We consumers now have a few more credit protections than we did before, but to get the Act passed, Congress had to water down the wording somewhat.  It would not do to pass a law that would put many of Congress’s biggest campaign contributors out of business. So, there are still a few areas left for issuers to extract profits. 

Students

Before this law went into effect, students were sent credit cards that they ran up like free money while the parents got stuck with the bills, since they were under age.  Now, students under 21 years of age cannot qualify for a card without a co-signer.  How will the issuer know the applicant is a student?  They will likely only have income from summer employment.  The real qualifiers are the applicant’s age, and their income. 

Interest Rate Hikes

The new law does not protect consumers against interest rate increases.  It does protect them against increases on existing balances, but as long as the card issuer notifies the consumer at least 45 days in advance, interest on new purchases can jump considerably. 

This is supposed to give the consumer the option of jumping to another card for new purchases.  The consumer has three billing cycles to decline the new terms, close the account to future purchases, and pay off their balance at the old rate and payment schedule. 

Payment Allocation

If you have separate interest rates in force for old balances and new purchases, be aware that the CARD Act requires the card issuer to apply the minimum payment amount to the greater balance, which most likely has the lower interest rate. 

The CARD Act requires payments to be applied to the highest-rate debt on the account, so watch carefully that any payments exceeding the minimum payment are “accidentally” applied to the lower rate balance.    

Universal Default

Under the old shell game, issuers could raise a consumer’s interest rate if they were late on a totally unrelated account, like a utility bill.  This is now prohibited under the new law. 

But card issuer’s legal wizards have left some language in some offers that will activate a penalty APR.  Some of the reasons are exceeding credit lines, credit report information, and bounced or late payments.  Some catch-all language might be “market conditions”, or “at any time for any reason.” 

Read the small print. 

Penalty Rate

If a consumer is more than 60 days late on a payment, the card issuer can initiate a penalty rate, which averages nationwide slightly less than 30 percent.   That means for every thousand dollars that remains on your credit card by the end of the year, you will owe another $300 in interest, or nearly an additional one-third of your balance.  This is the way card issuers generate cash flow and keep consumers imprisoned in their cycle of debt. 

The new law provides a way back down the interest ladder.  It is meant to require the credit issuer to return the customer to their previous interest rate after six consecutive months of timely payments.  In reality, the law states that the card issuer is “supposed to” review and reduce a cardholder’s rate after six months of consecutive on-time payments. 

The law also states that this review must include market conditions (what others are charging) and the creditworthiness of the card holder.  This gives the card issuer an out if you caught up on the penalty account but your other accounts are still behind. 

Another method card issuers have been known to use is a technique known as “pigeonholing” where your payment arrives on time, and due to the card issuer’s workload, it is not posted until after the due date.  Remember one late payment will result in a lot more income for at least six months for the card issuer while you straighten things out. 

It is more important than ever to keep records of the exact dates payments are made.  Sending a check in the mail has no basis for verifying the date it was received, since the card issuer will discard the envelope with the postmark proof as quickly as possible, and the date on a check can be any date. 

Paying a bill by electronic banking will issue recordable dates of payment receipt.  Remember that many banks still issue a bank check that is mailed, and the process can take up to four days until the check is in the mail.  Be sure to add the four days plus a comfortable mail delivery time for your payment to be received.

The language of the new law is loosely worded.  Expect some creative moves when it comes to the card issuer backing off penalty rates.

Mail Notification

The highest court has judged that putting a notice in the U.S. Mail is proof of delivery, whether or not the addressee receives it. 

The new CARD Act requires payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date. 

That concept seems to work fine for businesses that say they notified you, but doesn’t work that well for consumers mailing payments. 

Discontinued Cards

The 45-day rule will “probably” apply if the card issuer decides to discontinue your card.  The law is not clear about this circumstance, but issuers will most likely notify the consumer 45 days ahead to avoid running afoul of the law.  That’s good news for a consumer standing at a register with a big purchase.   

Added Fees

Credit card issuers have lost a bundle of expected revenue with this new law.  Estimates put the loss at around $12 billion per year.  It comes at a time when banks are already in bad shape because of the housing market, double the number of defaults from unemployed workers and others, and consumers cleaning up their balances. 

It is predictable that inventive fees not mentioned in the new law will surface.  There are countless fees that can be added to your bill, and interest rates can soar, if everyone in the credit market does the same and they notify you 45 days ahead. 

Although the prime rate for banks is low now, as it cycles upward, consumers can expect 45-day notices from their fixed-rate card issuer that they will be switched to a variable rate, tied to the prime rate.  Variable rates rise and fall with the economy and will not require the 45-day notice as the prime rate climbs. 

Be careful of ordering merchandise online.  If the merchandise comes from a foreign retailer or American territories, you can incur foreign transaction fees, even if the merchant allows you to pay in U.S. currency. 

Fee Avoidance

Be your own consumer advocate.  Consolidate your credit to one or two widely accepted cards with the lowest interest rate (beware of the balance transfer fee).  Join a credit union (lower interest rates).  Drop annual fee cards.  If you want to keep some cards, reduce your credit used to below 10 percent of your available credit to preserve your credit score.  For cards with inactivity fees, swipe them at a convenience store once a year (check the inactivity period).  If one of your issuers offers a rewards program, take the cash-back option. 

Pay your bills on time.  Read the fine print.  Read each piece of mail from your card issuers.  Stand up for your rights.  Play hardball.  Speak to supervisors.  Threaten to take your business elsewhere if they don’t retract an unjust fee, and do it if they don’t (I also like emails to the president or CEO,  factually detailing why you left).

The CARD Act was a big step in the right direction, but there will always be loopholes discovered by highly-paid legal eagles working against you.

It should be clear that the bank that issued the original mortgage in many cases no longer owns the investment; they only service the debt.  They accept payments from the homeowner, pay taxes and other obligations, and forward the remainder to the debt owner. 

 However, for mortgages owned by the two government homeowner-financing agencies, Fannie Mae and Freddy Mac, the Treasury Department started a Making Homes Affordable initiative with two components, the Home Affordable Refinance Program (HARP), and the Home Affordable Modification Program (HAMP). 

HARP allows homeowners relief who have remained current on their mortgages by allowing them to refinance their mortgage up to 125 percent of the appraised value of their home at current mortgage rates. 

HAMP encourages any investor or servicing company to participate with financial incentives for loan modified through reduction of interest, extension of term to a maximum of 40 years, and forgiveness of balloon payments.  The goal is to bring principal, interest, insurance, association dues and PMI to below 31 percent of the verifiable household income.  There is a 90-day trial period before permanent modification is granted. 
 

Now, Fannie Mae has announced a new program for those homeowners on the brink of foreclosure who do not qualify for the HAMP plan.  In exchange for transferring ownership to Fannie Mae, the homeowner will be allowed to rent their homes and lessen the credit rating impact of foreclosure.  Fannie Mae will make available to the homeowner a 12-month lease with month-to-month extensions when it expires and will not market the house until after the initial 12 months. 

Rents will be determined by a private management company and market conditions.  Former homeowners will have to qualify to stay with rent set at 31 percent of their pre-tax income or less.

Freddie Mac already has a similar program in place, but foreclosure must be completed and only month-to-month leases are offered.

Both these programs are designed to allow the homeowners to stay in their homes for a reasonable period and stabilize neighborhoods.  The thinking is that it is difficult to market homes in neighborhoods with scores of empty and sometimes vandalized homes.   Even though people are renting, they will tend to care for the home they used to own.

In our jobless recovery, some landlords are offering big incentives to retain their tenants. 

The national unemployment problem has driven some renters to seek roommates, or move into cheaper quarters.  Some are moving in with family. 

The national apartment-vacancy rate is now at a 23-year high. 

The worst thing for a building or house owner is an empty living space.  They can minimize utilities, but mortgage payments and taxes remain in force, and there is less to collect to pay the bills. 

When an apartment or house is vacated, it can remain empty for months, exposing it to vandalism, and requiring painting, marketing and commissions to attract a new occupant.

Landlords are offering incentives and becoming easier on requirements for occupancy.  In a tight market, landlords would deny prospective tenants with living space credit issues like foreclosure or eviction, but in today’s market they are more open-minded.   

New tenants on average are paying roughly ten percent less than previous tenants.  Renewing tenants are being offered items like free months, waived pet deposits, flat-screen TVs, cash, new carpet, painting, or upgraded appliances. 

Landlords generally are not initially offering incentives to renewing tenants.  Since tenants can easily check the Internet for comparable rents in their area, landlords will respond to negotiation and many times offer incentives or match rents to renew.

Lower rents nationwide are pressuring house prices as well as the CPI (Consumer Price Index).   This will keep inflation down.  However, the good news for renters will be offset by more apartment complex defaults, and in turn, losses for small local banks.

So if you are in the market to rent, renew or buy, this is the ideal time to exert pressure on landlords and sellers for concessions. 

Don’t be greedy.  Negotiation involves both parties calculating how much it will cost the landlord or seller to wait for and attract the next prospect.  In the case of landlords, they are losing the rental amount each month.  Sellers will have to pay their mortgage payments and taxes until the property is transferred. 

It is not taking advantage.  It is business. 

Rental Vacancy Rates from 1956

Existing Home Sales from 1987

New Home Sales from 1963

Images posted by CalculatedRisk on 11/01/2009

Jobs:

Nonfarm payroll employment continued to weaken this month (down 263,000 in September) ending a slowdown trend (201,000 in August (revised), 304,000 in July (revised), 467,000 in June, 345,000 in May, 539,000 in April and 633,000 in March). 

After the lowest level of job losses in a year, employment slipped by about 50,000 jobs from last months level. 

The average 3-month job layoff figure of 256,000 for July through September 2009 dropped 21 percent from the same average last month, when it was 324,000 for June through August, and 57 percent from the previous 3-month period (April through June) when it averaged 450,333 (also down from 505,667 for March through May). 

Although the unemployment slowdown has lost its momentum this month, the numbers still indicate that companies are approaching their maximum “leanness” and sustains perceptions that the economy gradually will swing to recovery.

Unemployment has increased steadily by 0.4 or 0.5 percent every month from December 2008 through May 2009.  August was the first month the increase was 0.3 percent.  September is similar.

The number of unemployed persons increased in September by 214,000 (August by 466,000, a decrease in July of 267,000, increases in June of 218,000, May of 787,000, April of 563,000 and March of 851,000.  Since the start of the recession in December 2007, 7.8 million workers have lost their jobs. 

Total unemployment has risen from 11.6 million (7.6%) in January to 12.5 million (8.1%) in February, to 13.2 million (8.5%) in March, 13.7 million (8.9%) in April, to 14.5 million in May (9.4%), 14.7 million in June (9.5%), 14.46 million in July (9.4%), and 14.9 million in August (9.7%).

The current rate is 9.8% and the number unemployed is at 15.1 million. 

Unemployment is the highest since June 1983 and has doubled since the start of the recession in December 2007.  In a healthy economy, around 125,000 jobs a month must be added and filled just to keep the unemployment rate stable.

There is little doubt at this point; we will hit 10% unemployment in the near future. 

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) rose to 9.2 million from the 9.1 million in August (8.8 million in July, and 9.0 million in June).  These persons had their hours cut back or were unable to find full-time jobs.  Since the start of the recession, the number of such workers has increased by 4.4 million, and has remained relatively constant since March 2009. 

The unemployment numbers look to be peaking.

Long-term unemployed persons (jobless for 27 weeks and more) has tripled since the start of the recession to 5.4 million since December 2007, adding 450,0000 to that number in September.  One in three (35.6%) unemployed persons are in this category. 

Ed.Note: It is possible that as consumer and business confidence is improving, more workers are starting to look for jobs again, returning to the workforce in anticipation of better employment conditions.  This drives the unemployment rate higher.

Construction job losses led the month (down 64,000 for September, 65,000 for August, 76,000 for July, 79,000 for June, 59,000 for May, 110,000 for April and 161,000 for March) with a total of 1.5 million since December 2007. 

Manufacturing was a close second (down 51,000 for September, 63,000 for August, 52,000 for July, 136,000 for June, 156,000 for May, 149,000 for April and 161,000 for March) with widespread job losses totaling 2.1 million since December 2007. 

Education and health services continued to add jobs, with payrolls increasing by 19,000 (52,000 in August and 21,000 in July).  Government employment fell by 53,000 (18,000 in August and 28,000 in July).

Retail trade employment dropped by 39,000 (9,600 for August, 44,00 for July, 18,000 for June and 47,000 for April). 

Service-providers stayed relatively the same after cutting 80,000 workers in August, while the goods-producers lost 136,000 jobs.

Professional and business service also stayed relatively the same after decliningby 22,000 in August, less than the 38,000 in July, 118,000 in June, 51,000 in May, 122,0000 in April and 133,000 in March. 

Unemployment spreads stayed relatively the same with the highest among teenagers (25.9%), followed down by African-Americans, then Hispanics.  The lowest unemployment started with Asians (7.4%) followed up by Adult women (7.8%), Whites, then Adult men (10.3%). 

The good news from this data, is that the job losses seem to be lessening.  It is perhaps due to fewer jobs available to lose, but the lower figures are an encouraging sign. 

The average workweek edged down by 0.1 to 33.0 hours in August.  This figure closely correlates with overall output and gives clues on when firms will start hiring. 

Average hourly earnings (reflecting the recent increase in the legal minimum wage) edged up to $18.67 ($18.65 in August, $18.59 in July), rising for a fifth straight month.  

 Workforce:

The total Civilian labor force stands at 154.0 million (down 571,000 from August).  There are nearly a million fewer workers in the work force than in June.   There are now 15.1 million people unemployed putting the rate at 9.8% of the available work force, last reached in June 1983. 

The Civilian labor force usually grows as a recession winds down and optimism about finding work grows.  But as long as Americans remain anxious about their jobs, consumer spending is not expected to grow enough to power an economic rebound. 

The employment population ratio, at 58.8 percent, has declined by 3.9 percent since the recession began in December 2007.

Comparing now with the final month of the last major downturn in November 1982, the total Civilian labor force then stood at 111.1 million.  In that month, there were 11.9 million people unemployed accounting for 10.8% of the available work force (average for the year was 10.6 million unemployed with the rate at 9.7%). 

Looking at jobs needed to reduce unemployment
with the total Civilian labor force at 154.0 million:

.
To restore employment to the 5.5% level of 2008, about 6.6 million people will have to regain their job or start new jobs.  It is a tall mountain to climb. 

Ed.Note:  Government and economists foretell that the “normal” unemployment rate will move up to 8% from its current 5.5% level.  With the current Civilian labor force, that means that on a permanent basis there will be roughly 12.5 million people unemployed — more than 4 million more than at the “normal” level today. 

Update: October 5:  The U.S. service sector grew in September for the first time in 13 months.  The Institute for Supply Management (ISM) reported that its service index hit 50.9 last month, up from 48.4 in August.   A reading of 50 is the dividing line between growth and contraction. 

Other encouraging signs were that the new orders index rose to 54.2, climbing over the dividing line for the first time in a year.  New orders are an indicator of future activity.  In addition, business order backlogs rose for the first time in 14 months.

Five industries grew in September; wholesale trade, retail, construction, utilities and health care.  In addition to healthcare and educational services, support services for companies added jobs, another encouraging sign. 

 Data collection:

The Census Bureau surveys 60,000 households across the country to insure an accurate demographic survey.  The unemployment rates are extrapolated from the survey results. 

The quoted unemployment rate excludes people who have stopped looking for work because they believe no jobs are available (discouraged workers) and others outside the labor force.  They are counted separately.  Their number has nearly doubled in the previous 12 months.

 Stimulus (Recovery Act):

The president’s $787 billion stimulus bill signed into law hopes to create about 3.5 million jobs.  Lower estimates put that figure at 2 to 2.5 million jobs by the end of 2010, reducing the unemployment rate to 7+%. 

The White House Council of Economic Advisers released a report showing the plan would save or create 1.5 million jobs by the end of 2009 and 3.5 million by the end of 2010. 

A senior White House official stated that the Obama administration’s fiscal stimulus plan will meet their previous estimates to save 3.5 million U.S. jobs by the end of 2010, but the unemployment rate at that time may be higher due to further deterioration in the economy.  White House officials have been careful to point out that estimated jobs created and saved have merely slowed continued job losses.

 Stimulus spending by state: 

As of September 30, 2009, of the
$241,105,531,529 announced
$214,964,917,646 (89%) has been made available
$90,402,704,572 (37.5%) has been paid out to the states

http://www.recovery.gov/?q=content/funding-notification

 Recession histories:

With Nov 1982 unemployment at 10.2%, and the government taking aggressive action, it was still more than five years (April 1988) from the peak before unemployment receded to 5.4%. 

The approach that time, however, was to fix the economy at the expense of the worker.

Some compare the the fall in employment to 1974-1975 and 1981-1982. If the comparison is accurate, the peak in unemployment may be reached within the next five to six months (past performance is no guarantee of the future).

Economist William Polley made a chart  that includes every recession since World War II.  It makes the chart pretty hard to read, so he simplified it with selected post-WWII recessions.

William Polley’s chart shows how the recovery from the 2001 recession took four years for employment to return to its February 2001 peak. 

Using the Department of Labor unemployment tables of unemployment rates and 5.5% as the “normal” rate of unemployment, I have analyzed things a little differently.  Of course, along the way, the Civilian labor force increases, so the percentages represent ever more workers.

The following table shows unemployment start dates, peaks and returns to the normal rate of 5.5%, Civilian labor force in millions of workers for that year, and the lengths of times from the start date in months:

 Recession peaks 1974-2009 

 Note that the unemployment peak period that started in 1974 and ended in 1979 (lasting nearly five years) was followed immediately by another peak period ending nearly nine years later.  By the end of that period, the work force had increased by more than 32%, meaning overall, almost 30 million new jobs had to be created.

 The aggressive increase in the Civilian labor force in that period can likely be attributed to post-World War II babies reaching adulthood, with some entering the labor force after secondary school and the rest entering the workforce after further education.

The periods from 1988 to 1990 and 1995 to 2008 were periods of prosperity, with low unemployment (but a building bubble). Here is the same data in graphic form:

Unemployment rates:

It is interesting to recognize that in most cases, unemployment peaks roughly one-third of the timeline for unemployment to return to its “normal” rate, so we can double the number of months from the Start to the Peak to expect to arrive at an approximate return to “normal.”

We live in hope (again, past performance is no guarantee of the future).

Full text: http://schotline.wordpress.com/2009/05/01/south-carolina-stimulus-funds/#comment-4339

Although Treasurer Chellis disagrees with the United States Congress in its method of throwing money at the problem (he’s a Republican in a Republican state), he is also a realist.

The realism is that the state allocated money from Congress may be either accepted or rejected.  However, the state is still obligated to repay it, even if they reject the funds.

Treasurer Chellis wrote, “Millions of dollars appropriated in the Recovery Act have already begun flowing into South Carolina to many different entities.  If the decision is made to not accept the $700 million in question for our state, those funds will go elsewhere and South Carolina taxpayers will still be obligated to pay that money back.”

Governor Sanford does not want to accept the money (perhaps on Republican principles).  If he accepts the money, he says it should be used to pay down the state’s debt.  Treasurer Chellis points out that the state debt is not “bad” debt like high credit obligations, but “good” debt spent for improvement projects.  The debt is  manageable and tracking to have 50 percent repaid in five years and 90 percent repaid in ten years, as per plan.

Treasurer Chellis advocates using the money for job creation and education, rebuilding the personal wealth of the citizens.  This is what the stimulus is all about.

A parallel may be drawn to the stimulus payment currently being delivered to working and retired citizens.  What will we do with the money?

Almost all of us have “bad” debt that is loading us down.  The temptation is to take the extra money from each paycheck and pay down the charge cards.  Will that stimulate the overall economy?  One argument says that paying down debt releases money to be lent out again by the banks we owe.  That only holds true if the bank lends out the money, but many are using it for their own paydown of bad debt, and reducing your limits.

Can you invest it in a tiny business operating from your own home that will generate future income?  Can you invest it in your own education that will enable you to get a higher paying position?  What can you use the money for to give you a brighter future? That’s what the stimulus is for, yours and mine.  Take a hint from Treasurer Chellis.

Think about it.

These are impressive numbers, since January 20 is only 77 days behind us. 

Optimism, according to Merriam-Webster online dictionary, is an inclination to put the most favorable construction upon actions and events or to anticipate the best possible outcome.

Of course, the most difficult people to convince that things are getting better are the millions of unemployed, the millions who are paying “upside down” mortgages, where their equity is in the minus.  As a special note, credit goes out to the homeowners who are staying the course with their homes and paying what they owe.  These are the true optimists.

Americans who have had their 401(k) savings reduced to minimal amounts have the hardest job to be optimistic.  Credit also goes out to those who are employed and staying the course, continuing to contribute with each paycheck.  My wife recently had her company share of contributions terminated as her company struggles to remain viable, but she is an optimist, happy to have a paycheck.

The stock market is again showing signs of life.  The strongest companies are surviving, even though their earnings are miserable.  This shows there is light on the horizon for them.  The weakest companies have breathed their last, or been absorbed by others, both camps leaving their excessed employees to fend for themselves.  The market thrives on optimism and hope, and that is what is providing the plus days.  Will it rise to former heights?  Yes.  In our lifetimes? That is a question answered differently by optimists and those who are not.

Home sales are also showing signs of life, even if most of the sales are foreclosures.  As banks rid themselves of the “toxic” assets and begin to lend again to other than those with an 800 credit rating putting down 80% of the purchase price, houses will rise in value as demand for ownership increases.  Unfortunately, there is wreckage there as well.  People who have walked away, people who have foreclosed, and investors who bought those packaged mortgage loans that went bad will suffer.

Such is the fate of the speculator.  We have become used to deriding speculators of mortgages, commodities like oil and other areas, so that we have forgotten we are all speculators.  Definitions of speculation include a conclusion or opinion reached by contemplation, conjecture or surmise, and engagement in business transactions involving risk but offering the chance of large gains in the hope of profit.

Were we invested in the stock market and 401(k) with the hope it would go down or stay even?  Did we purchase our home with the hope it would depreciate in value?

We had great hopes.  It was easy to be optimistic when everything was going up.  It’s hard to be optimistic when everything has crashed and we feel we have to start building again.  But that is what makes us Americans – optimism and hope.  Our optimism is being reborn.  We look beyond tomorrow and see the light on the horizon.  Today we survive.  Today we build for the future.  Today we survive so tomorrow we may thrive.  Our optimism carries us forward, eyes on the horizon, eyes on the light.

998 adults is a small sample on which to base the optimistic outlook.  How do you feel?  Are you optimistic?

In an optimism test formulated by Queendom.com (the land of tests), questions ranged from keeping in touch with family and friends, and feeling you can rely on them in time of crisis, to finding good in most people and something positive in difficult situations, dealing with whatever life throws at you, your outlook on finding solutions to a crisis, and whether you will ever give up.

Some of my highest choices in answer to these questions:

• I can find some good in even the most disagreeable people.
• I can find something positive in even the most difficult situations.
• I actively keep in touch with friends and family.
• When I’m feeling down, I remind myself to focus on the good things in my life instead of the bad.
• When I have a difficult problem, I try to look at it from different angles in order to come up with a solution.
• I refuse to give up, no matter how tough things get.
• No matter what life throws at me, I believe that I can deal with it.
• I know how to calm myself down and relax when my life gets too hectic.
• I think that it’s important to maintain a sense of humor when life is particularly rough.
• Given the choice, I think that the majority of people would choose to do good rather than evil.

And my optimism test results were:

“According to your responses, you seem to be the type of person who believes strongly in the goodness of humankind.  You give almost everyone the benefit of the doubt, and accept what people say and do at face value instead of making conjectures about their motives.  You try to find the good in even the most difficult of people, and are much more willing to place your faith in others.  Although your trusting and accepting nature is refreshing, you may benefit from a more balanced perspective.  Unfortunately, believing that everyone you meet has good intentions leaves you open to being taken advantage of.  This doesn’t mean that you should be suspicious of others or their motives, but a little skepticism couldn’t hurt.”

I guess I’m a little too optimistic.  Ok scammers, come get me.

The bad news:

• Nonfarm payroll employment fell sharply this month (-598,000) bringing the total unemployment from 11 million (7.2%) up to 11.6 million (7.6%).
• Job losses were large and widespread across nearly all major industry sectors. Goods producers, Manufacturing and Construction led the way down with a job decrease of about 1.5% each. Education and health services increased jobs by .25%.
• Employment has declined by 4.1 million since January 2008 with about half of this drop occurring in the past 3 months.

January 2009

The total Civilian labor force stands at 153.7 million.  There are 11.6 million people unemployed putting the rate at 7.6% of the available work force.  In modern times, this unemployment rate was last reached in September 1992 and only in the 1980 – 1986 years before that. 

Comparing now with the final month of the last major downturn in November 1982, the total Civilian labor force then stood at 111.1 million.  In that month, there were 11.9 million people unemployed accounting for 10.8% of the available work force (average for the year was 10.6 million unemployed and the rate at 9.7%).

Over the past 12 months, the number of unemployed persons has increased by 4.1 million and the unemployment rate has risen by 2.7%. 

Not since June 2003, has 22.8% of the unemployed been looking for work 27 weeks or longer.  This month, the figure for long-term unemployed doubled to 2.6 million (22.4%), from the 1.3 million (18.1%) in January 2008, while short-term (less than 5 weeks) unemployed rose to 3.7 million.

From the end of Quarter IV, the Civilian labor force decreased by nearly a million workers (-932,000) who dropped out of the labor pool. 

Unemployment: increases for this month were highest among teenagers at 12.6%, followed down by African-Americans, female heads of households, and Hispanics.  The lowest unemployment started with Asians at 6.9%, followed up by Adult women, Whites and Adult men. 

The number of unemployed workers age 55 and older jumped 70% in the past 12 months, and workers with college degrees jumped 85 percent.  Layoffs are also hitting middle managers and professional service firms.  Earlier job cuts were concentrated in retail, construction and manufacturing.  The proportion of older workers has increased 50% since 1982. 

Unemployment climbs over the young and inexperienced up through age, education and middle management.

Over the past 12 months, earnings for hourly employees increased an average of 3.9%, and weekly employee earnings rose by 2.7 percent.

This month, 2.75 million people were attempting to re-enter the work force after parenthood or retirement and 2.1 million people wanted work, were available for work and had looked for work in the last 12 months, but just not in the last 4 weeks.

 
Note: The Census Bureau surveys 60,000 households across the country to insure an accurate demographic survey.  The unemployment rates are extrapolated from the survey results.  The figures for January 2009 include updated population estimates.

The quoted unemployment rate excludes people who have stopped looking for work because they believe no jobs are available (discouraged workers) and others outside the labor force.  They are counted separately.

Looking at jobs needed to reduce unemployment with the total Civilian labor force at 153.7 million:

To restore employment to the 5% level of 2008, 4 million people will have to regain their job or new jobs.  It is a tall slope to climb. 

With 1982 unemployment at 9.7%, and the government taking aggressive action, it was still five years (1989) before unemployment receded to 5.3%. 

The approach that time, however, was to fix the economy at the expense of the worker.

The president’s $787 stimulus bill signed into law hopes to create about 3.5 million jobs.  Lower estimates put that figure at 2 to 2.5 million jobs by the end of 2010, reducing the unemployment rate to 6%.  That will do for a start.

But some Republicans still insist that the same techniques used by Ronald Reagan in 1982 will work for this economic crisis.

Inflation was then at 13.5% and unemployment at 7.5%.  Federal Reserve chairman Paul Volcker squeezed inflation from the economic system, by raising the federal funds rate to 20%, forcing the prime interest rate up to 21.5%.  This extremely tight monetary policy intentionally plunged the U.S. economy into a deep recession and wiped inflationary psychology and expectations out of the system.

Upper bracket taxpayers had their taxes reduced along with capital gains taxes to the tune of $749 billion over 5 years.  The tax loss was almost completely recaptured with increased taxes when the recession ended five years later.

It was a good plan then, except for high unemployment for five years while the economy recovered.  The average worker suffered with job loss while the wealthy and big business rebuilt their fortunes.

 
Trickle-down economics must have every piece in place and be entirely without blockages top to bottom in order to succeed.  And, the process is slow.  This is how it is supposed to work:

1. Taxes must be high enough that economic expansion is currently stifled. 

Now, economic expansion is stifled by lack of demand, not taxes.

2. The lowering of taxes must be noticeable enough to the wealthy that they will consider investing the extra money and not save it or spend it only on personal consumption.

In 1982, the top tax rate was reduced from 70% to 50% for incomes over $212,000.  Today’s top tax rate is already down to 35% for incomes over $372,950 filing singly or jointly.

There’s a blockage.  How much would the top income tax rate have to be lowered from 35% to encourage investment?  A small reduction would not be sufficient to interest a wealthy investor.

3. The stock market must be attractive enough for the wealthy to consider investment there, as opposed to, for example, foreign investments, commodities (like oil), or real estate.

There’s another blockage, and a major one at that.  Companies are folding left and right, domestic and foreign.  The stock market doesn’t sound like a good investment to me at this time and wouldn’t to investors. 

The market was driven to highs by a spending economy.  Real estate is better, and commodities (like oil) are always good investments.

4. Stock market companies who receive the investment must, in turn, invest in expansion and increased employment, with the goal of increased production and lowering prices of their products.

If stock market companies received investments, they would gladly expand their production, if they could be assured of or even encouraged that there would be demand for their products.  They would be happy if they could sell off their current backlog.

5. The demand for the products must increase as production increases so the company still makes at least the same profit as before the expansion.

Consumers are currently keeping their wallets shut, buying only what they need, fearful of further downturns for the economy affecting them, and hoping for lower prices.  The economy is far from increased demand.  

The place to put investment is at the consumer level to be used as discretionary income.  If consumers buy goods, companies will increase production to meet the demand, creating jobs and breaking the downward cycle.

The president’s plan to provide jobs, lower taxes and inject discretionary funds into the consumer level, and increase confidence in the future is a good one.  Let’s see if it works.
 

More on the economy to come.  Stay tuned.

The stimulus package is lumbering its way through Congress.  Using the House of Representative’s $820 billion stimulus bill as a model, the Senate came up with its own bill of $900 plus billion, and then carved it down to nearer $800 billion.

After more than five days of Senate conference negotiations, more than $110 billion has been cut from the $937 billion proposal.  The latest figure runs around $780 billion plus another possible $47 billion more in already promised tax incentives to aid auto and home sales broken down to about 40 percent tax cuts and the rest in spending. 

Major spending items cut from the bill were $40 billion in aid to the states, $16 billion for school construction and around $6 billion for public health projects.  Up to $100 billion will be spent to buy and modify some troubled homeowner mortgages.

The 58 Democrats in the majority are enough to pass a vote on the bill if they can get it to that position.  However, at least 60 Senators must vote to proceed to a vote before the vote is actually taken.  Currently, Republicans blocked a vote on Friday saying they have not had time to read the bill.  Debating sessions have been set for Saturday and Monday, with a vote expected midday Tuesday. 

The Republicans complained that the bill that came from the House contained a wish list of everything the Democrats ever wanted, and to some extent, I think some of that may be true.

Republicans Arlen Specter R-PA, Susan Collins and Olympia Snowe, both R-MN have stated that they will vote for the bill in or near its present form.

Senator Arlen Specter is not totally happy with the bill, but said, “I do believe that we have to act and I believe that under all the circumstances this is the best we can do and we ought to do it.”

Senator Susan Collins said, “This project, this bill is not perfect.  It would be difficult to get a bill that everyone agrees on; but it represents an effective, targeted approach to the economic crisis facing our country.”

Once the bill is passed in the Senate, representatives from both chambers will meet and reconcile any differences in the two bills, making it a single bill to be voted on by both houses and signed by the president.  Obama’s signature is what makes it law.

Moving to act quickly, the provisions of the bill target around 80 percent of the total package to be distributed into the economy in the first two years.

In addition, Senators voted Friday to direct the U.S. Treasury to spend at least $50 billion of the $350 billion remaining in the TARP fund on home foreclosure relief efforts. 

Democrats and the few Republicans who consider the welfare of the people they represent are working on a compromise stimulus bill that, although imperfect, can be put into action.  The Do-Nothing Republicans of the male Caucasian cadre who voted against equal pay for women, minorities, disabled and older workers, rail out against any action except their own.

Two of the most notable are John McCain R-AZ, still stinging over his last hurrah at trying to be President, and Michael Steele, the newly elected chairman of the Republican National Party.

Steele advocated in the latest Republican radio address that keeping more money in their pockets would help families the most.  I wonder if Chairman Steele understands economics at all, or is purposely looking to destroy America for his party’s purpose.  People keeping money in their pockets will extend the recession indefinitely and deepen it.  It is the flow of money in consumer spending that will start and drive the economic engine.  But then, they know that.

A professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts, is co-author of Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy.

This article (written November 6, 2008) appeared in the November 24, 2008 edition of The Nation.

Ed.Note: This article was interesting because it contains many of the points of the Obama Recovery Stimulus of 2009.  The article was slightly reformatted without omission or distortion of meaning to read easier online. 

Bolded passages are of particular interest; italic notes are my notes added for clarity.

A Green Public-Investment Stimulus

Recessions create widespread human suffering. Minimizing the suffering has to be the top priority in fighting the recession. This means expanding unemployment benefits and food stamps to counteract the income losses of unemployed workers and the poor. By stabilizing the pocketbooks of distressed households, these measures also help people pay their mortgages and pump money into consumer markets.

Beyond this, the stimulus program should be designed to meet three additional criteria.

1.      We have to generate the largest possible employment boost for a given level of new government spending.
2.      The spending targets should be in areas that strengthen the economy in the long run, not just through a short-term money injection.
3.      Despite the recession, we do not have the luxury of delaying the fight against global warming.

To further all these goals we need a green public-investment stimulus to
1.      defend state-level health and education projects against budget cuts
2.      finance long-delayed upgrades for our roads, bridges, railroads and water management systems
3.      underwrite investments in energy efficiency-including  building retrofits and public transportation-as well as new wind, solar, geothermal and biomass technologies.

This kind of stimulus would generate many more jobs–18 per $1 million in spending – than  would programs to increase spending on the military and the oil industry (i.e., new military surges in Iraq or Afghanistan combined with “Drill, baby, drill”), which would generate only about 7.5 jobs for every $1 million spent.

There are two reasons for the green program’s advantage.

1.      The first factor is higher “labor intensity” of spending-that  is, more money is being spent on hiring people and less on machines, supplies and consuming energy. This becomes obvious if we imagine hiring teachers, nurses and bus drivers versus drilling for oil off the coasts of Florida, California and Alaska.

2.      The second factor is the “domestic content” of spending-how much money is staying within the US economy, as opposed to buying imports or spending abroad. When we build a bridge in Minneapolis, upgrade the levee system in New Orleans or retrofit public buildings and private homes to raise their energy efficiency, virtually every dollar is spent within our economy. By contrast, only 80 cents of every dollar spent in the oil industry remains in the United States. The figure is still lower with the military budget.

What about another round of across-the-board tax rebates, such as the program the Bush administration and the Democratic Congress implemented in April?

A case could be made for this in light of the financial stresses middle-class families are facing. However, even if we assume that the middle-class households will spend all the money refunded to them, the net increase in employment will be about 14 jobs per $1 million spent-about  20 percent less than the green public-investment program (the main reason for this weaker impact is the lower domestic content of average household consumption, i.e. much of the consumption will be for foreign-made goods).

Also, it isn’t likely that the households would spend all their rebate money. Just as with April’s rebate program, households would channel a large share of the money into paying off debts. (paying off debts is not necessarily bad – it releases discretionary income for the family and increases reserves for the banks and credit card companies to extend more credit to others).

The Matter of Size

This is no time to be timid. The stimulus program last April totaled $150 billion, including $100 billion in household rebates and the rest in business tax breaks. This initiative did encourage some job growth, though as we have seen, the impact would have been larger had the same money been channeled toward a green public-investment stimulus.

But any job benefits were negated by the countervailing (counteracting) forces of the collapsed housing bubble, the financial crisis and the spike in oil prices. The resulting recession is now before us. This argues for a significantly larger stimulus than the one enacted in April.

But how much larger?

One way to approach the question is to consider the last time the economy faced a recession of similar severity, which was in 1980-82, during Ronald Reagan’s first term as president. In 1982 gross domestic product (GDP) contracted by 1.9 percent, the most severe one-year drop in GDP since World War II. Unemployment rose to 9.7 percent that year, which was, again, the highest figure since the ’30s.

The Reagan administration responded with a massive stimulus program, even though its alleged free-market devotees never acknowledged as much. They preferred calling their program of military expansion and tax cuts for the rich “supply-side economics.” (supply creates demand – see Trickle, Trickle, Up, Down, part I)

Whatever the label, this combination generated an increase in the federal deficit of about two percentage points relative to the size of the economy at that time. In 1983 GDP rose sharply by 4.5 percent. In 1984 GDP growth accelerated to 7.2 percent, with Reagan declaring the return to “morning in America.” Unemployment fell back to 7.5 percent.

In today’s economy, an economic stimulus equivalent to the 1983 Reagan program would amount to about $300 billion in spending-roughly double the size of April’s stimulus program, though in line with the high-end figures being proposed in Congress. A stimulus of this size could create nearly 6 million jobs, offsetting the job-shedding forces of the recession.

Of course, the green public-investment stimulus will be much more effective as a jobs program than the Reagan agenda of militarism and upper-income tax cuts. This suggests that an initiative costing somewhat less than $300 billion could be adequate to fight the job losses. But because the green public-investment stimulus is also designed to produce long-term benefits to the economy, there is little danger that we would spend too much. Since all these investments are needed to fight global warming and improve overall productivity, the sooner we move forward, the better. Moreover, under today’s weak job market conditions, we will not run short of qualified workers.

How to Pay for All This?

Let’s add up the figures I have tossed around. These include the $700 billion bank rescue operation being engineered by the Treasury, the $540 billion with which Fed chair Bernanke has pledged to bail out the money market mutual funds, along with unspecified additional billions to buy unwanted business debts held by banks. On top of these, I am proposing $300 billion for a second fiscal stimulus beyond last April’s $150 billion program. At a certain point, it is fair to wonder whether we are still dealing with real dollars as opposed to Monopoly money.

In fact, the whole program remains within the realm of affordability, albeit approaching its upper bounds. But major adjustments from the current management approach are needed. In particular, the Federal Reserve has to continue exerting control over the Treasury on all bailout operations. That is, we need more initiatives like Bernanke’s $540 billion program to stabilize the money market mutual funds and less Treasury fumbling with taxpayers’ money to buy either the private banks’ bad assets or ownership shares in the banks.

We need to recognize openly what has largely been an unspoken fact about these bailout operations: that the Federal Reserve has the power to create dollars at will, while the Treasury finances its operations either through tax revenues or borrowed funds (which means using taxpayer money at some later time to pay back its debts with interest).

The Federal Reserve does not literally run printing presses when it decides to inject more money into the economy; but its normal activity of writing checks to private banks to buy the banks’ Treasury bonds amounts to the same thing.

When the banks receive their checks from the Fed, they have more cash on hand than they did before they sold their Treasury bonds to the Fed. Especially during crises, there is no reason for the Fed to restrain itself from making good use (though of course not overuse) of this dollar-creating power.

The Fed is also supposed to be the chief regulator of the financial system. Now is the time to make up for Alan Greenspan’s confessed failures over twenty years in this role.

In exchange for the Fed protecting the private financial institutions from collapse, Bernanke must insist that the banks begin lending money again to support productive investments, while prohibiting them from yet another return to high-rolling speculation.  

Special measures are also needed to keep people in their homes.

The Deficit Looms

When the economy began slowing this year, the fiscal deficit more than doubled, from $162 billion to $389 billion. We cannot know for certain how much the deficit will expand. It could rise to $800 billion, $1 trillion or even somewhat higher, depending on how the bailout operations are managed.  Of course, it would be utterly self-defeating for the United States to run a reckless fiscal policy, no matter how pressing the need to fight the financial crisis and recession.  But in the current crisis conditions, even a $1 trillion deficit need not be reckless.

Let’s return to the Reagan experience for perspective. In 1983 the Reagan deficits peaked at 6 percent of the economy’s GDP. With GDP now around $14.4 trillion, a $1 trillion deficit would represent about 7 percent of GDP, one percentage point higher than the 1983 figure.

Of course, the global financial system has undergone dramatic changes since the 1980s, so direct comparisons with the Reagan deficits are not entirely valid.

One change is that government debt is increasingly owned by foreign governments and private investors. This means that interest payments on that debt flow increasingly from the coffers of the Treasury to foreign owners of Treasury bonds.

At the same time, as one feature of the crisis, Treasury bonds are, and will remain for some time, the safest and most desirable financial instrument in the global financial system. US and foreign investors are clamoring to purchase Treasuries as opposed to buying stocks, bonds issued by private companies or derivatives.

This is pushing down the interest rates on Treasuries. For example, on October 15, 2007, a three-year Treasury bond paid out 4.25 percent in interest, whereas this past October 15, the interest payment had fallen to 1.9 percent (currently 1.125 percent). By contrast, a BAA (investment grade) corporate bond paid 6.6 percent in interest one year ago but has risen this year to 9 percent (currently 8.24 percent).

As long as the private financial markets remain gripped by instability and fear, the Treasury will be able to borrow at negligible interest rates. Because of this, allowing the deficit to rise even as high as 7 percent of GDP does not represent a burden on the Treasury greater than what accompanied the Reagan deficits.

There is, then, no reason to tread lightly in fighting the recession, with all its attendant dangers and misery. Indeed, severe misery and danger will certainly rise as long as timidity-the path of least resistance-establishes the boundaries of acceptable action.

The incoming Obama administration can take decisive steps now to defend people’s livelihoods and to reconstruct a viable financial system, productive infrastructure and job market on the foundation of a clean-energy economy.

The House version of the economic stimulus package was passed 244-188 almost entirely on party lines (so much for bipartisanship) with every Republican voting against it.

Republicans wanted to strip spending for rebuilding roads and bridges and upgrade healthcare and schools, and instead provide only tax cuts of about $478 billion.

Ed.note:  I didn’t think so during the campaign, but Obama was right.  The Republicans are out of touch.  The members of Congress don’t see the need for upgrading health care, since they are part of the Federal Employees Health Benefits program that gives them top-level health care with many choices, mostly paid for by the government.  They can’t see roads and bridges in need of repair from private jets and limousines.  And they don’t need jobs, but what good is a tax cut to the millions that are out of work and have no income to tax?

There are also aggressive groups against the stimulus, collectively known as the “Do-Nothings.”  Their arguments include that the stimulus money is aimed at getting consumers spending and borrowing again where spending and borrowing were the problem in the first place.  I would feel better if they understood the problem was centered on borrowing to spend, not spending by itself. 

Our economy relies on the balanced and even flow of money.  For the individual, this boils down to monthly payments.  The economy collapsed because the supply of money in paychecks, etc. suddenly failed to keep up with the speed of the stream of capital required to pass from debtor to creditor.  Since everyone is both a debtor and a creditor, the flow slowed to a trickle for all, and creditors stopped extending credit.

The opponents quote the government regrets spending in crisis, quoting the Iraqi war (preemptive strike against a dictator with a history of attempted genocide by poison gas?), the Patriot Act (more than 700 thwarted terrorist attacks?), and the $700 billion bailout plan (still in process, but judged a failure by opponents).

Many of the Do-Nothings argue that a painful recession is the best way to cure American’s runaway culture of irresponsibility and debt and the government should allow the economic chips to fall where they may.  It is brutal but it is called capitalism and it works, where the alternative is socialism and it doesn’t work.

Ed.Note: These are all Republicans speaking who would do anything, including the destruction of America to make the other party look bad.  And Socialism is not an all or nothing policy – that’s called Communism.

Full-page ads against the stimulus will include the names of 250 economists who oppose the stimulus.  According to the Bureau of Labor Statistics, there are 12,740 working economists (SOC code 19-3011) in this country, at an average annual salary of $86,700.  That is less than 2% that have a dissenting opinion; hardly a mandate. 

The Do-Nothings advance that it is morally improper to deliver a crushing debt load to the next generation.  The thought passes my mind that the next generation will be a lot fewer if people feel they have no economic future and refuse to bring children into that world. 

It is also historical fact that these bailouts are mostly recovered by the government over a period of time through an increased tax base and compliance from working Americans.  What better way to spend our money than to attempt to provide for our children’s future, especially by improving the educational system, which is the lion’s share of the spending.

The Do-Nothings point out that housing sales rose 6.5 percent from November to December and this could be an indication that lower prices will draw buyers into the system.  They minimize the point that the increase for that month was based on the strength of bargain hunters picking up foreclosed properties. 

Ed.Note:  I am not sure I trust an economist who considers a single month a trend.  I know two young couples, both with high-paying jobs and no children who have purchased five foreclosed properties with the intent of renting them.  They are not exactly a portrait of the average American family.

On the other hand, to be fair, the Do-Nothings point out that without the stimulus, corrections are being made naturally.  Weak companies are going bankrupt.  It is hoped that the stronger ones will pick up their market share and laid-off employees.  Other companies, like the automakers are facing the facts that they haven’t been making the products that customers really want. 

American families are paying down their enormous debt.  This helps the economy because the money is paid to the credit card company or bank, where it can add to its reserves and extend more credit to those who need it.  When backs are against the wall, Americans know the right thing to do.

“Our standard of living must come down to the point where it can be supported by organic output,” quoting an interview with an investment consultant.  Weren’t those guys some of the ones who helped topple the economy in the first place?

The Do-Nothings fully expect to lose their argument, but put out the ads because they feel they have to Do Something.  And even though they are against it, they think it won’t work because it is not enough.  ??