Michael Meeropol – Why is Europe Experiencing a “Sovereign Debt Crisis?”

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I am sure that most listeners to this radio station know that Europe is in economic trouble.  You have heard about “a sovereign debt crisis.”   But what does it mean?  Briefly, it means that a number of countries in Europe – Iceland, Ireland, Greece, Portugal, Spain and Italy – have very high levels of liability to institutions outside their own countries.  These are debts of governments not to their own citizens. read more

Michael Meeropol – Edsall Commentary

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I recently saw Thomas B. Edsall interviewed on PBS.  His new book – The Age of Austerity: How Scarcity Will Remake American Politics  argues that the US has become incapable of solving the conflicts within the economy with economic growth.  According to Edsall, in the past, the economy grew and conflicts between Republicans and Democrats (conservatives and liberals) could be resolved.  Republicans could get tax cuts and Democrats could get growing entitlements. read more

Michael Meeropol – Why Inequality Harms the Entire Economy

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On January 1, the Business section of the NY Times asked six economists to comment on issues facing us all in 2012.  I have to say, I was really disappointed in most of the commentary but two of the economists made in my opinion outstanding contributions.

[The commentaries can be found on p. 1 of the Business Section.  Among the six economists was N. Gregory Mankiw, the author of a Principles of Economics textbook for which he received a $1 million advance.  Professor Mankiw is a former head of the Council of Economic Advisers under President George W. Bush and is currently the chief economic adviser to Republican candidate W. Mitt Romney.  He also teaches at Harvard University where he was the subject of a walkout by students protesting his narrowly-focused pro-laissez faire approach to teaching Principles of Economics.  His presentation focused solely on the idea that the Federal Reserve needed to bring “more clarity … about its contingency plans.”  This suggests that the major problem facing the economy is “uncertainty” --- a totally phony issue in the context of a sluggish recovery and outrageously high unemployment rates.  For balance, the Times included Dr. Christina Romer who until recently was the Chair of President Obama’s Council of Economic Advisers.  She argues that economic policy needs to do two things at once --- raise aggregate demand with further spending while coming to a long run “deal” on tax increases and entitlement reform such as was proposed by “The Bowles-Simpson Commission.”  With that sentence she forfeited her right to be taken seriously.  There was no proposal from the Bowles-Simpson Commission.  There was a proposal by the two chairs – Erskine Bowles and Alan Simpson – but it was not supported by a sufficient number of people on the commission and thus the proposal was never submitted to Congress.  The proposal by the two Chairs was completely flawed as anyone who read it carefully could see.  One member of the Commission who refused to support the proposal from the chairs released her own version --- It and her critique of the two co-chairs’ proposal can be viewed at http://schakowsky.house.gov/index.php?option=com_content&view=article&id=2777:

The third economist was Tyler Cowen.  People who read my commentaries who have long memories might remember Mr. Cowen as the individual who argued against nationalizing the biggest banks as a way of avoiding the “too big to fail” policies of previous Administrations.  He focuses on the problems of Europe suggesting we in the United States might be in for some rough going if some of the Central Banks in the Eurozone begin to fail and the Eurozone breaks up.  With all the problems we have here at home, it is a shame he wasted his time worrying about what might happen in Europe.  Unlike the situation with current US policy, there is virtually nothing readers of the Times can do to influence what Europeans decide to do.  The two economists who made useful contributions were Robert H. Frank and Robert Shiller.  This commentary focuses on Frank’s.  Professor Shiller, we should recall, warned about the stock market bubble back in 1998 and added to that warning a discussion of the housing bubble in 2005.  Here he makes a very sensible suggestion on how to change the tax code to help lower income homeowners while reducing the current windfall to high income homeowners.  Finally, we have the contribution of Professor Richard Thaler.  There is nothing particularly wrong with his suggestion – that incentives be changed to encourage healthy individual behavior.  My complaint is that our problems cannot be solved one individual at a time.  They require joint action --- and unfortunately only government policy can foster that.

 The economist I want to focus on is Robert H. Frank.  Professor Frank is the co-author of THE WINNER TAKE ALL SOCIETY which argued that for a variety of reasons, some markets (think professional athletes, top entertainers, textbook authors, so-called “super lawyers”) are structured so that a very few at the top get the lion’s share of the total revenue generated.   His contribution to the Times on January 1 identified one of the very negative impacts of the significant increase in inequality that has occurred over the past 30 years.  He noted that as the super rich have spent some of their very large incomes buying bigger and bigger houses, the price of housing FOR EVERYONE has risen dramatically. 

Here’s how he puts it:  “Parents naturally want to send their kids to good schools.  But quality is relative.  Because the best schools tend to be those serving expensive neighborhoods, parents must outbid 50 percent of other parents with the same goal just to send their children to a school of average quality.”  This creates, in his view, “a fruitless bidding war for homes in good school districts.” (NY Times, p. 4)

However, income growth has stagnated for the vast majority of the population.  Thus, according to Frank’s research the number of hours the typical wage earner has to work each month to earn enough to afford the cost of a median priced home rose from 41 hours in 1970 to 100 hours in 2005 just before the top of the housing bubble.  He concludes that, and I quote:  “Growing income disparities … raise the cost of achieving basic goals.”

 We often hear the argument that the increase in inequality is not a problem.  Since most people want to become rich, having a very large pot of gold at the end of the rainbow to shoot for is probably good for us – it improves all of our incentives. 

Then there is the old saw known as “trickle-down economics.”  High income individuals are the “job creators” and if they have high incomes (or can aspire to high incomes) they will increase their investments thereby creating jobs and thereby (in the future) raising the incomes of everyone in the economy.  This may have worked during the latter half of the 19th century but it never worked in the 20th century.

If the vast majority of the population experiences stagnant growth in their incomes, how do businesses find customers for their products? [For a brief discussion of the arguments see my book SURRENDER, pp. 62-3]

 The history of the US from World War II till the end of the 1970s completely refutes trickle-down economics.  During those years, the US resisted growing inequality and supported the growth of incomes at the bottom and middle of the economic ladder.  Those were extraordinarily prosperous years.  A high-consuming working class became solidly middle class. 

High income individuals had productive outlets for their profits which created capacity to produce consumer goods for this growing middle class.
 Since the end of the 1970s, these highly successful individuals and corporations have found fewer and fewer productive outlets for their massive profits.  They have shifted, therefore, to financial investments.    The result has been one bubble after another — outlets for the reinvestment of profits by the super-rich until they burst – first in 2000 with the tech bubble and (more disastrously) in 2006-2008 with the housing bubble.

For details, I highly recommend THE ABC’S OF THE ECONOMIC CRISIS by Fred Magdoff and Michael Yates.  It is not written in technical language but it has a significant amount of actual data to back up their analysis.

The middle class, caught up in this financial frenzy has been buying a higher percentage of their consumption items on credit — especially mortgage credit.
By 2007 household debt had risen to 100% of GDP.

 In a very real sense, the housing bubble, the financial collapse, the great recession and the sluggish recovery since 2009 have all had, at their roots, the massive increase in inequality.  Thus, growing inequality is the major cancer that is not only sickening our politics but our entire economy.  For details on the inequality see the work of Emanuel Saez at http://elsa.berkeley.edu/~saez/saez-UStopincomes-2006prel.pdf

 This inequality problem and the resulting macro-economic instability cannot be fixed by hitting the reset button on the financial system.  It cannot be fixed by making the rich even richer with lower taxes and reduced regulations.  There is only one cure — a major restructuring of the economy. I have previously discussed a document created in late 2008 which (of course) got virtually no discussion in the mainstream.  You can access it at http://www.peri.umass.edu/fileadmin/pdf/other_publication_types/PERI_SCEPA_full_statement.pdf

 Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution.

Michael Meeropol – WALL STREET, 26 years later

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I recently attended a showing of the film WALL STREET – the 1985 version.   Watching that movie again made me realize how damaged our society has become since the triumph of Reaganomics.   In 1980, a trend had begun to dominate national discourse and national politics.  That trend was the rejection of government economic activities – the kind that had created the Social Security System and committed the federal government in a 1978 law to use monetary and fiscal policy to achieve full employment.  read more

Michael Meeropol – Eric Cantor and Nan Hayworth are Dead Wrong

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The New York Times headline said it all:  “Emphasis on Federal Austerity Changes Dynamics of Disaster Relief.”  (NY TIMES, August 31, 2011)  http://www.nytimes.com/2011/08/31/us/politics/31disaster.html?_r=1&scp=1&sq=Financial%20Austerity%20and%20Disaster%20Relief&st=cse

In the article, a spokesperson for Majority Leader Eric Cantor says that while people expect government to treat natural disasters as priorities, they also “expect their government to spend their dollars wisely and to prioritize and save when possible.”  read more

Michael Meeropol – Another Deficit Reduction Plan

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THERE HAS BEEN A DEFICIT REDUCTION PLAN THAT HAS BEEN TOTALLY IGNORED BY THE MEDIA, EVEN AS COMPETING PLANS TO COUPLE DEFICIT REDUCTION WITH RAISING THE DEBT CEILING ARE DISCUSSED AT LENGTH.

As of July 30 there is no deal to raise the debt ceiling by August 2.   If Congress does not act, that means no more new borrowing.  The media keeps saying this would be a “default” on US debt but in fact, the government could avoid a default as it prioritizes where it will spend its reduced revenue stream.  The problem arises from that reduced revenue stream.  Anywhere from 55 to 60 percent of current federal spending obligations are covered by the inflow of tax revenue.  Thus, failure to borrow (and the debt ceiling limits borrowing) will mean that the Federal government will have to cut its spending by close to 40 percent.  Thus, the government could prioritize to make sure it pays interest on outstanding debt and principal.  This would avoid defaulting on the debt. read more