Tuesday, September 20, 2011

Why no increase in living standards?

In the excerpt below, economic historian Martin Hutchinson sets out clearly that real incomes for almost all Americans have not increased for a long time. Even the entry of many more women into the workforce has not helped. In the light of past income gains and all the technological progress over recent decades, this is pretty astounding. So why?

Congress, is the simple answer, sometimes with the assistance of the President. Their ever-increasing and amazingly stupid meddling in the economy has choked off growth. The half a billion dollars that Mr Obama recently wasted on a failed "green jobs" company (Solyndra) is merely the latest example of that.

As Hutchinson points out in detail, the blizzard of regulation does fairly closely coincide with the economic pause. He then goes on to blame a second factor for the pause: The expansion of international trade. But that is mightily eccentric. From ancient Athens onward, trading nations have always been beacons of prosperity -- so I think we can regard Hutchinson's excursion in that direction as either a descent into populism or a desire to provoke, probably the latter.

But there IS a second cause of the economic hiatus. The blizzard of regulation has produced both direct and indirect harms. Hutchinson concentrates on the indirect harms: The innumerable costly barriers that business now has to surmount before they can produce anything.

Quite amazingly, however, Hutchinson overlooks the direct harm of ever-increasing regulation: The vast expansion of a largely useless bureaucracy. It is the bureaucrats who are eating the worker's lunch. Why does America need Federal departnents of health, education and the environment, for instance? The States all have departments dealing with those matters. Abolishing all the Federal departments that overlap with State functions would slash the bureaucracy hugely and free up the penpushers to do something useful.

Making a useful citizen out of a penpusher would not happen overnight but with retraining it could happen over time. And doing something useful -- something people will voluntarily pay for -- is what wealth consists of. The national wealth consists of goods and services, not bits of greenbacked paper. The wealth is what the money will buy, not the money itself.

So if Obama had something more than a vacuum between his ears he would be blaming bureaucratic over-reach, not "The rich" for America's present doldrums

The Census Bureau’s study of American incomes, poverty and health coverage issued last week was most interesting when considered, not as a metric of this recession, but as a long-term picture of where American living standards are going. If median incomes are back to 1996 levels in real terms, then the stagnation which followed the 1973 living standards peak has intensified and the prognostication for the future must be thoroughly unpleasant. It’s thus worth examining how much of the decline is only a medium-term problem, due to mistaken policies that can be reversed, and how much is an inevitable and permanent decline from what may have been a fleeting middle class Nirvana in 1950-73.

Real U.S. median household income of $49,445 in 2010 was 6.4% below its level in 2007 and 7.3% below its peak in 1999. Given the performance of the economy it’s likely that this position has worsened in 2011. More alarmingly, median household income is only 0.9% above its value in 1989 and 6.3% above its level of 1973. For most households, an entire working life of 38 years has elapsed with no significant increase in living standards. As is well known, the dispersion of income has also sharply increased; in 1973 only 1.2% of households had an income above $200,000 in 2010 dollars, whereas in 2010 3.9% of households exceeded that level. The middle middle class, with incomes of $35,000 to $74,999 has shrunk from 40% of the population to 31%.

Even this grim tale does not give a full picture of the decline, because household income has been sustained compared to 1973 by a much higher proportion of women in the workforce. Real median male earnings have declined by 4% since 1973, whether you consider all men or only those with full-time, year-round jobs. However the picture is brighter for women, whose workforce participation rate was around 70% of men’s in 1973 if you consider all jobs, or a mere 43% of men’s participation if you consider only full-time, year-round jobs. Today female workforce participation is 90% of male whichever way you look at it. Furthermore women’s earnings have done much better than men’s, up by 85% for all workers or 33% when only full-time workers are considered. Still the bottom line is that for traditional families, real incomes have only increased since 1973 at the cost of the wife going out to work and childcare being hired (if necessary.)

Unsurprisingly, the U.S. workforce is thoroughly disgruntled, with attitudes to public institutions, politicians, churches the media etc. having declined catastrophically since the 1970s. This is in no way a sign of deteriorating national character, but simply of stagnating and in many cases declining national fortunes.

There appear to be two culprits for stagnating or declining living standards, apart from technological change, which may also have played a complex role. The first was a blizzard of regulation beginning in the 1960s and intensifying after 1970, with a second burst in 1989-94 and a third since 2009. In the 1970s, living standards’ fall from their 1973 peak coincided with (i) more U.S. income going into environmental cleanup (probably mostly beneficial, even if not directly included in GDP) (ii) into intensified safety and workplace welfare legislation (a bonanza for trial lawyers but probably little benefit to others, and certainly tending to reduce wages and increase healthcare costs) and (iii) such nonsenses as the Corporate Average Fuel Economy standards, which added a huge drag to the U.S. economy, wiped out well over a million high-paid jobs in the U.S. automobile industry and achieved far less fuel saving than would have been achieved by a 50 cent tax on gasoline. Second and third bursts of regulatory hyperactivity, in 1989-94 and since 2009, have coincided with further erosions of U.S. living standards; this is most unlikely to be a coincidence.

The other major culprit, which kicked in around 1995 or so, is globalization, caused by the immense technological change of the Internet and modern cellphones, which have made multinational logistical sourcing chains infinitely more efficient and cheaper. This is not simply a one-off effect; outsourcing a product or service to India, China or Vietnam not only makes it cheaper, but also increases the capabilities of the local Indian, Chinese or Vietnamese workforce, raising its capability still further and making it competitive in more sophisticated products and services. In this respect David Ricardo’s Doctrine of Comparative Advantage, which essentially said that outsourcing was beneficial to both the rich outsourcer economy and the poor outsourcee economy, has been proved to be completely wrong. Ricardo failed to take account of the improved capabilities in the outsourcee that would result from the outsourcing, and the ability of newly empowered impoverished outsourcee workforces to learn the business, clamber up the value chain and eat the outsourcer’s lunch.



The Dodd-Frank Layoffs: As regulation cuts profits, Bank of America cuts 30,000 jobs

What is the cost of overregulation? Bank of America appears to have provided part of the answer by announcing yesterday that the nation's largest bank will cut 30,000 jobs between now and 2014. CEO Brian Moynihan said the bank's plan is to slash $5 billion in annual expenses from its consumer businesses.

Mr. Moynihan didn't say this, but we will: These layoffs are part of the bill for the last two years of Washington's financial rule-writing. After loose monetary policy had combined with insane housing policy to create a financial crisis, the Democrats who ran Washington in 2009 and 2010 enacted myriad new rules that had nothing to do with easy money or housing.

Take the amendment that Illinois Democrat and Senator Dick Durbin (with the help of 17 Senate Republicans) attached to last year's Dodd-Frank financial law. Mr. Durbin's amendment instructed the Federal Reserve to limit the amount of "swipe fees" that banks can charge merchants when customers use debit cards.

How exactly does forcing banks to charge Wal-Mart less money for operating an electronic payment system prevent the next financial crisis? Readers may wait a long time for a satisfactory answer, but the cost of this Dodd-Frank directive is straightforward.

The Fed dutifully ordered banks to cut their fees almost in half. Bank of America disclosed in its most recent quarterly report that this change will reduce the bank's debit-card revenues by $475 million in just the fourth quarter of this year. The new rules take effect on October 1, so BofA seems to have sensible timing as it begins to shed workers from a consumer business that has become suddenly less profitable by federal edict.

Make that the latest federal edict. In 2009, when a comprehensive overhaul of financial regulation was still a gleam in Barney Frank's eye, President Obama signed the CARD Act into law. It limited the ability of banks to increase rates on delinquent borrowers and to charge fees on unprofitable customers. As Washington encouraged card issuers to be more selective in advancing credit and to demand higher rates when they do, interest rates on card customers predictably increased relative to other types of lending in the months after the law took effect.

Restricting bank profits on a particular product may have obvious populist appeal, but politicians shouldn't be surprised if banks decide that such consumer credit operations aren't good businesses and can function with fewer employees. Add in the various federal programs aimed at extracting penalties for this or that mortgage-foreclosure error and it's understandable that a bank would have trouble forecasting growth to justify its current work force.

To be sure, Bank of America is also suffering from its own mistake in deciding to buy Countrywide Financial in 2008. As for the financial industry generally, it had become distended and needed to shrink after the bubble years of easy money.

But given the real-world results for bank employees, politicians should not be allowed to pretend that there are no consequences when they deliberately reduce the profitability of employers. Mr. Obama proposed last week to spend some $450 billion more in outlays or tax credits to create more jobs, but it would have cost a lot less to save these 30,000.



Obama Tax Plan Would Kill Jobs, Small Firms Say

While President Obama's deficit-reduction proposal is sure to win plaudits from Warren Buffett, it may get a chillier reception from small businesses.

Obama's $3 trillion deficit reduction plan includes $1.5 trillion in tax hikes. It would end Bush-era tax cuts on the rich, cap deductions on mortgage interest and charitable donations and close various corporate loopholes.

But the plan's "Buffett Rule"may prove its most controversial feature. It would require those making more than $1 million to pay effective income-tax rates comparable to the middle class. "Any reform should follow (a) simple principle," said Obama. "Middle-class families should not have to pay higher taxes than millionaires and billionaires."

Small Firms' Big Objections

Ray Keating, chief economist with the conservative Small Business Entrepreneurship Council, responds, "That's going to raise taxes on capital. Among high-income earners, you're talking about the people with resources to invest in start-ups, new businesses and growing jobs."

Dan Danner, president of the National Federation of Independent Business, the largest small-business lobby, said in a statement: "New tax increases on America's biggest job creators are the last thing this economy needs to get back on track. At least 75% of small businesses file taxes on business income at the individual rate."

The Buffett Rule was inspired by the billionaire who lamented in a recent New York Times op-ed that due to various loopholes he pays a lower effective tax rate than his employees.

But Obama gave few details. It's not clear how the Buffett Rule would be enforced or how much revenue it would generate. "My understanding is that the president does not even count the revenue from the Buffett Rule" in the deficit plan," said Sen. Chuck Schumer, D-N.Y., in a conference call with reporters. "Instead, he means it as a first principle as we seek to cut our debt."

While Obama's deficit plan may hike taxes on entrepreneurs, the economic plan he released on Sept. 5 tries to spur job creation. It includes proposals such as a payroll tax holiday for adding new staff or increasing pay and a $4,000 tax credit for hiring the long-term unemployed.

"This is the detachment from reality among part of the political class," said Keating. "Businesses aren't going to hire somebody because of a one-time $4,000 tax credit. They weigh costs vs. returns. They look at where their business is going."

John Arensmeyer, CEO of the liberal Small Business Majority, replied, "It may not change a small business' decision if it doesn't need to fill a position, but makes it less costly to fill positions that it needs to fill."

Republicans accused Obama of engaging in class warfare. "Pitting one group of Americans against another is not leadership," said House Speaker John Boehner, R-Ohio.

But it may shore up the president's flagging support among his base. Just 68% of liberals told Gallup last week that they approve of his performance, an all-time low.

The Obama plan also cuts spending by $2 trillion — excluding the $447 billion jobs plan. That includes $1.1 trillion from the already-expected wind-down of troops from Afghanistan and Iraq, $580 billion in cuts to Medicare, Medicaid, farm subsidies and other programs, and $430 billion in interest savings.

Keating points out that many of the spending cuts are actually reductions in the rates of growth. "Spending cuts should be spending cuts," he said.

James Horney, vice president at the liberal Center on Budget and Policy Priorities, replies, "The right way to look at it is to say here is the path we're headed on, how much are we proposing to change that path?"



An amazing Grand Mufti of Australia

Grand Mufti Ibrahim Abu Mohamed feels duty to 'cure' radicals

HOMEGROWN Muslim radicals are like "ill" patients in need of guidance and whose extremism is often fuelled by examples of injustice abroad such as the simmering conflict between Israelis and Palestinians.

Australia's new Grand Mufti, Ibrahim Abu Mohamed, told The Australian young Muslims who were in the orbit of extremist preachers must be "corrected".

Speaking just days after his appointment, Dr Mohamed said homegrown radicalisation, considered by security agencies to be the most serious terror threat Australia faces, was the result of a distorted view of Islam. "Our duty is to clarify those matters," Dr Mohamed said through an interpreter.

"An extremist is like an ill person, an unhealthy person. You need to cure him and find the right cure for him more than just to destroy him and finish him off."

Dr Mohamed has earned a reputation as a bridge-builder between Australia's disparate Muslim communities. One law enforcement source contacted by The Australian described the Islamic scholar as "highly respected and very influential".

Dr Mohamed urged Australians to have some perspective on sharia law, saying the Islamic legal code was largely misunderstood and punishments were only a small part. "Sharia also calls for freedom, justice, right of speech and this is something we are very fortunate to have," he said.

"These are all matters that we already implement here as Australians, and we're proud to have it as Australian values."


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