What’s Wrong With Capitalism (Revised)?

Financial FAQs

Winston Churchill once said, “No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”

What about capitalism? Has it survived because it is the most imperfect economic system, except for all the others?

Hedge fund billionaire Ray Dalio has been sounding the alarm of late that the western, free market, American model of capitalism is no longer working for most Americans.

In a recent Linked In commentary he said, “I think that most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well, yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.”

Dalio was talking about the 1930s collapse of markets and Great Depression—when Roosevelt’s New Deal came to the rescue, employed millions of the unemployed and helped US win WWII. It was the last time income inequality had increased to the level it is today as shown in this well-known graph, and the last time “people of different ideological inclinations” worked together.

image

In the words of Marriner Eccles, Roosevelt’s Federal Reserve Chairman during the Great Depression, “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

We have the same situation today; partly as a result of the just-ended Great Recession, which was comparable to the Great Depression because of the $trillions in American households’ lost wealth yet to be recovered.

The Great Recession was a market failure caused by the housing bubble, but also by government policies that kept employees’ wages from rising with the increases in productivity—hence the return to record income inequality. For instance, collective bargaining labor laws were weakened in the 1980s. Today there are 26 so called ‘right-to-work’ states that restrict workers rights and union collective bargaining in some way.

This was accompanied by deregulation of whole industries in the name of globalization that loosened oversight and regulations controlling corporate behavior, unleashing the worst form of capitalism—cutthroat capitalism where the profit motive overrode all social obligations to take care of those less fortunate, which made it more difficult for ordinary Americans to climb the success ladder.

image

Dalio’s graph portrays who benefited from the 2001 and 2007 Great Recession. It wasn’t the employees, as employees’ share of US corporate sales plummeted from almost 76 percent of corporate revenues to 68 percent in 2017. Employees lost the most, in other words, and have yet to climb back above the 70 percent that prevailed from the 1970s to 2000.

And hence comes Ray Dalio’s dire threat: “The previously described income/wealth/opportunity gap and its manifestations pose existential threats to the US because these conditions weaken the US economically, threaten to bring about painful and counterproductive domestic conflict, and undermine the United States’ strength relative to that of its global competitors.”

So we need to find ways to escape repeating the history of the 1930’s and World War II that followed. Put another way, how do we rebalance the power structure that skewed incomes and wealth upward, and put the US at the bottom rankings of developed countries in services provided to its citizens—like educational opportunities, health outcomes, and chance for upward mobility?

Dalio’s answer is to identify leaders who believe greater equality of opportunity is the way to save capitalism, and who will in turn form public-private partnerships that include businesses, philanthropists (such as Dalio) and government to coordinate the planning of such partnerships via recommendations of a “bipartisan commission to bring together skilled people from different communities to come up with a plan to reengineer the system to simultaneously divide and increase the economic pie better.”

But who are those leaders? Philanthropists such as Bill Gates, Warren Buffett, and Dalio are already participating. And there are enlightened corporate leaders that don’t belong to ALEC, the right wing American Legislative Exchange Council lobby responsible for crafting the right-to-work laws that currently suppress both voter rights and worker salaries in many of the red states.

Princeton’s Nobelist Sir Angus Deacon says good luck in bringing together those different communities Dalio talks about in a Project Syndicate article: “I think that community is a casualty of an elite minority’s capture of both markets and the state…The genie of meritocracy cannot be put back in the bottle.”

And Nobel economist Paul Krugman once joked it may take another extremely dire event, maybe an alien invasion, before Americans will unite again in a common cause as they did with the New Deal and WWII.

Where will we find the political leaders? He doesn’t mention large ideas like the Green New Deal, which some of our younger leaders—and even Presidential candidates—are advancing. The bottom line is it will take very big ideas to tackle such  “existential threats”.  Let’s not forget global warming that the US Pentagon had said is already endangering our national security.

Harlan Green © 2019

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

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What’s Wrong With Capitalism?

Financial FAQs

Winston Churchill once said, “No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”

What about capitalism? Has it survived because it is the most imperfect economic system, except for all the others?

Hedge fund billionaire Ray Dalio has been sounding the alarm of late that the western, free market, American model of capitalism is no longer working for most Americans.

In a recent Linked In commentary he said, “I think that most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well, yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.”

Dalio was talking about the 1930s collapse of markets and Great Depression—when Roosevelt’s New Deal came to the rescue, employed millions of the unemployed and helped US win WWII. It was the last time income inequality had increased to the level it is today as shown in this well-known graph, and the last time “people of different ideological inclinations” worked together.

image

In the words of Marriner Eccles, Roosevelt’s Federal Reserve Chairman during the Great Depression, “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

We have the same situation today; partly as a result of the just-ended Great Recession, which was comparable to the Great Depression because of the $trillions in American households’ lost wealth yet to be recovered.

The Great Recession was a market failure caused by the housing bubble, but also by government policies that kept employees’ wages from rising with the increases in productivity—hence the return to record income inequality. For instance, collective bargaining labor laws were weakened in the 1980s. Today there are 26 so called ‘right-to-work’ states that restrict workers rights and union collective bargaining in some way.

This was accompanied by deregulation of whole industries in the name of globalization that loosened oversight and regulations controlling corporate behavior, unleashing the worst form of capitalism—cutthroat capitalism where the profit motive overrode all social obligations to take care of those less fortunate, which made it more difficult for ordinary Americans to climb the success ladder.

image

Dalio’s graph portrays who benefited from the 2001 and 2007 Great Recession. It wasn’t the employees, as employees’ share of US corporate sales plummeted from almost 76 percent of corporate revenues to 68 percent in 2017. Employees lost the most, in other words, and have yet to climb back above the 70 percent that prevailed from the 1970s to 2000.

And hence comes Ray Dalio’s dire threat: “The previously described income/wealth/opportunity gap and its manifestations pose existential threats to the US because these conditions weaken the US economically, threaten to bring about painful and counterproductive domestic conflict, and undermine the United States’ strength relative to that of its global competitors.”

So we need to find ways to escape repeating the history of the 1930’s and World War II that followed. Put another way, how do we rebalance the power structure that skewed incomes and wealth upward, and put the US at the bottom rankings of developed countries in services provided to its citizens—like educational opportunities, health outcomes, and chance for upward mobility?

Dalio’s answer is to identify leaders who believe greater equality of opportunity is the way to save capitalism, and who will in turn form public-private partnerships that include businesses, philanthropists (such as Dalio) and government to coordinate the planning of such partnerships via recommendations of a “bipartisan commission to bring together skilled people from different communities to come up with a plan to reengineer the system to simultaneously divide and increase the economic pie better.”

But who are those leaders? Philanthropists such as Bill Gates, Warren Buffett, and Dalio are already participating. And there are enlightened corporate leaders that don’t belong to ALEC, the right wing American Legislative Exchange Council lobby responsible for crafting the right-to-work laws that currently suppress both voter rights and worker salaries in many of the red states.

Princeton’s Nobelist Angus Deacon, author of Bowling Alone, the Collapse and Revival of American Community, doubts that American communities fragmented in the 1970s as a result of another ‘revolution’, the ICT revolution (in information and communications technologies), can be easily reconstituted. He says good luck in bringing together those ‘different communities’ Dalio talks about: “I think that community is a casualty of an elite minority’s capture of both markets and the state…The genie of meritocracy cannot be put back in the bottle.”

And Nobel economist Paul Krugman once joked it may take another extremely dire event, maybe an alien invasion, before Americans will unite again in a common cause as they did with the New Deal and WWII.

Where will we find the political leaders? He doesn’t mention large ideas like the Green New Deal, which some of our younger leaders—and even Presidential candidates—are advancing. The bottom line is it will take very big ideas to tackle such  “existential threats”.  Let’s not forget global warming that the US Pentagon had said is already endangering our national security.

Harlan Green © 2019

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

Posted in Consumers, Economy, Keynesian economics, Macro Economics, Politics | Tagged , , , , , | Leave a comment

March Job Creation Exceeds Population Growth

Popular Economics Weekly

Stanford economist and Former Chief Economic Advisor Ed Lezear said this morning on CNBC that job creation still exceeds population growth, which is a sign the US economy continues to expand, but at a slower rate.

“Total nonfarm payroll employment increased by 196,000 in March, and the unemployment rate was unchanged at 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services.”

February was revised slightly up to 33,000 instead of the 20,000 initial nonfarm payroll total, also an encouraging gain that hints growth in the economy might be picking up again. Hiring increased in most major segments of the economy, most notably health care and white-collar firms. The flush of new jobs kept the unemployment rate near a 50-year low, the Labor Department said.

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MarketWatch.com

Health-care and Educational Service providers led the way again, adding 70,000 jobs. Health-care has boosted hiring by almost 400,000 in the past year. Professional and technical firms hired 34,000 workers, restaurants increased staff by 27,000 and construction companies took on 16,000 new workers. A month earlier, builders cut employment by the most in a year and a half during a spell of severe cold and heavy snowfall.

But manufacturers trimmed 6,000 jobs after barely any gain in February. And retailers eliminated 12,000 jobs. The manufacturing losses seem to be coming from uncertainty over the prolonged trade negotiations with multiple countries. Manufacturers are complaining about the rising price of imported parts from the tariffs that make their finished products more expensive.

image

us.econoday.com

Another sign of a manufacturing activity slowdown was the decline in February Durable Goods Orders reported earlier this week. There was a cooling for aircraft orders, so that durable goods orders fell -1.6 percent with the ex-transportation reading very low at just a 0.1 percent gain.

Orders for core capital goods also fell -0.1 percent (ex-aircraft and autos), which are factory-produced tools, buildings, vehicles, machinery and equipment that increase future growth and productivity. The fact that orders have dropped below 5 percent annually when maintaining more than 6 percent annual growth the past 2 years is a definite sign of slowing activity.

But the 3-month 180,000 payroll hiring average is more than needed to employ the lower number of working-age adults entering the workforce. The workforce participation rate of 60.6 percent is also healthy, and governments have helped by adding 19,000 jobs since January.

MarketWatch reports another plus for economic growth. “Motor vehicle sales reached a seasonally adjusted annual rate of 17.45 million in March, up from 16.57 million in February, according to data from Autodata. That’s the highest reading in three months and represents a recovery from a downbeat start to the year. The MarketWatch-compiled consensus expectation was for a 16.8 million rate.”

What’s not to like about the unemployment report? Employers are paying more, and even willing to retrain workers to fill the skilled-worker void. The housing market has also picked up with record-low interest rates holding. The Mortgage Bankers Association reports refinance applications jumped 39 percent last week.

Harlan Green © 2019

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

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ANSWERING the KENNEDYS CALL: Birth of a “Livable” City

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It is extremely difficult to form a new city in California, or any other US State for that matter. The studies required to justify taking jurisdiction away from a county government really means taking it away from what is in essence state control, since county governments were originally set up under state jurisdictions, and controlled by state laws and regulations.

This is evidenced by the financial strings state and county governments hold over cities; mainly in terms of its planning and zoning regulations, but also the share of tax revenues to various local services, such water and sanitary districts.

The birth of a new city in the Goleta valley was a vision that took years to realize, and huge amount of patience and persistence to bring together a unique admixture of its citizens—from Mexican immigrants to hi tech engineers, to university-educated environmentalists, and Defense Department employees; from supporters that wanted more municipal improvements such as flood and highway improvements, to those that wanted it to remain a sleepy bedroom community serving the adjacent City of Santa Barbara.

Forming a brand new city was the most challenging example of community building I experienced in my life because it meant bringing together enough of its residents in a common vision of their community. Seasonal farmworkers that harvested large lemon and avocado groves lived side-by-side with University of California Santa Barbara students and their professors in the unincorporated valley.

Because of this diversity there were an almost equal number for and against the formation of a new city. But it finally happened on the fourth try—February 1, 2002. The high crime rate in Goleta’s Old Town—the historical center of the Goleta Valley since it was settled more than 100 years earlier—was documented in the Redevelopment District Agency study commissioned by Santa Barbara County. There were more bars than restaurants and it was home to several gangs. There were also serious environmental concerns, as high traffic totals were causing air pollution, and successive floods during the 1990s following an earlier drought required greater flood controls.

Just the fact that it became a city enabled Goleta to contract with the County Sheriff to provide a neighborhood police service accountable solely to Goleta residents. This resulted in Goleta being listed as one of the 50 safest American cities in 2017, eleven years after its formation, according to a survey by Safewise, a security firm.

The re-design of Old Town Goleta also seemed an ideal location to practice some of those precepts of True Urbanism, or New Urban Design, all labels attached to what is now a worldwide movement that sought to make cities more citizen friendly.

How hard could that be, though we didn’t realize the state’s Environmental Quality Report (CEQA) would require flood improvements before anything else was done. We didn’t realize in a word what an effort it would take, and continuing struggle it still is, to bring together so much diversity of opinion and conviction into a well-functioning and sustainable community that epitomized what pro-city residents wanted in a new city.

The first step was to organize a design conference to provide design and planning alternatives for the future—something county planners supported after three failed Goleta cityhood elections. It was obvious that without a community effort to create a town center with a unique identity that contrasted with neighboring Big Sister city Santa Barbara, Goleta’s cityhood might never succeed.

The American Institute of Architects was co-sponsoring eight simultaneous design charrettes across the country and in Hawaii at the time, in an attempt to create design outcomes using these new urban planning techniques. All were retreats that brought design professionals such as architects, designers, and urban planners together to envision and help to re-design a project area—such as a district or town center.

The Goleta Old Town design charrette, a French term for a gathering of designers and interested parties to create an innovative atmosphere in which a diverse group of stakeholders can collaborate to “generate visions for the future” to use Wikipedia’s description, was also hooked via Internet to the seven other design charrettes so we could share ideas and outcomes. All were weekend-long marathon sessions that began early and went late into each evening of those two days, creating a feverish intensity that only an assembly of very creative individuals can foment.

The idea of a design charrette was exciting in itself. It is a well-known architectural concept first adopted by students of Paris’s Ecole des Beaux Arts, Frances’s major design school, in the 1800s. They were used to cramming for exams at the last minute while riding in a charrette, or horse cart to the exams. So this was an exciting chance for local students, environmentalists, and some developers that wanted to participate in what Goleta might become for future generations.

These retreats were co-sponsored by the American Institute of Architects, or AIA, and included Honolulu and Charlottesville, Virginia, home of the Jefferson designed University of Virginia and Jefferson’s nearby Monticello home, of course. I remember Charlottesville was surrounded by a rusting industrial belt needing resuscitation that could benefit from mixed-use design concepts of the new urban planning, just as Old Town was surrounded by auto-dependent suburban malls and shopping centers with few pedestrian conveniences.

We were able to assemble 100 design professionals and civic activists such as myself. It was a vehicle to begin the process of envisioning, or re-visioning a future for Old Town and the Goleta valley community.

We basically locked ourselves into a large industrial building and broke into eight committees, each tasked to come up with a different design concept for that weekend. The eight results covered the gamut of ideas for Old Town, an area of no more than 20 city blocks and population of ­­­­5,000. The designs ranged from a totally pedestrian environment only accessible to public transportation with room for pedestrian-oriented businesses and entertainment to draw them out of their autos, to one that permitted automobile access, (which local small businesses badly wanted to sustain their small businesses), but with more off street parking and lots of green landscaping.

Margaret Connell, a recent Goleta city council member who supported the Old Town revitalization plan and wanted Old Town to be part of a new city center, voiced some of her concerns because much of the work has remained undone since cityhood: “…So Goleta Old Town feels more embedded than the more recent housing and worksites, and it also suffers from some disadvantages of being “old.” It lacks sidewalks through much of the older residential areas, though the city is taking steps to remedy this. There are many children who live here, but there are very few parks — a pocket park on Nectarine, a larger one on Armitos Avenue, and a four-acre, active-recreation park on Kellogg Street, which is still being developed,” said former council woman Connell.

The major environmental concerns were a lack of alternative transportation (such as busses and bike lanes) to manage traffic flow during peak rush hour that could still service Old Town residents and businesses. Flooding was also a major concern, in spite of periodic droughts, since Santa Barbara and the south coast had suffered several devastating floods during the 1990’s that ended a prior eight-year drought.

The flood that broke the 1993 drought was called the March miracle because 11 inches of rain fell that month, even closing the Santa Barbara Municipal Airport for several days that had been formed from a saltwater estuary.

Old Town’s main street was flooded as well one night with at least a foot of water from a torrential rainfall that overflowed the two creeks bracketing Old Town’s boundaries. That is why flood control improvements, such as an enlarged and channelized creek bed, were required in the CEQA (California Environmental Quality Act) report as the first step in any redevelopment effort.

The droughts and consequential flooding also made everyone aware of the limited water supplies in California, even though some areas that year had experienced the greatest rainfall totals since the 1880s.

This is why the work of the new city of Goleta has just begun. The community plan balances environmental with livable concerns, but there was a casualty of the 2007-2009 Great Recession that caused an unexpected disruption of Goleta’s future infrastructure upgrades; especially in Old Town, which is adjacent to Santa Barbara’s municipal airport with its own accessibility problems.

California, to solve its budget problems from the Great Recession, dissolved all 404 Redevelopment District Agencies in 2011, which removed the tax financing that Old Town was counting on to fix some of those transportation problems and relieve the traffic congestion. That has put many of the planned improvements on hold until alternative financing is found.

So has Goleta become a more livable city? Its residents think so, though affordable housing will always be a problem. Local Historian Walker Thompkins’ description of the Goleta valley as a pastoral paradise is immortalized in his book, Goleta, the Good Land that is still available on Amazon’s website.

The livable cities movement, which is what it has become as cities now compete to attract the best and the brightest people and best jobs, has evolved into a ranking contest. The annual rankings of the most livable cities are published by several well-known lifestyle publications and organizations, including the AARP Livability Index, Monocle‘s “Most Liveable Cities Index”, the Economist Intelligence Unit‘s “Global Liveability Ranking”, and “Mercer Quality of Living Survey”. 

Unfortunately, not a single US city on the Economist’s list makes the top 10 in a study of the world’s 140 major cities. Melbourne, Australia topped it in 2016, with Perth and Adelaide Australia also in the top ten. Honolulu, Hawaii is the only American city mentioned at all. It makes the top ten list of most improved cities over the past 5 years.

Is their bias showing? A ranking released by the Economist Intelligence Unit, attempts to quantify the world’s most “livable” cities—that is, which locations around the world provide the best or the worst living conditions. The index, measured out of 100, considers 30 factors related to safety, health care, educational resources, infrastructure and the environment to calculate scores for 140 cities.

“Those that score best tend to be mid-sized cities in wealthier countries,” said the Economist survey. “Melbourne tops the list for the sixth year in a row, and six of the top ten cities are in Australia or Canada. But Sydney, Australia’s largest city, drops out of the top ten due to fears over terrorism.”

So the safety of its residents and the threat of violence and terrorism seems to have knocked American cities off the list, and put Australia at the top of most livable cities rankings. How do we solve the increasing dangers from violent extremism and domestic violence that make so many American and European cities unsafe?

Goleta Old Town’s revitalization is still a work in progress, in other words. Goleta became a city in 2002, but is still wrestling with the idea of putting a new City Hall in Old Town rather than continue to rent space in an industrial complex farther to the west in the midst of malls and office complexes. It remains to be seen just what the new city of Goleta will look like 15 years after its formation, and whether it is able to embody the livable planning principles we envisioned in the design charrette.

And what are other institutions that might bring us more peace and freedom in the world with its droughts, mass migrations, inequality and civil unrest in so many countries? How can we nurture more viable communities and neighborhoods? There are modern social movements and community development tools that can bring this about. We will describe some of them in the next chapters.

Harlan Green © 2019

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

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Ignore the Bad News-Goldilocks Is Back!

Financial FAQs

Why has the Fed stopped raising their interest rates? Because this is the lowest inflation rate for ‘core’ consumption expenditures in three decades, as this FRED graph from 1980 onward portrays.

image

fred stlouisfed.org.

“We are almost 10 years deep into this expansion and inflation is still not clearly meeting our target,” said Fed Chairman Jerome Powell in the press conference ending last Wednesday’s FOMC meeting. “That’s one of the reasons we are being patient.”

“Despite the lowest unemployment rate since the late 1960s and the fastest increase in wages in a decade,” he continued, “the rate of inflation actually fell slightly in the second half of 2018. Conventional wisdom says that’s not supposed to happen when the labor market is what economists describe as “tight.”

Right, that’s not supposed to habit but regardless, it has put consumers back into the sweet spot of a Goldilocks, not-too-hot, not-to-cold economy with unemployment at a 50-year low and incomes rising at the fastest rate in 10 years, according to MarketWatch. This is not supposed to happen, per conventional wisdom.

Rather than attempting to fathom what “conventional wisdom” means, it’s more productive to understand why the Goldilocks scenario is happening again. Consumers want to spend more with their rising incomes, but the incomes of a majority of consumers aren’t rising fast enough to keep up with production of those goods, which now largely come from other countries that can produce them more cheaply.

Hence Personal Consumption Expenditures (PCE) continue to fall, in line with more slowly rising personal incomes (for the 99 percent) and inflation. This FRED graph shows that PCE consistently grew at more than 5 percent until 2000, when it began to plunge to as low as -3.7 percent during the Great Recession, and finishing up +2.5 percent in Q4 2018.

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FRED

This tells us several things. Firstly, most American workers have not yet recovered from the Greatest Recession since the Great Depression, which took WWII to get US out of that funk. So this hasn’t been enough consumption to boost inflation or interest rates, which is why we continue in the 2 percent GDP growth path, and retail sales were punk during the holidays and slow to recover.

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And, there was a 35-day government shutdown in December, which further depressed incomes and sales. Retail sales picked up slightly in January, but February isn’t looking so good with sales negative for the second time in 3 months, per the FRED graph.

And lastly, the final revision of Q4 GDP growth dropped to 2.2 percent from its 2.6 percent initial estimate, which has to be another casualty of the stupidest government shutdown ever.

So though inept government policies and the record income equality keep the economy from growing faster, it enables consumers to stay in the game; and keeps the US economy from overheating, which is a good thing, right?

Harlan Green © 2019

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

Posted in Consumers, Economy, Keynesian economics, Politics, Weekly Financial News | Tagged , , , | Leave a comment

This Is Not a Recession!

Financial FAQs

image

fred stlouisfed.org.

There is no ‘looming’ recession about to happen, in spite of the warnings from pundits; none of whom are reputable economists to date. For instance, Trump’s new pick for the Federal Reserve Board is not a practicing economist, but a TV pundit handpicked by Trump to browbeat the Fed Governors to lower interest rates even lower than they are today, so that the economy (read stock market) doesn’t sputter prior to the 2020 election.

Yet interest rates are already at rock-bottom, which is also why the reverse yield curve debate is happening. It’s supposed to be a sign of a looming recession. Yet today’s 2-year Treasury bond yield is 2.21 percent, vs. the 10-year (higher) yielding 2.38 percent at this writing. The comparison to the 3-month yield which is fluctuating between 2.21 to 2.45 percent—depending on the time of day—is not a realistic reversing of the yield curve that some pundits seem to be fearing.

The major reason long term rates are at historic lows, as I’ve been saying (the last time 10-year Treasury yield was this low for any extended period of time was in the 1950s, as the FRED graph shows), is because of the various austerity programs Europeans and the US put into place after the Great Recession that limited public spending, which would have boosted both productivity and economic growth past the current anemic two percent rate—and taken some of the excess profits from the private sector that didn’t place their money where it would increase productivity and growth, but instead chose to in effect hoard it.

And is anyone yet noticing the incoming cuts to Medicare, environmental protection, and very little infrastructure spending, so that Trump Republicans can spend the money on a Mexican wall that does nothing for the economy? This also diminishes the incomes of many consumers that drive two-thirds of economic growth.

In other words, while corporations have been making record profits, they haven’t spent it on either boosting their employees’ wages, or investing enough to elevate their labor productivity. Instead, most of the profits of US corporations, and surpluses of foreign central banks have remained liquid assets that boost US stocks and CEO salaries, or invest in US Treasuries, which is why long term interest rates are still this low.

When does an actual recession begin? When economic growth slows for an extended period of time—two consecutive quarters of shrinking GDP is the common indicator. But four major sectors would have to begin a sustained decrease—employment, real GDP growth, Personal Income less Transfer Payments (i.e., that include interest on the debt, social security, medicare payments and welfare.), and Industrial Production. All are still above pre-recession highs, and all would have to begin a sustained downward trend.

On the other hand, it takes time to even call the beginning of a recession, since much of the data comes in after the fact and many revisions to initial data. For instance, the Great Recession was called some nine months after it was deemed ‘official’ by the NBER’s Business Cycle Dating Committee, an economic think tank that doesn’t even meet regularly. The US economy began to recover in June 2009, and is now in its tenth year of expansion.

I can quote UC Berkeley Econ Professor Brad Delong on this uncertainty in his most recent blog post. “The next global downturn may well not be yet at hand: odds that the North Atlantic as a whole will be in recession in a year are now down to about one-fourth. German growth may well be positive this quarter. China might be rebounding this quarter. The U.S. is definitely slowing to 1% growth or so this quarter, but it is not yet clear that this slowdown will be more than a blip.”

Does that mean we really won’t know if a recession has begun until it’s too late? Not really, because we should always be planning for such exigencies, just as we plan for illness, loss of a job, even old age! Since we must plan for those, why not plan for the next downturn, whenever it happens.

That is the capitalist beast we must all live with, if we want to live in a democracy.

Harlan Green © 2019

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

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Near-Record Home Sales Combine with Record Low Interest Rates

The Mortgage Corner

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Graph: Econoday

Existing-home sales rebounded strongly in February, experiencing the largest month-over-month gain since December 2015, according to the National Association of Realtors. Three of the four major U.S. regions saw sales gains, while the Northeast remained unchanged from last month.

Total existing-home sales, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, shot up 11.8 percent from January to a seasonally adjusted annual rate of 5.51 million in February. However, sales are still down 1.8 percent from a year ago (5.61 million in February 2018).

This tells us several things. Firstly, record-low interest rates are bringing more home buyers into the housing market. Many are first-time millennial generation buyers now in their 30’s, as I said last week. But it’s also a sign of optimism–that consumers see decent job and economic growth ahead.

Single-family resales, up 13.3 percent to a 4.940 million rate, were especially strong in the month which is good news for the housing sector in general. Condo sales were flat at a rate of 570,000.

“And supply is coming into the market which is more good news, up 2.5 percent in the month to 1.630 million. Yet given the surge in sales, supply relative to sales actually fell sharply to a very low 3.5 months from January’s 3.9 months. Hopefully the pickup in sales will drive new resales into the market,” said the NAR.

But more importantly, it should drive more new-home construction, which surged 14 percent in January, reversing a 28 percent drop in December because of rising interest rates.

Lawrence Yun, NAR’s chief economist, credited a number of aspects to the jump in February sales. “A powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence is driving the sales rebound.”

And interest rates in general are even lower at this writing. The 10-year Benchmark Treasury yield has dropped below 2.50 percent—its post-WWII low in the 1950s. The 30-year conforming fixed rate for loans guaranteed by the GSEs Fannie, Freddie, FHA and VA, are now back to 3.50-3.625 percent, last seen at the end of the Great Recession.

This will continue to boost home sales and refinances for the foreseeable future, as even former Fed Chair Janet Yellen sees no more Fed rates hikes this year, even the possibility of a rate cut, if economic growth doesn’t pick up this year, when speaking at the Credit Suisse Asian Investment conference in Hong Kong.

Present growth forecasts for Q1 are between 0.8 to 1.5 percent at the highest. Yellen was attempting to dispel the likelihood of a looming recession this year that some pundits are forecasting. But not responsible economists, as businesses are still looking for more the one million new workers, the highest total in decades, according to the Commerce Department’s latest JOLTS report. Job vacancies and quits (voluntary leaves because workers are finding better jobs) are already up 15 percent this year.

This does not translate to a looming recession, but the same steady growth that prevailed before the Republicans’ December 2017 tax cuts, and should now return to the post-recession, 2 percent average this year.

Harlan Green © 2019

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

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Who’s Most Damaged by Trade Wars??

Popular Economics Weekly

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Why cannot the Trump administration make $1 + $1 = $2? It’s obvious to all major economists and anyone with basic arithmetic skills that foreign tariffs not only raise the prices of those imports to US, which lowers the demand for those products, but also causes the affected countries to counter by raising their tariffs, which reduces the demand for American products sold to them. It may also reduce US employment in those sectors, though the jury is still out on how it affects US employment.

Suffice to say that attempting to change incredibly complex balance of trade policies between countries that depend on each other for parts as well as finished products takes real negotiating skills, rather than bullying tactics in one-on-one confrontations and unilateral withdrawals from existing trade agreements, could very well slow growth enough to cause a mild recession—or worse.

In 2018, for instance, the country’s trade gap widened to a 10-year high, with the goods gap with China jumping to a record high despite tariffs on USD 250 billion worth of Chinese imports in the first year of Trump’s attempts to reorder the perceived trade imbalance.

The effects of fighting with friends as well as foes is already evident in the Boeing 737-Max 8 fiasco, in which allies chose to ban its flights even before analyzing the Black Boxes. And there is the ballooning trade deficit after one year of these trade wars.

“In the first two volleys of U.S. tariffs on China, which covered $50 billion worth of imports, only $1 billion were products where China had a dominant market position, according to a calculation by Deutsche Bank AG,” said Bloomberg’s Peter Coy, “In the latest round, which took effect on Sept. 24, American consumers are more vulnerable to price increases: Almost half of the $200 billion worth of products subject to the 10 percent duties come mainly from China. Things will get even worse for consumers if Trump makes good on his threat to place tariffs on the rest of Chinese imports, because for about 80 percent of the products, China is the majority supplier.”

And Harley-Davidson is transferring manufacturing to the EU of motorcycles sold in Europe, because of EU retaliatory tariffs on its US-manufactured Harleys. And now GM is also announcing some 14,000 layoffs in five US plants because it can produce its cheaper cars, such as the Chevy, overseas.

Why? Ask GM CEO Mary Barra. Trump’s tariffs on steel and aluminum have cost Ford and GM about $1 billion each. GM Chief Executive Officer Mary Barra cited the tariffs in November when she announced the 14,000 job cuts that included the Lordstown plant’s shuttering. Potentially making things even worse, Trump is now weighing new tariffs on foreign automobiles that could threaten hundreds of thousands of additional U.S. jobs.

So the fact tariffs that target trading allies as well as adversaries has only increased the trade deficit is not a sign that such a policy is working, especially with China that Trump has chosen as the poster boy of unfairness.

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Tradingeconomics.com

What is most shocking is the continuing growth of the US monthly trade deficit (in above graph), though only partly due to the trade wars, since American consumers flush with case have widened the deficit by continuing to buy more imports than we export. But it could get worse if Trump continues to raise tariffs on China, in particular. Labor think tank Economic Policy Institute (EPI) reports the U.S. goods trade deficit with China reached a new record of $419.2 billion in 2018, up from $375.6 billion in 2017, an increase of $43.6 billion (11.6 percent). United States trade with China is dominated by the deficit in manufactured products.

“Although the United States has imposed tariffs of 10 to 25 percent on $250 billion in imports from China (about half of total U.S. imports from that country),” says EPI, “China has played its ‘ace-in-the-hole’ by allowing it’s currency to fall by roughly 10 percent against the dollar. As a result, the U.S. trade deficit with China increased faster (11.6 percent) than the U.S. deficit with the world as a whole (10.4 percent).”

This is not bringing more jobs back to the US. In fact, studies are beginning to show a neutral to net loss of jobs from the tariffs, as sales lost through increased production costs from tariffs hasn’t yet been offset by promised jobs created from industries bringing jobs back to the US that haven’t yet materialized.

$1 + $1 doesn’t = $2 when there is no rhyme or reason for such tariffs without a well thought out plan to achieve results. Negotiating with confusion rather than clarity can only mean an uncertain trading future, which increases the certainty of a recession.

Harlan Green © 2019

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

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Why Do We Depend on the Fed??

Financial FAQs

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The March FOMC meeting ended today, the Fed left rates unchanged, and financial markets are spinning their wheels attempting to guess what happens next—e.g., how many rates hikes this year? The Fed’s decision to pause their rate hikes in January has brought the stock and bond markets back from their December swoon.

The fact that so much market activity seems to hang on what the Fed does next shouldn’t be the case. Nor the tepid 2 percent GDP growth average since the end of the Great Recession; in spite of the various Quantitative Easing programs that have kept interest rates at record lows, and caused a record amount of public and private borrowing.

We are therefore now in an unvirtuous circle that will be difficult to escape. The Obama administration and some Republicans passed ARRA—the American Recovery and Reconstruction Act in 2009 to keep the Great Recession from turning into another Great Depression. It worked for a while, boosting growth in 2010, but wasn’t enough to bring those 8 million lost jobs back.

Keynesian and neo-Keynesian economists such as Paul Krugman kept protesting that the one-time $787 billion shot in the arm wouldn’t be enough, since the recession was world-wide. US GDP growth shrank -3.9 percent, the Euro Area’s GDP sank to -5.5 percent, and Japan’s to minus -8.8 percent in 2009 as a result of the Great Recession.

But the Obama all-Democratic administration was distracted by the push to pass Obamacare, and lost the House of Representatives majority to Republicans in 2010 (until the 2018 election). House Republicans then controlled the government purse strings and vowed to oppose every new spending bill the Obama administration proposed, resulting in government shutdowns and draconian government spending caps when public spending was most needed to boost economic growth and put Americans back to work—because the private sector was refusing to do so at the time.

Unemployment rose to 10 percent in 2010 before beginning its slow decline to the current 3.8 percent rate. But that is not quite full employment, as some 6 million unemployed adult-age workers sit on the sidelines, for one reason or another.

So the Fed had to resort to its own monetary policies to maintain some growth—mainly the QE security buy-back programs that pumped more than $4.5 trillion back into the economy—because of the absence of any meaningful fiscal spending policies by national governments that would create those badly needed jobs.

Those rock-bottom lending rates encouraged corporations to borrow to the max to boost their profits because economic growth hadn’t recovered, and the public to borrow to augment their lower paychecks.

These so-called austerity policies (i.e., cuts in government spending) held back meaningful economic grow for most of the decade since the Great Recession. Hence the unvirtuous circle the US economy is currently in. How to put more of the 6 million still unemployed back to work, which would boost tax revenues, without going even further into debt?

Firstly, inflation has to rise substantially to devalue such a huge debt load (currently $20 trillion in federal debt and rising)—when inflation has been falling. The fact that long term interest rates are back to 1950 post-WWII levels means that the Fed has to sell more of the $4.5 trillion in securities back to the public to decrease the money supply and raise interest rates further. But that announcement sent the financial markets into a tail spin in December.

Then economic growth has to be juiced in some way, such as with massive public spending on infrastructure and the like, which should also boost household incomes and tax revenues that would pay for some of that debt.

In fact, research has shown that public infrastructure spending more than pays for itself in generating additional GDP wealth—as much as 1.5 times the initial investment.

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CBPP.org

This CBPP graph tells the story of many of those unemployed 6 million. The employment-to-population ratio hasn’t even returned to pre-recession levels, and earnings are at a nine-year high, but the recovery is in its tenth year. The incomes of many of those hourly workers hasn’t yet returned to pre-recession levels either.

So what will lure them back to work to fill the record number of job openings reported in my last blog piece? It has to be more than the Federal Reserve regulating currency flows and interest rates.

Harlan Green © 2019

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

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ANSWERING the KENNEDYS CALL FOR PEACE

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The Rebuilding of Local Communities!

Where does the rebuilding of local communities that creates a sense of healthy community itself really happen? At the local level, whether it be in neighborhoods, towns, or cities. It is everywhere residents find a reason to band together.

And it is an answer to the fragmentation of local communities caused by the loss of so many blue collar jobs due to the Digital Revolution and Globalization of the workforce that has internationalized commerce so that corporations ignore national borders in their search for cheaper labor and new markets.

This has meant that towns, cities and states have had to look inward to heal their broken communities in order to provide citizens with the necessary means to grow and prosper.

Two Visions of Community

Harvard Sociologist Robert Putnam in an American Prospect sequel article to Bowling Alone wondered what made a viable community: “Some seemingly obvious answers turned out to be irrelevant. Party politics or ideology makes little difference. Affluence and prosperity have no direct effect. Social stability or political harmony or population movements are not the key. None of these factors is correlated with good government as we had anticipated. Instead, the best predictor is one that Alexis de Tocqueville might have expected. Strong traditions of civic engagement – voter turnout, newspaper readership, membership in choral societies and literary circles, Lions Clubs, and soccer clubs – are the hallmarks of a successful region.”

My hometown of Redwood City had much to do with why I chose community development as a focus and discipline, as a way to bring people of different backgrounds and concerns together, because it had many of those ingredients—strong civic groups such as an active Rotary club that gave out thousands of scholarship dollars every year to college students and a historical society that gave 150 year-old Redwood City a strong sense of identity. It was also a small-town where we could easily interact with each other in neighborhoods such as mine that had many immigrants.

I learned the basic tools of community development later from my Peace Corps training, which were first put into practice in a medium-size Turkish village of approximately 800, and then as a member of Cesar Chavez’s United Farmworkers Union that came to represent tens of thousands of farmworkers during its heyday. Foreign cultures were something I was familiar with because of the ethnic diversity of my own childhood neighborhood and background. I felt comfortable in different cultures because of the friendliness and hospitality shown by these communities of farmers and farmworkers, and my belief that we had a common humanity.

Redwood City is a San Francisco peninsula suburb full of history and diversity that was ahead of its time, in many ways. It is best known for the motto, “Climate Best by Government Test” on a sign that arches over El Camino Real, its major highway at that time. The sign was erected because the National Weather Service once had a Redwood City office, and christened its climate the best in the Bay Area and an ideal place to live. El Camino Real is Spanish for the King’s Highway originally built by Spanish explorers that first came to California in the 1700s. It connected California’s 21 missions built from 1769 to 1833 by Spain’s Catholic missionaries—more compelling history that gave Redwood City and the coastal region of California its unique identity.

It was this unifying identity that helped to make Redwood City a functioning community and the seat for San Mateo County, as well. I found keeping a historical record is one necessary ingredient that creates a common identity of a well-functioning community. Redwood City was founded in 1867, the oldest city on the San Francisco peninsula, because it had the only deep water port on San Francisco Bay south of San Francisco.

It was also a lumber town because the coastal mountains looming behind it were full of mature, first-growth Redwood trees that were brought down to its deep-water harbor and shipped to San Francisco and beyond.

Living in such a close-knit community as an eleven-year-old meant I could sell the San Francisco Call-Bulletin with its Sporting Green in the downtown bars on Main Street after school and make good tips as the Happy Hours became cheerier. I remember saving up the $36 needed to buy my first bike so I could graduate to an actual newspaper route. My Dad and I brought the money in a one-quart milk carton and dumped it on the counter of the bicycle shop, where it was counted out penny, by nickel, by dime, by quarter. I then owned a new Schwinn bicycle and became a Redwood City Tribune door-to-door newspaper boy.

I had attended Sequoia Union High School; one of just three high schools in our county at the time. That meant our annual Thanksgiving Day football Big Game with Palo Alto High was such an important community event that even today it is played in Stanford University’s football stadium, where it has attracted as many as 20,000 rabid fans.

My neighborhood was full of immigrants, including a Polish farmer across the street, Mr. Kolka, who raised pigeons, goats, and had a large fruit orchard on several acres. Next door was the Penna family, Sicilian immigrants with four boys who were my playmates. A recently arrived German family lived next to the Pennas, and a Chinese family nearby had a grandmother with tiny, shrunken feet. I knew this because she exercised on their front lawn in the mornings.

My mother was also an immigrant; a British Citizen born in Jamaica before coming to San Francisco. She was from a family of Sephardic Jews that left Portugal during the Catholic Inquisition—first to Amsterdam, then London, until they arrived in Jamaica sometime during the Eighteenth century and established The Army and Navy Stores, Ship Chandlers, to provision ships that anchored in Kingston Harbor.

We all have individual family histories that contribute to our sense of identity, for better or worse. My father loved our history because his mother was a member of the DAR, the Daughters of the American Revolution. Her family descended from minute men that fought in the Revolutionary War. So I grew up with a love of history; which was why I wanted to participate in history-making endeavors, such as the Peace Corps.

My education in community development was furthered when I became a member of the United Farmworkers Union, and learned how Cesar Chavez organized the UFW. Cesar’s early life shaped his vision of a community with greater justice and freedom for all.

His vision made him the consummate community organizer that could build the UFW. His family had lost their Arizona farm during the Great Depression and moved to Southern California to find work, just as John Steinbeck’s Joad Family did in the 1930’s Grapes of Wrath. That work was crop-picking as a child, so he came to intimately know the people he was to organize. His community was the mostly Filipino and Mexican farmworkers in the fields of California that later included Arizona, Florida and Texas farmworkers as his organizing efforts spread.

I was drawn to Cesar and the UFW Union in part cause because I had joined the Carpenter and Teamster unions while working my way through college. They were more responsive to local membership in those days when local members controlled the rules and regulations of their unions and had little contact with national leadership. Unfortunately, this doesn’t describe the later Teamsters Union the UFW clashed with during the 1970s period of United Farmworker strikes and boycotts that gave the Teamsters in particular a bad name.

The strongest unions are democratic and run by their members; including the AFL-CIO, United Mineworkers, and United Autoworkers unions that supported and gave financial aid to the United Farmworkers Union when growers and the Teamsters attempted to destroy it.

Cesar Chavez was successful because his was a vision of bottoms-up, ‘grass-roots’ organizing of the farmworkers, something he knew how to do because he had grown up in their community, as I said. That means the impetus to organize came from the farmworkers themselves who saw the important of community organizing and were willing to fight for the right to organize a union. His lacked certain administrative skills to some extent which hurt the UFW later. He was extremely charismatic and much better at motivating farmworkers than creating a long term, farmworkers union.

But he was able to unite religious leaders with social activists into a national movement for farmworker and immigrant rights. That is why he could enlist Dorothy Day of the Catholic Workers Movement, Reverend Chris Hartmire of the California Migrant Ministry, Walter Reuther, storied President of the United Auto Workers Union, the AFL-CIO, and International Brotherhood of Electrical Workers (IBEW), and the pro-labor Kennedy family to support the UFW’s cause. Cesar said many times the IBEW was his ideal of a democratically-run, grass roots labor union he wanted the UFW to emulate, because its members had a long history of active participation in their union.

I use these two visions of communities because they are an example of what successful community organizations or groups must contain—a compelling history or vision that unites them, and an adequate diversity of people and opinions so they can adapt to changing circumstances that can be difficult to control. Without such diversity, no community has remained functional and open to what will be unexpected changes, in my experience.

I graduated from Sequoia Union High School in 1958 and was accepted into the University of California Berkeley’s Engineering School that fall. The Korean War had ended in 1956. And there seemed to be no limit to future career possibilities. Jobs were plentiful; there were lots of opportunities for work and play on the San Francisco Peninsula.

California’s population was exploding in the 1950s; which was probably why the New York Giants moved to San Francisco in 1958 and became the storied San Francisco Giants, where I was able to watch Willie Mays and Willie McCovey play in Seals Stadium, former home of the Pacific Coast League’s San Francisco Seals.

Redwood City grew faster after I left for Berkeley in 1958, and I hardly recognize it today on return visits. It became a high tech center with some of the first computer company startups, and the home of Oracle, just as Silicon Valley was developing. Those memories of my neighborhood and Redwood City were the elements I thought all successful, well-functioning communities should contain.

Harlan Green © 2018

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

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