Thursday, September 30, 2010

Job Creation is a Function of the Private Sector, Not the Government

The woeful state of the US economy (particularly unemployment) will have a huge impact on November's mid-term election. Elections are won and lost over the state of the economy. Remember the famous 1992 Clinton campaign slogan, "It's the economy, stupid?"

However, the nation's dire unemployment problem has spurred a strange political response from the GOP, which is blaming it all on President Obama. After the $787 billion stimulus program, the Republicans are asking, Where are all the jobs?

That because Christina Romer, head of the White House Council of Economic Advisors, claimed that the stimulus would keep unemployment at 8%.

Swing and a strike.

But it is very curious that the GOP is calling on — even expecting — the government to create jobs. It flies in the face of their core belief that government is the problem and should get out of the way. Republicans have always espoused the notion that job creation is best left to the private sector. And rightfully so.

After all, with more than two million civilian employees, the Federal Government, excluding the Postal Service, is the nation's largest employer, according to the Bureau of Labor Statistics.

That surely isn't something the Republicans endorse. No one should. It's a drain on the private sector, meaning the productive economy.

The hard truth is that there's little Washington can do to spur the creation of permanent jobs.

Aside from additional stimulus spending for our nation's crumbling infrastructure (an option Republicans strongly oppose), which would create temporary construction jobs, the government can only affect the unemployment problem by hiring even more federal employees to its already bloated roster.

Hiring more federal employees clearly isn't the solution. The federal government could also increase its purchase of goods and services, but it is already running unsustainable deficits. And once again, that is supposed to be the function of the private sector in a capitalist economy.

The great American job-creation machine always has been, and will continue to be, a private enterprise. As it should be. The Republicans surely know this. It has always been their mantra.

Ultimately, what creates jobs? Profits. The government does not create jobs. And neither does the Fed. Profitable companies create jobs and expand their capacity to hire more workers when they are optimistic about the outlook for profits.

But, right now, employers are not feeling particularly optimistic. And that is why private sector hiring is occurring at a glacial pace.

Another unfortunate reality is that job creation has been slowing for decades.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

So, we are in the midst of a rather ugly trend.

Nearly 15 million Americans are presently unemployed. According to economist John Williams, when part-time workers who want full-time work are added to the number of unemployed, the under-employment rate reaches 22%. Millions of those jobs are never coming back. They are outmoded and have been permanently outsourced.

Sadly, we are years — perhaps a decade or more — away from what was previously perceived as normal or acceptable unemployment.

The government may view a 5% unemployment rate as "full employment," but short of hiring 15 million Americans in an FDR-like Works Progress Administration program, there is not much the government can do about the unemployment problem.

However, Republicans have spent the last 75 years criticizing, discrediting, and trying to dismantle FDR's New Deal. Yet, what they won't admit is that they have no plan of their own, no alternative.

There is nothing they can do about unemployment either — other than blame it on Obama.

Wednesday, September 22, 2010

Like Rats Fleeing a Sinking Ship

The President's Closest Economic Advisors are Abandoning Him As Economic Problems Continue To Mount

When a ship is going down, even the rats know to bail out before it sinks.

First it was Budget Director Peter Orzag, in June. Then it was Christina Romer, head of the White House Council of Economic Advisors, in August. And now Larry Summers, director of the National Economic Council, has announced he is leaving the Obama Administration.

Orzag is already gone. Romer will leave on September 3. And Summers will exit by the end of the year.

Their departures leave a huge vacuum in the Obama administration's economic policy team — just before the midterm election and as hopes of a recovery are fading fast.

You have to wonder if Treasury Secretary Tim Geithner will be next.

Recently, Orzag and Romer both publicly advocated plans that conflict with the White House's.

In a New York Times' column, Orzag called for all of the Bush-era tax cuts to be extended for two years, including rates for the wealthiest taxpayers, which the administration wants to phase-out for deficit reduction. Orzag also said all of the tax cuts should be allowed to expire in two years for the sake of the nation’s budget.

In her last major address for the administration, Romer said that the government should “spend more and tax less” in helping the economy.

Yet, the White House knows that more stimulus is political suicide with a $1.5 trillion deficit this fiscal year. Even though our nation's infrastructure is in shambles, stimulus has suddenly become a four-letter word.

The President's advisors have seen the writing is on the wall; the economy is not coming back any time soon. And when (or if) it does, it will look very different than it did in the past. Our nation's problems are structural and systemic. They are not going away and they will be very difficult to grapple with.

The national debt is $13.5 trillion, and counting. The fiscal 2011 deficit is projected to be $1.4 trillion. Meanwhile, tax revenues are plummeting due to unemployment and pay cuts. That means the deficit and debt problems will only worsen. As it stands, total public and private debt exceeds that of the Great Depression.

Social Security took in less than it paid out this year. Yet, the Baby Boomers begin retiring in mass in little more than a year, a tidal wave that won't crest for nearly two decades.

Medicare is projected to be insolvent by 2017.

The fastest growing US demographic is people over 85, an unproductive populous. They all require or receive Social Security and Medicare.

Manufacturing amounts to just 12 percent of GDP. Meanwhile, exports also contribute just 12 percent to GDP. Imports, which vastly exceed exports, result in diminished GDP. And the growing trade deficit (nearly $43 billion in July) results in both jobs and dollars flowing out of the US.

Two-thirds of the oil used by US is imported. Oil is a finite resource and global demand is outstripping supply. This does not bode well for an economy that is completely and entirely reliant on oil to function, much less grow. This reliance also negatively affects the trade deficit and results in billions of dollars leaving the US each and every month.

One out of every seven homes in the US was either delinquent or in foreclosure in the first quarter. It seems that the problem is getting worse; more Americans lost their homes to foreclosure in August than any other month on record, according to RealtyTrac. Bank repossessions were 25 percent higher than the previous August and 2 percent higher than the previous record, just set in May.

And the shadow inventory is growing. According to Morgan Stanley, 8 million foreclosure-bound homes have yet to hit the market. It will take years to work off all this excess.

Unemployment remains stubbornly near 10 percent, as nearly 15 million Americans are still unemployed. Job creation was actually negative in the last decade, and millions of those jobs are never coming back. They were outmoded, outdated and outsourced.

Both housing and employment are years away from returning to 2007 levels — perhaps more than a decade.

It doesn't matter which party wins the upcoming midterm election. It matters not who controls the White House or either branch of Congress. It's like rearranging the deck chairs on the Titanic.

Orzag, Romer and Summers have all seen the writing on the wall, and they know it spells misfortune. They've decided to get out now, before the ship goes down.

Saturday, September 18, 2010

One In Seven Americans Now Living In Poverty

The Census Bureau reports that 44 million Americans were living below the poverty line in 2009, or one in seven people — a rather remarkable statistic.

The share of people living in poverty rose to 14.3 percent in 2009 from 13.2 percent in 2008, the highest level since 1994.

The rampant unemployment associated with the Great Recession was largely responsible for the development, as the ranks of the poverty stricken grew by four million last year. And there is every indication that the trend is continuing this year.

At its pre-recession peak, in the second quarter of 2007, the net worth of American households stood at $65.8 trillion. As of the second quarter of this year, it was $53.5 trillion, a 19 percent drop.

According to the Census report, three million American families were only kept above the poverty line by unemployment insurance.

But even those with jobs are regressing. Median family incomes were 5 percent lower in 2009 than in 1999. The median US household income in 2009 was just $49,777. That's less than a thousand bucks per week.

"This is the first time in memory that an entire decade has produced essentially no economic growth for the typical American household," says Harvard economist Lawrence Katz.

For a family trying to pay for housing, medical insurance, food and utilities in a large metropolitan area, that sum won't go far. Last year, the average health insurance cost for a family of four was $13,375, according to the Kaiser Family Foundation and the Health Research & Educational Trust.

In 2009, the poverty threshold for a four-person family, including two kids, was about $22,000. That's a very loose definition of poverty. Imagine living in a large city, especially on the coasts, and trying to support four people on $22 grand. Good luck.

To cope with falling incomes and joblessness, many people have been sharing homes with family and friends. The Census study found an 11.6 percent increase in the number of multifamily households over the last two years.

The one in seven Americans living in poverty conflates with the nearly one in seven also on food stamps.

The number of Americans receiving food stamps had grown by more than two million just by the midpoint of this year, reaching 41.3 million people. And it is still rising.

Taken as a whole, all of this data points to the hardships now faced by millions of American families. Any reasonable person would only expect the ranks of the poverty stricken to continue increasing this year and into the foreseeable future.

The Great Recession is taking a brutal toll on our nation and it is changing the lives of millions of Americans for the worse. An entire generation may grow up with diminished hopes and expectations for the future.

"Clearly, the Census is setting the income level for their poverty measurement extremely low, and if you increase that measure by just a small increment, to $25,000 for a family of four, you are now looking at nearly 100 million Americans in poverty." - David DeGraw, AmpedStatus Report

Wednesday, September 15, 2010

Americans' Retirement Savings Look Bleak

In the midst of the Great Recession, the financial positions of millions of Americans have become unstable, to say the least. And the problems aren't just related to high unemployment and falling home prices.

Decades of stagnant wages and lives lived on credit have created long term consequences for vast numbers of people.

As has been the case for most of the past decade, the retirement savings of the typical American isn't healthy or adequate.

According to the nonpartisan Employee Benefit Research Institute (EBRI), nearly half of baby boomers born between 1948 and 1954 — and now between the ages of 56 and 62 — are at risk of not having enough money in retirement to pay for basic expenditures

According to a survey by EBRI this year, 43% of workers said they have less than $10,000 in savings. More disturbing, 27% of workers said they had less than $1,000 saved.

Many of these workers may have to rely solely on Social Security in their retirement years, or perhaps not retire at all. As it stands, 35% of Americans over 65 rely almost totally on Social Security alone, says Dallas Salisbury, President of the EBRI and the Alliance for Investor Education.

Many Americans put their retirement hopes in their homes, which were expected to continually appreciate until their retirement years. The plan for most was to then sell the home and live off the proceeds. Declining home values have made such plans seem less feasible, and retirees still need somewhere to live.

All of this points to a very humble, if not outright difficult, retirement for millions of Americans.

Social Security was never meant to be the sole means of retirement income. Rather, it was meant to be just one leg of a three legged support system also consisting of savings and a pension. Yet, the latter are quite rare these days as most companies have stopped offering defined-benefit programs.

The sad reality is that millions of Americans will be relying on rather meager income in their retirement years. At present, the average monthly benefit for the 53 million Social Security beneficiaries is just $1,066. That may go down if benefits are reduced by Congress. Either way, it won't go far.

And with a consumer-driven economy, this lack of funds will ultimately depress the nation's GDP. But that's another concern.

The lack of savings is not just some new phenomena driven by the recession either.

A 2002 USA Today/Gallup Poll also found that more than one-third of adults had no money saved in any type of retirement account. And half of all households had not saved a penny in the previous year. That was at the height of the go-go years.

Prior to the recession, the median amount held in the retirement accounts of Americans was just $2,000, according to the Bureau of Labor Statistics. It would hardly be surprising if that amount has since decreased.

No matter how you view it, the data just isn't comforting. And the latest research is equally grim.

The Center for Retirement Research at Boston College recently calculated what the average person between the ages of 32 and 64 have saved so far for retirement.

It found that Americans are $6.6 trillion short of what they need for retirement. That works out to an average of $90,000 per potential retiree.

Unfortunately, they called their estimate conservative. The center assumed a three percent rate of return on investments and it also assumed there won't be any changes to Social Security benefits. At present, neither of those seem like reasonable scenarios.

Furthermore, the center didn't include what the average retiree spends on health care. The researchers assumed that future retirees would spend every penny they had on retirement, leaving nothing for their heirs.

While that may be a concern for some children and grandchildren, the primary concern for millions of Americans is whether or not they'll have enough just to meet their basic, everyday needs in what were supposed to be their retirement years.

Friday, September 10, 2010

Falling Incomes & Prices Stoke Delation Fears

The Commerce Department reports that incomes fell in 49 of the country's 52 biggest metropolitan areas last year. The only areas that saw incomes rise were Washington, DC, San Antonio, Texas and Virginia Beach, Va. All three cities have a strong presence by the federal government or the military.

The decline in wages is a worrisome development. It coincides with a drop in prices; the Consumer Price Index has fallen three months in a row.

Both data points stoke fears of deflation.

Excluding oil, prices are climbing at a very slow 1.2 percent pace, much slower than the Federal Reserve would like. The Fed likes to keep interest rates below the inflation rate. But with the Federal Funds rate near zero, there is little wiggle room should prices continue to fall.

While falling prices might not seem like such a bad thing to the average consumer, falling wages are another thing altogether. Falling wages make debt repayment all the more difficult. And considering the size of consumer debt in America right now ($13.5 trillion), that would be a very bad thing.

The Labor Department announced that business productivity declined nearly one percent in the second quarter, and yet labor costs hardly rose. It was the first time that productivity declined in a year-and-a-half. The bad news for workers is that they are working more and barely being compensated for it.

After all the trillions the Fed has pumped into the economy and banking system over the past two years, the greater concern should be price inflation. But that is nowhere in sight.

To fend off signs of deflation, the Fed may continue to print money, and lots of it. And it will continue buying Treasuries as well — lots of them. Through its purchases of more government debt, the Fed hopes to keep money from draining out of the financial system.

But after lowering rates to nearly zero, pumping money into the Big Banks, and buying enough mortgage-backed bonds to drop the mortgage rate to record-low levels, the question is, What more can the Fed do?

Even if money is cheap and readily available, no one can force people to borrow. People with huge debts, falling wages, no jobs, or the fear of losing their jobs, will not be persuaded to borrow.

And therein lies the problem: our entire economy is based on borrowing and lending for economic growth to occur. Money is created through borrowing. Without borrowing, there is less money and no growth. Absent growth there are no jobs. And without jobs there is no recovery.

The fear of so many economists is that the US might follow Japan's path into a "lost decade" of our own.

And that is a disturbing and worrisome possibility at the moment.

Tuesday, September 07, 2010

Tony Robbins Issues Stock Market Warning

The US economy has suffered a real estate collapse, a banking crisis that led to a near systemic collapse on a global scale, a resulting credit crisis, the worst economic downturn since the Great Depression, and a lasting global recession.

Yet, despite continual declines in US gross domestic product and consumer spending, the stock market seems almost immune.

In fact, the Dow Jones remains above 10,000. How can this be? Consumers are deleveraging and the flow of credit has slowed. One in five Americans is unemployed or underemployed. It makes no sense.

For starters, banks have significantly reduced lending since 2008 (down about 18%, year-over-year, in 2009). Much of the money not lent ended up in the stock market, and the returns were pretty good for Wall St. — for a while.

Simply put, lots of new money was flowing into the stock market and pushing up the average.

But, for the most part, the stock market is driven by a herd mentality, not fundamentals. Over the past year-and-a-half, investors bid up the stock market in a delirious frenzy, hoping to recoup previous losses, or get rich from buying when the market was perceived to be low.

However, many US corporations have been making money by cutting costs and laying off workers, not by increasing revenues.

In reality, Wall Street is a pretty poor barometer of the economy’s performance since it is simply a bet on the future performances of a select group of companies listed on a few stock exchanges. And for the last decade, it has been a bad bet.

Over the past 10 years, stock returns are negative 5.4%. Adjusted for inflation, $1 invested in stocks in March 2000 is now worth just 60 cents.

Today the Nasdaq trades at less than half the peak it reached a decade ago.

The market has been nothing short of schizophrenic in the past year. Since last September, the Dow Jones has been up or down by 100 points a third of the time.

By some estimates, "high frequency trading" is responsible for close to 70% of all volume in US markets. Computers can track hot stocks and immediately buy up all available shares, subsequently selling them at higher prices. Millions of shares can also be dumped in just milli-seconds.

The markets are manipulated, and unfortunately there will be a lot of losers because of this.

Fortunately, some investors have caught on to this scam.

According to the Investment Company Institute, investors withdrew a whopping $33.12 billion from domestic stock market mutual funds in first seven months of 2010.

Many people see a crash coming in the next few months, among them noted life coach Tony Robbins.

Why is that significant? Because Robbins has built his career and reputation by being positive and optimistic. He's the guy that tells people they can achieve happiness and success, as long as they have the will and believe in themselves. He is not known for being dour or pessimistic.

Robins has become a millionaire by coaching other millionaires. He has friends in high places, and apparently some of them have recently given him an urgent warning.

And now Robbins has issued his own warning about the stock market and what lies ahead for the US. It's not good. You can see part one here and part two here.

As Robbins suggests, reach your own conclusions and make your own choices.

One way or another, the reality of the market is evident and by virtue of the facts alone, we've all been warned.

Saturday, September 04, 2010

Military Spending Must Be Slashed to Save America

In a previous article, I discussed the fact that two-thirds of the federal budget is comprised by Social Security, Medicare/Medicaid, payments to veterans, and interest on the debt.

That leaves Congress little wiggle room in trying to address continual budget deficits and the burgeoning national debt.

Aside from interest payments (which cannot, and will not, be avoided), the other items are social contracts, or promises that have been made to the American people.

It is conceivable, if not likely, that the retirement age will be raised from 66 to accommodate longer current life spans, and that the Social Security earnings cap may be lifted as well.

However, Social Security payments are recirculated back into the U.S. economy and increase domestic consumption. They boost consumer spending and overall GDP. Without question, these payments are massive and — due to the extraordinary size of the Baby Boom generation (76 million strong) — they are growing.

Yet, neither Social Security or Medicare/Medicaid is the single largest budget item or expenditure. Rather, that distinction would go to defense and Homeland Security. Taken together, the two add up to $706.4 billion in the fiscal 2010 budget.

Officially, spending on veteran’s medical care and pensions is classified as an entitlement expenditure, as opposed to part of the defense budget. If these items were included, the defense budget would be even more massive.

According to an analysis of the 2011 Federal Budget by the War Resister's League (an annual project), when the cost of two concurrent wars, veterans benefits, and the interest on the debt created by military spending are added to the current military budget, overall defense spending equals 48 percent of the total Federal Budget.

That's truly stunning.

Despite the fact that the Cold War ended two decades ago, the U.S. still spends more on its military budget than all of the other nations of the world — combined.

The U.S. is presently maintaining its global military empire at an untenable expense. More than a third (500,000) of its 1.4 million active duty military personnel are deployed on over 700 bases in more than 150 countries and territories — including 37 European nations.

In fact, more six decades after the end of WWII, the U.S. still has more than 50,000 troops in Germany and 30,000 in Japan.

This is bloating the budget and it cannot continue much longer.

In June, Federal Reserve Chairman Ben Bernanke told a House committee, "The federal budget appears to be on an unsustainable path."

No kidding.

The national debt has eclipsed $13 trillion dollars, and is approaching 90 percent of the GDP. The size of our debt is creating a major drag on our economy. This is critical because by some accounts a 1 percent increase in GDP can create almost a million jobs.

With that in mind, White House budget planners are working to trim five percent from federal spending by 2012. However, they'll have to cut an equal amount in successive years to really make a difference.

And since two-thirds of federal spending is mandatory, defense (which is discretionary) is the area that will need to be trimmed most aggressively.

The nation's deficit and debt issues have gotten the attention of none other than Admiral Mike Mullen, chairman of the Joint Chiefs of Staff.

"I think the biggest threat we have to our national security is our debt," the Admiral warned in June.

That's powerful. And imagine; it came from a military man, of all people.

However, it's not a new line of thinking. Dwight Eisenhower famously warned that a strong economy is essential to a strong defense.

During a recent Washington speech, Mullen noted that within two years just the annual interest on the debt will be close to $600 billion.

Since that would approach the size of the defense budget, it is simply unsustainable.

As noted, at more than $700 billion a year, defense is the biggest part of the federal budget. It's worth repeating that the United States is now spending as much on defense as the rest of the world combined.

According to Harvard professor and historian Niall Ferguson, empires — such as the former Soviet Union and the Roman empire — can collapse quite quickly and the tipping point is often when the cost of servicing an empire’s debt is larger than the cost of its defense budget.

At the 2010 Aspen Ideas Festival in July, Ferguson provided a stark warning about the increasing prospect of the American “empire” suddenly collapsing due to the country’s rising debt level. Most ominously, Ferguson warned that this could happen "within the next two years."

Defense spending is driving our rather dangerous deficits and debt. And, unlike Social Security payments, that money is not recirculated to consumers and into the economy at large.

Remarkably, defense spending has doubled over the last ten years, according to Ashton Carter, the Defense Department's undersecretary for acquisitions.

The Military-Industrial Complex is massive and incredibly powerful. It is geared toward self-preservation and will battle for its survival. It will fight to maintain all the money flowing its way through the federal pipeline, as well as to maintain all of its power, its deep resources and its sprawling reach.

However difficult the fight may be, the Defense Department will have to learn to live, and fight wars, with less. America's national security depends on it.

Just ask Admiral Mike Mullen.