Why Is the Fed Waiting For Inflation?

Posted on March 22, 2016 by Popular Economics Weekly

Popular Economics Weekly

The Federal Reserve should stick with a “wait-and-see monetary response” absent more evidence of sustainable inflation gripping the U.S. economy, Chicago Fed President Charles Evans said Tuesday. That seems to be Fed Chairwoman Yellen’s response to current world events, as well.

But what is ‘sustainable inflation’, really? It’s a code word for sustainable growth, as past history tells us we really need an inflation rate that is more than the Fed’s 2 percent target to achieve GDP growth that is sustainable.  And, as I said last week, though several of the Fed’s Open Market Committee are still pushing for higher interest rates, there is little sign of inflation at the wholesale or retail level, which means wages are not rising fast enough (that approx. 2/3rds of product costs) to boost consumer demand, and hence economic growth.

Evans — considered to be one of the policy panel’s doves but perhaps no longer an outlier with that view — said he’s willing to allow the U.S. economy to tip above the Fed’s roughly 2 percent inflation target to gain assurance that flares in inflation signals aren’t transitory, even masking economic trouble-spots that might benefit from a go-slow Fed. Factors dragging on growth potential right now include: weaker corporate spending, low commodities prices, China’s economic slowdown and market volatility, he told the City Club of Chicago.

There’s also the U.S. Dollar’s strength, which is harming our exports (read manufacturing sector) because it is in such demand as the world’s reserve currency and considered a safe haven for foreign investors that are leery of investing otherwise amidst the current geopolitical uncertainty.

And if the Fed does boost interest rates further than last December’s one quarter percent hike, it will boost the dollar’s value higher, thus making U.S. exports even less competitive in the current hyper-competitive world trade environment. Such a trade environment with low trade barriers means almost anyone anywhere can produce what is needed, resulting in a world awash in goods and services. The current oil glut is just one example that is depressing commodity prices.

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Graph: Econoday

The good news is that manufacturing seems to be recovering, even with the strong dollar. The Philly Fed and Empire State manufacturing reports are the first positive signals of factory activity during the month. A look at February’s industrial indicators also show definitive evidence of recovery, says Econoday. The manufacturing component of the industrial production report posted a surprising 0.2 percent gain which came on top of January’s stunning gain of 0.5 percent.

Why the manufacturing pickup after 6 months of decline? The dollar is down a surprising 3.8 percent on the dollar index, making our exports less expensive to foreign customers. The above Econoday graph tracks the index value of the manufacturing component against monthly dollar totals for exports.

Exports have been sinking sharply for more than a year in what, by contrast, underscores the formidable strength of domestic demand. Yet the drop in the dollar has been accelerating. It is probably because the Fed’s Open Market Committee has been backing off its promise to raise short term rates as much as 4 times this year.

So we should listen to Fed Governor Evans. Higher inflation is necessary at his time and should be allowed, before the Fed raises rates further. Any sign that inflation could be a danger to growth would be almost instantly reflected by higher yields in the bond markets. And today’s US 10-year Treasury Bond is yielding an absurdly low 1.9 percent.

Harlan Green © 2016

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Existing-Home Sales Fall, Inflation Too Tame

Posted on March 21, 2016 by Popular Economics Weekly

The Mortgage Corner

After increasing to the highest annual rate in six months, existing-home sales tumbled in February amidst very low supply levels and robust price growth in several sections of the country, according to the National Association of Realtors. Led by the Northeast and Midwest, all four major regions experienced sales declines in February.

And though several of the Fed’s Open Market Committee are still pushing for higher interest rates, there is still little sign of inflation at the wholesale or retail level, which means wages are not rising fast enough (that aprox. 2/3rds of product costs) to boost consumer demand, and hence economic growth.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 7.1 percent to a seasonally adjusted annual rate of 5.08 million in February from 5.47 million in January. Despite last month’s large decline, sales are still 2.2 percent higher than a year ago.  

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Graph: Calculated Risk

Lawrence Yun, NAR chief economist, said existing sales disappointed in February and failed to keep pace with what had been a strong start to the year. “Sales took a considerable step back in most of the country last month, and especially in the Northeast and Midwest,” he said. “The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February’s lack of closings. However, the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”

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Graph: Econoday

Year-on-year, the producer price index (for wholesale goods and services), at dead zero, is a full 1 percentage point below the CPI while the producer core rate, at plus 1.2 percent, is 1.1 percentage point behind the CPI core.

So there is really no reason to worry about inflation. The Fed should instead be concerned with boosting growth. As the primary Presidential debates are highlighting, the various trade agreements have sent most of the high-paying blue collar jobs overseas. What is left? The lower-paying service sector jobs, such as in health care.

There is the hope that housing will boost construction jobs, which are higher paying. Indeed, the lower February existing-home sales are mainly due to the lack of inventory, which is down to a 4.4 month total, and the consequent higher prices.

“The overall demand for buying is still solid entering the busy spring season,” said Yun, “but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers.”

The median existing-home price for all housing types in February was $210,800, up 4.4 percent from February 2015 ($201,900). February’s price increase marks the 48thconsecutive month of year-over-year gains.

And total housing inventory at the end of February increased 3.3 percent to 1.88 million existing homes available for sale, but is still 1.1 percent lower than a year ago (1.90 million). That is why unsold inventory is at a 4.4-month supply at the current sales pace, up from 4.0 months in January.

Dr. Yun speculates part of the inventory decline may be due to large funds that are still buying up vacant units. “Investor sales have trended surprisingly higher in recent months after falling to as low as 12 percent of sales in August 2015,” adds Yun. “Now that there are fewer distressed homes available, it appears there’s been a shift towards investors purchasing lower-priced homes and turning them into rentals. Already facing affordability issues, this competition at the entry-level market only adds to the roadblocks slowing first-time buyers.”

Rising housing prices do boost inflation, but rising incomes even more so. So when incomes aren’t rising more than, say, 2.5 percent per year, then housing prices cannot rise much faster. The biggest constraint on housing today, even with still ultra-low interest rates, is in fact static household incomes.

Harlan Green © 2016

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Job Openings Still At Record Level

Posted on March 18, 2016 by Popular Economics Weekly

Popular Economics Weekly

The number of job openings rose to 5.5 million on the last business day of January, the U.S. Bureau of Labor Statistics reported today. It is just below the record high set in July 2015. Hires declined slightly to 5.0 million while separations edged down to 4.9 million. The JOLTS report highlights the millions of jobs actually lost and created each month. It highlights the rising number of job openings, which means more of the unemployed are finding work. And economic growth generally follows job growth.

The quits rate was 2.0 percent (looked at by the Fed because it tells them how many are voluntarily leaving their old job to find a better new job), and the layoffs and discharges rate was down to 1.2 percent.

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and Other (red column), and Quits (light blue column), according to Calculated Risk. The number of job openings (yellow) are up 11 percent year-over-year compared to January 2015. Quits are up 1 percent year-over-year. This is a sign of growing job opportunities as quits are voluntary separations. (see light blue columns at bottom of graph for trend for “quits”).

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Graph: Calculated Risk

This month, more than 4.5 million people who weren’t in the labor force found a job, according to the St. Louis Federal Reserve, even though only about 7.7 million Americans were officially unemployed the previous month. Just since December, the U.S. economy has added more than 1 million jobs and brought more than 1.5 million Americans into the labor force (based on the household survey).

It is huge, folks, and can only mean younger workers are also entering the labor force—i.e., from the millennial generation that now makes up some 53 percent of the workforce and will continue to increase. That’s because those born between 1980 to 2000 and are the offspring of the baby boomers already number some 90 million, a veritable population explosion that will boost economic growth even further, as they enter the job market.

Barron’s Magazine, for one, has been predicting robust, 3 percent plus GDP growth for years to come because of the population explosion that will bring years of prosperity harking back to the 1970s, when the baby boomers entered the jobs market.

“Industries from housing and autos to retailing and financial services could be transformed by their collective demands and desires,” says Barron’s Jacqueline Doherty, “while their growing wealth, coupled with their doubts about the future of government entitlement programs, could usher in a new era of saving and a bull market for stocks.”

The Millennials—sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37—make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7 percent larger than the baby-boom generation, which came of age in the 1970s and ’80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.

“When the baby-boom generation drove the economy in the 1990s,” continued Doherty, “growth in gross domestic product averaged 3.4 percent a year. As the Millennials hit their stride, they could help lift GDP growth to 3 percent or more, at least a percentage point higher than current levels.”

While it is not certain exactly when such GDP growth can be sustained, both economic theory and history says that such a large surge in population will eventually create what has been missing until now—a sustained aggregate demand that has to generate much stronger growth.

Harlan Green © 2016

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Builder Sentiment Holds, Housing Starts Booming

Posted on March 16, 2016 by Popular Economics Weekly

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes was unchanged in March at a level of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).“Confidence levels are hovering above the 50-point mid-range, indicating that the single-family market continues to make slow but steady progress,” said NAHB Chairman Ed Brady.  

And Housing Starts rose 5.2 percent in February to 1,178,000 units and is 30.9 percent above the February 2015 rate of 900,000, confirming builder’s increased confidence. Single family construction was 7.2 percent higher than January.

“While builder sentiment has been relatively flat for the last few months, the March HMI reading correlates with NAHB’s forecast of a steady firming of the single-family sector in 2016,” said NAHB Chief Economist David Crowe. “Solid job growth, low mortgage rates and improving mortgage availability will help keep the housing market on a gradual upward trajectory in the coming months.”

Solid job growth is being helped by those of working age returning to the jobs market. This month, more than 4.5 million people who weren’t in the labor force found a job, according to the St. Louis Federal Reserve, even though only about 7.7 million Americans were officially unemployed the previous month. Just since December, the U.S. economy has added more than 1 million jobs and brought more than 1.5 million Americans into the labor force (based on the household survey).

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Graph: Marketwatch

The labor force — which includes all adults over 16 who have jobs and as well as those are who actively looking for work — has increased by 2 million in the past year, the biggest 12-month gain since before the recession began in 2007, writes Marketwatch’s Rex Nutting.

This is giving a tremendous boost to new-home construction, in particular. It is why the U.S. Census Bureau reported that construction spending during January 2016 was estimated at a seasonally adjusted annual rate of $1,140.8 billion, 1.5 percent above the revised December estimate of $1,123.5 billion. And the January figure is 10.4 percent above the January 2015 estimate of $1,033.3 billion.

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Graph: Calculated Risk

On a year-over-year basis, private residential construction spending is up 8 percent. Non-residential spending is up 11 percent year-over-year. Public spending is up 13 percent year-over-year. Looking forward, all categories of construction spending should increase in 2016. Residential spending is still very low, non-residential is increasing (except oil and gas), and public spending is also increasing after several years of austerity.

In the meantime, the number of people who have jobs has increased by 2.8 million. The strength of those numbers is startling once you consider that the population of working-age people (ages 16 to 65) has grown by only a million in the past year, says Nutting. The number of employed people is growing about three times as fast as the number of working-age adults. This means that the slack in the economy is disappearing quickly (but it’s not gone yet).

The point is that with so many workers returning to the jobs market, a strong housing recovery is assured. For it is working age Americans that want most to own a home, according to a recent National Association of Realtors survey.

Harlan Green © 2016

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We Need More Productive Investment

Posted on March 15, 2016 by Popular Economics Weekly

Financial FAQs

Consumers’ financial health has substantially improved in 2015, according to the Fed’s 2015 Q4 Flow of Funds report, plus, their real wages are rising because of lower inflation. And since consumer income drives aggregate demand—the overall demand for goods and services, and so Gross Domestic Product —it directly impacts economic growth.

This dearth of aggregate demand has happened at the same time as diminished corporate investment in more productive capacity, according to a recent Bank of America report. “Since the Great Recession, US business investment has grown at an average annual rate of 4.9 percent, compared with the 8.1 percent average for the corresponding period of all post-war recoveries. This shortfall is a much larger than the 1.8pp shortfall for household consumption, and the 2.0 pp for residential investment.”

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Graph: zerohedge.com

Why? The Great Recession occurred in 2008, and businesses and financial markets have been slow to recover. But a recent Economic Policy Institute report highlights a more serious reason for slower growth—wage inequality.

“The rise in wage inequality over the last three-and-a-half decades largely stems from intentional policy choices that have eroded ordinary workers’ leverage to secure higher pay (Bivens et al. 2014), said the EPI author Elise Gould. “These policy choices—made on behalf of those with the most economic power—include allowing the minimum wage to stagnate, eroding workers’ rights to bargain collectively, and (the Fed) prioritizing low inflation over low unemployment. Policies such as these have resulted in hourly pay for the vast majority of American workers stagnating despite growing economy-wide productivity, with economic gains highly concentrated at the top.”

And because wages and salaries of most Americans haven’t increased more than 2.2 percent since 2000, economic growth has also been stuck in the 2 percent range. This creates ever larger budget deficits, needless to say, and so endangers social security, Medicare, crimps investments that would increase productivity and boost our standard of living, and is the reason for our crumbling infrastructure of roads, bridges, resulting in even more productivity losses, for starters.

So raising the minimum wage floor is a start. In fact, states that have already raised the minimum wage have boosted wages of the bottom 10th percentile—as much as 5.2 percent for women in states where it was legislated, vs. states with no minimum wage increase.

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Graph: EPI

That makes it even more important for companies and governments to invest more in capital expenditures, i.e., the best way to spend the profits made from higher productivity. But it is hardly surprising that businesses lack confidence in any sustained upswing in demand that would justify taking the risks associated with large increases in investment, concludes the BofA report. For many listed companies, returning surplus cash to shareholders through dividends or share buybacks has seemed a safer strategy.

It is the old chicken and the egg puzzle. Which comes first, investing to expand business, or removing the barriers that depress household incomes in order to encourage businesses to use their cash for productive growth rather than stock buybacks that benefit the few?

We really do know how to boost aggregate demand. We have to create more jobs to fix our public infrastructure that hasn’t been upgraded in 75 years, build and upgrade our schools to educate a growing population, and spend more for the research and development of new, productivity-enhancing inventions.

These are really the functions of governments, when businesses lack confidence to do anything but buy back their own shares.

Harlan Green © 2016

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Consumer Finances Much Healthier

Posted on March 11, 2016 by Popular Economics Weekly

Financial FAQs

Consumers’ financial health has substantially improved in 2015, and their net worth has now surpassed that of pre-recession 2006, according to the Fed’s 2015 Q4 Flow of Funds report. That is the main reason economic growth prospects have picked up in 2016.

The net worth of households and nonprofits as a percentage of Gross Domestic Product rose to $86.8 trillion during the fourth quarter of 2015, said the Fed. The value of directly and indirectly held corporate equities increased $758 billion and the value of real estate rose $458 billion. Consumers’ net worth is now the highest in history in this graph that dates back to 1952. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc.) net of liabilities (mostly mortgages).

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Graph: Calculated Risk

We are in a goldlilocks economic moment, in other words. Gas and energy prices are extremely low, there is almost no inflation, and we are nearing full employment. Interest rates are also still at record lows, with fixed 30-year conforming mortgage rates still at 3.375 percent for a 1 point origination fee in California, which means housing will continue to contribute to growth.

We know consumers are buying more because consumer debt is increasing. January’s increase in total outstanding consumer credit is an initial $10.5 billion (subject to later revisions, as more data comes in). But revolving credit, the component that tracks credit cards, fell $1.1 billion in January following December’s nearly unrevised $5.5 billion increase (due to holiday spending). Even with January’s dip, revolving credit has been showing strength and has been positive for consumer spending, hinting at greater willingness of the consumer to take on credit-card debt.

And sure enough, ex-gas retail sales month-to-month expanded for seven months in a row which matches the longest streak in five years. And year-on-year, ex-gas sales are at a very respectable plus 4.5 percent and reflect special strength in vehicle sales, up 6.9 percent on the year, as I’ve reported.

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Graph: Econoday

This is while overall construction spending rose a strong 1.5 percent in January. A one-month surge in highway & street spending skewed the headline higher as did gains for manufacturing and on Federal construction projects. Year-on-year rates include an impressive 33.9 percent gain for highways & streets which is a big category. Federal spending, a far smaller category to date, is up 9.9 percent.   But that will pick up as well, with more public works projects on the books for this year on federal highways and bridges, in particular.

Turning to the private nonresidential components, offices lead at a 24.8 percent year-on-year gain. Demand on the multi-family side, reflecting strength in rental prices, also has been very strong with year-on-year spending up 30.4 percent vs. 6.6 percent for single-family homes. Together, residential spending is up a year-on-year 7.7 percent.

We mention construct spending because construction projects will continue to add higher paying jobs, so important to income growth, in particular.

Harlan Green © 2016

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Who Will Trump Trump’s Ambitions?

Posted on March 10, 2016 by Popular Economics Weekly

Popular Economics Weekly

Thomas Friedman seems to believe the Donald has sewed up a majority of the Republican Primary delegates and will be a formidable foe for Hillary, assuming she is the Democrat’s candidate. But chances are his past will catch up with him as voters begin to think with their head rather than gut instinct that Friedman seems to believe motivates many voters.

“Donald Trump is a walking political science course,” said Friedman in a NYTimes Op-ed. “His meteoric rise is lesson No. 1 on leadership: Most voters do not listen through their ears. They listen through their stomachs. If a leader can connect with them on a gut level, their response is: “Don’t bother me with the details. I trust your instincts.” If a leader can’t connect on a gut level, he or she can’t show them enough particulars. They’ll just keep asking, “Can you show me the details one more time?”

That may be so for many Republican primary voters, but Trump’s suspect past hasn’t yet been investigated. Thinking Repubs have given him a blank check to date, believing that he will flame out of his own accord.

Even Mitt Romney calling him a con artist last week didn’t seem to hurt Trump in Michigan, though Ohio Governor John Kasich was creeping closer with the final tally of delegate votes, in a defacto tie for second place with Texas Senator Ted Cruz.

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Graph: Marketwatch

Trump’s sordid business dealings are known to very few. One of his 4 Chapter 11 (business) bankruptcies was for Trump Casinos and Hotels. “For 10 years between 1995 and 2005, Donald Trump ran Trump Hotels & Casino Resorts — and he did it so badly and incompetently that it collapsed into Chapter 11 bankruptcy,” said Marketwatch’s Brett Arends, who has been tracking his business failures for years. “His stockholders were almost entirely wiped out, losing a staggering 89 percent of their money. The company actually lost money every single year. In total it racked up more than $600 million in net losses over that period,” something no other major casino chain did over that term.”

In total, Donald Trump pocketed $32 million in nine years of running Trump Casinos and Hotels, while his public stockholders lost more than $100 million. But much more damaging are the various class action lawsuits filed again Trump and Trump University, which was a university in name only.

Instead of receiving a quality degree, “as good as any from a university”, said Trump, students received a printed certificate and no degree after spending as much as $36,000 on a weekend course that solicited more money, and were given commonly known real estate websites, such as Zillow, and several worthless property referrals.

These are the words of several plaintiffs suing Trump that a San Diego court has elevated to gangster status. Trump is accused of not only fraud, but racketeering, as if he were running a criminal enterprise.

One of the two San Diego cases has been allowed by the judge to be brought under the Racketeer Influenced and Corrupt Organizations Act, or RICO, said Time Magazine’s Steven Brill. “This means that, fairly or unfairly, opponents will be able to say that a large group of everyman voters, many of them elderly, have accused a leading contender for the Oval Office of being a racketeer.”

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The records indicate, for example, that Trump University collected approximately $40 million from its students–who included veterans, retired police officers and teachers–and that Trump personally received approximately $5 million of it, despite his claim, repeated in our interview, that he started Trump University as a charitable venture.

Trump’s own followers may be able to disbelieve the evidence that is being unearthed of his many business failures in a hyper fervid primary season full of hyperbole. But the facts are only now now coming to light. And the picture is revealing.

The evidence is in plain sight. The Donald always comes first, and very few others have profited thereby.

Harlan Green © 2016

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Why Did Michael Moore Invade Those Countries?

Posted on March 9, 2016 by Popular Economics Weekly

Popular Economics Weekly

The answer is so simple, and sad. Mr. Moore’s latest eye-opening documentary, “Where To Invade Next?” visits countries that have learned from, and adopted our laws and policies, policies that no longer exist in the U.S. of A.; such as tuition-free public colleges (Slovenia), prison systems that rehabilitate rather than punish (Norway), where drug use is not a crime (Portugal), and 8 weeks paid vacation is the law (Italy).

His film shows America on the way to becoming a Third World country, somewhat lost in the last century and falling behind other developed countries and many developing countries, in caring for our citizens.

Perhaps the most moving segment was that on women’s rights. We who were not able to pass the Equal Rights Amendment that prevented discrimination against women in the 1970s, were imitated in countries like Iceland with the first democratically elected President in 1980, and where women’s rights are enshrined in their constitution (Tunisia, a Muslim country).

For some reason, beginning in the 1970s, these countries began to give more rights to their citizens, while America, the world’s oldest democracy, took them away. Germany has enshrined collective bargaining in their corporations, where 50 percent of the governing board has to be made up of its employees, whereas many states in the U.S. have either banned collective bargaining, or the paying of dues to support collective bargaining, in 25 right to work states.

And Icelandic corporations must have at least 40 percent of each gender on their boards, which was made law after 2008 and the collapse of their banking system. The 3 largest banks all filed for bankruptcy, and some of their all-male executives went to jail, the result of “excessive, testosterone-driven risk taking” said a commentator on their trials. The result was a mass revolt by Iceland’s women that demanded a greater role in the running of their own country.

Michael Moore interviewed Iceland’s special prosecutor for financial crimes, Olafur Hauksson, who said he had learned his prosecution techniques from Bill Black, a U.S. special prosecutor who had convicted bank executives resulting from our Savings and Loan scandal. But no U.S. executive has been prosecuted since, much less convicted, for their excessive risk-taking and disregard of financial regulations during the subprime meltdown and Great Recession.

Why have such more modern democracies passed us by? Moore hints that maybe they have learned from their horrific past of religious and world wars to care better for their citizens. But the U.S. hasn’t learned from the biggest stain on our democracy—slavery. We still enslave mostly African Americans in our prisons, thanks to the war on drugs initiated by President Nixon, after President Johnson had signed the Civil Rights Act that finally gave Blacks the same rights as other American citizens.

While crime rates have gone down, the number of people incarcerated has gone up in U.S. prisons. According to Human Rights Watch, 2.3 million people were incarcerated as of 2007. The United States has the largest incarceration rate in the world with a staggering 762 per 100,000 residents. Compare this to the U.K. whose rate is 152 per 100,000 residents, or Canada whose rate is 102.

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Graph: Policy.mic

So many prisoners create a large workforce. According to truth-out and the Left Business Observer, “the federal prison industry produces 100 percent of all military helmets, ammunition belts, bullet-proof vests, ID tags, shirts, pants, tents, bags, and canteens. Along with war supplies, prison workers supply 98 percent of the entire market for equipment assembly services; 93 percent of paints and paintbrushes; 92 percent of stove assembly; 46 percent of body armor; 36 percent of home appliances; 30 percent of headphones/microphones/speakers; and 21 percent of office furniture. Airplane parts, medical supplies, and much more: prisoners are even raising seeing-eye dogs for blind people.”

And why do we no longer have tuition-free public colleges? It perhaps began when Ronald Reagan was elected Governor of California in 1966, UC Berkeley was a hotbed of protests, and tuition-free for California residents.

Governor Reagan didn’t believe such an education should be free for rebellious college students. His most famous action of that time was the firing of the UC Berkeley Chancellor Clark Kerr for not following his orders to ban the student protests. Reagan vowed to “clean up that mess in Berkeley,” warned audiences of “sexual orgies so vile that I cannot describe them to you,” complained that outside agitators were bringing left-wing subversion into the university, and railed against spoiled children of privilege skipping their classes to go to protests, according to Dissent Magazine, describing that time:

“He cut state funding for higher education, laid the foundations for a shift to a tuition-based funding model, and called in the National Guard to crush student protest, which it did with unprecedented severity. But he was only able to do this because he had already successfully shifted the political debate over the meaning and purpose of public higher education in America.”

California was becoming more conservative, in other words. Instead of seeing the education of the state’s youth as a patriotic duty and a vital weapon in the Cold War, Reagan cast universities as a problem in and of themselves—“both an expensive welfare program and dangerously close to socialism”. He even argued for the importance of tuition-based funding by suggesting that if students had to pay, they’d value their education too much to protest.

Reagan’s assault against higher education was only the beginning of the neo-cons attack on our educational system. Their real purpose was an attempt to dumb down the electorate by crippling our public school and university systems. The fewer that were well educated meant the fewer could challenge the power of those that supported the so-called Reagan Revolution.

So there is a reason our educational system ranks lower than 20 or more countries in the world. M Moore visited Finland to learn why they are ranked #1 in the world, according to the Programme for International Student Assessment (PISA), “a standardized test given to 15-year-olds in more than 40 global venues.”

He interviewed teachers, students, and education officials. They all said their students’ welfare came first, and standardized tests should be abandoned. They had learned from our educational system that once upon a time allowed more free time for social interaction, little or no homework, when music and art were an important part of our educational curriculum from elementary school onward.

Perhaps that is the saddest revelation of Michael’s film. How we have come to undervalue the lives of so many American citizens, including our own women and children.

Harlan Green © 2016

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Job Market Grows Stronger

Posted on March 4, 2016 by Popular Economics Weekly

Popular Economics Weekly

Americans are going back to work, though mostly in lower paying jobs at the moment. That’s why those states and cities raising their minimum wage rate are so important for growth.

The U.S. added 242,000 new jobs in February, and 30,000 more jobs to payrolls over the past 2 months, with revisions. Why does this confute the naysayers that predicted an oncoming recession? Because consumers are buying again, with retail jobs up 54,900, and governments hiring again with all the public works and infrastructure projects in the works. Hence the 19,000 new construction jobs.

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Graph: Marketwatch

The increase in jobs last month is a sign the economy is picking up steam despite a rocky start to the year for stocks, mostly because of worries that a global slowdown could undermine growth at home. The jobless rate, meanwhile, was unchanged at 4.9 percent.

This is when the EU jobless rate is stuck at 10.3 percent, with Italy’s jobless rate at 11.5 and Spain’s at 20.9 percent respectively.

Even more remarkable was that the labor participation rate continues upward with 500,000 more workers entering the workforce in February and 2 million since. It really looks like Americans are going back to work; particularly those most discouraged, as more states raise their minimum wage.

Oregon is the latest state jumping on the bandwagon, with its minimum wage rising in increments to $15 per hour over 5 years. Another sign of strength was that temporary help services fell for a second straight month, down 10,000 following a 22,000 decline in January. Government added 12,000 to payrolls while construction, where spending is solid, rose 19,000, as we said. And this is even though mining and manufacturing jobs contracted, down 19,000 and 16,000 respectively.

The U.S. has created 12.7 million new jobs since 2011 and the unemployment rate has fallen below 5 percent. But workers still aren’t getting big pay raises. Though almost seven years into the recovery, wages have barely accelerated. Hourly pay fell in February, reducing the year-over-year increase in wages to 2.2 percent from a post-recession high of 2.6 percent two months ago.

And, the so-called U6 rate that includes people who can only find part-time work or have become too discouraged to look for work dipped to 9.7 percent from 9.9 percent and reached the lowest level since May 2008.

We maintain raising the minimum wage of lowest paid workers is important for several reasons. Firstly, health-care companies and social-assistance providers led the way in hiring, adding 57,000 jobs. Retailers beefed up staff by 55,000, and restaurants took on 40,000 new workers. This means more employed consumers to boost retail sales, which comprise half of consumer spending, and consumers now power some 70 percent of economic activity.

Raising the minimum wage also takes more lower paid workers off the assistance rolls (such as food stamps), and unemployment insurance, and even welfare, which improves our budget deficit, as well.

We may be entering a virtuous cycle of growth, in other words, in spite of the drop in energy prices. It means more money in the pockets of consumers, creating more demand for goods and services, which in turn creates more jobs, and economic growth.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Fannie-Freddie Debacle Continues

Posted on March 3, 2016 by Popular Economics Weekly

The Mortgage Corner

We are already seeing the results of Obama Administration attempts to kill Fannie Mae and Freddie Mac, the Government Sponsored Entities that guarantee more than 60 percent of all mortgages originated in the U.S. housing market these days. The Mortgage Bankers Association in particular is beginning to worry that taxpayers will have to pick up the tab in the event of another housing bust, since Fannie and Freddie aren’t being allowed to maintain a capital cushion.

Obama’s Treasury Department has refused to allow Fannie and Freddie to maintain a capital base as their profits decline. Instead, all their profits flow into Treasury coffers due to a 2012 amendment to the government’s conservatorship agreement.

“Once their capital goes to zero, there will be no cushion between the GSEs [government-sponsored enterprises] and the need for additional draws on the remaining Treasury commitment, roughly $250 billion,” said Michael Fratantoni, the MBA’s chief economist and senior vice president of research and industry technology, in an article for The Hill.

The government took over Fannie and Freddie in 2008 to keep them from collapsing under the weight of bad mortgage debt. The two entities have drawn a total of $187.5 billion from the Treasury Department and have repaid $241 billion in dividends, though those payments don’t even count toward their debt, because of Treasury’s decision to commandeer all their profits.

The nominal head of Fannie and Freddie is Mel Watts, head of the Federal Housing and Finance Agency that also controls both FHA and VA mortgage agencies. And he is saying it is up to Congress to fix the problem. But Congress has done nothing, as the tug of war continues over whether the GSEs should be public supported or privately funded organizations.

“I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind,” he said in a Feb. 18 speech. 

In fact, the U.S. Treasury is really behind the 2012 amended conservatorship agreement that requires each firm’s capital to be reduced from $1.2 billion this year to $600 million next year and then to $0 in 2018, 10 years after the financial crisis. So taxpayers will still be on the hook, unless Congress can make up its mind. But that isn’t happening, and probably won’t happen until after the Presidential election.

Fannie and Freddie hold a combined $5 trillion in mortgage guarantees on their books but face shrinking earnings and a zero-capital predicament — a situation

David Stevens, head of the Mortgage Bankers Association (MBA), called “unheard of.” Stevens called the situation “a terrible predicament” because Fannie and Freddie “are completely critical to our housing system,” in The Hill article.

Stevens said he expects that one of the GSEs will need to take a draw from the Treasury Department’s credit line sometime this year — possibly as early as the first quarter, a move likely to reverberate on Capitol Hill. 

But that may not have to the case, according to documents filed in lawsuits against FHFA and the Treasury Department by holders of Fannie and Freddie stock that have been rendered valueless by the amended conservatorship. For starters, plaintiffs say, Treasury justified the conservatorship of the GSEs via accounting gimmicks since they faced no liquidity issue at the time of the crisis and recession. They note that Fannie Mae’s Cash Net Income, adjusted for non-cash items, was positive throughout entire crisis and recession.

Fannie Mae disclosed they held $36.3 billion cash in the bank on September 30, 2008 with a maximum exposure of roughly $6 billion per quarter. That was enough liquidity to survive over 18 months, assuming it didn’t bring in another dime.

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Graph: Huffington Post

But due to that last minute (2012) ‘tweak’ to the original conservatorship order by FHFA, all profits went into the Treasury General Fund, which raised suspicions that Treasury was behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders. How is that fair when the GSEs weren’t responsible for the bubble, or subprime loans, or the Great Recession?

We know this because some $16 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

Why has the White House resisted calls to unseal their documents in pending lawsuits by preferred stockholders attempting to recoup losses due to the conservatorship? Antonio Weiss,, a Treasury counselor, gave their only response to Bloomberg News.

“Some have suggested the federal government could stop supporting Fannie and Freddie in the near term by allowing the companies to retain their earnings. This overlooks the high level of capital required to adequately cover the risk of the $5 trillion in assets on the GSEs’ books. A recent analysis from Moody’s and the Urban Institute made clear that it could take decades for Fannie and Freddie to build safe and sound levels of capital and that recap and release would ultimately drive up the cost of mortgages.”

So this is the Treasury and White House response–inaction. Let’s keep the taxpayer on the hook for all losses in the event of another downturn, rather than allowing the GSE’s to begin to build their capital base again.

It may therefore be up to the courts to decide who is at fault in the continuing debacle–at a time of record low interest rates and a housing market just beginning to recover.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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