Great Recession: The Limping Middle Class

The 5% of Americans with the highest incomes now account for 37% of all consumer purchases, according to the latest research from Moody's Analytics.

An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back.

Look back over the last hundred years and you'll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It's no mere coincidence that over the last century the top earners' share of the nation's total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Some say we couldn't have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans' average hourly pay has risen only 6% since 1985, adjusted for inflation, German workers' pay has risen almost 30%. At the same time, the top 1% of German households now take home about 11% of all income — about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

The real reason for America's Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people with great economic power had an undue influence in making the rules of the economic game. With hefty campaign contributions and platoons of lobbyists and public relations spinners, America's executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.

For more, see The Limping Middle Class by Robert B. Reich, September 3, 2011 at NYTimes.com.

International: Hybrid in a Trade Squeeze

... as G.M. prepares to start selling [the Chevy Volt] here by the end of this year, the Chinese government is putting heavy pressure on the company to share some of the car's core technology.

The Chinese government is refusing to let the Volt qualify for subsidies totaling up to $19,300 a car unless G.M. agrees to transfer the engineering secrets for one of the Volt's three main technologies to a joint venture in China with a Chinese automaker, G.M. officials said. Some international trade experts said China would risk violating World Trade Organization rules if it imposed that requirement.

Chinese automakers may need technology assistance for advanced cars because their research budgets tend to be only a tiny share of sales by international standards.

The three core technologies that China is most interested in acquiring through the subsidy provision are electric motors, complex electronic controls and power storage devices, whether batteries or a fuel cell. At least one of those systems would need to be included in the technology transfer for a vehicle to qualify for the consumer subsidies.

For more, see Hybrid in a Trade Squeeze by Keith Bradsher, September 5, 2011 at NYTimes.com.

Security: U.S. Pulls Back from Lead Role in Conflicts: IISS

A war-weary United States will increasingly look for regional solutions to regional problems, playing a secondary "enabling" role in conflicts similar to the one it played in Libya, an influential think-tank said on Tuesday. Reuters

The International Institute for Strategic Studies (IISS) said U.S. leadership was giving way to a world where "rotating coalitions of the willing and available," sometimes without the United States, would address international crises.

"There is a sense that the West is suffering from strategic arthritis and exhaustion (and) the rising powers of the East from strategic growth pains and indecision," Chipman said.

"The room for mavericks and rogues to maneuver for their own gain is thus expanded," he said without naming any.

For more, see U.S. Pulls Back from Lead Role in Conflicts: Iiss by Reuters, September 6, 2011 at NYTimes.com.

Health: Saffron Takes on Cancer

Harvested from the Crocus sativus flower (shown), saffron stifles liver cancer's growth in rats and even inhibits the proliferation of human liver cancer cells, a new study finds.

Past studies have hinted it has benefits against depression, inflammation, memory loss and as an antioxidant.

For more, see Saffron Takes on Cancer by Nathan Seppa, August 30, 2011 at ScienceNews.

California: Education vs. Prisons: Shifting Priorities

The budget for the California Department of Corrections and Rehabilitation increased from about 3% of the state's general fund in 1980 to 11.2% for this fiscal year, according to figures prepared at the request of The Bay Citizen by the state Department of Finance. Meanwhile, funding for UC and CSU dropped from 10% of the state's general fund 30 years ago to about 6.6% this fiscal year.

"The growth in spending for pay and benefits for prison guards, prison health care mandated by various lawsuits, and the extraordinary amounts of money we are paying prison doctors" all contribute [to mounting prison costs], he said. "California is clearly the worst in the U.S. for what we get and what we spend. California has the largest prison system in the U.S., it is the most expensive per capita rate in the U.S. and the state has some of the highest recidivism rates of any state in the nation."

For more, see Education vs. Prisons: Shifting Priorities by Jennifer Gollan, Sydney Lupkin, August 30, 2011 at The Bay Citizen.

Mind: The Good Judgment Project

Prediction markets can harness the "wisdom of crowds" to solve problems, develop products, and make forecasts. These systems typically treat collective intelligence as a commodity to be mined, not a resource that can be grown and improved. That's about to change.?Starting in mid-2011, five teams will compete in a U.S.-government-sponsored forecasting tournament. Each team will develop its own tools for harnessing and improving collective intelligence and will be judged on how well its forecasters predict major trends and events around the world over the next four years.?The Good Judgment Team, based in the University of Pennsylvania and the University of California Berkeley, will be one of the five teams competing — and we'd like you to consider joining our team as a forecaster. If you're willing to experiment with ways to improve your forecasting ability and if being part of cutting-edge scientific research appeals to you, then we want your help.

In spite of the following, I was able to volunteer on September 4 and was accepted (so maybe you can, too).

As of August 22, 2011, we are recruiting "reservists" only. Those who pre-register now will be placed on a waiting list. When additional forecasters are needed, we will contact waiting-list pre-registrants in the order of sign up to fill the ranks of our forecasters.

For more, see The Good Judgment Project, September 7, 2011 at The Good Judgment Project.

Society: Welfare Rates Almost Unchanged During Recession

Not surprisingly, participation in government support programs like food stamps and unemployment insurance has soared in the United States during the recession. Those services kicked in, as the very concept of a social safety net implies, just when people have needed them the most.

But there is one odd exception to this trend: Caseloads for Temporary Assistance for Needy Families — the program created by the signing of welfare reform 15 years ago this week — have barely crept up nationwide since 2007. In 13 states, caseloads have dropped even as local unemployment as much as doubled.

Now we're learning for the first time how welfare reform looks in a severe recession. And it turns out that a system dramatically reformed to emphasize employment doesn't support the poor well when there are no jobs to be had.

In 1996, more than 80% of families eligible for the program enrolled in it. By 2005, that figure had fallen to 40%. In some states, the caseload decline during the recession has simply been an extension of that trend. The data have varied dramatically by state, as welfare reform's new block grant formula gave individual states much greater control over how they operate the program. In 2009, 80% of poor families in California participated. In Texas, 8% did.

For more, see Welfare Rates Almost Unchanged During Recession by Emily Badger, August 23, 2011 at Miller-McCune.

Economics: The Bush Tax Cuts and the Deficit

That chart comes from the Congressional Budget Office's latest report, released Wednesday, on the budget and the economic outlook.

For more, see The Bush Tax Cuts and the Deficit by Catherine Rampell, August 25, 2011 at Economix.

Economics: Why Do Companies Hire?

Based on my interviews with CEOs, I've concluded the obvious — companies hire only when not hiring means they can't satisfy customer demand. Put another way, companies hire when the profits missed from not hiring exceed the cost of adding a new worker.

Companies are not hiring now because in general, they have slack in their productive capacity. More specifically, in July 2011, their capacity utilization — a measure that compares demand for their products to their ability to produce them — stood at 77.5% — short of the long-term average of 80.4%.

For more, see Why Do Companies Hire? by Peter Cohan, September 3, 2011 at Forbes.com.

Regulation: Saving Gas via Underpowered Death Traps

After the Obama Administration unveiled new fuel-economy standards last week for cars, light trucks and SUVs — setting an average goal of 54.5 miles per gallon by 2025 — perennial critics of the policy pounced on one of its feared side effects.

This will take away consumer choice, warned Sterling Burnett, a senior fellow with the free-market think thank National Center for Policy Analysis, and force all but the wealthiest drivers into small, underpowered death traps.

Yes, it's true that the fuel-economy standards the U.S. has been using cost lives. Economist Mark Jacobsen has estimated that for every mile-per-gallon we raise the standards, 149 traffic fatalities occur per year. That would mean 1,490 deaths if the standards were raised from, say, 30 miles-per-gallon to 40. But this doesn't have to be the case. It's possible, Jacobsen has concluded, to increase fuel efficiency without also decreasing safety.

The fuel economy standards we've been using actually make [large differences in the sizes of vehicles] worse. The government deploys a separate, higher standard for cars than for light trucks and SUVs. And this essentially encourages carmakers to make small cars even smaller — without doing the same to trucks and SUVs and without providing any incentive for drivers to downsize from an SUV into a car.

Jacobsen's solution: one average fuel economy standard for all light vehicles (which is how the EPA now regulates auto emissions). Combining what engineers have learned about vehicle safety with what economists have studied about the auto arms race, Jacobsen's model produces a startling result. Separate standards for cars and trucks lead to deadly accidents; a single standard for all vehicles would lead to almost none.

For more, see Saving Gas via Underpowered Death Traps by Emily Badger, August 5, 2011 at Miller-McCune.

Budget: Budget Hawks, Enviro Doves Offer Budget Cuts

The Heartland Institute and Friends of the Earth don't agree on much of anything. Heartland, based in Chicago, is a free-market think tank widely viewed with suspicion by environmentalists. Friends, as its name suggests, is a progressive environmental advocacy group that's fought for action on climate change. Neither of them, though, can stand the federal government's flood insurance program.

Uncle Sam's ledger is in fact full of similar initiatives that sit within the overlapping crosshairs of organizations that would otherwise never be caught on the same conference call — green groups, tax hawks and free-market hard-liners. Friends of the Earth, along with Taxpayers for Common Sense, has been compiling a list of such programs for 16 years. Their regular manifesto is called the Green Scissors report.

Wednesday, they released the latest version, produced with the added buy-in of the Heartland Institute and left-leaning consumer advocacy group Public Citizen. And this year, the report carries new significance. Think of it, said Ryan Alexander, president of Taxpayers for Common Sense, as a memo to the congressional super-committee.

The groups have identified $380 billion in savings over five years that could come from eliminating subsidies they say are both fiscally and environmentally irresponsible.

Among the subsidies that could be eliminated, many of which require taxpayers to pay the bill for pollution and assume the risk for failure: royalty-free oil and gas leases in federal waters ($53 billion), the corn ethanol tax credit ($6 billion), loan guarantees for nuclear power plant construction ($18.5 billion) and crop insurance ($30 billion).

For more, see Budget Hawks, Enviro Doves Offer Budget Cuts by Emily Badger, August 24, 2011 at Miller-McCune.

Science: How a Hurricane Works

At its peak, a hurricane can dump 5 cubic miles of rain per day and unleash thermal power (freed by condensation of that water) at a rate of 6 x 1014 watts—equal to 200 times the amount of electricity generated by humans worldwide. Only about 0.25% of this power is converted to wind.

For more, see How a Hurricane Works by Douglas Fox, August 25, 2011 at Popular Mechanics.

Economics: Zero Job Growth Latest Bleak Sign for U.S. Economy

We have virtually the same number of jobs as we did in January 2000, said Patrick J. O'Keefe, the director of economic research at J. H. Cohn, an accounting firm. Were jobs to continue to grow at the 2011 monthly average, it would take more than four years to return to the prerecession employment level.

Governments continued to cut jobs, the Labor Department reported. Small gains at the state level were attributed in part to the return of workers from the government shutdown in Minnesota. Local governments lost 20,000 jobs as they continued to struggle with budget shortfalls and the disappearance of federal stimulus money.

For more, see Zero Job Growth Latest Bleak Sign for U.S. Economy by Shaila Dewan, September 2, 2011 at NYTimes.com.

Mind: Everybody's an Expert

Old but important ...

It is the somewhat gratifying lesson of Philip Tetlock's new book, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton; $35), that people who make prediction their business—people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables—are no better than the rest of us.

... Tetlock claims that the better known and more frequently quoted [experts] are, the less reliable their guesses about the future are likely to be. The accuracy of an expert's predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge. People who follow current events by reading the papers and newsmagazines regularly can guess what is likely to happen about as accurately as the specialists whom the papers quote.

He picked two hundred and eighty-four people who made their living commenting or offering advice on political and economic trends ... By the end of the study, in 2003, the experts had made 82,361 forecasts.

Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable.

And the more famous the forecaster the more overblown the forecasts. Experts in demand, Tetlock says, were more overconfident than their colleagues who eked out existences far from the limelight.

Expert Political Judgment is just one of more than a hundred studies that have pitted experts against statistical or actuarial formulas, and in almost all of those studies the people either do no better than the formulas or do worse. In one study, college counsellors were given information about a group of high-school students and asked to predict their freshman grades in college. The counsellors had access to test scores, grades, the results of personality and vocational tests, and personal statements from the students, whom they were also permitted to interview. Predictions that were produced by a formula using just test scores and grades were more accurate. There are also many studies showing that expertise and experience do not make someone a better reader of the evidence. In one, data from a test used to diagnose brain damage were given to a group of clinical psychologists and their secretaries. The psychologists' diagnoses were no better than the secretaries'.

Tetlock's experts were also no different from the rest of us when it came to learning from their mistakes. Most people tend to dismiss new information that doesn't fit with what they already believe. Tetlock found that his experts used a double standard: they were much tougher in assessing the validity of information that undercut their theory than they were in crediting information that supported it. The same deficiency leads liberals to read only The Nation and conservatives to read only National Review.

Tetlock found that ... experts routinely misremembered the degree of probability they had assigned to an event after it came to pass. They claimed to have predicted what happened with a higher degree of certainty than, according to the record, they really did. When this was pointed out to them, by Tetlock's researchers, they sometimes became defensive.

Low scorers look like hedgehogs: thinkers who know one big thing, aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who do not get it, and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. High scorers look like foxes: thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible ad hocery that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.

Tetlock did not find, in his sample, any significant correlation between how experts think and what their politics are. His hedgehogs were liberal as well as conservative, and the same with his foxes. (Hedgehogs were, of course, more likely to be extreme politically, whether rightist or leftist.) He also did not find that his foxes scored higher because they were more cautious—that their appreciation of complexity made them less likely to offer firm predictions. Unlike hedgehogs, who actually performed worse in areas in which they specialized, foxes enjoyed a modest benefit from expertise. Hedgehogs routinely over-predicted: twenty per cent of the outcomes that hedgehogs claimed were impossible or nearly impossible came to pass, versus ten per cent for the foxes. More than thirty per cent of the outcomes that hedgehogs thought were sure or near-sure did not, against twenty per cent for foxes.

The upside of being a hedgehog, though, is that when you're right you can be really and spectacularly right. Great scientists, for example, are often hedgehogs. They value parsimony, the simpler solution over the more complex. In world affairs, parsimony may be a liability—but, even there, there can be traps in the kind of highly integrative thinking that is characteristic of foxes.

Tetlock also has an unscientific point to make, which is that we as a society would be better off if participants in policy debates stated their beliefs in testable forms—that is, as probabilities—monitored their forecasting performance, and honored their reputational bets. He thinks that we're suffering from our primitive attraction to deterministic, overconfident hedgehogs. It's true that the only thing the electronic media like better than a hedgehog is two hedgehogs who don't agree. Tetlock notes, sadly, a point that Richard Posner has made about these kinds of public intellectuals, which is that most of them are dealing in solidarity goods, not credence goods. Their analyses and predictions are tailored to make their ideological brethren feel good—more white swans for the white-swan camp. A prediction, in this context, is just an exclamation point added to an analysis.

For more, see Everybody's an Expert by Louis Menand, December 5, 2005 at The New Yorker.

Economics: A Call to Arms

From an article Dave S. contributed ...

More capital [for Europe's banks], Ms Lagarde [the new managing director of the IMF] argued, was essential to cutting the chains of contagion in the euro crisis. Without it there could easily be the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.

Echoing a theme raised by Ben Bernanke, the Fed chairman, in his speech the previous day, Ms Lagarde argued that fiscal policy should pivot, putting in place policies to reduce future deficits while supporting growth today. This was not a cop-out, she argued. Growth was necessary for fiscal credibility. After all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

In America that pivot would require credible decisions on future deficit reduction involving both tax increases and spending cuts, coupled with a focus today on making a serious dent in long-term unemployment. In Europe, she argued, this fiscal rebalancing, and the bigger short-term deficits it implied, would mean more official financing for some countries. That ought to include continued support from the ECB.

For more, see A Call to Arms, August 28, 2011 at The Economist.

Diversion: Birth Control

From Calvin and Hobbes by Bill Watterson, August 27, 2011 at GoComics.

Taxes: Tax Me More, Europe's Wealthy Say

Echoing a call by Warren E. Buffett, members of the European wealthy elite are urging their governments to raise their taxes or enact special levies to help reduce growing budget deficits.

For more, see Tax Me More, Europe's Wealthy Say by Julia Werdigier, August 30, 2011 at NYTimes.com.

Politics: Perry's Blunt Views in Books Get New Scrutiny as He Joins Race

Rick Perry, the governor of Texas, believes that climate change is a “contrived, phony mess.” The federal income tax was the “great milestone on the road to serfdom.” And the Boy Scouts of America are under attack by “a radical homosexual movement.”

Mr. Perry also thinks that senators should be chosen by legislatures, not the people. And he says that Social Security, the retirement program for the nation's elderly, is a “failure” enacted during a power grab called the New Deal and is “something we have been forced to accept.”

Those blunt assertions are in two books Mr. Perry wrote while building a deep base of support in Texas among evangelical voters and Tea Party supporters.

For more, see Perry's Blunt Views in Books Get New Scrutiny as He Joins Race by Michael D. Shear, September 2, 2011 at NYTimes.com.

Great Recession: U.S. To Sue Big Banks over Mortgages

The agency that oversees U.S. mortgage markets is preparing to file suit against more than a dozen big banks, accusing them of misrepresenting the quality of mortgages they packaged and sold during the housing bubble, the New York Times reported late Thursday.

The government will argue the banks, which pooled the mortgages and sold them as securities to investors, failed to perform due diligence required under securities law and missed evidence that borrowers' incomes were falsified or inflated, the Times reported. Fannie and Freddie lost more than $30 billion, due partly to their purchases of mortgage-backed securities, when the housing bubble burst in 2008.

For more, see U.S. To Sue Big Banks over Mortgages by Reuters, September 1, 2011 at The Washington Post.

Economics: Budget Office Says Savings Could Be Short-Lived

The Congressional Budget Office, in its annual summer snapshot of the nation's fiscal health, projected annual deficits from fiscal year 2012, which begins Oct. 1, through 2021 totaling $3.5 trillion. That is just over half of the $6.7 trillion shortfall it forecast in March.

About two-thirds of the difference reflected projected savings from the bipartisan deficit deal; the rest was due to technical and economic revisions. The lower deficits would leave the nation's accumulated public debt at $14.5 trillion in 2021, or 61% of the gross domestic product — a level that many economists consider the maximum level of debt that is sustainable in a growing economy.

But such projections understate the budgetary challenges facing the federal government in the coming years, Douglas Elmendorf, director of the budget office, wrote on its Web site.

Annual deficits would be $5 trillion higher for the decade, or a total of $8.5 trillion, assuming the White House and Congress continue several policies as in years past — keeping the lower income-tax rates of 2001 and 2003, which already were extended by two years last December; adjusting the alternative minimum tax annually so it does not hit middle-class taxpayers, and blocking a mandated cut in Medicare payments to doctors. The result would be deficits averaging 4.3% of gross domestic product instead of 1.8%, the budget office said; economists generally say annual deficits should not exceed 3% of gross domestic product.

For more, see Budget Office Says Savings Could Be Short-Lived by Jackie Calmes, August 24, 2011 at NYTimes.com.