Iowa and the Stand For Nothing Party

Popular Economics Weekly

Can the Republican Party survive the Iowa and New Hampshire primaries and either Donald Trump or Senator Cruz winning? Can the Grand Old Party survive and thrive on a platform that opposes every relevant issue today — whether it’s voting rights, women’s rights, immigrant rights, global warming, racial discrimination, greater income equality, health care for all — even hope to corral more votes than those of the extreme right wing of their party, which means standing for nothing that would boost productivity or growth?

Why are these issues so important? Because the economic “malaise”, or whatever pundits want to call the tepid growth since the Great Recession, is precisely due to the Party that only compromises when it has to, even on taxes. And now we have the just reported Q4 GDP of 0.7 percent, after 2.0 percent growth in the third quarter.

Their anti-everything positions and policies come out of an incredible ignorance of how government and economies work. Maybe it’s the willful ignorance of those presidential candidates wooing the Tea Party, but the tax cut mantra of conservatives has literally damaged those factors that make US more prosperous. Cutting spending on schools, infrastructure and the environment — much less opposing raising the minimum age — literally cuts into work efficiency, slowing down learning, transportation of goods and services, and the damage from environmental catastrophes. The Flint drinking water crisis is just the latest example of such ignorance.

It isn’t government workers that build the roads, bridges, schools, and repair environmental damage that’s paid for with our taxes. It’s private industry that profits. Caterpillar Industries, for instance, says that just passage of the $305B Fixing America’s Surface Transportation Act, or the FAST Act transportation bill will add some 4,000 workers to its payrolls and $millions in profits.

The ‘socialist’ Bernie Sanders is right in saying that tax cuts from President Reagan to Bush II have benefited the wealthiest, but he doesn’t explain the why of it very well. So much of the opposition to taxing the wealthiest and corporations that evade or pay no taxes comes from that ignorance of what generates economic growth, and how government is there to aid in that growth.

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Bernie knows, for instance, that the current tepid economic growth still boosts the wealth of the wealthiest investor class, because they make most of their money speculating on Wall Street, but not the wages of 80 percent of the working force.

Whether it’s the massive hoarding of profits by corporations (more than $5 trillion in cash or cash equivalents at last count, according to the St. Louis Fed), or massive CEO salaries ($36 million in 2015 for JP Morgan’s Jamie Dimon), these profits aren’t being invested in productive enterprises for a reason.

Iowans that voted in the primary caucus are a fickle lot. And they seldom pick a president. So it may not matter. The Donald doesn’t so much oppose the most important issues as take both sides when it suits him. “I am malleable,” said Trump to Maureen Dowd in her latest New York Times Op-ed. “The head of Russian (Putin) calls me brilliant and you want me to disavow it? What are you smoking?”

“He rejects the idea that he’s too easily swayed by compliments or slights,” continues Dowd. “Maybe because Trump is so easily aggrieved himself, he had bonded with legions of aggrieved Americans.”

Senator Cruz prefers to carpet bomb (his term, not mine) his enemies, by simply ignoring the facts. He wants no path to citizenship for immigrants, even though he’s a Canadian born immigrant himself (and half of those 11 million ‘undocumented’ immigrants are actually here legally). Rather than decreasing income inequality, he opposes extending unemployment benefits and raising the minimum wage by “fiat”, which means by executive order. How would he raise it, then? He wouldn’t, in other words.

He led fight to shut down the federal government in 2010, which led to the spending sequester and downgrade of U.S. Treasury debt for the first time in history by the S&P rating agency to AA+. Senator Cruz is an anti-government bigot in every undemocratic way. It’s hard to say if he’s really for anything, other than carpet bombing the Middle East, until the “sands glow red”, in his words. He has read the Book of Revelation too many times with its end of the world prediction.

So it’s really hard to say what has caused such a massive ignorance of how and why our economy grows by one political party. But until the Grand Old Party realizes this, our economic growth ‘malaise’ will only continue.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Why Slower Fourth Quarter Growth?

Popular Economics Weekly

Gross domestic product — the value of everything a nation produces — expanded at a 0.7 percent annual rate from October to December. That’s a big markdown from 2 percent growth in the fall and 3.9 percent last spring. The economy expanded at a 2.4 percent clip last year, the same as in 2014, the Commerce Department said. Alas, the U.S. hasn’t topped 3 percent growth since 2005.

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Graph: Marketwatch

But those numbers may be revised higher, as more data on imports/exports and inventories for December come in. Hence there are two more revisions to the Q4 GDP estimate put out by Commerce. Softer consumer spending, falling exports and a smaller buildup in business inventories were largely the cause of the fourth-quarter slowdown, fresh government data showed.

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Graph: Marketwatch

However, the biggest drag on growth was in industrial production. Though the drop in industrial production in the fourth quarter was concentrated not in manufacturing, per se, but in mining and utilities, mostly due to falling energy prices, says Marketwatch’s Rex Nutting. “Manufacturing output slowed in the fourth quarter, but it did grow, at an anemic annual rate of 0.5 percent. Meanwhile, mining output (mostly petroleum and other fossil fuels) plunged at a 15.5 percent rate and utilities (hurt by the warmer-than-usual fall) saw seasonally adjusted output drop at a 15.4 percent annual rate.”

On the other hand, spending on services was higher, adding 0.9 percentage points, as was spending on goods, at plus 0.5. Residential investment, another measure of consumer health, rose very solidly once again, contributing 0.3 percentage points. Government purchases added modestly to growth.

Inflation fell again, but personal consumption is holding up, as is consumer sentiment. And next week’s December unemployment report will tell us if January growth might pick up, since strong employment tends to boost consumer spending.

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Graph: Econoday

Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says the Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

The assessment of the current jobs market is favorable with only 23.4 percent describing jobs as hard to get. This is a low percentage for this reading and down more than 1 percentage point from December. But improvement here is offset by a dip in those describing jobs as currently plentiful, down 1.4 percentage points to 22.8 percent.

The bottom line is economic growth has slowed due to a decline in energy and commodity prices that hurts some industrial sectors, but it helps consumers. And consumers account for some 70 percent of economic activity these days. So look for increased government spending (state and national) on public works, as well as more new home construction to keep us out of a recession in 2016. This activity is all domestic, which isn’t affected by what is happening in China, Europe, the Middle East, Russia, and other third world countries.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Higher Employment = More New Homes

The Mortgage Corner

Twenty Five states had lower unemployment, reports the Bureau of Labor Statistics, as the economic recovery continues. That is probably why consumers continue to be optimistic and housing prices continue to soar—as high as 11 percent in Portland, San Francisco, and Denver, reports the latest S&P Case Shiller Housing Price Index.

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Graph: Calculated Risk

Only 8 states, from New Mexico to Louisiana, now have more than 6 percent unemployment. Even energy-dependent states like Oklahoma and Texas are at less than 5 percent unemployment.

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 5.3 percent annual increase in November 2015 versus a 5.1 percent increase in October 2015. The 10-City Composite increased 5.3 percent in the year to November compared to 5.0 percent previously. The 20-City Composite’s year-over-year gain was 5.8 percent, up from 5.5 percent reported in October.

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Graph: Calculated Risk

This hardly puts housing prices in bubble territory. They rose more than 10 percent in 2014, before dipping back to the current increases. And it is putting pressure on the housing inventory, now down to a 3 months’ supply for new housing. So look for a continued surge in housing construction this year, which gives another boost to overall growth.

Builders broke ground on 1.11 million homes in 2015, more than at any point since 2007, according to a recent UBS study. That was an 11 percent gain compared to 2014. The consensus view of 1.25 million that UBS cites would represent a 13 percent gain in 2016. Their own forecast is for 1.31 million starts, an 18 percent jump.

The result is more new home sales, as sales ran at an annual pace of 544,000, the highest since February, the Commerce Department said Wednesday. November’s previously-reported 490,000 pace was revised up to 491,000.  In all, some 501,000 new homes were sold during 2015, Commerce said, a 14.5% increase over 2014’s tally.

And consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says The Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

Is this a good sign for future employment? That depends if consumers continue to spend. Retail sales have dipped below 4 percent annually in 2015, and the stock market is particularly volatile due to the uncertainty over energy prices. But this has not affected the mood of consumers, yet.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Davos Conference Highlights Why There’s Slower Growth

Financial FAQs

It’s time for the World Economic Forum, and this year more than 40 heads of state and 2,500 other participants are unlikely to run short of topics to discuss. “Meeting against a backdrop of market jitters, heightened geopolitical risks and a renewed focus on climate change, there will be intense focus on how these A-listers propose to solve the challenges facing the global economy,” reports Marketwatch about the meeting held at the ski resort of Davos, Switzerland.

What should be at the center of discussions is the increased inequality in wealth and income that is affecting U.S. economic growth in particular, but also the rest of the world.

How does inequality affect economic growth? Nobelist Joseph Stiglitz has written most recently about what he calls the “Great Malaise”, and IMF President Christine LaGarde says is the “New Mediocre” in economic growth.

“The economics of this inertia is easy to understand,” says Stiglitz, “and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.”

What is aggregate demand? It is an economic term that describes the overall demand for goods and services from consumers, business, and government, first formulated by the British economist JM Keynes. Professor Stiglitz’s thesis is that when most of the wealth goes to the top income brackets, less of it gets spent or invested in productive enterprises.

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Graph: St. Louis Fed

This is evidenced by the huge amounts of wealth that is hoarded where it does the least good. Corporations are holding more than $5 trillion in cash and cash equivalent assets, rather than investing it in productive enterprises. And the Federal Reserve is holding more than $2 trillion is excess reserves in MZM deposits, meaning that they earn little or no interest.

In fact, the St. Louis Federal Reserve Bank reports the Federal Reserve Banks currently hold some $2,330,461,000 in excess reserves (that are reserves beyond the required minimum bank capital reserves), whereas it was close to $0 before the Great Recession. Why isn’t it being invested productively?

The New York Fed says it is a byproduct of the Fed’s easy credit policies. The Federal Reserve Banks lend to commercial banks so that banks with constrained liquidity as a result of the Great Recession will continue to lend. But who are the banks lending to? Much of Wall Street’s borrowing is for leveraged buyouts, or buybacks of stock to boost stock prices (and CEO salaries, let us not forget).

But this is not where banks should be lending, if the goal is to increase productive investing, and so economic growth. A major reason for the Great Malaise is the huge cutback in government investments, due to the ongoing austerity policies of the western world mentioned by Dr. Stiglitz.

In the U.S., it has been conservative politicians—mainly Republicans—that oppose any government stimulus programs, which they believe takes wealth away from those that already have it. But that ‘no compromise” mentality made infamous by former House Speaker Boehner has made everyone poorer in the long run, and our public infrastructure in grave danger of collapse.

There is some hope with the new U.S. $1.1 trillion budget agreement, plus the $305 billion Highway Infrastructure Act, plus the Paris Climate Change Accord that will pump more $Trillions into alternative energy technologies, will mean government is coming back into the productive investment game.

That is how our public highway system was built, after all, as well as our Moon exploration, and even the Internet was developed. It took public monies to create the new technologies that private enterprise believed was either too risky, or didn’t benefit them directly.

“The obstacles the global economy faces are not rooted in economics, but in politics and ideology,” continues Stiglitz. “The private sector created the inequality and environmental degradation with which we must now reckon. Markets won’t be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed.”

Will Davos give us any ideas on how to boost economic growth? Time will tell.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Candidate Bernie Is Candidate Obama

Popular Economics Weekly

What I learned from last Sunday’s Charleston, South Carolina Democratic debate, the last debate before the Iowa and New Hampshire primaries, is that Bernie Sanders the idealist, is almost a reincarnation of candidate Barack Obama in 2008 when he was the fiery progressive on the campaign trail.

Hillary Clinton actually, maybe inadvertently, pointed this out during the debate, when she said candidate Obama the idealist became President Obama the pragmatist who had to compromise to accomplish as much as he did during his Presidency. Dodd-Frank was passed that put in place orderly procedures to downsize banks and Wall Street entities in danger of failure, as well as the Affordable Care Act, in spite of almost universal Republican opposition.

Candidate Obama also campaigned on single-payer, universal health care, raising taxes on the wealthiest, as well as cleaning up Wall Street and the too-big-to-fail banking system, just as candidate Sanders has promised. Only Bernie promises to work to break up these same banks from Day One of his Presidency that helped to cause the Great Recession with their “criminal behavior”.

What happened when Obama became the pragmatist in order to accomplish what he did with Republican majorities or near majorities in the House and Senate? Those Progressives that became disillusioned with Obama now support Bernie, even calling Obama a weak leader for not fulfilling his promises made on the campaign trail.

I maintain candidate Sanders will confront the same problems if he succeeds in becoming President. Why? Because there is little or no chance that both the House and Senate will have Democratic majorities after 2016. And he will have to work with the Congress to get anything passed, whether he likes it or not.

We have learned that much from the Obama Presidency. Nobelist Paul Krugman criticized Sanders on his naiveté re the costs of a universal, single payer health plan such as was tried in Bernie’s home state of Vermont, as described by Vox Reporter Sarah Kliff.

“Vermont Gov. Peter Shumlin announced in late 2014 that he would give up on single-payer after budget analysts realized Vermont would need an additional $2.5 billion in tax revenue to pay for the system,” said Kliff. “That would have required raising the payroll tax by 11.5 percent and income tax by 9 percent.”

To which Krugman added, “The point is not that single-payer is a bad idea. It is that given where the U.S. is now, achieving the kind of low costs we see in other countries would involve imposing large losses on many stakeholders, including people with generous policies, health care providers, and more — which is the point I’ve been making. The gains would almost surely be bigger than the losses, but that’s not going to make the very hard politics go away.”

So candidate Hillary Clinton has a problem, maybe the same problem she had in 2008. If she remains the seasoned, political pragmatist, claiming to carry on President Obama’s legacy, can she ignite the same passions in her followers that caused Obama to defeat her in 2008, and seems to be igniting Bernie’s supporters?

The real question is whether a seasoned 20-year Senator such as Bernie can work with his colleagues on both sides of the aisle, as has Obama, and that candidate Hillary promises to do. Bernie so far is acting like the Bernie of old, the Vermont, lone-wolf Independent he was before joining the Democratic Party.

Harlan Green © 2016

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High Builder Confidence Signals More Affordable Housing In 2016

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes held steady at 60 in January from a downwardly revised December reading of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index. Any number above 50 says that a majority of builders are optimistic about future new-home construction and sales.

Builder confidence is as good for predicting new-home construction and sales as is the Pending Home Sales Index for existing sales. And it shows builder confidence is back to pre-recession levels.

“January’s HMI reading is right in line with our forecast of modest growth for housing,” said NAHB Chief Economist David Crowe. “The economic outlook remains promising, as consumers regain confidence and home values increase, which will help the housing market move forward.”

And housing starts fell 2.5 percent last month to an annual rate of 1.15 million, the government said Wednesday. For all of 2015 home builders started work on 1.11 million new houses, the largest number since the Great Recession. Starts climbed nearly 11 percent compared to 2014. Requests for new building permits, meanwhile, slipped to an annual rate of 1.23 million in December. But the increase in permits was also the strongest in 2015 since the Great Recession.

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Graph: Marketwatch

Overall, permits rose 12 percent in 2015 to an estimated 1.18 million units. Permits reflect how many new homes that companies plan to build in the near future. Rising demand for new and existing homes has boosted sales of a wide variety of goods used to furnish them. The housing market was one of the strongest performing parts of the economy in 2015.But more new homes being built will hold down prices, which makes homes more affordable, especially for millennial generation buyers just coming into the market.

So what about those rising prices? Calculated Risk reports that FNC’s Residential Price Index shows housing prices rising at 5 percent per year, as are the Case-Shiller and most other housing price indexes. But that is a leveling off from the peak of 10 percent in 2014, when the housing market first shook off the housing bubble.

Prices are rising moderately, as opposed to faster rising pre-recession prices all the way back to 2000, which gives hope that affordability won’t be such a problem.

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Graph: Calculated Risk

There is also an optimistic report by Fannie Mae just out. Fannie Mae’s Economic & Strategic Research Group states that it expects further labor market tightening will lead to increased household income and job security amid more relaxed lending standards and easier access to mortgage credit throughout 2016.

But strong home price gains, especially in the lower-end of the market, will continue to outpace household income growth, which, in turn, will negatively affect affordability, Fannie Mae said.

Additionally, Fannie Mae said consumer spending is expected to support economic growth again in 2016, while residential investment and government spending should help drive growth despite some drag from net exports.

Overall, the ESR Group said that it expects the economy to grow 2.2 percent for all of 2016, with China’s deteriorating economic activity, a stronger dollar, geopolitical turmoil, and uncertainty about monetary policy remaining as risks to the outlook.

“We ended 2015 with a positive jobs report, an annual record high for auto sales, and the housing market poised to be the strongest since 2007,” said Fannie Mae Chief Economist Doug Duncan.

“The first Fed funds rate hike since 2006 has had a minimal impact on mortgage interest rates so far, and we believe mortgage rates will edge up only gradually, ending the year around 4.2 percent,” Duncan continued.

We are currently seeing 3.50 percent conforming fixed rates in California, which given nonexistent consumer inflation, makes me believe that Dr. Duncan’s rate forecast is a bit too conservative.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Why Has It Taken So Long?

Financial FAQs

The latest Federal Reserve press releases—firstly, the minutes of last FOMC meeting, and also its reduced projections of expected inflation—tell us the Fed is still in austerity mode due to a fear of non-existent inflation. And it is that unjustified fear that puts the brake on economic growth, since even the fear that the Fed will tighten credit conditions via its control of short term interest rates affects business investment.

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Graph: Marketwatch

The just released FOMC minutes reveals there was hardly a consensus on raising the Fed Funds rate to 0.5 percent from 0.25 percent. Why? Because many of the Fed Governors don’t believe inflation will rise at all this year from the present 1.3 percent annual Personal Consumption Expenditure index rate it favors.

This is while Nobelist Joseph Stiglitz has been decrying the lack of concern over the slow recovery from the Great Recession; lest we forget has grown more slowly than during the Great Depression. And the Fed hasn’t seemed to notice.

But what can duplicate the conditions that led to President Roosevelt and the New Deal programs (which were created by a woman, Labor Secretary Francis Perkins, by the way) that gave enough benefits to workers and trade unions so they could ultimately negotiate for a living wage and working conditions?

“In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise,” said Stiglitz. “Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.”

We needed another New Deal, in other words, but there was neither a Roosevelt with the experience and political savvy to push through the job creation programs of the 1930s, nor such a loss of faith in capitalism that prevailed then. Let’s not forget that Herbert Hoover lost his job precisely because private industry ran for the exits, refusing to create jobs, so government job programs such as the CCC, and WPA employed those millions left jobless and became the bulwark that saved the US economy during that time.

Now we sadly have history repeating itself. “The economics of this inertia is easy to understand,” continues Stiglitz, “and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.”

History has repeated itself in several ways. Income inequality was this high in 1929, as well as a stock market bubble. A six-year drought in the Midwest created the Dust Bowl, and made millions homeless. And credit was too easy then as well and consumers spent too much, believing that stock values would never fall.

John Steinbeck described those times the best in A Primer on the ’30s’ by John Steinbeck, 1960, pgs. 17-31: “I remember the Nineteen Thirties, the terrible, troubled, triumphant, surging Thirties. … I remember ’29 very well … the drugged and happy faces of people who built paper fortunes on stocks they couldn’t possibly have paid for. … In our little town bank presidents and track workers rushed to pay phones to call brokers. Everyone was a broker, more or less. At lunch hour, store clerks and stenographers munched sandwiches while they watched stock boards and calculated their pyramiding fortunes. Their eyes had the look you see around a roulette wheel …”

Why is it important that we remember those times? Why is it so important to learn from history, you say? Because the Great Depression led to WWII in direct ways. Hitler rose out of a Germany shamed by its failed economy, and so chose dictatorship.

“[I]n the Thirties when Hitler was successful,” continued Steinbeck, “when Mussolini made the trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith, Father Coughlin, Huey Long, Townsend – each one with plans to use the unrest and confusion and hatred as the material for personal power.”

And today we have blatantly racist Republican presidential candidates like Donald Trump and Senator Ted Cruz doing the same.

Professor Stiglitz says we know what to do: “…some of the world’s most important problems will require government investment. Such outlays are needed in infrastructure, education, technology, the environment, and facilitating the structural transformations that are needed in every corner of the earth.

Therefore, “The obstacles the global economy faces are not rooted in economics, but in politics and ideology. The private sector created the inequality and environmental degradation with which we must now reckon. Markets won’t be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed.”

There is a price we pay for ignoring the lessons of history, in other words.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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