Friday, September 16, 2011

The New Great Depression

Economically speaking, the U.S. remains in the midst of a perfect storm.

The nation is plagued by a vicious cycle of slower growth, leading to lower tax revenues, followed by spending cuts, ultimately resulting in even slower growth.

The economy grew a meager 0.4 percent in the first quarter and just 1 percent in the second quarter. That amounted to an annual rate of just 0.85 percent in the first half of the year.

According to the National Bureau of Economic Research — which declares such things — the economy is not officially in a recession. But it couldn't be much closer.

And to huge swaths of this nation, the recession never really ended; it morphed into a depression.

Economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower doesn't even keep up with population growth.

There are numerous reasons for this economic breakdown.

Since their 2006 peak, home prices have now fallen further in percentage terms than they did during the Great Depression. And it took 19 years for prices to fully recover after the Depression. That's an ominous precedent.

As it stands, some 6.5 million homes have already been lost to foreclosure. In addition, another 2.16 million properties are presently in foreclosure, representing a combined $1.27 trillion of unpaid principal.

As if all of that wasn't bad enough, there are an additional 4.3 million homeowners who are now “seriously delinquent,” meaning they are more than three months behind in their payments. Many of those homeowners will soon enter the foreclosure pipeline.

All of these foreclosures are deflating home values and sales prices. That's bad for all homeowners.

By the end of last year, about 11.1 million households, or 23.1 percent of all mortgaged homes, were underwater.

Due to the housing bust, millions of households have seen their equity wiped out. That's been a major factor in diminished consumer spending.

Additionally, after borrowing heavily for a decade, Americans are now grappling with mountains of debt. People are opting to pay with cash instead of credit and, rather than going even further into debt, are putting off purchases they can't afford.

Though the Fed has kept borrowing rates near zero for three years, there's very little it can do to stimulate demand for credit that no one wants.

Millions of Americans currently qualify for record low mortgage rates. It's just that most of them aren't interested in borrowing. No matter how low rates are, it's tough to make a monthly payment without a job. And millions more are unwilling to take on a mortgage when they're worried about losing the job they already have.

This leads us back to the other major factor crimping consumer spending; unemployment.

The government's most widely reported unemployment figure (U-3) currently stands at 9.1 percent. However, that number does not include people who have lost their unemployment benefits, or those who can only find part-time jobs even though they want full-time work.

Economist John Williams of (who provides detailed economic reports for U.S. businesses) puts the real unemployment rate at a whopping 22.8%. That's akin to the Great Depression.

With all of these factors in mind, it was little surprise that U.S. consumer confidence fell to 44.5 in August, the lowest level since April, 2009, more than two years ago.

However, when the Consumer Confidence Index fell to 47.7 in 2009, it was at its lowest level in more than a quarter century, and it is now even lower than that.

A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth. Obviously, we are a long way from that.

Low confidence creates a downward spiral in which consumers don't spend and the economy continues to further weaken. Consumer spending accounts for 70 percent of U.S. economic activity, which is why consumer confidence is so critical. It is a bellwether of this nation's economy.

As long as consumers are unwilling or unable to spend enough to spur economic growth, there will not be enough demand to create new jobs. It's a vicious cycle that is very tough to break.

The lack of buying power isn't merely the result of the 14 million Americans who are currently unemployed. Many of those who currently have jobs are actually making less than workers did four decades ago.

According to the latest Census figures, the median annual income for a full-time, year-round, male worker in 2010 was $47,715. That was nearly three percent less, in inflation-adjusted dollars, than the $49,065 those workers earned in 1973.

This means that median male incomes have gone backward in the intervening decades, an absolutely stunning development.

All of these factors will keep the government hamstrung in its attempts to get the economy out of the doldrums. The $787 stimulus bill didn't work, and 37 percent of that was tax cuts (something Republicans love to ignore).

The payroll-tax cut hasn't worked either. Wage earners will take home roughly $1,000 in payroll tax breaks this year, but it hasn't made a difference in the overall economy. That's because households and small businesses tend to save a greater proportion than they spend when a tax break is only temporary.

People are naturally inclined to save for an emergency when it seems like one is lurking around every corner.

Ultimately, cutting income taxes even further will not solve our economic problems. The reality is that federal tax rates are already historically low, and it's still not stimulating the economy.

The top tax rate has varied over the decades, from an initial low of 7% from 1913-1915, to as high as 94% during WWII.

The top rate is presently 35%, established in the cuts initiated by President George W. Bush. Rates this low have not been seen in two decades.

For comparison, in 1932 the top rate was 63% and it didn't move lower until 1982, when it dropped to 50%. So, for five decades the top rate ranged from 50% to 94%, and job creation did not cease.

The suggestion that cutting taxes creates jobs is thoroughly discredited by historical facts.

According to the Wall St. Journal, Bill Clinton raised taxes and the economy created 23.1 million new jobs, an eight-year, post-war record.

On the other hand, George W. Bush cut taxes and the economy created just 3 million new jobs in eight years.

The U.S. economy experienced lengthy periods of robust growth in the 1940s, '50s and '60s, when top marginal rates exceeded 90%.

This is not an argument for higher rates, but a reality check for those whose answer to every economic problem is to simply cut taxes even further.

The Federal Reserve is now essentially out of bullets in its battle to get the economy moving again. Interest rates can't go any lower than zero, and the Fed has already flooded the financial system with over $2 trillion. Yet, the economy is just treading water and trying to stay afloat.

Without an economic resurgence, fueled by more jobs, leading to more workers paying taxes, the government's deficit and debt problems will not only persist, but will worsen.

According to the latest Census figures, about 48 million people ages 18 to 64 did not work even one week during 2010, up from 45 million in 2009.

It's understandable if your head is still spinning after reading this alarming fact.

This means that huge portion of the U.S. workforce is no longer productive, which is a death blow to any economy.

It's little surprise then that poverty hit new record in the U.S last year. The 46.2 million Americans living below the poverty line is the highest number in the 52 years of reporting.

It was not an isolated occurrence, but rather part of a disturbing trend. The number of people in poverty rose for the fourth consecutive year in 2010, as the poverty rate climbed to 15.1% — the highest since 1993 — up from 14.3% in 2009.

Sooner or later, the realization that we are in the midst of a long term depression will fully sink into the national conscience. Tens of millions of Americans already recognize this. Those who don't eventually will.

According to a CNN/Opinion Research Corporation poll conducted in June, nearly half of Americans (48%) think the U.S. is likely to slip into another Great Depression within the next 12 months.

That's not pessimism; it's realism.

Thursday, September 08, 2011

Plastic-to-Oil Converter Exemplifies Energy Ingenuity

Japanese inventor Akinori Ito sees plastic shopping bags as the “fuel of the future”. Since plastic bags are made from oil, Ito developed a machine that reverts them (and other plastics) back to their original form.

Ito is the CEO of Blest, a Japanese company that produces these intriguing machines in various sizes, with applications ranging from industrial purposes to simple home use.

At the industrial level, this is not a novel technology. However, at the consumer level, it is indeed a breakthrough.

The smallest version of the Blest Machine will fit on a countertop and currently costs $12,700. However, Ito hopes that through increased production the price will drop so that "anyone can buy” one.

This technology converts 1 kilogram (about 2 lbs.) of plastic into 1 liter (about a quart) of oil using just 1 kilowatt of power, at a cost of about 20 cents.

One liter of gas is essentially nine kilowatt-hours of energy — enough to drive a typical car eight miles, or run ten 100-watt bulbs for nine hours.

The conversion process reveals the fuel potential of plastic, which could become a coveted commodity and boost recycling efforts immensely. If plastics are viewed as a resource rather than waste, the results would be rather positive.

Non-biodegradable plastic waste is overflowing from dumps and landfills all around the world. And it's also polluting our oceans. Sadly, the global recycling rate for plastic is quite low.

For example, each year America uses 380 million plastic bags and only 7 percent of them are recycled. If we can convert an everyday waste product into a source of fuel, it would greatly decrease the amount of plastic piling up in landfills.

It's estimated that 7 percent of the world’s annual oil production is used to produce and manufacture plastic. So the idea is to utilize existing plastic waste, of which there is an abundance.

As noted, Ito's conversion system is made for households and could allow consumers some measure of energy independence. Producing fuel locally would greatly lower the carbon footprint that results from transporting petroleum from distant countries.

The Blest Machine can convert several types of plastic back into oil. This promising contraption is capable of processing polyethylene, polystyrene and polypropylene (numbers 2-4) but not PET bottles (number 1).

The result is a crude gas that can fuel things like generators or stoves. Further refining produces gasoline, kerosene and diesel, meaning it can also fuel autos.

Burning plastic trash typically creates both toxins and CO2. However, Ito's device uses an electric heater in place of a flame. So while the plastic melts, nothing is directly burned.

As a result, Ito says that no toxic substance is produced in the conversion. Though methane, ethane, propane and butane gasses are released in the process, the machine is equipped with an off-gas filter that disintegrates these gases into water and carbon.

The invention is a carbon-negative system and is therefore non-polluting. The self-contained process heats up the plastic to about eight hundred degrees Fahrenheit, traps the vapors and channels them through an intricate system of pipes and water chambers. These, in turn, cool the vapors and condense them back into crude oil.

No, the Blest Machines will not solve our energy problems. But they can be part of the solution. Yes, the fuel created does give off CO2 as part of the combustion process, like any other carbon-based fuel.

However, it encourages recycling, eliminates non-biodegradable plastic waste, and lessens our dependence of traditional oil.

Plastic is potential oil. Since it is derived from oil, converting plastic back to its original form reduces the need for further oil production.

Perhaps the best news is that Ito's invention uses less than one kilowatt-hour per batch of plastic. A power plant uses three kilowatt-hours to deliver one to the Blest Machine, but it's still a net six kilowatt-hours.

Domo arigato, Mr. Ito.

Sunday, September 04, 2011

Unemployment Remains Bleak; Challenges Are Daunting

The fact that the U.S. economy created zero jobs in August is an ominous sign for a nation that needs to create 125K each month just to keep up with population growth.

Though the unemployment rate held steady at 9.1 percent, more than 14 million Americans remain out of work and actively looking for jobs.

The economy has created less than 100,000 jobs for four straight months. As if that weren't enough, on Friday, the government also said job creation in June and July wasn’t as good as originally thought.

The government claims that the labor force participation rate — the percentage of people employed and those who are unemployed but seeking a job — is currently at 64 percent, up a tiny bit from July. That is very low by historical standards.

When the recession began in December of 2007, 66 percent of Americans were participating in the labor force.

However, if you compare the labor force participation rates with the employment population ratios (EPR) for 1973 and 2000 versus today, the current numbers don't really add up.

In a recent blog post, Vox Day put it this way:

Is it reasonable to believe that people are any less inherently willing to work in these difficult economic times than they were in the year 2000? I don't see any justification for it.

Given that the percentage of women participating in the labor force has methodically risen from 44.7% in 1973 to 59.2 in 2009, and that this increase has outpaced the exit of elderly men from the labor force since 1973, the current overall participation rate should be significantly higher than it was in 1973. But this is not the case, according to the BLS.

Dec 1973 Participation rate 61.2 EPR 58.2 U3 4.9
Jan 2000 Participation rate 67.3 EPR 64.7 U3 4.0
Jul 2011 Participation rate 63.9 EPR 58.1 U3 9.1

Now, if we simply compare the present number of reported employed to the present size of the civilian, non-imprisoned population, but calculate the labor force based on the 2000 participation rate, we get an unemployment rate that is 50 percent higher than the currently reported rate of 9.1%. Note that numbers given are in thousands as per the BLS.

239,671 Civilian non-imprisoned population x.673 participation rate equals

161,299 Labor Force minus
139,236 Employed
= 22,063 Unemployed

22,063 divided by 161,299 equals 0.13678

This means the current U3 unemployment rate according to the BLS metric should be 13.7%, not 9.1%. Note that this is higher than the "unemployment rates" reported in the first two years of the Great Depresion, 1930 (8.9%) and 1931 (13.0%). Please also note that the two historical "unemployment rates" are estimates made well after the fact as the BLS didn't track unemployment statistics until 1948. Finally, one also must take into account that the current rate would be considerably higher were it not for the 2,868,000 more people that are now employed by the federal government than were employed in 1940, much less before the New Deal of 1933. Including these extra 2.8 million government workers in the unemployed list, as one must do in order to make a reasonable comparison between 2011 and 1930-31, indicates a comparable "unemployment rate" of at least 15.5%.
It's important to remember that even if the economy simply kept up with population growth by adding 125,000 jobs each month (for a total of 1.5 million new jobs this year), it still wouldn't help the roughly 24 million Americans who are already unemployed or under-employed, meaning they can only find part-time work.

To provide some perspective of the hole we're in, consider this: the government said that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.

Obviously, that isn't happening.

The stark reality is that there are 7 million fewer workers today than just four years ago and the number of unemployed Americans has roughly doubled, to more than 14 million.

What's most disturbing is that the government's most widely reported unemployment figure (U-3) does not include those who have lost their unemployment benefits, or those who have only part-time jobs but want full-time work.

Economist John Williams of (who provides detailed economic reports for U.S. businesses) puts the real unemployment rate at a whopping 22.8%. That's akin to the Great Depression.

The current state if affairs is nothing new; job creation has been in a long-term downturn.

Astonishingly, job growth in the last decade was actually negative. While the number of new workers entering the workforce swelled during that period, just 1.7 million new jobs were generated.

According to the Bureau of Labor Statistics, just 1.1 million jobs were created last year. Remarkably, that was nearly as many as in the previous decade combined.

The troubles go back many, many years. In fact, job creation has been slowing for decades, and that's a very bad omen.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased at about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

And it's taking longer and longer to recover from each successive recession. The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.

The historical precedents and current trends make it very difficult to feel optimistic about the future.

This nation's unemployment problem has truly negative consequences for our consumption-based economy, which is 70% reliant on consumer spending. Obviously, there is less consumption when fewer people are working, as there is less disposable income directed back into the economy. It also means lower tax receipts at both the state and federal levels.

If unemployment remains stubbornly high, wages will also remain stagnant. That will create a negative feedback loop of both lower both consumer spending and economic output.

American consumers remain totally strapped due to their heavy debt burdens. Consequently, we will not spend our way out of this malaise.

Our unemployment problem is huge and complex. Millions of lost jobs are never coming back. As a result, millions of American workers need new skills and new training.

Therefore, the problem is much bigger than creating the 1.5 million jobs needed to keep up with annual population growth.

Even if the nation had started adding 2.15 million private-sector jobs per year beginning in January of 2010, it would have needed to maintain that pace for more than seven consecutive years (7.63 years), or until August 2017, just to eliminate the current jobs deficit.

It's now abundantly clear that this isn't going to happen.

The U.S. is faced with a grim new reality of lower economic growth, less consumption, higher unemployment, lower wages, lower government revenues and unwieldy debt levels at the government, corporate and consumer levels.

Our present economic state is quite bleak. Sadly, for most Americans the future is virtually certain to be less prosperous than the past.

These are hard times indeed. And they are poised to remain that way for the foreseeable future.

Thursday, September 01, 2011

Food Stamp Use Rising With Poverty

The times are tough now, just getting tougher
This old world is rough, it's just getting rougher

— Bruce Springsteen, 'Cover Me'

The Great Recession has left quite a scar on this nation. Rampant unemployment has led to rising poverty and homelessness, plus an increase in the number of Americans needing government assistance just to buy food.

Since 2007, the number of people in the Supplemental Nutritional Assistance Program (SNAP) has increased by 74 percent. SNAP is the new name for food stamps, though most people still refer to the program by its former name.

At present, some 46 million people in the United States use food stamps, roughly 15 percent of the population. To put it another way, that's more than one-in-six Americans.

That tally squares with the government's revelation that 44 million Americans were living in poverty last year.

Food retailers have taken notice.

Bill Simon, head of Walmart's U.S. operations, told a conference call recently that the company had seen an increase in the number of shoppers relying on government assistance for food.

With so many people receiving assistance, the cost of the program doubled to $68 billion in 2010. That's a problem for a government as deeply indebted as ours, and one that has seen its safety net expenses spike at the same time its revenues have plummeted.

In fact, the cost of food stamps amounts to more than a third of what the government received in corporate income taxes last year.

Unemployment has had the duel effect of raising the number of Americans seeking assistance while simultaneously shrinking the tax base. It's been a real double whammy.

However, not everyone receiving food stamps is unemployed. In fact, many have jobs. The problem is that they are low-paying jobs.

About forty percent of food stamp recipients are in households in which at least one member of the family earns wages. That's a big change from two decades ago.

In 1989, a higher percentage of the program's recipients were on benefits than were working. However, as of 2009 a higher percentage of recipients had earned income.

A looming prospect for the government is that the cost of the program could grow even if the economy doesn't worsen. The government estimates that one in three eligible Americans are not presently in the program. That's a troubling reality.

The maximum amount a family of four can receive in food stamps is $668 a month. The benefits can only be used to buy food — though not hot food — and for plants and seeds to grow food.

Low wages and rising poverty are behind the large increase of Americans needing food assistance. While there may indeed be some fraud, the fact that wages have been stagnant for nearly four decades has manifested itself in some rather stark ways.

Six percent of the 72.9 million Americans paid by the hour received wages at or below the federal minimum wage of $7.25 an hour in 2010. That's up from 4.9 percent in 2009, and 3 percent in 2002, according to government data.

Due to their low incomes, minimum wage single parents are almost always eligible for food stamps. Assuming they work 40 hours every week of the year, a minimum wage worker earns about $15,000 annually. An $800 per month apartment would eat up nearly $10K of that income.

But it's not just minimum wage earners that often need food assistance. Even those who earn $10, $11 or $12 an hour typically face enormous challenges in supporting their families.

Based on a 40-hour work week, someone who earns $12 per hour would gross about $25,000 before taxes. That comes out to less than $500 per week, which obviously doesn't go far for a family of three or four.

The federal poverty level for a family of four this year is $22,350. However, it's probably fair to say that millions of families earning more than that amount are still living in poverty.

With an unemployment rate over 9 percent, many people are taking jobs for which they are grossly over-qualified, including people with advanced degrees. Workers are now competing for low wage jobs that keep them in poverty and on government assistance.

Take Walmart, the nation's largest private employer, for example. It's sales associates and cashiers typically earn around $9 per hour. For a full-time worker, that amounts to $360 per week, or $18,720 annually.

The same types of wages would typically be expected for similar retail workers and fast-food employees. The U.S. is now primarily a service sector economy, highlighted by low-paying, unskilled jobs. Service sector jobs are also the kind that don't produce anything, other than cheap, fast food, for example.

According to the Bureau of Labor Statistics, from 2008 through 2018, "The shift in the U.S. economy away from goods-producing in favor of service-providing is expected to continue. Service-providing industries are anticipated to generate approximately 14.5 million new wage and salary jobs."

That's not a good tend. The middle-class was not built on low-paying service sector jobs, but rather on well-paying manufacturing jobs with good benefits. As of last year, the service sector was responsible for $11.2 trillion of U.S. GDP.

The unvarnished reality is that the richest 1% of this nation own a third of the country's assets and the poorer 50% owns less than 2.5%.

As long as that remains true, the number of Americans receiving food stamps is only likely to grow.