Ed,
At 15:09 02/06/2011, you wrote:
Robert Reich's take on what has happened to the USA since world war II.
<http://truthout.org/truth-about-american-economy/1306953884>http://truthout.org/truth-about-american-economy/1306953884
This is a pretty accurate account of the American
economy since '45. However, towards the end he writes:
<<<<
Democrats, meanwhile, are behaving as if theyre
powerless to affect the economy even though a
Democrat occupies the White House and his
appointees run the federal government.
>>>>
. . . and then gives no hint of what policy the
Democrats should be advocating! OK, it's true
enough that they don't have a policy (except more
public spending which would only make the deficit
worse) but that he -- one of the most articulate
economists on the left -- hasn't been able to
sketch out something that's anywhere near relevant is eloquent enough.
But there's another point that intrigues me for
which Reich is not to blame. This is the figure
of 1.8% that's officially quoted for present GDP
growth. This cannot be so. In America, as in the
UK and Europe, the average income and well being
of ordinary folk has actually been declining for
decades. And yet GDP has supposedly been tanking
along at anything between 3% and 5% p.a. for year
after year! There's clearly a discrepancy here of
at least 2%. Far from being 1.8% today, it ought
to be 0% or even a negative figure. This is pure
spin by government statisticians and economists.
Much the same applies in the case of official
figures for inflation -- except the fix is in the
opposite direction. To be realistic, at least 2%
or 3% should be added to the officially quoted
rate. This is why Bernanke is so ambiguous as to
know what he's going to do next. He knows that
America is not far away from galloping inflation.
"Can I get away with yet another dose of QE", he
must be asking himself. He must be very fearful
that if he does so he might go down in the
history books as the person who transformed the
Great Recession into the Great Depression Mark II.
Keith
Ed
<?xml:namespace prefix = fb />
The Truth About the American Economy
Wednesday 1 June 2011
by: Robert Reich, <http://robertreich.org/post/5993482080>Robert Reich's Blog
[]
Lisa Stauber and her daughter, Aliaanna, one,
with index cards she uses to track grocery
prices at her home in Houston, on March 26,
2011. (Photo: Michael Stravato / The New York Times)
The U.S. economy continues to stagnate. Its
growing at the rate of 1.8 percent, which is
barely growing at all. Consumer spending is
down. Home prices are down. Jobs and wages are going nowhere.
Its vital that we understand the truth about the American economy.
How did we go from the Great Depression to 30
years of Great Prosperity? And from there, to 30
years of stagnant incomes and widening
inequality, culminating in the Great Recession?
And from the Great Recession into such an anemic recovery?
The Great Prosperity
During three decades from 1947 to 1977, the
nation implemented what might be called a basic
bargain with American workers. Employers paid
them enough to buy what they produced. Mass
production and mass consumption proved perfect
complements. Almost everyone who wanted a job
could find one with good wages, or at least wages that were trending upward.
During these three decades everyones wages grew
not just those at or near the top.
Government enforced the basic bargain in several
ways. It used Keynesian policy to achieve nearly
full employment. It gave ordinary workers more
bargaining power. It provided social insurance.
And it expanded public investment. Consequently,
the portion of total income that went to the
middle class grew while the portion going to the
top declined. But this was no zero-sum game. As
the economy grew almost everyone came out ahead, including those at the top.
The pay of workers in the bottom fifth grew 116
percent over these years faster than the pay
of those in the top fifth (which rose 99
percent), and in the top 5 percent (86 percent).
Productivity also grew quickly. Labor
productivity average output per hour worked
doubled. So did median incomes. Expressed in
2007 dollars, the typical familys income rose
from about $25,000 to $55,000. The basic bargain was cinched.
The middle class had the means to buy, and their
buying created new jobs. As the economy grew,
the national debt shrank as a percentage of it.
The Great Prosperity also marked the culmination
of a reorganization of work that had begun
during the Depression. Employers were required
by law to provide extra pay time-and-a-half
for work stretching beyond 40 hours a week. This
created an incentive for employers to hire
additional workers when demand picked up.
Employers also were required to pay a minimum
wage, which improved the pay of workers near the bottom as demand picked up.
When workers were laid off, usually during an
economic downturn, government provided them with
unemployment benefits, usually lasting until the
economy recovered and they were rehired. Not
only did this tide families over but it kept
them buying goods and services an automatic
stabilizer for the economy in downturns.
Perhaps most significantly, government increased
the bargaining leverage of ordinary workers.
They were guaranteed the right to join labor
unions, with which employers had to bargain in
good faith. By the mid-1950s more than a third
of all America workers in the private sector
were unionized. And the unions demanded and
received a fair slice of the American pie.
Non-unionized companies, fearing their workers
would otherwise want a union, offered similar deals.
Americans also enjoyed economic security against
the risks of economic life not only
unemployment benefits but also, through Social
Security, insurance against disability, loss of
a major breadwinner, workplace injury and
inability to save enough for retirement. In 1965
came health insurance for the elderly and the
poor (Medicare and Medicaid). Economic security
proved the handmaiden of prosperity. In
requiring Americans to share the costs of
adversity it enabled them to share the benefits
of peace of mind. And by offering peace of mind,
it freed them to consume the fruits of their labors.
The government sponsored the dreams of American
families to own their own home by providing
low-cost mortgages and interest deductions on
mortgage payments. In many sections of the
country, government subsidized electricity and
water to make such homes habitable. And it built
the roads and freeways that connected the homes with major commercial centers.
Government also widened access to higher
education. The GI Bill paid college costs for
those who returned from war. The expansion of
public universities made higher education
affordable to the American middle class.
Government paid for all of this with tax
revenues from an expanding middle class with
rising incomes. Revenues were also boosted by
those at the top of the income ladder whose
marginal taxes were far higher. The top marginal
income tax rate during World War II was over 68
percent. In the 1950s, under Dwight Eisenhower,
whom few would call a radical, it rose to 91
percent. In the 1960s and 1970s the highest
marginal rate was around 70 percent. Even after
exploiting all possible deductions and credits,
the typical high-income taxpayer paid a marginal
federal tax of over 50 percent. But contrary to
what conservative commentators had predicted,
the high tax rates did not reduce economic
growth. To the contrary, they enabled the nation
to expand middle-class prosperity and fuel growth.
The Middle-Class Squeeze, 1977-2007
During the Great Prosperity of 1947-1977, the
basic bargain had ensured that the pay of
American workers coincided with their output. In
effect, the vast middle class received an
increasing share of the benefits of economic
growth. But after that point, the two lines
began to diverge: Output per hour a measure of
productivity continued to rise. But real
hourly compensation was left in the dust.
Its easy to blame globalization for the
stagnation of middle incomes, but technological
advances have played as much if not a greater
role. Factories remaining in the United States
have shed workers as they automated. So has the service sector.
But contrary to popular mythology, trade and
technology have not reduced the overall number
of American jobs. Their more profound effect has
been on pay. Rather than be out of work, most
Americans have quietly settled for lower real
wages, or wages that have risen more slowly than
the overall growth of the economy per person.
Although unemployment following the Great
Recession remains high, jobs are slowly
returning. But in order to get them, many
workers have to accept lower pay than before.
Starting more than three decades ago, trade and
technology began driving a wedge between the
earnings of people at the top and everyone else.
The pay of well-connected graduates of
prestigious colleges and MBA programs has
soared. But the pay and benefits of most other
workers has either flattened or dropped. And the
ensuing division has also made most middle-class
American families less economically secure.
Government could have enforced the basic
bargain. But it did the opposite. It slashed
public goods and investments whacking school
budgets, increasing the cost of public higher
education, reducing job training, cutting public
transportation and allowing bridges, ports and highways to corrode.
It shredded safety nets reducing aid to
jobless families with children, tightening
eligibility for food stamps, and cutting
unemployment insurance so much that by 2007 only
40 percent of the unemployed were covered. It
halved the top income tax rate from the range of
70 to 90 percent that prevailed during the Great
Prosperity to 28 to 35 percent; allowed many of
the nations rich to treat their income as
capital gains subject to no more than 15 percent
tax; and shrunk inheritance taxes that affected
only the top-most 1.5 percent of earners. Yet at
the same time, America boosted sales and payroll
taxes, both of which took a bigger chunk out of
the pay the middle class and the poor than of the well off.
How America Kept Buying: Three Coping Mechanisms
Coping mechanism No. 1: Women move into paid
work. Starting in the late 1970s, and escalating
in the 1980s and 1990s, women went into paid
work in greater and greater numbers. For the
relatively small sliver of women with four-year
college degrees, this was the natural
consequence of wider educational opportunities
and new laws against gender discrimination that
opened professions to well-educated women. But
the vast majority of women who migrated into
paid work did so in order to prop up family
incomes as households were hit by the stagnant
or declining wages of male workers.
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This transition of women into paid work has been
one of the most important social and economic
changes to occur over the last four decades. In
1966, 20 percent of mothers with young children
worked outside the home. By the late 1990s, the
proportion had risen to 60 percent. For married
women with children under the age of 6, the
transformation has been even more dramatic
from 12 percent in the 1960s to 55 percent by the late 1990s.
Coping mechanism No. 2: Everyone works longer
hours. By the mid 2000s it was not uncommon for
men to work more than 60 hours a week and women
to work more than 50. A growing number of people
took on two or three jobs. All told, by the
2000s, the typical American worker worked more
than 2,200 hours a year 350 hours more than
the average European worked, more hours even
than the typically industrious Japanese put in.
It was many more hours than the typical American
middle-class family had worked in 1979 500
hours longer, a full 12 weeks more.
Coping mechanism No. 3: Draw down savings and
borrow to the hilt. After exhausting the first
two coping mechanisms, the only way Americans
could keep consuming as before was to save less
and go deeper into debt. During the Great
Prosperity the American middle class saved about
9 percent of their after-tax incomes each year.
By the late 1980s and early 1990s, that portion
had been whittled down to about 7 percent. The
savings rate then dropped to 6 percent in 1994,
and on down to 3 percent in 1999. By 2008,
Americans saved nothing. Meanwhile, household
debt exploded. By 2007, the typical American
owed 138 percent of their after-tax income.
The Challenge for the Future
All three coping mechanisms have been exhausted.
The fundamental economic challenge ahead is to
restore the vast American middle class.
That requires resurrecting the basic bargain
linking wages to overall gains, and providing
the middle class a share of economic gains
sufficient to allow them to purchase more of
what the economy can produce. As we should have
learned from the Great Prosperity the 30 years
after World War II when America grew because
most Americans shared in the nations prosperity
we cannot have a growing and vibrant economy
without a growing and vibrant middle class.
This is excerpted from my testimony to the U.S.
Senate Committee on Health, Education, Labor,
and Pensions, on May 12. It is also drawn from
my recent book, Aftershock: The Next Economy and Americas Future.)
<http://robertreich.org/post/6072567291>The
Truth About the American Economy (II)
The Stalled Recovery
The U.S. economy was supposed to be in bloom by
late spring but its hardly growing at all.
Expectations for second quarter growth arent
much better than the measly 1.8 percent annualized rate of the first quarter.
Thats not nearly fast enough to reduce our
ferociously-high level of unemployment. The
Labor Department will tell us Friday whether the
jobs situation improved in May, but theres been
no sign of a surge in hiring. Nor in wages.
Average hourly earnings of production and
non-supervisory employees who make up 80
percent of non-government workers dropped to
$8.76 in April. Adjusted for inflation, thats
lower than they were in the depths of the recession.
Meanwhile, housing prices continue to fall.
Theyre now 33 percent below their 2006 peak.
Thats a bigger drop than recorded in the Great
Depression. Homes are the largest single asset
of the American middle class, so as housing
prices drop many Americans feel poorer. All of
this is contributing to a general gloominess.
Not surprisingly, consumer confidence is also down.
The recovery has stalled. Its unlikely America
will find itself back in recession but the
possibility of a double dip cant be dismissed.
The Problem of Demand
The problem isnt on the supply side of the
ledger. Corporate profits are still healthy. Big
companies continue to sit on a cash hoard. Large
and middle-sized companies can easily borrow more, at low rates.
The problem is on the demand side. American
consumers, who constitute 70 percent of the
total economy, cant and wont buy enough to get
it moving. They justifiably worry they wont be
able to pay their bills or afford to send their
children to college or to retire. Banks, with
equal justification, are reluctant to lend to
them. But as long as consumers hold back,
companies remain reluctant to hire new workers
or raise the wages of current ones, feeding the vicious cycle.
The timing is unfortunate. Foreign consumers
wont help much even if the dollar continues to
slide. Europes debt crisis and embrace of
austerity, Japans tragedy, and Chinas fiscal
tightening have reduced global demand. At the
same time, the federal stimulus here has about
run its course. The Federal Reserve is about to
end its $600 billion of purchases of Treasury
bills, designed to bring down long-term interest
rates and make it easier for homeowners to
refinance. Worse yet, state governments
starved for revenue and constitutionally barred
from running deficits continue to cut
programs. Local governments are now in worse
shape, laying off platoons of teachers and fire fighters.
Washingtons Paralysis
Under normal circumstances, this would be the
time for the federal government to take bold action to ward off a double dip.
For example, it could put more cash in peoples
pockets while giving employers an extra
incentive to hire by exempting the first $20,000
of earnings from payroll taxes, for a year or
two. It could lend money to state and local
governments. It could launch a new WPA (modeled
after its antecedent during the Great
Depression) to put the long-term unemployed to work on public projects.
It could amend the bankruptcy law to allow
people to include their prime residences in
personal bankruptcy, thereby giving homeowners
more leverage to get mortgage lenders to
mitigate the terms of their loans. It could
enlarge and expand the Earned Income Tax Credit
so that the bottom 60 percent got a wage subsidy instead of a tax bill.
But these arent normal circumstances. America
has been through a devastating recession that
poked a giant hole in the federal budget. And
with a presidential election coming up next
year, both parties are already maneuvering for tactical advantage.
Since taking over the House of Representatives
in January, Republicans have focused on cutting
government spending and paring back regulations.
Their colleagues in the Senate, whose leader has
proclaimed his major goal to unseat President
Obama, are almost as single-minded. Cynics might
suspect Republicans of quietly hoping the
economy stays rotten through Election Day.
Democrats, meanwhile, are behaving as if theyre
powerless to affect the economy even though a
Democrat occupies the White House and his
appointees run the federal government. Theyd
rather not dwell on the slowdown because they
dont want to spook the bond market or add to
the prevailing gloom (Jimmy Carters ill-fated
comment about the nations malaise during the
stagflation of the late 1970s has served as a
permanent admonition for presidents to stay upbeat).
Democrats are staking their electoral hopes on
continuing disarray among Republican
presidential aspirants, as well as the
Republicans suicidal plan to turn Medicare, the
popular health insurance system for seniors,
into vouchers that would funnel money to
private, for-profit insurance companies.
The result is as if Washington were on another
planet from the rest of the country (many
Americans would argue this is hardly a new phenomenon).
The noisiest battle in the nations capital is
over raising the statutory debt limit a game
of chicken in which Republicans are demanding,
in return for their votes, caps on future
federal spending while Democrats insist on
preserving the possibility of tax increases on
the wealthy. Countless budget analysts are
combing through endless projections of
government revenues and expenditures in five or
ten years. Think tanks and blue-ribbon panels
are issuing voluminous reports on how to tame
the budget deficit in decades to come. The
President, meanwhile, is trying to appear as
fiscally austere as possible keeping a lid on
non-defense discretionary spending, freezing the
wages of civil servants, and offering his own deficit-reduction plans.
Washingtons paralysis in the face of a stalled
recovery is bad news not just for average
Americans but for the world. Ironically, it also
worsens Americas future budget crisis because
it postpones the day when the debt begins to
shrink as a proportion of the GDP. Yet as the
2012 election season looms, the prospects for
sensible policy seem to decrease by the day
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Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2011/06/
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