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Over the past five years the US central bank, the Federal Reserve (Fed), has printed nearly $4 trillion in liquidity (money) which it has provided to banks and professional investors. This is called ‘Quantitative Easing’ (QE). QE means the Fed essentially prints money and buys bonds—mostly toxic subprime mortgages to date—from institutional investors (i.e. banks, shadow banks, foreign banks, other investors). In addition to printing nearly $4 trillion with which to buy bonds from banks and investors, since 2008 the Fed has also conducted various ‘special auctions’, by which it has loaned additional trillions of dollars at little or no interest to banks. Still more trillions were loaned were loaned by the Fed by means of policies that resulted in near zero interest rates (between 0.1%-0.25%) at which banks could borrow money.

The Fed’s QE purchases represent a massive direct subsidization of banks and investors, since the Fed’s bond purchases were almost certainly bought in most cases at prices well above the collapsed value of the bonds—most of which were mortgage bonds including toxic subprime mortgages. But we’ll never know the exact price the Fed paid bankers and investors for the bonds, since the Fed doesn’t provide specific reports on individual deals and purchases; not even to Congress. Only the aggregate data is reported.

The total of QE, special auctions, and near zero interest rates made available to bankers and investors since 2008 comes to at least $10 to $15 trillion. Some estimates range as high as $20 trillion. The number rises still higher when similar QE and free money measures by foreign central banks is taken into account; specifically, by other major central banks like the Bank of England, Bank of Japan, and the European Central Bank (ECB).

Justifying QE1: Economic Recovery

The Fed originally argued in 2009 that this massive, free money injection and bank subsidization was necessary to stimulate the US economy and generate a sustained full recovery as quickly as possible. But even if the Fed and its policies were responsible for all the economic growth since 2009, an impossible assumption that ignores all other contributions to growth, that contribution would still amount to only 8.2% GDP growth over the past five years—which is about only half the GDP growth after five years that occurred in prior recession recoveries since the 1970s.

The Fed’s QE policies these past five years have come in four doses. There was the initial QE1 in 2009, amounting to $1.75 trillion in bond purchases. The US economy then stalled out in the summer of 2010. Then came the $600 billion QE2 in the fall of 2010. The economy stalled a second time in 2011, leading to what was called ‘Operation Twist’ (QE 2.5?) that provided another $400 billion in mortgage bond purchases. When that petered out, it was followed by QE3 last September 2012. Unlike its predecessors, QE3 has had no limit. It calls for Fed purchases of $85 billion a month for ‘as long as necessary’. So QE3 has now amounted to about another $1 trillion, and continues to rise by $85 billion every month.

While there is talk that the Fed may start to ‘taper’ (reduce) its $85 billion a month, don’t expect much of a change. Maybe $10 billion a month or so reduction. QE will therefore continue for some time. That’s because, as this writer has argued elsewhere, bankers and big investors are now ‘addicted to the free money’ regime that characterizes 21st century finance capital globally today.

Just the mention of a possible ending of QE by the Fed this past June sent bankers-investors globally into financial fits and paroxysms last June. Stocks, bonds and other financial assets fell into a major tailspin in a matter of weeks. The Fed quickly denied it had any such intention of ending QE. The markets quickly recovered and went on their merry financial bubble way once again. That event of possibly reducing QE, and financial markets’ extreme reaction, this past summer has been called the ‘taper tantrum’. What’s coming in the next few weeks, however, is at most a ‘taper tweak’.

Justifying QE2: Restoring Price Stability

The Fed initially launched QE1 in early 2009, claiming it would stimulate the economy and generate a recovery. But no such thing happened. In the summer of 2010 the economy weakened again. The Fed thereafter switched its excuse. It next argued in 2010 a second QE was necessary, this time to head off the growing trend in the economy toward deflation (price declines) at the time.

Deflation is a very dangerous thing. As long as prices continue to fall, businesses will hold off investing and consumer households from buying. For businesses, deflation creates uncertainty whether they can sell their goods at a price high enough in the future to cover their production costs in the present. For households, deflation results in consumers ‘waiting for prices to bottom out’ before actually purchasing again. The recent housing market in the US is a good example. Home prices continued to fall for four years, about 40% on average. During the period of home price declines the housing market did not recover, despite the 30%-40% price drops. It wasn’t until late 2012, as home prices began to rise, that home buying recovered a little and home prices began rising a little, by about 12-15%. Thus deflation means both business investment and household consumption ‘freeze up’. That means no recovery. The Fed therefore argued another round of QE was needed to halt deflation and get prices rising again, so that investment, consumption, and recovery could follow.

But the Fed’s claim that QE 2 was needed to prevent deflation and raise prices (to a Fed target of 2.5%), as a way to encourage investment and consumer spending, didn’t materialize either. Between 2010-2011, the period during which QE2 was in effect, consumer and wholesale prices for goods and services continued to slowly drift lower, flirting dangerously with deflation. While QE policies may—and often do—result in price bubbles for financial assets (stocks, bonds, etc.), they have little effect in terms of inflating prices for normal goods and services.

So the Fed’s QE1 did not generate a sustained recovery for the US economy (which has been bouncing along the bottom now for four years since the ‘end’ of the recession in June 2009). And its QE2 did not result in getting prices to rise to the Fed’s minimal target of 2.5%. The primary goals of QE in its first and second iteration therefore failed.

Justifying QE3: Reducing Unemployment & Creating Jobs

Enter QE3, and the Fed’s third justification for introducing yet another third round of QE3 in the fall of 2012. The new excuse was that another QE was necessary in order to reduce unemployment rates and get a job recovery underway. In September 2012 the Fed announced it would launch another QE, printing and injecting $85 billion a month into the economy, until such time as the ‘U-3’ unemployment rate fell—from the 8.1% level in September 2012 to a 6.5% target level. The U-3 rate has come down over the past year to 7.3%. Meanwhile, the more accurate U-6 unemployment rate still remains around 14% and more than 20 million continue unemployed.

But the Fed’s QE3 has not really been responsible for reducing even the unemployment rate from 8.1% to 7.3%. That reduction has been the result of millions of unemployed leaving the labor force altogether over the past year, and from jobs ‘churning’ from declined in full time jobs to increases in part time and temporary jobs.

Over the past year, 2012-2013, it is true that the US economy has created 2.3 million jobs. But this has been largely part time and temp jobs, with low pay and essentially no benefits.

‘Jobs Churn’: The US Jobs Market Today

The main characteristic of the US job market today is perhaps best described as a ‘job churn’. While the US is not losing jobs, it is not creating them very well—at least not decent paying jobs.

The US is ‘churning out’ full time jobs and replacing them with ‘contingent jobs’. Since January 2013 through July 2013, just under a million jobs were created; but no fewer than 650,000 of these were part time and temp jobs. Meanwhile, 250,000 full time jobs disappeared over the same period. This ‘job churn’ has other dimensions as well.

In addition to replace full time with part time-temp jobs, it is providing jobs for millions of new entrants (at mostly part time-temp status) as millions more leave the labor force altogether.

It is substituting high paid jobs for low paid. As a recent study showed, 60% of the jobs lost since 2008 have been ‘high paid’ (more than $18/hr. on average), while 58% of the jobs created since 2008 have been ‘low paid’ (less than $12 an hour).

Not only substituting new entrants to the labor force for those leaving the labor force; not only full time for part-time/temp jobs; not only high paid for low paid. The economy is churning out union jobs and replacing them with non-union jobs as well.

It is a sad but remarkable fact that while the economy added a couple million jobs since 2012, US unions experienced an unprecedented decline of 500,000 jobs in 2012 alone. That loss amidst job creation has never before occurred for organized labor. At that rate, its meager 6% or so unionization rate in the private sector today will fall to 3% or less by the end of the current decade—i.e. the lowest ever, signifying the virtual disappearance of organized labor in the private sector in America for all practical purposes.

QE as 21st Century ‘Trickle Down’

Notwithstanding the foregoing facts, if one still insists on maintaining that the Fed’s QE3 has reduced unemployment, it is clear that QE to date is an incredibly inefficient, costly, and wasteful way to create jobs.

For example, let’s assume QE3 and Fed monetary policy is responsible for half of all the 2.3 million jobs created over the past year—a generous assumption. But let’s assume it nonetheless. That’s 1,150,000 of the roughly 2.3 million jobs created over the past 12 months. Let’s further assume that about 400,000 of that 1,150,000 represents part time-temp jobs. Next, if two part time jobs roughly equals one full time job, that’s 200,000 full time equivalent jobs created by QE and the Fed the past 12 months. Add that 200,000 to the remaining 715,000 full time jobs assumed created by QE3 over the past year, adds up to a total of 915,000 full time jobs created by QE/Fed over the past year. Let’s round it all up, to an even 1 million jobs created by QE3.

Now let’s take the $1 trillion cost of QE3 over the past year. Divide the $1 trillion by 1 million jobs and the result is a cost of $1 million per job created. That’s an absurdly inefficient and wasteful job creation program!

So who has really benefited from the Fed’s $1 trillion QE job creation program?

Taking the calculations one further step, the average wage of the 1 million jobs is reasonably no more than $15/hr—given the composition of 400,000 part time-temp, low paid jobs in the total. That $15/hr. is about $30,000 a year. The ‘benefits cost’ load is no more than 10% of the base pay, since many of the jobs are part time-temp with essentially no benefits. That’s another $3,000. That’s $33,000. That leaves $967,000 of QE3’s Fed printed money going into the pockets of someone else other than the worker who got the QE created job!

The ‘someone else’ in this case include the bankers and investors to whom the $1 trillion was provided in the first place. The bankers and investors then mostly loaned out the QE mostly to other speculators, who in turn likely invested it in the stock, bond and derivatives markets—thereby driving up the financial asset prices for these securities which, when sold, realize super-capital income gains. Given the absurdly low capital gains tax rates that exist, the bankers-investors get to keep 85% or more of their profits (realized income). Alternatively, they might not loan out the $967,000 billion from the Fed QE windfall to other financial market speculators, but loan it to offshore emerging markets, like China. In either case, the $967,000O doesn’t create any jobs in the US since it doesn’t result in investment in the US. Or, thirdly, they might just hoard the cash; or send it to their offshore tax havens in order even to avoid paying the nominal capital gains tax; or, if they’re a public corporation, as most banks are, use it to buy back their bank stock, payout more dividends to shareholders, or use it to purchase their competitors (mergers & acquisitions). None of that creates jobs either.

The net outcome of QE is the escalating incomes of bankers, investors, wealthy shareholders and high net worth individual households. That means even more income inequality in the US.

It is not coincidental that during the period of QE1-QE3 in the US, income inequality has accelerated at an even faster pace than in the past. As the most recent data on income inequality trends, released by Professor Emmanual Saez of the University of California earlier this month as part of his on-going study of income inequality trends, shows: the wealthiest 1% households accrued 95% of all the income gains in the US economy between 2009-2012.
QEs mean bankers and investors get $967,000 and the worker gets $33,000. That’s the essence of the Fed’s current QE3 job creation/unemployment rate reduction claims!

If one were to assume this ratio represents ‘trickle down’ economics in practice today, it would mean that for every one dollar in income for the worker, the capitalist-investor-banker is now getting 29.3. Of course, that 29.3 invested in financial securities generates even more income over time. The ‘trickle down’ ratio rises further and is virtually unlimited to the upside for the wealthy investors who benefit enormously from the free money QE policies of the Fed—while workers struggle to make ends meet working increasingly part time and temp jobs with low pay and no benefits.

A ‘QE for Jobs’ Program Alternative

It doesn’t take much imagination to envision a better, more efficient, less wasteful way to create jobs. If the Obama administration had a 21st century Works Progress Administration direct job creation program, it could have the Fed print the $1 trillion QE3 and create 20 million jobs at a fully loaded full time $50,000 a year. That would instantly wipe out every U-6 jobless person in the US. That’s 20 million jobs at $50k vs. the Fed’s current ‘unemployment reduction program’ of 1 million jobs at $33k.

Why should the Fed print money and subsidize the incomes of super-wealthy investors and their banks? Why shouldn’t the Fed use its printing press to instantly finance the creation of 20 million jobs directly by the US government? That’s a jobs program that would add nothing to the US deficit and debt, just as the Fed’s QE programs have added nothing to the US deficit and debt.

Those who argue to do so would result in a major inflation are simply ignoring the facts. Nearly $4 trillion in QEs to date have had no effect on inflation in goods and services. They have only inflated financial securities prices. Inflation in real goods and services continues to drift lower, flirting with bona fide deflation. If the Fed wants the get goods and services inflation to rise to 2.5%, a QE for Jobs program noted above would likely do it.

Others might argue that a $1 trillion ‘QE for Jobs’ program would mean the Fed would have to print $1 trillion every year to keep paying for the jobs in subsequent years. But that’s nonsense. It doesn’t take much imagination to understand that $1 trillion in jobs-related income in the hands of 20 million workers would result in a major boost to consumption. That in turn would result in businesses finally investing in the US and creating jobs to match the consumption demand. As real investment rose, the Fed ‘QE for Jobs’ might actually be scaled back in magnitude.

A ‘QE for Jobs’ program would also represent the greatest reduction in income inequality overnight in US history. It would also mean an annual first year boost to consumption of at least $500 billion. Considering possible ‘multiplier effects’, that would mean a boost to US GDP of more than $1 trillion. That would in turn easily push the US economic recovery to an annual GDP growth rate of more than 7% to 8%–and result in the fastest (not currently slowest) economic recovery on record for the US.

Jack Rasmus
September 15, 2013

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On Tuesday, February 12, 2013, President Obama will give his State of the Union address. Previews from the media in recent days indicate he will talk about job creation and the problem of income stagnation for the middle class. Neither of these issues—jobs and income—have been seriously addressed for more than five years since the start of the recent recession in December 2007. More than 20 million workers remain jobless and real income for middle class families has fallen, and continues to fall, for the past five years according various measures.

It is rumored Obama will call for a massive increase in Free Trade, specifically for a pacific-wide free trade agreement, the ‘Trans Pacific Partnership’ agreement that his representatives have been working on already for more than a year. Also in the works is a parallel Free Trade agreement with the entire European Union. If passed, these agreements will result in millions more lost jobs—not new jobs—and will make the more than 5 million jobs already lost to NAFTA free trade and China preferred trade pale in comparison. But it will be passed off as a ‘job creator’.

With regard to domestic job creation, it is rumored he will call for business to invest more in the US in order to create jobs here. It is not likely, however, the President will bother to mention the more than $2 trillion in cash US corporations are sitting on—or distributing to their stockholders to the tune of $500 billion last year—instead of creating jobs. Nor is it likely the President will mention that, according to latest Wall St. Journal surveys, big businesses plan to increase investment in 2013 by a mere 2%, down from 8% in 2012 and 20% in 2011. He will exhort them to do something more about investing and job creation, without saying what he himself will do if Business continues to sit on its massive cash hoard and lower investment still further.

The reason most frequently given by CEOs for not investing more in the US is that US consumers aren’t buying enough. True enough. Except for the wealthiest 10% households, median family consumer spending is lagging badly. Most of median household spending that is occurring is spending on credit—credit cards, installment loans, student loans—or spending from depletion of savings to cover escalating healthcare costs. Consumer spending based on real income gains is just not happening for the middle class. And that picture is about to get seriously worse very quickly in coming weeks, given the recent run-up in gas prices that will almost certainly exceed $5 a gallon this spring.
But Obama will talk about the need for income gains for the middle class, while remaining short on the specifics how that will occur; he’ll talk about the need for more jobs without offering specific programs except for more job-destroying free trade agreements. And while he’ll reference the key problem of falling real middle class incomes, specific solutions he plans will be conspicuously absent.

How important is the fact of stagnating and/or declining middle class incomes? The following are some of the more salient facts about income inequality trends in the US in recent decades and years; why those trends are growing worse; and why that inequality is a major factor in the now stagnating once again US economy and recovery.

The Wealthiest 1% Households Historic Income Gains

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.

The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012, and the accelerating accrual of all income gains by the top 1% noted previously in the opening paragraphs of this essay.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degree workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.

But don’t expect to hear anything specific or concrete from the President how he proposes to reverse the continuing deterioration in middle class income. What he’ll likely say is you don’t have enough income because you don’t have enough education, so go out and get more and take on even more student debt. And he’ll say the way to stimulate investment and jobs is to pass more Free Trade treaties that will destroy millions more jobs. Or pass the Immigration bill, much of which is being drafted right now by big tech companies to ensure they can hire hundreds of thousands more H-1B visa workers from their offshore subsidiaries. Or propose to create ‘green’ jobs by giving the ‘greenlight’ to natural gas fracking and pipeline construction throughout the US. But none of that will solve the problem of more than 20 million still jobless, or the fact that jobs that have been created are low pay, part time, temp, non-union service jobs with little or no benefits—that is, jobs that do little to resolve the even deeper problem of stagnating middle class incomes.

Jack Rasmus
February 11, 2013

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An addendum, and partial correction, is in order to my previous post on ‘Are the September Jobs Numbers Cooked Controversy’, as follows:
My reference to the Current Population Survey, CPS, surge in jobs by 870,000 last month, and my associating that surge with the labor department’s ‘Business Employment Dynamics’ model, was incorrect. The BED raw data on jobs are added to the labor department’s second jobs data source, the Current Establishment Survey, CES, and then together seasonally adjusted. Those numbers for CES in September were a lower than average 114,000 jobs created, as have been the CES jobs numbers throughout the summer months historically lower the past three consecutive years and subsequently higher the winter months.
For the past two years I had been pointing out that the BED raw jobs data were artificially boosting the CES jobs numbers in the winter months, November-January, and in turn likely artificially underestimating the numbers of jobs in the summer months, May-August. (See my blog, jackrasmus.com, for that argument in detail in my earlier postings on jobs this past winter and in previous winters. My recent book, Obama’s Economy: Recovery for the Few, also documents these excessive swings up and down in jobs for the past three years). I still think that is true and that the CES-BED is generating false seasonal jobs growth—inflated in the winter and deflated in the summer.
If so, what that means is that we will likely see an artificial surge in CES jobs numbers in the November-January months coming up, just as we’ve seen a collapse in job creation in the summers the past three years. That of course does not explain the 870,000 September CPS numbers. So what accounts for the CPS 870,000 is the obvious next question. Is the CPS now picking up numbers that the CES is underestimating in September? Or do we have some kind of parallel seasonality adjustment problems now going on with the CPS as well as the CES? My guess is that the inordinate surge in CPS jobs in September is related to the extraordinary surge of 582,000 involuntary part time jobs in September.
I noted this other possible explanation in my previous post briefly, but without elaborating. This kind of one month growth in involuntary part time is somewhat unprecedented. We haven’t seen a surge of such dimensions in involuntary part time job creation since the jobs crash of late 2008—as companies both laid off full timers in record numbers as they simultaneously converted more other jobs to part time. The 582,000 last month may therefore be a leading indicator of decline in employment in CPS jobs that could come in the next 3-6 months. That means a major ‘switching’ in the two jobs surveys, with CPS jobs contracting sharply in coming months while CES jobs artificially surge over the winter.
Whichever the case, the bigger picture beyond September worth considering is that we are apparently getting increasing divergences and magnitude swings between the two jobs surveys, the CPS and CES. That volatility is not an indicator of a stabilizing jobs market. Quite the contrary. Moreover, something is going on here with jobs calculations in both surveys worth further investigation. It could be that seasonality assumptions and adjustments being used for both surveys, CPS and CES, were perhaps more appropriate in a pre-2007 economy and not today’s very much altered employment market environments. Or it could mean we can expect to see a crash in the CPS numbers soon and a simultaneous moderate rise in the CES jobs numbers in coming months—i.e. the opposite of what’s been happening over the past summer and in September. In either case, the labor department’s jobs numbers will then appear even less convincing.
Jack Rasmus

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This week the first presidential candidates’ debate will be aired on television. A good part of the topic of the first debate will focus on economic programs of the respective candidates. They will say they represent fundamental differences. This is in part true. But equally true is that their positions on the economy in many important aspects are strikingly, and disturbingly, similar. Read the following except from my just published article on this topic in Z magazine.

This week the first televised debate between the two presidential candidates will be held and a good part of the debate will address programs for economic recovery for the next four years. Both parties and candidates are now proclaiming there are historic, stark differences and choices between them; that this election will mean choosing two fundamentally different paths for the country for years, and perhaps decades, to come with regard to the future of the economy in terms of jobs, taxes, deficits, housing, state and local governments, and other economic indicators. A closer examination reveals, however, that while there are some clear differences between the two candidates on economic matters, the similarities in their economic proposals are both striking and disturbing.
JOBS
OBAMA
Upon entering office in 2009 Obama promised to create 6 million jobs if his $787 billion stimulus bill of (mostly business) tax cuts and spending subsidies to states and unemployed were passed. But after 18 months neither the tax cuts nor subsidies resulted in any appreciable job creation. Between June 2009 when the recession was officially declared over, and 18 months later in December 2010, an additional 1.1 million private sector jobs were lost. By year end 2010 the president had to resort to the claim he had at least had ‘saved’ further millions of jobs. With the effects of the $787 billion stimulus mostly spent, his job creation strategy then shifted mid-2010. A second recovery program passed late 2010 composed totally of an additional $800 billion in tax cuts—including $450 billion in extended Bush tax cuts Obama promised in 2008 he would not do.
This $800 billion more in tax cuts was supplemented by a new policy focus on manufacturing and promoting exports as the primary program to create jobs. Multinational corporate CEOs , like General Electric’s Jeff Immelt, were put in charge of his job creation program. That meant more free trade agreements, more deregulation for business, and more subsidies for U.S. export companies.
In 2011-12 still more business tax cuts were proposed as the way to create jobs. In 2011 tens of billions more for small business to hire unemployed and a so-called ‘JOBS’ (Jump Start Our Business Startups). JOBS was nothing more than a cover for more tax breaks and financial deregulation for start up companies, but Obama praised it as ‘a game changer’ for employment. More subsidies to the states to hire teachers and emergency responders, now being laid off in the hundreds of thousands, was also proposed but never passed Congress.

Obama’s Jobs Programs over the past 42 months therefore amount to the following:
• Tax cuts and more tax cuts for businesses
• Manufacturing-centric policies driven by more Free Trade agreements, more manufacturing export subsidies, and more business deregulation
• More subsidies to the states to hire teachers and emergency responders
These programs have proved pretty much a total bust, however: After $3 trillion in tax cuts and spending, total private sector employment has risen by only 2 million, or about 50,500 per month, which is well less than half that needed just to even absorb new entrants to the labor force. Total unemployment, as measured by the labor department’s U-6 rate, has fallen by a mere 1.3 million—from 24.6 million in June 2009 to 23.3 million in July 2012. Between June 2009 and July 2012 a paltry 200,000 manufacturing jobs were created, for an average of a mere 5,000 per month. And Obama’s much vaunted recovery of the Auto Industry has produced 157,000 auto jobs, which is still 180,000 fewer than existed at the start of the recession in December 2007.
Despite this embarrassing record on job creation, the President in his September 6 convention speech indicated clearly he would ‘stay the path’ with this business tax cuts + manufacturing promotion + free trade as his basic approach to job creation. He made it clear his second term’s strategy would be to “export more products” and that he would continue to work with business leaders to “create 1 million more manufacturing jobs over the next 4 years”. In his speech he also proudly proclaimed he had signed free trade agreements “bringing jobs back” and declared he would sign still more—a clear reference to his proposal for creating a ‘Trans-Pacific Partnership’ (TPP), a free trade agreement with all the countries of the pacific rim which Obama has been promoting for several months and an even bolder goal than George W. Bush’s Free Trade of the Americas that was proposed in 2005 to create a free trade zone throughout all of north and south America. In other words, in terms of jobs creation programs don’t expect much different from his first term in either job creation programs or results in an Obama second term.
ROMNEY
Romney’s view on how to create jobs focuses even more heavily on tax cuts as the primary approach. Romney proposes to create 12 million jobs by 2017. The primary engine would be extending the entire $3.4 trillion in Bush tax cuts of the last decade as is for another decade (minus extending the cuts for those households earning less than $40,000 a year). Obama would extend the Bush tax cuts for all but the top 3% households. So Obama cuts out part of the ‘top tier’ of households from the Bush tax cuts extension, while Romney cuts out the ‘bottom tier’ of households. (Both support, however, reducing the top corporate tax rate from current 35%, as noted below).
To create the 12 million, however, Romney proposes more than just extending the Bush cuts: he calls for even more tax cuts for corporations (as does Obama), reduced business regulations and more Free Trade agreements (ditto Obama), but adds more oil drilling and some token worker retraining as addenda to his jobs program.
However, Romney’s 12 million jobs goal is somewhat of a sham. It amounts to creating only 180,000 jobs a month on average, i.e. just 50,000 more than needed for new entrants to the labor force each month. That means reducing the current 23 million jobless by only 50,000 a month, which would leave 20 million still unemployed by 2017. So the Romney program is not really a program to eliminate the massive jobless overhang today—apart from the question of whether more business tax cuts, free trade, oil subsidies, etc. will even create the 12 million jobs in the first place.
In short, the relationship between job creation programs and business tax cutting is just a matter of degree between the two presidential candidates. Romney advocates ‘Bush tax cuts on steroids’ to create jobs, while Obama exempts the top 3%. Both strongly propose Free Trade and more business deregulation as job creation measures. Obama proposes subsidies to states to hire teachers and firefights, while Romney doesn’t and proposes token job retraining. Romney wants still more cuts and subsidies to oil companies; Obama does not. Both support multiple handouts to small businesses. But all these programs have been proven failures to date, so the unemployed have little to expect from either candidate once elected.

TAXES
OBAMA
As previously mentioned, Obama proposes to discontinue the Bush tax cuts for the wealthiest 3%. The top marginal tax rate for individuals would be allowed to rise from 35% to the 39.6% level of the Clinton years, impacting wealthiest households earning more than $250,000 a year. Taxes on the wealthiest 1% (earning more than $600,000 a year) would rise $93,000 a year. (For millionaires a tax hike of $296,000 a year). The tax on capital gains, now at only 15%, would also increase to 20% under Obama proposals. Oil and gas industry tax breaks would be reduced.
But what Obama proposes to ‘taketh away’ from the top tier of the personal income tax he proposes ‘to giveth’ to their corporations. His proposals include reducing the top corporate tax rate from current 35% to the 28% it was under Reagan. This shift is proposed despite the fact that in 2011 corporate taxes amounted to only 12.1% of profits—compared to the 1987-2008 period when corporate taxes averaged 25.6% of profits. For all businesses, corporate and non-corporate, the super-generous ‘bonus depreciation’ provision of the past two years, in which businesses can write off the cost of all capital investment in the first year of purchase, would also be continued despite its costing a whopping $55 billion a year.
Obama also favors changing the taxing of U.S. multinational corporations, reducing taxes on their offshore profits, even though that group today is hoarding $1.4 trillion of in their offshore subsidiaries and refusing to pay US taxes on it. In exchange for this tax reduction, Obama proposes to raise taxes in a yet unspecified way on those multinationals that offshore jobs.
ROMNEY
Romney’s tax program is once again an extreme version of Obama’s but with many content similarities. In addition to extending all the Bush tax cuts of the past decade, for yet another decade, which would cost the US Treasury another $4.6 trillion according to the Congressional Budget Office research arm, Romney proposes the following tax changes:
• Cut the personal income tax rate for the rich even further than Bush, by 20% across the board.
• Cut the top corporate tax rate from 35% to 25% (vs. Obama’s 28%)
• Introduce a ‘territorial tax’ for US multinational corporations, which would in effect end the current foreign profits tax they pay (or in fact now refuse to pay)
• Repeal the Medicare 2.9% additional tax on the wealthy contained in Obama’s 2010 ‘Affordable Care Act (Obamacare) by repealing the entire Act.
• Allow tax credits for those earning less than $40,000 a year to expire (i.e. earned income, child care, and other tax credits).
• End all taxation on capital gains, dividends and interest income for households earning less than $200,000 a year.
• Keep the capital gains, dividends and interest income taxed at current 15%.
• Bigger tax cuts for business research and development
• End the Alternative Minimum Tax (AMT) altogether, which impacts those earning around $150,000 a year and above
• End the Estate Tax altogether
In summary, apart from their respective positions on extending the Bush tax cuts, both Obama and Romney are largely in synch on introducing more massive cuts in corporate income taxes, reducing corporate taxes to the 25%-28% range from current 35%–despite corporations today paying the smallest share of taxes from profits. Both have plans as well to provide multinational corporations even more tax concessions. Romney differs in proposing to give upper middle class households bigger incentives to invest in stocks, bonds and other interest bearing securities—an ultimate boon to his stock-bond market buddies. He also proposes to give the wealthy big tax bonuses by ending the Estate, Alternative Minimum, and forthcoming Medicare 2.9% taxes. Both propose more tax cuts that will not reduce the projected US budget deficits over the coming decade, but actually make them worse—and much, much worse in the case of Romney—leading in both cases to even more massive cuts in spending programs than either candidate is so far admitting to.
BUDGET DEFICITS
OBAMA
Obama’s policy with regard to US deficits is his pledge to reduce the deficit by $4 trillion over the next decade. That has been Obama’s stated goal since the deficit debates in 2011 leading up to the debt ceiling crisis of August 2011. That $4 trillion goal, moreover, is the same as proposed by his Deficit Commission (Simpson-Bowles), Paul Ryan in the House of Representatives, and various other Senate and ex-government officials. Details of the president’s $4 trillion deficit reduction plan are to be found in his 2012 budget. It is perhaps of some interest to note that Obama’s budget projections include a $5.8 trillion bill for defense spending over the decade, an amount which is 23% greater on an annual average than defense spending during the Bush years, 2001-2008.
The Congressional Budget Office has issued a different estimate of the likely budget deficits over the next decade. Given current tax cuts and spending projections, the CBO estimates the Obama deficits will amount to $6.4 trillion from 2013-2022. In January 2013 government spending will decline by $1.2 trillion over the coming decade, based on the debt ceiling deal agreed upon by Obama and the Republican House of Representatives in August 2011. Raising the debt ceiling once again will therefore become a major issue in early 2013. That means major tax increases and/or further spending cuts will be on the agenda immediately after the November 2012 elections regardless who is elected president (the challenge sometimes referred to as the coming ‘fiscal cliff’ by the media). Republican insistence on no tax increases and on raising defense spending even higher than projected by law or in the Obama budget, will mean an historic confrontation between deficit reduction and massive cuts in social program spending, including not only Medicaid but Medicare, Education, Social Security, and other discretionary spending programs. As this writer has been predicting, the confrontation will start immediately, within days, of the upcoming November 2012 elections—again regardless of who is elected president.
ROMNEY
As frightening as the upcoming budget deficit confrontation following the elections will be with the Obama budget as starting point, the Romney budget-deficit proposals represent a deficit crisis of even far greater magnitude.
Romney tax cut proposals include the major elements of a continuation of the Bush tax cuts for another decade, at a cost of $4.6 trillion, plus adding trillions more in business-investor tax cuts. The result is deficits for the next decade equivalent to approximately $10 trillion! To address this massive deficit Romney proposes cutting federal spending from its current 24% of GDP to 18%-20%. That 6% of GDP in 2013 equals an immediate reduction in spending and/or increase in working poor and middle class tax cuts amounting to $300 billion. By 2015 the estimate is $500 billion, presumably rising further thereafter. In addition, he proposes to reverse the sequestered scheduled $500 billion in defense spending cuts agreed to in Congress in August 2011. The increases in working poor and middle class tax cuts were noted above. The spending cuts would mostly come from discretionary non-defense spending on items like education, transportation, healthcare, etc., for which Romney proposes a 5% cut across the board. The 5% represents no more than $60 billion a year. As others have pointed out, the Romney proposals do not add up and it is unclear how the 5% discretionary cuts, no defense cuts, retaining Bush tax cuts, adding trillions more in corporate-wealthy individual tax cuts can cover the $10 trillion. Proposing to reduce federal spending by 6% of GDP means spending cuts and/or tax increases totaling at least $900 billion a year. It can only mean unmentioned additional massive cuts in Medicaid-Medicare-Social Security and historic reversals in middle class tax breaks that are left conveniently unmentioned.
The Romney deficits therefore mean not only massive social spending cuts but hundreds of billions more in middle class tax increases as well. High on the list of the latter would have to include the elimination of tax deductions for health care and pension contributions by workers, virtually ending the mortgage interest and state income tax deductions, new taxation on Medicare benefits, and ending most of the earned income tax deduction for the working poor. Sharply reducing, or even ending, these deductions would be necessary to accommodate Romney’s proposed business and investor tax cuts. Romney would additionally end Obama’s Affordable Healthcare Act, reducing the deficit by another $.9 trillion. The rest presumably would come from other spending cuts in education, Medicaid, Medicare, and Social Security.
In summary, whoever wins the election, get ready for massive social spending cuts and a fight over how little to raise taxes. The deficit reduction proposals of both candidates envision historic cuts in social spending. Both envision more tax cuts for corporations that would additionally have to be made up from spending cuts and/or middle class tax hikes. Obama’s deficit reduction plan envisions some tax increases on the wealthiest individuals, while Romney’s envisions trillions of dollars more tax cuts for the wealthy, paid for by tax hikes by the poor and middle class as well as historic cuts in social spending of even greater magnitude than Obama’s.
FREE TRADE
There is virtually no difference between the two candidates on trade policy, and free trade agreements in particular. Both strongly supported recent free trade agreements with Panama, Columbia, and South Korea. And Romney supports Obama’s current drive to implement the biggest expansion of free trade with the ‘Trans-Pacific Partnership’ (TPP) pacific rim free trade policy, a development that will dwarf in scope and magnitude even Bill Clinton’s passage of NAFTA and his opening of China trade. According to the Economic Policy Institute, China trade alone has cost the US 2.7 million jobs just in the past decade. NAFTA millions more. Neverthless, both candidates unreservedly advocate accelerating free trade agreements.
The battle between Romney and Obama on trade amounts to token differences on how to show they are ‘tough on China’. Romney accuses Obama of being ‘too soft’ on China and demands more punitive action. Both candidates talk in vague generalities about the ‘offshoring’ of US jobs that has occurred by the tens of millions in recent decades, but neither offers any specific proposals for addressing the issue.

HEALTHCARE-MEDICARE/MEDICAID
OBAMA
The heart of Obama’s Healthcare policy is, of course, the retention of his 2010 Affordability Care Act. Costing nearly $1 trillion over the rest of the decade, the Act does provide a number of meaningful benefits for the general populace. However, it has two great flaws: first, it amounts to a health insurance company subsidy bill. Health insurers will receive hundreds of billions of dollars of extra business. The second flaw is that it fails fundamentally to control health insurance and other health care costs. The problem of runaway healthcare costs will thus re-emerge and continue under the ACA, a problem which has already emerged as health insurance premiums and other costs have once again begun surging in 2011-12.
On the positive side, the ACA raises taxes on the wealthy by another 2.9%–which is the real source of much of the opposition to the ACA by the wealthy, transmitted through their manipulation of the Teaparty on the issue. But it also includes a reduction in payments to doctors and health providers in the amount of more than $700 billion. That will inevitably lead to doctors and providers refusing increasingly to provide services to Medicare patients. The ACA is thus a form of income shift that promises to reduce health care access. That is the price to be paid for the subsidization of health insurers and coverage extension to the tens of millions without any coverage.
It should further be noted, that Obama has signaled in July 2011, as he sought desperately an agreement with Republicans on the debt ceiling debate, that he was willing to cut Medicaid and Medicare by $700 billion despite the proposed expansion of Medicaid in his ACA. That public proposal provoked a near revolt by Democrats in Congress and was withdrawn. Nevertheless, it remains ‘on the table’, as they say, and will most certainly arise again immediately after the November elections. Voters will not hear of this during the election campaign, but will most certainly once the election is over.
ROMNEY
Romney’s program with regard to health programs and policy top priority is to repeal Obama’s health care act of 2010. Next in priority is his complete embracing of his Teaparty Vice President, Paul Ryan, view for Medicare. The Ryan plan is to voucherize Medicare, provide payments to senior to then go and buy private health insurance—an even bigger windfall for insurance companies than Obama’s subsidies to insurers in his ACA. Ryan has projected this will ‘save’ the federal government $700 billion. However, not all seniors will receive the same voucher payment. Some will get less than others, thus creating a kind of ‘two tier’ voucher system. Moreover, there are no assurances the value of vouchers will increase annually with the rising cost of healthcare services, thus requiring seniors to increasingly pay more out of pocket for healthcare insurance. The main beneficiary from this, apart from health insurance companies, is the federal government which Ryan estimates will save $700 billion in government spending over the next decade. The Romney-Ryan Medicare voucher plan thus represents an income transfer of hundreds of billions from seniors to both insurers and the government.
Romney-Ryan are also major proponents of massive reductions in the Medicaid program, proposing to cut federal and state Medicaid costs by turning it into block grants to the States—many of which would refuse to participate or would take the money in the block grant and spend it elsewhere.
SOCIAL SECURITY
Proposals by both candidates are almost identical with regard to social security. Both are purposely saying little before the election about how they would address social security. Romney proposes vaguely that the age for eligibility for retirement benefits should be raised, as does Obama. Neither say raised to what or how quickly. Both suggest cost of living adjustments annually should be lowered. Obama implies by changing the way the consumer price index is applied. Romney goes further and recommends the creation of a ‘two tier’ system in the future (similar to Medicare) in which seniors with a certain level of retirement income would receive less social security benefits. What’s left unsaid by both is their agreement to target social security disability benefits for major reductions.
HOUSING CRISIS
OBAMA
Apart from the failure to create jobs, the next greatest economic policy failure of Obama’s first term has been his reluctance to direct confront the housing crisis. The housing sector has languished in a veritable depression for three and half years, with home building and jobs stuck at only a third to half of pre-recession levels. More than 12 million of the 54 million mortgaged homeowners in the US have been forced into foreclosure, often illegally by the banks. More than 8.5 million on Obama’s watch, while than 10 million similarly languish with mortgages in ‘negative equity’.
From the beginning in 2009 Obama’s policies have focused on subsidizing mortgage lenders and mortgage servicers (big 5 banks), to help them move foreclosed homeowners out of their homes and to resell to new buyers. Early 2009 Obama programs like HAMP (Home Affordability Modification Program) are acknowledge failures, providing tens of billions of dollars of subsidies to banks and homebuilders and token assistance to homeowners.
In 2010 Obama then ignored the ‘robo-signing scandal’ that broke that summer, leaving it to state attorneys general to deal with. However, when it appeared legal suits would cost the banks potentially hundreds of billions of dollars, only then did the Obama administration intervene in 2011. That intervention was designed to help the banks—not homeowners—by limiting banks’ liability to homeowner and state legal suits. As part of that compromise, banks’ liability from legal suits arising out of robo-signing illegal foreclosures was capped at a mere $25 billion. Payments to homeowners illegally foreclosed have averaged only $1,500 each in the settlement and less than a billion of the $25 billion. Recent reports are that the $20 billion is not going to reducing loan balances for homeowners in ‘negative equity’ but is being deducted by banks against the $25 billion in the form of charges against short sales of homes in negative equity. In other words, homeowners are not being assisted to remain in their homes, but assisted in vacating them—which the banks then resell to new buyers at still further profit.
In exchange for the limits on liability, the banks were ‘encouraged’ to participate in latest OBAMA housing recovery program, his 2012 program called HARP 2.0. The HARP program was a ‘quid pro quo’ for relieving from pending massive liability action by the States. But HARP 2.0 is, in final analysis, just another ‘banker subsidy’ program. Not only are the big mortgage banks protected from further legal suits, but they are profiting nicely from the program. In exchange for refinancing homeowners in negative equity, the banks involved receive a commission of 5 ‘points’ (each point=1% of the value of the mortgage) from the quasi government mortgage agencies, Fannie Mae and Freddie Mac. Five points on a $500,000 mortgage refinancing amounts to a generous $25,000 fee paid to banks by the federal government for each refinancing. In turn, these costs incurred by Fannie and Freddie will have to be restored with funding from Congress and thus the taxpayer. HARP 2.0 remains as Obama’s latest centerpiece program for rescuing the millions of homeowners illegally foreclosed or in negative equity.
ROMNEY
Romney’s program for ending the Housing crisis includes the following measures: first, to sell the 200,000 estimated local government owned homes. Somehow that is supposed to help raise home values, according to Romney, but will actually increase the excess supply of homes on the market and thus further depress home prices in most cases. Another Romney proposal is a vague demand to ‘restart lending’ to credit worthy borrowers. How to force banks to lend to homeowners, when they have been clearly reluctant to lend to small-medium businesses, is not explained in the Romney proposals. Romney’s Housing solution also calls for major reform of the Fannie Mae-Freddie Mac government mortgage institutions as well as still further deregulation of mortgage lenders and banks—i. e. two long time conservative demands designed to further privatize and deregulate the housing market.
CONCLUSIONS
While there are several dramatic differences between the Obama and Romney economic programs, there are also several almost identical programs shared by both. Both favor major reductions in corporate taxes. Both advocate hundreds of billions in social spending cuts, including entitlement programs. Both are almost identical in their positions on Free Trade.
Concerning tax policies, both propose to extend much of the Bush tax cuts—Obama suspending the cuts for the top 3% and Romney eliminating tax credits for the working poor and lower middle class. Obama has proposed some minor tax loophole closings, while Romney proposes additional, massive tax cuts for investors and businesses on top of the Bush tax cuts. Obama’s deficit over the decade amounts to a sizeable $4-$6 trillion but Romney’s more than $10 trillion. Both mean massive cuts in social programs coming immediately after the November elections, with Romney requiring major middle class tax hikes as well. Obama’s budget is very generous to Defense, and Romney’s even more so. A big difference between the two exists with regard to healthcare programs, including Medicare and Medicaid. Romney wants to destroy Obama’s ACA immediately and Medicare eventually. Both appear quite willing to gut Medicaid spending, with Romney cutting other discretionary spending by additional trillions over the decade.
These comparisons mean that, regardless who is elected president, an historic reduction in social program spending is on the agenda for the weeks immediately following the November 2012 elections. Defense spending will be either totally or partly protected from the cuts. And taxes will be further reduced for corporations, tokenly raised for wealthy individuals, and most likely significantly raised for middle class and the working poor. Nothing of any significance will be done to address the Housing crisis and programs to create jobs will continue to fail to have much impact.
It is this scenario that has prompted this writer repeatedly to predict the likelihood of a double dip recession in 2013, especially if the Eurozone crisis continues to deteriorate and China and the rest of the global economy continue on a path to an economic ‘hard landing’. It is possible, if Obama is re-elected, the fiscal austerity coming in early 2013 may be delayed a year and effectively ‘back loaded’ to start taking its greatest effect a year later in 2014. But if Romney is elected and Republicans control either, or both, houses of Congress the more draconian austerity programs will take effect earlier in 2013. That alone will ensure a double dip recession. And if the Eurozone slides deeper in recession and banking instability, virtually guarantee a double dip.
Dr. Jack Rasmus
Jack is the author of the new book, “Obama’s Economy: Recovery for the Few”, April 2012, and host of the radio show, ALTERNATIVE VISIONS, on the Progressive Radio Network, PRN.FM, in New York, on Wednesdays at 2pm. His website is http://www.kyklosproductions.com and blog, jackrasmus.com. Copies of the book can be purchased at the website or blog bundled with a DVD and a 66 slide powerpoint slideshow on the current state and future direction of the US economy.

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FOR THREE CONSECUTIVE MONTHS NOW, APRIL TO JUNE, MAINSTREAM ECONOMISTS HAVE BEEN PARROTING THE POLITICOS’ SPIN MESSAGE, THAT GOOD WEATHER LAST WINTER IS THE CAUSE OF THE COLLAPSING JOBS GROWTH SINCE APRIL. THIS ANALYSIS BY METAPHOR IN LIEU OF REAL CONDITIONS IS CRITIQUED IN THE FOLLOWING, WHICH LOOKS AT THE REAL CAUSES OF LAST WEEK’S DISMAL JOB REPORT BY THE LABOR DEPARTMENT, THE THIRD IN AS MANY MONTHS (AND PREDICTED LAST WINTER BY THIS WRITER).

The US Labor Department released its monthly jobs numbers for June 2012 this past week. Once more the numbers showed a dramatic slowdown in job creation for the third consecutive month. Job creation averaged around only 80,000 a month for April to June, about a third of that in the 1st quarter, January-March period earlier this year.
The reason most often offered for the jobs relapse in June and for the past three months—the third such mid-year jobs relapse in as many years—is that the weather last winter quarter was the cause of the last three months’ dramatic drop off in job creation. As the argument goes, the ‘good weather’ of this past winter somehow drew forward the economic activity and therefore job creation that would have been otherwise created the past three months. That explanation, however, is nothing more than an excuse designed to avoid an otherwise more fundamental analysis why job creation has been collapsing once again in recent months.
Never mind that the last three months’ job creation collapse represents the third consecutive mid-year slowdown in job creation. If good winter weather were the explanation for the latest, 2012, such slowdown, then good winter weather should have been the explanation for 2010 and 2011. But those previous winters were quite ordinary. Second, if winter weather were the primary cause in 2012, then an inspection of those sectors of the economy—construction, agriculture, transport, retail—over the past six months should show significant jobs gain in the winter months followed by the exceptional collapse in jobs in those sectors this past April-June. But there is no such evidence, if one bothers to take a look at these potentially seasonal sectors.
The industries that might conceivably benefited seasonally from extraordinary better weather last winter—in effect pulling jobs into the winter quarter from this spring and thereby lowering net job creation this past three months—in fact produced very few additional jobs this past winter. We’re talking about around 20,000 jobs at most for all the preceding sectors noted—out of a reported total of 700,000 new jobs created in the winter quarter.
So if it wasn’t weather and seasonality that produced the 700,000 extra jobs over this past winter quarter, what then was responsible for that growth? Equally important, what then was responsible for the collapse in jobs the past three months, April-June, if it wasn’t winter weather effects? And will those real (non-weather) factors continue to have a similar impact on job creation going forward?
The ‘Good Weather’ Metaphor Explanation of Job Creation
When economists explain by resort to metaphor it is usually a good indication they have little idea as to what the actual causes may be.
The inordinate ‘good winter weather’ was no more responsible for job creation this past winter, and the consequence decline in job growth the past three months, than arguments that ‘sunspots activity’ can explain economic growth and job creation—i.e. an argument that in fact was once offered in the distant past by economists to explain economic growth despite its obvious ridiculousness. ‘The weather last winter’ thus represents a retreat by economists to past absurd modes of ‘analysis by natural metaphor’—in effect an excuse substituted for a real explanation and analysis of the sad state of the jobs market in the US today. Such explanations should be left to political and press pundits who are more inclined to avoid the facts than reveal them.
Actual Explanations of the Jobs Reports
So what might otherwise explain the 240,000 average job creation record of this past winter, followed by the dismal record of only 80,000 jobs a month on average created this past April-June?
The reasons are threefold and none has to do with weather hypotheses: (1) growing evidence of a problem with statistical methodologies used by the US labor department to estimate jobs; (2) the timing of policies, both fiscal and monetary, by the Obama administration and the Federal Reserve bank over the past three years; and (3) the convergence of global economic developments.
1. A Problem with Statistical Estimation?
As this writer has been arguing in publications the past six months, the 240,000 average jobs creation this past winter did not represent actual job creation. It was the outcome of statistical estimation methods by the US labor department that have consistently over-estimated job creation over the winter quarter for three consecutive years now. Without repeating the arcane details here (see the blog, jackrasmus.com), suffice to simply say those methodologies are based on an economy pre-2007, and are now, in today’s relative economic stagnation in the US (and increasingly globally), no longer as accurate and should therefore be fundamentally overhauled.
2. Ineffective Policy Responses to the Labor Market
The recent collapse in job creation is more obviously due, in part, to policies both fiscal and monetary of the past three years: specifically, with the timing of government policies in 2009, 2010 and 2011 that provided an insufficient dose of tax-spending stimulus earlier in the year that quickly dissipated by the following mid-year. The Obama administration has introduced three ‘fiscal stimulus programs’ (tax cuts and spending) to date that provided in each case a limited boost to the economy around year end that subsequently ran out of steam by the following mid-year. The reasons for the rapid dissipation of the stimulus are only in part due to the inadequate magnitude of each of the three programs. The rapid fading of the stimulus has been due even more so to the problems of composition and timing at the heart of the recovery programs.
Concerning monetary policy, the past three years have also been characterized by three Federal Reserve ‘quantitative easing’ policy programs that have also been ‘seasonal’ in their timing and impact, and subsequently therefore dissipated in their effects by mid-year as well.
Considering just the current year, 2012, an analysis that doesn’t rely on the excuse of ‘good winter weather’ must ask what happened in the winter quarter of this year that resulted in the definite slowing thereafter of the US economy, and job creation, the past three months? Among the possible real explanations, there was the spike in gasoline prices in the first half of this year, together with other inflation factors, that hit median households hard in the winter, with after-effects on consumer spending just felt in recent months. Food prices, utility cost increases, health insurance premium hikes, rental costs escalation—to name but the most obvious—are now having a major influence on real disposable income growth for the majority of US households. This is now showing up in recent months’ retail sales weakness and service sector spending slowdown, the latter of which represents 80% of the economy.

 
Service sector jobs rose by about 250,000 in both the first and second quarters. But the composition of those jobs created in this sector differed significantly in the 2nd quarter compared to the 1st. Service sector jobs this past quarter have tended to be heavily weighted toward part time and contingent work. Since March more than 500,000 involuntary part time (i.e. non-agricultural) jobs have been created, along with more than 100,000 temps and who knows how many middle management & professionals laid off who immediately designate themselves as ‘self employed’ and thus avoid the unemployment rolls.

 

Given weak to non-existent real disposable income growth, businesses have begun to add only part time jobs in the 2nd quarter in anticipation of a potential slowdown in services spending. Simultaneously, they are also eliminating full time jobs, as more than 700,000 full time jobs were eliminated the past three months. In other words, a kind of ‘churning’, from full time to part time employment has been occurring in recent months. And when that occurs, few net jobs are added.
Another ‘non-weather’ factor explaining the real slowing of job creation the past quarter is attributable to the global slowdown in manufacturing that inevitably began to penetrate the US manufacturing sector by the late spring 2012. Much has been hyped since late 2010 by large corporations and the Obama administration about how manufacturing is ‘going to lead the way’ to recovery and job creation in the US. But according to the Labor Department’s Table B-1 for June, manufacturing jobs grew by only 68,000 over the winter quarter, and since March by half that, at 34,000. Moreover, virtually all that roughly 102,000 manufacturing job creation in the first half of 2012 represents jobs for managers, supervisors and other professionals in the industry. Net job creation involving production and non-supervisory workers in manufacturing have actually declined by 170,000 from March through June 2012. This represents clear evidence that employers are now, effective the 2nd quarter, cutting back on production employment as the global manufacturing slowdown begins to impact the US in recent months. That job cutting will accelerate in coming months, given that new orders for factory goods in June fell at the worst rate since 2009.
A third real, non-weather, explanation involves job hiring trends involving government workers. Their numbers have been steadily declining over the past three years. Especially hard hit has been local government, and therefore teachers. Layoffs and decline in jobs reported for this group does not occur in the winter quarter, but does in the spring quarter. That also therefore, in part, explains the 2nd quarter fall off in job creation. But the ultimate causes here are government policies since 2009. Obama policies provided subsidies to the public sector to prevent (not create) job layoffs for one year. After mid-year 2010, those subsidies were gone and state and local governments began deep spending cuts that continue to the present.
Finally there is the Construction industry. Good weather also does not explain what’s happened with jobs in the industry. Employment in Construction declined by 13,000 in the industry over the 1st quarter, as typically occurs in winter months. But it has continued to decline, on a seasonally adjusted basis, from April to June, by another 42,000. That’s because there is no job recovery in Construction. The press has been contorting itself to try to pry some evidence that somehow housing is recovering. Because home prices did not fall last month, and home sales are bouncing along a bottom, according to the press that somehow constitutes recovery. However, the only evidence of growth in the industry is apartment construction—predictable since tens of millions have lost their homes since 2007 and must live somewhere. But construction employment has been unaffected by this ‘faux recovery’ in construction. Construction jobs declined by 13,000 in the first quarter of 2012, and then another 42,000 in the second.
When economists who should know better simply repeat the ‘weather’ as responsible for the April-June collapse in the monthly rate of job creation they in effect parrot the prevailing ‘spin’ of politicians and their media friends who prefer the public does not point fingers at their policy failures ultimately responsible for the jobs collapse. There has not been a bona fide job creation program since the current recession began. There have been massive tax cuts for business that never got invested to create jobs; there have been bail outs of banks who were supposed to lend to smaller businesses to invest and create jobs but didn’t; and there has been a turning over of jobs programs to manufacturing corporate CEOs, like GE’s Jeff Immelt, whose idea of a jobs program is more free trade and more deregulation, in exchange for hiring a couple thousand jobs temporary status workers in the US at half pay.
3, Converging Global Economic Slowdown
Combining with the preceding real explanations is an accelerating slowing of the global economy, led by a contraction in manufacturing across all major economies. This slowing began well back, in late summer 2011, recovered slightly and now is trending down once again more strongly. This time it also includes China, Brazil, India and other economies—in addition to the Eurozone wide recession now well underway and the clear slowing of the US economy in recent months as well.

Manufacturing was touted as the solution to job creation in late summer 2010, and the Obama administration made a concerted shift toward it as the solution to a then faltering recovery. That shift has produced little to nothing in terms of job creation, however. The third jobs relapse in as many years is therefore on the horizon this summer.
But one doesn’t need a weatherman to know which way the jobs winds are blowing in America.

Jack Rasmus, July 8, 2012

Jack is the author of the April 2012 book, ‘Obama’s Economy: Recovery for the Few’, available at discount at this blog. Click on the book icon on the right sidebar.

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Friday, June 1, is a date that marks a shift in the public consciousness of the state of the US and global economy.  What was touted for months over the past winter as a rebound taking hold in the US economy and the assertions that the US economy was ‘exceptional’ and would not suffer the slowdowns underway in Europe, China and the rest of the world – were all swept away on June 1 by the May US jobs report, a downward revised U.S. GDP numbers for the first quarter 2012, as well as by the rapidly deteriorating banking and general economic situation in the Eurozone.

Why Economists’ Jobs Forecasts Consistently Miss Their Mark

On the jobs front, Friday’s labor department data showed a growth of only 69,000 jobs, while the preceding month’s jobs numbers were revised downward for April from 115,000 to only 77,000. Both months were originally officially forecast by mainstream economists to show jobs growth of 150,000 and 180,000 respectively. A day earlier, the first quarter GDP numbers were also adjusted downward from 2.2% growth to only 1.9%, a decline that was totally unexpected by most economists, who had been forecasting that the current quarter, April-June, GDP would come in around the 2.5% to 3% range. But now will almost certainly end up in the 1.5% or even lower range, given a likely more rapid slowing in June.

One cannot miss jobs and GDP forecasts that badly without something being fundamentally wrong with forecast methodologies employed by most mainstream economists today, a point this writer has been making publicly repeatedly since last December.

The main excuse being offered today by economists for missing their recent jobs and GDP forecasts so badly is ‘the weather’.  The exceptionally good weather this past winter, it is argued, moved normal spring production and jobs up by several months into the winter numbers. Another favorite excuse now appearing is that growing uncertainty about the coming ‘fiscal cliff’ (read: excessive deficits) after the upcoming November elections has resulted in an unanticipated slowing of business spending, and therefore of new investment and consequent job creation.

But the extremely poor jobs numbers for May and April have very little to do with the ‘weather this past winter’. Nor with business confidence impacted by anticipated deficits and debt levels after the November elections. It’s just bad forecasting, the result of cherry-picking the most recent jobs data to forecast long term, but without considering the broader economic picture and ‘broad turning points’ in the US and global economy.

In part, the winter months’ jobs numbers were grossly overestimated statistically for several reasons. As this writer has repeatedly noted in this and other publications, the jobs numbers during this past winter were suspect in the first place, largely boosted by questionable statistical adjustments based on methodologies that were more relevant pre-2007, but less so today. When this past winter’s jobs reports, averaging more than 200,000 a month are ‘smoothed’ out with April and May jobs results, what remains is a picture of continuing stagnant jobs growth since the economic relapse of last summer 2011.

To the extent jobs growth did occur over the winter, that growth was due to business spending, the nature of which was clearly unsustainable beyond a few months. Very short term, temporary factors were at work at the time that were clear for anyone willing to look: (1) excessive inventory build-up after the general inventory spending collapse of last summer; (2) business one time leveraging of end-of-year tax cuts; and (3) auto sales recovering from summer 2011 supply disruptions combined with deep year-end price discounting by the auto companies. None of which were long-term sustainable, as recent data are now beginning to show. And none of all this has anything to do with ‘business confidence’ falling due to growing concern about deficits and debt levels post-November elections.

Since August 2011, including the questionable brief jobs surge over the winter, the U.S. economy on average has been creating jobs at a pace of barely 125,000 a month, i.e. not even sufficient to absorb new entrants into the labor force. The reasons for the long term stagnation of job creation in the U.S. are simple. There is still no real recovery in new housing and construction spending in the U.S.; the Obama administration’s policies subsidizing manufacturing and exports since 2010 have produced a mere dribble of new jobs (even though many jobs created are at half pay); state and local governments continue to lay off tens of thousands every month; hundreds of thousands of workers continue to leave the labor force monthly; bank lending to small businesses never really recovered from 2009 lows and is slowing once again; and real median household incomes have continued to decline in 2012, devastated in recent months a third time in as many years by rising gas, food, healthcare, education costs, and other prices.

Specifically, household consumption – the most important economic sector – continues today at best to stumble along, kept from contracting sharply only by rising credit card balances, historically cheap auto financing, rising household dis-saving, and, for the wealthiest 10%, by the ups and downs of the stock market (now in another sharp down phase until the Fed announces another ‘QE3’ program later this year). But there is no basic household income growth for the bottom 80%, nearly 100 million, households in the U.S. Median household income has fallen by more than 5% the past few years, continuing what is clearly a long term trend that began more than a decade ago in 2001, and thus far resulting in a decline of more than 10%.

Credit card, debt-driven, dis-saving-based consumption cannot be sustained. And without fundamental household income growth for the bottom 80%, combined with fundamental reduction of household debt loads, no sustained jobs recovery will occur.

The 1st Quarter GDP Statistical Revision

A similar critique applies to mainstream economists’ winter predictions that GDP would continue to rise in the second quarter higher than the first quarter’s initial 2.2% estimate.

As previously noted, GDP growth in the fourth quarter was largely inventory driven or a result of one-time year-end business spending designed to leverage business tax cuts. To the extent household spending occurred, it was debt and dis-saving driven. Both inventory spending and business spending thereafter slowed significantly in the first quarter, while government spending at all levels continued to decline significantly.  Manufacturing and exports grew only modestly in the quarter.

But economists nonetheless predicted manufacturing and exports would accelerate in the second quarter, jobs growth over the winter would raise income and household consumption, and the ‘warm winter’ construction trend finally signified a turnaround of the housing sector and its recovery and contribution to growth in the spring. But none of this happened after February.

Almost all economists underestimated the impact of first quarter accelerating gas and fuel prices on consumers’ spending.  The run-up in gas prices was largely the consequence of global speculators’ driving up the price of oil, combined with US refineries conveniently shutting down refinery plants simultaneously (which they typically do when there’s a surge in global crude oil prices), plus retail stations then holding prices at the pump up while crude and refinery prices fall. This coordinated supply chain development has occurred repeatedly since 2008. That year surging oil (and commodity) prices drove inflation to excess levels, despite a recession in the US already underway. It happened again in 2010, and again in 2011. The impact of rising gas prices on the US economy is generally underestimated by economists. The impact of the first quarter 2012 surge in gas prices on the current slowing of the US economy has been significant – and was generally unheeded by economists in their GDP growth projections earlier this year.

Nor were sanguine forecasts for the first quarter of accelerating jobs growth realized. Instead, jobs growth in April and May collapsed, as noted above – and with it, the projected income and consumption recovery. Home sales and home prices further disappointed, confirming no real recovery in construction. Finally, manufacturing and exports began to hit the wall of a global manufacturing slowdown, most serious in the Eurozone, but occurring in China, Brazil, India and elsewhere as well.

Already by June, bank research departments project a lower estimate for GDP growth for the second quarter, and even the third, July-September. But just as they underestimated the gas spike effect and the jobs collapse earlier, they are similarly underestimating the general impact of the Eurozone crisis and the global manufacturing slowdown now beginning to worsen rapidly.

The Eurozone Crisis and US Economic Contagion

 The Obama administration’s first and second economic recovery programs, costing nearly $1.7 trillion in tax cuts and spending in 2009-2010, failed to produce a sustained economic recovery by 2011. The third recovery program, dribbling out piecemeal since September 2011 and culminating in the absurd ‘JOBS’ bill and HARP 2.0 housing plan, is now proving no more effective than the previous two programs in 2009 and 2010.

At the center of Obama’s third recovery program has been a focus on manufacturing-exports, run by General Electric’s CEO, Jeff Immelt.  At the request of the big multinational corporations in 2010, Obama delivered more free trade agreements, more business deregulation, more pro-US business trade assistance, backed off from insisting they repatriate offshore profits and pay taxes, and introduced other manufacturing-centric US corporate assistance. This manufacturing-exports strategy was purportedly to generate the recovery that the 2009-10 first two programs did not. Manufacturing would ‘lead us out of the recession’, Obama and business announced. But it hasn’t – and it won’t.

Manufacturing now represents too small a total of the US economy at only 12% and employs only 11 million out of a US labor force of more than 150 million. The US dismantled and shipped its manufacturing base overseas over the past three decades. Multinational corporations admit that, in the last decade alone, they reduced employment in the US by 2.7 million jobs and hired 2.4 million offshore. Approximately 8 million jobs in manufacturing in the US have been lost just since 2000. Yet manufacturing, and the even smaller sector of manufactured exports, was supposed to generate the recovery in 2011-12 that still has not occurred.

Manufacturing did revive modestly since early 2011 but, as this writer predicted in late 2011, has now run headlong into a rapidly declining global manufacturing sector. The Eurozone’s manufacturing and exports have plummeted since late last year. Virtually all Eurozone economies’ manufacturing indicators (PMI) are also now declining. Moreover, China, Brazil and other key economies’ manufacturing and exports sectors are contracting as well. Manufacturing and exports are rapidly slowing across the world.

There is no therefore way US manufacturing and exports can continue to grow in a global economy where they are rapidly declining just about everywhere else. Meanwhile, housing and construction in the US is still bumping along a depression level bottom, with only apartment building showing any signs of growth. And state and local government spending continues to contract in most regions. Along with stagnant jobs growth, this is a scenario for slower growth in what remains of 2012, not a recovery.

Some mainstream liberal economists argue the Eurozone and China’s declining manufacturing and exports sectors will not negatively impact the US economy, since trade in goods is not that large a part of the US economy. But the flow of goods is not the key transmission mechanism for the contagion of the Eurozone’s accelerating recession impact on the US economy. The key transmission mechanism for the contagion is the banking system. Bank lending is already freezing up in Europe, as all the economies there (except Germany) have already crossed the threshold into what will prove a deep and protracted recession. Potential bank losses will likely spread from Spain and Greece to elsewhere in Europe, in particular Italy and France. Those losses and the lending freeze will spread to the US, where bank lending, already slowing to small and medium businesses again, will decline still further in the US, resulting in a slowing US economy in turn.  Meanwhile, the US corporate bond markets and bond issues are slowing, junk bonds in particular. That will result in a further US slowdown in business spending and job creation.

 

As this writer concluded last October 2011 in the book, ‘Obama’s Economy: Recovery for the Few’, which predicted a steeply slowing global economy in 2012 driven by the Eurozone and a ‘hard landing’ in China, Brazil, and elsewhere, “The U.S., Eurozone and U.K. economies are tightly integrated, not just financially, but in a host of other economic ways. What happens on either side of the Atlantic soon produces a similar reaction on the other.”

In the months to come, the jobs markets in the US will continue at best to stagnate; apart from seasonality factors, the housing market will continue to ‘bump along the bottom’ as it has for four years now; government spending will continue to decline; and business spending, bank lending, manufacturing and exports will continue to slow, while consumers will continue to rely on credit and dis-saving to maintain consumption. GDP as a result will continue to lag.

And when US political elites gather immediately after the November elections, both political parties’ leaders will agree by December 31 to cut $2-$4 trillion more in spending in addition to the $2.2 trillion already scheduled to begin in January 2013. But they won’t call it austerity, which is the term for the deficit cutting in Europe from Greece to the U.K that is driving their economies into a deeper crisis. US capitalists and policy makers are more clever than their European counterparts. The US code words used for austerity will be ‘grand bargain’ and ‘fiscal cliff’.

Jack Rasmus

Copyright June 2012

Jack is the author of the April 2012 published book, “Obama’s Economy: Recovery for the Few”, published by Pluto books and distributed by Palgrave-Macmillan. His blog is jackrasmus.com and website: www.kyklosproductions.com

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