Friday, July 2, 2010

Structural Reform down at the temple

The unemployment rate fell again, pointing out what little meaning that indicator really carries as the real number out of work continues to climb. The method for computing the rate of unemployment has gone through forty years of political tinkering to make each subsequent President’s policies look better than they really were. The Bureau of Labor Statistics also compiles the U6 rate that you’ve never heard of from prior administrations and that includes people who aren‘t registered with job service. That number is 16.5 percent or 30 million Americans and even this number is not as inclusive as it was in the good old days when they thought eight percent unemployment was a scandal, now its twice that and it isn‘t likely to improve.

Federally-funded extended benefits have given the unemployed additional weeks during eight recessions since the 1950s. The Republicans refusal to allow Congress to reauthorize the current round of extra jobless aid marks the first time since ever that extended benefits have been allowed to expire when the national unemployment rate is above 7.2 percent. Remember the real rate is well over 16%, the worst it has been since the last Republican Great Depression. 55% of adults have been impacted by the economy in the last two years, personally experiencing a layoff, job loss, a pay cut or more hours for the same pay and of course if you’re an adult male there is a one in five chance that you are currently unemployed. That’s a lot of men selling apples on the corner with the new “no benefits for the deadbeats” plan from the Republicans.

The popular phrase that Wall Street is pushing in Washington is “
structural reform”. This is Wall Street jargon for reducing what is often called the "social wage" for working people. They mean to do this in every way possible: increasing the retirement age to 70 and cutting Social Security benefits if you aren‘t worked to death by then, cutting government employment and benefits, eliminate funds for public education, eliminate all defined benefit pensions in favor of pensions you pay into but never see any return from, and the elimination of health care expenditures entirely.

The first accomplishment for this “structural reform” program was eliminating extended unemployment benefits. The Senate's refusal, yet again, to extend unemployment for millions laid-off workers is not just a random bit of mean spiritedness from Republicans. Their instinctual response in an election year would be to play it both ways by complaining about the cost and then bragging back home about securing relief for their suffering constituents. All of these Senators come from states that are the hardest hit with double digit unemployment even using the rigged numbers.

Supposedly, the desired outcome from these "reforms" is to reduce public debt while making the labor market more "flexible" so that employment and wages can rise and fall quickly in response to shifting supply and demand. This "freer" labor market reduces the employer's cost of hiring workers, which will according to their theory trigger a major jump in private sector employment.

Just the opposite is true of course, driving down wages just reduces demand as workers have less money to spend and the economy shrinks putting more people out of work. It has always worked this way throughout history and no example can be shown where gravity was defied with conservative magic. But wait! Wages have been declining ever since Reagan declared war on the unions and we still had low unemployment. Of course they were lying about the numbers, it was twice as high in real terms all along. It was the high unemployment that allowed them to drive down wages. The only way they were able to maintain enough demand for goods to keep the economy going while wages were kept low was by creating staggering amounts of debt both public and private.

The Republicans rail about Keynesian economics as being a failure and how we can’t run up debt to stimulate the economy, we need “structural reform” instead. In fact the Republicans in the person of Allan Greenspan had been stimulating the economy for thirty years with debt. The Reagan Recession in the 1980’s would have been known as the end of the Republican Party once and for all if not for trillions in deficit spending.

The thing that few people understand is that this kind of debt is not anything real. The debt was not legitimate to begin with but just a mechanism to balance demand with production by creating money out of thin air. They understood this in Biblical times and that was why every so many years they simply wiped out all debt in order to return to the economy to balance and thereby increase their chances of survival, they didn‘t really depend on miracles.

In more modern times, Progressives figured out that you could balance the economy by taxing the rich and regulating their money making schemes. Unfortunately this wisdom has been lost and instead of being chased from the temple, it looks increasingly like the money changers are going to implement “structural reform” instead. We really need a “miracle“.

Tuesday, June 29, 2010

No time like the present or 2022 if that works better

The often quoted Conference Board issued two huge pieces of “news” today. Their US Consumer Confidence Index plunged by a huge amount for last month and the Conference Board has revised their index of leading economic indicators in China down for April to near zero from the significant growth they had reported earlier. (they blamed a calculation error)

The nearly one hundred year old Conference Board is a non-profit research group whose members and funding come from the executives of 1500 of the world’s biggest corporations. Keep in mind these aren’t “real” numbers but an index that is supposed to divine the direction the “real” numbers are moving in. Is this insight or just propaganda intended to push everything in the direction these masters of the universe want it to go? Either way they do reflect what is happening. You can tell which way the sheep are going by just watching the dog.

Critics are pointing out that these China numbers are already four months old and China doesn’t seem to be doing that badly. How China will react is not yet known. They really don’t like to be pushed around and already resent pressure to adjust the value of their currency relative to the USD and may use this slight as an excuse to not cooperate. This could be a good thing for Conference Board members who have their interests at heart and not yours.

This news pushed world markets down sharply by as more than three percent in the US and four percent in Shanghai. It also drove down interest on US Treasury bonds as panicked investors are paying a premium to buy them. If this holds, it translates into lower home mortgage rates and lower interest on the trillions in US government debt. Of course nobody can get a mortgage so what does the rate matter?

If you had high hopes for the new Volcker Rule to crack down the gambling done by the big banks, not so fast. The banks will in theory be restricted to using only four percent of their cash to own hedge funds and such, starting 18 months after the law takes effect, but banks could be granted exemptions on divesting their current holdings until 2022. This will disguise the value of the worthless junk on their books until the current officers have retired to Jamaica. Of course that assumes the Volcker rule even becomes law and that we get can through the next 18 months after that because by then it will be start of President Palin‘s first term, so none of this probably matters anyway.

Monday, June 28, 2010

The Depression with no name

The G-20 is over and President Obama is trying hard to put on a brave face. No decisions are ever really made at these meetings so the announcement that the G-19 (that’s everybody but the US) is going to plunge head long into fiscal conservatism (ala Herbert Hoover) was well thought out ahead of time.

If Europe is serious about austerity this would be bad news for the US in several ways. Much of what the US exports is made by European companies that own a large portion of the remaining manufacturing in the US and they will be cutting jobs here. A decline in Europe would also be a big set back for China who exports more to Europe that they do to the US and this would make them (China) even less likely to revalue their currency in favor of the US. They are already hinting that there will be no movement, there is even wild talk that the Yuan could go the other way if allowed to float.

Although President Obama all but pleaded with the Europeans to keep spending he sent home a completely different message. He said it'll be put-up or shut-up time on cutting deficits soon enough, saying on Sunday that he would deliver serious deficit reduction proposals next year. And when he does, those politicians who talk tough on debt simply to score votes will have to show their hand, he said. "When I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, because I'm calling their bluff,"

So there you have it; the Europeans are afraid to spend money to keep the economy going and Obama is determined to slash the budget here even more. Does the ghost of Hebert Hoover visit Obama at night dragging his chains like the spirit of Depressions past? Or does he sleep the dreamless sleep of the truly clueless?

The stock market fell today on news that although consumer spending was up more than predicted, it was not up by as much as the rise in income which signals increased savings due to consumer caution or maybe they are simply paying down debt. It could also be that he numbers are wrong or otherwise meaningless in the long term which is so often the case these days.

The real numbers that do affect the economy in this neo-Hoover era are that: Congress has cut off unemployment for millions of people who have been unemployed for a long term already. Add to that an increasing number of people who had exceeded the 99 weeks maximum that had been allowed already and millions more (a full third of the unemployed) who were denied eligibility to begin with. Congress in keeping with the fashion of austerity has denied aid to cities and states who can’t meet payroll as local revenue collapses.

Increased savings only cut into the possibility of a recovery and this applies pressure to cause even more job losses in an economy that has continued to lose jobs right along. Now millions will be plunged into poverty as the prospect of ever getting another job evaporates, putting even more strain on government services that couldn‘t cover their budgets already.

Paul Krugman’s column today dealt with his view that we are entering the third American Depression. His opinion is that this one will more resemble the historic Long Depression of the 1870’s as opposed to the severity of the Great Depression of the 1930’s. I personally think Krugman is an optimist. In past depressions much of the economy was able to operate on at least a subsistence level even if no meaningful social safety net existed.

America today is a hollow shell supported by sheets of tissue paper and we import the paper from China. Eighty years ago 60% of the country could feed itself, today that number is near zero. The factory at the edge of town might have been closed but it was still there waiting to be reopened, that is not the case today. The shock of waking up in a country where most people not only don’t know where their next meal is coming from but have no idea how that will ever change can cause things to get out of hand very quickly. The Depression of the 21st century will likely be Great and may go on so Long as to not be remembered with a name.