Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: August 2014

The No-Raise Expansion

Our current economic expansion is now past the five year mark and the gains for most working people are hard to find.  Media attention has largely focused on the weak record of job creation.  Less attention has been given to the lack of growth in wages and benefits.

As Bloomberg News explains:

Meager improvements since 2009 have barely kept up with a similarly tepid pace of inflation, raising the real value of compensation per hour by only 0.5 percent. That marks the weakest growth since World War II, with increases averaging 9.2 percent at a similar point in past expansions, according to Bureau of Labor Statistics data compiled by Bloomberg.

The chart below looks at the inflation adjusted growth in hourly compensation (wages and benefits) for 11 different economic expansions.  The gains are for the first five years for those expansions that lasted longer. Full business cycle dating can be found here.

compensation comparisons
The following chart highlights the widening gap between the growth in compensation during the average post-war economic expansion and the current one.

compensation trends

Clearly, business feels no pressure to boost compensation—and it is worth underlining that we are talking about wages and benefits—despite the severity of the past recession and the growing length of the current recovery. It is no wonder that many workers are even reluctant to believe we are in recovery.

To make matters worse, economists Martin Feldstein and Robert Rubin are now calling on the Federal Reserve to slow growth.  In a Wall Street Journal op-ed they expressed their fear that new asset bubbles are growing dangerously large.  However, as Dean Baker points out:

Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in The Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain. . . .

It would have been great if Feldstein and Rubin had used their stature to warn of the dangers of the housing bubble in 2004, but they were otherwise occupied. Feldstein was on the board of AIG (yes, that AIG), where he was pocketing several hundred thousand dollars a year for his services. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. He walked away with over one hundred million dollars for his work. So it was easy to see why Feldstein and Rubin could not have been bothered a decade ago to warn about the housing bubble.

Making matter worse, their current warnings are completely misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from the inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals. . . .

So there you have it: two extremely prominent political figures who got rich off the housing bubble, now taking time from their busy schedule to call on the Fed to raise interest rates and destroy millions of jobs. In the “show no shame” contest, this looks like a real winner.

To this point, Janet Yellen, the head of the Federal Reserve Board, has wisely resisted their advice.  But the problem is that the status quo is far from satisfactory.

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Almost 1/4 of U.S. Children in Poverty

If the well-being of our children is an indicator of the health of our society we definitely should be concerned.  Almost one-fourth of all children in the U.S. live in poverty.

The Annie E. Casey Foundation publishes an annual data book on the status of American children.  Here are a few key quotes from the 2014 edition (all data refer to children 18 and under, unless otherwise specified): 

  • Nationally, 23 percent of children (16.4 million) lived in poor families in 2012, up from 19 percent in 2005 (13.4 million), representing an increase of 3 million more children in poverty.
  • In 2012, three in 10 children (23.1 million) lived in families where no parent had full-time, year-round employment. Since 2008, the number of such children climbed by 2.9 million.
  • Across the nation, 38 percent of children (27.8 million) lived in households with a high housing cost burden in 2012, compared with 37 percent in 2005 (27.4 million). The rate of families with disproportionately high housing costs has increased dramatically since 1990 and peaked in 2010 at the height of the recent housing crisis when 41 percent of children lived in families with a high housing cost burden.

As alarming as these statistics are, they hide the terrible and continuing weight of racism.  Emily Badger, writing in the Washington Post, produced the following charts based on tables from the data book. 

economics

education indicators

health

Children live in poverty because they live in families in poverty.  Sadly, despite the fact that we have been in a so-called economic expansion since 2009, most working people continue to struggle.  The Los Angeles Times reported that “four out of 10 American households were straining financially five years after the Great Recession — many struggling with tight credit, education debt and retirement issues, according to a new Federal Reserve survey of consumers.”

 

Corporations, Inequality, And Economic Stagnation

Wealth inequality isn’t just growing among individuals.  It is also growing among corporations—and that is not good for the U.S. economy.

According to Bloomberg News:

Eighteen American businesses held 36 percent of corporate wealth in 2013, up from 27 percent in 2009, according to a report from Standard & Poor’s, a credit rating firm in New York. The bottom 80 percent have lost ground, with just 11 percent.

The top 1 percent includes all the big companies you might well imagine, including Microsoft, Google, Apple, Coca-Cola, and Ford Motor Company.

The top companies are holding ever more of their wealth as cash and outside the United States.  The wealthiest 1 percent of corporations raised the share of their assets held as cash from 20.4 percent in 2009 to 23.6 percent in 2013.  The rest of the corporate sector held cash balances that were worth less than 7 percent of their total assets.

Some highlights:

  • Apple is holding 78 percent of its $40.7 billion in cash overseas.
  • Cisco is holding 93 percent of its $47.1 billion in cash overseas.

Among other things this behavior means that corporations are dramatically cutting their tax obligations to the U.S. government. The congressional Joint Committee on Taxation estimates that this corporate strategy cost the U.S. Treasury over $83 billion dollars in revenue this fiscal year.

Corporations, fearful that the government might take steps to force them to invest this money in the United States economy, are exploring new strategies. For example, some are merging with foreign companies so that they can legally establish themselves in lower tax countries.

Bloomberg News ends its story as follows:

“You could argue that companies that make a billion dollars and don’t pay taxes are freeloaders,” said Mitch Rofsky, president of the Better World Club, an insurer based in Portland, Oregon, and member of the American Sustainable Business Council, a group of small employers.

“It’s basically an issue of do our economic models work, is infrastructure supported, does government have the money it needs,” Rofsky said. “It’s unfair.”

Unfortunately under capitalism fairness is besides the point.  What matters is power and our challenge is to build popular support for effective policies that privilege the public interest over the private.