“Good News” For A Change From Paul Krugman

Economist and liberal Paul Krugman, who has been quite sour on the economy despite his sympathy for President Obama, wrote what I consider to be a rather remarkable column on Thursday.

Krugman asked: Is the economic “mess” Obama inherited “really getting cleaned up“? He wrote:

The answer, I would argue, is yes. The next four years are likely to be much better than the last four years — unless misguided policies create another mess.

That’s kind of shocking coming from him, since he believes Obama’s stimulus was much too small, and that his administration did not take seriously the need for widespread debt relief, which he has argued would have made the recovery much stronger.

But his reasoning for his latest cautious optimism goes like this:

On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble.

He pointed out that the financial system crisis was resolved “quite quickly” but by itself did not “produce a robust recovery.” And then he writes something that all of us who care about this stuff should understand:

Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish.

The “good news” Krugman says (man, that sounds funny coming from him) is that,

The forces that have been holding the economy back seem likely to fade away in the years ahead. Housing starts have been at extremely low levels for years, so the overhang of excess construction from the bubble years is long past — and it looks as if a housing recovery has already begun. Household debt is still high by historical standards, but the ratio of debt to G.D.P.* is way down from its peak, setting the stage for stronger consumer demand looking forward.

And what about business investment? It has actually been recovering rapidly since late 2009, and there’s every reason to expect it to keep rising as businesses see rising demand for their products.

So, as I said, the odds are that barring major mistakes, the next four years will be much better than the past four years.

We can only hope that the next four years are not Romney’s first term as president, in which case Krugman will have to go back to his old pessimistic self.

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* Keep in mind he is talking about the ratio of “household debt” to GDP, not government debt.

Is Ben Bernanke A Closet Democrat?

If you watched the television reporting on Federal Reserve Chairman Ben Bernanke’s appearance before Congress’ Joint Economic Committee yesterday, you likely don’t know much of what he said, except for this:

…the economy is, the recovery is close to faltering.

That clip was played over and over, without proper context.  What Bernanke was doing, in context, was simply defending the Fed’s decision a couple of weeks ago (“Operation Twist”) to replace $400 billion worth of short-term securities in the Fed’s portfolio with longer-term securities.  While not a game-changing move, said Bernanke, it was,

…particularly important now that the economy is, the recovery is close to faltering.

His expectation, though, for the economic recovery is that it will continue, albeit slowly, and that GDP growth should pick up the second half of this year.

That’s not very exciting for broadcast on cable or nightly news, however.

And what you may have missed in the sensationalist TV coverage is that Bernanke essentially informed Congress in rather loud terms—for  a Fed chief—that it had better get its act together and (1) address “long-run fiscal sustainability” while (2) avoiding “fiscal actions that could impede the ongoing economic recovery.”  If that sounds familiar, that is exactly what President Obama and the Democrats have been saying since the fuss over the national debt became a going-over-the-cliff-tomorrow issue.

Here is what Bernanke said in his statement:

These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term.

Here’s what Mr. Obama said in August:

When Congress gets back in September, my basic argument to them is this:  We should not have to choose between getting our fiscal house in order and jobs and growth.  We can’t afford to do just one or the other.  We got to do both. 

Hmm. No wonder the right-wing wants to indict Bernanke for treason. He agrees with Obama on the salient economic issue of our times.

In any case, an interesting question was asked of Bernanke by an interesting man, Vermont Senator Bernie Sanders:

SANDERS: …Mr. Chairman, as you know there are people demonstrating against Wall Street in New York City and other cities around the country, and I think the perception on the part of these demonstrators—and millions of Americans—is that as a result of the greed, the recklessness and the illegal behavior on Wall Street, we were plunged into this horrendous recession we are currently in. Do you agree with that assessment? Did Wall Street’s greed and recklessness cause this recession that led to so many people losing their jobs?

BERNANKE: Excessive risk-taking on Wall Street had a lot to do with it and so did some failures on the parts of regulators.

Note that Bernanke didn’t say that efforts to help poor minorities buy houses was the cause of the problem—a typical charge from conservatives.  “Excessive risk-taking” translates into “greed and recklessness.” And the “failures on the parts of regulators” tranlates into a repudiation of Republcan anti-regulatory philosophy.  Period.

Also interesting was Bernanke’s acknowledgement of the incredible wealth gap in America.  Rep. Maurice Hinchey (D-NY) read off the following statistics:

♦ The top 1% of Americans hold 33% of the total wealth.

♦ The top 5% hold nearly 60% of the total wealth.

♦ The top 10% hold 72% of the total wealth.

♦ The bottom 50% of Americans hold only 3% of the total wealth.

Mr. Hinchey asked Bernanke what caused this gap and what can we do about it.  Bernanke said:

It’s not a new phenomenon, it’s been going on for 30 or 40 years.

Let me see… What happened a little over 30 years ago?  Oh, yeah. Reaganomics was born.

But Bernanke said of the wealth inequality that “a lot of it has to do with divergent educational skill levels,” which, of course, is true.  But he ignored the point of Rep. Hinchey’s question, which was our tax policies—tax cuts—have had a lot to do with it, too.

Finally, Bernanke was asked about the role the housing crisis is playing relative to the sputtering economy, and he said, “Housing is very central to the situation we have now.”  Loss of equity means less willingness to spend, he noted.

Rep. Elijah Cummings (D-MD) asked him:

CUMMINGS: Would you agree that it’s going to be impossible to resolve our economic situation, when you’ve got people losing their houses at the rate they are losing them?  Would you agree with that?

BERNANKE: I would agree with that, yeah.

Think about that. The Chairman of the Federal Reserve—essentially our national economist—agrees that it is “impossible to resolve our economic situation” while folks are losing their homes at breathtaking rates. 

And while neither political party has made the foreclosure issue a national priority—as they should—some Democrats have urged President Obama to take some additional action beyond his mortgage modification program, which hasn’t worked so well.  

Just six weeks ago, Sen. Jeff Merkley (D-OR) wrote the President a letter strongly advising him to do something about the foreclosure crisis:

…we can and should adopt an aggressive strategy to substantially reduce foreclosures nationally.  There are as many as five million foreclosures anticipated to come – this is a huge tragedy for individual families but it is also a drag on our communities and our economy as a whole.  Our economy cannot get out of the ditch with so much uncertainty hovering over so many homeowners.

Again, if you followed Bernanke’s testimony on this and other issues, he and the Democrats seem to be on the same page. Which means that should Rick Perry get elected president, Bernanke can expect to be charged with treason soon after.

Tea Party Tongues

The jobs numbers are out for June and it is becoming clear that the Tea Party has paralyzed not only the government, but it has gone a long way toward freezing in place a weak recovery.

Oh, I know the right-wing is proud of its achievements.  After all, they have managed to bring Democrats to the budget-cutting table; they have all politicians now talking in Tea Party tongues; they have managed to change the debate from what to do about the struggling economy and jobs to how much to cut entitlement programs and other staples in the Democratic Party and American diet, like, say, education.

They have done a lot those teapartiers. But they certainly can be most proud of contributing significantly to stagnating economic growth and keeping unemployment high—both of which just happen to be politically deadly for Barack Obama in 2012—and they show little sign of relenting.

Their continued opposition to government stimulus—in any form—and their continued insistence that we can cut our way to prosperity, including cutting taxes even further than the government-starving ratios in place now, is the most significant contributing factor in our inability to escape the black hole of the Great Recession.

The unemployment rate has now crept up to 9.2% and job growth has been essentially flat the last two months.  But the worst of the news is summarized in this sentence from CNN:

So far, the nation has only gained back about a fifth of the 8.8 million jobs lost during the recession.

And while Tea Party Republicans in Congress have spent a good deal of time fretting over Planned Parenthood and National Public Radio and other non-jobs concerns, they have managed to do what many of them said they wanted to do when they ran for office. From Bloomberg:

Employment in government continued to trend down over the month (-39,000). Federal employment declined by 14,000 in June. Employment in both state government and local government continued to trend down over the month and has been falling since the second half of 2008.

Yep, they can be proud of this accomplishment, as thousands upon thousands of teachers and other “government” workers join the millions of other victims of the kind of Republican economics that ruled the day not so long ago and a kind of economics that will—if Mr. Obama is defeated in 2012 because of the bad jobs numbers this year—rule our tomorrow.

“The Original Welfare State” Versus America

About three years ago I was in Boston and I chatted with a couple of German salesmen who were staying at our hotel.  They were in the city on behalf of a German manufacturer of lab equipment, and they had an appointment at Harvard.

I was interested in their standard of living and the effects of reunification and they explained to be the differences between the former West German states and those in the East, and how those in the East were not as “productive” as elsewhere and it would take much time to integrate them into their way of life.

I thought about those two gentlemen yesterday, when on The Dylan Ratigan Show I saw some amazing graphics that compared the relative economies and economic policies of Germany and the United States.  It turns out that David Leonhardt, economics columnist for The New York Times, had previously covered this ground.  He pointed out that both liberals and conservatives have used Germany as an example to support a) stimulus and b) austerity as a way out of our economic mess.  But, he said:

the full story is more interesting than any caricature. In the last decade, Germany has succeeded in some important ways that the United States has not. The lessons aren’t simply liberal or conservative. They are both…

The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.

The German economy has outperformed ours since the middle of the last decade, Leonhardt says, and in the process, “most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.” Here are a couple of the charts used on The Dylan Ratigan Show:

And here’s the unemployment rate comparison:

Leonhardt noted that the Germans have made cuts to unemployment benefits and have reduced early-retirement incentives, as well as attempted to “move the long-term unemployed into the labor force.” These are the things that you hear conservatives in the media talk about, as they argue for drastic budget cuts here at home. But the truth is that in terms of safety-net benefits here in the United States, the German system is still relatively generous.

The real point, and the real difference between the United States and Germany, though, is this:

But the German story is not merely about making government more efficient. It’s also about understanding the unique role that government must play in a market economy.

That role starts with serious regulation. American regulators stood idle as the housing bubble inflated. German banks often required a down payment of 40 percent.

Unlike what happened here, German laws and regulators have also prevented the decimation of their labor unions. The clout of German unions, at individual companies and in the political system, is one reason the middle class there has fared decently in recent decades. In fact, middle-class pay has risen at roughly the same rate as top incomes.

Labor unions.  Dirty words here in the United States, thanks to Republican meme-making and legislation, but not in Germany. From Wikipedia:

German industrial relations are characterized by a high degree of employee participation up to co-determination in companies’ boards (“Aufsichtsrat”), where trade unionists and works councils elected by employees have full voting rights. Local trade union representatives are democratically elected by union members and formally largely autonomous. Central boards of directors (“Vorstand”) are elected by delegates.

Trade unions in Germany define themselves as being more than a “collective bargaining machine,” but as important political player for social, economical and also environmental subjects, especially also for labor market policy and professional education.

Hmm.

And we’ve all witnessed the war on collective bargaining waged by Republican governors and legislators here in the U.S., but in Germany most workers are covered by a collective bargaining agreement:

The relative friendliness of the German government to labor unions and collective bargaining is perhaps the best reason to explain the following eye-popping income-disparity graphic from Ratigan’s show:

That graphic is difficult to fathom, and should be even more difficult to accept. The top 1% of wage earners here in America are cleaning up, while in Germany, the wealthy, while still doing well, are earning income at the same rate as 40 years ago.  Stunning.

Finally, Leonhardt says, there is the issue of taxes:

Germany does not have a smaller budget deficit because it spends less. Germany, you’ll recall, is the original welfare state. It has a smaller deficit because it is more willing to match the benefits it wants with the needed taxes. The current deficit-reduction plan includes about 60 percent spending cuts and 40 percent tax increases…

Here’s the chart: 

As Leonhardt says, no one is advocating “that the United States should want to become Germany.”  We are richer and still attract immigrants by, unfortunately, the truckload. But in our weakened condition we should be willing to deal with our weaknesses.  But we are not, at least in terms of the political parties cooperating with one another to address them.

Leonhardt:

Some Democrats say Social Security and Medicare must remain unchanged. Most Republicans refuse to consider returning tax rates even to their 1990s levels. Republican leaders also want to make deep cuts in the sort of antipoverty programs that have helped Germany withstand the recession even in the absence of big new stimulus legislation.

I resist the implicit “both sides are equally too blame” in that statement.  I don’t know many Democrats, if any, who say “Social Security and Medicare must remain unchanged.”  But there is a point to be made that Democrats must be willing to explain how those programs can be adjusted to keep them solvent in the future.

In the mean time, Republicans continue to insist that our problems should be solved on the backs of the poor, the disabled, and the soon-to-be elderly, as well as on the backs of our education-challenged children.  And they insist on these things while advocating even more tax relief for the wealthy.

Why, just the other day, one of their most viable, “adult” presidential candidates, Tim Pawlenty, came out with a budget proposal that would lower tax rates for both the wealthy and corporations to cartoonish levels.

And it would be as funny as a cartoon, if our economic troubles were merely part of a Looney Tunes script. But they are not, and the Germans seem to understand that.

Spend, If You Love Democrats

“Patience is bitter, but its fruit is sweet.”

                                                            —Rousseau

Consumer spending, experts tell us, represents about 70% of the Gross Domestic Product.  The bottom line is that if folks are spending money, the economy will grow.  If they’re not, it won’t.

During the 1960s, the personal savings rate—the amount of personal disposable income not spent on current consumption—was in the 7 to 10% range; during the 1970s it was in the 8 to 12% range.  During the late 1980s and 1990s, the rate began to decline, and after 2000, the average rate began falling to less than 2%.

See for yourself [click on for better view]:

The source of most consumer spending is, of course, wages.  And since median wages—in inflation-adjusted dollars—have declined over the last 10 years (I will refrain from pointing out who was in charge during that time), a lot of the money consumers spent was borrowed, just to keep up with “normal” rates of consumption. (By the way, there is no doubt that the rich got richer during this same period, wealth becoming more concentrated at the top than at any time since the 1920s.) 

This seemingly irrational continuance of credit-fueled spending may have been based on what smart people call the “wealth effect,” a condition in which consumers assume continued appreciation of their assets, primarily their homes and other investments, most of those investments residing in their employer-sponsored 401(k)s.

The economic crisis of 2007-2008 changed all that, obviously.  There no longer is a sense of stability—of certainty—that the expectation of rising asset values brings, since folks lost a lot of value in both their houses and their 401(k)s.

Thus, there may be what some are calling a “new normal” in play these days, based on doubt and uncertainty, which breeds caution, which results in less consumption, which retards economic growth, which slows the recovery.

The savings rate is on the rise.  In 2009 it was over 4%, the highest rate since 1998. That translates into hundreds of billions of dollars not contributing to the GDP.

Much of the increase, I believe, can be attributed to employment fear: fear that workers are just a pink slip away from personal disaster, and employers can either openly or subtly threaten them with economic extinction.

In May of this year, consumer spending increased, but only at a rate of 0.2 percent compared to April, which showed no increase over March.  Historically, the current recovery’s increase in consumer spending is less than half of that which followed the crippling recession during Reagan’s first two years in office, 1981-1983.

Add to all that the fact that in order to keep pace with population growth, the economy needs to create about 130,000 jobs every month, over and above that needed to put folks back to work who were victims of Republican economic and regulatory policies.

See here:

No doubt, a powerful argument can be made that over the long term, an increase in the savings rate, even though it means a slow recovery, will be good for us.

Unfortunately for Democrats, all of the above is not easily explainable to impatient voters, and November is on the horizon.

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