wages

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Inequality Intrudes

Senator Orrin Hatch made a fool of himself last week when he seemed to suggest that the poor were not paying their share of taxes. The middles class, he said, is paying too much, so we should not reverse the Bush tax cuts on the wealthy. After all, he argued, is a $200,000 a year income truly wealthy? Worse, he told us the number of people not paying taxes because they are “poor” has leapt during the past two years. Obama is presumably tinkering with the law to attack the “wealthy”.

Oh dear. Where do we start?

I am often accused of having a left wing bias. This outburst from the worthy Senator helps explain that appearance

He’s not just a fool. He’s an ignorant fool.

But within his evident stupidity lies an important insight: he is representative of the Republican viewpoint during this crisis. They are clueless and heartless all at once.

What Hatch and his buddies do not seem to understand is that a large number of Americans do not pay taxes because they do not earn enough. They are not cheating. They are not evading tax. They simply are too poor. Truly poor. That our economy has become so tilted and twisted that the number of non tax payers can creep up to about half of all citizens is astonishing. Hatch doesn’t draw the right conclusion: that the economy needs urgent fixing in order to undo the inequality. No. Not at all. He gets mad that the people at the bottom are not sharing in the burden. He expresses bemusement. He flails around accusing Obama for something that has taken a very long time and a whole heap of Republican policies to create. We need, he says, to find ways to get the poor to help out a bit and pay some taxes.

Thus has inequality intruded into the stately world that Hatch inhabits.

Apparently it hasn’t dawned on Hatch and his Republican buddies that if you create a highly unequal economy eventually you will end up with a small number of people still able to pay tax, and a larger number unable to pay. There is no mystery to this. Yes, it is true that many people earning high salaries are feeling highly taxed. That comes with the territory. And, yes, those folks feel that they are carrying the entire burden of paying taxes. They are. They earn the money.

They cannot complain. At least the earn enough to pay taxes. A very large number – according to Hatch 51% of citizens – are so poorly paid that they don’t pay anything.

How can we make this easy for the Senator?

The tax burden is skewed because incomes are skewed.

The answer is not to fiddle with the tax code to spread the burden downwards so that the poor share the burden. It is to fix income inequality so that the poor have sufficient incomes to start paying taxes. We should help the poor move up. Or is that too interventionist? Or perhaps not libertarian enough? After all the poor surely choose to be poor. And we should let them be free to remain poor. Maintaining freedom is, after all, more important than dealing with poverty. Or so the Republicans argue.

If ever there was a moment that clarified how far removed the Republicans are from the consequences of their own policies this is it. They are divorced from the reality of life for the majority of Americans. They feel the pain of the upper middle class and big business as they are forced to carry the entire tax load. Instead of re-balancing the economy, the GOP reacts by seeking to tilt it even further.

That’s vicious. That’s callous. That’s anti-social. That’s a sure way to end the very dream that fools like Hatch think they are defending when they attack government intervention.

No wonder the economy can only limp along. Our leadership doesn’t understand the consequences of its own action.

Inequality intrudes and Hatch gets mad. Not at inequality. But at the poor.

Oh. One more thing.

Of course the number of people not paying tax has gone up recently. They’re unemployed. They don’t have an income to pay tax on.

Grief.

Is this really that difficult to understand?

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This Stinks – A Rotten Jobs Report

Sorry. There is no other way to describe today’s employment report. It stinks. There is no saving grace. No excuse. No special circumstance to suggest it is an aberration. No. It just stinks.

One of the reasons I didn’t comment about this week’s ADP payrolls report was that I felt it would misrepresent things. In particular it excludes the public sector, and there’s a lot going on there worth waiting to hear about. What I didn’t expect, and as far as I can tell no one else did either, was just how rotten the private sector would be also.

The facts are deplorable.

Unemployment, in the narrow sense, rose from 9.1% to 9.2%. Not a huge change, but obviously in the wrong direction, and simply atrocious for an economy supposedly in recovery mode. Worse: the wider measure of unemployment – including the underemployed – also rose, from 15.8% to 16.2%. Both numbers better describe a failing than a successful economy.

The economy added only 18,000 jobs in June. This after a paltry 25,000 in May. Recall that April’s figure was a more respectable 217,000. Even at that April rate of progress we would take almost a full decade to get back to anything resembling a healthy jobs market. June’s data implies a much longer period of mediocrity. I have said it before, but let me shout it louder: we are stuck firmly in a stagnating economy, going nowhere fast. Remember: we need to add about 150,000 jobs a month just to keep up with population growth.

The gloom has forced large numbers of people to drop from the workforce. These people are not just retiring, they have just stopped looking for a job. Some may retire early. Others may simply fester and consume precious savings. Either way, the decline in workforce participation is a stark measure of both our declining productive capacity and the loss of faith in the economy. The message is ugly whichever emphasis you place on the data.

The big damage is coming from two sources. Private businesses are simply not hiring with much enthusiasm; and the public sector is in a state of contraction as states and local governments fore workers in order to cut spending. Please remember this: cutting government spending, especially at the local and state levels, means firing people: teachers, police, fire, and other government workers. That undermines those local economies and sucks what little wind we have from our sails. There is no way that such austerity builds an economy. On the contrary, it makes getting going much more difficult due to the loss of those incomes. In the vernacular it’s called cutting your nose off to spite your face. In economics it’s called austerity driven growth. In neither case does it make sense.

There are two explanations for the privates sector’s dismal hiring record. If you listen to Obama and the Republicans – yes they are in agreement on this – the reason businesses are not hiring is that they lack confidence about the future. According to this narrative, business is holding back and not investing or hiring because the Federal deficit and debt undermines confidence in the outlook for interest rates, taxes and all the other sensitive pressure points that can muck up business conditions.

The other narrative is one you construct if you actually listen to businesses directly, especially small business. Their number one issue, and their number one reason for not hiring, is that they see no increase in sales over the short to medium term. Hiring people is expensive. Especially in America where benefit costs also include the very high cost of health care. When the outlook for demand is weak, it makes no sense to hire. That seems straightforward to me. We have a demand problem. Not a supply problem.

The first of these two explanations is the one being tossed around in Washington by both the White House and the Republican leadership. They are in lock step. The solution, according to them, is to put first priority on cutting government spending. This will, they tell us, remove all that uncertainty and doubt stalling our doughty business leaders. Once the deficit is reduced, or, rather, when a plan to reduce the deficit is in place, a surge of confidence will unleash investment and hiring. And we will take off in a supply side zoom to renewed heights of wealth and fortune.

No we won’t.

The real explanation is the second. The one that business managers will tell you when they are not being politically correct. Demand sucks. It really, really sucks. And as long as these folks do their planning in the context of flat, or near flat, forecasts for sales, the economy will flounder.

The first explanation, the one being peddled by conservatives, right wing ideologues, and the White House, is fantasy designed to justify the downsizing of government. It has nothing to do with jobs. It is directed at the long desired goal, by the right wingers, of rolling back the New Deal. In order to attach credibility and practicality to this goal they wrap the failure of the economy to create jobs around their hidden agenda. By arguing that cutting government spending we create jobs they at least sound as if they care about the latter.

They do not.

Right wing economic policy, all of it, is currently focused relentlessly on the New Deal roll back.

The White House is either clueless about, or complicit in, this goal if it goes along. And all the current available evidence is that Obama is a supply side believer. He believes that the confidence fairy will pop back up if we cut spending. He believes in the inexplicable mysteries of market magic.

Faith based economics is running amok in Congressional and White House circles. Watch out: we will lose a lot more jobs as a result.

Oh.

One more thing.

The really bad news in today’s report – as if that jobs figure wasn’t enough – was that wages went down. Think about that. Wages actually declined. In an economy trying to shed debt and struggle back to life, a decline in wages is the very last thing we need. It makes debt reduction more difficult because there is less income to allocate to it. And it makes increasing consumption even more more so, since debt reduction is still the highest priority for a majority of our hard pressed households and thus squeezes any plans to spend.

The only problem worse than this would be if this combination of rotten employment and weak wages persists for a prolonged period.

I am glad you asked: the US economy has been stuck in exactly such a position since the end of the 2001 recession. The Bush regime oversaw the worst employment and wage years ever recorded during modern non-recessionary times. This dismal performance led households to pile up debt in the hope that they could pump up their standard of living. That blew up in our faces in 2007/2008. We suffered through a lost decade for most Americans between 2001 and 2011. Current policy seems destined to make sure to double that over the next decade.

A gentle reminder: wages adjusted for inflation, were precisely the same in 2007 as they were in 1996.

It needn’t be this way.

But Washington doesn’t care. Those folks have a different agenda all their own. And it isn’t about jobs.

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Dispelling The Rubber Duck Theory

It’s hard to tell. The problem with a stagnant economy is that when news is announced there is a tendency to yawn and go back to sleep. That condemns us to further stagnation, but, as I have argued before, our elites have thrown in the towel. Either they don’t care, they haven’t a clue, or they are happy with what’s going on. Perhaps a bit of each.

Today’s news fits this pattern. The weekly report on new claims for unemployment assistance is dismal. Claims rose, not massively, just a bit. By 9,000 to be exact. That gets us back up to the 429,000 level, which is terrible for an economy this far into a supposed recovery and with the amount of slack we have. Something dire is wrong. And the reaction from officialdom? Yawn. Oh, and the data for the week before last was adjusted – upwards. That had the effect of making last week’s increase smaller than it would have been.

Meanwhile, sales of new homes fell 2.1% in May. That’s not quite as bad as analysts were expecting, but it perpetuates the long gloom in real estate.

Let me see what else is going on?

The activity index in the New York Fed district slipped back.

Consumer confidence is all over the lot, but generally people remain in a sour mood.

Long term interest rates are low, which under normal circumstances should encourage borrowing in the interest sensitive parts of the economy, but having no effect because households are still nervous about the future and need to cut debt even more.

The list goes on.

Every time we read a bad or weak report someone tries to brush it aside as an exception. Hence the current notion that we have hit a temporary lull in an other wise decent upward path.

As you know I have a problem with that line of reasoning. We have had far too many of these exceptions. So many that they are no longer exceptional. They are the norm. During the crisis there were plenty of analysts who argued that the depth to which we plunged implied a very rapid recovery. I call this the rubber duck theory: if you hold a rubber duck under water it will shoot up whenever you let go. The idea being that the original buoyancy is unaffected by being held underwater, and will re-assert itself as soon as the downward pressure is removed.The problem is that our economy was not a rubber duck, or if it was it now has a gaping hole in it so that original buoyancy has been drastically changed by the crisis. Our particular duck on water and is not bouncing back.

We all know why this happened, so let’s not repeat ourselves.

The general point being that our economy has been re-engineered significantly in recent decades, and so its bounce back capability has also been altered. This was, I think, an unintended consequence of the massive re-structuring of the past three or four decades during which we kicked away many of the institutional supports and frameworks that provided buoyancy. We shifted risk onto household shoulders by reducing wage growth while adding burdens like rising health care and education costs; reducing privately provided retirement security; increasing job insecurity; and allowing asset price bubbles. These all came about due to the opening up of the economy and the general deregulation program begun back in the 1980’s. In the face of this shift of risk onto those least able to sustain it, we not only slowed growth in good times – the trend line of the 2000’s was much flatter than the previous decade – but we altered the economy’s ability to recover. One of the most notable aspects of recent decades is the enormous lengthening of the employment cycle. The time it takes to recover back to the previous employment peak after a recession is now radically different from the early post war decades. We have introduced a lot of ballast into that rubber duck.

So instead of recessions being short and dramatic perturbations in an otherwise steady rate of growth, they have become longer and longer spells of disturbance. We have surrendered a great deal of wealth as a result. And more worrying, we may have shifted the long term trend line downwards as well. After all an economy with heightened risk is one with less overall confidence, and is thus likely to move more cautiously.

That’s where I think we are now. The average person is having to absorb much greater risk in their ordinary life decisions. Their day to day finances are more precarious. Their job outlook less upbeat. They see no end to the rising cost of health care and education – two of the biggest cost for most middle class families – and their prospect for decent pay increases seems like a dim memory.

Many of my colleagues apportion a lot of the blame for our malaise on the accumulation of debt that now needs to be paid down. I se that pile of debt a symptom not a disease. The deeper problem, as I have said many times before, is the imbalance in the share of productivity benefits accruing to wages or to profits. Previously, in our more regulated and institutionally more rigid economy, there was a more equable balance. Post deregulation, and in the aftermath of modern management techniques – both of which are grounded in a common economic theoretical basis – that balance was lost.

This led to the shift in risk I mentioned; to a surge in profit at the expense of wages; to a heightened privilege for capital owners; and to a diminution of labor. Since the vast majority of families provide for themselves and their futures through the provision of labor to the economy, it was inevitable that the social engineering of the Reagan/Bush era would alter the way in which the economy bounces back from any shock it endures.

On the surface it may appear that we introduced, or encouraged, flexibility by reducing structural blocks to change in the economy. And in those odd models some economists use such flexibility might appear to enable the economy to adapt more easily to shocks. But in fact the opposite is true. Those structural blockages were actually shock absorbers from the point of view of the average household. They mitigated the damage. By removing them, far from increasing adaptability, we have had the reverse effect: we have made the average household less capable of withstanding shock, and therefore we have made them more risk averse.

That risk aversion is the current drag that is dispelling the rubber duck theory.

To get our bounce back we need to re-introduce some of those structural and institutional supports to provide a framework within which average families can plan their futures with confidence. Then they can save and spend in a way that sustains the economy at a higher level of activity.

One last thing: privatization is just another word for piling more risk onto the already burdened shoulders of average families. It sounds nice, if that’s what you like, but that extra risk will reduce, not increase, the degrees of freedom households have to spend. The current proposals to reduce or eliminate Social Security and Medicare are nothing but a massive attempt to add to the burden that households have to bear. Arguing that they will have additional choice is specious. People only have choice if they can afford to exercise such choice. Additional choice without additional income is a cruel hoax. If wages don’t rise to compensate for this additional risk, all we achieve is to add more ballast to that rubber duck.

At some point it will simply sink.

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Choppy Waters?

The Conference Board loves the publicity it gets whenever it releases its Index of Leading Indicators. Today it entered the ranks of those trying to manage expectations downwards. It told us that the drop of 0.3% in the index during April portends choppy waters ahead. This was the first time the index had declined in almost a year. So, I agree. Something is not quite right. But then again we all knew this didn’t we?

One of the main components of the index is claims for unemployment assistance. They went in the wrong direction in the last few weeks before improving last week, and then again today – more on that in a moment. I have been arguing for a long time that the recovery is nowhere near the scope or size we need to bring the labor market back to satisfactory levels. In my opinion there has been a major policy failure in this regard. The emphasis was twofold: first to prevent disaster; second to nudge the economy back towards health. Both at the time, and in retrospect, this seems to have been a weak response. It has left us with a legacy of stuttering growth and a very elongated recovery time. Yes, history tells us to expect weak and awkward recoveries in the wake of a bank created crisis, but that should have led policy makers to be bold, not tepid. Meanwhile unemployment as expressed in all the associated measures of the labor market will continue to create a drag on activity. Today’s leading indicators report simply captures that drag in vivid detail.

Adding to the gloom this morning was the news that the Philadelphia Fed’s measure of industrial activity also slipped back. This index is designed to measure the extent of growth and any reading over zero is positive. The higher the number the better the news. In March this year the index stood at 43.4, the best reading since 1984. It has now sunk to 3.9. Clearly things have slowed down. There is still growth, but the margin for error from a policy perspective is very narrow.

While we are piling on the weak news we also heard today that sales of existing homes sank back again. They slipped to an annual rate of 5.05 million in April, which is a drop of 0.8%. While that decline is not enormous and could be explained by any number of weather related excuses, the fact that sales failed to increase is a sure sign that real estate is still mired in the doldrums. To make matters worse, home prices show no sign of stemming their slide: they are down about 5% since this time last year. At one point prices firmed slightly last year, but they have since resumed their decline. In the absence of a stronger general recovery, higher wages, and a healthier jobs market, I see no reason to assume that prices will not continue down.

Now for the good news. Back to those new claims for unemployment assistance. Today’s report showed a decline in claims to 409,000. This a much better improvement than most people expected, especially in view of the upward revision to last week’s total to 438,000. It has been very difficult to spot a trend in this data in recent weeks, claims had reached a low of 375,000 in February, but had shot back up to 478,000 in April. If ever there was choppiness, to use the Conference Board’s description, the claims data embodies it. The key point to make about the employment situation as that there is no rapid improvement developing. Nor is there any sign of help arriving. On the contrary, with Washington focused on all the wrong issues, and distracted by the spectacle of competing debt reduction plans, I cannot see a reason to be upbeat about the jobs market at all. No one cares. Perhaps they are all embarrassed by their failure to deal with it in 2009 and 2010. I would like to think so. But I have my doubts.

One last thing: if you ever want to disabuse yourself of the sensibility of the stock market, consider today’s reaction. Stock prices rose. Why? Because the market embraced the improvement in claims as being the relevant news of the day. All the rest? Too gloomy, and therefore ignored. No wonder stocks move all over the lot. It makes more sense to argue for higher stock prices on the basis of profits. Corporations are doing well. Cash flows to shareholders are strong. They ought to be: wages are lousy, and hiring weak, so all benefits of what growth there is flows asymmetrically to capital.

Yet the stock market reacted to better jobs news. Clearly the traders know that if all the gains go to capital, eventually their gravy train runs out of steam. Somewhere along the way workers need to get a piece of the action too. Without growth in worker incomes there is no growth in sales. It’s all about aggregate demand. So maybe our traders are all closet Keynesians. Maybe not. But at least they acknowledge something the politicians don’t seem to understand. Without demand this recovery will go nowhere.

And that’s where it seems headed.

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More Jobs, More Unemployment?

I would be remiss if I ignored today’s employment report. It was generally good news. The economy added 244,000 jobs in April, with a gain of 268,000 in the private sector being offset by a decline in the public sector as state and local governments reduce their workforces in an attempt to balance their budgets.

Curiously, despite this increase in jobs, the unemployment rate increased from 8.8% to 9.0%, thus creating quite a conundrum we need to explain.

We should recall that the two numbers, the unemployment rate and total jobs added, are derived from two very different sources. There is no relationship between the two other than coincidence. Naturally over longer periods of time we would expect the two to follow the same trends, but there will be months when they move in contradictory directions. The apparent difference this month is made worse by by the same problem over the last few months. The unemployment rate dropped sharply according to its source – the monthly survey of households – even though the total number of jobs – as derived from its source, the establishment survey – didn’t show the same sudden improvement. So it was inevitable that we would reach a month when this split in trends was compensated for. That seems to be what happened in April: the jobs created rose much more rapidly, while the unemployment rate backed up to a level more in keeping with the recent jobs trend. So the oddity of the apparent contradiction is solved when we accept that this was simply the two trends getting into harmony.

With that out of the way, what do we make of the numbers?

Obviously the job gain is good news. That it was spread across the economy is also good. Service industries provided the bulk of the new jobs: the biggest increases came from retailing which added 57,000; consulting and other professional services which added 51,000; hospitality which added 46,000; and health care which added 37,000. Meanwhile manufacturing added 29,000 jobs, bringing its gain since the low point to approximately 250,000, of which 141,000 have been added in 2011 alone.

So the labor market is improving. Of that there can be no doubt.

The issue is how quickly and whether the improvement is sufficient to break the back of unemployment within an acceptable timeframe.

I think the response is that even this gain in jobs is not enough. Recall that during the peak Clinton years we were adding at this rate routinely. Plus with about 125,000 new workers entering the workforce each month detracts from the nature of the gain. The main point to keep in mind is that at this rate of improvement we will still have unusually high unemployment levels at the end of 2012. There has been no massive bounce back in the manner of past recoveries, and there is no real evidence of such a bounce back arising any time soon.

Couple this more sober reflection with the news, also released today, that wages rose only 0.1% in April, bringing their increase over the last year to 1.9%, and we can easily understand why overall growth is still mediocre. Demand will remain relatively dampened while both unemployment and wages languish in the doldrums.

So, while we should applaud today’s numbers – they were much better than I expected – we should not take our eye off the need for more effort to get people back to work and to make work more remunerative.

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