Friday, April 1, 2011

Weekend links

1--Of the 1%, by the 1%, for the 1%, Joseph Stiglitz, Vanity Fair

Excerpt: Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow....

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

2--The Mellon Doctrine, Paul Krugman, New York Times

Excerpt: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression. To be fair, there’s some question about whether Mellon actually said that; all we have is Hoover’s version, written many years later.

But one thing is clear: Mellon-style liquidationism is now the official doctrine of the G.O.P.

Two weeks ago, Republican staff at the Congressional Joint Economic Committee released a report, “Spend Less, Owe Less, Grow the Economy,” that argued that slashing government spending and employment in the face of a deeply depressed economy would actually create jobs. In part, they invoked the aid of the confidence fairy; more on that in a minute. But the leading argument was pure Mellon.

Here’s the report’s explanation of how layoffs would create jobs: “A smaller government work force increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.” Dropping the euphemisms, what this says is that by increasing unemployment, particularly of “educated, skilled workers” — in case you’re wondering, that mainly means schoolteachers — we can drive down wages, which would encourage hiring.

There is, if you think about it, an immediate logical problem here: Republicans are saying that job destruction leads to lower wages, which leads to job creation. But won’t this job creation lead to higher wages, which leads to job destruction, which leads to ...? I need some aspirin....

But never mind the lessons of history, or events unfolding across the Atlantic: Republicans are now fully committed to the doctrine that we must destroy employment in order to save it.

And Democrats are offering little pushback. The White House, in particular, has effectively surrendered in the war of ideas; it no longer even tries to make the case against sharp spending cuts in the face of high unemployment.

So that’s the state of policy debate in the world’s greatest nation: one party has embraced 80-year-old economic fallacies, while the other has lost the will to fight. And American families will pay the price.

3--The Anatomy of Slow Recovery, J. Bradford DeLong, Project Syndicate via Economist's View

Excerpt: ...[T]he decidedly sub-par pace of today’s jobless recovery in the US ... is not out of line with other American yardsticks: since the output trough, real GDP has grown at an average rate of 2.86%/year, barely above the rate of growth of the US economy’s productive potential. ...
The obvious hypothesis to explain why the current US recovery – like the previous two – has proceeded at a sub-par pace is that the speed of any recovery is linked to what caused the downturn. A pre-1990 recession was triggered by a Fed decision to switch policy ... to inflation-fighting. ... As soon as the Fed had achieved its inflation-fighting goal, however, it would end the liquidity squeeze. ... From an entrepreneurial standpoint,... recovery was a straightforward matter: simply pick up where you left off and do what you used to do.

After the most recent US downturn, however (and to a lesser extent after its two predecessors), things have been different. The downturn was not caused by a liquidity squeeze, so the Fed cannot wave its wand and return ... to the... pre-recession configuration. And that means that the entrepreneurial problems of are much more complex...: as long as aggregate demand remains low... investments, lines of business, and worker-firm matches that would be highly productive and profitable at normal levels of capacity utilization and unemployment are unprofitable now.

So, what America needs now is not just a recovery in demand, but also structural adjustment. Unfortunately, the market cannot produce a demand recovery rapidly by itself. And it cannot produce structural adjustment at all until a demand recovery is well under way.

4--How is the recovery going?, Bradford Delong, Grasping reality with both hands

Excerpt: There is the unfortunate fact that none of our net reduction in the unemployment rate over the past year comes from increases in the employment-to-population ratio and all of it comes from decreases in labor force participation.

Leaving that to one side--assuming (which is surely not the case) that the unemployment rate is a sufficient statistic for the health of the labor market and that all those dropping out of the labor force are not of special concern--how are we doing, recovery-wise?

Between 1950 and 1990--back in the old days of Federal Reserve inflation-fighting recessions--the unemployment rate would on average return 32.4% of the way back to its natural rate over the course of a year....If the unemployment rate had started to follow such a path after its fall 2009 peak, we would now have an unemployment rate of 8.3% instead of 8.9%.

5--Marx, Mervyn or Mario?, Buttonwood, The Economist

Excerpt: The authorities have applied shock and awe in the form of fiscal and monetary stimulus. They have prevented the complete collapse of the financial sector—bankers’ pay has certainly held up just fine. The corporate sector is also doing well. Even if banks are excluded, the profits of S&P 500 companies were up by 18.7% last year, says Morgan Stanley.

But the benefits of recovery seem to have been distributed almost entirely to the owners of capital rather than workers. In America total real wages have risen by $168 billion since the recovery began, but that has been far outstripped by a $528 billion jump in profits. Dhaval Joshi of BCA Research reckons that this is the first time profits have outperformed wages in absolute terms in 50 years.

In Germany profits have increased by €113 billion ($159 billion) since the start of the recovery, and employee pay has risen by just €36 billion. Things look even worse for workers in Britain, where profits have risen by £14 billion ($22.7 billion) but aggregate real wages have fallen by £2 billion. A study by the Institute for Fiscal Studies, a think-tank, found that the median British household had suffered the biggest three-year fall in real living standards since the early 1980s.

Are these trends a belated vindication of Karl Marx? The bearded wonder wrote in “Das Kapital” that: “It follows therefore that in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse.” But Marx also predicted a decline in profit margins in capitalism’s dying throes, suggesting some confusion in his analysis....

Wages still account for a much greater slice of income than profits, but labour’s share has been in decline across the OECD since 1980. The gap has been particularly marked in America: productivity rose by 83% between 1973 and 2007, but male median real wages rose by just 5%.

6--Fukushima Workers Threatened by Heat Bursts; Sea Radiation Rises, Bloomberg

Excerpt: Japan’s damaged nuclear plant may be in danger of emitting sudden bursts of heat and radiation, undermining efforts to cool the reactors and contain fallout.

The potential for limited, uncontrolled chain reactions, voiced yesterday by the International Atomic Energy Agency, is among the phenomena that might occur, Chief Cabinet Secretary Yukio Edano told reporters in Tokyo today. The IAEA "emphasized that the nuclear reactors won’t explode," he said...

Tokyo Electric Power Co., the Fukushima Dai-Ichi plant’s operator, and Japan’s nuclear watchdog, dismissed the threat of renewed nuclear reactions, three weeks after an earthquake and tsunami triggered an automatic shutdown. Tokyo Electric has been spraying water on the reactors since the March 11 disaster in an effort to cool nuclear fuel rods...

A partial meltdown of fuel in the No. 1 reactor building may be causing isolated reactions, Denis Flory, nuclear safety director for the IAEA, said at a press conference in Vienna. This might increase the danger to workers at the site.

7--Why house prices will keep falling, Fortune

Excerpt: Unless Ben Bernanke sets off a big inflation wave, house prices are doomed to keep falling for years.

Tuesday's release of the monthly Case-Shiller U.S. house price index shows a 3.1% year-over-year decline for January. The index of 20 big U.S. cities fell to 140, just a point and change above its spring 2009 low in the wake of the financial meltdown....

So while house prices have dropped by a third from their bubbly highs in 2006, that only closed part of the gap (see chart, right) between house prices and inflation that opened up during the bubble years. Assuming the Federal Reserve isn't able to inflate another housing bubble, house prices have much further to fall.

"Despite the 33% drop in the Case-Shiller home price index from the peak, the cumulative gap since 1987 between baseline inflation and home price inflation is still 25%," Oppenheimer analyst Chris Kotowski wrote in a note to clients this month. "Thus, we believe home prices will still trend flat to down for a number of years."

A steep decline along the lines of the 2007-2009 plunge isn't the only way this gap can close, of course. If the Fed does succeed in engineering mild inflation and house prices "bump along the bottom" for a few years, as Case predicts, house prices and inflation could come back into line without much drama.

Even if the economy remains slack and inflation tame, another steep slide in prices may not be in the cards, with the government propping up the big banks and pouring money into Fannie Mae and Freddie Mac to avoid a repeat of the lending collapse of a few years ago.

But consider that even after the recent plunge the 20-city Case-Shiller composite index is at 140, up 40% from its level in 2000 – a period over which the U.S. private sector has created next to no net new jobs and incomes have been flat.

Just to take houses back to their inflation-adjusted 2000 level, the index would have to fall 8% -- or, alternatively, Bernanke would have to somehow get inflation roaring in an economy where 1 in 6 people is underemployed. No matter what the hawks are screaming, that's not going to happen overnight.

So if you want to buy a house, go right ahead -- but don't do it because you think it's a great investment. Somewhere we have heard that one before.

8--Irish Finance Minister: Bank stress test results of "major significance", Calculated Risk

Excerpt: The Irish bank stress test results will be released tomorrow.

From the Irish Times: Noonan to propose 'radical' bank sector restructuring

... The results of the tests will lead [Finance Minister] Michael Noonan to undertake “a radical new approach” to fix the banks, a Government source said.

Mr Noonan will make a “watershed” argument for a EU-wide solution around passing bank losses on to bondholders ... The Minister will speak for 20 minutes in the Dáil immediately after the announcement of the test results by the Central Bank.

Mr Noonan told Fine Gael TDs and Senators at the party’s parliamentary party meeting last night that the test results would be of major significance and would dominate the news over the weekend.
ECB chief Jean-Claude Trichet chaired a teleconference meeting of the bank’s governing council from China yesterday to discuss the situation in the Irish banks. A further meeting may be held today as the ECB finalises its response.

9-- How credit card companies want to debit you, Dean Baker, Economist's View

Excerpt: We have two credit companies, Visa and MasterCard, who comprise almost the entire market. This gives them substantial bargaining power. ... Visa and MasterCard have taken advantage of their position to mark up their fees far above their costs. This is true with both their debit and their credit cards, but the issue is much simpler with a debit card. ... While ... costs are quite small, the credit companies take advantage of their bargaining power to charge debit cards fees in the range of 1-2% of the sale price. They share this money with the banks that are part of their networks.

This fee is, in effect, a sales tax. Since the credit companies generally do not allow retailers to offer cash discounts, they must mark up the sales price for all customers by enough to cover the cost of the fee. This seems especially unfair to the cash customers... Those paying in cash ... tend to be poorer than customers with debit or credit cards, which means that this is a transfer from low- and moderate-income customers to the banks.

This is where financial reform comes in. One of the provisions of the Dodd-Frank bill passed last year instructed the Federal Reserve Board to determine the actual cost of carrying through a debit card transfer and to regulate fees accordingly. The Fed determined that a fee of 10-12 cents per transaction should be sufficient to cover the industry's costs and provide a normal profit. The Fed plans to limit the amount that the credit card companies can charge retailers to this level.

This would save retailers approximately $12bn a year... The prospect of losing $12bn in annual profits has sent the industry lobbyists into high gear. They have developed a range of bad things that will happen...

The credit card industry and the banks really don't have a case here; they are just hoping that they can rely on their enormous political power to overturn this part of the financial reform bill. ... Brushing away their rationalizations, their argument here is that they want larger profits and they have political power to get them. That may turn out to be true.

10--We’re Heading Back Toward a Double Dip, Robert Reich's blog

Excerpt: Why aren’t Americans being told the truth about the economy? We’re heading in the direction of a double dip – but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.

Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It’s weaker today on average than at the lowest point of the Great Recession.

The Reuters/University of Michigan survey shows a 10 point decline in March – the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board’s index of consumer confidence, just released, shows consumer confidence at a five-month low — and a large part is due to expectations of fewer jobs and lower wages in the months ahead.

Pessimistic consumers buy less. And fewer sales spells economic trouble ahead.

What about the 192,000 jobs added in February? (We’ll know more Friday about how many jobs were added in March.) It’s peanuts compared to what’s needed. Remember, 125,000 new jobs are necessary just to keep up with a growing number of Americans eligible for employment. And the nation has lost so many jobs over the last three years that even at a rate of 200,000 a month we wouldn’t get back to 6 percent unemployment until 2016.

But isn’t the economy growing again – by an estimated 2.5 to 2.9 percent this year? Yes, but that’s even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we’d expect growth of 4 to 6 percent.

Consider that back in 1934, when it was emerging from the deepest hole of the Great Depression, the economy grew 7.7 percent. The next year it grew over 8 percent. In 1936 it grew a whopping 14.1 percent.

Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop. Hourly wages are falling because with unemployment so high, most people have no bargaining power and will take whatever they can get. Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes the biggest asset most Americans own, as home prices drop most Americans feel even poorer.

There’s no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year’s budget.

In other words: Watch out. We may avoid a double dip but the economy is slowing ominously, and the booster rockets are disappearing.

So why aren’t we getting the truth about the economy? For one thing, Wall Street is buoyant – and most financial news you hear comes from the Street. Wall Street profits soared to $426.5 billion last quarter, according to the Commerce Department. (That gain more than offset a drop in the profits of non-financial domestic companies.) Anyone who believes the Dodd-Frank financial reform bill put a stop to the Street’s creativity hasn’t been watching.

To the extent non-financial companies are doing well, they’re making most of their money abroad. Since 1992, for example, G.E.’s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes). In fact, the only group that’s optimistic about the future are CEOs of big American companies. The Business Roundtable’s economic outlook index, which surveys 142 CEOs, is now at its highest point since it began in 2002.

Washington, meanwhile, doesn’t want to sound the economic alarm. The White House and most Democrats want Americans to believe the economy is on an upswing.

Republicans, for their part, worry that if they tell it like it is Americans will want government to do more rather than less. They’d rather not talk about jobs and wages, and put the focus instead on deficit reduction (or spread the lie that by reducing the deficit we’ll get more jobs and higher wages).

I’m sorry to have to deliver the bad news, but it’s better you know.

11--Inequality Is Most Extreme in Wealth, Not Income, New York Times

Excerpt: Typically, comments about rising inequality refer to the stark disparities in incomes of the very highest-paid Americans and everyone. We have observed in several posts, for example, that most of the income gains over the last few decades have gone to the very richest Americans. That means the highest-paid Americans have been claiming a larger and larger share of earnings. (see chart)

As of 2008, about 21 percent of income was received by just 1 percent of earners.

But economic inequality isn’t just about how much you make — it’s about how much you have.

To that end, the Economic Policy Institute, a liberal research organization, has published a new report looking at disparities in wealth in the United States.

It includes this chart, showing estimates of what share of wealth each class claims (chart)...The top 1 percent of earners receive about a fifth of all American income; on the other hand, the top 1 percent of Americans by net worth hold about a third of American wealth. (Note that the top income earners are not necessarily the same people as the top net-worth Americans — after all, lots of high-net-worth people don’t work or have much else in the way of sources of new income.) Wealth-related inequality has also been relatively stable over the last few decades, whereas income-related inequality has been growing since the ’70s.

Why is there more inequality in wealth than in income, both today and yesterday?

Remember that wealth accumulates over time. The highest earners are able to save much of their incomes, whereas lower earners can’t. That means high earners can accumulate more and more wealth as time goes on (assuming they don’t blow it all, of course).

12--Libyan Rebel Leader Spent Much of Past 20 Years in Langley Virginia, Chris Adams, McClatchy via Information Clearinghouse

Excerpt: WASHINGTON - The new leader of Libya's opposition military spent the past two decades in suburban Virginia but felt compelled — even in his late-60s — to return to the battlefield in his homeland, according to people who know him.

Khalifa Hifter was once a top military officer for Libyan leader Moammar Gadhafi, but after a disastrous military adventure in Chad in the late 1980s, Hifter switched to the anti-Gadhafi opposition. In the early 1990s, he moved to suburban Virginia, where he established a life but maintained ties to anti-Gadhafi groups.

Late last week, Hifter was appointed to lead the rebel army, which has been in chaos for weeks. He is the third such leader in less than a month, and rebels interviewed in Libya openly voiced distrust for the most recent leader, Abdel Fatah Younes, who had been at Gadhafi's side until just a month ago.

At a news conference Thursday, the rebel's military spokesman said Younes will stay as Hifter's chief of staff, and added that the army — such as it is — would need "weeks" of training.

According to Abdel Salam Badr of Richmond, Va., who said he has known Hifter all his life — including back in Libya — Hifter -- whose name is sometimes spelled Haftar, Hefter or Huftur -- was motivated by his intense anti-Gadhafi feelings.

"Libyans — every single one of them — they hate that guy so much they will do whatever it takes," Badr said in an interview Saturday. "Khalifa has a personal grudge against Gadhafi... That was his purpose in life."

1 comment:

  1. Mike,
    At this point in time, I doubt that the "1%" give a rats ass about the other 99%. They do not seem to be aware that ALL of us are in the very same boat. They don't seem to see that WE outnumber them and we ARE used to doing all the dirty work. WE are the ones who fight and die in their damn fool wars of choice.
    They had best wake up and see how pissed off we are, or it just may be too late for them, again.