Monday Reads

Good Morning!

I’ve  been wondering quite a bit recently about what is becoming of the American Middle Class.  Some times it seems that the kind of situation that I grew up in is a far grasp from what any potential grandchildren of mine will have.   Both of my daughters are highly educated and I still feel this way. While I study so much on the rise of a strong, vibrant middle class in many South East Asian countries, I cannot help but wonder what’s gone so wrong that we seem to be losing ours? This month has been a very violent one here in Louisiana.  We’ve had a 7 year old boy with cerebral palsy killed–dismembered actually–by a mother’s boyfriend and a number of gang shootings recently.  These kinds of crimes always increase with economic hopelessness and summer heat.  It gets to me a lot these days.

Here’s a good question from September’s The Atlantic:  “Can the Middle Class be Saved?”

It’s hard to miss just how unevenly the Great Recession has affected different classes of people in different places. From 2009 to 2010, wages were essentially flat nationwide—but they grew by 11.9 percent in Manhattan and 8.7 percent in Silicon Valley. In the Washington, D.C., and San Jose (Silicon Valley) metro areas—both primary habitats for America’s meritocratic winners—job postings in February of this year were almost as numerous as job candidates. In Miami and Detroit, by contrast, for every job posting, six people were unemployed. In March, the national unemployment rate was 12 percent for people with only a high-school diploma, 4.5 percent for college grads, and 2 percent for those with a professional degree.

Housing crashed hardest in the exurbs and in more-affordable, once fast-growing areas like Phoenix, Las Vegas, and much of Florida—all meccas for aspiring middle-class families with limited savings and education. The professional class, clustered most densely in the closer suburbs of expensive but resilient cities like San Francisco, Seattle, Boston, and Chicago, has lost little in comparison. And indeed, because the stock market has rebounded while housing values have not, the middle class as a whole has seen more of its wealth erased than the rich, who hold more-diverse portfolios. A 2010 Pew study showed that the typical middle-class family had lost 23 percent of its wealth since the recession began, versus just 12 percent in the upper class.

The ease with which the rich and well educated have shrugged off the recession shouldn’t be surprising; strong winds have been at their backs for many years. The recession, meanwhile, has restrained wage growth and enabled faster restructuring and offshoring, leaving many corporations with lower production costs and higher profits—and their executives with higher pay.

The entire issue covers the disappearing US middle class and it’s worth checking out.  Yes, it was happening prior to the 2007-2008 meltdown, but the acceleration of the decline of the standards of living for most Americans is hard to miss.  We shouldn’t forget how that happened.  Steven Pearlstein at the WP places blame squarely with the corporate lobby.

When it started out all you really wanted was to push back against a few meddlesome regulators or shave a point or two off your tax rate, but you were concerned it would look like special-interest rent-seeking. So when the Washington lobbyists came up with the clever idea of launching a campaign against over-regulation and over-taxation, you threw in some money, backed some candidates and financed a few lawsuits.

The more successful it was, however, the more you put in — hundreds of millions of the shareholders’ dollars, laundered through once-respected organizations such as the Chamber of Commerce and the National Association of Manufacturers, phoney front organizations with innocent-sounding names such as Americans for a Sound Economy, and a burgeoning network of Republican PACs and financing vehicles. And thanks to your clever lawyers and a Supreme Court majority that is intent on removing all checks to corporate power, it’s perfectly legal.

Somewhere along the way, however, this effort took on a life of its own. What started as a reasonable attempt at political rebalancing turned into a jihad against all regulation, all taxes and all government, waged by right-wing zealots who want to privatize the public schools that educate your workers, cut back on the basic research on which your products are based, shut down the regulatory agencies that protect you from unscrupulous competitors and privatize the public infrastructure that transports your supplies and your finished goods. For them, this isn’t just a tactic to brush back government. It’s a holy war to destroy it — and one that is now out of your control.

Dr. Christine Romer suggests that all we have to do is look to our history for good lessons.  Yes, she’s the Obama economic advisor that kept having to explain continually why all those labor market numbers were looking so bad for two years while not having much input into the change that would’ve made things different right now.

One reason the Depression dragged on so long was that the rapid recovery of the mid-1930s was interrupted by a second severe recession in late 1937. Though many factors had a role in the “recession within a recession,” monetary and fiscal policy retrenchment were central. In monetary policy, the Fed doubled bank reserve requirements and the Treasury stopped monetizing the gold inflow. In fiscal policy, the federal budget swung sharply, from a stimulative deficit of 3.8 percent of G.D.P. in 1936 to a small surplus in 1937.

The lesson here is to beware of withdrawing policy support too soon. A switch to contractionary policy before the economy is fully recovered can cause the economy to decline again. Such a downturn may be particularly large when an economy is still traumatized from an earlier crisis.

The recent downgrade of American government debt by Standard & Poor’s makes this point especially crucial. It would be a mistake to respond by reducing the deficit more sharply in the near term. That would almost surely condemn us to a repeat of the 1937 downturn. And higher unemployment would make it all that much harder to get the deficit under control.

Salon‘s Glen Greenwald has Yves Smith guest posting. She reminds us that income inequality is bad for rich people too.

A new survey found that 64% of the public doesn’t have enough funds on hand to cope with a $1000 emergency. Wages are falling for 90% of the population. And disabuse yourself of the idea that the rich might decide to bestow their largesse on the rest of us. Various studies have found that upper class individuals are less empathetic and altruistic than lower status individuals.

This outcome is not accidental. Taxes on top earners are the lowest in three generations. Yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable.

Given that this rise in wealth has been accompanied by an increase in the power of those at the top, is there any hope for achieving a more just society? Bizarrely, the self interest of the upper crust argues in favor of it. Profoundly unequal societies are bad for everyone, including the rich.

First, numerous studies have ascertained that more money does not make people happier beyond a threshold level that is not all that high. Once people have enough to pay for a reasonable level of expenses and build up a safety buffer, more money does not produce more happiness.

But even more important is that high levels of income inequality exert a toll on all, particularly on health. Would you trade a shorter lifespan for a much higher level of wealth? Most people would say no, yet that is precisely the effect that the redesigning of economic arrangements to serve the needs at the very top is producing. Highly unequal societies are unhealthy for their members, even members of the highest strata. Not only do these societies score worse on all sorts of indicators of social well-being, but they exert a toll even on the rich. Not only do the plutocrats have less fun, but a number of studies have found that income inequality lowers the life expectancy even of the rich.

All the economists that I follow have been abuzz about that NYT’s article on Sunday on how politics and not economics is driving Obama’s policy.  Here’s some thoughts from Mark Thoma.

When you are arguing that deficit reduction — less spending — creates jobs because it’s politically expedient to make this point and you care more about votes than fixing the economy, the truth can be uncomfortable. Is it so hard to explain that yes, in the long-run deficit reduction can be helpful. When the economy is near full employment and the demand for investment funding is high, the government’s use of funds to finance its deficit can slow investment activity. Near full employment, government spending can crowd out private investment so we need a long-run plan for deficit reduction.

But presently, with so much idle capacity and with so much liquidity looking unsuccessfully for a place to earn profits, no such fear exists. Government spending won’t crowd out private sector investment, it will provide a needed net addition to output and provide jobs for struggling households. Borrowing costs are extraordinarily cheap and there are plenty of infrastructure needs for the government to invest in, so it’s not as though we wouldn’t get something of value for our money over and above the needed help it provides to working class households. It’s a short-run and a long-run win.

Deficit reduction in the short-run makes things worse, not better, and hence harms rather than helps reelection chances. I understand that the administration is doing its best to prevent immediate cuts, and that the recent deficit agreement doesn’t put large cuts into place until 2013. But there are still small cuts endorsed by the administration — we are still going in the wrong direction — and if employment remains sluggish come election time, and if the administration has no public record of trying to do anything about it, what argument will they have?  We could have provided more jobs, but we didn’t bother to try because we didn’t think we could explain ourselves to the public? We knew better, but the polls were unfavorable so we didn’t bother to pursue it?

I’ve spent the entire day flummoxed by the obvious cynicism that underlies the idea that it’s easier to sell out all principles than actually elucidate an answer to the problem that we know we have and that we know every one cares about which is lack of jobs and lack of economic growth to due lack of aggregate demand. We should all go to the White House and start pitching macroeconomics textbooks over the fences.

Anyway, that’ll get things started today.  What’s on your reading and blogging list?