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We have an employment problem, not an inflation problem (part 2)

Artist: Rex May “Baloo”

Last week I wrote on Paul Ryan’s unusual take on monetary policy.  Again, the Romney/Ryan ticket (in particular Ryan) wants to do away with the Fed’s dual mandate and have it focus primarily on stabilizing prices.  For them the Fed should have no stimulative role as any quantitative easing would create unsustainable levels of inflation and weaken the dollar.  So, according to Romney/Ryan, the Fed should ignore the unemployment problem and focus primarily on inflation.

Again, here is the core consumer price index


I’m not sure exactly what “threat” of inflation Ryan would be referring to, but 2% is rather sustainable.

But what about the first two rounds of quantitative easing.  Surely QE1 and QE2 must have increased the rate of inflation, right?  Well, no.

…And it looks like previous rounds of quantitative easing didn’t hurt us either.

Let’s look at the other side of the dual mandate – the Fed’s focus on employment

Here is the unemployment rate (both the official and real)

Unemployment is a far great problem than inflation.  Official unemployment has gone down a point over the past two years but, according to other measures, will most likely stay around 8% or 7% for another couple of years without decisive government action.  Now, look at the real unemployment rate (measured by those who used to be in the workplace but have been laid off and quit looking for work).  That does not look like it’s going down but, rather, stabilizing at 12%

I’m not sure how one can look at these two charts (inflation and unemployment) and then conclude that the Fed should focus on price stability and not jobs.


Who’s to blame for the shrinking middle class?

The Pew Research Center released a new report called “The Lost Decade of the Middle Class.”  According to the report, the middle class is earning less and shrinking in size.

Money quote:

In 2011, this middle-income tier included 51% of all adults; back in 1971, using the same income boundaries, it had included 61%. 2 The hollowing of the middle has been accompanied by a dispersion of the population into the economic tiers both above and below. The upper-income tier rose to 20% of adults in 2011, up from 14% in 1971; the lower-income tier rose to 29%, up from 25%. However, over the same period, only the upper-income tier increased its share in the nation’s household income pie. It now takes in 46%, up from 29% four decades ago. The middle tier now takes in 45%, down from 62% four decades ago. The lower tier takes in 9%, down from 10% four decades ago.

The problem, to summarize, is growing income inequality.  Who do American blame for this.

The majority of Americans blame Congress and the banks, which they should.  Congress’ inability to compromise on economic issues was highlighted during the debate over the debt ceiling, a debate largely responsible for America’s downgrade from a AAA rating.  Now, we’re approaching a new fiscal cliff which, according to the CBO’s latest report, could bring the U.S. back to recession if Congress fails to act.  As far as the banks are concerned, who can overlook the series of heinous bank scandals these past couple of months, as well as the key role the banks played in the subprime mortgage crisis.

Not to diminish the role that Congress or the banks play in our current economic state, but those are more current developments that have only exacerbated the problem which has actually been unfolding for decades now.  To better understand income inequality, you have too look back three to four decades…and you’ll see this:

For the past few decades, wages have not kept up with productivity.  For some, this is all too familiar.  People are working harder than ever despite the fact that the bottom 40% of our workforce hasn’t seen a pay increase in decades.

Productivity is virtually the supply of goods and services in the economy.  There is plenty of supply given the rise of productivity, but that’s only good news if demand rises with it.  Consumers can only demand products if they have the money to purchase them, which comes from their wages.  When wages don’t keep up with productivity, supply and demand are essentially out of whack.

There are several reasons for this.  Some of it has to do with the introduction of technology.  Some of it has to do with jobs going over seas.  Some of it has to do with decreasing membership of unions.  The bottom line is that most of this has to do with a globalizing economy.

The real problem isn’t globalization but, rather, how we deal with it.  How do you keep high levels of consumerism under stagnating wages.  Our solution was to make credit more available.  The only thing preventing an increasingly unequal economy from slipping into recession was the demand for credit.

This, however, just built the economy on top of debt which just made the problem worse.  There should have been mechanisms in place to protect the labor force from stagnating wages.  This is where we get back to Congress and the banks, but I’m not referring to the bickering and the scandals.  We should expect structural change from these institutions that shift economic power back to the side of labor.  We need to raise minimum wage, grow our manufacturing base, and end corporate favoritism in Congress.  If the middle class doesn’t grow, we can expect the 8% unemployment to be the new norm.

Fed considering another round of stimulus

Minutes released from the Fed show them considering more stimulus.  (hat tip: Tim Duy’s Fed Watch)

David Warsh on the battle over economic ideas in the GOP

Great article by David Warsh on the battle over economic ideas in the conservative party and in presidential politics in general.

Tax breaks for the wealthy do not create jobs

One of the biggest differences between the President’s tax plan and Mitt Romney’s plan is that Obama ends tax cuts for the wealthy while Romney extends them. Romney’s plan furthers a philosophical mainstay of conservative fiscal policy – the supply-side argument that excess capital for top-income earners spurs employment.

The argument goes like this: Cut corporate taxes and taxes for the wealthy and those recipients are going to use the excess capital to reinvest in their business and hire more people. According to this argument, the wealthy are the job creators.

In fact, our tax policy has been doing exactly this for decades. Taxes for the wealthy have continuously gone down which has resulted in huge profits for top-income earners and corporations.

Below is a graph showing the profits for corporations.
Corporate America is sitting on record profits and the unemployment continues to hover above 8%. In fact, as tax rates have fallen, business have actually shed more and more jobs. Below shows the number American jobs replaced with cheaper labor abroad.
Tax cuts for the wealthy do not create jobs here in America. It’s time to realize that what’s good for corporate America is not always good for Americans.

We have an unemployment problem, not an inflation problem

Paul Ryan may be better known for his fiscal policies of deficit reduction and austerity, but his monetary policies are just as important.  In fact, his stance on these issues go hand in hand – as he feels that Congress should do less for the sluggish economy, he argues the same for the federal reserve.  For Ryan, the Fed should abandon it’s dual mandate (it’s balanced approach of stabilizing prices and maximizing employment) and focus strictly on controlling for inflation.

He fears that the recent efforts of the Fed to stimulate the economy through quantitative easing (increasing the money supply by buying financial assets) will cause unsustainable levels of inflation and weaken the dollar.  He made his views clear after telling Bernanke that such actions have “highly undesirable unintended consequences.”

The trends mesuring inflation, though, don’t back up his fears.  Below is the standard measure the Fed uses to measure inflation.HHInflation.pngAfter the oil shocks in the 1970s, inflation has been on the steady decline.  However, the unemployment rate is still hovering above 8%.  In other words, unemployment is the issue, not inflation.  Yet, Ryan wants the Fed to focus on only inflation.

Quantitative easing is not a panacea, but it does have some stimulative effects on the economy.  It could have substantial effects on the economy if it were coupled with fiscal stimulus.  Ryan’s focus on inflation misses the big picture.

Reuters: “Obama presidency great for stocks”

From Reuters: “At 1,400, the S&P 500 on Friday was closing in on a four-year high and was up 74 percent since January 20, 2009, the day Obama took office. Not since Dwight Eisenhower’s first term has a president had such a strong run for their first term.”

New Grunwald book reveals organized efforts to block all Obama efforts

Illustration: Barbara Kelley

Michael Grunwald has a new book, The New New Deal, about making the stimulus.  Economics aside, it reveals some pretty interesting details about the republican party and their organized efforts to completely block government action under the Obama Administration.

First, some context on our heightened political polarization.

In June of this year, the Pew Research Center published a report showing the rise of polarization in American politics.  It’s no secret that America is more politically divided than we’ve been in recent history, but the new report broke it down to particular issues and showed how far our differences really go.  The following graph sums up that rising polarization

Other demographic divides remain generally stable while partisanship soars.

Other studies focused on the our political divide focusing on Congress.  Below is a chart showing the rise of the party unity votes

Notice the steady rise of Congress people voting consistently with their party.  Not only do members vote more with their party, the Senate is using the filibuster more frequently.

This has real life consequences for out political system.  Congress and the White House are only as productive as they can reach compromise on certain policy issues.  If they can’t find a middle ground then nothing gets done, which is alarming given the urgency for decisive government action on the economy, jobs, poverty, etc.

Here is the heart of the problem:

Americans generally want their political leaders to compromise on issues.  More and more democrats and independents recognize the value of compromise (The number of Democrats have risen from 77% to 90% and Independents have risen from 68% to the 88%).  The values of compromise for republicans, however, has not changed.

This reflects a growing aversion to compromise which we have seen from a number of Republican leaders.  The most obvious example is when John Boehner said on an interview with 60 Minutes that he rejects the word compromise.

Another example is when House freshman rejected a deficit reduction deal that included one dollar in new taxes for each ten dollars in spending cuts.  The same question was posed to all eight GOP presidential candidates, including Romney, during the primary debates to which they all opposed it as well.

Disturbing news comes out today concerning a growing culture of intransigence from the right.  According to Michael Grunwald’s new book, The New New Deal, several republican senators confided to Joe Biden that they received orders from Mitch McConnell to oppose everything the President does.

From page 207

Biden says that during the transition, he was warned not to expect any cooperation on many votes. “I spoke to seven different Republican Senators, who said, `Joe, I’m not going to be able to help you on anything,’ he recalls. His informants said McConnell had demanded unified resistance. “The way it was characterized to me was: `For the next two years, we can’t let you succeed in anything. That’s our ticket to coming back,’” Biden says.

The vice president says he hasn’t even told Obama who his sources were, but Bob Bennett of Utah and Arlen Specter of Pennsylvania both confirmed they had conversations with Biden along these lines.

Let’s not forget when McConnell said on Fox News that the republicans should work on making the President a “one-term president”

It’s unlikely that this new culture of republican intransigence is to blame for all of the politicking and polarization in America, but it is responsible for most it!

The U.S. drought, corn, and global food market

Corn prices are up 60%!  Don’t eat corn?  Doesn’t matter – corn is in almost everything that we eat.  It’s used as a filler, as a preservative, a sweetener, as well as a primary source of feed for livestock.  Pull out something from the pantry and corn, or some corn based product, will be listed in the ingredients.

What does this mean for consumers?  Well, prices are already up because of the drought (food prices are up 6%).  So, this will likely compound the problem rising food prices – not just for the U.S. but for the rest of the world as well.  Food is a major U.S. export (constituting 10% of our $1.5 trillion export market), so the drought and the rise of corn prices will affect food prices worldwide.

Romney’s tax plan has giant holes in it.

Romney’s plan, which cuts taxes for top income earners, cannot make up for the loss of revenue by ending loopholes. There simply aren’t enough of them.