare" like WIC, food stamps and unemployment benefits for these same struggling Americans.

Something's gotta give. The Fed's continued quantitative easing is not reaching average Americans. If their struggles continue, then we can anticipate another decade of economic malaise: the "secular stagnation" theory.  In this context the risk -- the temptation, for some -- is to blow up another asset bubble to give the economy the appearance of health and spur consumer confidence, thus consumer spending. But we know that such bubbles burst eventually, leaving those same working-class people worse off.  

It's a shame our leaders can't come up with anything to break this vicious cycle, besides yet more asset bubbles that benefit business insiders, and free money for Wall Street banks that don't need it and doesn't "trickle down" in the form of loans to Main Street Americans.

Focus for many consumers? Just paying bills

By Polyana da Costa

November 25, 2013 | Bankrate

URL: http://www.bankrate.com/finance/consumer-index/focus-for-many-consumers-just-paying-bills.aspx#ixzz2lhMv4ATH

Japan v. Europe / stimulus v. austerity

It's still early, but so far so good for the anti-austerity economic policies of Japan's Prime Minister Shinzo Abe aimed at pulling Japan out of 20 years of economic doldrums.  

He's doing the exact opposite of what the IMF/WSJ/CNBC/Davos talking heads say to do, by spending money and encouraging inflation. 

I know, I know, many old teabaggers are clutching their chests and turning purple upon reading those words, but there are unintended evils attendant with high savings and zero inflation.

So, once again, the rest of the world is doing us a favor, showing us what works and what doesn't, and all we have to do is watch and copy the smart guys.

It's austerity on the right in Europe, and stimulus on the left in Japan.  Who's gonna win?  

Rest assured that your ace blogger will be following this story!....

(This is totally off-topic, but remember that Michael Crichton novel & movie Rising Sun?  Remember how he and others warned us that Japan's economy was going to eat our lunch?  Seems very silly now.  This was the same Michael Crichton, by the way, (may he RIP) who reportedly convinced Dubya that man-made global warming was a scientific hoax.  So that's, uh, two big strikes against the dead guy.)

Japan household spending surges as "Abenomics" gains momentum

By Stanley White and Kaori Kaneko

April 30, 2013 | Reuters

URL: http://www.reuters.com/article/2013/04/30/us-japan-economy-idUSBRE93T03R20130430

Fed: Lack of demand, not red tape & taxes, is the problem

Here's some interesting research from the Fed, based on National Federation of Independent Businesses monthly surveys of small business, that disproves what conservative pundits and economists have been saying about "burdensome regulations" and "uncertainty" holding back the U.S. economic recovery.

Read their executive summary and weep, teabaggers!

What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.

These findings support what Paul Krugman, et al have been saying all along.  Don't get me wrong, it's good to be a liberal, it's great to be right most of the time, but it's really sad and frustrating that the truth is so easily dismissed. Getting this stuff right affects the lives of millions!

UPDATE: Just to be fair & balanced, here's a link to an article by economist Jeffrey Sachs on why Paul Krugman is wrong, why he is a "crude Keynsian." Maybe later I'll refute Sachs in a separate post, although I will say that the major points he offers are special pleading, not backed up by data.

Aggregate Demand and State-Level Employment

By Atif Mian and Amir Sufi

February 11, 2013 | FRBSF Economic Letter

URL: http://www.frbsf.org/publications/economics/letter/2013/el2013-04.html

Private, not public, debt is the problem

Check this out, you deficit fetishists!:

American Private Debt [was] 310% of Gross Domestic Product in 2008, the highest since 1929, the last Great Depression, when Private Debt was 240% of GDP.

Government debt in 1929 was a paltry 40% of GDP. In 1945, when America was financing its participation in World War II, government debt exploded to 120% of GDP. That is the highest government debt has been in America, making the 85% of GDP in 2011 seem almost insignificant.

Government debt vis-a-vis Gross Domestic Product is not astronomical, according to this chart. It was not high in 1929 either, the last time the global economy had a heart attack and died. Public Debt is, in fact, at the time of this chart at least, lower than in 1945, when the public financed American involvement in World War II.

And before you go comparing us to the EU, or misdiagnosing the EU's problem as excessive public debt, read this:

Spain and Ireland were spectacularly successful in reducing their government debt to GDP ratios prior to the financial crisis [emphasis mine], i.e. Spain from 60% to 40% and Ireland from 43% to 23%. These were the two countries, which followed the rules of the [EU] Stability and Growth Pact better than any other country – certainly better than Germany that allowed its government debt ratio to increase before 2007. Yet the two countries, which followed the fire code regulations most scrupulously, were hit by the fire, because they failed to contain domestic private debt.…

So what's the solution?  Debt forgiveness: government regulators should be "forcing big banks, bondholders and other creditors to write down some of their bad debts."

138 Years of Economic History Show that It’s Excessive PRIVATE Debt Which Causes Depressions

By WashingtonsBlog | September 9, 2012 

URL:  http://www.washingtonsblog.com/2012/09/138-years-of-economic-history-show-that-keen-and-minsky-are-right-and-all-of-the-mainstream-economists-are-wrong.html

David Frum: GOP's ideology trumps economics

So the topic of conservative pundit David Frum's op-ed is what's wrong with Romney-Ryan, and it's definitely worth reading for that, but his explanation of the Great Recession and its aftermath is the most concise and on-target I've seen anywhere.  I'd like to say Frum's observations are obvious, but apparently they are not, not by a mile, not even among some very smart people, because many persist in believing that our current economic malaise has been caused by government debt, or at least is somehow aggravated by government debt, rather than their acknowledging that fiscal deficits and public debt are symptoms of a down economy, not its cause.  See here:

Americans assumed crushing levels of debt in the 2000s to buy expensive homes, homes they assumed would continue to rise in price forever. In 2007, household debt relative to income peaked at the highest level since 1928. (Uh oh.) When the housing market crashed, consumers were stranded with unsustainable debts, and until those debts are reduced, consumers will drastically cut back their spending. As consumers cut back, businesses lose revenue. As businesses lose revenue, they fire employees. As employees lose their jobs, their purchasing power is reduced. As purchasing power is lost throughout the economy, housing prices tumble again.

Rinse and repeat.

Since 2008, the debt burden on households has declined somewhat, partly because of increased saving, mostly because of mortgage default. But household debts have declined nowhere near enough, and the pace of household debt reduction is slowing.

The result: slow recovery of the private economy, weak consumer demand, paltry job growth -- considerably offset by continuing job shrinkage in the public sector.

In other words, as I've been repeating over and over again (apparently talking to myself for all the good it's done), the Great Recession and whatever we're suffering now has been caused by a lack of aggregate demand, i.e. too few people ready & willing to buy stuff.  And low demand is being aggravated by government at all levels cutting spending and public-sector jobs.  

Tragically, neither Obama nor Romney-Ryan has really addressed that core problem, or proposed a credible, much less courageous, solution.  Sadly, a vote for either ticket is a choice to muddle along.

Romney did Obama a huge favor

By David Frum

August 14, 2012 | CNN

URL:  http://edition.cnn.com/2012/08/13/opinion/frum-romney-ryan/index.html?hpt=hp_bn4 

Stiglitz: 'Deficit fetishism is killing our economy'

If you take away anything from this, remember these words from favorite bearded liberal Nobel economist, Joe Stiglitz:  

The fundamental problem is not government debt.  Over the past few years, the budget deficit has been caused by low growth.  If we focus on growth, then we get growth, and our deficit will go down.  If we just focus on the deficit, we're not going to get anywhere.  [...] If we go into austerity, that will lead to higher unemployment and will increase inequality.  Wages go down, aggregate demand goes down, wealth goes down.

Joseph Stiglitz: 'This Deficit Fetishism Is Killing Our Economy'

August 9, 2012 | Associated Press

What's wrong with the U.S. economy?

Growth comes in fits and starts. Unemployment has been over 8 percent for three and a half years. Cutting taxes and interest rates hasn't worked, at least not enough.

To Joseph Stiglitz, the Nobel Prize-winning economist, the economy's strange behavior can be traced to the growing gap between wealthy Americans and everyone else.

In his new book, "The Price of Inequality," he connects surging student loan debt, the real-estate bubble and many of the country's other problems to greater inequality.

When the rich keep getting richer, he says, the costs pile up. For instance, it's easier to climb up from poverty in Britain and Canada than in the U.S.

"People at the bottom are less likely to live up to their potential," he says.

Stiglitz has taught at Yale, Oxford and MIT. He served on President Bill Clinton's council of economic advisers, then left the White House for the World Bank, where he was the chief economist. He's now a professor at Columbia University.

In an interview with The Associated Press, Stiglitz singled out the investment bank Goldman Sachs, warned about worrying over government debt and argued that a wider income gap leads to a weaker economy.

Below are excerpts, edited for clarity.

___

Q: The Occupy Wall Street demonstrations are no longer in the news, but you make the case that income inequality is more important than ever. How so?

A: Because it's getting worse. Look at the recent Federal Reserve numbers. Median wealth fell 40 percent from 2007 to 2010, bringing it back to where it was in the early '90s. For two decades, all the increase in the country's wealth, which was enormous, went to the people at the very top.

It may have been a prosperous two decades. But it wasn't like we all shared in this prosperity.

The financial crisis really made this easy to understand. Inequality has always been justified on the grounds that those at the top contributed more to the economy — "the job creators."

Then came 2008 and 2009, and you saw these guys who brought the economy to the brink of ruin walking off with hundreds of millions of dollars.  And you couldn't justify that in terms of contribution to society.

The myth had been sold to people, and all of a sudden it was apparent to everybody that it was a lie.

Mitt Romney has called concerns about inequality the "politics of envy." Well, that's wrong. Envy would be saying, "He's doing so much better than me. I'm jealous." This is: "Why is he getting so much money, and he brought us to the brink of ruin?" And those who worked hard are the ones ruined. It's a question of fairness.

Q: Markets aren't meant to be fair. As long as we have markets, there are going to be winners and losers. What's wrong with that?

A: I'm not arguing for the elimination of inequality. But the extreme that we've reached is really bad. Particularly the way it's created. We could have a more equal society and a more efficient, stable, higher-growing economy. That's really the "so what."  Even if you don't have any moral values and you just want to maximize GDP growth, this level of inequality is bad.

It's not just the unfairness. The point is that we're paying a high price. The story we were told was that inequality was good for our economy. I'm telling a different story, that this level of inequality is bad for our economy.

Q: You argue that it's making our economy grow more slowly and connect it to "rent- seeking." That's an economist's term. Can you explain it in layman's terms?

A: Some people get an income from working, and some people get an income just because they own a resource. Their income isn't the result of effort. They're getting a larger share of the pie instead of making the pie bigger. In fact, they're making it smaller.

Q: So, for example, I put a toll booth at a busy intersection and keep all the money for myself.

A: That's right. You just collect the money. You're not adding anything. It's often used when we talk about oil-rich countries. The oil is there, and everybody fights over the spoils. The result is that those societies tend to do very badly because they spend all their energy fighting over the pile of dollars rather than making the pile of dollars bigger. They're trying to get a larger share of the rent.

Q: Where do you see this in the U.S.? Can you point to some specific examples?

A: You see it with oil and natural resources companies and their mineral leases and timber leases. Banks engaged in predatory lending. Visa and MasterCard just settled for $7 billion for anticompetitive behavior. They were charging merchants more money because they have monopoly power.

One good example was Goldman Sachs creating a security that's designed to fail.  That's just taking money from some fool who trusted them. Our society functions well when people trust each other. It's particularly important for people to trust their banks. Goldman basically said, "You can't trust us."

Q: Economic growth is slowing again. Unemployment seems to be stuck above 8 percent. Is that the result of high debts or slower spending?

A: The fundamental problem is not government debt. Over the past few years, the budget deficit has been caused by low growth. If we focus on growth, then we get growth, and our deficit will go down. If we just focus on the deficit, we're not going to get anywhere.

This deficit fetishism is killing our economy. And you know what? This is linked to inequality. If we go into austerity, that will lead to higher unemployment and will increase inequality. Wages go down, aggregate demand goes down, wealth goes down.

All the homeowners who are underwater, they can't consume.  We gave money to bail out the banking system, but we didn't give money to the people who were underwater on their mortgages.  They can't spend.  That's what's driving us down. It's household spending.

Q: And those with money to spend, you point out, spend less of every dollar. Those at the top of the income scale save nearly a quarter of their income. Those at the bottom spend every penny. Is that why tax cuts seem to have little effect on spending?

A: Exactly. When you redistribute money from the bottom to the top, the economy gets weaker. And all this stuff about the top investing in the country is (nonsense). No, they don't. They're asking where they can get the highest returns, and they're looking all over the globe. So they're investing in China and Brazil and Latin America, emerging markets, not America.

If the U.S. is a good place to invest, we'll get money from all over the world. If we have an economy that's not growing, we won't get investment. That's exactly what's happening. The Federal Reserve stimulates the economy by buying bonds. Where's the money go? Abroad.

Q: What's the answer, then? Raising taxes on wealthy people can't possibly solve all the problems you mention.

A: No, there's no magic bullet. But there are other ways of doing things. Just to pick one, look at how we finance higher education. Right now, we have this predatory lending system by our banks with no relief from bankruptcy. In some fundamental ways, it's really evil and oppressive. Parents that co-sign student loans now find out they can't discharge those loans, even in bankruptcy.

Education is so important, but there are so many barriers. Just 8 percent of those students in the most selective colleges come from the bottom half of the income scale. Eight percent! They can't get in because they don't get as good an education in elementary and high schools. Education is the vehicle for social mobility. It's how we restore the American dream.

Baker: What politicians won't say about U.S. economy -- MUST READ!

It's evident that Obama doesn't want to blame the bad economy on G.W. Bush, although he has every right to talk about the s**it sandwich that he was served up by his predecessor: two costly foreign occupations; 7 million jobs lost; and a burst housing bubble that removed $1 trillion a year from the U.S. economy.  I'm not sure most Americans understand the size of the hole we must dig ourselves out of.

Recently Obama got creamed by the media for saying the private sector was doing "fine," but in certain ways, it's doing better than just fine, as Dean Baker points out: corporate profits are at a 50-year high, and corporate taxes being paid are at a post-WWII low.  Gains in U.S. productivity are far outpacing gains in workers' wages.  And we have the best rating among larger countries for the ease of doing business.  Although my man Joe Stiglitz says our economy has hidden structural defects that the housing bubble only covered up, most economists, including my man Paul Krugman, believe the fundamentals of the U.S. economy are sound.  The problem is a gaping hole in aggregate demand.

Thus Romney's recycled Republican campaign mantra of "unleashing the private sector" is especially deceitful.  Where is all the pent-up demand supposed to come from that business investments are going to meet?  In other words, who in the world has the purchasing power to buy all the stuff that "unchained" U.S. companies are ostensibly going to produce once Romney has slashed their taxes and chainsawed their regulators?  

The truth is that we're in for a long, painful recovery that could be made a bit shorter and less painful with more government spending.  The multipliers of that gov't consumption would grow the economy and replace the spending with more tax revenue, rather than continuing to slash, slash, slash government while the economy shrinks in unison.

The Story of the Housing Crash Recession That Politicians Don't Want to Tell

By Dean Baker

June 19, 2012 | Yahoo! Finance

The economy is certain to occupy center stage in the presidential race this fall. Unfortunately, neither Governor Romney nor President Obama is likely to give us an accurate account of the economic problems we are now facing.

Romney's efforts seem intended to convince the public that President Obama has turned the country into the Soviet Union, with government bureaucrats shoving aside business leaders to take the commanding role in the economy. He will have lots of money to make this case, which he will need since it is so far from reality.

Corporate profits are at their highest share as a percentage of the economy in almost 50 years. The share of profits being paid in taxes is near its post-World War II low. The government's share of the economy has actually shrunk in the Obama years, as has government employment. Perhaps Romney can convince the public that the private sector is being crushed by burdensome regulation and taxes, but that has nothing to do with reality.

A Better Explanation

Unfortunately, President Obama's economic advisors have not been much more straightforward with the American people, never offering a clear explanation of why the economy has taken so long to recover. They have pointed out that economies often take long to recover from the effects of a financial crisis like to the one we experienced in the fall of 2008, but that is not an explanation for why we have not recovered.

The basic story is actually quite simple. The housing bubble had been driving the economy prior to the recession. It created demand through several channels. A near-record pace of housing construction added about 2 percentage points of GDP to annual demand or more than $300 billion in the current economy.

The $8 trillion in ephemeral housing wealth created by the bubble led to a huge surge in consumption. Tens of millions of people borrowed against bubble-generated equity or decided that they didn't need to save for retirement. When house prices were going up 15 percent-20 percent a year, the house was doing the saving. The result was a huge consumption boom on the order of 4 percent of GDP or $600 billion a year.

In addition, there was a bubble in non-residential real estate that followed in the wake of the housing bubble. This raised non-residential construction above its normal levels by close to 1 percent of GDP, or $150 billion a year.

A Bubble Generated

Adding these sources of demand together, the bubble generated well over $1 trillion in annual demand at its peak in 2005-2007. When the bubble burst, this $1 trillion in annual demand vanished as well. That is the central story of the downturn.

To recover we must find some way to replace this demand; however, that is not easy. People will not go back to their old consumption patterns because they know they need to save more. Tens of millions of people have much less wealth than they expected at this point in their lives after they saw the equity in their homes largely vanish. Tens of millions of baby boomers are approaching retirement with almost nothing but their Social Security to support them.

Given the huge loss of wealth from the collapse of the housing bubble, it is not reasonable to expect consumption to rise to fill the demand gap. It doesn't make much more sense to expect investment to do the job. Historically, investment in equipment and software has been close to 8 percent of GDP. It is pretty much back to that level today. To fill the demand gap created by the collapse of the housing bubble, the investment share of GDP would have to nearly double to 14 percent.

This would be almost impossible to imagine at any time, but it is especially far-fetched at a time when much of the economy is operating far below its capacity. Businesses are unlikely to spend a lot of money expanding their facilities when the existing capacity is sitting idle regardless of how nice we are to job creators.

Boosting Demand

Over a longer term we can expect that net exports will fill the demand gap. If we bring our huge trade deficit close to balance by selling more abroad and importing less, it will provide a substantial boost to demand. However, this will require that the dollar fall in value relative to the currencies of our trading partners, making U.S. products more competitive. That is a process that will take time. With many of our trading partners also in severe slumps, we cannot expect any major improvement in our trade balance in the immediate future.

This leaves government as the only remaining source of demand. This is not a question of whether we prefer the government or the private sector. We need the government sector to fill the gap in demand because the private sector will not do it. And that will be true no matter how much we love the private sector and its job creators.

Until we get our trade deficit closer to balance, we will need large government deficits to fill the gap in demand created by the housing bubble. That is the simple reality that neither party seems anxious to tell the people.