There was a recently published Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – by Kenneth D. Garbade, which recounts the way the central bank in the US could purchase unlimited amounts of treasury debt by creating funds out of thin air and how that capacity was eventually constrained. The Report is an understated account of the way in which the conservative ideological forces eventually prohibited this capacity and forced the US government to only issue debt to the private sector. He shows that between 1917 and 1935, this capacity was used often “without incident” but as the conservative antagonism grew it was limited (in 1935) and then abandoned altogether in the early 1980s. The Report demonstrates there were no intrinsic financial reasons for abandoning this capacity.
The basis of a fiat currency, which is issued under monopoly conditions by the government and has no intrinsic value (unlike say gold or silver currencies) is that it is the only unit that the non-government sector can use to relinquish its tax and related obligations to the government. That property immediately makes the otherwise worthless token valuable and demanded. If there was no capacity to use the currency for this purpose then why we would agree to use the government’s preferred currency? Recently, some economists in Italy have come up with a hybrid scheme to save the euro yet allow Italy to resume growth without violating the rules governed by the Stability and Growth Pact and without the ECB violating its no bailout clause, even though both violations have occurred in the last 5 years and been overlooked by the elites. The plan is similar to that proposed in 2009 by the Government in California. It has merit but ultimately misses the point. The Eurozone problem is the euro!
On September 15, 2014, the Melbourne Age article – Workers can forget about big pay rises for some time to come – summarised the wages outlook that workers can expect in the coming year as the labour market weakens. Its bleak. Meanwhile, CEO pay while down from the peaks of 2007 remains excessive according to a major survey released in Australia this morning. Depending on how one measures it, the average CEO of the Top 100 companies earns between 65 and 84 times what the average worker takes homeeach year. And these bosses lead the cheer squad when industry leaders and government ministers claim workers have to take pay cuts and surrender penalty rates and that the minimum wage should be abandoned. The neo-liberal obscenity survived the GFC and has now reorganised. Woe be us!
The latest US Federal Reserve Bank Bulletin – (Volume 100, No. 4) was released on September 4, 2014 and – Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances provides a very deep insight into what has been going in America over the period since 2010 with some comparative data from 2007-2010. So we get a glimpse of what happened during the crisis period in family incomes and wealth holdings (by a number of different characteristics) and then see what has transpired during the so-called ‘recovery’. The results will lead you to question the extent to which using the term ‘recovery’ is meaningful. In the growth period 2010-13, only the top 3 per cent of the income distribution have enjoyed real income gains whereas the bottom 40 per cent have seen major real cuts. A similar story relates to changes in family wealth. The reality is the highest income earners are capturing the real income growth at the significant expense of the rest notwithstanding the overal decline in unemployment. It is a recipe for disaster – an increasingly unequal society where some cohorts have virtually no chance for upward mobility.
I have started to research the idea of the disappearing or shrinking middle class as part of a book project (for 2015) I am amassing materials for. The idea is simple but the conceptualisation and demarcation of the idea is rather complex. The hypothesis is that Capitalism is now striking at the income and wealth segment that has helped give it stability (which in this sense relates to not having a revolution rather than eliminating major economic cycles and mass unemployment). Marx said that religion was the opiate of the masses that kept them in line whereas in modern times it is mass consumption and credit that seems to keep the middle class in line. The rise in income and wealth inequality over the last 3 decades under the watch of neo-liberalism is obvious and initially showed up as a widening 90/10 gap (the numbers being deciles in the relevant distribution). But as the lowest income groups were marginalised, the dynamic moved on and started hollowing out the middle deciles. Real wages have lagged well behind productivity growth and mass unemployment is infiltrating the middle-income cohorts who typically have superior education, which has insulated them from job loss. The US Census Bureau provides excellent data on – Wealth and Asset Ownership, which allows us to trace the trends in household net worth and debt in the US in some detail. This blog just documents some of the characteristics of those distributions – it is preliminary work for me but of interest nonetheless.
Labour force participation rates are falling around the world signalling the slack employment growth that has accompanied the aftermath of the Global Financial Crisis. It is clear that many workers are opting to stop searching for work while there are not enough jobs to go around. As a result, national statistics offices considered these workers to have stopped ‘participating’ and classified them as being ‘not in the labour force’, which had had the effect of attenuating the official estimates of unemployment and unemployment rates. These discouraged workers are considered to be in hidden unemployment. But the participation rates are also influenced by compositional shifts (changing shares) of the different demographic age groups in the working age population. In most nations, the population is shifting towards older workers who have lower participation rates. Thus some of the decline in the total participation rate could simply be an averaging issue. This blog investigates that issue for the US after noting yesterday that there has been a massive decline in the participation over the course of the downturn in that country. But we also note that the aggregate participation rate has been in decline since the beginning of this century so there is probably more than cyclical events implicated.
Last week (July 3, 2013), the – US Bureau of Labor Statistics – released their latest – Employment Situation –June 2014 – which showed that in seasonally adjusted terms, total payroll employment increased by 288,000 in June while the Household Labour Force Survey data showed that employment rose by 407 thousand. The essence to be extracted from the data is that total employment in the US is now outpacing the underlying population growth by a considerable margin and the official unemployment rate is dropping quickly (from 6.3 per cent in May to 6.1 per cent in June). Over the last year, the official unemployment rate dropped by 1.5 percentage points. There has been an acceleration in employment growth in the last 6 months. But the unemployment rate has benefited not only from stronger employment growth but also from a continued decline in the labour force participation rate. As a result the labour force shrunk has fallen by 128 thousand people over the last year. There is also evidence that a significant proportion of the jobs created are in low pay, precarious areas of the labour market.
One of the things you can always bet on with surety is that the conservatives will always try to convince the public that a cyclical event is, in fact, a ‘structural’ event. This has two, linked purposes. First, they can downplay any hint that aggregate fiscal policy interventions, which work at the macroeconomic level are necessary no matter how bad the problem is. Second, they can then wheel out their favourite ‘structural’ remedies, all of which just happen to result in national income being distributed to profits or high income earners, less capacity for low-wage workers to enjoy real wage rises or reasonably share in national productivity growth, and lower government income support payments to the disadvantaged. A double-whammy strategy. Here is an example of that sort of lie. The US Employment-Population ratio has fallen dramatically since the onset of the crisis and remains stuck at low levels. The reason is clear – there was a huge collapse in employment in 2008 and 2009 and, in the recovery, the rate of job creation has not been sufficiently strong to reverse that decline. Total employment growth has been around or just above the underlying growth in the civilian population (above 16 years), which is why the ratio is stuck. There needs to be much faster employment growth for the US to make back the ground that was lost in the downturn. While the US civilian population is growing older and that is having an impact on the calculated Employment-Population ratio, the impact is small and doesn’t alter the fact that a huge negative cyclical event occurred in the US and the fiscal intervention was not large enough to fix the problem.
As a follow up to Monday’s blog on the US labour market – Cutting US unemployment benefits is cruel and stupid – this short blog considers the latest flows in the US to provide a fuller understanding of why it is madness to even contemplate undermining aggregate demand overall (by cutting unemployment benefits). The flows data shows that the labour market is still in recovery, albeit a very tepid recovery, and the chance of a reversal in fortunes is very high, should aggregate demand falter. The US labour market is a long way from full employment (as I demonstrated on Monday) and the underlying dynamics of the labour market which this blog is about show that it is also not very vital at present. Taken together only a stupid person would think it was sensible to deny benefits to the long-term unemployed. Their stupidity is only topped by the intensity of their socio-pathic tendencies.
Once upon a time when I was a postgraduate student and there were around 10 unemployed for every registered vacancy in Australia a professor at my university was waxing lyrical about the lazy unemployed and what they should do to get off the welfare list. His said well “if they really wanted to work they could go down to the municipal tip and scratch together some scrap wood and some old pram wheels and build a cart, then follow the milkman around each morning and collect the horse dung and start a garden fertiliser business”. He wanted the unemployment benefit eliminated to get “these characters off their bums”. I remember the session vividly. That was his cure for the indolence of the unemployed. I put my hand up and said: “Two problems. First, the local council generally will not allow people to scour the tips for rubbish. Second, more importantly, the dairies now have trucks. The horse and cart milkmen were eliminated a few decades ago”. Much laughter followed. My relations with that professor soured a little more after that but the base (sourness) was already large so the percentage change was minimal. The same sort of idiocy is driving policy in the US at present with the US Congress enforcing more than a million unemployed Americans (that is, about 12 per cent of the total official unemployed) will lose their unemployment benefits this coming Saturday because the US politicians have decreed against all available evidence and research that this cohort is lazy and that the dole is standing between them and jobs.