Election and the Economy- perception v. reality

I wish someone would re-examine some of conventional wisdom about the economy in light of seemingly contradictory facts.

  While the economy is improving statistically, people, we are told, don't feel that things have gotten better.

We are told that median income has been flat or falling.  Therefore the middle class has not benefited from the recovery, and that's why Obama hasn't gotten credit for the robust improvements during his tenure.

 I don't buy it. The latest University of Michigan survey of consumer confidence shows consumer confidence to be exceptionally strong, highest in seven years..

I think the problem arises from the media and politicians, from both parties, focusing on the median income and income inequality too much, and not focusing on the how much the economy has improved.

 The fact that the Dow is up 10,000 points since Obama took office ( remember 65% of American are in the market); unemployment is down from over 10% to under 6%; over five million new jobs have been created; GDP growth has been solid ( especially from  a global perspective) and housing is recovering--- ought to count for something!  And don't forget inflation has been pretty tame.

As I have written several times before, the problem is not between the 1% and the 99%, but rather between the "haves" and the" have nots". That's a real problem as well, but it's a different one, and explains why the economy is growing and things are improving, while the median income has not grown.

 As I've also written , while it's true that the middle class is shrinking, it's shrinking in two directions.  Almost half of those who have left the middle class have gone up ; while the other half have gone down. If many go up and an equal number go down, the median stays the same.  This would mean that there are more people with more income who are doing spending  and growing the economy, even though others have less.

 The 1% couldn't have done all that purchasing  all by themselves. But an increasing group of "haves' could. Note also that consumer debt has continued to go down, so more debt doesn't explain the increase in spending.

 Think about it.  Who's buying all those cars ( especially GMs and Fords).  Who's going to all those malls and restaurants. The 1% don't shop at Wall Mart, or even Macy's, or eat at Applebee's or Chipolte. The growing class of "haves" do and they are not borrowing to do so. Who's going to all those sporting events? The 1% are in the skyboxes!

 My guess is the growing group of "haves" are reluctant to tell people they are doing well , so they have joined the chorus that things are better only for the rich.

 Why am I so hung up on this? It's makes a big difference in the attitudes of people in this country, and politically it's killing the Democrats.

Of course  the Democrats are partly to blame themselves because they keep on refusing to acknowledge that the economy is better. They'd rather focus on the negative aspects of the recovery, to their detriment. Perhaps it's because they are often  just so anti-business that they rarely like to concede improvements have occurred, unless the government did it.

I get where the GOP  is coming from ( they want to win), but not the Democrats.

 Let's just recognize that many people are much better off today, not just the 1%, and work to improve things for those who have fallen behind .

Remember Democrats "don't let the perfect be the enemy of the good".  

 Eric

Observations on current economic issues

1. Inequality-- currently reading Piketty book on Capital in the 21st Century ; his solutions aren't realistic, even if he's right.

 Also I'm not completely sold- I don't want to kill the "golden goose" to achieve greater equality. At least Piketty seems to recognize that Communism which had to be totalitarian in its implementation wasn't a good idea.

 However, other than taxation, he doesn't seemed to have another solution. Still have the issue of human nature. I just returned from China. Capitalist drive is apparent everywhere; even at the cost of social welfare and political freedom. Has real Communism worked anywhere?

 I understand how taxation reduces the high end after tax income and helps the bottom , but how does it raise middle class incomes?

Also Piketty admits that inequality on a global basis has actually been reduced. It's just a current problem in rich western economies. He seems to be less concerned about raising income taxes (although he would, but says it doesn't raises much money) . Rather he feels the way to go is a global wealth tax.

 Interesting letter to editor of NYT that under our current system everyone is living a better standard of living and the criticisms are essentially about complaining that some are making too much.Those who are doing the most complaining are to sort of rich about the very very rich.

 2. I've been concerned about this issue for quite some time but believe it's more about the widening gap between the "haves" and "have nots", as opposed to the 1% v. the 99%. Many people have prospered beyond the 1%, while many others have fallen farther behind.

 My solutions are to strengthen private sector unions and rein in executive compensation through shareholder action. However this leave the pure capitalist alone, which I believe is the best that can be done in a free society.

 Taxation of capital would reduce wealth, but the concern is whether it will reduce growth and hurt everyone. Inheritance taxes with generous exemptions for the less than ultra rich is also a way to reduce inequality on a  generational basis.

 3. Guaranteed Minimum Income. Helps the bottom, but does nothing for the middle. Still in a very wealthy nation like ours it sounds like a good idea. By eliminating the vast bureaucracy ( Q loss of jobs) and most current welfare programs, it might even be an economic wash.

Should be appealing to the Left and the Right.

 4. Global, but national corporation versus national governments. Latest example of France objecting to GE buying French high tech company. Also US drug company trying to buy UK company and change domicile to UK or Ireland to reduce corporate taxes. Nationalism, local jobs, taxation-- complex mix for global corporations and governments.

Afghanistan

Maybe you can help me with the following questions: 1. After 12years of fighting , and our multi- billion dollars of infrastructure building and military training etc etc, can the Taliban really be " poised "to take over the country when we leave this year? 2. Where does the Taliban get its money, weapons and military training? How can it possibly match what we have done and what we have provided " our" Afghans? 3. In addition we are told that polls show that more than 85% of Afghans hate the Taliban ( not to mention how they would treat women), so where is the large scale public support for a Taliban takeover of the country? 4. Finally I've always wondered why our Afghans are so much worse fighters than the Taliban Afghans? I never understood why our fighters even needed much training since my reading of Afghan history is that Afghans are literally " born with a rifle in their hands". I assume the Taliban has not received sophisticated military training like we have provided. Who would have done the training ? Suffice it to say that I just don't get what's going on there , and can't believe the Taliban will really take over the country and undo whatever progress , especially for women, has occurred there for over the last decade. It just makes no sense to me , so maybe you can enlighten me. Eric

Income Mobility in the United States

A new comprehensive, and apparently highly credible, study came out that contrary to conventional belief (another words what we've been told by our politicians and the media) income mobility in the United State has remained the same for the last 40 years. While this was barely covered in media reports for some reason,and has been generally absent from the political talk show conversations,I noticed that the President in his State of the Union address did modulate his words and referred to economic mobility having "stalled" rather than "declined" which is what I'm sure he would have said before the release of this study. The conclusion of this study did not fit the narrative of the Left, and indeed some on the Right, who take the position that economic mobility in the US has gotten worse over the years,and was much better in the past. However, the study did mention that income mobility in the U.S. was behind most developed countries. The study I read didn't go into detail about this issue and I'd like to see if the comparisons are really apples to apples. I've done a little digging myself and here's an example of how statistics often don't tell the whole story and can be used to distort political points of view. As mentioned, we hear that income mobility is so much better in other countries, such as Denmark, than in the United States. Put aside the lack of diversity of this small country, and other factors, compared to the US, we are told that income mobility is much better there than here. However what does that mean? Consider the following information I came across from a reliable source: A Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000 to move from the bottom to the top. As best as I can tell both countries have similar costs of living. If so, who is better off; a Dane who's income has gone up $45,000, thus moving her into the top from the bottom percentile; or an American whose income went up twice as much as the Dane's ($90,000), but went up from the bottom to only the second highest percentile? Those who deprecate US economic mobility would say the Dane is better off. I don't think that Dane would agree; she'd rather have the increased income the American got, I assume. However, as I've often said statistics can be misleading , so where did I go wrong here?

Too Big to Jail?

This is an excerpt from a January 9,2014 New York Review of Books article by Judge Jed S. Rakoff of the Federal District Court in New York on why no high level executives have been prosecuted . It mirrors the points I made in my blog post The Root Causes of the Great Recession- An American Tragedy- Part 1 (posted two years ago). Judge Rakoff is a highly respected liberal jurist.

 Among other points, Judge Ratoff concluded as follows ( emphasis added) :

" But a second, and less salutary, reason for not bringing such cases is the government’s own involvement in the underlying circumstances that led to the financial crisis. On the one hand, the government, writ large, had a part in creating the conditions that encouraged the approval of dubious mortgages.

Even before the start of the housing boom, it was the government, in the form of Congress, that repealed the Glass-Steagall Act, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the SEC but also of such diverse banking overseers as the Office of Thrift Supervision and the Office of the Comptroller of the Currency, both in the Treasury Department.  It was the government, in the form of the Federal Reserve, that kept interest rates low, in part to encourage mortgages.

 It was the government, in the form of the executive, that strongly encouraged banks to make loans to individuals with low incomes who might have previously been regarded as too risky to warrant a mortgage. Thus, in the year 2000, HUD Secretary Andrew Cuomo increased to 50 percent the percentage of low-income mortgages that the government-sponsored entities known as Fannie Mae and Freddie Mac were required to purchase, helping to create the conditions that resulted in over half of all mortgages being subprime at the time the housing market began to collapse in 2007.

  It was the government, pretty much across the board, that acquiesced in the ever-greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay. Indeed, in the year 2000, the Office of Thrift Supervision, having just finished a successful campaign to preempt state regulation of thrift underwriting, terminated its own underwriting regulations entirely. The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations. And what did the government care, since it was helping to create a boom in the economy and helping voters to realize their dream of owning a home?

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of, among others, Bank of America with Merrill Lynch, and of J.P. Morgan with Bear Stearns. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault? One does not necessarily have to adopt the view of Neil Barofsky, former special inspector general in charge of oversight of TARP, that regulators made almost no effort to hold accountable the financial institutions they were bailing out, to wonder whether the government, having helped create the conditions that led to the seeming widespread fraud in the mortgage-backed securities market, was all too ready to forgive its alleged perpetrators.

  Please do not misunderstand me. I am not suggesting that the government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a CEO who might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do."

Eric