Friday, February 22, 2013

Low Incomes and a Dearth of Good Jobs Have Led to Unsustainable Dependence

During the last election cycle, the American public was subjected to a contentious debate about 'makers' versus 'takers.' Posited on one side of the argument were the industrious, entrepreneurial Americans who produce things (including jobs) and on the other side were the Americans who allegedly mooch off the government.

Republican vice presidential candidate Paul Ryan initiated the dispute when he had previously argued that 60 percent of Americans receive more financial benefits from the government than they pay in taxes.

Quite obviously, the framework for this debate was bound to be controversial. It implied that the majority of Americans are idly sitting around, just waiting for a check from the government so they don't actually have to work. Under this argument, an enormous segment of the American public is deemed as lazy, unmotivated and lacking ambition.

The proper context would be to question why the middle class has been entirely shredded and why so many millions of Americans cannot find work, leaving them to simply exit the labor force as a result. Chronic unemployment has become the new normal.

The U.S. labor market started 2012 with fewer jobs than it had 11 years earlier, in January 2001. The only reason the unemployment rate continues to drop is because people keep dropping out of the labor force.

The percentage of the civilian labor force that is employed fell every single year from 2006 to 2011, according to the Bureau of Labor Statistics. In other words, this ugly trend was already underway a full two years before the financial crisis even began.

Yet, those fortunate enough to have jobs are confronted by the fact that, adjusted for inflation, wages have been stagnant since the 1970s. And the prevalence of low-wage jobs is further hampering the U.S. economy.

The U.S. had the highest share of employees toiling away at low-wage work among all developed/industrialized countries in 2009, according to OECD data. One in four U.S. employees were low-wage workers that year. That is 20 percent higher than in the number-two country, the United Kingdom.

Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

The number of employees working in low-wage jobs has been rising since 1979, according to to John Schmitt, senior economist at the Center for Economic and Policy Research.

Given these troubling developments, it should come as no surprise that government dependence has reached an all-time high.

Charles Hugh Smith spells out the stark reality quite clearly:

There are roughly 127 million people who receive government transfers or benefits. Sixty-one million recipients of Social Security and Medicare and 66 million people receiving welfare (SNAP food stamps, housing credits, Medicaid, etc.) Since there are about 115 million full-time jobs in the U.S., this means there are 1.1 government dependents for every full-time worker in the U.S. (For context, there are 315 million Americans and roughly 142 million jobs. About 38 million of these jobs are part-time that pay less than $10,000 annually. Fifty million wage earners earn less than $15,000 a year, and 61 million earn less than $20,000 annually.)

The Federal government counts a person who is self-employed and earns $100 a year as "employed" and a person who works one hour a week as "employed." As a result, the only meaningful metric is full-time employment.

A new research paper by Patrick Tyrrell and William W. Beach says the number of Americans receiving money directly from the federal government each month has grown from 94 million in the year 2000 to more than 128 million today.

Whether the number of Americans receiving government benefits each month is 127 million or 128 million amounts to quibbling. It is a serious problem when there are just 115 million full-time workers subsidizing that many of their fellow citizens.

It's not even a matter of morality, or charity, or fairness; it's a matter of practicality and sustainability.

It's reasonable to ask how long the federal government can afford to support 128 million Americans every month. There will always be poor people in any society, including ours. But how can the U.S. maintain first world status with such a rapidly growing portion of poor and low-income citizens?

I wrote about the shocking upswell of low-come Americans in a recent article, Stagnant Incomes Leading to Economic Decline.

According to Census Bureau data, a record number of Americans – nearly 1 in 2 – are now classified as either poor or low income. About 97.3 million Americans fall into a low-income category, and 49.1 million fall below the poverty line and are counted as poor. This means that 146.4 million, or 48 percent of the U.S. population, is now considered to be either poor or low-income.

This is why so many millions of our fellow citizens rely on government transfer payments.

According to the U.S. Census Bureau, 49 percent of all Americans live in a home that receives direct monetary benefits from the federal government. Back in 1983, less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

Here's the breakdown of the households receiving government benefits: Social Security - 31.6 percent; Medicare - 29 percent (obviously there is a lot of overlap between the two, since those programs mainly benefit retirees); Medicaid - 19.5 percent; food stamps - 12.7 percent; subsidized lunches - 11.2 percent; public housing - 5 percent (again, there is some overlap here); unemployment - 4 percent; and veterans’ compensation - 2.6 percent.

The growth in these various programs has resulted in significant increase in the amount of income that Americans now derive from the associated government payments.

In 1980, government transfer payments accounted for just 11.7 percent of all income. Today, government transfer payments account for more than 18 percent of all income.

Low and stagnant wages, plus an insufficient number of well-paying jobs, have left far too many Americans dependent on government benefits. This is plainly unsustainable. Low wages and chronic unemployment are crippling the economy and leaving the U.S. continually vulnerable to recession. That, in turn, will increase the number of Americans in need the government safety net and continual transfer payments.

Without an abundance of middle-class jobs — millions of new ones each and every year — the U.S. economy will continue to decline. Our economic health relies on quality jobs that allow millions of low-income Americans to participate in the middle class. This would also increase the tax base and lessen the dependance on government.

At the end of 2012, just 58.6 percent of all working age Americans had a job. According to the Bureau of Labor Statistics, the percentage of the U.S. labor force that is employed has been steadily falling since 2006.

Take a look at the percentage of the civilian labor force that has been employed over the past several years. These numbers come directly from the Bureau of Labor Statistics:

2006: 63.1

2007: 63.0

2008: 62.2

2009: 59.3

2010: 58.5

2011: 58.4

2012: 58.6

As you can see, the percentage of the civilian labor force that is employed fell every single year from 2006 to 2011.

In January, only 57.9 percent of the civilian labor force was employed. So the number is trending downward once again.

As a result, the number of Americans "not in the labor force" has absolutely skyrocketed in recent years. There has been an alarming and steady rise every year since 2006:

2006: 77,387,000

2007: 78,743,000

2008: 79,501,000

2009: 81,659,000

2010: 83,941,000

2011: 86,001,000

2012: 88,310,000

In January, there were reportedly 89,868,000 Americans at least 16 years of age not in the labor force.

Despite mainstream media reports, it's obvious that unemployment is "improving" only if you pretend that millions of American workers no longer want jobs.

As long as the percentage of the civilian labor force with a job remains this low — much less continues to increase — the reliance on government benefits will persist and even grow. As it stands, the 75 million Baby Boomers will progressively become eligible for Social Security and Medicare benefits each and every year for the next two decades. That will pose a tremendous burden to this nation.

By 2033, there will be almost twice as many older Americans as today — from 43.4 million at present to 75.7 million — according to the Social Security Administration. Meanwhile, the number of workers for each Social Security beneficiary will decline from 2.8 to 2.1.

The vast number of seniors, alone, will create a tremendous fiscal burden. The additional weight of so many poor and low-income Americans also in need of support could strangle the economy. The current state of affairs cannot continue indefinitely. At some point, it will collapse.

There is certainly enough money in the U.S. economy. The problem is that it is too restricted at the top.

According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.

As long as that persists, the current level of government dependance will also persist — until it can be sustained no longer. At that point, it's game over. Our days as a first-world nation will be nothing more than a memory and a tale for the history books.

Friday, February 15, 2013

Stagnant Incomes Leading to Economic Decline

If you're wondering why attempts to reinvigorate the American economy have been so ineffective, you can blame it on the evisceration of the middle class. The emergence of a vibrant middle class had previously allowed the U.S. to become the dominant economic power in the world. The rapid collapse of our middle class is leading to a historic economic decline.

The facts are striking.

According to Census Bureau data, a record number of Americans – nearly 1 in 2 – have fallen into poverty or have earnings so low that they are classified as low income.

Pause for a moment and let that sink in.

About 97.3 million Americans fall into a low-income category, commonly defined as those earning between 100 and 199 percent of the poverty level, based on a new supplemental measure by the Census Bureau that is designed to provide a fuller picture of poverty. Together with the 49.1 million who fall below the poverty line and are counted as poor, they number 146.4 million, or 48 percent of the U.S. population.

When nearly half of your population is defined as low income, you are merely clinging to 'first world' status. Yet, the whittling down of the middle class has been underway for decades.

Since 1980, the typical hourly wage for a worker has increased just $1.23 cents, after accounting for inflation. The effects of this have been felt most broadly by those on the bottom of the income scale.

The inflation-adjusted average earnings for the bottom 20 percent of families have fallen from $16,788 in 1979 to just under $15,000, and earnings for the next 20 percent have remained flat at $37,000.

Though the problem of falling incomes has been decades in the making, it accelerated during the financial crisis and worsened in the alleged recovery.

Despite record-high corporate profits, the inflation-adjusted median wage continues to drop. And the share of the economy going to wages rather than to profits is the smallest on record.

Median household income in America has fallen for four consecutive years, according to the Census Bureau. Overall, it has declined by over $4000 during that time span.

Remarkably, approximately one out of every four American workers makes 10 dollars an hour or less. That makes growing the economy very difficult because it is choking off demand.

Though salaries and wages have essentially been stagnant, the cost of living has been continually rising. For example, inflation was 27 percent from 2000 to 2010. That's a hidden tax on all Americans, young and old, rich and poor. However, it disproportionately affects the poor and middle class, who can least afford it.

Historically, from 1914 until 2012, the United States inflation rate averaged 3.36 percent. This means that your money has been losing roughly a third of its buying power each decade. This is having punishing affects since incomes have not kept up with inflation.

The Federal Reserve's aggressive monetary policy (money printing), in which it has expanded its balance sheet by $3 trillion (on its way to $4 trillion by year's end), has set the stage for a massive devaluation of the dollar.

When you hear your parents or grandparents talk about how cheap things like bread and milk or cars and houses used to be when they were young, you can blame this on the dollar's continual loss of buying power due to the Federal Reserve's well-orchestrated inflation objectives.

The Fed intentionally creates inflation by printing more money, which devalues all of the money already in circulation. This is not hidden or secretive. In fact, the Fed is quite open about this.

On January 25th, 2012, Fed Chairman Ben Bernanke announced a 2 percent target inflation rate. Simple math reveals that over the course of a decade, this would add up to 20 percent, meaning your money would lose one-fifth of its buying power.

Since wages and salaries for most Americans have not kept up with inflation for many years, this has punished the poor and the middle class (or, what's left of it), while hindering the economy.

Safety-net programs (such as food stamps and unemployment benefits) and tax credits have kept millions of out of poverty, masking the true magnitude of the problem.

Many middle-class Americans continue dropping below the low-income threshold – roughly $45,000 for a family of four – due to the loss of a job, pay cuts and/or a forced reduction of work hours.

A continually growing segment of Americans can be described as 'low income' and the affects of this a can be seen throughout the economy.

Since consumer spending drives 70 percent of U.S. economic activity, lower incomes and falling demand are obviously impacting the broader economy. By and large, Americans have less disposable and discretionary income to direct back into the economy, which is why it no longer operates smoothly.

We are learning about the limits of growth.

Decades of massive debt accumulation masked stagnant and falling incomes. Americans were forced to live on credit just to pay for essentials, such as food, gas, medicine and doctor's bills.

But people have learned that the accumulating interest makes paying off this debt difficult to impossible. As a result, Americans have been defaulting at record rates over the past five years. This has made credit issuers more cautious and made credit more difficult to obtain.

The point is, we can no longer count on debt to propel the economy — nor should we. Despite decades of debt accumulation (total U.S. household debt reached a whopping $13.8 trillion by 2008), it still wasn't enough to stop the long term decline of the U.S. economy.

Historically, from 1948 until 2012, the annual GDP growth rate in the U.S. averaged 3.22 percent. However, since 1973, the U.S. economy has experienced slower growth, averaging 2.7 percent annually. And this slowdown has accelerated in recent years.

In the 1950s and 1960s the average growth rate was above 4 percent. In the 1970s and '80s it dropped to around 3 percent. Yet, in the last ten years, the average rate has been below 2 percent.

After contracting in 2009, the U.S. economy expanded 2.8% in 2010, 1.7% in 2011 and 2.2% in 2012. The Congressional Budget Office projects GDP to increase 1.4% this year.

As GDP growth rates have tumbled, personal disposable income growth has fallen even more precipitously.

In the 1970s and '80s personal disposable income for the average American was rising 10 percent a year. From 1990 to 2008, income growth rate had dropped to an average of 5.8 percent. And since the recession in 2009, when it actually declined, income has been growing an average rate of 3.6 percent.

As incomes have declined, the middle class has declined. Quite predictably, the U.S. economy has declined as well.

That's where we find ourselves in 2013, on a long road to continual economic decline.

Wednesday, February 13, 2013

Despite its Debt, the US Can't Afford to Ignore its Antiquated Infrastructure

In 2009, the American Society of Civil Engineers (ASCE) gave America’s infrastructure a “D-“ grade and called for $2.2 trillion in investment over the coming five years. However, the necessary investment has not since been made. This has jeopardized our economy and even our safety. Basic upgrades and critical modernization have been ignored.

In his State of the Union Address, President Obama acknowledged this, admitting that we have an "aging infrastructure badly in need of repair," while also noting that there are “nearly 70,000 structurally deficient bridges across the country.”

Roads, bridges, ports, and rail systems allow businesses to move goods, reach global markets, grow their market share and create new jobs. Investing in these critical elements of our nation's infrastructure, as well as our water systems, is the only way to build and maintain a 21st Century economy.

Greg E. DiLoreto, President of the ASCE, put it this way:

For the U.S. economy to be the most competitive country in the world we need a first class infrastructure system—transport systems that move people and goods efficiently and at reasonable cost by land, water and air; transmission systems that deliver reliable, low-cost power from a wide range of energy sources, and water systems that drive industrial processes as well as the daily functions in our homes. Infrastructure is the foundation that connects the nation’s businesses, communities and people, driving our economy and improving our quality of life.

On March 19th, the ASCE will release its 2013 Report Card for America’s Infrastructure. It will be interesting to see if anything has improved in the intervening four years, or if our overall infrastructure has predictably regressed.

The 2009 report highlighted a continual pattern of disrepair and neglect. The ASCE had previously given US infrastructure a "D" grade in 2005 as well. Getting the same grade again in 2009 clearly indicated a total lack of national commitment to correcting these critical problems.

In an economic report on the failure to invest in infrastructure, ASCE has found that "infrastructure investment is inherently linked to our nation’s economic success. The Failure to Act report found that if we fill our infrastructure funding gap by 2020, the U.S. can eliminate potential drags on economic growth, protect 3.5 million jobs, and protect $3,100 in annual personal disposable income."

If these problems are ignored, the ASCE warns, "Your commute will become less reliable, your shipments will take longer. You may experience more electrical outages and water issues."

Those problems will come at a great expense.

The ASCE study finds that the overall cost to households and businesses of deficient infrastructure grows to $1.2 trillion for businesses by 2020 and $611 billion for households, under current investment trends.

The ASCE asserts the following:

Thus, the investment gaps will total $1.1 trillion by 2020, and will grow to $4.7 trillion by 2040.

If we don’t address this funding shortfall of $157 billion a year for our nation’s infrastructure, we will be faced with the following by 2020:

• A projected loss of $3.1 trillion in GDP, almost the equivalent of the 2011 GDP of France

• A $1.1 trillion decline in U.S. trade value, equivalent to Mexico’s GDP

• A loss of 3.5 million jobs in the year 2020 alone, more than the jobs created in the U.S. over the previous 22 months

• A $2.4 trillion decline in consumer spending, comparable to Brazil’s GDP

• A drop of $3,100 in disposable income per year, per household

Obviously, the cost of performing these vital infrastructure repairs and improvements will be great. Yet, the ASCS says, "the real story of this report is that we can’t afford not to."

Whatever the cost, the price of not investing will be even higher.

Repairing, rebuilding and modernizing our national infrastructure would also create jobs, increase demand, circulate money back into the U.S. economy and revive the tax base.

It will be impossible for the U.S. to maintain it's status as a super power and a world leader in the 21st Century with a failing and crumbling infrastructure. Quite disturbingly, the current state of affairs reveals a nation in decay and decline.

The problem is that the U.S. is already running massive annual budget deficits and is burdened by a cumbersome national debt exceeding $16 trillion. Our politicians have squandered our national wealth, as well as opportunities to address these problems, for many years. This decay didn't just happen overnight.

The repairs to our nation's infrastructure are long overdue. Yet, for a nation with such a staggering debt burden, they will prove cumbersome.

Economic growth this year will average only 1.4 percent, according to the Congressional Budget Office’s latest forecast. In other words, growth will be too paltry to pay for these vital repairs.

Yet, they cannot be ignored, and that's the conundrum for the U.S.

The U.S. can't afford $2.2 trillion in infrastructure repairs and improvements, and yet it can't afford not to fund them either.

When the Obama administration unveiled its fiscal stimulus package in early 2009, the federal government’s debt to the public amounted to only 35 percent of our gross domestic product. Today, it amounts to about 75 percent. That's a whole lot of new debt in a very short time frame.

However, according to CBO calculations, the 2009 fiscal stimulus produced about $1 of economic output for every $1 in stimulus, on average. In other words, spending on infrastructure paid for itself.

But there is still reason for caution.

Earlier this month, the CBO produced an analysis of the impact that further deficits would have on the economy. A $2 trillion fiscal stimulus would increase growth for the next three or four years. But as the economy recovered, the deficit would crowd out private investment, reducing growth over the decade. By 2023, government debt would amount to 87 percent of GDP.

Congress needs to weigh the potential return on public investment over the long term. Improving the nation’s infrastructure could ultimately yield much more than a dollar in economic output for each dollar spent.

The reality is that we can't ignore our infrastructure. Even absent the goals of modernizing and improving our infrastructure, old bridges, roads, dams, dikes and levees will continue to crumble.

It is a problem that cannot, and will not, be ignored.

Friday, February 08, 2013

Treasury Using Fed to Create Illusion of US Bond Market

The Treasury Department, in conjunction with the Federal Reserve, has created its own bond market.

The government's monthly borrowing needs are so great that it can't find enough corporate, institutional and sovereign buyers on the open market to purchase the copious amounts of available U.S. debt.

Consequently, the Federal Reserve's printing press has become the alternative.

The U.S. private sector — namely banks, mutual funds, corporations and individuals — reduced purchases of U.S. government debt to a meager 0.9 percent of GDP in 2011, from a peak of more than 6 percent in 2009. That's because everyone is chasing higher yields in riskier markets.

This has put the U.S. in desperate situation where it has sought a buyer of last resort. Enter the Fed.

The U.S. is heavily reliant on short-term funding; only 10 percent of the public debt matures beyond ten years. This creates constant pressure to issue new debt and to get our creditors to roll over their existing debt, with the promise of even more interest payments down the road.

This is an important concept: the federal government — already so deeply in debt — must continue issuing Treasuries just to pay back its current debt holders, in addition to maintaining its deficit spending.

This means the U.S. is on a never-ending carousel of debt. The government has to continue issuing new debts just to support its old debts.

Like any pyramid or Ponzi scheme, the system needs continuous inflows of new money to refinance its debts and keep itself afloat.

The U.S. economy has become so reliant on these Fed purchases, that it's reasonable to wonder if — not when — they will end. Simply put, the U.S. government would cease to function without the absolutely massive interventions of its central bank.

This month, the Fed will buy 75% of new 30-year Treasuries. While that sounds utterly astonishing, such an outsized share is reflective of the increasing surge that has been taking place over the last few years.

In 2011, the Federal Reserve purchased a stunning 61 percent of the total net Treasury issuance. And the Fed has purchased 41% of all the 30-year Treasury bonds issued since 2009.

The Fed is effectively subsidizing the U.S. government's borrowing and spending. It allows the government to repay older, maturing debt that is not rolled over and reinvested by legitimate creditors.

Given that the U.S. is piling ever more debt onto its current $16.4 trillion burden, it's understandable that foreign governments and sovereign wealth funds may feel reluctant — or even refuse — to roll over their existing debts.

In essence, the Fed is monetizing U.S. debt, meaning that it is printing money — backed by nothing — so that the government can maintain its deficit spending and debt payments.

Monetizing the debt will devalue the dollar and eventually spike inflation. That would create a self-perpetuating cycle in which inflation then decreases the buying power of the dollar.

When interest rates eventually rise (and they will), there will be a variety of consequences. Rising interest rates automatically devalue older bonds issued at lower fixed rates. That will be punishing to holders of current Treasuries.

Right now, yields are barely keeping up with inflation and are, in fact, usually losing bets. Last year, inflation ran at 2.1 percent. Meanwhile, the yield on 10-year notes was 1.78 percent at the end of 2012, while the yield on the 5-year note was 0.72 percent.

Famed investor Jim Rogers says he is short long-term government bonds. A short position is a bet that the value of an asset will decline.

With the U.S. dollar used as the world's reserve currency and U.S. Treasuries historically viewed as the safest of all investments, the Fed has long been able to control interest rates.

But if investors demand higher rates due to reckless U.S. fiscal and monetary polices, the general consensus is that the Fed will then lose its control over rates, which would subsequently begin to rise.

However, if the Treasury can continue using the Fed to create an artificial debt market, then it should be able to keep interest rates at paltry levels — at least as long as it is able to maintain this charade.

How long will that be? Who knows?

Everything can seem to be going along just fine, until suddenly it isn't.