A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Monday, September 26, 2011

Transcript 460: Forecast Inflation


Backing the Fed and monetary policy is like watching your horse come in last in every race and still putting money on it in the Derby.


It is often claimed that the Federal Reserve has a dual mandate. Indeed, there is such a thing in law. The Humphrey-Hawkins Full Employment Act of 1978 established full employment and price stability, along with requiring the Fed’s Chair to report to Congress and a list of other things designed to bring the Fed back into concern with the real economy.
Listen to this episode
But as soon as the ink was dry, the Fed was back at work, not promoting full employment, nor price stability. Then, as soon as Carter’s presidency turned into Reagan’s, the Full Employment Act became a footnote. What survived was basically the mandatory appearances before Congress by the Chairman.
The Fed sees its single mandate neither as price stability nor full employment, but protection and encouragement of the banking sector. There is little room for debate on the point. The Fed is a captured regulator. Its concern with inflation is not concern for inflation, but concern for the returns on fixed rate investments.

Ben Bernanke was brought on board largely because of appreciation for his work on the Great Depression, which he analyzed forty years after the fact as primarily the result of not protecting the banks. The past four years of aggressive monetary policy, massive guarantees to bank credit, wholesale purchases of shoddy mortgage-backed securities and other direct if secret support to banks and quasi-banks, ahs been a test of Bernanke’s hypothesis. The result four years on? Hypothesis rejected. Bailing out the banks, holding their managements and creditors harmless, shifting trillions upward in the wealth scale, has not prevented the Second Depression.

We didn’t mean to get off on this, but the manifest failure of monetary policy illustrates the manifest ineptness of the Fed and its governors.

Maestro Magoo, Alan Greenspan also protected banks and markets to the exclusion of full employment, never shrinking from massive liquidity injections when things were rocky for markets. “The Greenspan Put” became the aggressive stock pickers ace in the hole. Greenspan would never let markets fall. But they did fall, late in the 1990s, and soon after we got Greenspan’s Put Two, 1% interest rates for years to jinn up a housing bubble. Previous to Greenspan, the now-venerated Paul Volcker made his reputation by sacrificing millions of jobs on the altar of low inflation. Volcker’s hypothesis, actually Milton Friedman’s hypothesis, was also untested: “Inflation is always and everywhere a monetary phenomenon.” Turns out, didn’t matter how you squeezed the money supply, inflation continued until you shut down the economy.

And on back to the Treasury Accord of 1951. Excess interest payments as a result of Fed favoritism to the banking sector and rentiers were, by the accounts of Leon Keyserling, the economist who led the transition from War to Peace under Truman, were tremendous even prior to 1980.

So when you hear, “the Fed targets inflation,” realize the Fed and its version of monetary policy are chosen not because they control anything, but because they serve the purposes of the financial sector.

So we should expect them to have a good idea about inflation. Right? No they don’t. That’s apparent by the wide diversion of opinion on their own self-selected Board.

Inflation and unemployment are the two horns of their dilemma. That is indisputable the way it is characterized. Raise rates to fight inflation. Lower rates to boost the economy and fight unemployment. Do I hear anybody who disagrees that this is how they work it? Basically a roomful of people operating a toggle switch? No.

It hasn’t worked, it won’t work, it can’t work.

Three years after the collapse of inflation with the collapse of the last commodities bubble, the central bankers are still running out their inflation horse. There is conflict at the fed, sadly, not about what to do about deflation or unemployment, but about how not to do anything more aggressive because of high inflation. As if…

And inflation, we assure you, is the subject of today’s forecast.

Unemployment is the cancer in a diseased economy. Inflation is body temperature. Or blood pressure. The two are not alternatives. One is a disease. The other is an indicator. To manage an economy to stabilize inflation without regard to what is going on with the patient is like forcing the blood pressure down or up to a medium level whether the patient is vigorously exercising or comatose.

What is inflation? First:

Is there inflation? No. There is no inflation. There is deflation. House prices are deflating, labor prices are deflating, investment goods prices are deflating.

But core CPI is on the uptick. Headline CPIO is going up.

Inflation is properly defined as a rise in the general price level. Core CPI, Headline CPI, PPI are the aggregate of many prices. So 95% of prices could be going down and one could be going up, dramatically, and the official measures would record an increase in inflation, CPI, or PPI.

Which is what we have. Here is Chad Moutray, chief economist at the National Association of Manufacturers, when he lets the cat out of the bag at a recent presentation at the National Economists Club.

Yes, the rise in producer prices is due exclusively to a rise in industrial commodity prices, we suggest as a result of financial market speculation.

Bottom line, we don’t have a rise in the general price level.

Here are our predictions anyway, for core inflation, all items, health care and energy components. Making sure you understand our point, that these are the indicators of prices of different sectors, they are not general inflation. Putting them together and adding them up does not necessarily approximate inflation.

Now our rendition here captures some of the volatility of prices that escape year-over-year comparisons. Ours is a 6-month moving average rendered at the mid-point. At least you can see why high-frequency inflation hawks get disturbed when you look at this. There is steepness you don’t see. You can imagine one of the hysteria hawks losing sleep over that.

But more interesting and instructive to us is the energy component driving the core and all items. Energy quickly becomes embedded in the all-items headline number, but look at core. Core, as we’ve noted, being a measure that eliminates energy and food – that is commodities – ends up measuring labor input. And here you see one of our – actually following from Warwick University professor Andrew Oswald’s – key observations. Everything in the world is made of energy and labor. If prices are going to remain steady, when the price of one of these components goes up, the other must go down. Energy up, returns to labor down. Looking closely, you can see, even the past ten years – Oh, expand the first chart by clicking on it – that just such a relationship is shown. Energy prices up, all items up, core down. If we lagged it right, you could see it even more clearly.

Now we don’t expect a recovery in labor – core – this time, because we are in a deflationary cycle. When energy prices go down this time, as always led and defined by oil, or as they fluctuate lower over time as you see in our forecast, labor prices will not go up. The deflationary cycle.

Where is the deflation?

It is in asset prices. House prices, financial asset prices, investment goods, capital goods, whatever you want to call it, that’s where the deflation is. We divide them between financial assets and investment goods. Where is my forecast for the index of those? There is no index for asset price deflation. Maybe the stock market. House price indicators. But the rest is locked behind obtuseness. Ask the owner of a downtown office tower how it’s going for the price of his investment good. He won’t say it’s inflating, and he’ll likely say the next owner will be the bank.

This deflation is critical. It kills construction. It stops the investment sector that is the engine of growth. Getting some life back in investments is the only way out of the continuing Depression. As we’ve said, though, there is no life in private investments and these investments will have to be made in public goods.
And as we said, this asset price deflation – or the inflation in previous decades to asset prices – is invisible to the inflation hawks and the Great Moderators. House price inflation was running at ten and twenty percent when Alan Greenspan had his interest rates locked in at one percent. What would have happened had he simply incorporated that inflation number into the CPI. Likely he wouldn’t have been so concerned then about deflation. Might have even raised rates enough to forestall the great financial crisis. Well, no, probably not. Greenspan was in the business of engineering whatever economic activity he could find.
But wait, you say, there has been inflation.

No. There has been commodity speculation. Not investment. Goods are not investments, they are the products of investments. Playing computer games to milk the futures or options markets may make money for the trading house, but it may come up craps, too. Has anybody else noticed the bunny hops in the commodities indexes since the peak of the most recent bubble?

I’ll put that up online.

Tracks of the carnivore in the snow, I say.

This commodity bubble was the trigger for the most recent downturn. We correctly cited that in January, and even back in November 2010. The trigger because it sucks demand out of the economy in a sharp way. In this case, like punching an old man, because the economy is sick and frail. It has grown sick and frail from decades of supply side nonsense and public goods atrophy. Will it blow up? This commodities bubble.

Here From L.Randall Wray

Now, to be sure, the whole thing is going to blow up, in what Frank Veneroso calls a commodities nuclear winter. As prices rise, consumption of the commodities falls (as we are already observing) both through substitution and through conservation. At the same time, additional supplies come on line. Real world suppliers feel the imperative to slash prices to have some actual real world sales. They cannot forever live in never-never land with rising prices and collapsing sales.

There are many shoes that will drop, bringing back the Global Financial Crisis with a vengeance. Commodities crash, default by a Euro periphery nation, failure of a Euro bank, or the closure of Bank of America or Citi. All of these are likely events, less than one standard deviation from the mean; probably all of them will happen within the next year.
No matter what the triggering event is, that commodities nuclear winter will happen.
Nuclear winter. So why is our forecast, even as low as it is, not lower? Because it’s lower than anybody else’s already. Not that watching forecasters is a good idea, but we have leverage on the downside. We have core inflation below zero for an extended period. We have headline dipping below. We have energy prices fluctuating widely – notice they are marked to the right axis, which is basically three times the scale of the left axis where everything else is graphed, and they are still the biggest waves on the screen.

Secondly, it is asset price deflation and unemployment that will reflect the road down, the bottom sloped downward. Commodity prices coming down will put people out of business, perhaps, but there will be an increase in disposable incomes reciprocal to that of the decrease on the way up. Maybe we’ll come up with an asset price index some night.


Now, before we let you go today, we want to bring your attention to a transition we are making from one platform to another. For the near future, you can find us at both demandsideeconomcs.net and demandsideforecast.net. The latter reflects our attempt to get more exposure, capitalizing on being right for the past four years. Relatively right, I suppose. The demand side perspective needs to get into the thought train of more people and find its way into policy.

You can help us by re-upping your review on iTunes. Thank you very much for all those nice words over the past years. We see that some of the things you most liked we’ve gotten away from. But time is limited. We learn a lot from it every time we sit down.

You can also follow us on Twitter, for whatever good that will do. I’ll try to get that straightened out. Link to the posts. Get the Email version. Give us your feedback in the comments or at the address demandside@live.com. Making money is low on the priority list here. Any ads you see are not endorsed by us. We will probably opt out of the ads soon, but since we can’t see them from our terminal, they don’t really bother us.

We were inspired to go more mainstream, to take advantage of accuracy, just last month. It was the first week in August when we saw in the sky the great turning of economists and pundits, like a flock of birds turning in one motion. Previously the recovery, now the no recovery. It was a beautiful thing.

Here on the ground we, like many of you, saw there has been no recovery. The current non-policy of genuflecting to the powerful hasn’t worked, it won’t work, it can’t work. For anybody.

Ah well, at least they’re going in the right direction now. Too bad they’re still so far above the real world. You know, it’s not brilliance that makes the demand side work when all that hypothetical and market fundamentalism doesn’t. Look at what we’ve got today. When people trot out in their two thousand dollar suits and talk about how important it is to have investor confidence, and that’s bought on the backs of austerity and suffering. When bailing out governments is important only when they can’t pay their bankers. When the Washington Consensus, a program with no successes, is the order of the day. That’s the “confidence” that they are in charge of governments. It seems to me.

Sunday, September 18, 2011

Transcript 459: Forecast Capacity Utilization

Listen to this episode

The forecast today: Capacity Utilization, trending down for 45 years and going to record lows, is our projection. First a note on “Leadership.”

We’re looking for leadership these days, I’m told by the newly anxious. Leadership is what you call for when things are going wrong and people need to step up and do the right thing. We have been calling for leadership for the past three and a half years.

I suppose what the right thing is depends on who you are. When you ask for leadership, you want people to do what you want them to do, not what anybody else who is calling for leadership wants them to do. And here’s another take, right off the top of Bloomberg.
TOM KEENE:  Greg Anderson starts us off from Citigroup FX.  Greg, good morning.

GREG ANDERSON:  Hi, how are you?  Good morning.

TOM KEENE:  Very good.  Well you have in your very fine print in your statement on the dollar.It says here there are few alternatives to the U.S. dollar.  There are also few alternatives to a coordinated response to European crisis.  This is the Market simply telling the political leaders and financial elites what to do, isn't it?

GREG ANDERSON:  Ah.  It is.  And they don't necessarily like to be told what to do.  But yeah, the Markets will force the hands of politicians in reducing debt burdens and in resolving Europe's situation one way or another.  I would say, look, it lets you know that policy makers are gearing up for the potential of major volatility like we saw in 2008, and they're sort of proactively going back to 2008 type measures.

The 2008 measures they are talking about is TARP. Bail out the banks. Yes, folks, we’re back. The issue is not liquidity, so what the central bankers did early last week is as much the precursor to bad things as it was in the dark days of the subprime crisis. It is solvency, not liquidity. The banks want another bailout. “We lost a hand, no fair, we’ve used up our chips. If you want us to keep playing, you’d better give us another stack.”

It’s not Greece. As we’ve said since late last year. The default that is on the minds of the markets is the banks. It is Soc Gen, Deutche Bank, and yes, Citigroup. Greece is, on the great scale of things, even smaller to Europe than the subprime sector was to the U.S. On whose minds? Who is worried about default in the great mega-banks of Europe. It is the megabanks of the U.S. U.S. banks have withdrawn their short-term funding, and the long-term bets of their European brothers (or competitors) combined with the credit default swaps that link them all together have made banks too fragile to survive and to interconnected not to bail out.

Wall Street is worried. They sent their emissary Tim Geithner to the finance ministers meeting in Poland at the end of the week. Tim got a chilly reception. The Europeans don’t want to hear about it. They have a problem to solve, and it is the problem Wall Street, the world’s Wall Street, and Lombard Street made.

Are we going to bail them out again? Angela Merkel is is on the political hot seat. Germans still think it’s the Greeks. Maybe they’ll never figure it out. The best thing for the Euro would be if Germany left it. Then there could be a rational revaluation. German capitalists would never let it happen. They are the major beneficiaries of the weak euro. They don’t even have to peg it like the Chinese do to the dollar.

Pretty soon Barack Obama will be sitting in Merkel’s seat. Not only are the banks connected to the European mess, those in the U.S. are still holding a lot of the bad mortgages, with more coming as former customers demand their money back on shoddy securities unloaded during the 2008 crisis. Will Obama really ask for another bailout? Where will the leadership be? Carrying the flag for …. You ask. Wall Street, the banks, or a real economy that needs a rational financial sector, not a casino.

Now the forecast.

It is capacity utilization.

Of course, industrial capacity will be used less as the economy flags, according to the Demand Side projections, even though no more capacity is being built. It’s part of the debt-deflation cycle. The point with capacity utilization is that it’s been grading down for forty years, and this illustrates a primary mistake made by the orthodox economists in charge of the current muddle.

That point is made clearly by Steve Keen in the paper of the week. At Real World Economics Review, it’s
Economic growth, asset markets and the credit accelerator (link on the transcript) (http://www.paecon.net/PAEReview/issue57/Keen57.pdf)

Keen says
“Firstly, and contrary to the neoclassical model, a capitalist economy is characterized by excess supply at virtually all times. There is normally excess labor and excess productive capacity, even during booms. This is not per se a bad thing, but merely an inherent characteristic of capitalism – and it is one of the reasons that capitalist economies generate a much higher rate of innovation than did socialist economies. The main constraint facing capitalist economies is therefore not supply, but demand.”
And that is what you see in the capacity utilization numbers.

Since the total index was begun in 1967, the trend has been down. You can see it on the transcript. Prior to 1967 there was no total index, but there was a manufacturing index of capacity utilization. That index has tracked the total index fairly closely since, although manufacturing utilization has sunk a bit from the total index as time has worn on. In any event, we append the earlier series so as to get a reading back to 1948.

As you can see by the trendlines, prior to 1967 the trend was up. This reflects the privileged place America found itself in after the Second World War. During the war the industrial capacity of Europe and Japan was decimated. This left a virtual monopoly for American industry, which benefitted further from the Marshall Plan and the rebuilding of Europe. Once other capitalists came on line, that monopoly eroded. Footnote: It also marks the heyday of American unionism, which split the take with the capitalists in the monopoly economy.

But today is long past 1967, and the point is, unused capacity in the private sector has been growing for decades. Excess productive capacity means investment has been redundant. Particularly since a lot of productive capacity has moved overseas, where Chinese and Germans are making things and shipping them into the American market.

Not to say there isn’t a need for productive capacity, but it is just not in the satiated consumer economy, the private economy dominated by consumerism. So returns to capital came down and investors went looking for yield in the financial sector and in a housing bubble.

Yes, we have need. This is the ultimate frustration. No more frustrating, I suppose, than when the one of the supply side talking heads complains about government deficits in one breath and then in the next says, “But I just came back from (fill in the blank of Asian or European country) and when I came back, it was obvious that the U.S. is falling behind in infrastructure. We are approaching Third World status.” Often they add, “The budget will have to come out of entitlement spending.” How that follows from the European example, I’m not sure, but it often does.

Yes, we have need. But need is not demand unless, as Keen says, it comes with money.
Secondly, all demand is monetary, and there are two sources of money: incomes, and the change in debt. The second factor is ignored by classical economics, but is vital to understanding a capitalist economy. Aggregate demand is therefore equal to Aggregate Supply plus the change in debt.

and he goes on to explain how a capitalist economy buys not only new goods and services, but also bids up the value of existing assets.

But we have a mixed economy, a capitaliist private sector and a public sector charged with providing the structure and groundwork for capitalism and the public goods and social insurance capitalism by itself will never provide. Monetary demand can come from an agency able to borrow at near zero or tax from its privileged citzens and spend on useful, even vital – though not consumer – goods and services.

Let’s take an example. Transportation infrastructure. The U.S. depends on a tremendous fleet of trucks utilizing the public highways. Other nations have built up their rail systems, which are lower maintenance and lower cost per mile. Our system requires lots of fossil fuels, a semi wears at the road surface at the rate of 16,000 tiimes that of a passenger car, and the privately operated railroads ship bulk commodities like grain and coal or intermodal containers. It is parallel to the health care industry, where the profitable portion of the operation is segregated for the private corporations to maximize, and the remainder is shunted onto the public sector.

So, forecast, trending down, below the trendline, not in a gradual line, but in the dives and surges typical of this index. The 2008 dive was to a historic low, and we expect to see another record low by 2014. Capacity utilization in the form of private industrial capacity will, in fact, be lowered, not raised by tax incentives for private investment. We don’t need it any more than we needed McMansions. Capacity in the form of public infrastructure, education, and preparation for climate change is not on the horizon.

You figure it out.

Friday, September 16, 2011

Transcript 458: Forecast Median Household Income

Listen to this episode

Today on the forecast: Median Household Income. While we’re on the subject of income, we’ll show that income disparity, particularly the rise of the super-rich, is a signal of decay, instability and potential collapse. That signal has been flashing red for several years.

but first a note on the Jobs Bill.

As we predicted last week, the President’s jobs speech is more likely to revive his political fortunes than the economy. And as we were afraid, it is heavy on the tax breaks. These will not produce jobs, as we said last week, yet they cost a bundle. Now I’m not going to turn down a 3 percent raise from the payroll tax reduction, but I will be saving it, paying down debt and continuing to buy a latte every once in awhile. No net job growth if I am at all the common person. That half will be saved, used to pay down debt, or support jobs already in place. The employer portion will disappear into the employer’s balance sheet. Hiring is made on the basis of demand, not tax breaks. The economy operates … say it with me … from the demand side. If there is increased demand of 1 or 2 or even 3 percent from the employee half and that causes you as a businessperson to hire somebody, then you are not suffering in this economy. We got support from Bruce Bartlett on this point this week.

The modest … no, the tiny, miniscule … support to states and infrastructure is the part that might do something, but it is a day late and a dollar short.

Still, it demonstrates that reality IS seeping into DC. The downward trajectory of the economy must have caught somebody’s eye. A day late. Even IF this so-called jobs bill were passed tomorrow, it is hard to see how it could prevent the layoff of the 280,000 teachers as advertised. Didn’t school start last week? Total infrastructure spending, pitiful, not even the amount needed to get back up to speed.

The most politically astute thing the Republicans could do is pass the entire thing as-is, showing they are bi-partison and willing to compromise, not obstructionist, and watch it not work. Of course, that won’t happen because they are playing to the brown shirts.

Could you do better with the $450 billion?

How about the first installment of $250 billion in infrastructure spending for surface transportation and energy transmission, per year, for twenty years. The first installment of $100 billion per year for at least three for states and localities to hire. And the first tranche of $100 billion in direct hiring for a CCC-, WPA-style program to give anyone who wants a job some work doing what needs to be done. In addition, a plan that did not see the light of day in Obama’s speech, but which former president Clinton proposed in a recent Newsweek article. Retrofitting buildings for energy efficiency. These projects can pay for themselves in five to seven years by reducing energy consumption. All that is needed is the accounting architecture to segregate the energy savings. If we made it 6-8 years, we could offer a pretty good interest rate for private financing. Are you telling me there wouldn’t be takers? One million jobs, says Clinton.

Counting it up, the Demand Side plan, 6-9 million jobs. The Obama Day Late Plan, 750,000 jobs. Cost. Demand Side $450 billion plus guarantees and support to the energy retrofitting. Year one. Obama’s plan. The same, except ours creates 6-9 million taxpayers. His, to be generous, three-quarters of one one million.

We’ll even pay for it. Uncap payroll taxes, add in to the 6-9 million new taxpayers contributions, plus the jobs multiplier in the realm of 1.6-2.0. Increase the gas tax five cents a year. Done. That is the hole we have to fill.

The best of the week:

Paper of the Week: Michael Hudson, Real World Economics Review, Issue 55, The use and abuse of mathematical economics (http://www.paecon.net/PAEReview/issue55/Hudson255.pdf)

Podcast of the week: Lewis Latham interview David Graeber on his book, Debt: The first 5,000 years

Median Income

The next in line for indicators we are going to forecast is median income. As a metric for the economy median household income has its problems, but they are not necessarily crippling. We’ll touch on them in a moment. The primary strength of median household income is its direct connection with the well-being and strength of the economy. A vital middle class is both the symptom of current health and the condition for improvement and development in an advanced capitalist economy.

Census Bureau
Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median…. Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999.

Demand Side sees real efficiencies in an interrelated society of not too disparate incomes, the lowest adjusted being no more than one-third of the highest. We’re talking economic efficiences. The book Spirit Level: Why Greater Equality Makes Societies Stronger by Richard Wilkinson and Kate Pickett details the empirical evidence of societal well-being, from obesity to incarceration rates and so on, and finds more equal societies always perform better. They may be dismissed by the crass as “normative,” not positive indicators, but saying they are not important is equally normative. And even from a crass GDP economic outcomes perspective, and confining ourselves just to the U.S., we see that when the society has been more equal, the economy has growth faster, with more stability. If you think economic outcomes are limited to how much money you make, we suggest a career in drug dealing or strong-armed robbery.

So the first drawback to median household income is that the data comes out with a lag. We’re giving you 2010 data today and it came out, what, Tuesday? September. It is produced by the Census Bureau, not the Bureau of Economic Analysis or the Bureau of Labor Statistics. The BLS has wage statistics, and they are useful in getting to the concept we want, which is How well is the broad center doing? And is there a broad center?

As a high wage worker loses her job and falls to the bottom, the measure ticks down a fraction to record the worker having been pushed off the ship and now occupying a lifeboat, some of which are getting very overloaded.

One problem, since “income” includes taxes and other stuff, “disposable income” looks better. We don’t use it because we think taxes buy real goods like schools and police. But even so, while disposable income subtracts taxes, it does not subtract costs like health care or debt payments or mandatory utilities and fuel that ARE large subtractions from the English meaning of disposable.

Median household income tracks average hourly compensation – itself inflated by high health care costs – and other measures of the financial well-being of households. In so doing it both describes and predicts the trajectory of the economy much better than GDP, even per capita GDP. It’s the difference between looking through a tinted window and looking through the same one with a magnifying glass. If you’re interested in the view, much better to put away the distortions. If you want to check out the surface of the window, use the lens. Or something like that. GDP can signal a bunch of things that are not healthy.

Our forecast is, then, for a serious and continual deterioration of median household income over the next six years, falling to a level below that of the first data point available from the Census Bureau, which is in 1980. In our view, by 2017, households will be in worse shape than they were at the low in 1983. Wiping out thirty years of gains in six years.
We would characterize these projected losses as optimistic absent significant policy changes not now in prospect. We include in the transcript a graph displaying historical data and our projections. These are not the jaw-dropping dramatic you might think, because median household income growth has been anemic for years. This is a problem 30 years in the making. The transcript also displays a chart from Atkinson, Piketty and Saez showing median household income basically stagnating since 1980. That same chart offers a comparison to GDP per capita.

You would expect perhaps that GDP per capita and median household income have some correlation, but that would be wrong. Income growth over the period has gone to the rich, and notably the super-rich, it has drawn up the average aka per capita, as displayed in charts borrowed from Uwe Reinhardt and his Economix column at the New York Times. Income growth for the top one percent has been surging for decades. The top one percent captured 58% of income growth since 1976 and 65% since 2002.
This new upward pulse in income disparity and its absolute level are key indicators of impending crisis. It clearly foreshadowed the 2008 meltdown, and since the policy response since then has been socialism for the rich, basically cover their losses, and cut loose the middle class, that disparity is only increasing AFTER the crisis.

Another chart from Atkinson et al makes the point that the super-rich top 1% made off with nearly 25% of total income in 2008, the same figure as in 1928.
Interesting here is that it is not just the rich, but the super-rich who are leading us into the new plutonomy. While the four percent directly below the top percentile HAVE done better, it is more by comparison to the ninety-five percent who have done worse than in absolute terms. Even the next highest five percent, not so good.

So does the collapse indicated by the income disparities and our personal experience have a silver lining? Or maybe it won’t collapse completely. Maybe bread and circuses combined with the Fed’s promotion of ever-higher credit and governmental socialism for the rich will morph into a national socialism for the rich. Well, that is collapse, of democracy anyway.

Forecast? The outlook for median household income is bleak.

Tuesday, September 6, 2011

Transcript 457: Forecast Employment

Listen to this episode

A full employment economy is the only healthy economy. Last week we visited the current employment depression via our forecast for headline and U-6 unemployment rates. This week, we’ll look at employment growth itself and what can and cannot work in getting jobs for a healthy economy. Plus the forecast. Grim forecast.

We’re going to propose that in this day of high household debt and real asset deflation that the income multiplier be revised to a jobs multiplier. It is the number of jobs added, not the number of dollars that grows an economy as a function of our interdependence with each other.

And we’ll look at the special meaning of construction and government jobs. How do the loss of construction and government jobs means bad things for the total economy as measured by its most appropriate measure – employment?

The multiplier. What is it? Why has it broken down?

R.F. Kahn and John Maynard Keynes developed the concept of the Investment multiplier, which later came to be understood as the government spending multiplier. Keynes’ famous example from the General Theory, in its original and correct form:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it private enterprise on well tried principals of laissez-faire to dig the notes up again(the right to do so being obtained, of course, by tendering for leases of the note-bearing territory),there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.

New investment exogenously introduced generates a multiple of the original investment, as companies organize and hire for the new event. This concept has been warped and adopted by conservatives to suggest that tax cuts always and everywhere stimulate economic activity. Rather than trying to tease out the sense of that, just realize that tax cuts that are not paid for, that is, government borrowing, may or may not stimulate the economy depending on the financial situation of the recipients. But borrowing by the government that is investment in even idle ventures such as in Keynes’ example will stimulate the economy, because it WILL create jobs and new spending in the private sector.

Simply look at the current experiment that we are running. The ARRA, also known as the Obama stimulus has one component that matched Keynes’ example. That was infrastructure spending. It had another that might be called a negative version, which was support to states to prevent layoffs of teachers, police and fire personnel. The ARRA spending on these two activities marks a line that the actual experience of the economy follows.

The chart in a recent piece by Paul Krugman displays government spending absent the transfer payments to the unemployed and others. It is dropping off a cliff as the ARRA expires.

“When the recession officially ended, spending was rising at an annual rate of around $60 billion; now it’s declining at an annual rate of $60 billion. That difference is around 1 percent of GDP, and maybe 1.5 percent once you take the multiplier into account. That makes the turn toward austerity a major factor in our growth slowdown.” Says Krugman. He adds, “Still, I guess the beatings will continue until morale improves.”

Borrowing from the future to make useful investments in our physical or social capital is productive on its face, and to our point here, when done in conditions of underemployment it produces a multiple of the investment by way of induced economic activity. New workers spend their incomes and thus increase the number of jobs in the consumer goods sector, which themselves prompt more jobs.

This is not necessarily true of tax cuts. Sorry, John Boenher. The profile of spending of a job-holder is quite different than the profile of spending out of marginal increase in monthly income of somebody already employed or already retired. Notice in our current experiment the absence of impact of the 2% payroll tax reduction, and particularly of the extension of the Bush tax cuts. Enormous expenditures, tiny impact. Maybe pays down debt, maybe buys a consumer discretionary made in China. The argument that this new consumption will induce big new hiring and investment is very weak, particularly when confronted with the evidence. It is particularly unclear how it can induce new investment in the context of the huge capacity now standing idle.

And how would we know if the jobs multiplier works?

Let’s use the construction sector as a proxy for investment goods workers to illustrate our point. We’ve dialed up several charts here. We have one from Calculated Risk showing the position of losses and gains in construction with respect to official recession calls. Pretty starkly predictive. Dropping before and through recessions, rising through recoveries. Another we produced shows the relation of construction jobs to total non-farm employment. Now construction is a relatively minor part of the whole jobs picture, but it does represent these investment impacts. Construction is almost by definition investment.

Can we use government employment similarly? Yes. At least according to Demand Side. Since government employees are not involved in producing consumer goods, except on the margin, but are producing social capital – security in the case of police, safety in the case of fire departments, education in the case of teachers, social order in the case of courts, and so on. Even market structure in the case of regulators, and we’ve seen the impact of breakdowns in market structure in the absence of regulation.

I think we’ve all heard the claim that only the private sector produces jobs. I have anyway. And I’m left with nothing to say. What is your response when somebody says it only rains at night. Such an observation cannot come from experience or logic or even rationality. So, Where do you begin with your response?

The multiplier for state and local government spending is very high. Republican economic adviser Mark Zandi paid a heavy price for simply pointing this out. Zandi, an advisor to Republican presidential candidate John McCain, constructed a ranking of multipliers early last year in a defense of the ARRA, American Recovery and Reinvestment Act, the Obama Stimulus, for short. State and local spending came in over 1.5. While tax cuts to individuals came in around 1.0. It was down into the .30 range for some corporate tax breaks. At .30 every dollar of spending induces 30 cents of activity, a loss of 70 cents. Needless to say, perhaps, the reaction from the business constituency was large and nasty and swift. Zandi makes very few public pronouncements these days.

High household debt and asset price deflation mean the income multiplier is very low for tax cuts, but the jobs multiplier is unaffected. Government jobs, far from being a drag on such an economy, are actually quite potent as stimulus. Roads and teachers multiply jobs far faster than extra trips to the mall. The inverse is true, too, as we are about to see. Cutting government spending decreases jobs at a high rate. The multiplier works in the negative direction.

Let’s go through our graphs and see what the forecast is.

Chart 1 illustrates the relationship between construction jobs and total jobs, the same relationship that is displayed in CR’s chart with respect to recessions. In particular, please see … well, you can’t avoid seeing … the huge unprecedented drop in construction employment in the past three years. More than 2 million, 25% of construction workers, versus a drop of 7 million in total employment, say 5% of the employed. Total employment has leveled off a bit, and this, we believe, illustrates that construction workers are collecting unemployment and continuing to support the consumer sectors while they don’t work. But beware. The only reason the drop in construction workers was not greater was the support from the public sector in the ARRA. That support is petering out. As Paul Krugman calls it, we are entering the “austerity economy.”

Chart 2 illustrates the relationship with construction plus government workers. Here there is little predictive value. Government employment depends on tax revenues. These can lag recession and recovery. Most government employment is at the local level – roughly two-thirds -- and local governments have had to cut teachers, fire and police to balance budgets being slammed by lower tax revenues, in many cases property tax revenues. Barely one-tenth of government employment is federal. Notice the total employment line leveling off while the combination of government and construction employment continues a steep decline.

Chart 3 is the first look at the forecast. Here you see a leveling off in construction employment in a manner not visible in the annual data. And you see our forecast extending that leveling off on a much more gradual slope than witnessed in the 2008-2010 period. Total employment declines somewhat more quickly, but again, not at the same steep rate as 2008-2010. Still, it is a decline and not the extension of the feeble improvements of the past eighteen months that most forecasters predict.

Chart 4 looks at the combined construction plus government workers, a rough and ready combination of jobs with the biggest multipliers. Here you see steepness. The decline in government workers is projected by us to continue apace. This decline is going to be the biggest drag on total employment, both in absolute terms and in its multiplier effect. We have the potential short-term shocks of 100,000 postal workers getting laid off and a potential bug from teacher layoffs that may have escaped by way of the seasonal adjustment to previous counts.

Why does total employment not drop in our forecast at the same rate or even steeper? Again the total reflects the support to the consumption sector by way of government transfers, in unemployment, social security, food stamps, and other safety net spending. Precisely the kind of spending that makes deficits unavoidable, even as government is cut.

Following our charts is one from the Center on Budget and Policy Priorities, displaying three years of state and local job loss. It is accelerating, and now is hitting 345,000 per year. The majority of the losses in the last year have been in education. Cutting teachers at a record rate.


So the forecast is for down. It is not the crash we saw with the Great Financial Crisis, because debt-driven demand is not going to drop by 20 percent of GDP and investment in the real economy won’t go away overnight, since it has already gone away. But government jobs are going to wither in the climate of austerity, in the madness of austerity.

Employment will grow again when it is truly targeted. We have plenty to do and plenty of idle people and capacity which can be trained up to do it. The deficit is over a trillion dollars. If a third of that amount went to direct employment or infrastructure replacement repair and construction, there would be no employment problem and no economic malaise. Profit would quickly return to drive private sector investment. Yes, there would be inflation, but that would be the major cost of getting going. And inflation has the benefit in countering high debt levels. .

Not using the idle capacity in labor and other productive resources when the climate crisis is looming over us is the ultimate tragic irony.

You will notice our forecast contains no adjustment for the much-anticipated jobs speech by the president tomorrow. We do not expect substance. The president may recover his political fortunes, but we doubt there will be real movement in the economy.

Thursday, September 1, 2011

Transcript 455: Forecast: Unemployment (with charts included)

Listen to this episode

Employment growth and the real rate of unemployment are not only key economic indicators. They are the measure of the economy. All the other numbers, including GDP growth and the other indices, are secondary. Labor is the primary capacity that must be used to its maximum. A full employment economy is the only healthy economy.

This is intuitively understood. People do not believe that the GDP upticks and stock market growth mean health. They know from looking out the window that things are not good. The statistic that most matches their mood is the unemployment rate. And now that statistic indicates that the bleeding continues, the malaise worsens, that the dead weight drags down demand.

The chart we include from Calculated Risk displays the huge crater of the depression in employment in which we now find ourselves, now on 42 months. This chasm swallows all other post-war recessions combined. Unemployment here is the weakness and fragility that resonates with the feelings of the real person in the real economy. The only reason other recessions are visually close to the current line in CR’s chart is because the data is in percentage terms – the unemployment RATE, right? – and in the years directly after the war, the civilian labor force was much smaller as a percentage of the population. Taking absolute jobs numbers, we’ve already swallowed up more than all those recessions combined.

On the Real World Economics Review blog recently, it was asked what are the best forward-looking economic indicators. The responses came some from heavy hitters like Michael Hudson and Dean Baker, but they were equivocal. The same indicator can mean many things. But our answer was not so equivocal. Employment growth, which we’ll look at next week, unemployment rates and per capita income. These are not only the appropriate measures of economic health in the present, they are forward-looking too. They are the heart and lungs of the economy, the muscle mass. The intestines have to work, too, and so we need the financial sector or an equivalent. But when commentators say we’re looking at a long period of high unemployment and then things will be all right, it’s like saying we’re going to get somewhere without an engine or wheels on the car, just because we’ve made sure to have enough gasoline.

I should note that we also included Steve Keen’s private debt to GDP ratio and the credit accelerator as good forward-looking metrics, and they are. They capture changes in demand arising from the debt cycle. But employment and income are the base from which debt-driven changes rise or fall.

Our forecast for unemployment today and employment growth next week is pretty much our forecast for the economy. Which is continued weakness and deterioration, with opportunities for spikes related to technical issues and various crises in the financial sector.

Our backcast is similarly depressing. Unemployment has blossomed since the turn of the millennium, masked a bit by changes in the calculation methods. Raw numbers: Since the year 2000 we’ve added 25 million to the working AGE population and 2 million to the working population. Two million jobs for 25 million people.

The madness of austerity means unemployment trends upward as workers continue to be squeezed out of jobs. The continuing fragility of private financial institutions along with household debt burdens could mean unemployment spikes. You will see the chart describing the forecast. The trend line has no bounce to it. It just mechanically rises in this era of self-imposed stagnation. Even the spikes are relatively uninteresting hills compared to the mountain of unemployment they rise from.

Demand Side had some things to learn about unemployment in 2008 and 2009. Our forecast failed to anticipate the drop in the participation rate that happens in severe contractions. We said 12 percent headline unemployment was baked in. Headline unemployment rose to 10.1 percent in October 2009 before dropping back into the 9 percent range. Only some, not even half, of the gap between our estimate and the actual numbers was due to the drop in the participation rate – people going back to school, dropping out until they could get to to social security age, taking disability, taking part-time jobs and moving back in with the parents, robbing the society of its vitality and its ability to develop.

Much of the deficiency in the headline unemployment metric is captured in the U-6 measure of unemployment. Sometimes called the “all-in” measure. It is meant to count those who would take a full-time job if they could get one. This more closely corresponds to the numbers used in the other Great Depression. Read that as those who need a real job. Again, in 2008-09 we said U-6 would top out at 20 percent. It reached 17.4, again in October 2009. It briefly dropped below 16 percent, and is now on the rise again.

Looking again at the chart we presented in early 2009. We proudly placed our forecast directly next to the actual numbers, and you can see the lines are parallel and very close. That was to highlight that our forecast in the first year and a half of the Great Recession had been right on the mark. Then we split into the baseline, the optimistic and the pessimistic forecasts. The difference was what we counted on as the policy response. As we watched and saw no fundamental policy shift, we came to look more and more to the pessimistic line, which is that 12 percent and 20 percent. The baseline and optimistic were sadly too optimistic by a lot. But at least we got the real numbers in between. And you could argue we got the direction right. If you want to compare us with anybody.

But that brings into view our major mistake in 2008-09. We assumed the prospect of 10 percent unemployment and the clear failure of the private financial sector would bring about a conversion to the old religion of public works and full employment and strict structuring of the financial sector, and this would come primarily at the expense of the capitalists who had cost us so dearly.

Naïve is the kind word, I suppose.

We assumed there would be a rational policy response from the federal government, particularly when the new president proclaimed himself to be, first of all, pragmatic. We took that to mean he would be a second coming of FDR, who reached for what worked. The new president’s pragmatism, however, was actually code for compromise with entrenched interests. It was practical – pragmatic – not in the economic sense, but in the political sense. Even there it has failed, since the absence of real results is going to weigh heavily on the re-election balloon. More than the political pragmatism can fill it with campaign donations. Who knows?
But, as we said, it was a mistake to assume policy response in the appropriate direction and scale.

A favorite of the analysts we force ourselves to listen to is the term “stall speed.” Another favorite is “hard slog.” “Hard slog” is meant to define high unemployment and stagnant household demand for several years until debts are paid down, households de-leverage. “Stall speed” means there’s not enough growth to prevent decline.

The “hard slog” is not going to happen, since it defines a crisis in employment and incomes that is going to work its way up and out into the sectors that have more influence on the political system than households. We’ll have deterioration or recovery, not equilibrium. The engines of monetary policy have been revving at full throttle for 40 months. They’re providing a nice breeze if you’re sitting in the lanai with the financial sector, but they are not moving the economy anywhere.

You will see with the charts online that we’ve taken these numbers out two years – two and a half, really – to the end of 2013. We presume there will be a policy response, but we’re not going to mark it on the charts. We’ll wait to see what it is, and we’ll reserve the right to make adjustments should anything meaningful be enacted.

We expect spikes into the 10.5 range, but the baseline is a trend to 9.5 percent by year’s end, 10.1 percent by the end of 2012, and stabilizing slightly higher than that. U-6, likewise, trending upward at a somewhat steeper rate. 16.7 percent at the end of 2011, 17.9 percent at the end of 2012, flattening somewhat but still rising to 18.6 at the end of 2013.

It’s a fairly easy call, really. Made much easier by the official policy in governments domestic and foreign which can only be termed the Madness of Austerity.

Too many people say we cannot afford to hire people. What we cannot afford is idle labor. The three years of unnecessary stagnation we’ve endured since the financial sector crashed the economy is corrosive to the fundamentals of our economy and society.

The 2009 forecast for unemployment