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Monday, February 16, 2015

Where did $25 Trillion Go?

              Where is that $25 Trillion?

The private wealth of the nation increased by $25 trillion since 2008. Did you get some of it?

OK, it was only $24.8 trillion. Where did it go? See the Federal Reserve report here, page 2.
(How this relates to the Ryan-Republican budget plan follows below this discussion of $25 trillion.) 

How much is $24.8 trillion created over a six year period? It is  $77,500 per citizen or $200,000 per household of new or additional wealth. (Divide $24.8 trillion by 320 million citizens). That's how much more wealth each American has since 2008. Every family of four will have $315,000 more savings since 2008 to add to their previous savings. Now the average family has almost $700,000 in total assets, not bad is it? It is a gain in national wealth of over 44% since 2008 while most families were struggling with declining home values, unemployment, loss of wages, and the worst economic collapse in 75 years. The per capita GDP between 2006 and 2012 increased by all of $3, from $48,905 to $48,908 (see this site to check). The national income, a composite of everyone's income, declined in 2008 for only the second time since 1933. But wealth began to skyrocket -- check the Federal Reserve report cited above. 

Now the average wealth per human being in the U.S. is $254,000, and each household has $676,000 in savings, on average. But, in actual fact, only about 10% are average or above. Most of the $25 trillion went to just 5% of the households. 

The lower-saving 50% -- half of America -- own just 1.1% of all savings (see here) and their average savings is below $14,000, not the average for all of $676,000. Inequality is the structural problem of our nation's economy, and our society. We must ask, does this affect the life opportunities of everyone, including the reader? Are we all poorer as a result of such extreme inequality? Is there an immense and immoral human suffering because many have NO access and many have little access to the immense resources that the nation possesses? Are we ignorant, heedless, or uncaring that we allow this distribution of resources to remain so one-sided. 

I have difficulty explaining the economy. My friends and those I share my concerns with do not get it. The economy's main problem is that the immense "surplus" has not been shared adequately; the poor receive too little for their contributions, and the very wealthy seemingly hog most of the surplus. The result is a horrible distribution of total wealth that is beyond moral justification. Yet the most vociferous among us are silent, as though they must ignore this stupendous inequality. 

Together the economy is a collective effort, but 40% of the workers only receive 4% of the annual income in wage income, check out  the Social Security Administration's report on wage income. The annual surplus, which we call savings, profit, net worth, more-than-we-need-to-use-this-year, mostly goes to waste in excess savings of  the very wealthiest. In order to save $25 trillion over a six year period when total output was around $90 trillion, some 28% of the output had to be saved. How else can one explain a gain of $25 trillion? (25 is 28% of 90) And during this period most were experiencing crushing wage decline, job loss, and housing value collapse. The median family lost 39% of its life savings according to the Federal Reserve (see page 2 and page 17), a drop from $124,000 to $77,000. But the national increase in net worth resulted from a splurge of wealth pouring into capital markets inflating financial assets, creating a bubble condition.    

The new $24.8 trillion of savings increases each household's savings by  $200,000, on average. Or $101,000 per adult. How many readers actually experienced this gain? 

In contrast, about 47 million out of about 320 million Americans (about 1 in 7) cannot buy their food with money, instead they rely on the charity of food stamps (or its equivalent SNAP credits). They get $1.40 per meal, or $30.05 per week or $130 per month. What is a normal food expenditure per household? Let's look to the basic family budget analyzed by the EPI. It is $188.50 per month per person, or $43.50 per week per person, for a family living in Topeka, Kansas, the median expense location in the nation. The SNAP food budget is almost a third less than the basic frugal food budget. Instead of three meals a day, maybe food stamp recipients  eat just two meals daily? 

As a nation are we concerned about those one in seven American citizens, 47 million humans, who must rely on that $30 a week for food? How do we explain this failure in the wealthiest nation on the planet? Are these Americans stuck in a state of dependency on the government? Or is there a structural reason for their poverty, such as perhaps chronically low wages and inadequate job  opportunities? 

Lawrence Mishel published in the New York Times an op-ed that targets low wages as the primary source of the economy's troubles. 
Here's an excerpt:


WASHINGTON — WITH the early stages of the 2016 presidential campaign underway and millions of Americans still hurting financially, both parties are looking for ways to address wage stagnation. That’s the good news. The bad news is that both parties are offering tax cuts as a solution. What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate.
Wage stagnation is a decades-long phenomenon. Between 1979 and 2014, while the gross domestic product grew 150 percent and productivity grew 75 percent, the inflation-adjusted hourly wage of the median worker rose just 5.6 percent — less than 0.2 percent a year. And since 2002, the bottom 80 percent of wage earners, including both male and female college graduates, have actually seen their wages stagnate or fall."

There is an solution, a way to reverse the trend. Briefly, you can go to Bernie Sanders' statement on the 12 proposals to turn the national economy in the correct direction. Or you can read on further in this blog, or review the blog list to the right here, particularly the EPI and its proposal of the Progressive Caucus budget. Sample idea: "
  • Make necessary public investments. The [P C] budget finances roughly $485 billion in job creation and public investment measures in calendar year 2014 alone and roughly $1.35 trillion over calendar years 2014–2016.3 This fiscal expansion is consistent with the amount of fiscal support needed to rapidly shrink the “output gap” and restore the economy to full health.

The economic solution lies in taxing the unused surplus that the wealthiest have coopted and waste in financial speculation and employ at a living wage in public jobs the capable but un-employed and under-employed and under-paid, which is about one in every four adult American workers -- one in four (I explain this 1 in 4 in the most recent posts. It is over 40 million workers.). Yes, we can be proud of our history, our  heritage, our patriots, etc., but surely we can do better. 

I could go on in detail about the means to spread prosperity, to spread the vast resources at hand, to spread the amazing $254,000 per citizen of personal savings or the near $700,000 per household savings, on average. Easily we all could have access to living wage  employment. The CBO shows that the average market income per household is $93,900 per year (see page 2, here), and that translates into $72,000 per worker (on average) including all the unemployed workers. Each worker, even the unemployed and the part-timers, contribute $72,000 to the total national income. Yet 40% of all workers earn less than $20,000 a year  and most of that 40% earn less than half that amount. The average wage income for the 40% (or 62 million workers) is just over $8,000 a year -- not $72,000. We could easily devise a way to share more equally these resources -- a true ownership society. (I explained this in a recent posting.) Figure it out, reader. We have plenty --- $81 trillions in savings, and over $12.7 trillion in annual income, according to the Joint Committee on Taxation, and $14 trillion according to the BEA.gov --- but millions are destitute and suffering, truly suffering. About 44% of citizens live in households where a $1,000 emergency expense is a disaster.  And 40% of the adults self-identify as "lower or lower middle class". Soon the majority will self-identify as poor.  
FT_14.01.24_middleClass_line_420

Most citizens are sleeping. We should be clamoring for real redistribution of resources. But the society is adrift, tragically unconcerned or unperplexed, often caught in a dog-eat-dog mentality, and cannot see its great potential.   

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Wikipedia's article on Income Inequality in the U.S. is an excellent and detailed reference that covers the full scope of the issue. It's an example of the power of "wiki". I highly recommend it.

I looked at the EPI article on international comparisons of "safety net" support for the poor, also an excellent reference. It concludes that the U.S. has a greater differential from low to middle to high incomes, and it also supports low income the least. I'm not convinced the report proves the last statement.

The U.S. Census finds that 48% of citizens are low-income or poor, from an article at Huffington Post.     
Pew Research finds that 69% of Americans believe that government should do more to reduce inequality. 

The Ryan-Republican Budget Plan
The Ryan budget, which is supported by all Republicans, would reduce by half the taxes on the wealthiest who earn more than $400,000 a year, and raise taxes by $788 on households earning $40,000 (see here, page 2 and 5). Tax increases would be served to three out of four Americans. Halving the tax rate on the wealthiest is hare-brained, to say the least, given that research shows that in the 28 years, 1979 to 2007,  the top one percent has increased its income by 200% (a tripling) while the average weekly earnings of the lower 80% of earners has decreased by 2%(see here, Federal Reserve chart and convert for inflation, using this site).The per capita GDP expanded by 72% in this 28 year period, see here. An excerpt from the cited report:

"The average inflation-adjusted income of the bottom 99 percent of taxpayers grew by 18.9 percent between 1979 and 2007. Over the same period, the average income of the top 1 percent of taxpayers grew by 200.5 percent. This lopsided income growth means that the top 1 percent of taxpayers captured 53.9 percent of all income growth over the period."

An updated report shows that between 1979 and 2012 households in the lower 99% had 2.6% income growth and the top 1% had 180.9% growth. Does this mean its time to cut the taxes of the 1%? 
According to Ryan and the Republicans, yes.

Ryan's budget would cut total tax revenues by 22% to 28%, and to compensate for the drop in revenue it would eliminate government programs serving the poor. About 69% of the cuts in program benefits eliminate serves to the poor elderly, the poor disabled, and poor children --- the politically defenseless. Read the report. The Tax Policy Institute predicts that since no new revenues are specified the national debt would climb from around 60% of GDP to 175% by year 2050. Ryan's budget would totally eliminate Medicaid, it would convert Medicare to a poorly funded voucher system, and it would privatize Social Security as well as raise the retirement age to 69. 
I'll write a more detailed analysis someday. References for the above info can be found here, and here and here
Here's an income perspective from the Joint Committee on Taxation, 2014, see page 30:
The wealthiest 5.2% of tax filers, earning over $200,000 yearly, earn 32.3% of all income, pay 70.0% of all income taxes, and 46.7% of all combined income and Social Security taxes. Most of Ryan's tax cuts would benefit the top-earning 5 percent. The fact that they earn almost a third of all income, own 75% of all financial assets, and more than half of all wealth -- that's the status quo that is anti-democratic and harmful. The Ryan Budget is a pay-off to the rich (campaign contributors) who make most of the campaign contributions. Two-thirds of all contributions came in amounts greater than $200 from just 0.5% of all U.S. adults -- see here. The wealthiest exclude, effectively, any candidate who would raise their taxes and reward those who would cut them in half. The Ryan budget is also an insult to intelligence, as it does not balance out as the proponents claim. It is Robin Hood in Reverse. 


Monday, February 9, 2015

What Caused the Recession ? 

          and Are We Still In It in 2015?                

Excessive Private Debt caused the Recession. 
And the employment rate among age 25 to 54 years old has 
recovered by half, so we are half way to recovery --- after 5 and a half years! 
(See here, the February 6, 2015, articles by Elise Gould, with relevant graphs.)
The unemployment rate would be 9.0% she says, if the dropped-out workers
were counted.
9.0% unemployment IS recession.
Not since 1986 has this particular age group showed such low employment.
This age group is not affected by the baby boomer retirement event; their low 
employment rate is solely an effect of the recession. And a perspective on the devastation of long term  unemployment can be found at the CEPR site.  

From 1996 to 2008 outstanding financial debt increased by 162%
and the economy's growth per capita grew by 24%
Creating debt at a rate almost 7 times faster than real growth is disastrous. 
When the median household savings falls by nearly 40%, when 15  million or 11% of the workforce lose their jobs in a two year period, and when the recipients of food stamps increases from 17 million in 2000 to 47 million in 2013, that is a disaster
(see graph here)
Excessive private, not public, debt created the fatal flaw leading to the great recession.
I calculated from the Federal Reserve's Flow of Fund report, Table D3, and then adjusted for inflation. You can also note that government debt grew slower than all other sectors' debt. This Federal Reserve Graph shows the growth of the financial system outstanding debt, numbers unadjusted for inflation. And this one shows the growth of household debt.
Here's another comparing financial debt with non-financial corporate debt.
I also used the Measuring Worth web page where they calculate GDP per capita growth between 1996 and 2008.

Here's a graph of total private debt as a percentage of GDP. We are still around double the historical average. Between 1946 and 1976 the economy grew at a rate of 

Chart- US Private Debt as a Percent of GDP

Here's a video about the drag of private global debt from the Guardian newspaper. 

The U.S. economy grew at half its normal rate between 2000 and 2010. From Wikipedia and BEA.gov:  
"US real GDP grew by an average of 1.7% from 2000 to the first half of 2014, a rate around half the historical average up to 2000.[84]"  There's a chart tucked away in Bailout Nation by Barry Ritholtz showing that GDP growth during the pre-crash 2000s was generated by home loan mortgage borrowing, called 2nd mortgages. 
Christian Weller provides a monthly snapshot of the economy at the Center for American Progress. 
This comes from the January report: "Household debt equaled 102.5 percent of after-tax income in September 2014, down from a peak of 129.7 percent in December 2007." And this graph showing our present recovery vs. other recoveries:


EconSnapshot-Jan15fig1 

The EPI also presents a similar graph (see here) except you can see the performance of the 2007 
recovery is about a third, not a half, of all previous recoveries:
Chart: Real GDP growth, comparison of recessions


Home Mortgage Crisis Still Unfolding

Dan Alpert at Economonitor, March 6, 2015, writes about the wrongly perceived recovery in housing.
It's an important article showing the impending deflationary pressures on the economy.
One must link to his Westwood Capital web page to see the entire presentation. The graph 
on page 12 tells a powerful story of deflation, especially combined with the thesis of his 
analysis.  

Here's an article about the failure of the Obama Administration effort to save homeowners (from a recent American Prospect issue). This is an example paragraph from the article:

                 "The most direct and effective policy solution to stop foreclosures is to allow bankruptcy judges to modify the terms of primary-residence mortgages, just as they can modify other debt contracts. This is known in the trade as “cramdown,” because the judge has the ability to force down the value of the debt. The logic of bankruptcy law reduces debts that cannot be repaid in order to serve a broader economic interest, in this case enabling an underwater homeowner to keep the house. Liberal lawmakers believed the threat of cramdown would force lenders to the table, giving homeowners real opportunities for debt relief. Wall Street banks were so certain they would have to accept cramdown as a condition for the bailouts that they held meetings and conference calls to prepare for it."

Housing Crisis Myths
Here are the Ten Myths from Jennifer Taub's book Other People's Houses from the last chapter :

1. There has been no official bipartisan consensus on the causes of the financial crisis.
                               Carl Levin (D) and Tom Coburn) investigated and agreed on the causes, see here. 

2. The financial crisis was an accident without human causes.
                        Steve Keen explains in his book Debunking Economics that he received 
                        the (Paul) Revere award for his prescient forecast of the economic freefall.
                       There were 94 other economists in the running for the award, and 5,000 who voted 
                       in the award. Read the article.

3. The financial crisis was brought about because the Community Reinvestment Act of 1977 forced banks to lend to people with low incomes who could not afford to pay back their mortgages. 
                       This is the conclusion of most Republicans, and it is fantasy.

4. The giant government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, caused the financial crisis because he government pushed them to guarantee mortgage loans to people with low incomes as part of their public housing mission.
                     Fannie and Freddie were private enterprises selling their stock shares on the NYSE. 
                     The FCIC concluded they were acting out of self-interest, not government pressure

5. Mistakes were made, but there was not widespread fraud and abuse throughout the financial system.
                     Jennifer Taub's book and others will convince you of fraud.

6. The financial crisis was caused by too much government regulation.
                     Most people realize that the system was poorly regulated. 

7. Nobody saw it coming.
                      See note #2 about the Revere Award.

8. The financial crisis was unavoidable. And financial crises of this magnitude are inevitable.
                       The Federal Reserve is charged with oversight sufficient to quell over-speculation.

9. The Dodd-Frank Act has ended "too big to fail". 
                      The six largest banks are larger than before their self-destruction.

10. The bankers are the victims of greedy homeowners who borrowed money and did not pay it back. 
                              When debt increases 7 times faster than growth over a 12 year period, 1996 to 2008; when home price jump by 70% nationally over a four  year period, 2002 to 2006, banks are not ignorant observers, they are perpetrators. They immediately sold most of their loans as 
securitized  assets. 

Taub's book is masterful, I nominate her for the Supreme Court. It is also very complicated and detailed. The last page of her book quotes Bank of America CEO Brian Moynihan testifying to the FCIC, 
"Over the course of this crisis, we as an industry caused a lot of damage. Never has it been clearer how mistakes made by financial companies can affect Main Street, and we need to learn the lessons of the past few years." 
Excessive private debt is a well-known cause of speculative collapse, it is 
surprising that so many ignore this as the main cause. Economist Steve Keen has 
placed his analysis on it in his book Debunking Economics. From page six, ". . . the 
never ending crisis . . . was no 'Black Swan.' Its inevitability was obvious to anyone
who paid attention to the level of debt-financed speculation taking place, and considered what would happen to the economy when the debt-driven party came to an end.

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POVERTY RAGES
Paul Buchheit has been writing the nation's best journalism. He explains in this February 2015 article the endemic poverty in the wealthiest nation. He cites a study showing that "almost two-thirds of Americans didn't have savings available to cover a $500 repair bill or a $1,000 emergency room visit."
The average household income, pre-tax and pre-transfer, is $93,000 a year (see CBO report here). The average savings per household is around $650,000 (see Federal Reserve report, page 2, here) -- and almost 2 in 3 live in households that cannot pay a $1,000 emergency room visit. !!!
Should it surprise us that the suicide rate among age 40 to 64 group has increased by 40% since 2000?
Read the article here
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LOW WAGES
I made this comment on one of Elise Gould's articles about employment, cited above.
"The Social Security Administration report on wages for 2013 says that 40% of workers earn less than $20,000 a year. The National Jobs for All Coalition shows that 12% of all workers work full-time and year round for under $23,500 a year, the poverty level for a family of four. 

40% of Workers Earned Just 4% of all Income in 2013
The combined or collective income of all 61 million workers who earned less than $20,000 in 2013 is about 4% of the total national income. Again 40% of the workers earn only 4% of all the income our economy generated. 
It's not complicated to figure it out. Add the incomes at the SSA report to get the $504 billion in income going to the lowest earning 40%, then go to the BEA.gov / personal income interactive site to find total personal income for 2013, $14.167 trillion. Then divide the numbers for a percent of total. Even if we take the total income recorded by the Joint Committee on Taxation for 2014, $12.7 trillion, the percentage does not really change much (see here for the JCT, page 30). Or look at the EPI table 2.4, see here, and find that wage income amounts to 54% of total income. 
Something should go off in your mind when you read this.