The American Prospect Online, August 21, 2008
This week in economic news: Newsflash! Giving tax breaks to the rich doesn't create jobs, it looks like recession time, and more tales of dumb executives.
No-Jobs McCain Takes the Offensive
Given the economy's dismal performance during the Bush presidency, a candidate who is running on the Bush economic program would have reason to be defensive, but not Sen. McCain. McCain is turning reality on its head, filling the airwaves with commercials saying that Obama's plan to raise taxes on the rich will kill jobs.
It is truly unbelievable that we are having this argument. We only have to go back to the Clinton years to see how the economy performs when tax rates on the rich are at the level proposed by Sen. Obama.
During the eight years of the Clinton administration, the private sector added 15.8 million jobs. By contrast, in the seven years and six months of the Bush administration, when rich people paid the Bush-McCain tax rates, the private sector added just 3.5 million jobs, and it is now losing jobs at the rate of almost 100,000 a month as President Bush prepares for retirement.
The real wage for the typical worker rose by 6.6 percent in the Clinton years. By contrast, wages have risen by just 1 percent in the Bush years and are now falling. At the current rate of decline, real wages will be lower in January 2009 than when President Bush took office in 2001. The typical family's income rose by 15.3 percent under Clinton and fell by 1.6 percent under Bush.
Wealth levels, health-care coverage, poverty rates, and just about any other measure of broad well-being shows that the economy did better with the Clinton-Obama tax rates on the rich than it did with the Bush-McCain tax rates.
At this point, it is ridiculous that we are even having this debate. We've tried trickle down economics; it doesn't work. It didn't work under Reagan, and it didn't work under Bush. Giving tax breaks to the rich doesn't create jobs; it just gives money to rich people, end of story.
Falling GDP, Just Before the Election
The last major release of economic data before the election will be the third-quarter gross domestic product report which comes out the Thursday before Election Day. The big jump in the July consumer price index (CPI) that the Labor Department reported last week makes it very likely that this GDP report will show negative growth.
The CPI increased by 0.8 percent in July. This means that consumer spending is likely to show a decline in the month, after adjusting for inflation. Consumer spending is likely to look even worse in August and September because the effect of the tax-rebate checks will be wearing off, the economy is losing jobs, and wages are falling. That means that consumption, which is 70 percent of GDP, is mostly going to be down for the quarter.
The other components of GDP probably won't look much better. Housing is still heading down, as is investment. State and local governments are making budget cuts in order to balance the budget. Trade has kept the economy growing the last three quarters, but we are unlikely to see enough improvement to keep GDP growth in positive territory this time.
In short, it looks like recession time. That's certainly bad news, but if it's going to happen, it might be a good time.
Producer Prices Jump in July
The Labor Department's finished-goods index increased by 1.2 percent in July, bringing the increase in the index over the last year to 9.8 percent, the highest year-over-year increase since 1981. The biggest factors in this increase have been food and energy prices, which have risen by 8.7 percent and 28 percent respectively over the last year.
Even pulling out these volatile components, there is still considerable evidence of growing inflation. The core finished consumer goods index rose by 3.8 percent over the last year and has risen at a 5.1 percent annual rate over the last quarter. Inflation at earlier stages of production looks even worse.
The basic story is that rising commodity and import prices are putting considerable upward pressure on prices. Until recently, these price increases had been largely absorbed with lower profit margins, but now firms are raising prices. This is bad news for workers, since wage growth has actually slowed.
Really Dumb at the Top
Workers may have trouble paying for their food and gas, but those eight-figure CEOs are still doing just fine. The question that the rest of us have is what do they do for this money.
The Post tried to answer this with a lengthy piece about Daniel Mudd, the CEO of Fannie Mae, the near bankrupt mortgage giant. Mr. Mudd thought it was a clever idea to buy up more sub-prime debt in early 2007, when the market was already collapsing.
According to the article, Fannie Mae ran simulations assuming that house prices fell by 5 percent for two consecutive years. Even then, its sub-prime debt should have been fine.
It might have tried simulations that assuming a 20 percent, 2-year price decline, like the one we have actually seen. Or better yet, they could have assumed the 30 percent drop in prices that some of the hottest sub-prime markets have experienced. But that might have required some knowledge of the housing market.
More Dumb Executives
New York Times columnist Floyd Norris reports on a CreditSights.com analysis of the problems at Wachovia, another giant bank on its back. This detail from an interview with Wachovia's chief financial officer and chief risk officer is particularly funny and depressing:
"Wachovia noted that some portion of the population which is attracted to the option ARM product seemed to 'know something that the underwriters didn't.' ... So it seems that borrowers who choose a mortgage with the option of lower minimum payments may in fact be indicating to the lender that there is more likelihood that they will not have the resources to cover the fully amortizing payment."
In other words, Wachovia discovered that people who opt for loans that charge them higher interest rates, but allow them to make low initial payments, may have trouble paying off their loans. As Norris comments: "Who could have known?"
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.