Daily Blog

Slower Growth Stats--Catching Up With Reality

    I've never liked government statistics that claim to measure the economy--particularly the Gross Domestic Product. GDP only tells you that stuff is being made--not who truly benefits from the growth in GDP. But, it is worth noting yesterday's news, from The New York Times, that not only is economic growth slower but, more important, for regular people, is the continued rise in prices. Now, rising prices--especially when we know wages are fumbling along--is bad news for workers.

Economic growth slowed to its weakest pace in four years during the first three months of 2007, underscoring how the persistent slump in the housing market continued to serve as a drag on the American economy.

In its first estimate of economic growth for the quarter, the Commerce Department said the nation’s gross domestic product, the most comprehensive measure of overall economic activity, expanded 1.3 percent for the quarter, barely over half the rate recorded in the final quarter of last year.

The abrupt slowdown was not enough to put a brake on inflation, however. The consumer price index most carefully monitored by the Federal Reserve, which excludes food and energy, rose 2.2 percent in the quarter, at an annual rate, above the Fed’s stated comfort ceiling.

Small Step For Minimum Wage

    Catching up to this so you'all may know about this...busy weekend...From The Wall Street Journal yesterday:

Democrats Move Ahead
On Minimum-Wage Rise

By DAVID ROGERS
April 21, 2007; Page A3

WASHINGTON -- House and Senate Democrats reached agreement on a $4.8 billion package of business tax breaks that the party hopes will clear the way for a $2.10-an-hour increase in the federal minimum wage.

The wage increase, the first in almost a decade, has been a signature issue for the Democratic majority and would raise the hourly rate to $7.25 over the next two years in three 70-cent increments.

Both the House and Senate approved the increase soon after Democrats took over Congress in January. But to the party's growing embarrassment, the bill has been stalled because of differences over the level of business tax breaks, first added by the Senate to get past a Republican filibuster.

    But not clear that this goes anywhere because it's gotten wrapped up in the Iraq occupation spending bill.

We Are Not Getting Our Share

    A few days, I got a report from the good folks at the Center for Economic and Policy Research on a topic that hasn't gotten the attention it should--the break between productivity and wages. CEPR's report focuses on looking at productivity and how that relates to wage growth and income inequality. Some of the conclusions:

From 1973 to 2006, the rate of total economy productivity growth has been 0.3 percentage points less than the rate of productivity growth in the non-farm business sector. This is due to the fact that reported productivity growth in the government, household, and institutional sectors is considerably lower than the rate of productivity growth reported for the non-farm business sector.

There has been a growing gap between gross output and net output in the years since 1973 as an increasing share of GDP goes to replace worn-out capital goods. Only net output can raise living standards, since the portion of output that goes to replacing depreciated capital equipment cannot directly affect living standards. A net measure of annual productivity growth is nearly 0.2 percentage points lower than a gross measure for the years from 1973-2006. By contrast, the two measures were nearly identical over the period from 1947 to 1973 as the share of output going to depreciation changed little over this period.

The consumption deflator used to measure real wages has shown a much higher rate of inflation than the output deflator used to measure productivity growth. This is due to the fact that the price of many consumer goods and services, like health care and education, have risen more rapidly than investment goods like computers.

If the U.S. economy could have sustained its 1948-73 rate of productivity growth it would be more than 80 percent larger today. This could have allowed for major increases in incomes and/or more leisure time.

    The rest of the report is here.

No Wonder People Are In Debt

    Louis Uchitelle has a strong and heart-breaking story about the choices auto workers are having to make as tens of thousands of them leave the industry--the largest exodus of workers from one American industry in decades, according to the story.

    What caught my eye, within the wrenching stories, was this paragraph:

Across America, more than 30 million people have been forced out of jobs since the early 1980s, the Bureau of Labor Statistics reports, and regaining lost incomes has not been easy. Nearly 50 million new jobs have been created over that same period, according to the bureau, so there are always new opportunities but more often than not at lower pay. Among those who have lost work, only a third held new jobs two years later that paid as well as those that were lost, according to the bureau’s surveys of displaced workers. Another third of those displaced were in jobs that paid, on average, 15 to 20 percent less than their previous employment — while the final third had dropped out of the labor force entirely.

    If you wonder why the savings rate is so low--actually, negative--and why personal debt is at record highs, there you have it--if only a third of the people out of 30 million people who have been forced from their jobs since the 1980s can find work that pays as well as the jobs they left, it is no wonder that people are struggling under a mountain of debt. This is not some trend that requires "personal responsibility"--the debt comes from a dramatic shift in the world we live in.

Productivity Slowing But Do We Care?

    This morning, The Wall Street Journal has a story about the slowing of productivity. But it misses the main point. First, here's the main thesis:

Productivity Lull
Might Signal
Growth Is Easing

Ripples Could Confuse
Interest-Rate Outlook;
Fed Remains Optimistic

By GREG IP
March 31, 2007; Page A1

The U.S. productivity boom that began in the mid-1990s is showing signs of running out of steam.

If it proves more than a temporary lull, slower growth in productivity -- that is, output per hour worked -- could lead to slower growth in living standards, more difficultly paying for the baby boomers' retirements and a greater risk of inflation. Inflation fears would make the Federal Reserve more reluctant to lower interest rates.

Official measures have slowed since the late 1990s, when an acceleration in productivity growth made possible faster growth, lower unemployment, lower inflation and lower interest rates. It fueled a boom in business investment and stock prices. Today, in contrast, productivity growth has slowed, business investment has turned down and inflation is proving stubborn.

"All the elements of the good years of the '90s have now turned around," said Robert Gordon, an economist at Northwestern University who has been studying productivity trends for years. As a result, he said, current Federal Reserve Chairman Ben Bernanke faces "tougher decisions" than his predecessor, Alan Greenspan.

    The main issue though is that while productivity was on fire for many years, workers got very little from the gains. Here is something I wrote almost two years ago to make the point:

The link between productivity gains and wages has been broken. Recently, the Economic Policy Institute showed that productivity has grown almost three times faster than wages since 2001. During that time, 70 percent of the nation’s income growth has gone straight into corporate coffers as profits—presumably to continue to finance staggering pay and benefits for executives—a complete reversal from the previous seven business cycles when 77 percent of the overall income growth went to wages.

Although the theft of workers’ sweat of the brow is even more obvious today, the erosion began about three decades ago. Joel Rogers, director of the Center on Wisconsin Strategy, has made a recent stunning calculation: Had wages tracked productivity as they have over the past 30 years, “median family income in the U.S. would be about $20,000 higher today than it is.”

Check this out: Taking into account productivity, the minimum wage should be $19.12—which would make it almost 50 percent above today’s median wage (not to mention the pathetic $5.15 current minimum wage). Rogers concludes: “It’s fair to say that most American workers today are making substantially less than the (historically, productivity-normed) wage of the economy’s worst-off workers of a generation ago.”  Now, most of us would find this lopsided economic arrangement obscene just by its sheer unfairness: No matter how hard you work, you won’t get a fair return on your labor. Beyond the unfairness, it also tears at the country’s social fabric because an economic system cannot endure if it is perceived to be unfair and fails to deliver a rising standard of living.

    Here's the post where you can link to the rest of the article.

The Blind Federal Reserve

    If you are one of the 48 million Americans without health care, if your wages are barely rising or are stuck, if your debt level is crushing because you can't keep up with the basic bills that pay for the rock bottom necessities  of life, if you have no real retirement...hey, don't worry because the Federal Reserve says the economy is just fine and dandy.

    Appearing before a Senate committee yesterday, the Fed's chairman, Ben Bernanke, was positively thrilled:

The chairman of the Federal Reserve, Ben S. Bernanke, gave Congress an upbeat view of the economy on Wednesday, predicting that unemployment was likely to remain low over the next two years even as inflation declined slightly.

Mr. Bernanke’s comments, which suggested that he was comfortable with interest rates at current levels, immediately lifted stock markets. His testimony soothed investors who had begun to worry that the central bank might be tempted to raise the cost of short-term borrowing later this year in fear that a stronger economy would push inflation higher.

    I'll give credit to Democrats who at least pushed Bernanke a bit:

It was Mr. Bernanke’s second Congressional appearance since Democrats assumed majority control in both the House and Senate last month, and Democrats peppered him with questions about rising income inequality and the growing insecurity they said confronted middle-income families.

“People are working longer and harder, but many are not bringing home enough money to keep pace with what they need,” said Senator Christopher Dodd of Connecticut, chairman of the banking committee and a contender for the Democratic presidential nomination.

But Mr. Bernanke faced little direct criticism himself, and he refrained from weighing in on policy proposals outside of monetary policy.

When Senator Charles E. Schumer, Democrat of New York, asked whether rising income inequality might be a reason to make the income tax more progressive by imposing higher tax rates on richer taxpayers, the Fed chairman politely but firmly declined to engage. “I’m afraid my answer is going to disappoint you,” he said.

    That last point is the most galling. The top one percent of taxpayers are pocketing hundreds of billions of dollars thanks to the Bush tax cuts--money that could finance a single-payer system which would save the economy $300 billion in administrative costs and assist companies like Chrysler. But, no, let's let the rich get off like bandits, no matter the cost to the rest of us poor slobs.

Trade Deficits, Job Cuts

    Here are two related issues: the trade deficit and the announcement today that Chrysler was cutting 13,000 jobs. First, the record trade deficits (from The New York Times):

    WASHINGTON, Feb. 13 — The United States ran a record trade deficit in 2006 for the fifth consecutive year, the Census Bureau reported Tuesday in an announcement that quickly reignited the dispute between the Bush administration and Democrats over the value of past and future deals lowering trade barriers.

The bureau said that the trade deficit, or gap between what the United States sells abroad and what it imports, reached a new high of $763.3 billion last year, a 6.5 percent increase over the year before. The deficit was fueled by the continuing American need for foreign oil and imports of consumer goods from China and other countries.

The record trade deficit was no surprise, since it had been foreshadowed in monthly figures over the last year. But in the current tense political climate in Washington, it was seized upon by both the Bush administration and its critics. It also seemed certain to become a factor in the accelerating presidential race.

    And, then, almost as if the timing was coordinated:

DaimlerChrysler said today that it was leaving all options open for the future of its struggling Chrysler Group, which announced a plan to close all or part of four plants and eliminate 13,000 jobs in North America.

    There isn't a quote from the UAW in the story but obviously this is another hit for my union. And these crazy politicians want to continue to pass so-called "free trade" agreements? Wake up.

Tax Cuts Are Like Fish...

    Well, I was just paraphrasing a good headline from the Economic Policy Institute (imagine that...a snappy headline from the staid but smart folks over there...keep it up). A few days ago, I wrote about the idiocy of the Senate linking tax cuts to a hike in the minimum wage. Max Sawicky at EPI had a good column a couple of weeks ago (which I missed, yes indeed) showing how the tax cuts are simply an issue of politics, not economics. The headline of the piece: Like A Fish Needs A Bicycle:

The House of Representatives has passed an increase in the minimum wage, but the proposal faces obstacles in the Senate ostensibly founded on a desire to compensate small business owners for the burden such an increase might impose.   But this alleged need to compensate businesses is dubious at best and clearly more inspired by politics rather than credible equity considerations or sound economic reasoning.

    The piece gives some very good rebuttals to the arguments for tax cuts. The conclusion:

There is no sound rationale for the current efforts to offset the impact of an increase in the minimum wage.   As a general matter, every budget decision entails a shift in resources somewhere in the economy.   Obviously, most such decisions are not subjected to a compensation requirement.   Moreover, any actual compensation disadvantages some third party.   A tax cut to offset the impact of the minimum wage is ultimately paid for by future taxpayers.   Finally, the bill contains tax increases that are uncompensated and must lay a

Tax Breaks for The Minimum Wage

    I'm a little disappointed that House Democrats have apparently caved into the demand that, in order to get a minimum wage hike, business has to get tax breaks. Is there any piece of economic legislation that we can pass in this day and age that does not have a tax break in it? Please.

    Here's the first few paragraphs from today's Wall Street Journal story that reports on an emerging deal:

House Democrats are preparing a $1 billion package of small-business tax breaks to be paired with an increase in the federal minimum wage, hoping to break a stalemate with the Senate over one of their top legislative priorities.

In doing so, the House is likely to avoid many of the revenue increases passed by the Senate in its small-business tax package, increases that have caused heartburn for business groups and lawmakers in both parties.

The House package is far smaller than the $8 billion, 10-year package of tax breaks the Senate approved last week as part of its minimum-wage-increase package. Still, it represents a nod by the House to the Senate's insistence that tax breaks are needed to get Republican support sufficient to enact a phased-in, $2.10-an-hour increase in the minimum wage.

    There was no need for the tax breaks. Who will have the courage to stand up and say, "Enough" when it comes to the mantra on tax breaks?

Stop The Presses! Rich Getting More

    I know this will be a shocker for most of you: the rich are getting more from the economy than the average person. Wow. But, it is worth backing up what we know already with some statistics--which the good folks at the Economic Policy Institute have done:

Newly released data from two separate sources reveal just how skewed the distribution of economic growth has been over the current recovery.  Data from the Bureau of Economic Analysis through the third quarter of 2006 show that a historically high share of corporate income is going into profits and interest (i.e., capital income) rather than employee compensation.  And a newly released Congressional Budget Office (CBO) analysis of household incomes shows that a greater share of this capital income goes to the richest households than at any time since the CBO began tracking such trends.  In other words, our economy is producing more capital income and that type of income is more likely to go to those at the very top of the income scale.  Together, these dynamics are contributing to a uniquely skewed recovery.

    You can see the more detailed version, with graphs, here.