State of the Union—Why So Few New Jobs?

Posted on February 16, 2013 by Popular Economics Weekly

Popular Economics Weekly

President Obama’s State of the Union address was all about jobs. So why have so few been created since the Great Recession?

Federal Reserve Vice Chair Janet Yellen gave a recent speech entitled: A Painfully Slow Recovery for America’s Workers: Causes, Implications, and the Federal Reserve’s Response. It is a warning about future job formation. She attributes most of the weak recovery to ‘fiscal headwinds’ (a shrinking of government spending to support growth and jobs), as well as the busted housing market that reduced consumers wealth some 40 percent. And because housing will take years to recover, more government stimulus is needed to bring down unemployment to an acceptable level.

Why do we need the government to continue spending? The reduction in household incomes since the 1970s reached its climax in the Great Recession. Income inequality had risen to the levels of 1929, just before the Great Depression. And Economist Emmanuel Saez has just updated income growth since the Great Recession. From 2009 to 2011 the top 1 percent incomes grew by 11.2 percent while bottom 99 percent incomes shrank by 0.4 percent. Hence, the top 1 percent captured 121 percent of the income gains in the first two years of the recovery.

And expectations of future income growth haven’t improved, as shown in this graph from 1978 presented by Dr. Yellen. Just 25 percent now expect higher incomes since the Great Recession, vs. a historical average of 50 percent since 1978.

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Graph: Federal Reserve

So we are in a very tough spot. The fiscal headwinds Dr. Yellen speaks of have to do with the shrinking budget deficit, believe it or not. The Congressional Budget Office expects the deficit to shrink from 8.7 percent of GDP in fiscal 2011 to 5.3 percent in fiscal 2013 if the sequester takes effect and to 5.5 percent if it doesn’t. Either way, the two-year deficit reduction — equal to 3.4 percent of the economy if automatic budget cuts are triggered and 3.2 percent if not—would stand far above any other fiscal tightening since World War II, and could lead to another recession. For without rising household incomes, and private sector businesses that aren’t reinvesting, only the government can boost the demand for goods and services.

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Graph: Calculated Risk

There is no simpler explanation for the employment picture. There cannot be more private sector growth if the government continues to shrink spending, since household incomes aren’t growing that control most of the aggregate demand (70 percent) for goods and services. Businesses account for approximately 20 percent of total demand, and government spending accounts for the other 10 percent.

Lower taxes can help if they go to the right households, but most tax cuts enacted since 1980 have benefited the wealthiest, or corporations’ record profits, rather than economic growth overall. In fact, corporations have been hoarding their profits—some $2 trillion in cash—rather than reinvest it in the economy. Overall buying power has been significantly reduced, in other words. And the 2 percent payroll tax increase just enacted with further cut consumer spending.

So the problem is how to create enough new jobs to generate more demand for goods and services. And only government is in a position to do that at present. Nothing else will generate the growth we need.

Harlan Green © 2013

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The Fed Worried About Continued Growth

Posted on February 11, 2013 by Popular Economics Weekly

Popular Economics Weekly

Fourth Quarter Gross Domestic Product growth was a bust. What does that say about 2013? Are consumers tapped out, and capital expenditures (capex) shrinking, the two main drivers of economic growth? It doesn’t seem so, as long as the Federal Reserve keeps interest rates this low.

The Federal Reserve was worried about diminished growth at its January FOMC meeting, and so voted to continue its Quantitative Easing programs.

“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” said the FOMC press release of its meeting. “Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

And Barron’s Magazine recently predicted an increase in capex spending this year, citing Standard and Poor’s estimate of 9.9 percent growth, vs 6.9 percent last year. It also cites ultra-low interest rates that provide a double nudge: punitive returns for companies that continue to hoard cash and alluring rates on equipment loans. Also, the fiscal cliff deal in early January extended a tax perk called accelerated depreciation, which sharply increases the portion of capex that companies can write off against income right away.

And consumers are spending like their recession is over. Consumer debt continues to grow, especially for autos and student loans, while they continue to pay down revolving credit card debts.

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Graph: Econoday

The revolving credit component (primarily credit card balances) declined $3.6 billion in December.  Given the healthy retail sales figures for December, consumers are still relying on cash.  This may be due to consumers continuing to mend their credit and/or due to credit card companies keeping credit tight.

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Graph: Econoday

The Commerce Department said consumer spending was moderately strong in December.  Retail sales gained 0.5 percent after a 0.4 percent rebound the month before, with automobiles leading the way. That’s 6 percent per year, close to normal sales’ growth. Without autos and gasoline, strength in the core was also broad based.  Gains were led by furniture and home furnishings, food services and drinking places, and health and personal care.  A decline was seen in electronics and appliance stores.

One caveat: The Fed seems to have painted itself into a corner with its stated mandate of 2 to 2.5 percent inflation, as we said last week. It’s a scenario eerily similar to Germany’s fixation on inflation since its 1920s hyperinflation, and the reason Germany is punishing the Mediterranean countries with its austerity demands. Though U.S. inflation is running below 2 percent at the moment, it could rise with short term rises in gas prices and cause the Fed to terminate its QE program.

What about 2013? We think zero growth of Q4 Growth Domestic Product was an aberration and will probably be revised upward in the next estimate. It looks like the fiscal cliff negotiations, and higher payroll taxes aren’t stopping consumers, or companies from spending more than originally anticipated.

Harlan Green © 2013

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Mortgage Activity Continues To Improve

Posted on February 6, 2013 by Popular Economics Weekly

The Mortgage Corner

Increasing mortgage purchase and refinance activity, key forward looking indicators of our housing market, show 2013 should be a great year for housings’ continued recovery. The Mortgage Bankers Association reported its Refinance Index increased 4 percent from the previous week. The seasonally adjusted Purchase Index increased 2 percent from one week earlier was at its highest level since the week ending May 7, 2010.

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Graph: Calculated Risk

The purchase index has increased in all but one week this year, and is now at the highest level since May 7, 2010 – and that was a spike related to the housing tax credit. The 4-week average of the purchase index is also at the highest level since May 2010.

This is causing housing prices to almost soar, up 5 percent in 2012, according to several price indexes, including the S and P Case-Shiller Home Price Index. Some hardest hit markets like Phoenix, Arizona, are up 20 percent.

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Graph: Econoday

But housing sales might slow this year, if inventories don’t begin to rise again. The NAR’s Pending Home Sale Index fell in December for that reason. A Limited supply of homes for sale is increasingly taking the steam out of the housing market. Pending sales of existing homes fell 4.3 percent in December to pull the year-ago comparison, which had been trending in the double digits, down to plus 6.9 percent.

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Graph: Econoday

And credit quality has increased dramatically for conforming loans purchased by Fannie Mae and Freddie Mac, which guarantee some 90 percent of originations these days. The average score has risen from 730 to 760 in just the past 3 years.

Mortgage Rates are holding in most areas of the country. The conforming 30-yr fixed rate is 3.375 percent for 0 Points origination in California, up just one-eighth percent from its low of the past several months. So watch out, prospective homebuyers. Though the Federal Reserve is doing all it can to keep down mortgage rates, lenders will be tempted to raise them if demand continues to pick up.

Harlan Green © 2013

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Why Shouldn’t the Fed Do More?

Posted on February 4, 2013 by Popular Economics Weekly

Financial FAQs

Fourth Quarter Gross Domestic Product growth was a bust. And so cries are rising for the Federal Reserve to do more to promote growth (since Congress and the White House can’t or won’t). Actually the Fed has done more in the past to promote growth—mainly by ignoring its own inflation goals.

An excellent piece by New York Times’ Binyamin Appelbaum highlighted the controversy over whether the Fed’s $85 billion per month purchasing of Treasury and Mortgage Backed Securities is enough to stimulate more growth.

What, you say? Isn’t $3 trillion already on their books too much? Not really, when you look at what even Fed Chairman Bernanke’s predecessor, wily Alan Greenspan (master of do what I say, not what I do), was able to engineer during his almost 20-year tenure. How did he do it? He basically ignored the 2 percent inflation Federal Reserve target when he wanted to stimulate more growth, while supporting record-breaking budget deficits during the GW Bush administration, in particular.

Inflation rose as high as 6 percent during the late 80s in an attempt to boost growth for the first Bush, before the 1991 recession sunk his chances at reelection. And he tolerated 5 percent plus inflation in the early 2000s. Both times unemployment fell to between 4 to 5 percent. This was considered full employment before Greenspan finally put on the credit brakes by raising interest rates.

It is obvious Chairman Bernanke does not have Greenspan’s panache, for want of a better word. History shows higher inflation is needed to boost growth, and developing countries such as China tolerate much higher inflation rates precisely for that reason. Yet the Federal Reserve Bank of Cleveland calculated in a January report that average expected inflation over the next decade was just 1.48 percent per year.

The Fed seems to have painted itself into a corner with its stated mandate of 2 to 2.5 percent inflation. It’s a scenario eerily similar to Germany’s fixation on inflation since its 1920s hyperinflation, and the reason Germany is punishing the Mediterranean countries with its austerity demands. Such intransigence is causing Europe to fall back into recession. Great Britain’s conservative government is slavishly following Germany’s lead, leading to its own triple-dip recession since its Conservatives Party took office.

It’s as if the Fed can only look in the rear view mirror. Inflation (price stability) became its dominant goal in 1977 over maximum employment, after years of what came to be called stagflation—rising unemployment plus inflation. The Federal Reserve Reform Act of 1977 enacted a number of reforms to the Federal Reserve, making it more accountable for its actions on monetary and fiscal policy and tasking it with the sometimes conflicting goals to “promote maximum employment, production, and price stability”.

But the 70’s inflation was mainly caused by the Arab Oil Embargo and spiking oil prices, among other things—a scarcity of supply—which is no longer the case. It spawned supply-side economics, or, the theory of diverting more wealth to the actual suppliers so they will produce more to bring demand and supply back into equilibrium—with large tax breaks, for starters. And that stimulated the supply of everything with a vengeance; due to globalization (and consequent loss of employee wage bargaining power), corporate monopolization, and deregulation so that oversupply and falling prices became the problem.

Now the greater danger is continuing the tepid growth policies that break the record for length of long term unemployment. As the latest very unprogressive tax accord shows, the U.S. might repeat Germany’s mistakes with greater government austerity when precisely the opposite is needed. Neither Presidents Reagan or GW Bush had any problem with deficits—in fact created the largest federal deficits since WWII.

Why can’t this Democratic administration learn the same lesson? It’s time for the Fed Governors to take the side of consumers and drop their inflation bias. It has become a straitjacket when higher inflation is needed to boost growth. Consumers and employers might tolerate a bit higher inflation, if they knew Fed policy had corrected its inflation bias to encourage more income and jobs growth after 30-plus years of wage stagnation.

Harlan Green © 2013

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Why Are Consumers So Unhappy?

Posted on February 2, 2013 by Popular Economics Weekly

Popular Economics Weekly

It shouldn’t be a secret, by now. Consumers are unhappy. And it’s not because we are too busy paying down our debts. It’s really because no one in Washington has been focusing on job creation—at least since 2010, when $830B of ARRA stimulus spending petered out that saved or created some 3 million jobs.

The latest Conference Board survey shows consumer confidence is down a surprising 8.1 points this month to 58.6. This is the lowest level since the debt limit fiasco of 2011. The rise in payroll taxes that was put into effect as part of the fiscal cliff resolution has resulted in lower expectations for future income, which continues the trend of the past 30 years, falling household incomes.

Fewer, down to 13.6 percent, now see their income increasing. While those seeing their income decreasing jumped nearly three percentage points to 22.9 percent which is the highest since 2009. This is also the lowest confidence reading since 2011.

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Graph: Reuters

It is happening in part because Republicans turned down Obama’s $4 trillion jobs bill last year that would have boosted growth by some 1 percent. President Obama is also at fault for not pushing job creation measures. Instead, he focused on the Republican agenda of debt reduction, when in fact it is job programs that boost growth, as did the ARRA stimulus spending.

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Graph: Reuters

And now we have fourth Quarter GDP growth shrinking for the first time in 3 years. The fourth quarter GDP number is shockingly low. It posted a minus 0.1 percent annualized pace, following a third quarter gain of 3.1 percent. It was the first actual GDP decline since 2009.

This is enough to make everyone unhappy. Much of the slow growth was due to a sharp slowing in inventory investment and a drop in government purchases. Demand figures were not quite as weak as overall GDP but still sluggish. Final sales of domestic product rose 1.1 percent, following an increase of 2.4 percent in the third quarter. Final sales to domestic producers (which exclude net exports) posted a modest 1.3 percent gain after rising 1.9 percent the quarter before.

But some good news is that job growth has been picking up. Payroll jobs in January advanced 157,000, following a gain of 196,000 in December (originally up 155,000) and an increase of 247,000 in November (previously up 161,000). The net revisions for the last quarter is 335,000 additional payroll jobs.

The upward revisions are from annual revisions and indicate that job growth has been somewhat stronger than earlier believed. In 2012, employment growth averaged 181,000 per month. Most of the upward revisions were in the latter part of the year.

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Graph: Reuters

But the root cause of the Great Recession was Wall Street banks that had borrowed too much—i.e., became overleveraged thinking housing prices would always go up. It was the failure of Lehman Brothers, Bear Stearns, and AIG that had insured all those bad loans without sufficient capital to back up their ‘bets’ that dried up the credit that was fueling the boom.

Yet consumers continue to be punished for its excesses with more cries to cut government spending and entitlements. As Paul Krugman and others have said; austerity policies are unprogressive, punishing the poor and middle classes, while further enriching the wealthy. And that will continue to depress consumer sentiment, as long as the more extreme elements of the Republican Party have their way.

Harlan Green © 2013

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Dr. Robert Shiller Says No Housing Boom

Posted on January 29, 2013 by Popular Economics Weekly

The Mortgage Corner

Dr. Robert Shiller, Yale Econ Professor, and co-creator of the Case-Shiller Home Price Index, has become very cautious in his latest articles. Don’t expect much in the way of a housing boom in 2013. He isn’t even sure prices will continue to rise as they have over the past 3 years given all the headwinds, such as tighter mortgage regulations, a declining percentage of homeowners versus renters, and low consumer expectations in general.

This is in spite of the fact that home sales are up some 5 percent, and his own price index is 5.5 percent higher in one year, for the strongest year-over-year growth since August 2006 with increases in 19 of 20 cities..

“On the one hand, there were sharp price increases in 2012, with the S.&P./Case-Shiller 20-City Index, said Dr. Shiller, “which I helped devise, up a total of 9 percent over the six months from March to September. That comes after what was generally a decline in prices for five consecutive years. And while prices dropped very slightly in October, the trend was quite encouraging for the market.”

“But some of these changes were seasonal,” he continues. “Home prices have tended to rise every midyear and to fall slightly every fall and winter. And for some unknown reason, seasonal effects have become more pronounced since the financial crisis.”

Yet he cites a consensus of some 100 economists that real prices will rise 1 to 2 percent over inflation in coming years. Folks, that is the historical norm for housing prices in the 20th century that Dr. Shiller himself cites in his second edition of Irrational Exuberance.

Why so much pessimism from the Oracle who actually coined the term ‘irrational exuberance’ that Fed Chairman Greenspan used in his famous speech so many years ago?

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Graph: Calculated Risk

I believe he is neglecting what is behind the current surge in home buying—pent up demand, and record low interest rates that the Fed has vowed to keep low until the unemployment rate falls to the 6 percent range from the current 7.8 percent. Pent up demand is a powerful driver of home building, for one thing. And household formation is predicted to double to some 1.3 million per year in coming years from a low as 350,000 annually during the Great Recession.

That, and real interest rates make homes the most affordable in history, according to the National Association of Realtors. While this won’t bring us back to boom times, it will at least restore housing to its proper place in the economy.

Even though national existing-home sales declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, sales are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

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Graph: Calculated Risk

The result is total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing, as we have said in past weeks. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

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Graph: Econoday

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

Hence we do not share Dr. Shiller’s uncertainty about the direction of home prices. Extremely tight housing inventories mean demand has picked up substantially. It all might depend on one’s definition of a housing ‘boom’. No one expects a return to the bubble years when consumers borrowed more than they earned. Maybe it’s a relief just to return to a more normal housing market?

Harlan Green © 2013

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2013 U.S. Economy Finally In Recovery

Posted on January 25, 2013 by Popular Economics Weekly

Popular Economics Weekly

With tax rates returning to more normal levels from the rollback of Bush era tax cuts, and Republicans giving up on denying debt ceiling increases until April that would force more cuts in government spending, there seem to be very few domestic factors to hold back more robust growth in 2013.

The “No Budget, No Pay-Act” bill could also open a path to a longer term increase: It would require the House and Senate to each agree by April 15 to a budget resolution for fiscal year 2014. And such a measure, which is intended to set spending and revenue levels for the next five to ten years, might include debt ceiling increases, say congressional staffers.

We are already seeing signs higher growth is happening—maybe even approaching 3 percent GDP growth in 2013. The Conference Board’s Index of Leading Economic Indicators (LEI) just jumped 0.5 percent in December, industrial production is rising again, and retail sales are surging. This and increased housing production are sure to increase hiring. Weekly initial jobless claims have already fallen to 330,000, close to the longer term average.

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Graph: Calculated Risk

The drop in jobless claims was the biggest factor in the LEI increase that predicts future growth. Conference Board economist Ken Goldstein said: “The latest data suggest that a pickup in domestic growth is now more likely, compared to a few months ago. Housing, which has long been a drag, has turned into a positive for growth, and will help improve consumer balance sheets and strengthen consumption. However, for growth to gain more traction we also need to see better performance on new orders and an acceleration in capital spending.”

What will help capital spending is surprising strong industrial production, with the manufacturing component up 0.8 percent following an increase of 1.3 percent the prior month.  Motor vehicle production was strong with a 2.6 percent rise after a 5.8 percent boost in November, along with other sectors.  Excluding motor vehicles, manufacturing output increased 0.7 percent after a 0.9 percent rebound in November.

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Graph: Econoday

And retail sales are increasing 5 percent per year, almost back to early 2000 levels. Gains were led by furniture & home furnishings, food services & drinking places, and health & personal care.  A decline was seen in electronics & appliance stores. Overall consumer spending was moderately healthy in December and likely will lead many economists to bump up their fourth quarter GDP forecast (which had been nudged down last week from a negative international trade report).

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Graph: Econoday

More housing construction in particular will boost growth this year, as it leads directly to new construction jobs, as well as boosts the financial sector. The jump in December housing starts was led by the multifamily component although single-family starts also were up notably.  Multifamily starts jumped 20.3 percent after a 6.3 percent decline in November.  The single-family component gained 8.1 percent in December after decreasing 3.2 percent the prior month.

The lesson seems to be that for all the political quarreling, there are fundamental factors driving growth. Increased hiring is driving up the demand for goods and services. Record low interest rates are boosting housing and stimulating exports due to the weaker dollar. The U.S. economy seems finally to be out of intensive care, and government is now aiding, rather than obstructing better growth.

Harlan Green © 2013

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Existing-Homes Inventory at Record Lows

Posted on January 22, 2013 by Popular Economics Weekly

The Mortgage Corner

The housing market is recovering with the highest sales and price rises since 2007. Only problem is that inventory is also at the lowest level since 2007, with just 4.4 month’s supply of housing on the market. We haven’t seen this low a level since early 2000, and even back to the 1980s.

The result is that housing prices are predicted to rise some 5.6 percent this year, and housing construction to top 1 million units for the first time in 5 to 6 years.

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Graph: Calculated Risk

Total national existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, but are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

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Graph: Calculated Risk

The preliminary annual total for existing-home sales in 2012 was 4.65 million, up 9.2 percent from 4.26 million in 2011. It was the highest volume since 2007 when it reached 5.03 million and the strongest increase since 2004.

The result was total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing—which includes both single family homes and rental units for those who aren’t purchasing. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

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This Calculated Risk graph that dates back to 1968 tells us how far construction has to grow to even return to historical levels of 1.5 million annual units. The shadowed areas are recessions.

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

The real problem at present is the political gridlock. “Builders’ sentiment remains very close to the index’s tipping point of 50, where an equal number of builders view conditions as good and poor, and fundamentals indicate continued momentum in housing this year,” said National Association of Home Builders Chief Economist David Crowe. “However, persistently tight mortgage credit conditions, difficulties in obtaining accurate appraisals and the ongoing stalemate in Washington over critical economic concerns continue to impede the housing recovery.”

Need we say more about what is holding back not only housing growth, but overall economic growth in this country?

Harlan Green © 2013

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Juicing Employment Is Good

Posted on January 20, 2013 by Popular Economics Weekly

Financial FAQs

The subject of juicing is in the air with Lance Armstrong’s confession that he and his cycling teammates injected various stimulants to win races. Yet he told Oprah on her show he didn’t think he was cheating. “Scary, hunh?”

But when it comes to stimulating growth of the U.S. economy after a recession there shouldn’t be any debate about boosting economic growth. Yet bond vigilantes and other austerity advocates think governments are cheating in some way by spending to stimulate economic growth, and create jobs (rather than let growth continue to stagnate).

But in reality, it is the age old attempt to restrict government from being effective in its various mandates, including helping to grow the economy; which also helps to right the record inequality that was a major cause of the Great Recession.

My goodness, we have such huge budget deficits, say the deficit hawks and bond vigilantes (who sing the same basic tune). This means their thinking is even scarier. It’s as if the Great Recession never happened. Because some deficits are good during an economic recovery, when there is little chance of inflation. Fed Chairman Bernanke has even said we could tolerate 3 to 4 percent inflation—instead of the current 2 percent—and it wouldn’t hurt economic growth.

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Graph: BLS

In fact, we can’t have real inflation until the unemployment rate drops back to 6 to 6.5 percent. One Fed Governor, Naryana Kocherlacota, even wants to wait until it falls to 5.5 percent, which is closer to the historical norm for inflation to kick in. This is why the Fed Governors set such a target before beginning to tighten credit.

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Graph: BLS

History has shown there isn’t sufficient demand to drive up prices when unemployment is high, which is the same as saying not enough money is in circulation that would drive up inflation. A good recent example is in the 1990s as the accompanying graphs show. When unemployment rose, inflation fell at the same time. Inflation then remained in the 2-4 percent range during the 1990s when unemployment was between 4-6 percent, which seems to be the norm, as we said.

We call it austerity when inflation hawks hold sway as they are doing in Europe at the present. It is also the rationale used by the deficit hawks who resist any stimulus spending, even though history has shown it decreases record inequality, the major cause of the current recession and economic stagnation, as we said. Nobelist Joseph Stiglitz is one who has trumpeted the necessity of decreasing inequality if we want real growth.

This is the lesson that Bernanke’s Fed has learned, and why they continue to pump money into our economy by buying up bonds and mortgage-backed securities with successive Quantitative Easing (QE) programs.

So Lance Armstrong’s ‘juicing’ does teach us something. It is a label misused by those protecting their wealth who resist all stimulus spending that benefits most Americans, and decreases record inequality. Using monetary stimulants to boost economic growth when unemployment high is good, because it creates a healthier economy, more jobs, and yes, a winning mentality for the right reasons.

Harlan Green © 2013

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What Budget Problem?

Posted on January 17, 2013 by Popular Economics Weekly

Popular Economics Weekly

Does Congress know that our federal budget deficit has been shrinking steadily since 2009, the end of the 18-month Great Recession? Yes, that’s right. A combination of cuts in government spending and very low interest rates on the public debt have been bringing down what is really an apples and oranges problem. Annual deficits are decreasing, but they still add to the overall public/private debt, much of which is held by the Federal Reserve in bonds they can sell back to the public when the economy improves sufficiently.

In the depths of the most recent recession, the fiscal year that ended Sept. 30, 2009, the deficit was 10.1 percent of gross domestic product, the value of all the goods and services produced. Since then, the deficit has declined to 9 percent of GDP in 2010, 8.7 percent in 2011 and 7.0 percent in fiscal 2012. Private analysts predict the deficit will be between 5.5 percent and 6.0 percent of GDP in fiscal 2013, says Calculated Risk quoting Wall Street Journal’s David Wessel.

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Graph: Calculated Risk

And bond investors must know this, since they keep buying Treasury Bonds, whose yields are hovering near all-time lows. The U.S. has no problem paying its bills, in other words. Inflation hawks have been crying inflation over the Federal Reserve’s bond buying program since the end of the recession. Yet interest rates, the best indicator of inflationary tendencies, continued to decline to their current lows.

That is why much of the outcry over the debt ceiling has been fabricated by those who want little or no government, who believe all government spending is for the 47 percent of ‘takers’, when in fact a large part of the government ‘largesse’ goes to the wealthiest to finance their tax breaks. Most of the federal debt comes from past spending, the spending run up since 2000 in fighting two wars, the Bush tax cuts, and recession. This is after 4 consecutive years of budget surpluses under President Clinton, as the graph shows.

Because debt held by the public flows through financial markets, it has more immediate relevance to the economy than intragovernmental debt, which is a matter of internal bookkeeping. As of the end of December 2012, debt held by the public (subject to the limit) totaled $11.563 trillion, according to the Concord Coalition.

The rest of government debt for the most part is intragovernmental debt, consisting of trust fund accounts that are credited with dedicated revenue such as Social Security and Medicare payroll taxes (FICA). In theory, any surpluses in these accounts are “saved” for future benefit obligations. As of the end of December 2012, intragovernmental debt (subject to the limit) totaled $4.831 trillion. Hence the grand total of federal debt is $16.4 trillion.

But we know how to pay it down. The Clinton Presidency showed us how. It is important to reduce government spending, particularly on defense, which is being done as the wars wind down. Another part is fostering job formation programs that increase tax revenues, as happened during the 10-year growth cycle of the 1990s, the longest growth cycle in our history. Twenty one million jobs were created just during the 8-year Clinton term.

In fact, history shows growth remains mediocre without government revenues to support it. This is not just to finance social welfare and senior pension programs. There is so much public infrastructure repair and upgrades that need to be financed at the state and national levels which private industry cannot initiate.

For instance, building our national highway system in the 1950s was a huge boost to growth, and there is a multi-trillion dollar deterioration of current public infrastructure. Much more needs to be spent on schools just to keep up with rising worldwide educational standards. This is not to speak of environmental protection, renewable energy, and research and development that only governments can instigate.

Americans do know how to foster growth. But it has always been due to the partnership of private and public sectors, something our current Congress seems to have forgotten.

Harlan Green © 2012

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