Economics

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Fed Slowing Economy

Watch out everyone. The chances of recession have risen recently. Here’s the New York Times on the Fed minutes in which a slowdown was discussed: Fed Minutes Show Fears of Slowing Economy

The odds of a recession next year sometime have increased. The biggest source of danger is the over-extension of bad mortgage loans by banks during the housing bubble. With house prices beginning to fall year on year, and unsold home inventories rising rapidly the housing market looks very weak for the first time in years. The problem is that house price appreciation was a significant source of spending power for consumers who took our home equity loans to fuel consumption. The rate of draw down of those types of loans is now fading away. With wages weak there is little other than a run up in credit card debt to keep consumption rising.

That’s a recipe for a decline. Looks like choppy water ahead … just in time for the next presidential election.

Another thing for Bush’s successor to clean up.

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Budget Woes

This analysis, by the Center on Budget and Policy Priorities, highlights the hole the Republicans have dug for us over the past few years: Budget Deterioration from 2000-2006
One of the Largest Ever

The deterioration in America’s budget is both startling and historically huge. Yet the public rarely focuses on it. The year on year damage is bad enough, but the comparison with the 1990’s is downright depressing.

The rhetoric that “the tax cuts pay for themselves” is blown away by study after study. Even the Treasury’s latest effort which you can find an anlysis of here: Analysis of Tax Cuts shows that, at best, only 10% of the tax cuts will ever be paid for by economic improvements resulting from those same tax cuts. On the contrary the evidence is overwhelming that unless the tax cuts are paid for immediately by offsetting cuts in government spending they end up hurting by reducing employment and investment levels later on.

There is no other way to put it: the Republican policy of the last few years has been an unmitigated disaster.

Our kids will look back at these years and ask why we hated them so much that we voted for Bush and his cronies.

And why do the Republicans hate the middle class so much?

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Where Have the Wages Gone?

Well I am back from my summer break and what do I find? This depressing news in the New York Times: Real Wages Fail to Match a Rise in Productivity

Wages, as a percentage of the economy, have reached a lowpoint of 45.3% and have given back all the gains of the late 1990’s. Part of the reason is that benefits such as health care costs, which are considered part of total compensation, have risen so quickly that employers have diverted cash that could have been used for wage increases into paying for them. So workers get a “pay raise” even if the cash they take home doesn’t rise. This draining away of cash is just another effect of America’s failed health care system. Runaway inflation in health care costs is strangling the potential for wage increases. This leaves workers with less for other things, and more to the point it means that they fall progressively further behind inflation.

Grim though this is, it is not the whole story: productivity has growen strongly, but the benefit of that improvement has gone almost entirely to stockholders, not to workers. This is unusual. One of the key drivers of wage gains has traditionally been an increase in productivity. Now, it appears, corporate owners are keeping the benefit for themselves and are not passing it along. They are not even sharing it a little. The share of the economy taken up as profits is at its highest for forty years, which is not surprising in a Republican era, but which is still a little eye popping when the rhetoric of the Republicans is considered. After all they are constantly beating the drum for cuts in corporate and dividend taxes so as to encourage investment. Surely a record share of the economic pie is enough of an incentive to invest already? Plus the benefits of this record share of wealth held by profits eventually flows to the Republican contituency: the wealthy who hold the vast majority of the stock of American companies.

It is statistics like these that can be depressing. The plutocracy has regained control of America and the heyday of the middle class is over for now. Look at these numbers in the context of the massive divide in the distribution of income and wealth. The success of the Republican agenda to destroy the middle class is ever more evident.

Remember that the American middle class is a phenomenon of the post war years. The distribution of income that was radically altered and tilted away from the rich by the New Deal, and the prolonged post-war boom when America had no serious economic competition were the two pillars of the expansion of the midddle class. Then came complacency and a post-war generation that did not realize the value of the social programs that underwrote their position. That generation saw social programs as a cost, as a burden, rather than as an insurance. They bought into the apparent, and surface, dynamism of the “market knows best” mantra spewed out by the Republicans. They bought into tax cuts for the rich. They bought into gutting programs for the poor. They really thought they could defy economics 101 that teaches that without government intervention the rich will always dominate and work to exclude the masses. They also forgot that the middle class is part of the masses, a privileged part perhaps, but inexorably a part. When the plutocracy wants to squeeze more wealth for itself it cannot turn to the poor: there is nothing there to squeeze. No. The people to squeeze are the middle class.

Numbers like these wage figures show just how successful the plutrocrats have been.

Like a boiled frog the middle class just keeps on voting for Republican economics unaware that it is killing itself. Maybe that will change. Maybe not.

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Minimum Wage Hike?

The stars are beginning to align around an increase in the minimum wage. The Republicans are under intense pressure from their moderate wing to do something that might shore up support in the Northeast where many of their seats up for re-election this fall are very vulnerable. The New York Times makes this point here: G.O.P. Nears Vote to Increase U.S. Wage – New York Times

As usual we can expect to hear squeals from the business community about the damage to job creation that a hike would do. But let’s consider the facts: profits are taking a higher percentage of the economy than any time since the 1930’s; and the minimum wage, adjusted for inflation has less purchasing power than at any time since the early 1950’s. You have to go back all the way to 1949 to find a year in which the minimum wage was less as a percentage of the average wage.

This tells me that it’s high time for an increase. Yes I agree that job creation will be slowed down. Globalization has made our low wage jobs vulnerable to foreign competition, particularly from places where the wage rates are especially low. But American profits are very high so companies have already milked their low wage labor; and a very large number of low wage jobs are in the service sector or agriculture where foreign competition has far less impact.

An interesting study of the issue can be found at the Economic Policy Institute, here: Minimum Wage Analysis .

The Democrats have been pushing for a minimum wage increase for some time. It will be interesting to see how they avoid losing this issue during the election run-up.

In any case this is good news for a change!

UPDATE:

I spoke too soon!! Those Republicans aren’t going to leave their rich friends behind, so they are planning to attach the minimum wage hike to a bill handing out more tax cuts for the really, really wealthy. CNN has the story here: GOP Tax Cut Wheeze This is really low. Now the Democrats will be put in the position either of having to vote for a tax cut they can’t stand, or of opposing a minimum wage hike. That’s ugly. The Republicans simply cannot get away from handing out cash to the wealthy. And we have a massive deficit to fund! This is politics of the worst kind. It is a wanton slap at the working poor.

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Bush Gets It Wrong On Taxes Again!

As Ronald Reagan would say: “There he goes again!”. George Bush is doing the rounds today proclaiming that his tax cuts are “paying for themselves” and are the reason the economy is “doing so well”. The New York Times has a transcript of his comments here: Bush Comments on the Economy His evidence is the news published yesterday that Federal tax revenues are higher than expected and tha, therefore, the deficit will be less this year than forecast.

Nonsense.

Here’s a very good analysis of the situation by our friends over at the Center on Budget and Policy Priorities: The Recent Upturn in Revenues and OMB?¢?‚¬?„¢s Mid-Session Review, revised 7/11/06

There’s a lot of meat here. First it’s clear that Bush is trying to use elastic accounting. When the tax cuts were passed he used predictions for the subsequent years to justify his argument that the taxes would pay for themselves. His prediction for 2006 is for approximately $300 billion higher tax revenues than this supposedly surprising high level we are now being told about. By his own accounting his tax cuts have a shortfall of that amount to make up!

Second: this business cycle has seen awful revenue gains. Typically revenues pick up dramatically as the business cycle improves. The “normal” pick up is around 10% from the trough to the peak of the cycle. This time through? Practically zero. Bush’s tax cuts eliminated any revenue gain that would have accrued from the economic improvement. He thus locked the country into huge deficits even when business was good [imagine the sea of red ink when things slow down!].

Third: revenues are frequently hard to predict. There have been many surprises during Bush’s reign. Two or three, back in 2001 through 2003 were strongly negative. Naturally Bush ignored those slumps today when he crowed about his success in rasining revenues while cutting taxes.

Finally: the upswing in revenues seems to reflect the widening inequality in earnings. One of the reasons the tax take has swelled is that the richer segments of America [the wealthy individuals and corporations] are paying more because their incomes have raced upward. Their marginal rates of tax has not changed, but the absolute amount of tax they owe has grown hugely.

None of what Bush is claiming is even remotely true. His regime has been an economic disaster, particulary for the average American. No amount of elision can hide his failure. His tax cuts have left future generations of Americans with massive debts to pay off: even with the improved deficit forecast for this year we will add a further $1,000 of debt to the total for every one of us.

Thanks George, but no thanks. Go ride your bike!

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