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CHEERLEADERS AND POVERTY IN ECONOMY I AND II

June 9, 2015

CHEERLEADERS AND POVERTY IN ECONOMY I AND II

I often write of the two-tiered economy we live in, one for the rich and investment class and the one the rest of us live in, or Economy I and Economy II, respectively. Economy I is booming with a Dow and S & P at historic highs while Economy II (where the rest of us live) is mired in chronic and worsening malaise due largely but not entirely to wage inequality. In addition to the economic cancer of wage inequality, there is a psychological component leading to loss of aggregate demand in the overall market which is real but unmeasured (if measurable at all) by economists and government agencies such as the Fed because it comes with no numbers for Wall Street propagandists and others to massage and manipulate. The fact that it is difficult to quantify does not mean that it is not real, as we shall see.

Why are Wall Street cheerleaders on TV and in print continuing to pretend to be surprised that our economy is “hesitant” when they know why and so do those of us who can do addition and subtraction? Let’s take a short look at some of the excuses and diversionary chatter offered by Wall Street’s PR people for our continuing failure to recover from Bush’s Great Recession and the costs of poverty arising from our failure to adopt Keynesian tactics to do some things that need to be done which would in turn speed the recovery (if any is to be had under current ownership of the political process by the elite).

Let’s do a short survey of pro and con commentary on the issue. We now find (per Josh Mitchell in The Wall Street Journal) that our first quarter’s GDP’s performance was not at a positive 0.2% rate of growth but rather (as reconfigured) our GDP shrank 0.7% for a net change of a negative  0.9% from the government’s first estimate, a horrific performance by the overall economy. We are not going up; we are going down. The government’s initial estimate of our overall economy’s GDP performance was way off the mark, and this is our third contraction since the recession ended in mid-2009 (i.e., it ended for those in Economy I but its poverty-causing effects are still being strongly felt in Economy II), and let’s keep in mind that two successive quarters of negative GDP equal imminent recession. Our second quarter’s GDP had better be positive, or else, though most of us who are stuck in Economy II are so inured to malaise that we may not even notice that the overall economy has slipped back into recession. To such unfortunate victims in Economy II it’s just another day on the poverty treadmill.

Excuses provided by Wall Street cheerleaders for the first quarter’s performance range from bad winter weather and a strong U.S. dollar to labor disputes at West Coast ports, ignoring the facts that winter weather offers economic opportunities as well as reduces them, that the strength of the dollar was a before-after drag on our export trade due to currency valuation having nothing to do with weather, and that labor disputes on West Coast docks had no discernible effect on the overall economy since the problem was not the unloading of Oriental goods for distribution in the United States but rather that would-be customers stayed home due to not having sufficient income (which was in turn due largely to wage inequality) to buy the goods already on the shelves of Wal-Mart, Target and others.

In short, tepid aggregate demand primarily accounts for the quarter’s downturn due in turn to a lack of purchasing power of consumers. Such consumers had just gone through a gift-giving Christmas season (a fact left unmentioned by Wall Street’s cheerleaders) and had increased credit card debt to pay in the first quarter of 2015, whatever the weather, the strength of the dollar or labor turmoil in West Coast ports. Hired guns for Wall Street banks (banks who own the credit card industry) publicly lament the fact that consumers did not borrow yet more for the Christmas season and spend even yet more for the first quarter after Christmas. One wonders where they think such resources can come from when the purchasing power of consumers in Economy II is going south every day. It is clear that recovery of our overall economy from Bush’s Great Recession is still fragile at best. Someone tell Wall Street moguls.

There is no need to panic per Martin Crutsinger of the AP. Things have “brightened considerably since winter.” Steady job growth and lower gas prices should ultimately boost consumer spending, “the main fuel for the economy.” I agree that consumer spending is the main fuel for the economy but disagree with the rest of such assertion. We have had “steady job growth” and “lower gas prices” for many moons and yet the overall economy is underperforming for lack of consumer demand, which comprises 70% of the economy’s performance. The obvious cause of tepid demand is wage inequality. Consumers without money go to the store less often and buy less when they do go.

I think consumers have developed a new mindset (a psychological component in the marketplace). Harlan and Halzack in the Washington Post agree. They write that with the psychological trauma of the Great Recession fresh in consumers’ minds, many Americans are spending less and saving more, even when they have more money in this pockets, noting further that the average household has an extra $700 this year because of lower gas prices, but that only 1 in 7 consumers has spent the savings on discretionary items like travel and restaurants. I distinctly recall the ravages of Wall Street investment mistakes and the bailouts and the near international depression caused by Wall Street banks’ antics while Bush and his regulators slept, and so do millions of Americans, especially those who lost their homes and jobs during this economic holocaust. These are the same people Wall Street now wants to spend more money on imported goods on credit. Once burned, twice shy, as the old saying goes. Perhaps at long last American consumers are demonstrating that they will spend largely on non-discretionary goods and services (food, rent etc.) until the overall economy’ GDP can be measured by positive numbers rather than propaganda and misinformation from the moneychangers on Wall Street.

Pulitzer Prize – winning economist Robert J. Samuelson sums it up best in the Washington Post. He notes that corporate executives have a hangover from the recession, too, and that to hold down costs, they’re refusing to increase salaries and relying more on temporary workers with no or limited benefits; that that creates insecurity for workers, WHOSE LACK OF SPENDING HURTS THE RECOVERY (my emphasis). He finally rightly concludes that the “thick residue of anxiety” left over from the financial crisis and recession has our economy “caught in a vicious cycle.” The new consumer mindset is at work.

When all else fails, Wall Street apologists such as Wolfers in the New York Times want to change the means of measurement of the overall economy from GDP to GDI (gross domestic income), noting that if we had used the latter instrument as the measure of economic growth it would show that our economy actually grew 1.4 percent over the first quarter. My response? Even if we were to agree to adopt the GDI measurement of the overall economy’s growth during the first quarter, to whom did such economic growth go? It went to the rich and investment class, not to would be consumers. Problem unresolved.

Under-consumption in the marketplace will end when wage inequality ends, all of Wall Street’s increasingly frantic excuses for cost-cutting to the contrary notwithstanding. Period.    GERALD    E

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