What Really Ails America This Election Season

The internet is abuzz with criticism of Niall Ferguson’s factually-challenged rebuke of President Obama’s performance in the latest Newsweek cover story. His views include a steady stream of slanted statistics circulating these days (which is not to say there aren’t reasonable criticisms out there). But that’s nothing new for the historian turned pundit.

Consider his January 16, 2012 Newsweek article “Rich America, Poor America” in which he uses Charles Murray’s book “Coming Apart” as evidence for the uneducated, lazy and irreligious poor in America essentially being the cause of their own misfortune. After all educated people simply self-segregate themselves, have smarter children, go to church more, and work harder than the poor (his assessment). By the end of the article he recommends Romney read the book as a guide to fixing the country (article here).

In “The Cure for Our Economy’s Stationary State”, 7/16/12, he focuses on rising disability claims and people not moving around the country as much as they purportedly did in the past to find jobs as reasons for U.S. economic stagnation. Again it’s the “lazy” poor abusing the system or just not working hard enough.

Disability claims have been rising. Yet he doesn’t bother to address precisely how much is due to an increase of the aging population and other factors or exactly how much fraud is occurring (or its cost on economic growth). Instead he leans on overly general statistics and insinuation. Here’s a certainty, something definitely happened back in 2008 on Wall Street that stinks like abuse. Maybe that was a plot by overnight janitors to sneak derivative trading schemes into the computers at night and pad their retirement accounts, maybe not.

Then he uses the overplayed China card saying:

“It is Westerners who are in the stationary state, while China is growing faster than any other major economy in the world.”

As economists and well informed historians know all too well countries in different stages of economic development grow at different rates. That China is in a growth spurt coming out of a very low developmental base starting in the late 1980’s is a well studied phenomenon. Rwanda, Indonesia and Lithuania have all been growing (and outpacing the U.S.) lately as well. Good for them. That says absolutely nothing about what ails America.

And finally he says:

“The mood disorder is especially bad for investors. Only seven out of 47 national stock markets around the world have posted gains in the last 12 months.”

Is he suggesting that U.S. markets are among those without gains and U.S. investors have fallen on hard times? Fact check: The Dow Jones Industrial (DJI) is up over 22% from 12 months ago. Maybe he meant since January, 2012. Um, nope. Still up. Here’s the chart.

Okay, okay, maybe he was referring to NASDAQ. Wrong again. A gain of almost 24% since a year ago, and up since January too. Take a look here. These two data points took all of five minutes and basic math to figure out.

Mislead and misdirect appear to be the commentary tricks of the trade these days rather than fact-based opinion. Maybe this is what you get when a historian tries to play economist, except that he isn’t even playing economist but simply an information-twisting partisan hack.

As we go into election season what America really needs is informed debate. There are plenty of thinkers who take the future of this country very seriously and have good arguments to support their positions (conservative and liberal alike). Ferguson is not among them.

World Politics Review Article on the Global Middle Class – Part II

World Politics Review Article on the Global Middle Class – Part II

The damage done to the global middle class, while significant, is not irreparable. The solutions are as varied as the countries themselves, but they all share several key features that influence whether a consumer-driven economy will flourish or not.

First and foremost is access to capital for small and medium-sized enterprises. In developed and developing economies alike, funding all but dried up during the economic crisis that began in U.S. and quickly spread around the world. Especially during recessionary periods, start-ups are critical job creators compared to existing firms, which tend to shed employees. During the 1991 and 2002 U.S. recessions, start-ups added nearly 3 million new jobs, while established firms laid off 4 million to 5 million people, according to a Kaufmann Foundation report.

Misguided government regulations have also been thwarting the return of the middle class. Breaking up the excessive influence of conglomerates in emerging economies is another way to create room for the middle class, but doing so often proves to be difficult and controversial. Policymakers, no matter where they are, need to shift their fixation from top-line statistics like GDP growth, which can obscure wealth-gap and purchasing-power problems, and focus more on the health and size of their middle class. Until the world’s middle class recovers, there will be no global recovery.

Full article is available on the World Politics Review website.

Photo: President Barack Obama signs the Middle Class Tax Relief and Job Creation Act of 2012 in the Oval Office, Feb. 22, 2012 (White House photo by Pete Souza).

Blog Series: The Middle Class – Engine of Innovation

Blog Series: The Middle Class – Engine of Innovation

Consider this: The greatest inventions of the modern age— from the light bulb and the telephone to antibiotics, airplanes and the computer— were all made possible by the purchasing power of the middle class. Without this market much of what has redefined the way people live today would never have been successfully developed.

While early adopters fund initial inventions (one of the first home computers cost thousands of dollars in the 1970’s),  mass market appeal keeps the innovation engine humming. Energy, automobiles, communications, pharmaceuticals, electronics and retail make up the vast majority of the world’s 500 largest companies. Commercial financial institutions account for only 19% of the total.

When executives sit down to plot out what new products they’re going to pursue they inevitably size the market. That’s business 101. None of today’s global companies would even exist if it weren’t for the mass middle market. And when that market begins to shrink real consequences follow.

Investments in nascent and emerging businesses are no longer growing like they once did. Venture capital fundraising, one of the main financial sources for start-ups and fast growth young companies has yet to recover from its 2008 high water mark of $25 billion, plummeting to under $14 billion in 2010. Results for 2012 remain cautiously optimistic. Reuters and the National Venture Capital Association reported a 10% rise for the first half of 2012 compared to the same period a year ago after a disastrous first quarter drop of 35%. The number of firms raising new capital has shrunk considerably, however.

Start-ups, especially during recessionary periods are critical job creators while existing firms tend to shed employees. During the 1991 and 2002 recessions they added nearly 3 million new jobs while established firms laid off four to five million people according to a Kaufmann Foundation report. Meanwhile corporate research and development funding, while growing nominally at about 2.8% in the U.S. remains flat in real terms owing to inflation.

While start-up funding has become more difficult for start-ups a new crowd sourcing platform is emerging. Still in its nascent stage this has led to millions being raised on kickstarter.com which has grown from an indie creative fundraising outfit to a real source of finance for entrepreneurs. With the passage of the Jumpstart Our Business Startups (JOBS) Act individuals will be able to invest directly in small companies for an equity share within certain limitations.

The “industry” is still finding its way and looking to create a unified set of standards. Fraud concerns are real and need to be addressed (hopefully better than the pervasive fraud on Wall Street these days). Crowd Funding Intermediary Regulatory Advocates (CFIRA) has held events to solicit public input. Crowdsourcing.org has launched an accreditation program. The Securities and Exchange Committee has scheduled an Aug. hearing on lifting advertising bans on securities. New rules on crowdfunding up to $1 million in equity are expected by the end of this year.

New approaches to small business support will go only part of the way to rebuilding a middle class. Much broader efforts need to be implemented to save the middle from truly hollowing out and innovation grinding to a halt. Middle class consumption clearly drives innovation. Their health is the health of a nation. Until they recover, there is no recovery.

Coming up: Middle Class Awakening – when the middle does not hold.

Photo: Tokyo at Night, Brian P. Klein, 2009

Blog Series: Rebuilding the Global Middle

Blog Series: Rebuilding the Global Middle

Part I: Good Times Gone Very, Very Bad –

It seems like a quaint folk tale told to schoolchildren. Study, work hard, and you too can live happily ever after. The American Dream, each generation better off than the last meant true upward mobility. Skills rather than birthright defined success. It’s been the mainstay of popular culture for over a century. Was it too good to last?

There’s a long and generous history of hardworking immigrants establishing themselves in the U.S. Children often gained more education than their parents and either walked into a good manufacturing job after high school, went to a trade school or off to college. Eventually most married, bought a small house, a car, a television and appliances. Maybe they took a vacation to Disneyland or rented a room for a week at the beach each summer.

Suburbs sprouted out of shallow fields and the interstate highway connected a patchwork of states that eventually became part of a global economic, media and politically powerful nation.

Somewhere around the 1970’s the magic of upward mobility soured. Wage growth stalled while the cost of living kept rising. A worker might produce more per hour, especially with the aid of advanced manufacturing and automation, but that didn’t translate into higher take home pay, especially with the bite of inflation. Where one salary supported a family of four in the past, two incomes and credit card debt soon became the norm.

When that failed to keep up with the Joneses next door home equity loans became the fashion. “Free” money paved the way up the increasing slope of superficial prosperity until the road ended in a cliff. That was 2008 and four years after the the worst economic disaster since the Great Depression the U.S. recovery slows to near stall speed. Signs of a prolonged global slowdown point to increasing middle class strain.

At this juncture in economic history it becomes increasingly difficult to imagine how the middle class recovers absent a 1950’s-60’s style manufacturing boom. That pattern can hardly repeat itself considering the outsourcing trend and globalization which, in theory, opens the way for more value-added jobs in the U.S.

The changing structure of work isn’t necessarily a bad thing. Telephone operators that literally connected phone calls with wires and plugs were made obsolete by electric switching. Automobiles replaced horse drawn carriages.

Each leap forward left some destruction in its wake, but there was always another factory, another invention, another job to do.

Lower prices for clothing and shoes to washing machines and televisions made every dollar go further, for the moment. That moment has passed. Borrowing to buy now and retire later in near poverty has become the new reality, not the promise of an almost forgotten dream.

Has the middle class been damaged beyond repair? While this may not be the end of the age of opportunity, some serious surgery is required, and soon.

Next: Middle Class: Engine of Innovation

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Global Economic Downturn Gathers Pace

Wishful thinking aside, the global economy appears more fragile than ever. After promising signs earlier this year of sustained (if not accelerating) U.S. growth, new employment figures continue to disappoint with a mere 80,000 new jobs for June (see “The Jobs Week That Wasn’t” for longer term implications.) The IMF revised growth estimates down to 2.0% from 2.1% for the year while other estimates dip to 1.8%. By any measure there’s little bounce and less resiliency in this post-recession period than most others.

In Europe the debt crisis has only been delayed, not solved. After gaining over 15 percent since the beginning of the year the DAX index has reentered a downward drift, loosing half its gains over the past few months. Commodities are trading at two week lows even after news of China stimulus measures hit global markets.

China unexpectedly reduced bank lending rates (along with European and British central banks) to spur growth. Freeing up money for what type of development remains uncertain. Endless infrastructure projects have proved no panacea. Savings rates also dropped making households worse off longer term. They continue to earn less in interest than inflation takes away each year. Sound familiar?

The goal may have been to induce more spending, but a consumer-driven economy doesn’t suddenly appear overnight because bank deposits earn less interest. Social investments have been so minor, even during the recent boom years, that a household’s desire to save will remain strong. Though wages have been rising faster than inflation mid-career earners are squeezed between the high cost of medical care for their aging parents and high education expenses for their children. Don’t expect any major policy changes ahead of leadership transition in late 2012 despite Premier Wen’s entreaties to take more forceful action.

India has suffered mostly from its own stalled reforms rather than shrinking export markets. Domestic retail, agriculture and continued state dominance of entire industries coupled with runaway corruption have seriously injured growth. No concerted political effort in New Delhi has appeared to counter internal inertia for maintaining the status quo.

Endless promises of emerging markets picking up the slack from western industrialized countries have clearly failed to deliver.

The recent litany of bad economic news only confirms earlier signs of a more serious global slowdown. Unfortunately politicians, at least in the U.S., have eyes only for November elections. As it stands now any major stimulus will come after inauguration day, January 2013. That’s a long wait.

Holding the economy hostage for potential political gain may backfire well before the hundreds of millions of campaign advertising dollars are finally spent. Imagine what good that could do the U.S. were it used to fund start-ups instead.

Welcome to the dog days of summer . . .


Related Posts:

June 29, 2012 – Mid-Day Note: Global Economic Data Disappoints

The Week That Was (and Wasn’t)

Walking Backwards into the Future – In a 5-4 Supreme Court ruling upholding President Obama’s healthcare bill the U.S. finally joined the rest of the developed world of 60 years ago with universal coverage. China joined the space world of 50 years ago with a successful orbital docking mission, including a safe return to earth of three astronauts and China’s first woman in space. Read more »

Blinded by the Euro Light – Hopes for a breakthrough on several fronts in the global economy came to naught this week. EU leaders met, and discussed, and discussed some more. Solutions to the spread of financial distress affecting France, Italy, Greece, Spain, and Cyprus appeared at hand. Markets rallied after the European Stabilization Fund was announced which would buy sovereign debt and lend to banks across the EU. The compromise solution avoided the more prickly bailout mechanism of direct loans to financially unstable countries. Have any of the foundational problems changed? Sadly, no. Read more »

Financial Deception, Not Just for Wall Street Anymore – Were the financial mess in Europe not enough to make people wonder about the global economy more banking scandals erupted, this time in the UK. Collusion on bank-to-bank lending rates first discovered at Barclay’s are now suspected across a number of other banks. Not only do these rates directly impact financial performance, they are supposed to be a bell-weather of economic activity. If the instruments of market temperature-taking are faulty then a host of undiscovered ills will erupt yet again in crisis. Read more »

A Tentative Peace, and More War – China and the Philippines withdrew their ships from the Scarborough Shoal after a tense standoff in contested fishing waters. Wars have started over lesser disagreements. There’s no end sight to the cycle of provocation and pushback. ASEAN has failed to act – non-claimant states are loathe to risk their economic relations with China by siding with their southeast Asian counterparts. And China is quick to react to perceived slights using import bans including Norweigan fish after a Dalai Lama visit (no more smoked salmon from you, literally). Philippine fruit was the latest during the recent stand-off. The Chinese government also banned tourist travel (yes, travel agencies still need government approval to organize trips from China to other countries). Read more »

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Walking Backwards Into the Future

In a 5-4 Supreme Court ruling upholding President Obama’s healthcare bill the U.S. finally joined the rest of the developed world of 60 years ago with universal coverage. Perhaps Americans can now rest a bit easier knowing that in 2014 they won’t be denied healthcare for pre-existing conditions. The 20-30% annual premium increases may even slowdown once basic medical services for the uninsured kick in. Preventive care can work wonders (think catching a cavity today rather than surgery for an abscess tomorrow). Frontline and the Center for Public Integrity “Dollars and Dentists” laid it all out – “100 million Americans don’t go tot the dentist because they can’t afford it”.

Meanwhile, China joined the space world of 50 years ago with a successful orbital docking mission, including a safe return to earth of three astronauts and China’s first woman in space. While the technology is ancient by today’s standards, China rightly celebrated and pledged some $3 billion for more space programs. Pundits jumped on the decline of the west bandwagon with comments like – maybe NASA can take a lesson from China. A quick look at proposed budgets (even with cuts) shows NASA spending more than double that figure in one year on space exploration activity alone. Extensive Mars programs may not see the light of day or may be delayed, but seriously, a docking mission as a guide for NASA?

There’s no space race going here and pitting the U.S. against China as if it were the old Cold War is useless and counterproductive. Rivalry and divergent interests abound, but constructive engagement remains the wise word of the diplomatic day. Find areas of agreement and manage the difficulties while standing firm on at least some principles.

Sometimes going backwards is going forwards, other times not.

Back to “The Week That Was“.

Mid-Day Note: Global Economic Data Disappoints

Mid-Day Note: Global Economic Data Disappoints

U.S. economy still lags.

Today’s U.S. housing and consumer confidence figures failed to signal a real economic rebound. This after Moody’s downgrades of fifteen banks last week, including Goldman Sachs, and earlier Federal Reserve data* showing U.S. household net wealth plunging over 40 percent between 2007-2010. That’s an entire generation of wealth creation gone in three years. On a slightly positive note net wealth has been growing slowly since then, but for whom? Mainly shareholders and executives. Corporations continue to sit on cash ($1.7 trillion give or take) while the middle class, hit hardest by the downturn remains worst positioned to recover.

The temperature continues rising on a host of ills begging for resolution (jobs, insurance, income gaps), but as election season shifts into full gear expect more political paralysis in Washington, not less. Still, some growth, any growth, is better than contraction even at a paltry 1.8%. Lower gas prices may pump a few extra dollars into pockets over the next few months. Major concerns of course remain. Where will growth emerge if consumers continue to face pressure from all sides – stubbornly high unemployment, marginal home price increases, expiring tax breaks and soaring healthcare costs. Expect a long, hot summer.

Europe – Cyprus and Spain join the bailout line.

Moody’s downgraded Spanish banks in a widely recognized crisis of financial confidence. Now one of Europe’s larger economies officially joins the bailout que. Add Cyprus’s estimated 5-10 billion euros, a pittance compared to Greece, and Europe’s southern rim continues unravelling. Brussels won’t yield money without constraints. The only question left, at what cost in the short term versus broader integration later. The focus needs to remain firmly on the moment as the European Union will need plenty of time to hash out new monetary rules among its 17 member countries and 23 official languages.

Japan – Nuclear power returns but jobs may not.

Nuclear plants are coming back online absent energy alternatives (including a fragmented electrical grid and untapped geothermal resources). That will at least avoid production shutdowns that hobbled 2011 electronics and automotive manufacturing. Tepid recovery following last year’s disaster remains on track, but a track to where? Longer trends still point downward. Major manufacturers are off-shoring in droves, responding to light domestic demand, a troublesome exchange rate (making exports exceptionally expensive for overseas buyers), and greater growth prospects elsewhere. With all three of the world’s traditional growth engines stalled or sputtering, sources of new growth remain a mystery.

China – Slower growth than expected.

Serious headwinds continue to mount in China’s struggle to maintain history-defying growth. HSBC’s June flash purchasing manufacturer’s index fell to 48.1, it’s eighth consecutive month of contraction staying below the critical 50 mark. Accurate statistics continue to be problem, but if electricity consumption and coal inventories are any gauge, especially in China’s southern production heartland, then a slowdown has been building for some time. Power generation is barely growing as it approaches early 2010 lows, and this time absent a major global economic shock like the U.S. financial crisis. Strains in Europe alone don’t account for this slowdown. Chinese stimulus efforts are expected to fall far below their previous $550+ billion injection during the leanest years (2008-2009). Officials know that only so much demand exists for infrastructure and construction projects, their preferred stimulus sectors of the past.

Bottom Line:

Tepid U.S. recovery continues but rising risks suggest more slowing ahead. Europe’s ills are the near term weight, but China has a long way to go towards structural change and real consumer-driven demand. With their own power transition incomplete until the end of the year don’t expect dramatic upside surprises any time soon. If/when politicians on any continent finally resolve to get more money into the pockets of the middle class, then recovery prospects will finally brighten.

* For Federal Reserve household wealth data see:

Photo: Brian P. Klein
The Jobs Week That Wasn’t

The Jobs Week That Wasn’t

Bad news on U.S. employment numbers last week (a paltry 69,000 new jobs) left many wondering how long it might take for this economy to reach escape velocity from a slow burn. A scrappy little California start-up, SpaceX, made it to the international space station and back. What’s taking the rest of the country so long to recover?

Bureau of Labor Statistics employment data* (2002-2012) show the depths of the crisis and partial rebound. Beyond how steep the initial decline and gradual the return that little flatlining from January 2012 onwards is even more troubling. Even at an average 150,000 new jobs per month pre-crisis employment numbers are still 2 1/2 years away which would mark a total 80 months for full recovery. Compare that to previous recessions at the mind-numbing depths become painfully obvious.

The 1990-1993 recession (34 months for  employment recovery) and the 2000-2003 tech bubble burst (27 months) look like speed bumps compared to the present sink hole of unemployment.

Perhaps those 2007 employment levels were artificially high to begin with considering all of the new homes being built and the incredible levels of household debt-fueled spending. On the positive side at least the economy is growing at roughly 2% and 4.2 million new jobs have been created. It could be worse (Greece or Spain).

Still the disconnect between top line gross domestic product (GDP) growth, financial sector recovery (seven out of the ten largest U.S. banks reported significant 1Q 2012 profits), and incredibly anemic job growth poses some troubling questions for a middle class recovery, if there is one at all. The National Economic Council’s Alan Kreuger gave a detailed speech to the Center for American Progress back in January detailing the hit on the middle (good graphs in the Reuters summary.)

The slow pickup in lending to small and medium sized enterprises (SMEs) contributed to the problem. The WSJ reported back in May that the U.S. lagged other countries in lending and the largest banks were slower than all the rest. Recent lending levels seem to have recovered, but how much is actually feeding into SME growth rather than say mergers and acquisitions remains unclear.

We know SMEs drive new job creation, especially during recessions and yet they still struggle to get access to capital. Even for new and innovative companies venture capital funding is down 35% in the first quarter of 2012 compared to the same period a year ago and far from its 2008 peak. Perhaps the crowdfunding movement will take its place. Websites like kickstarter.com, previously home to small project donations for everything from documentary films to food trucks, broke the funding bar at $7 million for a start-up hi-tech watch company. The new JOBS Act expands funding for equity. NowStreetJournal has been chronicling this rise in crowdsourced funding. Perhaps the middle will support the middle after years of the top taking care of themselves.

* Note: BLS employment figures are in thousands (left axis)