Tag: Economic Policy

Saturday Soother – November 25, 2017

The Daily Escape:

Blue Mosque, Istanbul -2013 photo by Wrongo

Wrongo planned on taking the rest of the week off, but couldn’t resist this:

We live in a time when inequality of wealth, income and influence is thought to be greater than at any time in history. Inequality strengthens social injustice and with it the existence of The Privileged and The Disadvantaged. Of those who have influence and feel they are entitled to everything, and those who expect little, receive even less but need most. Government policies are fashioned by The Privileged for their own benefit. The Disadvantaged, having little or no voice, are ignored, allowing the Cycle of Containment to be maintained, change to be suppressed and social divisions to deepen.

This is from a post entitled What Price Humanity? at Dissident Voice, and it is a pretty accurate description of where we are in America. More:

Sitting at the center of this socio-economic tragedy is an economic ideology that is not simply unjust, it is inhumane. Compassion and human empathy are pushed into the shadows in the Neo-Liberal paradigm, selfishness, division and exploitation encouraged. The system promotes short-term materialistic values and works against mankind’s natural inclination towards unity, social responsibility and cooperation, inherent qualities that are consistently made manifest in times of crisis, individual hardship and collective need.

Graham Peebles is asking what are We the People entitled to in 2017 America? And his answer is grim.

Wrongo thinks nothing is more appropriate to this discussion than FDR’s Second Bill of Rights as stated January 11, 1944 in his message to the US Congress on the State of the Union:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
  • The right to earn enough to provide adequate food and clothing and recreation;
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
  • The right of every family to a decent home;
  • The right to adequate medical care and the opportunity to achieve and enjoy good health;
  • The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
  • The right to a good education.

FDR could foresee the end of WWII when he gave this speech. He concluded that: (emphasis by the Wrongologist)

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

Sadly, on this 2017 Thanksgiving weekend, we remain very far from these goals.

The inequality and sense of entitlement we see today won’t be turned around without work. Financialization is a poisonous monster. It dictates government policy, and makes the rules about how our businesses and governments at all levels engage with our people and our environment.

People are little more than sources of revenue: Their capacity to spend, to invest and consume determines how they are valued. Driving virtually every decision within the suffocating confines of the ideal is an addiction to profit.

FDR’s ideas seem quaint in 2017. The US cannot even ensure basic civil rights such as racial equality, much less “life, liberty, and the pursuit of happiness.” Most Americans have freely indentured themselves to the financial sector so that they can pretend to own a house in which to raise their kids, and a car to drive to work in order to earn income so they can make loan payments on the house and the pick-up.

Enough! Let’s forget about life for a while. Grab a cup of Climpson & Sons Signature Espresso that is 100% Adamo Sasaba from Ethiopia, and stay away from the turkey Tetrazzini at lunchtime.

Now, watch and listen to Narciso Yepes interpret Joaquin Rodrigo’s Concerto d’Aranjuez (Adagio) on his 10-string guitar. The 10-string was conceived in 1963 by Yepes, who ordered it from JosĂŠ RamĂ­rez [III].

The conductor is Raphael Frübeck de Burgos with the Radio Symphony Orchestra of Frankfurt. It’s a lovely piece with a remarkable guitar:

Those who read the Wrongologist in email can view the video here.

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IMF Reports US Standard of Living is Falling

The Daily Escape:

Haleakala Crater, Maui

Is it the best of times or the worst of times? This is no longer a partisan discussion. We have an economy in the midst of a long expansion, the third longest since 1850. The statistics say we are close to full employment. But, our mortality rate is moving in the wrong direction, and we have an opioid epidemic that is serious enough to cause jobs to go unfilled. The NYT reports that in Youngstown Ohio, middle class factory jobs go begging:

It’s not that local workers lack the skills for these positions, many of which do not even require a high school diploma but pay $15 to $25 an hour and offer full benefits. Rather, the problem is that too many applicants — nearly half, in some cases — fail a drug test.

The Fed’s regular Beige Book surveys of economic activity across the country in April, May and July all noted the inability of employers to find workers able to pass drug screenings.

So the best of times? Probably not. Bloomberg reports that the International Monetary Fund (IMF) looked at the US economy. This is what they see:

For some time now there has been a general sense that household incomes are stagnating for a large share of the population, job opportunities are deteriorating, prospects for upward mobility are waning, and economic gains are increasingly accruing to those that are already wealthy. This sense is generally borne out by economic data and when comparing the US with other advanced economies.

The IMF then goes on to compare the US with 23 other advanced economies in the Organization for Economic Cooperation and Development (OECD) in this chart:

The chart is a bit of an eye test unless it’s viewed on a big monitor, but its overall point is that the US has been losing ground relative to its past OECD reports by several measures of living standards. 35 countries make up the OECD. The members include all of Western Europe, Russia, Japan, Australia, and several developing nations like Korea and Panama.

This from Bloomberg:

And in the areas where the US hasn’t lost ground (poverty rates, high school graduation rates), it was at or near the bottom of the heap to begin with. The clear message is that the US — the richest nation on Earth, as is frequently proclaimed, although it’s actually not the richest per capita — is increasingly becoming the developed world’s poor relation as far as the actual living standards of most of its population go.

This analysis is contained in the staff report of the IMF’s annual “consultation” with the U.S., which was published last week. The IMF economists haven’t turned up anything shocking or new, it’s just that as outsiders, they have a different perspective than what we hear from our politicians and economists.

For example:

Income polarization is suppressing consumption…weighing on labor supply and reducing the ability of households to adapt to shocks. High levels of poverty are creating disparities in the education system, hampering human capital formation and eating into future productivity.

What is to be done? Well, the IMF report concludes:

Reforms should include building a more efficient tax system; establishing a more effective regulatory system; raising infrastructure spending; improving education and developing skills; strengthening healthcare coverage while containing costs; offering family-friendly benefits; maintaining a free, fair, and mutually beneficial trade and investment regime; and reforming the immigration and welfare systems.

In other words, they suggest substantial reform. It’s doubtful that America can take care of these things anytime soon.

The subtext to most of their suggestions is that other affluent countries have found ways to improve in these areas, while the US has not. We don’t have to look too far into the past to see when those countries were modeling their economies on ours. But today, on all sorts of issues, like taxation, labor markets, health care, and education, the opposite is now true.

One major difference between the US and the rest of the developed world is ideological: Voters and politicians in the US are less willing to raise taxes to finance a better life for our citizens.

Other wealthy countries have figured out how to raise revenue, provide quality education, help the the unemployed, reduce poverty, and keep their citizens healthier than America has.

We must catch up, or admit our time as the world’s indispensable economy is over.

Today’s music (dis)honors the turmoil in the White House. See ‘ya Mooch! Remember that in just six months, Trump has gone through two National Security Advisers, two Chiefs of Staff, two Communications Directors, two Press Secretaries, and two Directors of the FBI.

Here is “Disorder in the House” by the late Warren Zevon and Bruce Springsteen:

Those who read the Wrongologist in email can view the video here.

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Will Take-Home Pay Grow?

One of the big questions that we must force Hillary Clinton and Donald Trump to address is: Where will growth in take-home income come from?

If we look at pay, despite recent improvements, real average hourly earnings have declined since the 1970s:

Real Hourly Earnings 2016

Source: Advisorperspectives.com

At the same time, the average hours per week have trended down from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the last recession. It is 33.7 hours today. After eight years of economic recovery, it is only up by 42 minutes.

So, take-home pay has stagnated (or worse) for the average American since the Nixon administration. People have coped by having both spouses work, by borrowing under a Bank of America heloc, and by refinancing mortgages when interest rates declined.

But, by 1995, spousal participation in the job market had peaked, at about 60%. Borrowing under home equity lines of credit peaked in 2005 at $364 billion. These loans that were used to pay for remodeling, education costs, or new Ford F-150s were less than half of that amount in 2015, at $150 billion.

After the Great Recession, The only remaining way to boost household cash was mortgage refinance. There were windows to refinance a mortgage in 2009, and again in 2013. The reason was that mortgage interest rates stayed very low. In fact, US 10 year treasuries were at a 60 year low in 2013 at 1.50%, and mortgage rates are tied to the treasury rate. Refinancing mortgages can happen to many people, this is where companies like Polar Mortgage come in to help homeowners out. Homeowners also have the ability to get financial help from the government through the use of federal credit union home loans in order to refinance their homes.

As an example, a 1.5% decline in a mortgage payment on a $250,000 house would save $3750 a year, or a little over $300 a month added to the pockets of the average hourly worker. Taking income tax into consideration, it would take an additional 17.5 hours of work at the $21.45 rate to equal that amount. But that’s not practical. It would require a 52% increase in hours, if you are working the national average number of hours, which isn’t going to happen.

So, if the Federal Reserve raises interest rates, as they seem set to do this month or next, mortgage refinance will no longer be helpful to the vast number of working people. CoreLogic tracks the interest rates on outstanding mortgages, collecting data from mortgage servicers. Their data track the volume of outstanding mortgages by interest rate level for both the number of mortgages, and the unpaid principal balance on those mortgages (UPB).

Their analysis says that few mortgages will be refinanced if rates go up: Most borrowers have mortgages with rates below 4.50%, with 62% of mortgages and 72% of UPB in this range. There are an additional 14% of borrowers and 13% of UPB with mortgage rates between 4.5 and 5.0%.

Since refinancing has costs (legal, title search and insurance, and points), a simple rule of thumb is to add 1% to the current mortgage rate to get a rate at which borrowers would have a financial incentive to refinance. The current Freddie Mac mortgage rate is 3.57%, so the point of indifference for a borrower would be ~4.5%. CoreLogic estimates that only about 28% of the UPB of America’s outstanding mortgage loans are worth refinancing today. And should the Fed live up to their plan, and increase rates by ½% in 2016, an additional 5.5 million borrowers will lose their incentive to refinance.

So, if mortgage rates rise in 2016 as predicted, refinancing won’t improve the financial situation for very many of us.

New Deal Democrat sees all of this and says:

So the bottom line is, we are already in a period…where real gains by average Americans won’t be available from financing gimmicks, but must come from real, actual wage growth. At the moment I see little economic or political impetus to make that happen, even though average Americans understand via their wallets the issue all too well.

We’ve killed our economy.

You’d think after 8 years where most US job growth was in part-time jobs, where hourly income is at the same level as in the Ford administration, where we have the most people ever in poverty, where student debt exceeds credit card debt and automobile debt, people would catch on.

Maybe, but not unless we demand real answers of Hillary Clinton and Donald Trump, and not let the candidates say the plan is to rearrange the deck chairs on the Titanic.

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Will We See a Recession Soon?

With Trump vs. Clinton vs. Sanders sucking all of the oxygen out of the news cycle, it is probable that you missed the release by the Federal Reserve on May 18th of its delinquency and charge-off data for all commercial banks in the first quarter. It isn’t a pretty picture.

Heres a few nuggets:

  • Delinquencies of commercial and industrial (C&I) loans at all banks, after hitting a low point in Q4 2014 of $11.7 billion, have ballooned. C&I loans are classified delinquent when they are 30 or more days past due.
  • Between Q4 2014 and Q1 2016, delinquencies have increased by 137% to $27.8 billion. Currently, they are halfway to the all-time peak during the Financial Crisis in Q3 2009 of $53.7 billion. And theyre higher than they were in Q3 2008, when Lehman Brothers melted down.

Below is a chart of delinquencies released by the Board of Governors of the Fed. The shaded areas are times of economic recession. Wolf Richter of Wolf Street added the emphasis in red to point out where we stand in relationship to the 2008 Lehman moment:

C&I Deliq Q1 16

As you can see from the chart, business loan delinquencies are usually a leading indicator of economic trouble. They begin rising at the end of the credit cycle since loans made in the good times start to go bad when the economic situation changes. Then, the obligations of interest payments and loan repayments begin to pose a problem for weaker borrowers whose sales, instead of rising as expected when times were good, may be flat or shrinking while expenses can be rising. Suddenly, there is not enough money to service the loan.

It is however important to also consider Economic Injury Disaster Loans (EIDLs). Although no one can accurately predict what might happen in the future to an absolute degree of certainty, economists should always consider the possibility that we might see an increase in businesses seeking SBA eidl status in the event of a recession.

That being said, this all started with the oil and gas sector reacting to lower crude oil prices in 2015, but it has moved beyond the oil patch. Total US commercial bankruptcy filings in April, 2016 rose 3% from March, and are up 32% from a year ago, to 3,482, according to the American Bankruptcy Institute.

This is happening at an interesting time.

First, the health of the economy will be a huge deal in the General Election. Both Trump and Clinton have a stake in saying it isn’t as good as it could be. Yet, it is highly unlikely that we will be in a recession in November 2016, because our current economic momentum will carry us for at least another 6 months.

Second, the Fed is now indicating that it believes the economy is strong enough to raise rates for a second time this year, perhaps as soon as June, according to the Feds recent Open Market Committee minutes. That supports the idea that no recession is imminent.

But we still have this pesky loan delinquency data.

Loan delinquencies must be cured within a specified time. If not, they’re taken from the delinquency bucket and dropped into the default bucket. If defaults are not cured within a specified time, the bank deems a portion (or all) of the loan balance uncollectible and writes it off, therefore moving it out of default and into the write-off bucket. This is a factor in many different loan types, such as the usda business loans on the market.

That’s why the delinquency statistics usually do not get very large loans and don’t stay delinquent for a very long period.

Of course, there are other loans that might be impacted by these trends too. For example, it would be interesting to analyze the trajectory for merchant funding options such as a business cash advance loan for businesses in need of a financial boost. Ultimately, only time will tell what the future holds for loans and the financial sector in general.

Regardless, the Fed has painted itself into a corner. They have to raise rates because low rates are destroying many pension funds and they hurt retirees who rely heavily on interest-bearing investments. Pension funds have been modeled on interest rates of between 6%-8%, which have not been seen for at least 10 years.

But, a Fed rate hike would add more risk of more loans becoming delinquent.

And the largest American corporations are awash with the debt that they used to fund buy-backs of their shares. That debt has to be renewed periodically. If rates rose high enough to help pension funds, it could wound quite a few large companies.

If that wasn’t bad enough, South America, Europe, and the Chinese are looking increasingly fragile. Even if the Fed engineers a domestic miracle of sorts, it may not be enough. The financial world can be a minefield when we are trying to hang on to our hard-earned money.

So, prepare to hear both Trump and Hillary tell you they have the answers.

Since their global corporate benefactors now rule the world, they should be able to figure out what to do with it.

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Pope Francis on Capitalism

With the Pope starting his visit to the US, most focus will be on Conservatives’ support for the Catholic Church’s views against abortion and gay marriage. Conservatives are far less enthusiastic about Francis’ views about climate change and capitalism, both of which are covered in Pope Francis’ encyclical, Laudato Si’.

While the Wrongologist has not read Laudato Si´, he did read an extensive and thoughtful review by William Nordhaus in the NY Review of Books, who says the Pope thinks that the degradation of our environment is a symptom of deeper problems: rapid change, unsustainable over-consumption, indifference to the poor, and the decay of social values.

Nordhaus notes that the encyclical contains an extensive discussion of the features of markets and modern capitalism. It emphasizes dysfunctional tendencies and distortions, witness his criticism of excessive consumption:

Since the market tends to promote extreme consumerism in an effort to sell its products, people can easily get caught up in a whirlwind of needless buying and spending. Compulsive consumerism is one example of how the techno-economic paradigm affects individuals. [Paragraph 203]

And Francis’ criticism of the distorting effect of the drive for profit:

Once more, we need to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals. Is it realistic to hope that those who are obsessed with maximizing profits will stop to reflect on the environmental damage which they will leave behind for future generations? [Paragraph 190]

Nordhaus quotes Francis, who argues that profit-seeking is the source of environmental degradation:

The principle of the maximization of profits, frequently isolated from other considerations, reflects a misunderstanding of the very concept of the economy. As long as production is increased, little concern is given to whether it is at the cost of future resources or the health of the environment; as long as the clearing of a forest increases production, no one calculates the losses entailed in the desertification of the land, the harm done to biodiversity or the increased pollution. In a word, businesses profit by calculating and paying only a fraction of the costs involved. [Paragraph 195]

Francis singles out financiers for special disapproval:

In the meantime, economic powers continue to justify the current global system where priority tends to be given to speculation and the pursuit of financial gain, which fail to take the context into account, let alone the effects on human dignity and the natural environment…. [Paragraph 56]

The Pope criticizes capitalism’s push to make ultra-consumers of everyone:

This paradigm [consumerism] leads people to believe that they are free as long as they have the supposed freedom to consume. But those really free are the minority who wield economic and financial power. [Paragraph 203]

Pure capitalism ignores two major shortcomings of those economies run by Mr. Market: The first is the emergence of monopolies, or things like unregulated pollution, which distort market outcomes. The second is inequality of opportunities and income. And much has been written about rising income inequality, particularly by Seitz and Piketty, and Joseph Stiglitz.

However, it would be inaccurate to point solely to the depletion of resources or pollution as major causes of rising poverty. Instead, it is forces such as the labor-saving nature of new technologies like robots, rising imports from low- and middle-income countries, and the capture of our income taxing system by corporations and the wealthy that have distorted our markets.

Specifically, as economist Arthur Okun has written, markets do not have automatic mechanisms to guarantee an equitable distribution of income and wealth:

Given the chance, [the market] would sweep away all other values, and establish a vending-machine society. The rights and powers that money should not buy must be protected with detailed regulations and sanctions, and with countervailing aids to those with low incomes. Once those rights are protected and economic deprivation is ended, I believe that our society would be more willing to let the competitive market have its place.

So, as this week rolls out, expect to hear many voices on the right argue that Francis is an unrealistic economic fool. In particular, expect to hear George Will’s arguments this week in the National Review echoed by the media. Here is a representative quote from Mr. Will: (emphasis by the Wrongologist)

Francis’s fact-free flamboyance reduces him to a shepherd whose selectively reverent flock, genuflecting only at green altars, is tiny relative to the publicity it receives from media…He stands against modernity, rationality, science and, ultimately, the spontaneous creativity of open societies in which people and their desires are not problems but precious resources. Americans cannot simultaneously honor him and celebrate their nation’s premises.

See what George Will did there? He says that climate denialism is pro-science, while belief in climate change is anti-science.

Know the enemy by their arguments.

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