Category Archives: The Economy in Trouble

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.


Tax Cheats are Forcing Painful Federal Cuts

Corporate profits have surged since the Financial Crisis, but these companies are using dozens of tax loopholes to starve the U.S. government of revenue – pushing up the deficit and forcing Congress into making painful budget cuts.

One sign of a dysfunctional political system is when major corporations refuse to pay taxes.

As we have every year since right-wing Republicans found that cutting taxes and creating deficits was good politics, there will be an enormous outcry about taxes this April. I propose we turn the spotlight on this county’s biggest tax cheaters – large corporations that think they are doing us a favor by operating in the U.S. instead of Switzerland or Dubai.

They claim to be job creators, but they certainly aren’t tax generators. The federal Joint Committee on Taxation estimates that in 2013 about $154 billion in special corporate tax breaks will be granted through 135 individual sections of the U.S. tax code. This staggering sum is nearly twice as much as the more than $80 billion in spending cuts taking place through “sequestration.”

One example is the Active Financing exemption for multinational banks and corporations, which was renewed as a little noticed part of the tax legislation passed to avoid the fiscal cliff. This exemption allows multinational firms to set up foreign subsidiaries that receive interest and insurance payments, and carry out financing activities for American exports. Citizens for Tax Justice says:

[The exception is one of the primary reasons General Electric has paid, on average, only a 1.8% effective U.S. federal income tax rate over the past ten years. G.E.’s federal tax bill is lowered dramatically with the use of the active financing exception provision by its subsidiary, G.E. Capital, which Forbes noted has an “uncanny ability to lose lots of money in the U.S. and make lots of money overseas.”]

The exemption, which was eliminated in the 1986 Tax Reform legislation signed by President Reagan, was re-enacted over President Clinton’s veto in 1997. It is renewed each year through the efforts of The Active Financing Working Group, a coalition of multinational companies that includes G.E., J.P. Morgan Chase, and Caterpillar. The Working Group paid $540,000 in lobbying fees to Elmendorf Strategies in 2012 according to Senate disclosure forms.

These tax subsidies continue to flow to corporations even as their profits have soared since 2009. General Electric has raked in $81 billion in profits over the last five years and received a $3 billion refund as a compliment to its tax lawyers.

This is not merely an issue of fairness – corporate tax avoidance, which goes on at the state and local level as well, is bleeding our nation’s ability to educate our youth, send kids to college, care for the sick, and support the elderly and the disabled. In an era of economic decline it is a crime.

This Economy isn’t Working

Full time jobs are hard to come by and many people have stopped working all together. Feeble economic growth is imposing hardships on people of all ages.

Millions of people may never work again.

Here are three charts that dramatically demonstrate our jobs problem. The first shows that the percentage of the population working in full-time jobs is at its lowest levels since the 1950s. In 2007, just as the housing bubble was bursting, more than 52% of the adult population had a full time job. By 2009, six million of those jobs were gone – and we have not gained any of them back during the economic “recovery” that began in 2009. Just 47% of the adult population had a full time job in February of 2013.

What are those six million people without full time work doing? The next chart shows there has been an increase of about 400,000 part time jobs since the recession ended. The next chart shows that the drop in the unemployment rate is largely the result of people leaving the workforce. In 2007, before Bear Stearns collapsed and started the financial crisis, 66% of the working-age population was employed or seeking employment. Today, just five years later, a little over 63% of that group of people is in the labor force and the trend line is almost straight down – about five million people have retired prematurely, work entirely in the underground economy, live at home with mom and dad and watch television, became homeless, or do chores at home while a partner works.

This is frightening, because we know that most of these individuals will never work again, or at least not in regular, full-time jobs. I remember the fear I felt in 2009 and 2010 that if I, as a worker over the age of 55, lost my job, I might never find a steady job again – I would be left to wander on the fringe of society. Keep in mind how much a person’s sense of self-worth, pride, and energy is wrapped up in feeling like a useful, paid participant in society. At least five million Americans don’t feel that way anymore.

So far, theirs is a quiet desperation. Since the late 1960s, women have been entering the labor force in large numbers. Note on the last chart how the labor participation rate rose steadily after 1966, from 59% to a high of 67% in 2000. That means two-thirds of households used to have two wage earners and the five million lost Americans are, in most cases, being supported by other members of the household and by programs like food stamps. In fact, food stamp participation has soared from 28,223,000 in 2008 to 47,791,996 in December of 2012.

Tragically, the sequestration budget cuts will chop away at some of the public supports for these families. The general attitude toward these individuals now on the fringe is similar to that of the Lawrence mill owner talking about the immigrants who worked 14 hour days in his textile factories, “they don’t suffer, they can’t even speak English.”

The Big Banks, Big Media Screen Play

Big Banks and hedge funds usually have a cozy relationship with government regulators; a situation that Congress supports and the media seldom reveals to the public.

The term for this is “regulatory capture” and each actor has a role to play.

We begin our story with an article last week in the business section of the Boston Globe that was written by a journalist with the Associated Press. The article informed readers that Mary Jo White, the president’s nominee to be chairman of the Securities and Exchange Commission (which regulates stocks and bonds and the companies that trade them) is a former federal prosecutor. During her confirmation hearing before the Senate Banking Committee, she said “Strong enforcement is … essential to the integrity of our financial markets.” The article concluded that the president’s nomination of a former prosecutor sent “a signal that he wants the government to get tougher with Wall Street.”

However, readers of Truthout, a much smaller group of Americans, discovered that Mary Jo White left government more than ten years ago to join a Wall Street law firm and represent clients such as JPMorgan Chase, UBS, General Electric, and a former Goldman Sachs board member who is appealing an insider trading conviction. Her role at the firm was to “concentrate on internal investigations and defense of companies and individuals accused by the government of involvement in white collar corporate crime or Securities and Exchange Commission and civil securities law violations.”

While serving as SEC Chairperson, she will be receiving $42,000 a month in retirement pay from her former firm, Debevoise and Plimpton LLP, which pays partner retirement benefits out of its current operating income – i.e. fees from large banks and corporations.

The Senate Banking Committee did not find this apparent conflict of interest troubling. In fact, the Washington Post noted that no senator voiced opposition and some of the time was spent discussing Ms. White’s active recreational habits such as riding motorcycles.

After exchanging pleasantries with Ms. White, the Republicans on the Banking Committee spent the rest of the day attacking Richard Cordray, who the president re-nominated to head the Consumer Financial Protection Bureau. These ever aggressive defenders of big corporations and big banks denounced the Bureau and said they would filibuster Mr. Cordray’s nomination.

I believe this situation presents a good case study of regulatory capture in action. The less obvious, but still important things to note are:

(1) even Democratic liberals on the committee – including Sherrod Brown of Ohio, Jack Reed of Rhode Island, Robert Menendez of New Jersey, and Charles Schumer of New York – were not willing to challenge the president’s nominee or Wall Street influence, and

(2) voters who read only the Associated Press account of the hearing would have no idea of the compromised politics involved in the nomination.

I believe that regulatory capture, which happens everywhere in Washington, can only be prevented by interventions carried out by a political movement that pressures Democrats and demands media attention.  We can not wait for them to stand up to Wall Street and big business.


Are Those February Jobs any Good?

236,000 new jobs in February is great news; but many of those newly hired employees will be receiving lower pay and fewer benefits than they did in their last positions.

This is a classic good news – bad news story.

Adding more than 200,000 jobs in one month is enough to drive down the unemployment rate and contains the promise of more hiring in future months. Five long years since Bear Stearns collapsed in the early days of the financial crisis, it is good to have some optimism.

Unfortunately, these new jobs are unlikely to alter the frightening slide in the standard of living of the average American. A 2012 study by the National Employment Law Project found that about 60% of the jobs lost during the economic downturn were mid-wage occupations such as billing clerks and electricians. In contrast, more than half of the new jobs (58%) created since the recovery are what the study classifies as low-wage positions such as retail clerks, food preparers, and home care aides.

This lop-sided job growth, along with high unemployment and employers refusing to offer significant wage increases, have combined to pole axe family incomes. The U.S. Census Bureau reports that between 2007 and 2011, the median U.S. household income, “adjusted for inflation,” fell 8% from $54,489 to $50,054. That drop means that people are struggling to pay growing food costs, the soaring cost of college, and the steady increase in health care premiums and deductions.

We need more than new jobs; we need a whole new re-definition of the financial relationship between employers and workers. For that to happen, we need a social movement that makes the declining standard of living for ordinary people the principal political issue in the United States.

The Slowly Sinking Middle Class

In my book, Perils of Empire, I devote some time in Chapter 8 to a discussion of the growing conflict in the Roman Republic between the small number of families who grew rich as the Republic acquired an empire and the vast majority of the population whose standard of living deteriorated.  I later suggested that the angry mob that burned down the Senate’s meeting hall in 52 B.C.E. when their champion, Publius Clodius Pulcher was murdered, was expressing the rage felt by the world’s first impoverished proletariat.

I also contrasted the situation in Rome with the last four decades of the American experience.  In Chapter 8, I point out that between 1973 and 2001, correcting for inflation, household income for the bottom 90% of the population rose at a rate of barely more than 1% per year.  This week I found more detailed information that helps explain why income grew so slowly.  A recent report by the Census Bureau shows that the average yearly wage for men has actually declined since 1973.  That year, just before the recession of 1974, men, as a group, earned an average of $48,452 (measured in 2008 dollars).  The average wage for men declined gradually, with a few brief upward swings, until 2000, when wages began to fall steadily.  By 2008, the average male earned $46,367 – more than $2,000 less than males earned in 1973.

Why has household income gone up?  Women in the household went to work.  Starting in 1965, there has been a steady rise in the workforce participation rate of women and a gradual increase in the average wage for women workers.  In 1965, a little less than 40% of the adult female population worked, but that figure grew to 58% in 2000.  The wage information reported by the Census Bureau shows that women earned an average of $22,881 in 1965 (in 2008 dollars), $29,815 in 1985, and peaked at $36,148 in 2001, just as the stock market boom was going bust.   With women earning more and more women out working, household income was able to creep ahead between 1973 and 2001.  This fits with my general impression since the 1980s that households or families where two adults work are more prosperous than households or families where only one person works.

Unfortunately, since 2001 the average woman’s wage has stagnated, falling slightly to $35,745 in 2008, and the workforce participation rate for women declined to 54% that year.  Unlike in the 1970s, 1980s, and 1990s, female household members have not been able to bring in more income to compensate as men’s wages declined during the last decade.  Consumer purchasing power jumped during the 2003 – 2006 period when people took equity out of their homes by refinancing, but that option is gone for a very long time.

We are left with a population that, in general, has had to run very hard while gradually losing ground since the crash of 2001.  In addition, most households have no significant income gains from previous decades to fall back on.  The result, in 2010, is a general rage, running straight through the once secure American middle class.  Everywhere, people who are either laid off, working part-time, or re-employed at a job with less pay have a sense that it is all slipping away.  To understand American politics in 2010, we need to remember that this nasty recession has fallen upon a population whose standard of living has stagnated since the early 1970s – a whole generation.  They have a right to be angry.

On Our Own

The business pages of the Boston Globe seldom have deep stories analyzing economic trends.  The main healines are reserved for stories about the ups and downs of local and regional businesses and the people who manage them.  However, buried in smaller stories are bits and pieces of information that, when put together, give us clues to trends in our dismal economy.

For example, on January 29th, a small A.P. story noted that durable goods orders (things that last a while like refrigerators and televisions) rose only 0.3% in December, far less than the 2% rise predicted by professional economists.  Traditionally, when our economy rebounds from a recession, durable goods orders jump as consumers begin spending again.  The latest number was a huge disappointment, given that durable good orders fell 20% during 2009.  The same article points to the reason – 470,000 people filed claims for unemployment benefits the week before – that is, even as government statistics show the GDP going up, nearly half a million Americans got laid off.

On January 30th, a small A.P. story reported that even if you kept your job during 2009, things got worse.  Overall, wages rose an average of 1.5% in 2009, far below the official (doctored-down) inflation rate of 3%.  On February 1st, a tiny Bloomberg News article reported that Nouriel Roubini, the economics professor who predicted the financial crisis before most “experts” noticed there was a problem, said that unemployment will remain over 10% even if statistics show the GDP is growing.  He said, “It’s going to feel like a recession even if technically we’re not going to be in a recession.”

On January 28th, Michell Singletary wrote about President Obama’s “Middle Class Task Force,” which has, after a year of study, recommended that debts for the Federal college Loan Program be forgiven after the student pays 10% of his or her income for twenty years – a reduction from the current 25 year requirement.  This minor change comes from an administration that has fully cooperated with the Bush administration’s handout of more than $600 billion to banks and hedge funds with no requirements for increased business lending, no requirements for renegotiation of mortgages with individuals who are facing foreclosure, and no significant limitations on management bonuses.  Highlighting the contrast, an A.P. article on the same day noted that the Federal Reserve reported that lending is still contracting.

I could go on, I clipped out a week’s worth of stories with the same message – the aftermath of the great financial crash of 2008 is not going to be a return to normal.  While GDP “growth” might be trumpeted in the news, our friends, neighbors, and family are going to be unable to find jobs and the purchasing power of those who keep jobs will continue to decline.  Meanwhile, the Obama administration, moving in slow-motion as it follows the advice of its Wall Street born and bred economic advisors, will only propose tiny changes at the margins, while right-wing Republicans in the Senate will howl about government deficits and bloc even those reforms.  We are on our own.