Category Archives: Growing Inequality

The Market for Million Dollar Homes is Hot – the Rest? Not.

If you want to buy a million dollar home, then you better hustle out there and get one. The National Association of Realtors says that sales of homes costing $1 million or more rose 7.8 percent in March of 2014. With big bonuses back in style in the financial sector and stocks tripling their value since 2009, the wealthiest 10% of the population is living in style.

fancy houses

Oh yes, the number of transactions for $250,000 or less – about two-thirds of the housing market – fell by 12%. Slow wage growth, rapidly rising prices, and rising mortgage rates have put home ownership out of reach for many first-time homebuyers.

With demand so slow at the bottom of the market, many homebuilders are switching to larger, more expensive properties that appeal to wealthier buyers. For example, KB Home now builds about half of its houses for the upper tiers of the market. “With the mortgage headwinds and the lack of job growth and everything else that we dealt with through this housing cycle and now into the recovery, the typical first-time buyer got kneecapped,” said Jeff Mezger, company CEO.

Since the Federal Reserve Bank announced last May that it was going to begin cutting back on its $85 billion monthly purchases of housing bonds and treasury bonds, the average mortgage rate has risen by almost a full point. In addition, millions of Americans are still stuck in homes where they owe more on their mortgages than their houses will sell for. In March of 2014, nearly five years since the recession officially ended in the summer of 2009, 18.8% of homeowners – 9.7 million families – have mortgages that are “underwater.” Another 18% are all but underwater because their home won’t sell for enough to give them a down payment on a new house.

Let’s face it, there are winners and there are losers in 21st century America. As Bonnie Stone Sellers, CEO of Christie’s International put it, “The trends in luxury housing are similar to trends in other luxury goods. Whether you’re buying a third home in Manhattan as a pied-a-terre or another Picasso, these are acquisitions of passion, of lifestyle, and of experience.”

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Wall Street Adrift

The erratic movements of the stock market since the beginning of 2014 reflect the sense of uncertainty that grips the wealthy investors and institutional buyers who dominate the market. (The 1% own 33% of all stock wealth.)

Trader Reacts to 1987Over time, stock prices reflect current corporate profits and expectations about future profits. Without the Federal Reserve pumping $85 billion each month (over $1 trillion in 2013) into the financial system, few investors believe corporate profits will continue to rise.

The irony is strong – signs that the American economy will grow more rapidly in 2014 and that unemployment will continue to decline actually reinforce the fears on Wall Street that corporate profits and stock prices are about to take a fall.

The current situation highlights the agonizing contradictions the U.S. economy has developed over the last 40 years. Without innovative policies emanating from Washington D.C., prosperity for the general population will continue to remain elusive. The profit squeeze scenario has three elements:

1) The main way in which corporations have increased their profits is by clamping down on worker salaries – that is, workers’ wages have actually fallen since the 1970s, with an acceleration in the decline since 2008, while worker productivity has increased. A 4% fall in wages along with a 2% rise in productivity means a 6% increase in profits, even with small increases in sales. Now, as the economy slowly picks up, business economists argue that a 6.5% unemployment rate will lead to a shortage of skilled labor and a resulting rise in wages. Their claim is that many of the 4 million long term unemployed and most of the 5 million people who have dropped out of the labor force since 2008 are no longer employable as skilled labor. If they are right, then wages for skilled workers will soon rise – squeezing corporate profits.

This is doubly threatening to stock prices because, after the internet bubble burst in 2000 and even more since 2008, corporations have used their profits to artificially push up the value of their stock by buying it back, thus increasing the value of the remaining securities left on the open market. For example, in 2013, corporations invested more than $600 billion buying back their own stocks. If profits go down, fewer companies will be able to carry out this strategy.

2) Another reason corporate profits have been very healthy since the Great Recession is because American businesses have become adept at “financial engineering.” Financial engineering is a business strategy designed to ensure that corporate profits are high and grow almost every quarter. With the great increase in financial speculation that began in the1980s and 1990s, Wall Street began severely punishing companies that don’t report higher profits every quarter. This is feat is almost impossible in an economy where demand and supply rise and fall in unpredictable ways.

However, corporations have discovered they can create steadily rising profits by borrowing money at low interest rates and investing those funds in short term financial products such as derivatives and commercial paper. Now, as the Fed cuts back on its $85 billion per month subsidy, the possibility of rising interest rates threatens the viability of this profit-making strategy.

3. Finally, Wall Street knows there is a major flaw in the Keynesian argument that greater consumer spending will jump start the economy by triggering increases in sales that will improve corporate profits. The flaw is, without tariffs to balance out price differences, American consumers will use wage increases to buy huge quantities of less expensive or higher quality foreign products. Even in a slow growth economy, we continue to run huge trade imbalances with China, with Japan, with Germany, with South Korea, with Singapore, with Saudi Arabia, with Venezuela – the trade deficit with China alone was $440 billion in 2013.  Thus, pumping up our economy is like putting air into a leaky tire – there is lots of huffing and blowing, but the tire stays limp.

In the 1980s, the 1990s, and then the 2000s, the Federal Reserve and the Federal Government joined consumers in debt binges that together, blew hard enough to make our economic tire fill up. However, in the world of 2014, both Federal institutions are cutting back their stimulus efforts. This is why Wall Street investors are afraid; they believe we are headed for a brief period of prosperity, followed by a withering away of corporate profits and then of economic growth.

Wal-Mart Leads the Low Wage Economy

Wal-Mart not only exploits its 1,400,000 workers, its huge size and low prices force other companies – both its suppliers and its competitors to exploit their workers.  In the process, Wal-Mart is one of the major forces pulling down wages in the United States.

The cost of Wal-Mart’s persistent anti-worker policies extends to every taxpayer.  For example, half of Wal-Mart’s workers qualify for federal assistance through the food stamp program.

On Black Friday, I went to the Wal-Mart nearest to my home.  Not to shop, but to demonstrate against Wal-Mart’s employee policies.  The theme of the rally was Wal-Mart: Always Low Wages, Always.  It felt good to do a small thing to protest against hard working people being squeezed by the largest employer in the country.  It also felt good that many people in cars coming into the parking lot honked their horns in support of our protest.  This makes sense – the people most likely to shop at Wal-Mart are the millions of minimum or near minimum wage workers who seek low prices in order to stretch their household budgets.

In recent posts, I have outlined how we are becoming a low-wage economy, with the real wages of average families falling by almost 10% since the recession of 2000 – 2001.  Wal-Mart is the leader of the pack in holding wages down.  The average hourly wage of a Wal-Mart sales associate is $8.81.  That adds up to $1,527 per month or $18,325 per year if the person works full time – but, of course, no sales associate works full time.  That is why a new report from the Democratic staff of the U.S. House Committee on Education and the Workforce estimates that each Wal-Mart store costs taxpayers an estimate $1 million in public assistance for its employees.

Oh, and the company reported profits of $17 billion in 2012.  If even half of those profits were distributed equally to its employees, each of them would make an extra $6,070 each year.

Unfortunately, Wal-Mart’s competitors are working just as hard to keep their wages down, too.  The nine other companies that employ the most low-wage workers should be very familiar – McDonalds, Starbucks, TJX (Marshalls & TX Max), Macy’s, Darden Restaurants (Olive Garden, Red Lobster), Sears, Yum Brands (Taco Bell, Pizza Hut, KFC), Target, and Kroger (Kroger, City Market, Dillons).  Together they have 3,021,000 employees and made $15.6 billion in profits last year.

Of course, these employees could unionize, but it is like rolling a boulder up hill.  First, the workers are scattered around the country in hundreds of retail or restaurant outlets.  Second, the turnover is tremendous because workers leave as soon as they can find anything even a little bit better in terms of hours and wages and benefits.  Finally, these employers are nasty.  According to the National Labor Relations Board, Wal-Mart has “unlawfully threatened, disciplined, and/or terminated employees” in 13 states for protesting their work conditions or attempting to organize a union.  In four states those charges also include “the surveillance, discipline, and or termination of employees in anticipation of” planned strikes.

That is why our citizen protest was important.  There is a rising tide of discontent among Wal-Mart workers and other low-wage employees.  Unions are trying to organize workers at many stores around the country.  When Wal-Mart workers get together and actually try to negotiate with management, we can expect a hostile reaction and the new union will have to strike to get any concessions.  That is when community support will be crucial and can tip the balance.  I urge you to adopt a local Wal-Mart and help the community committee forming to help its workers – some day soon it will be a vital service.

The Federal Reserve vs. the Tea Party

The Federal Reserve turned down its invitation to a Tea Party.  The Fed looked at the havoc Tea Party Republicans want to create with the U.S. budget and decided to put more sand bags in the economic dike.

Ben Bernanke and his fellow bankers decided on September 18 to keep buying $85 billion in mortgage bonds and treasury bonds, hoping they can keep the feeble economic recovery from collapsing into recession when the Tea Party Republicans refuse to raise the debt ceiling.

The good news is that Fed Chairman Ben Bernanke is trying to keep the economy on track as we head into a serious collision between the Democrats and the Republicans over the federal budget and the debt ceiling resolution – both of which have to be resolved in October.  The bad news is the economic expansion is so weak, a few weeks of political confusion might plunge us back into recession.

Buried in the back part of stories about the Federal Reserve’s decision was the grim news that the Fed’s economists have lowered their predictions for economic growth.  The new prediction is for tepid growth of 2.0 to 2.3 percent this fall – a rate that will not put many people back to work.  The Fed and the mass media have finally noticed what I pointed out last spring in this blog – much of the fall in the unemployment rate is coming from people dropping out of the labor force.

Look at this, the number of people in the labor force, that is, working full or part time or looking for work, fell by 312,000 in August.  As a result the labor force participation rate fell to just 63.2 percent – the lowest it has been since 1978, back when it was pretty common for only one adult in a household to be working.  The impact is staggering – the unemployment rate has fallen 2.7 percentage points from a peak of 10 percent in 2009 to 7.3 percent in August.  The majority of that decline, 1.8 percentage points is from the drop in the participation rate!

Enter the Tea Party/Republican Party.  In utter disregard for the spreading poverty around them, the House of Representatives voted 217 to 210 to slash $40 billion from the Food Stamp program.  This is the latest round in the right’s relentless push to re-distribute income through tax cuts for the rich and benefit cuts for the poor.  As usual, this subversive program is obscured by a fog of words proclaiming a moral crusade against deficit spending and the undeserving poor.  For example, Representative Marlin Stutzman of Indiana, who led the Republican push for the cuts, said “This bill eliminates loop-holes, ensures work requirements, and puts us on a fiscally responsible path.”

What nonsense.  The 44 million Americans, one in every seven of us, who have their income supplemented by food stamps and the 48 million Americans without health insurance are not causing our economy to stumble along.  The Republicans have been using this “blame-the-victims economics” for over a generation.

It only works if the rest of us are unable to see that the root causes of our problems lie in the selfish decisions being made by bankers, hedge fund managers, right-wing CEOs, and the political leaders they support with millions in political donations.  Don’t take my word for it, ask Ben Bernanke.  If the Federal Reserve Board is afraid of the political plans of the Republican Party, then we should be too.

Labor Day Lament

News Item: economists are concerned that income from American wages and salaries fell by $21.8 billion in July of 2013, about -0.3%.  The decline was led by $7.7 billion lost because of forced furloughs for federal employees.  However, dividend income increased by 2.2 percent and rental income by 1.3 percent, so the category “income from assets” went up by 0.7%.  Consumer spending, boosted by increases in spending by upper income groups, rose 0.1 percent.

News Item: To the delight of many consumers, Twinkies and other Hostess products are back on the shelves.  When the company went bankrupt in the fall of 2012, 15,000 union workers lost their jobs.  The new company emerged from bankruptcy with no union workers and a whittled down wage and benefits package – for example, former employee pensions have been reduced from $1,800 per month to $500 per month.

Since the 1970s, fierce competition from foreign imports has pushed many companies to reduce wages to maintain profit rates that will keep their Wall Street investors happy.  Since then, there have been a series of campaigns led by Republicans, think tanks, and right-wing talk shows to reduce the wages of “undeserving” groups of workers.  Democrats have responded to these campaigns by gradually increasing funding for federal job training programs.

One by one, groups that had middle class wages and benefits have been targeted and subdued.  So, on Labor Day, 2013, with real salaries and wages at approximately the same level as they were in 1973, I publish this lament, with acknowledgements to Pastor Martin Niemoller:

In the 1970s they said regulated industries were fueling inflation, and the process of de-regulation led to slashed wages in the airline and trucking industries,

But I did not speak out because I didn’t work in transportation;

Then, in the 1980s they said the wages and pensions of blue-collar manufacturing workers were making America uncompetitive in world markets, and crushed the Air Traffic Controllers union and many other unions,

But I did not speak out because I didn’t work in manufacturing;

Then they said that middle managers were useless bureaucrats who were making American companies uncompetitive, and those workers were forced into early retirement,

But I did not speak out because I didn’t work in middle management;

Then they said in the 1990s that retail workers were unproductive and inefficient, and they computerized stores and gave people part-time shifts without benefits,

But I did not speak out because I didn’t work in the retail trade;

Then they said that teachers were lazy and inefficient and laid the blame for poor children’s lack of educational attainment on teachers unions, companies like Apple got better at avoiding local taxes and hard-pressed tax-payers supported laws that restricted teacher salaries and benefits,

But I did not speak out because I wasn’t a teacher;

Then they said in the 2000s that technical assistance people were inefficient and spent too much time helping people over the telephone, and they replaced them with telephone systems with recorded voices and endless choices or with technical workers from other countries,

But I did not speak out because I did not provide services over the phone;

Then they said that the post office was out-dated and postal delivery people were inefficient, and they passed laws forcing the post office to forward fund its pensions so it began losing money and had to close post offices and lay off employees,

But I did not speak out because I didn’t work at the post office;

Then they said that I was inefficient, my health care benefits were too generous, and I was not competitive in the world economy,

And everyone else was scrambling to get by on their low wages and had no time to speak for me.

Time for a National Voting Rights Law

The Supreme Court is right, voting rights are threatened throughout the country and national standards are needed for any election involving federal lawmakers.  Voting rights abuses in Ohio, Pennsylvania, Florida and other states reveal widespread attempts to deprive people of the vote.

Voting rights are too important to leave to the whim of state and local governments.

Most commentaries about the Supreme Court’s decision to strike down part of the Voting Rights Act of 1965 focus on its impact in the southern states most directly affected by its provisions.  This tendency will be accelerated by the way Texas, in keeping with their cowboy reputation, is rushing ahead to implement a discriminatory voter ID law that will affect thousands of poor people in that state.  (Mississippi is doing the same thing.)

This, of course, is rank discrimination and must not be allowed to succeed.  The NAACP estimates that one-quarter of African-Americans and 16% of Latinos of voting age do not have a government-issued photo ID.

However, we need to keep in mind that there were widespread attempt to limit access to voting in a number of states during the 2012 election season.  In Florida, Republican officials attempted to shorten the popular early voting period, making it harder for people to chose to vote on the weekend and avoid the burdensome task of waiting in line for many hours on Election Day.  Reportedly, the Republicans were disturbed when they discovered that more than four million people voted before election day in that swing state.

In Ohio, Republican officials tried to get rid of the rules instituted in 2008 that allowed people to vote early by absentee ballot and to vote on the Saturday and Sunday before the traditional Tuesday election day.  When they saw that the new rules encouraged minority and working class voters to show up, their earlier enthusiasm for the reform disappeared.

“It just so happened that this was the first time that early voting had been used in large numbers to mobilize African American and Latino voters,” said Wendy Weiser, who directs the Democracy Program at the Brennan Center for Justice at New York University School of Law.”

In Pennsylvania, the Republican legislature passed a strict Voter ID law.  However, the state Supreme Court ruled that the state did not do an adequate job of providing voters with an opportunity to acquire state-issued IDs and prevented the law from going into effect in 2012.  The ID law is operational this year and inspiring protests even as I write this posting.

Thus, voting restrictions are not monopolized by backwoods legislatures in Dixie, but are a national issue that requires national solutions.  The President should step forward and propose a national election law that would require fair standards in every election where a federal office is part of the ballot.

Why should Pennsylvania be allowed to require voter IDs and Texas be prohibited?  Voting in every state is a right, not a privilege, and citizens should be encouraged to participate in the political life of the country, not be excluded by discriminatory laws.

Don’t Buy at the Top of the Stock Market

The Stock Market is reaching the end of a long rise in values, so heed the yellow caution signs. There are many indications that when the downturn comes, investors who brought their money late to the party will end up taking a financial bath.

It is not time to run, but it is time to put your cash in a safe place.

Our modern Stock Market is not deeply tied to the fate of the real economy; with hedge funds, e-trading, derivatives, and “shorting,” the markets have plenty of things to do with their cash without worrying about messy things like investing, manufacturing, and selling. However, there is one thing that gets everyone’s attention – the candy machine known as QE 3, the U.S. Federal Reserve program that injects $85 billion into the financial markets every month, providing cheap money for banks to use as they please.

The key is to remember that the third round of Quantitative Easing since 2010 (thus QE 3) does not consist of the Fed buying government bonds, which would facilitate deficit spending and stimulate the entire economy. Instead, QE 3 consists of the Fed buying housing bonds from banks and other bundlers of mortgage bonds, thus giving money to these financial firms to spend on stock market purchases, commodity speculation, and maybe a few bank loans. It is the trickle-down theory in a financial management disguise. Give money to the rich and let them do things that will get the economy moving.

In practice QE 3 has two results: (a) mortgage rates are very low, so if you have a good, steady job you can get a cheap mortgage and, (b) financial firms have a lot of money to invest in stocks. Thus, the stock market has steadily risen during QE 3.

So, when Fed Chairman Ben Bernanke told a Congressional Committee on May 22 that the Fed might decide to reduce the number of housing bonds it purchases at one of the “next few meetings” the stock market trembled. Then, the minutes of the April Fed meeting were released later that afternoon and people discovered that “a number” of officials wanted to begin reducing the program in June. Investors panicked. The Dow lost more than 80 points in two hours and other indexes fell, too. With wild rumors about the Fed’s intentions still flying about, the Dow lost 138 points on Wednesday the 29th and 240 points on Friday, May 31st.

These events essentially confirm what many people suspected; the vigorous rise in the stock market since last fall is primarily a function of the Federal Reserves’ stimulation policy. It must be, because the real world economy is in decline:

The Eurozone, the world’s largest economic unit, is trapped in its 7th consecutive quarter of declining growth;
China’s growth is slowing to less than 7% a year (the smallest rate since 1990);
Cuts in federal spending will reduce U.S. economic growth in the second part of the year; and
The gradually falling U.S. unemployment rate is largely a product of 6.5 million people leaving the workforce.

In this environment, stocks will continue to rise only as long as the Federal Reserve keeps pumping $85 billion dollars into the financial markets each month. A major cut-back in that subsidy is likely to lead to a drop of 10% to 20% in stock prices. That means that if you put money in the market when the Dow is at 15,200 and it rises to 15,500 and falls 20%, then it goes back to 13,000 or less and you lose a good chunk of your investment. Wait and buy at the next market bottom, when you see Washington and the Fed stimulating the real economy.