I’m about to take a few weeks off. If you are, too, we’re in the minority. A Conference Board poll last April found fewer than 40 percent of Americans planning a summer vacation.
Of course, for most Americans, there’s not much summer vacation to begin with. The average American employee gets a total of 14 days off each year. If you want to take a few of them around Thanksgiving, between Christmas and New Years, and maybe when the kids are home on spring break, summer vacation is already practically gone.
Those 14 days, by the way, are the fewest vacation days in any advanced economy. The average French worker gets 37 days off annually; In Britain, it’s 26.
And even when we take those 14 days, we don’t always get paid for them. The Bureau of Labor Statistics tells us 1 out of 4 workers gets no paid vacation days at all. Every other advanced nation — and even lots of developing nations — mandate them.
On top of all this comes the current economic squeeze. That figure of 40 percent of Americans planning a summer vacation is the lowest in 30 years.
Not incidentally, consumer confidence in the economy is the lowest it’s been in 28 years. In other words, there’s a correlation between the small number of Americans taking a vacation this summer and this very bad economy.
It’s not that we’re too busy to vacation. Just the opposite: There’s not enough work go around. Which means we don’t dare leave work, lest we lose us a customer who might just happen to want us when we’re gone. Or we could even lose the job, because employees on vacation might seem expendable to an employer looking for a way to cut costs.
Despite all this, you need a summer vacation. I do, too. I’ll return in August.
I’m about to take a few weeks off. If you are, too, we’re in the minority. A Conference Board poll last April found fewer than 40 percent of Americans planning a summer vacation.
The Federal Reserve Board’s “beige book” for June and July offers a clear explanation for why the economy has slowed to a crawl. It shows American consumers cutting way back on their purchases of everything from food to cars to appliances to name-brand products. As they do so, employers inevitably are cutting back on the hours they need people to work for them, thereby contributing to a downward spiral.
The normal remedies for economic downturns are necessary. But even an adequate stimulus package will offer only temporary relief this time, because this isn’t a normal downturn. The problem lies deeper. Most Americans can no longer maintain their standard of living. The only lasting remedy is to improve their standard of living by widening the circle of prosperity.
The heart of the matter isn’t the collapse in housing prices or even the frenetic rise in oil and food prices. These are contributing to the mess but they are not creating it directly. The basic reality is this: For most Americans, earnings have not kept up with the cost of living. This is not a new phenomenon but it has finally caught up with the pocketbooks of average people. If you look at the earnings of non-government workers, especially the hourly workers who comprise 80 percent of the workforce, you’ll find they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Per-person productivity has grown considerably since then, but most Americans have not reaped the benefits of those productivity gains. They’ve gone largely to the top.
Inequality on this scale is bad for many reasons but it is also bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.
This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. But they have now run out of such coping mechanisms. As I’ve noted elsewhere, the first coping mechanism was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.
So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.
But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third coping mechanism. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. And now, with the bursting of the housing bubble, the piggy banks are closing. Americans are reaching the end of their ability to borrow and lenders have reached the end of their capacity to lend. Credit-card debt, meanwhile, has reached dangerous proportions. Banks are now pulling back.
As a result, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there’s not enough purhasing power in the economy to buy all the goods and services it’s producing. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.
The only way to keep the economy going over the long run is to increase the real earnings of middle and lower-middle class Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway. Nor is the answer to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We’ve tried that and it hasn’t worked. Nothing has trickled down.
Rather, the long-term answer is for us to invest in the productivity of our working people — enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding our infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state, and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.
McCain and Obama represent two fundamentally different economic philosophies. McCain’s is top-down economics; Obama’s is bottom-up.
Top-down economics holds that:
1. If you give generous tax breaks to the rich, they will have greater incentive to work hard and invest. Their harder work and added investments will generate more jobs and faster economic growth, to the benefit of average working people.
2. If you give generous tax breaks to corporations, reduce their payroll costs, and impose fewer regulations on them, they will compete more successfully in global commerce. This too will result in more jobs for Americans and faster growth in the United States.
3. The best way to reduce the energy costs of average Americans is to give oil companies access to more land on which to drill, lower taxes, and lower capital costs. If they get these, they’ll supply more oil, which will reduce oil prices.
4. The best way to deal with the crisis in credit markets is to insure large Wall Street investment banks, as well as Fannie and Freddie, against losses. This will result in more loans at lower rates to average Americans. (Bailing them out may risk “moral hazard,” in the sense that they will expect to be bailed out in the future, but that’s a small price to pay for restoring liquidity.)
All of these propositions are highly questionable, especially in a global economy. The rich do not necessarily invest additional post-tax earnings in the United States; they invest wherever around the world they can get the highest returns. Meanwhile, large American-based corporations are doing business all over the world; their supply chains extend to wherever they can find low labor costs combined with high output, and their sales to wherever they can find willing buyers. Oil companies, too, are operating globally and set their prices largely at the point where global supply meets global demand. Additional drilling here creates environmental risks for us but generates the same marginal benefits for consumers in China, India, and Europe as we might enjoy (most likely not for a decade or more). Credit markets are global as well, so the beneficiaries of bailouts of large investment banks and lenders are also worldwide while the potential costs (including moral hazard) fall on American taxpayers.
This isn’t to argue that top-down economics is completely nonsensical. America is, after all, the world’s largest economy. So whatever helps the top of it will to some extent trickle down to everyone else here, and whatever hurts the top is likely to impose some burdens all the way down.
But in a global economy, bottom-up economics makes more sense. Bottom-up economics holds that:
1. The growth of the American economy depends largely on the productivity of its workers. They are rooted here, while global capital and large American-based global corporations are not.
2. The productivity of America workers depends mainly on their education, their health, and the infrastructure that connects them together. These public investments are therefore critical to our future prosperity.
3. Global capital will come to the United States to create good jobs not because our taxes or wages or regulatory costs are low (there will always be many places around the world where taxes, wages, and regulatory costs are lower) but because the productivity of our workers is high.
4. The answer to our energy costs is found in the creativity and inventiveness of Americans in generating non-oil and non-carbon fuels and new means of energy conservation, rather than in access by global oil companies to more oil. So subsidize basic research and development in these alternatives.
5. Finally, in order to avoid a recession or worse, it’s necessary to improve the financial security of average Americans who are now sinking into a quagmire of debt and foreclosure. Otherwise, there won’t be adequate purchasing power to absorb all the goods and services the economy produces. (As to “moral hazard,” the financial institutions that did the lending had more reason to know of the risks involved than those who did the borrowing.)
Listen carefully to the economic debate in the months ahead in light of these two competing economic philosophies. And hope that the latter wins out in years to come.
It will soon dawn on Congress (although it may never dawn on the White House) that we need a much larger second stimulus package than is now being contemplated in order to give the economy the jump-start it needs and fill in for consumers who can’t and won’t spend more. My guess is that this second stimulus plan, including infrastructure, will ultimately reach $200 billion or more.
A special word about infrastructure spending. Not only is the nation sorely in need of it — given deferred maintenance on roads and bridges, water and sewage systems, levees, and many of our ports, and the increasing need for public transportation — but spending on infrastructure generates much more growth than cutting taxes. (This point, incidentally, was stressed in a paper earlier this year by Mark Zandi, chief economist at Moody’s Economy.com and, not incidentally, an economic advisor to John McCain.)
Socialized capitalism of the sort the Fed and the Treasury are now practicing, consisting of private gains and public losses, is untenable. On the other hand, it’s also true that giant Wall Street investments banks as well as Fannie Mae and Freddie Mac are too big to fail. How to reconcile these conflicting principles?
Here’s a modest proposal: When taxpayers insure a giant entity against loss — as we now are with Freddie, Fannie, and Wall Street investment banks — those entities must agree that:
(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and
(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) — so that if and when the entities become profitable again, taxpayers are compensated for the risk they’ve taken on.
As we bail out Wall Street along with Freddie and Fannie and all the top financial executives who have been pocketing tens of millions a year, yet allow millions of homeowners and jobless Americans to sink, it’s worth contemplating what’s happening to the American economy and to our social safety nets.
What economists have called “The Great Moderation” - a period when the business cycle evened out, and neither inflation nor recession posed much of a threat- began in the mid-1980s, and now appears to be over. It was good when it lasted. But it led the nation to think we didn’t need much by way of social insurance.
No one knows for sure what caused the Great Moderation. Some had credited increased sophistication of financial markets and the wisdom of the Federal Reserve Board. Hindsight suggests it was more luck than anything else.
Well, folks, it turns out the great moderation was something of a fluke, and now tens of millions of Americans are in trouble with no safety net to help them.
That’s because the apparent end of the boom and bust cycles led us to assume the economy would no longer impose huge, unexpected, and arbitrary losses on large numbers of Americans. So we basically got rid of the safety nets. We abolished welfare, let unemployment insurance wither, and paid scant attention when corporations eliminated defined-benefit pensions and cut health insurance benefits. We even stopped worrying about the safety of small investors, allowing federal deposit insurance to shrink as a proportion of total savings (witness the recent bank run in California).
But now we have to rethink safety nets. Right now, nets are being spread for the wrong people. The giants of Wall Street along with Fannie and Freddie get bailed out but there’s still no relief in sight for most homeowners who can’t pay their mortgages. Corporations that don’t deliver on their pension obligations are helped but there’s nothing for retirees and small investors whose savings are drying up because of Wall
Street’s decline. Small investors are losing their shirts but the Fed stands by to help the biggest.
Yet I have to believe the end of the Great Moderation will eventually result in a broader safety net. Maybe not the old forms of social insurance, but new ones like universal health insurance, earnings insurance, and savings accounts in which the dollars you put away are supplemented by government dollars.
The very rich, fattest investors, and the biggest corporations don’t need safety nets. Now that the booms and busts are back, the rest of us do.
To set the record straight, I do not believe all playground bullies become right-wing Republicans when they grow up, nor do I think all right-wing Republicans were playground bullies when they were young. Nor, for that matter, am I at all convinced that left-wing Democrats are innocent of bullying, either as adults or when they were children.
I feel compelled to say all this because of a short interview I gave to Deborah Solomon of the New York Times Magazine, which was published last weekend. In it, I mentioned that I had been bullied when I was a youngster, mainly because I was very short. She then asked me “what do you think playground bullies grow up to be?” With my tongue planted firmly in my cheek, I answered “Right-wing Republicans.”
For the last few days my email has been inundated with angry messages from self-defined right-wing Republicans, taking umbrage at my remark. Apparently they did not see the humor in it. A majority of the emails have been civil, but a large minority have been, well, how shall I put it? Filled with the sort of epithets and threats I last heard on the playground.
John McCain today announced his first foreign-policy appointment, should he become president. He will name Phil Gramm Ambassador to Belarus. McCain’s decision apparently was precipitated by Gramm’s insight into the American economy, when he said Americans were suffering from a “mental recession,” and were “whining” about the economy. McCain obviously agrees with Gramm, because McCain himself said just a few months ago that a lot of the problems the economy is facing were “psychological” in nature. Just months before that, McCain said that the economy was making significant “progress.”
But sending Gramm to Belarus may not reduce America’s tensions with that part of Asia, or with Russia for that matter. Gramm may decide that Belarus is suffering from mental depression.
Fannie Mae and Freddie Mac, the two giant quasi-public housing lenders that together own or guarantee about half the $12 trillion in home loans outstanding, are heading into insolvency. No surprise. As housing prices continue to drop, more and more middle-class homeowners who got their loans from Fannie or Freddie are under water — owing more on their homes than their homes are now worth. And as the economy continues to go south, more and more of them can’t meet their loan payments.
While it’s true that most of their home loans were made before 2006 when lending standards were tighter, that doesn’t really matter because the rip-tide of this sinking economy is now hitting a much broader group of home owners.
Fannie and Freddie may not be technically insolvent yet, but I’m betting that if their lending portfolios reflected the true market prices of their loans they would be. That’s why their own investors are bailing out.
So who gets stuck with the tab? Investors in Fannie and Freddie have always believed that the loans issued by the two giants were guaranteed by the federal government but technically they aren’t. The guarantee has always been assumed but has never been put into law explicitly, and the liabilities have never been carried on the federal books. Yes, the companies’ charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default, and the two companies have access to the Fed’s so-called Fedwire payments system allowing them to access funding if needed. But these won’t keep the two afloat for long.
As a practical matter, we’re facing a Bear Stearns squared. Fannie and Freddie are way too big to fail — especially now. There’s no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again.
Here we have another example of socialized capitalism. The executives of Fannie and Freddie have been among the best paid in all of corporate America. We’re talking tens of millions a year in CEO pay alone. Fannie and Freddie are treated like giant investor-driven entities as long as they’re healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, the rest of us have to bail them out.
The great American jobs machine is grinding to a halt. In response, Congress has just extended unemployment benefits 13 additional weeks, over and above the 26 weeks normally provided. That’s good as far as it goes.
But most people who lose their job these days don’t qualify for any unemployment benefits at all.
How can this be? Simple. In order to be eligible, most states require you to have been working in the job you lost full time, and for a certain number of years.
These requirements made sense decades ago when labor markets were far more stable – when most working people stayed in the same full-time job for years, and only lost it temporarily during the downdraft of a recession, picking it up again when the economy rebounded. And back then, one full-time breadwinner could keep a family whole. In those days, unemployment insurance counter-balanced recessions by keeping money in the pockets of working families.
But nothing is stable about today’s labor market. Every time the economy sinks, employers fire workers permanently. Even when the economy is doing fine, pink slips proliferate — although under these circumstances it’s easier to find a new job. All of which means a growing fraction of the labor force is in a job only a few years.
Meanwhile, full-time jobs are vanishing. More companies are contracting out their work. As a result, more people are doing several part-time jobs, or are self employed. They’re also more likely to be part of a couple whose family depends on two sets of paychecks.
So when times get tough, as they are now — and people lose a job after having it for only a few years or lose their part-time job or lose their client, or one member of a couple loses earnings — a family can be in real trouble. And there are no unemployment benefits, not even partial benefits based on the proportional loss of income from a part-time job, to help them. Or to help counter-balance the economy as a whole.
It’s a disgrace that most Americans who lose their jobs don’t qualify for unemployment insurance. It’s also bad for the economy because unemployment insurance is less effective as a counter-cyclical device. Congress should expand coverage (condition federal UI funding of states) so a majority of American families have some security in these perilous times.
George W. Bush took the largest budget surplus in history and transformed it into a giant deficit. McCain’s economic plan, announced today, will to even worse. McCain says he’s going to balance the budget by the end of his first term (actually, he didn’t literally say that – he just “demanded” it – implying that a Democratically-controlled Congress would be ultimately responsible if it didn’t happen). And then McCain came up with numbers that will blow the deficit into the stratosphere.
The non-partisan Congressional Budget Office projects that the budget deficit will be $443 billion in 2013, the end of the next president’s first term, if Bush’s tax cuts are made permanent (which McCain pledges to do). So start with this $443 billion hole. Now add in McCain’s promise to cut corporate taxes by a hundred billion a year ($4 billion of this for American oil companies, more than a billion for Exxon-Mobile alone). Then add in McCain’s promise to get rid of the Alternative Minimum Tax, designed to ensure that the very rich pay at least a minimum percent of their income in tax. Obama would properly index it to inflation but McCain will let the rich pay as little as they can get away with. Non-partisan tax experts put the ten year cost of this at $1 trillion. All told, McCain promises more than $650 billion of new tax cuts per year. (That doesn’t even include McCain’s promise to allow corporations to immediately expense all their investments – which, he asserts, would add nothing to the budget deficit at all!)
Who gets all these cuts? Mostly, the very rich and big corporations. The non- partisan Tax Policy Center estimates that 25 percent of McCain’s cuts would go to people earning over $2.8 million a year (the top one-tenth of one percent). Each would get an average tax cut of $269,000, over and above what George Bush gave them.
Back to McCain’s promise to balance the budget by the end of his first term. The big question is how he proposes to fill the giant budget hole he’s dug for himself, over and above the $443 billion already there. Answer: He doesn’t say. He calls for $160 billion in unspecified spending cuts, and unspecified “reform” of entitlements. Whaaaa?
Supply-side economics is one of those unfortunate half-brained theories actually to have been tried in practice, and failed miserably. Now we have a candidate for president of the United States who says to the American people, in effect: I know you know supply-side economics is a crock. Well, I’m going to do the biggest supply-side tax cut in history, mostly for corporations and the well-to-do. And I’m going to tell you I’ll balance the budget. If you believe this, you’ll believe anything.
Total job losses since the first of the year are now 438,000. That’s a loss of 73,000 a month. The economy needs to CREATE 125,000 jobs a month just to keep up with population growth.
In other words, this hole is getting deeper.
Consumers have no money left. This is the first consumer-led recession in over twenty years. Consumer-led recessions are worse than the normal kind, where the Fed has overshot by raising interest rates too high or corporations have pulled back their spending. Consumer-led recessions are deeper and longer, which makes the case for major infrastructure spending. (The normal worry with infrastructure spending as a stimulus is the lag effect — by the time the spending gets into the system and creates jobs, it’s too late. But not this time.)