The short answer is yes, it can. The longer, more complicated answer is that the looming (potential) failures of Ford, GM, and Chrysler present long term sustainability problems for a middle class that is already clamoring for short term, emergency . . . → Read More: Ford, GM, Chrysler Announce Losses; Can the American Middle Class Survive a Big Three Meltdown?]]> Can the U.S. economy possibly get any scarier or more complicated?

The short answer is yes, it can. The longer, more complicated answer is that the looming (potential) failures of Ford, GM, and Chrysler present long term sustainability problems for a middle class that is already clamoring for short term, emergency solutions.

Ford recently announced third quarter losses of $129 million but admitted to having burned through $7.7 billion in operating costs during the same period. GM announced a staggering loss of $2.5 billion. Chrysler, by all accounts, will be belly up by the start of 2009 if the government is unable to broker a merger with GM, and all three are begging Washington for a second $25 billion in low-interest loans to keep them all afloat until the current economic crisis passes.

The announcement of these stunning losses and the request of additional federal money came alongside industry announcements of even more lay-offs and possible suspension of the plans for research and development of new, more fuel-efficient American cars. Without a more competitive product than the big trucks and SUVs of the past 15 years, it’s hard to see how and when things will get much better for the U.S. auto industry, but unfortunately the problems go much deeper than that.

Retail sales fell of a cliff in October across the board, with the exception of Wal-Mart, which saw a 2% increase in sales. Even sales of luxury items fell; items which in the past have been fairly recession-proof. Stores like Saks and Bloomingdales posted some of the worst figures of all. Job losses for October came to just under a quarter of a million, bringing the unemployment rate to a 14-year high of 6.5%, and this, by general agreement, is only the beginning of the labor effects of the recent credit crunch.

All of this bad news is hitting right before Christmas, a time when retail stores generally expect to be ramping up for the November and December sales that will carry them through the rest of the year. This year, those sales may not materialize at all. Circuit City is shutting down 120 stores for good, right before Christmas, just to stay solvent, and other big box stores that usually hire extra help for the holidays are actually terminating permanent workers to reduce costs.

The fact is that people are not buying anything right now. Even if the Big Three could produce a car that runs on air and then start shipping it to car lots tomorrow, most Americans would be unable to qualify for loans to buy these magical air cars, even if they had jobs or money to put down on them, which fewer and fewer people do with each passing day. The recession is looking like it will be long and hard, with many analysts seeing a turn-around no sooner than 2010.

When Henry Ford first started to build automobiles in the U.S., he made the radical decision to pay his assembly line workers incredibly well. He did this not out of a sense of altruism or social justice, but rather to expand his business plan so he could market his cars to everybody, thereby making more money for himself. In making this decision, he not only enabled his workers to buy the cars they were building, he also ended up creating a thriving American middle class.

Over the course of the past 30 years several developments have increased profits for U.S. corporations and their stockholders, while at the same time putting downward pressure on the mostly industrial middle class. Changes in U.S. trade agreements allowed industry to flee the U.S. rapidly and dramatically, forcing formerly middle class workers into low-wage jobs in the service sector.

As the good industrial jobs disappeared, corporations also began to eliminate middle-management white color jobs with middle class salaries. Most of the corporate jobs left in the U.S. today are entry level service sector jobs, often in call centers or tech support, with little opportunity for advancement or career development. Not much remains between the bottom of the corporate pyramid and the CEO, and what does remain is under constant pressure to produce more profit for less reward.

In fact, in most of these workplaces (the classic cubicle farms of the ‘Dilbert’ comic strip) a management style designed to turn over employees in one to two years remains firmly in place. While this rapid turnover keeps labor costs low, it also creates a very unstable, low-paid workforce with no special loyalty to any one job and not enough annual income to commit to a four-year auto loan.

In other words, the middle class jobs that created the ‘consumer economy’ are largely gone with the decline of the Big Three and the loss of myriad other U.S. industrial jobs, both related and unrelated. Steel, textiles, electronics, computer chips—all of these items are made overseas now. When people don’t have good jobs and can’t get credit, they can’t spend money. When people can’t spend money, more people lose jobs.

Short term, the U.S. will have to find a way to keep people in their homes, keep them warm and fed, and stabilize housing and financial markets. Those challenges would be daunting in and of themselves for even an economic Mozart. Deficit spending seems unavoidable at a time when the national debt is already completely out of control.

But long term, the U.S. will have to find a stable job base that can support a middle class and do whatever is necessary to keep those jobs here. If that doesn’t happen, if we don’t see something on the horizon to replace the dead industrial base, then all the stimulus packages Congress can dream up won’t prevent a long and painful period of poverty and contraction in America.

Gas prices are finally coming down.

Unfortunately we’re running on fumes and our credit cards are being declined.

What happens next will have long and lasting effects, not just on the economy, but on the health and security of the nation.

Join the forum discussion on this post - (2) Posts]]> http://www.citizeneconomists.com/blogs/2008/11/10/ford-gm-chrysler-announce-losses-can-the-american-middle-class-survive-a-big-three-meltdown/feed/ 3 http://www.citizeneconomists.com/blogs/2008/10/29/is-the-us-on-the-road-to-socialism-part-2/ http://www.citizeneconomists.com/blogs/2008/10/29/is-the-us-on-the-road-to-socialism-part-2/#comments Wed, 29 Oct 2008 21:00:14 +0000 J.D. Seagraves http://citizeneconomists.com/blogs/?p=365 Last week, I looked at the first five planks of Karl Marx’s Communist Manifesto and the extent to which they have been integrated into the U.S. government. This week, I’ll examine planks 6-10.

6. Centralization of the means of communication and transport in the hands of the State.

Check. We have the Federal Aviation . . . → Read More: Is the U.S. on the Road to Socialism? (Part 2)]]> Last week, I looked at the first five planks of Karl Marx’s Communist Manifesto and the extent to which they have been integrated into the U.S. government. This week, I’ll examine planks 6-10.

6. Centralization of the means of communication and transport in the hands of the State.

Check. We have the Federal Aviation Administration (FAA), the Interstate Commerce Commission (ICC) and government ownership of Amtrak, the U.S. Interstate Highway System and its centralized funding, and the Federal Communications Commission (FCC) to regulate everything from radio and TV to telephones. Even satellite radio is regulated by the state, limiting the band to just two stations (Sirius and XM) who then had to ask the government’s permission to merge.

7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands; and the improvement of the soil generally in accordance with a common plan.

President Truman socialized the steel industry in 1952, reasoning that steel was vital to America’s defensive interests. With a military-industrial complex so vast, what isn’t “vital” these days? Regardless, the Supreme Court rejected this Marx-like expropriation after the fact. Would today’s SCOTUS remain as true to the Constitution? The EPA and various environmental regulations do much of what’s included in the second half of the plank above. Overall, we’re not quite there on #7 — a half-hearted cheer (perhaps more of a whimper) for capitalism.

8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.

Both John McCain and Barack Obama favor some type of mandatory “national service.” The Army Corps of Engineers is a psuedo-industrial army. FDR’s WPA projects would certainly fit the bill, and as the current recession turns into a depression, don’t be surprised to see the next president reinstitute public works projects.

9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.

Various zoning, anti-”sprawl,” and “smart growth” policies fit the bill here.

10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production.

Just as with plank #5 (”Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly”), the U.S. passes this test with flying colors. Not only is education in America “free and cumpulsory,” it is also federally controlled, now more than ever thanks to the disastrous No Child Left Behind. Anti-child workplace discrimination was codified by various “progressive” reforms in the early 20th century — long after most child labor had stopped, voluntarily, as living standards rose thanks to the free market — and today’s schools meet an updated version of combining education with “industrial production” in that they’re designed primarily to train children to be “good” employees.

In Conclusion

Karl Marx was a brilliant man who properly diagnosed the ills of what he called “capitalism” — a system in which the rich and propertied classes were given legal sanction to plunder the poor and working classes. Marx believed that all nations with “capitalism” (as he defined it) would eventually disintegrate into socialism and then the true worker’s paradise of Communism. The five tenets above, along with the previous five, were the preconditions that Marx thought needed to be met before a “capitalist” nation could become socialist (and then Communist). We’re almost there.

But as brilliant as Marx’s analysis of “capitalism” was, his solution — Communism — was utterly off the mark.

What we need in America is true capitalism: a system of peaceful and voluntary exchange, wherein capital is employed in the best interests of its private owners and without government interference. To the extent that capitalism and its Invisible Hand are allowed to operate, living standards of all from the poorest to the richest are improved. To the extent that the government intervenes, we become more like Marx’s version of “capitalism” and take another step on the road to his nightmarish vision of the total state.

The emphasis of the role of government in education predates the establishment of the . . . → Read More: Will the Student Loan Industry Be Bailed Out Next?]]> Will companies that issued derivatives based on bundled student loans be the next financial dominoes that will require a government “bailout”? The country’s long dedication to education makes it a virtual certainty.

The emphasis of the role of government in education predates the establishment of the United States as a country. As early as 1642, a year before the founding of Harvard, laws of the Massachusetts Bay Colony broke with English tradition of purely private education and introduced a role for the state. The law essentially suggested that the colony’s government would assume the duty of teaching children if parents failed to do so.

A century later, the new Congress of the United States enacted the Northwest Ordinance of 1787. It set forth the role and obligation of the state in education. Article 3 of the Ordinance stated that

Religion, morality, and knowledge, being necessary to good government and the happiness of mankind, schools and the means of education shall forever be encouraged.

Early in the 19th century, Horace Mann took a leading role in the advancement of public education. Both as a Senator from Massachusetts and later as Secretary of the State Board of Education in 1837, Mann was instrumental in establishing textbooks and libraries, doubling the wages of teachers, and securing state aid for education. He argued that the country’s wealth would increase by educating the public and should be borne by the taxpayer. He was immensely successful in the task. Mann ultimately became president of Antioch College in 1853, six years prior to his death.

The fundamentals for universal public education were established and accepted on both a private and state level. However, it took nearly three quarters of a century, in 1935, for direct federal government loans to be debated. First, government student lending began on the state level when Indiana initiated the waiver of fees to students who successfully competed in statewide tests.

By 1944, the Serviceman’s Readjustment Act (commonly known as the G.I. Bill) was passed. It was the first legislation to provide direct aid for students on the federal level. The bill was amended and expanded following the Korean and Vietnam conflicts. Now called the Montgomery G.I. bill, it forms a crucial benefit to men and women voluntarily joining the military services.

The next half century saw a rapid rise in various federal, or federally-guaranteed, student loans and grants. Loans are to be repaid at subsidized low interest rates, while grants are outright gifts, requiring certain criteria and qualifications.

Some examples include:

• National Defense Education Act was launched after Russia orbited Sputnik I in 1958. It was centered on science, mathematics and language. The federal program is now called the Federal Perkins Loan program for low-income students with ten years to repay at five percent interest.

• The Health Professions Educational Assistance Act 1963 for medical and health program students was later broadened to add scholarships in addition to loans.

• The most significant and sizeable is the Federal Stafford Loan Program. It was initially passed by Congress in 1965 as the Guaranteed Student Loan Program. The program used private banks and other lenders, guaranteed by the federal government.

• Outright grants, such as the 1965 Educational Opportunity Grant Program and the 1972 Basic Educational Opportunity Grant, now known as the Pell Grant, consist of outright gifts to students in low income brackets. Eligibility is based strictly on need.

Later yet, government educational funding started to be offered to middle and upper income families such as the 1978 Middle Assistance Act and the 1981 PLUS loans.

Finally, loan consolidations and the William D. Ford Direct Student Loan Program of 1993 expanded loans available directly from participating schools.

As the population increased, and students availed themselves of the increasing variety of grants and loans, so did defaults on student loans.

A report published in October 2007 by Education Sector, an independent non-profit, non-partisan think tank, shows that student loan default rates were approximately five percent. Twenty percent, the largest percentage of those defaulting, owed $15,000 or more after attaining a four-year undergraduate degree.

According to the report,

Black students who graduated in 1992–93 school year had an overall default rate that was over five times higher than white students and over nine times higher than Asian students. … Hispanic students’ overall default rate was over twice that of white students and four times higher than Asian students. (www.educationsector.com)

The current financial crisis offers some serious food for thought.

Most significant is that, unlike mortgages, student loans have no underlying asset value. While defaults on mortgages have the backing of real estate – no matter if it has depreciated in market value – student loans are unsecured. Recourse to recover default payments may exist through attachment of wages and other measures, including tracking of an individual through IRS records, but has no tangible value except the student’s future earning power.

Despite the high-risk exposure, private firms in the student loan industry, such as SML Corporation, generally known as “Sallie Mae,” realized some $18.5 billion in derivatives sales in 2007. According to Bloomberg.com on October 22, Sallie Mae lost $185.5 million for the third quarter, compared to $344 million year-to-date. The company increased contingencies for bad student loans by some 31%. It also had extraordinary legal expenses in connection to a failed sale of the company to a third party. The stock declined from a high of $48.24 to close at $4.50 October 22, year-to-year.

According to Bloomberg, SLM “is partly insulated from the crisis because the company’s loan portfolio is 82 percent government guaranteed. The U.S. Department of Education is offering funding for those loans through July 2010.”

SLM Corporation owns or manages some 10 million student loans in addition to its ancillary businesses of college savings accounts and collection agencies. It was originally formed in 1972 as a “government-sponsored entity” similar to Fannie Mae and Freddie Mac. It became a totally independent company in 2004.

The question remains: if SLM Corporation’s management underestimates its potential student loan defaults and overestimates its cash and asset positions, will the federal government be in yet another “bailout” mode?

The history of government’s historic and stated position regarding education is clear. It remains for legislators to determine how best to reduce or eliminate student loan defaults. Don’t let the fear of college debt keep you from getting your degree. See the affordable degree options available at Belhaven College.

Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.

The ‘Fear Index’, also known as the VIX (or, officially, the Chicago Board Options Exchange Volatility Index) is a financial tool that measures market swings or volatility. The higher the VIX goes, the scarier . . . → Read More: Thanks VIX, But I Don’t Need Your ‘Fear Index’ to Tell Me People Are Nervous About the Economy]]> Why, oh why, did the biggest financial crisis since the Great Depression have to hit during a presidential election year?

The ‘Fear Index’, also known as the VIX (or, officially, the Chicago Board Options Exchange Volatility Index) is a financial tool that measures market swings or volatility. The higher the VIX goes, the scarier the market looks, and the more panicky investors feel. Until very recently, few people had heard of the VIX and even fewer cared about it, but ever since the credit crunch took hold a few weeks back, the VIX has been a staple number on nightly cable news channels. On October 17, it hit 70.3, the highest fear rating ever recorded since the VIX was first introduced in 1993.

I don’t know about you, but I don’t really need a VIX rating to convince me that people are scared. Insiders and investment specialists do have a practical use for an exact day-by-day volatility measurement. People like me, however, who write for economics blogs and read the financial sections of the major newspapers for sport, tend to get a general sense of the mood of the country simply by watching how many people in our own communities are completely melting down at any given moment.

Here’s a basic formula I’ve devised that any nonprofessional can use to measure financial fear:

1) Take the number of personal friends and family members who have lost at least 30% of their 401(k), and 2) divide that by the number of emotional outbursts about the economy that you have personally fallen victim to on the day you are measuring, then 3) multiply that final figure by the chocolate available in your household by 10:00 p.m. on any given weeknight, and 4) eat all the chocolate before someone else in your house gets to it.

Perform that equation and I guarantee you will discover that Americans are pretty scared right now.

Sadly, fear is a big stick that can be useful in political campaigns, especially with only days left until November 4th. Think you might need some help with that adjustable rate mortgage pretty darn quick? Socialist! What, do you think the government is supposed to wipe your chin and put you to bed! On the other hand, do you think you deserve the tax breaks you got under George W. Bush for finally, after 50 plus years, making it to a 50% income bracket? Fat cat! What are you, some kind of AIG executive or something? I’ll bet you eat homeless people for breakfast, you scoundrel!

The rhetoric surrounding the already significant economic mess is off the charts emotionally right now, and I submit it does not help the current situation one bit. What can we make of the term ’socialist’ in an environment in which the U.S. Treasury has just admitted it is considering nationalizing the banks? Which is more ’socialist’: a nationalized banking system, or a universal healthcare system? Don’t taxes by definition always redistribute wealth (unless we’re talking about a flat tax, which we aren’t)?

On a related note, if people who earn over $250,000 are actually about to be financially eviscerated by Barack Obama’s plan to rescind the Bush tax cuts, how is it that Cindy McCain paid just 20% of her 2007 income ($2 million of a total income of $10 million) but my household got stuck paying 27% on a microscopic fraction of that amount? OK, I know that question isn’t entirely logical, but it does beg a related question: Are taxes really the central issue here? Or do we just need access to much, much better accountants?

The economic political waters are about as muddy as they can get right now, and that’s useful because confusion and rhetoric throws people back on their own fears and emotional prejudices instead of their capacity for rational analysis of the issues at hand.

I’ll be frank: I have no clue what is going to happen next.

There, I said it.

You know, there are people in the world who spend years and years in Zen meditation practice just to someday, hopefully, somehow, train their minds to live completely in the present moment. Here in America, we’ve suddenly been given that gift free of charge by means of a financial meltdown. If we want, we can choose to simply admit that we are at a completely unrecognized moment in historical time, that no one is certain how this is all going shake out, and then we can just wing it, as it were.

That’s what will ultimately end up happening anyway.

In Zen meditation, when practitioners get caught up in projecting what might or might not happen and in thinking so fast it starts to make a soft whirring noise inside their own heads, the Zen master will often come up behind that practitioner and whap him or her upside the head with a big stick to snap that person out of it. Right now I see an excess of stick wielding Zen masters and a shortage of humble practitioners. If one more Zen master starts in on my own head, seriously, I’m going to…

Well, I’m going to do exactly what I’m currently doing: baking lots of chocolate things and eating them while I still can.

Here’s the scoop (as I understand it): We are either in for the hardest, longest recession in U.S. history or a mild downturn of one to two years followed by complete recovery. We are either about to become a socialist nation with requisite neo-WPA posters in every heavily-taxed home, or else we’re about to give the obscenely wealthy all the rest of our money and stuff, whatever little we have left, even our cats. These dueling outcomes will destroy us by fire or ice, but the important thing for us to understand is that, either way, we will indeed be destroyed.

No wonder people are scared!

I submit we may soon be looking at C) None of the above.

In the meantime, keep your stick to yourself, would you please?

Join the forum discussion on this post - (1) Posts

Now, some economists are finally starting to admit that, yes, the U.S. . . . → Read More: Economists Finally Agree: We’ve Been in a Recession Since January]]> For at least a year now, ordinary people in the United States (people the press has been referring to as “Main Street”) have known that the economy was starting to slow down at the same time that prices were rising uncomfortably fast.

Now, some economists are finally starting to admit that, yes, the U.S. probably went into recession somewhere around January of 2008. U.S. economic growth is expected to go officially negative by the end of this year, and this negative growth pattern is expected to continue and worsen throughout most of 2009, if not longer, driven by job losses, a continued drop in factory orders, and falling home prices that still have a long way to fall before the housing market stabilizes.

On October 3, the U.S. Labor Department announced that 159,000 jobs were lost in September, much higher than the expected loss of 100,000 jobs. Orders for durable manufactured goods declined by 4%, almost double the 2.5% figure expected by analysts. Even the service sector flat-lined in September, hovering just barely above the 50 point threshold that signals economic growth.

Although the House of Representatives finally did pass the $700 billion credit market rescue package on October 3rd, by the time the bill was at last on its way to the White House for the President Bush’s signature, that same credit crisis had already pushed the State of California into a $7 billion budget shortfall, with the real possibility of not being able to meet payroll this month, and the State of New York into a shortfall of $1.6 billion, expected to worsen next year. California may have to turn to the Federal Reserve to borrow if credit isn’t available by the end of October or else face a total shut down of state government.

It is not at all unusual for economists to declare a recession in retrospect or for consumers to feel the recessionary effects before the experts do. This is partly because economists have varying criteria for labeling an economic slowdown recessionary (two consecutive quarters of negative growth is just one rule-of-thumb) and partly because it takes awhile to accumulate enough data to analyze and declare a trend. So often the effects of a recession are felt long before it is formally announced.

However, this time the economic trouble feels like it runs much deeper; and the unease accompanying the acknowledgment of this trouble feels closer to panic. While caution is almost certainly wise at times like these (Why create panic if taking care with words can restore calm?), it is also true that, at every step of this current economic crisis, experts have erred on the side of minimizing the depth of the turn-down. With each new catastrophe, someone important was out in front of cameras declaring that the housing market was bottoming out and the economy was about to turn around. Each catastrophe was expected to be the last. Until the next catastrophe. The phrase “a river in Egypt” springs to mind.

Eventually, the public quit believing the experts. Soon the public ignored the experts entirely, believing instead that positive spin was all that was really available from such persons: the hard truth was to be found instead in the price of milk, the number of overdrafts in a personal checking account, a declining 401(k) balance marked with a red double-digit loss percentage. Let the experts spin until they puked: the truth is that when the money is gone a week before payday arrives, you don’t need an expert to explain that times are getting tough.

By the time Henry Paulson and a seemingly exhausted, sincerely frightened Ben Bernanke went before Congress (was it really only a couple weeks ago?) with their request for $700 billion right now and a prohibition on any oversight or prosecution, it seemed obvious to all that Wall Street’s unending font of optimism had very suddenly run dry. Wall Street seemed to learn what Main Street had known all year in the space of only a few days. How can that be? Lots of people were asking themselves this same question, all at the same time.

All of which brings me to the current situation and the grotesque chasm that seems to have opened up overnight to separate the folks on Wall Street from the folks on Main Street and to separate Main Street from its supposedly representative democracy. To paraphrase the famous line from Cool Hand Luke, what we have here is not just “…a failure to communicate,” but rather a total breakdown in trust.

So what are we looking at here? A recession similar to the recession of the early 90’s with a light at the end of an admittedly dark tunnel? Or are we instead, as New York Times op-ed columnist and economist Paul Krugman says, truly on “The Edge of the Abyss”?

If you ask Wall Street that question today, you may or may not get an answer that spins. There comes a time when all that is left for anyone to do is breathe and pray and cross their fingers.

If you ask Main Street this question today, you will probably get an earful.

It won’t be pretty.

Neither will the year ahead. Or the one after that. Let’s hope our new leadership has a strong spine and a better plan. We’ll all be needing both.