Tag Archives: 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.”

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.

The Stock Market and the End of the Bernanke Put – Part I

Since the 1980s, speculation in U.S. financial markets has been supported by first the Greenspan “Put” and then the Bernanke “Put.”  These puts – informal promises by the Federal Reserve Bank to protect the value of stocks and bonds and prevent destructive crashes, will come to an end if the Fed stops buying housing bonds and allows interest rates to rise this fall.

The wealthiest 1% of Americans, who own about 33% of the total value of stocks and bonds on Wall Street, are upset about the amount of risk they face without the Fed pouring money into the economy.

PART I  To understand why the stock market jumps up and down depending on what Ben Bernanke says, you have to understand the Greenspan “Put.”  In the 1970s, the post-WWII golden age of American prosperity came to an end.  The combination of staggering oil price increases, fierce competition from foreign imports, and resistance to wage cutbacks by unionized workers led to “Stagflation” – an unhappy world of slow growth and high inflation.

Profits for non-financial corporations were squeezed by these trends; in the late 1970s the rate alternated between 2% and 4%, less than half the profit rate of the 1950s and one third of the profit rate of the mid-1960s. 

In response to intense competition from modern factories in Germany, France, and Japan, U.S. industrial firms began what Barry Bluestone and Bennett Harrison wrote about in their ground-breaking book The De-Industrialization of America.  In a process that now seems commonplace to us, many companies closed old, unionized factories in the northeast and mid-west, moving them first to the south and then overseas.

Other manufacturing firms were purchased, their assets sold for cash, and the shell of the company then allowed to go bankrupt.  The blockbuster movie Wall Street captures the ruthless scramble to turn factories into cash in the 1980s.

With investment in tangible production assets becoming more risky and less profitable, American banks and investors began turning to financial speculation as a way to maximize their returns.  The newly elected Reagan administration was eager to help, persuading Congress to loosen regulatory restrictions on the savings and loan industry and stocking the government with regulators who looked the other way when new financial instruments like “junk bonds” appeared on Wall Street.

The explosive growth in these new financial products was fueled by a rapid and costly defense build-up which led to federal deficits of 6.1% of GDP in 1983, 5.2% in 1985 and 5.1% in 1986 – the largest peace-time deficits in U.S. history.  These deficits led to wild speculative excesses on Wall Street, vividly captured in Tom Wolfe’s novel Bonfire of the Vanities.

Alan Greenspan, formerly Chairman of Gerald Ford’s Council of Economic Advisors, was appointed chairman of the Federal Reserve in August of 1987, at a time when the roaring stock market had soared 44% in just one year.  Then, on October 19, 1987, a day after the Hong Kong the stock market collapsed, Wall Street stumbled into full financial panic, losing 22.5% of its value in a single day.  Greenspan immediately stepped in, providing large loans to banks and lowering interest rates.  He announced that the Fed “affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

Greenspan, over the course of five terms as Fed chairman, would demonstrate again and again that the Federal Reserve was ready to pump money into the economy any time the financial markets got into trouble.  This guarantee of support became known as the Greenspan “Put.”  In the world of finance, a “put” is a contract that gives its owner the right to sell a stock or bond at a certain price regardless of whether the market is falling – essentially a guarantee against severe losses.

With the Greenspan “Put,” banks and investment companies could take more risks.  In response, they began inventing the world of derivatives, hedge funds, sub-prime mortgages, and securitization of loans that proved so unstable in 2000 and 2008. 

Next week in Part II, I will look at two examples of the Greenspan “Put” and then show how Bernanke has done even more than Greenspan.

Postscript: Front page headline in the Wall Street Journal on Friday the 11th, the day after I put up this post: “Stocks Surge to Fresh Highs: Skittish Investors Gain Courage From Fed Chief’s Reassurance on Easy-Money Policy.”

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.