economics

Cross-posted at Reports from the Economic Front.

Congress has finally agreed on a deficit reduction plan that President Obama supports. As a result, the debt ceiling is being lifted, which means that the Treasury can once again borrow to meet its financial obligations.

Avoiding a debt default is a good thing. However, the agreement is bad and even more importantly the debate itself has reinforced understandings of our economy that are destructive of majority interests.

The media presented the deficit reduction negotiations as a battle between two opposing sides. President Obama, who wanted to achieve deficit reduction through a combination of public spending cuts and tax increases, anchored one side. The House Republicans, who would only accept spending cuts, anchored the other. We were encouraged to cheer for the side that we thought best represented our interests.

Unfortunately, there was actually little difference between the two sides in terms of the way they engaged and debated the relevant issues. Both sides agreed that we face a major debt crisis. Both sides agreed that out-of-control social programs are the main driver of our deficit and debt problems. And both sides agreed that the less government involvement in the economy the better.

The unanimity is especially striking since all three positions are wrong. We do not face a major debt crisis, social spending is not driving our deficits and debt, and we need more active government intervention in the economy, not less, to solve our economic problems.

So what was the deal?

Before discussing these issues it is important to highlight the broad terms of the deficit reduction agreement. The first step is limited to spending cuts; discretionary spending is to be reduced by $900 billion over the next ten years. Approximately 35% of the reduction will come from security-related budgets (military and homeland security), with the rest coming from non-security discretionary budgets (infrastructure, energy, research, education, and social welfare). In exchange for these budget cuts the Congress has agreed to raise the debt ceiling by $1 trillion.

The agreement also established a 12 person committee (with 6 Democrats and 6 Republicans) to recommend ways to reduce future deficits by another $1.2-1.5 trillion. Its recommendations must be made by November 23, 2011 and they can include cuts to every social program (including Social Security, Medicare and Medicaid), as well as tax increases.

Congress has to vote on the committee’s package of recommendations by December 23, 2011, up or down. If Congress approves them they will be implemented. If Congress does not approve them, automatic cuts of $1.2 trillion will be made; 50% of the cuts must come from security budgets and the other 50% must come from non-security discretionary budgets. Regardless of how Congress votes on the recommendations, it must also vote on whether to approve a Balanced Budget Amendment to the Constitution. Once this vote is taken, the debt ceiling will be raised again by an amount slightly smaller than the deficit reduction.

Check out this flowchart from the New York Times if you want a more complete picture of the process.

Why is this a problem?

Those who favor reducing spending on government programs generally argue that we have no choice because our public spending and national debt are out of control, threatening our economic future. But, the data says otherwise.

The chart below, from the economist Menzie Chinn at Econbrowser, shows the movement in the ratio of publically held debt to GDP over the period 1970 to 2011; the area in yellow marks the Obama administration. While this ratio has indeed grown rapidly, it remains well below the 100% level that most economists take to be the warning level. In fact, according to Congressional Budget Office predictions, we are unlikely to reach such a level for decades even if we maintain our current spending and revenue patterns.

The sharp growth in the ratio over the last few years strongly suggests that our current high deficits are largely due to recent developments, in particular the 2001 and 2003 Bush tax cuts, the wars in Iraq and Afghanistan, and the Great Recession. Their contribution can be seen in this chart from the New York Times.

The effects of the tax cuts and economic crisis on our deficits (and by extension debt) are especially visible in the following chart (again from Menzie Chinn), which plots yearly changes in federal spending and federal revenue as a percentage of GDP (the shaded areas mark periods of recession). As we can see, the recent deficit explosion was initially driven more by declining revenues than out of control spending. Attempts to close the budget gap solely or even primarily through spending cuts, especially of social programs, is bound to fail.

To summarize:

Tragically, the debate over how best to reduce the deficit has encouraged people to blame social spending for our large deficits and those large deficits for our current economic problems.  As a result, demands for real structural change in the way our economy operates are largely dismissed as irrelevant.

Recent economic data should be focusing our attention on the dangers of a new recession.  According to the Commerce Department our economy grew at an annual rate of just 1.3% in second quarter of this year, following a first quarter in which the economy grew by only 0.3%.  These are incredibly slow rates of growth for an economy recovering from a major recession.  To put these numbers in perspective, Dean Baker notes that we need growth of over 2.5% to keep our already high unemployment rate from growing.

Cutting spending during a period of economic stagnation, especially on infrastructure, research, and social programs, is a recipe for greater hardship.  In fact, such a policy will likely further weaken our economy, leading to greater deficits.  This is what happened inthe UK, Ireland, and Greece—countries with weak economies that tried to solve their deficit problems by slashing public spending.

We need more active government intervention, which means more spending to redirect and restructure the economy; a new, more progressive tax structure; and a major change in our foreign policy, if we are going to solve our economic problems.  Unfortunately for now we don’t have a movement powerful enough to ensure our side has a player in the struggles that set our political agenda.

Cross-posted at Family Inequality.

The news each month is usually on unemployment rates, weekly filings of new claims, layoffs and new hiring. And the Pew report on widening race/ethnic wealth gaps was eye-opening. But you can take the measure of the recession overall maybe best with the employment rates — how many people have jobs? By that measure, the news is flat-to-down without letup. The Black-White discrepancy in the trends is increasing.

Here is the employment trend for White and Black women, showing that Black women had higher employment rates before the recession, but they’ve fallen more than twice as much as White women’s (a drop of 5.7% versus 2.4% as of June):

Source: Bureau of Labor Statistics data.

For men, the gap is bigger and the lines further apart, so I added a ratio line to help show the gap. Black men’s rate has fallen 5.6%, compared with 3.8% for White men:

The Christian Science Monitor has an article reviewing some of the factors that contribute to the unemployment gap for men, including education, incarceration and discrimination. And the Center for American Progress has more detail in this report, which argues that declines in manufacturing and public employment are increasing the Black-White gaps especially in this recession.

What the broader statistics don’t show as well is the tenuousness of the jobs Black workers have compared to Whites generally — working for weaker firms, in more segregated jobs, as a result of a racialized sorting process, which put them at higher risk of job loss in a recession (even without discrimination in firing decisions, which there is, too).

Cross-posted at Ms.

A new study from the Pew Research Center reports staggering racial gaps in median wealth — a person’s accumulated assets minus her debt — between whites ($113,149), blacks ($5,677) and Latinos ($6,325). That’s a 20-to-1 white-to-black ratio of wealth and a 18-to-1 white-to-Latino ratio.

Essentially, all of the economic gains made by people of color since the Civil Rights Movement have been erased in a few years by the Long Recession. Whites experienced a net wealth loss of 16 percent from 2005 to 2009, while blacks lost about half of their wealth (53 percent) and Latinos lost two-thirds of their wealth.

Media outlets reporting on the Pew study point to housing loss as the primary culprit, since the net worth of blacks and Latinos is heavily reliant on home ownership, while whites are more likely to have retirement accounts and stock.

While this is certainly accurate, it obscures the core racism at play. Public policy decisions have been responsible for the speedy recovery of the financial market and the slow recovery of the housing market. From the start, the Troubled Asset Relief Program (TARP) favored Wall Street recovery over homeowner recovery, with only $12 billion of the $700 billion bailout spent on foreclosure programs. (To be fair, most of the Wall Street money was eventually paid back.)

So prioritization of corporate interests disproportionately assisted whites in the recovery — but (perhaps) not intentionally. The same cannot be said for actual lending practices.

Rampant– — and racist — fraud in the home loan industry was a primary contributor to the collapse, with 61 percent of sub-prime loan holders actually qualifying for prime loans that would have been easier to maintain. Blacks and Latinos were especially targeted for sub-prime loans, a practice called “reverse redlining.” Wells Fargo loan officer-turned-whistle blower Elizabeth Jacobson admitted that her company specifically went after African Americans for sub-prime loans through “wealth building” conferences hosted in black churches.

The employment gap between whites and blacks is also a contributor to the wealth gap. While white American are suffering through the Long Recession with 7.9 percent unemployment, blacks are experiencing Great Depression-like figures of 16.1 percent unemployment. This figure jumps to 31.4 percent for blacks ages 16 to 24, and black Americans have consistently had the higher rate of unemployment compared to white Americans since 2007.

Not surprisingly, the employment gap, too, has racist origins. The Center for American Progress analyzed unemployment data from the last three recessions and found that black unemployment starts earlier, rises faster and lingers longer. Explanations include the concentration of black workers in the stumbling manufacturing sector, the cutting of public sector jobs — and racial discrimination. This last finding is no shock given that employers are more likely to call back a white job applicant with a criminal record than a similarly qualified black man without a record.

The role of racism in poverty is important to keep in mind at a time Washington politicians are manufacturing crises that will slash the entitlement programs that 1 in 6 Americans rely on. It’s ironic that we’re cutting safety nets for the poor just as we’re experiencing the highest poverty rate since 1960, with blacks and Latinos three times as likely to live in poverty. Public policy is supposed to knock down racial and other non-meritorious barriers to pursuing life, liberty, and happiness, not jack them higher.

The Pew Research Center just released an analysis of 2009 government data on the wealth gap between White non-Hispanics, African Americans, and Hispanics, and it’s pretty depressing. It’s not just that the gap is so large, but also that Hispanic and African American households have such low median worth in absolute terms (p. 13 in the report):

A quarter of Hispanics and Blacks have no assets other than a vehicle, compared to 6% of Whites. And 35% of Black and 31% of Hispanic households had negative median net worth in 2009, with their debts outweighing all of their assets; this was true of only 15% of White non-Hispanics.This is partially because African Americans and especially Hispanics were disproportionately hit by the effects of the housing crisis, the single largest source of reduced wealth. Overall, those two groups have suffered a much more dramatic loss in assets than Whites (sorry, Asians weren’t included in all the images, and Native Americans aren’t included in any):

The result is a wealth gap that is the largest it has ever been since the government began making such data available in the early ’80s. White non-Hispanics have nearly 20 times higher median wealth than Blacks, and 15 times as much as Hispanics:

For more details, check out the full report. The implications of these disparities, and the low levels of financial assets available to African Americans and Hispanics compared to Whites, is truly stunning.

Cross-posted at Reports from the Economic Front.

Austerity advocates talk about government spending as if its impact on the economy is marginal. In their world, we can slash spending with few if any consequences for our roads and bridges; transportation, health care, and educational systems; research and development activity; investment in plant and equipment; employment and wage levels; economic growth . . . the list goes on.

That may be how it looks in their world, but in the real world it is quite different. Looking just at personal income, for example, the New York Times reports that:

An extraordinary amount of personal income is coming directly from the government.

Close to $2 of every $10 that went into Americans’ wallets last year [2010] were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

If the austerity advocates have their way, public spending will be cut. However, as the information in the box below reveals, the consequences will be severe for our entire economy, not just for those individuals directly receiving support. As the New York Times explains, “Throughout the recession and its aftermath, government benefits have helped keep money in people’s wallets and, in turn, circulating among businesses. Total government payments rose to $2.3 trillion in 2010, from $1.7 trillion in 2007, an increase of about 35 percent.”

We definitely need to remake our political-economy. However, it is madness to think that destroying the social infrastructure underpinning current economic activity is a productive way to achieve that goal.

Recently I posted about the loss of genetic diversity in industrial agriculture, partially due to increasing concentration at every link in food commodity chains, from the farm to the grocery store. This image from the Centre for Research on Globalization, sent in by Rick T. of the University of Western Ontario, illustrates the process of concentration at the farm level. In the U.S., the total number of farms has fallen from an all-time high of over 6.3 million to just over 2.2 million. Meanwhile, the average size per farm nearly tripled between 1900 and 2007, from 147 to 418 acres.

A 2010 USDA report provides detailed information about the structure of U.S. agriculture. For instance, overall, average farm household income is higher than the U.S. average, though I’d rather see the median income to reduce the impact of outliers on the calculation. But as the bottom line shows, farm households are highly dependent on non-farm income for their survival. Overall, farm income accounts for less than 20% of the total income of farming families:

And as we saw recently with the mortgage interest deduction program, the benefits of farm subsidies are unevenly distribution. Small-scale family farms (defined as operator-owned farms with less than $250,000 in sales — which does not mean $250,000 in profit, of course) make up 88.3% of all farms in the U.S., while large-scale family farms (operator-owned farms with sales over $250,000) are 9.3%:

While small-scale family farmers receive the majority of land-retirement payments — that is, subsidies in return for taking land out of agricultural production — large-scale family farms are the major beneficiaries of commodity payments such as price supports that subsidize the cost of production:

Of course, that doesn’t mean that small-scale producers don’t benefit from farm subsidy programs, but as with the mortgage interest tax deduction, they are set up to reward size — the more you have, the more you get. Whether farm subsidies are essential to preserving small family farms or actually hurt them by artificially supporting capital-intensive large-scale production is a topic of much debate within agricultural circles.

Deeb Kitchen sent in an essay at The Brookings Institution with a graph comparing the number of hours worked and earnings in middle-class, two-parent households (the 10% of households that are in the very middle of the income distribution).   Controlling for inflation (results are in 2009 dollars), we see that these households are earning more, for sure, but also working more.  In other words, they’re getting about as much buck for their bang as they were in 1975.

The authors of the post argue that the 26% increase in the number of hours worked is due mostly to mothers increasing their work hours.  Wages, as you can see below, have been stagnant for fathers, but gone up for mothers:

See also: more men and less women earning poverty wages and why did married mothers go to work.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.

Dmitriy T.M. sent in this hilarious 2-minute rap about first world problems. The idea is to draw attention to how the daily frustrations faced by those of us in the most advantaged and developed countries in the world are really, really, like really small.

Edit: Sociologist Michael Kimmel reminds me that, though in certain ways the above is definitely true, it’s also not useful to trivialize the ways in which advantaged and developed countries still create suffering. Some of us benefit from our overall advantage more than others.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.