Wednesday, July 7, 2010
This installment has six sections:
1. Dean Baker on Inequality, the Best Article in Years, and Inequality in Short, a Quick Guide with sources.
2. One in Three Americans -- Less than $5,000
3. A 1932 Question with a 1931 Answer -- about the federal deficit 2010
4. The Bush Years --- The National Debt and the Annual Federal Deficit, The Tea Party during the Bush Years Saw 16% Over-Budget Spending for Eight Years
5. A comment to a radio station about the extent of ‘the problem’
6. Reliable Information Sources
I hope to offer fairly simple explanations about complicated economic riddles. Naturally, no one agrees about economics, but we should all try to have an informed opinion. “Intelligent people can and often do disagree,” as Warren Brussee often notes.
Dean Baker on Inequality, the Best Article in Years
This morning I read the best summary article about the economy that I’ve read in months if not years. Dean Baker’s “The Right Prescription for an Ailing Economy” printed in the Nation magazine, and printed at his web site, Center for Economic Policy Research, --- http://www.cepr.net/index.php/op-eds-columns/ ---
offers the best summation I have read. If you read no other article on economics, read this one. Inequality is the problem.
The Nation magazine published six essays about inequality, all good, especially Dean Baker's and Robert Reich's. Jeff Madrick's I found not up to his normal excellence, but still good. Baker summarizes his argument noting the growing mismatch of productivity gains and wage stagnation in this paragraph:
This virtuous circle was broken by Reagan-era policies intended to weaken the power of ordinary workers. Wages no longer kept pace with productivity growth, eliminating the automatic link between productivity growth and demand growth. This led to excess capacity in the economy, which was filled in the 1990s with demand generated by the stock bubble and in the 2000s with demand generated by the housing bubble.
As Robert Pollin pointed out, 1973 to 2005, productivity increased by 90% while median weekly income decreased by 10%. But the economy grew because of what Robert Brenner calls "asset bubble Keynesianism." Demand is then powered not by self-sustaining organic income growth, nor by federal job creation as in the New Deal and World War II era, but by government orchestrated escalation of asset prices by regulatory mismanagement. The word "mismanagement" is a conscious choice here. A market can sell no more than what purchasers can purchase. Cut wages and you cut purchases, which unchains systemic shrinkage. The economy ratchets downward. When the bubble breaks there is a lower "normal." Inequality matters, it is foremost.
Inequality in short:
At least 33.1% of Americans live in households with less than $5,000 to their names. Regrettably 24.1% live without any savings at all, according to Edward Wolff, as I cite below. If you are serious about learning about inequality, you will check these sources of info. More sources I provide at the bottom of this July 7, 2010, installment.
As 33.1% struggle --- and that is more than 100,000,000 citizens in the richest nation in the world whose annual GDP amounts to over $47,000 of output per citizen, and whose workers produce on average more than $100,000 per worker ---
Peter Edelman and Barbara Ehrenreich point out in March, 2010 (http://www.agenceglobal.com/article.asp?Id=2284),
Millions of Americans are in dire need. Six million have no income other than food stamps, which is astonishing, since food stamps by themselves provide help at a level that is just 37 percent of the poverty line. Not surprisingly, extreme poverty -- having an income below half the poverty line, below $9,100 in 2009 terms -- had already skyrocketed before the recession, from 12.6 million people in 2000 to 15.6 million in 2007, well over 40 percent of the poor and more than 5 percent of the entire population. In 2008, with the recession beginning to bite, the number swelled to 17.1 million.
The Commerce Department reported that for the second time in 71 years, personal income dropped by 1.7 percent in 2009. (See:
Americans have lost not just income but wealth. The median household net worth dropped from over $102,000 to $65,400, the 1992 level,
a 36.1% drop, while the mean (average) net worth dropped by 17.1%. That means that the nation has 1 in 6 fewer dollars today compared to three years ago. It went up in speculative smoke. One can read Edward Wolff's summation (Working Paper 589) of the effects of the downturn on page 34 of his report at the Levy Economics Institute, (http://www.levyinstitute.org/publications/?docid=1235).
One paper estimates that net worth will shrink by 45% to 55% for ages 45 to 64, as summarized by Rosnick and Baker, The Center for Budget and Policy Research. They estimated this loss in September 2009 in their paper, "The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble." (http://www.cepr.net/index.php/publications/reports/the-wealth-of-the-baby-boom-cohorts-after-the-collapse-of-the-housing-bubble)
"The Income Gaps Between Very Rich and Everyone Else More Than Tripled in the Last Three Decades," reports Chad Stone and Arloc Sherman at the Center on Budget and Policy Priorities. (http://www.cbpp.org/cms/index.cfm?fa=view&id=3220) The after tax income of the top one percent in 1979 was 7.5% of national income, in 2007 it was 17.1%. Between 2001 and 2007, "Households in the bottom fifth of the income spectrum received tax cuts averaging $29, which raised their after-tax incomes by an average of 0.4 percent." "Within the top 1 percent, those with incomes exceeding $1 million received tax cuts averaging $114,000, which raised their after-tax incomes by an average of 5.7 percent."
Here are some writings I’ve knocked out lately:
One in Three Americans -- less than $5,000
One in three Americans lives in a household with less than $5,000 in savings. It is more accurate to say, one in four live in a household with zero savings, and another nine per cent live in a household or family with less than $5,000. Typical poverty measures only take into account annual income, not savings.
Just how many people are poor in the U.S.? About one in three, at least. Here's how I draw that conclusion.
Income: Almost one in three workers are either unemployed (9.5%), under-employed (8.7%) or working full-time full-year at below poverty wages for a family of four (11.6%). These three groups make up 29.8% of the workforce, June, 2010. But the official measure for poverty covers not workers but households. (See njfac.org for BLS statistics) With workers almost 1 in 3 are out of luck.
Savings: The edge of absolute poverty draws closer and sharper when you realize that, beyond annual income, the fall-back savings, wealth, or net worth of about 1 in 3 Americans is also extremely low. The net worth, or savings less debt, of around 1 in 3 American households is less than $5,000 in 2009. So a household of 3 with less than $5,000 has about $1,667 per person in savings. I consider that poor. Households are between 2 and 3 people on average, and 1 in 3 Americans reside in a household where there is less than $5,000 of savings. And, again, 1 in 4 households have zero net worth, with an additional 9 percentage with less than $5,000 to their name.
According to Edward Wolff following the economic downturn between 2007 and 2009 the percentage of U.S. households with zero or negative net worth increased from 18.6 to 24.1 percent (page 33 from Working Paper No. 589, Levy Economics Institute of Bard College, March 2010). According to another report by Wolff ("Recent Trends in Household Wealth in the United States" June 2007), the percentage of Households with net worth less than $5,000 has ranged since 1983 to 2004 from 8.9% to 9.8% above the percentage of households with zero or negative net worth. In his 2010 report he does not mention the percentage with less than $5,000. But it's reasonable to conclude that those with less than $5,000 in 2009 is at least 9% higher than 24.1%, which is to say it stands at 33.1% and probably a little higher.
The conclusion: one in three Americans lives in a home with under $5,000 to their name, and about 3 quarters of these folk have no savings at all. Not all these are single earner households, but some are. And the annual earnings status of about one in three in the workforce is 'without a job', 'with not enough job', or working for less than poverty-level income. If you enlarge your criteria for poverty to a more realistic poverty income, then the percentage of Americans who live in poverty enlarges even more than one in three.
Why cannot our economy, with the aid of or our public policy, generate more jobs? And why can't jobs in general pay more, that is, generate higher wages? Currently our economy generates over $47,000 per citizen each year. Per citizen includes everyone, those who do not work included with those who do work, or generate economic value. With that very high level of economic activity, it’s a wonder that anyone is poor. Maybe our policy is deliberately designed to create poverty? The top one percent of households in 2007 earned 23.5% of pre-tax income, and 17% of post-tax income, both amounts more than what half of America’s households, at the bottom of the income scale, received collectively. Over the past 35 years the average worker’s productivity, that is dollar value produced per hour, has gone up by 90%, yet non-supervisory workers’ average incomes have stayed even or shrunk.
Public policy questions in a democracy should focus on these contradictions, injustices and social suffering. These are the policy questions the nation should ask. We have to find a way to employ virtually everyone who wants to work, and pay each a handsome wage. Each worker generates on average almost $100,000 a year. Half of those workers receive less than $33,000 a year, and often much lower. Maybe we are just trying to create poverty and succeeding.
A 1932 Question with a 1931 Answer
An article at Roubini.com web-page questions the policy decision of the German government to cut its stimulative spending, asking whether it is time to stimulate the national economies with more government spending or to cut government deficits; it’s a worldwide problem. The Germans are declaring victory from the recession and pushing to restore balanced budgets in European nations. This is called “The Treasury View.” The author calls this into question in his article; “The Treasury View Failed in the 1930s. Why Should It Work Now?” by Roberto Tamborini, July 1, 2010.
This is my response to his article:
What is the basis of sustained aggregate demand? As the author states, no leader or banker or economist will state that "large worldwide displacement of aggregate demand that was caused by the financial crisis is behind us," The pre-crisis demand was founded on financial bubble-economics, not on organic demand. Demand is based on wide-spread distribution of income, making feasible consumer spending. Capitalism has to overcome its contradiction, it has to sustain demand while maintaining profits, and in the process maintain reinvestment to propel productivity. Professor Emmanuel Saez's report Striking It Richer, August, 2009 Update, shows that between 1942 and 1982 the top 10% of households took in no more than 35% of the national income, but today they receive almost 50% of the national income. Most of the increase has gone to the top-most one percent of households. The bottom level households have seen their incomes squeezed; that is the pie grew, but the slices for most did not. The aggregate demand from these households has been stunted. The demand we witnessed pre-crisis was speculation driven, not socially driven. On the other hand, from 1939 to 1945 unemployment dropped from 19% to below 2%, and for 1943, '44, '45, the rate was below 2%. This high employment was a result of high deficits, a full employment program, that effectively transferred both wealth and income into households without the means to stimulate the economy. The Treasury View, as per this article, has relevance during most periods of economic history and normally can contain and overcome recessions.
But for the last decades worldwide economic "growth of private sector real non-residential capital stock" has declined since 1960, dropping from 5.0% per annum in the 1960s, in the 70s to 4.2%, in the 80s to 3.1%, in the 90s to 3.3%, and in the U.S. 2.1% between 2000 and 2005. The failure of investment to replace capital stock is a consequence of crowding out of aggregate demand, also called lowering wages. The data of the last sentences comes from OECD database as reported in Robert Brenner's Book Economics in the Age of Global Turbulence, 2006, page 282. "(T)he Treasury View is a foggy road with many dangerous pitfalls," is most certain. I'm waiting for some world leader to proclaim all those turn-around events that this article mentions. In the U.S. median household wealth has dropped by 36% since 2007 according to Edward Wolff of the Levy Economics Institute. Some 32% of households have less than $5,000 to their name. Where will the sustained aggregate demand come from to sustain economic dynamism? This article makes a strong case that that demand element is still missing. This is not a minor question. We are in a 1932 moment with a 1931 answer. Professor Jack Rasmus' book Epic Recession also draws much the same conclusion.
This is the relevant quote from Tamborini’s article that the world is waiting to hear from it’s political and economic leaders:
“Going through Buiter's list, neo-supporters of the Treasury View should be ready to go on TV and tell people more or less the following:
The large worldwide displacement of aggregate demand that was caused by the financial crisis is behind us. We have largely succeeded in bridging the gap between aggregate demand and potential capacity of our economies. Inventories are thinner, plants are approaching full capacity, job creation is brisk, prices are soaring, credit lines are plentiful. We can now return the main control leverage of the economy to the hands of the central bank; nominal interest rates are sufficiently far from the zero-lower bound, interbank markets are calm, and the transmission mechanisms of ordinary monetary policy ensure prompt effects on credit supply and economic activity.”
It is obvious this is not the case, and as the author concludes,
“Far from being the polar star towards recovery, the Treasury View is a foggy road with many dangerous pitfalls. It is clear that the G8 governments should elaborate a credible exit strategy from extra-ordinary deficit spending in the medium-long run, but what is happening in Deutscheuroland is most probably too much and too early. If this is "imposed" by financial markets and LCFE, it only means that they have not stopped destabilizing the world economy, and we all are in serious trouble.”
The National Debt, and the Annual Federal Deficit:
The Tea Party during the Bush Years: 16% Over-Budget for Eight Years
I spent some time looking up the (over) spending behavior of the Bush administration, 2001 - 2009. I researched the figures at www.usgovernmentspending.com/ and drew the above conclusion, on average the Bush years saw 16% more out-go than in-come, expenses over revenue. So, imagine, $1,000 is the expense, $840 is the revenue to pay for the expense, $160 is what goes on the credit card. Multiply by eight years and trillions of dollars. Under Bush, the national debt expanded enormously.
Bush years added $6,068 billion to the national debt, according to the above web page. The increase went from $5.807.5 trillion to $11.875.9 trillion, and increase of over $6 trillion. These dollars are not adjusted for inflation. To better understand the increase, one takes the percentage of GDP from both beginning and end years, 2001 and 2009. I have not done that.
The 16% over-budget amount is not even drawing out the Social Security and payroll taxes that are not discretionary spending. When Social Security is withdrawn, the budget over-spending was 20% a year. That means, the Bush people ran up a bill, but for every $1,000 of expenses they only collected $800 to pay for it, and the rest was put on credit. Prudent? Where were the Tea Party folk when we needed them?
About the 2009 Budget Deficit:
The best article I’ve read is by John Miller at Dollars and Sense Magazine, November/December 2009, “How I Learned to Stop Worrying and Love the Deficit.” He states “Even after correcting for inflation, $1.58 trillion is a record federal budget deficit. But this eye-popping number needs to be seen in context. A trillion and a half dollar deficit will equal 11.2% of Gross Domestic Product (GDP) for 2009, according to CBO estimates. That too is a record for “peacetime” deficits. The Reagan deficits in their worst year reached 6% of GDP. During World War II, however, military spending pushed the federal deficit to qualitatively different levels, reaching 31.3% of GDP and never dropping below 14.5% during the war years 1942 to 1945.” The gist of the article draws from a report from the Economic Policy Institute, The 2009Budget Deficit” by John Irons, Kathryn Edwards, and Anna Turner, August 20, 2009.
In summation, he and they say, there are four drivers: 1) 42.3% of the deficit results from the economic downturn (less tax revenue), 2) the Bush tax cuts to the rich (less tax revenue), the unpaid wars in Iraq and Afghanistan, the unfunded addition to Medicare, Plan D, caused another 42% of the drop-off, and 3) the Bank Bailout contributed 7.7%, and 4) the Obama Stimulus Package of April, 2009, another 7.6%.
The downturn was a result of financial system mismanagement under Greenspan. The tax cuts, etc., came under Bush. The bailout and stimulus were a consequence of economic mismanagement under the Bush regime. Clinton and Democrats had their hand in deregulating the financial system, and the Democrats are not exonerated or exempt from severe criticism.
I sent the following to radio station KPFA after a good session with an economist.
I like Max (the economist interviewed), I might call in.
This is a good question: According to Edward Wolff who studies wealth in the U.S. between 2007 and 2009 the mean (average) household wealth dropped by 17%, but the median household wealth dropped by 36%. If there is about 1/6th less money in our nation, and the typical household has about 1/3 less savings or net worth, how will the economy recover quickly?
Recovery means people buy stuff and services again, generate profits for companies, the companies add workers, it's a positive self-sustaining cycle. The typical family owns about 1/3 less, and income is declining, and fewer people are working. Access to credit is difficult, people are saving to pay off their debts. The mortgage crisis is as bad as ever. How can we bounce back quickly?
I know, you wonder about my sources. I was reading in TooMuch.org an article about the meltdown of wealth.
That article led to this essay/report by E. Wolff,
And this is a quote from page 34 (of the 59 page report):
"A somewhat rough update, based on the change in housing and stock prices, shows a marked deterioration in middle-class wealth. According to my estimates, while mean wealth (in 2007 dollars) fell by 17.3 percent between 2007 and 2009 to $443,600, median wealth plunged by an astounding 36.1 percent to $65,400 (about the same level as in 1992!.") (The Stanford University's Center for the Advanced Study of Poverty and Inequality published in fall 2009 a summary article by Wolff, for another look at his findings.)
And a few paragraphs below it says, interestingly:
"There was also a large expansion in the share of households with zero or negative net worth, from 18.6 to 24.1 percent." (that is 2007 to 2009) So, about one in four households own nada, zip, nothing, and that's why one in four children get their food from food stamps. According to the Wealth Inequality Reader, a book by Dollars and Sense magazine, the portion of households with less than $5,000 net worth in 2004 was 27.1%, so let's say it is now 5.5% higher, at least, that's 32.6% of all households, call it one in three -- less than $5,000. And at the bottom of Wolff's report there is a page about income distribution: the top one percent over 21%, the bottom 60% under 21%.
That's why I do not understand Max when he says a hefty income tax would not be a good thing. Between 1940 to 1983 the highest marginal income tax ranged between 70% to 90%. It was Reagan who dropped it to about 35%. (First to 50% then to 28%)
Thanks Brian, I can't take up all your day. Good weather this week-end. Enjoy.
If you want to read more of my writing, http://benL8.blogspot.com
Reliable Information Sources --------
Here are some sources I find very interesting.
The Nation magazine carried six articles about inequality in America, which is
my continuing thesis --- according to former Chairman of the Federal Reserve,
Marriner Eccles, you have to spread the surplus or you will stunt the entire system.
I am continually looking at Too Much (www.toomuch.org) online for its weekly take on inequality.
I read Dean Baker every week at his Center for Economic Policy Research
You can also read the twin, www.cbpp.org, or Center on Budget and Policy Priorities.
Robert Pollin writes at the Political and Economic Research Institute
Levy Economics Institute offers the best in scholarly Keynesian proposals.
Economic Policy Institute is the grandfather of liberal economics.
I found Hazel Henderson's Amazon web profile a very informative place to browse.
I read Warren Brussee twice a month to stimulate my mind about the on-going slump.
And all are professional sources of information with scholars who have devoted their lives to
capturing the essence of good public economic policy.
Now I’m done for the day, July 7, 2010. I hope this expands your understanding of the national and world economies, and the challenges that lie ahead for all of us. Ben Leet