Tag Archives: middle class

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.”

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.”

Corporate Tax Dodgers Have Clout in Congress

Corporate tax payments have fallen from a rate of about 40% in the 1950s, to around 11% since 2008 – Congress creates tax loopholes and gets campaign donations in return.

The corporate tax system is on the verge of being organized crime. The Institute for Policy Studies found that 25 of the Fortune 500 U.S. companies paid their CEO more than they paid in federal income taxes.

There are many examples of companies taking advantage of legal ways to “launder” their profits to avoid federal and state taxes. For example, Apple is sitting on over $120 billion in cash reserves. A significant portion of that surplus is a result of the company paying just $3.3 billion in taxes on its reported profits of $34.2 billion in 2011 – a rate of 9.8%. A recent New York Times article explained how Apple sets up small offices in low-tax place like Nevada, Ireland, and the Netherlands. There is even a new accounting term the “Double Irish with a Dutch Sandwich” to describe the tax dodges employed by Apple and, as the word spreads, many other companies.

The list of companies that pay almost no taxes is longer than a Clint Eastwood monologue. For example, General Electric brought in $81 billion in profits during the last five years and received a $3 billion refund for “overpayments,” Verizon received a refund in spite of ringing up $48 billion in profits over the last five years. Boeing made a total of $21.5 billion in profits and got a small refund, and Kraft enjoyed a refund in spite of $13.5 billion in profits over five years. Just typing this paragraph makes me as cranky as John McCain.

The result is a laughably small corporate contribution to the common good. The Center for Tax Justice (which is a wonderful non-profit that I donate to) calculated that corporate taxes have fallen from 4% of the Gross National Product in 1965 to 1.3% in 2009. This amount is lower than the percentage in dozens of developed countries including Korea, Japan, England, Norway, Israel, Canada, and Turkey to pick a few off the list.

While the nominal federal tax rate on corporate profits is 35%, no major corporations pay at that level. Since the 1970s, when business lobbying activity became a major force, Congress has created a growing pile of tax breaks for every industry and business activity. The famous oil depletion allowance no longer makes headlines because it is now just one of hundreds of tax give-a-ways. Congressional leaders on key committees ensure a steady flow of campaign donations by making many of these tax breaks temporary – meaning they have to pass through committees and be voted on every two years.

The link to Congressional campaigns is filled with $$ signs. For example, Senator Max Baucus (D-Montana), Chair of the Senate Finance Committee, has raised $12 million over the last six years. $5,353,000 (43%) came from corporate Political Action Committees (PACs); $6,253,000 (50%) came from individual donations totaling more than $200 in any one year; $59,000 (1%) came from labor-related PACs; and $16,928 (0%) came from individual donations of less than $200 in any one year.

We can only imagine how many corporate tax cuts Senator Baucus has voted for in his 23 years on the Finance Committee. Have you give the Senator more than $200 this year? I don’t think you should be expecting a tax cut any time soon.

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.

Oil Price Declines Unrelated to Supply and Demand

All spring and into June we have been told by the media that the rise in oil prices was related to the “supply and demand for oil.”  Journalists and economists told us that the doubling of the price of oil, from $72 per barrel in September of 2007 to $147 at the beginning of July was the market responding to (and you can take your pick) China and India buying more oil, guerrilla bands attacking oil rigs in Nigeria, oil companies being unable to find new oil supplies, or tensions between the U.S. and Iran.  Then, once again, reality showed that most economists and journalists are merely putting a positive spin on anything that puts money into the pockets of big corporations.

In the two weeks between Friday, July 11 and Friday, July 25 the price of oil fell 16.3%, from $147 per barrel to $123.26 per barrel.  Did China or India stop buying oil, were tensions eased betweent the U.S. and Iran, did Exxon-Mobil find a new oil field, is there peace and justice in Nigeria?  No – yet the price fell 16.3% in 14 days.  What better evidence that most of the price rise was speculation; speculation based on the falling U.S. dollar, speculation based on low U.S. interest rates, speculation based on U.S. trade and budget deficits.  The price fell in July because the speculators went too far, the U.S. dollar is not collapsing, it is gradually sinking, so they overshot their mark.  This is cold comfort as we spend $50 to $100 dollars filling our tanks.

Let’s be clear, this is not the kind of illegal, market manipulation speculation that the Democrats in Congress say they can wipe out with legislation.  This is financial managers at multi-national corporations, traders at hedge funds, investment banks in Switzerland and London and New York, doing what they do every day, year after year, move money around the globe to find the best pay-off for their cash.  Countries that have suffered runs on their currency at one time or another since 1990 include Mexico, Russia, South Korea, Indonesia, Malaysia, and Argentina.  Now it is the U.S.’ turn – our budget deficits, trade deficits, and low interest rates are a classic set-up for a run on our currency – and the traders are doing the run in oil futures because oil is paid for in dollars.  Check out my post from June 27 for a more detailed explanation of why the oil price rise is a run on the dollar.

There is a solution to this problem, but it can’t be done overnight.  It will take rare leadership ability for the U.S. to change the way it operates in the world.  If the oil price speculative frenzy is at heart a run on the dollar, then the cure is:

1) Reduce the U.S. trade deficit by greatly reducing imports of oil (take out the cost of imported oil and our trade is roughly in balance) and do it by conserving energy and ultilizing alternative energy, not by making ridiculous claims about the amount of oil that can be drilled off-shore.

2) Raise U.S. interest rates above their artificially low levels so that people can get decent interest rates when they save money and then resolve the mortgage/financial crisis by targeting aid to people who are either in foreclosure or verging on foreclosure.  It sounds expensive, but direct subsidies to homeowners in trouble would be way cheaper than what doubling the price of gasoline has cost us.  Plus, every dollar spent would stay in the United States, while our oil dollars line the pockets of companies in other countries.

3) Reduce the U.S. federal deficit by ending the Bush tax cuts for the rich and reducing military spending by ending the War in Iraq.  Most of the federal deficit run up during the Bush years is a creation of the tax cuts for the wealthy in 2001 and 2002 and by the $150 billion per year we are spending to occupy our new colony in Iraq.