The Oser View

Gains & Losses

By now, everyone is aware of that most publicized, and most politicized, of economic statistics: payroll employment in the United States rose by 115,000 in April. This does not mean that the economy simply added a total of 115,000 jobs; rather, it means that some very large number of new jobs and some very large number of lost jobs netted to an increase of 115,000. Figuring out those two large numbers is much harder and takes much longer than simply noting the net change.

On May 1, the Bureau of Labor Statistics, that great storehouse of useful information, released its most recent count of job gains and losses. It is a mark of difficulty that the "most recent period" is the third quarter of 2011. The chart below summarizes the data. The gray bars show periods of recession, the blue line tracks job gains and the red line, job losses. At this high level, the picture is clear: In bad times more jobs are lost; in good times more jobs are gained.

From the beginning of 2001 through the third quarter of 2011, the economy created 316 million jobs and lost 319 million. These are both astonishingly large and astonishingly close numbers. To put it in perspective, 2.4 jobs were created and 2.4 jobs lost for every American currently employed, a demonstration, apparently, of tremendous mobility and vitality in the economy. But the details show a more nuanced picture. In the recession years of 2001 and 2008-09, job losses exceeded job gains by 12.1 million. In contrast, during the three boom years, 2004-06, job gains exceeded job losses by only 6.0 million. Bad times have been considerably worse than good times have been good.

Looking even closer, we find that both job creation and job destruction have slowed dramatically over the past decade. The vertical axis on the chart at left adds together jobs created and destroyed. The red line tracks the changes in the total in each year from 2001 to 2011, what one might call job volatility. As you can see, job volatility declined sharply during and immediately after the 2001 recession. It evened out during the mid-decade boom, but dropped again in the Great Recession. It is leveling off in the present recovery but at a much lower level.

I suspect this trend is related to and reflects the decline in the labor participation rate. The last chart shows the percentage of Americans over age 16 in the labor force over the last 10 years. The drop, from nearly 67% to 63.5% has been drastic. Of course, every person who stops looking for a job has his or her own reasons, but individual circumstances should not blind us to a central fact: fewer Americans have to work to provide all the goods and services we need. Indeed, fewer Americans have to work to keep the US economy the strongest in the world.

Economists have a typically cold-blooded term for describing this phenomenon: the Non-Accelerating Inflation Rate of Unemployment or NAIRU (pronounced like the former Indian prime minister). It means that in order for the economy to adjust dynamically to changing demand, technologies, and competition, some fairly significant percentage of would-be employees will always be out of work. Employees are the economy's unwilling elastic.

In one sense NAIRU is an obvious concept. Its alternative is a command economy in which people have jobs for life, few businesses are created and fewer still are allowed to die. It's an approach that has been tried and found wanting. As factory hands in the old Soviet Union used to say, "We pretend to work and they pretend to pay us." The problem, though, is that nobody knows what the lowest sustainable rate of unemployment actually is. Economists tend to come to the ex post facto conclusion that NAIRU is simply the current unemployment rate. In the boom periods of the 1990s, they were saying that the NAIRU may be as low as 4-5%; now they are saying it may be 7-8%.

This is more than an academic exercise. If an ever smaller proportion of Americans has to work, how will the growing number of non-workers live? In my opinion, this will be the great social and political question of the next 50 years. If addressed constructively, it will result in a redefinition of usefulness and productivity. If ignored, it will perpetuate an underclass whose hopes for a better life will be blighted from birth.

 

 

 

 

 

I Dreamed I Saw Joe Hill Last Night

Joe Hill ain't dead, he says to me
Joe Hill ain't never died
Where working men are out on strike
Joe Hill is at their side

 

There was a time in America when the labor union movement was a powerful force for social change. Work in the newly industrialized nation was long, poorly-paid, and dangerous. One of the first great labor causes in the Massachusetts textile mills of the 1830s was the reduction of working hours to ten a day, six days a week. Pay was as low as hours were long, and workers were at the mercy of the owners of industry. When the Panic of 1893 reduced demand for his luxurious sleeping cars, George Pullman cut workers' wages an average of 25-33%. He neglected, however, to drop the rents in his company town where the workers were forced to live. But the truly horrendous part was how many workers were injured, maimed, and killed. In mining, deaths averaged 6,600 between 1900 and 1904. The worst years for fatalities among railway workers were 1889 (8,500), 1895 (6,450), and 1901 (7,350).

Today, work is short, reasonably well-paid, and safe. The average work week for all workers has hovered around 34 hours for years; in manufacturing, it's typically a bit above 40 hours. Last month, production and non-supervisory employees earned an average $19.64 an hour ($40,851 annualized), a figure that increases almost every month. The biggest improvements have been in safety. In 2010, the last year for which data is available, total work fatalities were 4,547, a mere three-thousandths of a percent, and almost 1,000 were caused by traffic accidents.

Who can we thank for these great achievements? Organized labor, of course, with its great heroes and martyrs, like Joe Hill, framed for murder in Utah in 1914 and executed because he was a member of the radical union, Industrial Workers of the World.

But in modern America, labor unions are nearly as dead as Joe Hill. Labor statistics are a bit dicey until the 1970s, and comparisons are difficult over time. Nevertheless two trends stand out. First, union membership increases in good economic times and falls in bad times. Second, membership rates track closely with manufacturing as a percentage of the economy. At the turn of the 20^th century, there were fewer than 800,000 unionized workers in America, but Labor's ranks grew steadily. Thanks to World War I production, trade union membership nearly doubled between 1915 and 1920, from about 2.5 million to 5 million. This latter figure was about 19% of the non-farm workforce. Moreover, in 1920, 47% of payroll employment was generated by manufacturing, a figure that has never been approached since. Union membership declined during the '20s, hitting bottom at the depth of the Depression, when about 12% of the workforce was unionized and unemployment reached 25%. The World War II boom was a great stimulus to unions. As early as 1940, nine million workers, more than a quarter of the non-agricultural workforce, were in unions. By war's end membership had swelled to 15 million, and it continued to climb in the postwar boom period. In 1955, nearly 17 million workers were unionized, representing fully a third of the workforce. The number of union members topped out in 1978 at 22.9 million, but, with the growth of the workforce, the percentage of unionized labor was back down to 26% and falling. Not coincidentally, the percentage of manufacturing payroll employment was also falling, from a steady 41% in the 1930s through the 1950s, to 38% in 1960, 33% in 1970 and 28% in 1980. By 1983, following the terrible recession of the early '80s, the union membership rate was down to 20.1% and the number of unionized workers was back down to 17.7 million.

The downward trend has never been halted. Last year, only 14.7 million workers were union members, just under 12% of the non-farm workforce. But, and it's a very large "but", a mere 6.9% of private sector workers (7.2 million) were in unions, compared to 37% of public-sector workers. In no private sector occupation did union representation reach more than 25%. The following chart shows a selection of private section union representation in traditionally organized occupations:

Industry	Number Employed	Union Members	Percent of Employed
Mining	780,000	56,000	7.2
Construction	6,244,000	874,000	14.0
Durable Goods Manufacturing	8,530,000	871,000	10.2
Non-durable Goods Manufacturing	5,070,000	553,000	10.9
Transportation	4,335,000	887,000	20.4

 

The drop in union membership is nothing compared to the drop in union militancy. In the 1950s, there were 3,517 work stoppages involving a thousand or more workers each. Almost 16 million workers were involved in one time or another. By the 1980s, comparable figures were 831 and five million. In the first decade of this century, there were 201 work-stoppages involving 1.3 million workers. Last year there were precisely 19 work-stoppages of 1,000 or more workers. The percentage of estimated working time lost was less than .005%. Of the 19 stoppages, just four lasted more than a month, and one of those was the National Football League.

Nor should we imagine that workers have nothing to complain of. In 2009, when there were only five major work-stoppages involving 13,000 workers, there were more than 10,000 mass layoffs (defined as 50 or more workers) affecting 1.2 million workers in the manufacturing sector alone. In all there were more than 28,000 mass layoffs that year, resulting in more than 2.8 million unemployment insurance claims.

Some might say that unions have no one to blame but themselves. Organized crime and corruption were endemic in many big unions, especially the Teamsters where leaders like Dave Beck and Jimmy Hoffa were little more than gangsters. The unions also failed to cement their ties with the Democratic Party. Indeed, pro-Vietnam "Hard-hats for Nixon" turned many 1960's liberals permanently anti-union. Also, the ties between Big Business and Big Labor have long seemed too cozy. Others might blame Big Government, which has co-opted Labor's issues with all sorts of laws and programs, most notably the Fair Labor Standards Act, Minimum Wage laws, the Occupational Health & Safety Act, Workers Compensation, and many more. The strongest argument, though, is that organized labor is just a poor fit for a service and information economy. Today, the entire goods producing sector employs a mere 13.8% of the total workforce and 16.5% of the private sector workforce. Manufacturing employs just 9%.

And yet, there's something wrong with this picture. In every recession over the previous 30 years, it has taken progressively longer for employment to recover. The economy is still something like five million jobs from its pre-Recession peak, and an 8.3% unemployment rate is nothing to brag about. It makes me wonder. Why haven't unions been able to make more inroads among private, service sector white-collar workers? Nearly half of all local government employees are unionized, and more than a third of state and federal employees. Why isn't there a bank tellers union? Or a union for telemarketers? Or temporary workers?

Back in 1909, an economist named Herbert Croly provided a rationale for organized labor that holds even truer today:

A simple and poor society can exist as a democracy on a basis of sheer individualism. But a rich and complex industrial society cannot so exist; for some individuals, and especially those artificial individuals called corporations, become so very big that the ordinary individual…cannot deal with them on terms of equality. It therefore becomes necessary for these ordinary individuals to combine in their turn, first in order to act in their collective capacity through that biggest of all combinations called the government, and second, to act also in their own self-defense, through private combinations, such as farmers' associations and trade unions.

 

It's impossible to know if fewer Americans would be unemployed today if the Labor movement was still vibrant, but I suspect so. More generous unemployment benefits, more federal stimulus to rebuild infrastructure, and greater support for career education are Labor causes. The AFL-CIO website boasts, "Working people's power is our strength in numbers. That's how we win change at City Hall and pass legislation at the state level and in Congress to create jobs, boost the economy, ensure quality education for our children and much more." Unfortunately, as we have seen, "strength in numbers" is exactly what Labor no longer has. There was a time when Labor was an effective opponent of the power of corporations. There was a time when it stood firm in defense of the ordinary worker. But those times are gone. I'm afraid old Joe Hill really is dead.

The Fundamentals

January 25, 2012

Coaches love to preach the fundamentals. There is a story, possibly apocryphal, about Green Bay Packers coach, Vince Lombardi, addressing his team after a particularly egregious loss. Pointing to an object on his desk, he said, "Gentlemen, this is a football." A player, standing towards the back, is said to have responded, "Uh, coach, could you go over that again."

Still, it's not a bad idea to go review the fundamentals now and then, even for those who are, or are supposed to be, seasoned professionals. Today, the Federal Open Market Committee, the policy arm of the Federal Reserve System, went back to basics in explaining its purposes and actions. Finance professionals may skim past these background parts of FOMC's press releases, issued following a two-day policy meeting. But they are extremely, indeed fundamentally, important. The FOMC, after all, is not talking just to professionals. The Committee is talking to everyone who is affected by monetary policy; which is to say, everyone. "The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision-making by households and businesses…" (emphasis added). "Transparency and accountability…are essential in a democratic society."

It doesn't get more fundamental than that, and we should take the FOMC's announcements at face value. We are so distrustful of public officials and so used to looking behind their words for the real, hidden, meaning that we have all but lost the facility of belief. I am not asking you to agree or disagree with the FOMC's statements. I do urge you to believe the Fed means precisely what it says, and for that reason, consider its points seriously.

The statements continually reference the Fed's dual statutory mandate, "to foster maximum employment and price stability." Every word here is important. The mandate is "dual" because both parts are equally important, and they contain the entirety of what the Fed is empowered to do. It has often been noted that the two goals can be contradictory. Jobs tend to be created quickly when the production of goods and services heat up to meet demand, but ultimately the cycle can turn inflationary as prices spiral out of control. Stable price tend to retard employment because people have less money to spend resulting in less production of goods and services. Here the danger is that the economy will stall and fall into recession. Economies rarely stay in equilibrium for long. But, it's the Fed's responsibility to balance the two mandates. Second, the mandate is "statutory;" Congress has specified by law what the Fed is required to do. Intervening in the economy in other ways would not just be misguided but illegal. In its statements, the FOMC emphasizes its responsibilities and authority with great clarity because it wants you to understand clearly what it can and cannot do.

At present, the Fed believes

1. "The unemployment rate remains elevated" and "the unemployment rate will decline only gradually towards levels that the Committee judges to be consistent with its dual mandate." (Mandate #1), and
2. "Over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate." (Mandate #2)

For the first time ever, the Fed specifically defines the optimum levels of inflation and unemployment. An inflation rate of 2%, as measured by the annual change in the price index of personal consumption expenditures (PCE), will be the Fed's long-term inflation target. Determining an ideal unemployment rate is, surprisingly, more difficult. You might think the best unemployment rate is 0%, but in a healthy economy there are always people changing jobs voluntarily as well as a certain amount of creative destruction leading to involuntary job losses. The economy's health is demonstrated by how quickly people get new jobs. The Fed has established a target range of 5.2% to 6.0% for unemployment, while emphasizing that, unlike inflation, this range can be expected to vary over time.

Directly following on these conclusions, the FOMC announced three actions to achieve its mandates:

1. It will maintain the fed funds target rate—that is, the rate banks pay for overnight loans from other banks—between 0% and 0.25%;
2. It expects to maintain the fed funds rate at these extremely low levels "at least through late 2014."
3. It will continue its purchases, and extend the maturities, of long-term US Treasury bonds and similar securities.

To many people, these actions may seem meager and extraneous to the real problems of the economy. Herein lies the Fed's communication problem. In practice, the actions outlined by the Fed do have a substantial economic effect. Very low short-term interest rates anchor all interest rates at low levels. The announcement that short-term rates will be kept low for three years—virtually a millennium the way the financial markets measure time—encourage a long-term investment horizon at current rates. Investors and lenders need not fear that their assets will lose value quickly due to rapidly rising interest rates. Finally, the Fed's continued purchases of very large amounts of bonds are simply an application of the law of supply and demand. The more the Fed buys, the less other investors can buy. Hence, bond prices are kept high and interest rates low.

The bottom line is that our nation's central bank expects the economy to grow slowly and below its potential for years to come. The Fed's policy makers intend to use the bank's powers to their utmost to lessen and shorten the period of economic malaise. But, as the FOMC points out, we live in a democratic society, not a command economy. All that the FOMC can do is "maintain a highly accommodative stance for monetary policy;" that is, it can use its tools to keep short-term interest rates low. Low interest rates should encourage more borrowing and lending, which in turn should fuel economic activity. But the Fed cannot order economic conditions to its liking. Again, you don't have to agree with the FOMC's opinions or methods. But understand that, today, the Fed has made some fundamental statements, which they will live by and we will all live with.

Looking Backward: 2012-1888

Grover Cleveland, 22^nd & 24^th President              Benjamin Harrison, 23^rd President

In a recent New York Times column, David Brooks complains that members of the Obama administration have been comparing the present political and social environment to the Progressive era. The Progressives came to prominence early in the last century. The movement reached its apogee in the presidential election of 1912, when, as a third-party candidate, Theodore Roosevelt received 27% of the popular vote on a platform of reducing the outsized gap between rich and poor Americans. Brooks repudiates the comparison, pointing to the many differences between America in 1912 and 2012. One distinction he makes is that a century ago "the economy was in its adolescence," whereas now it is in middle-aged doldrums. But the real distinction is moral: A hundred years ago, America "still had a Victorian culture, with its rectitude and restrictions. Back then, there was a moral horror at the thought of debt… In the progressive era, there was an understanding that men who impregnated women should marry them." This is just Golden-Ageism, the notion that life was better in some favorite "good old days." In fact, in 1912-America prejudicial stereotypes of all sorts were taken for granted, capitalists routinely cooked their corporations' books, and violence against organized labor was supported by all three branches of government.

Still, I agree that with Brooks that the comparison of 2012 to 1912 is not especially apt. A more useful comparison is to 1888, when Republican Benjamin Harrison narrowly defeated Democrat Grover Cleveland for the presidency. One similarity between the campaigns of 1888 and 2012 is the role of corporate finance. The coming election marks a turning point in which corporate money, after years of at least partially successful limits, can now be spent with few restrictions on pro-business candidates. There were no political spending restrictions at all in the 19th Century. By 1888, the necessary preconditions of increased corporate wealth and improved nationwide transportation and communication were in place to make large-scale fund-raising possible. Of course business had contributed to campaigns before and would exercise a much greater influence in the years ahead, but 1888 was a turning point. In that year, Philadelphia department store magnate John Wanamaker toured the country, selling business groups with a pro-Republican pitch. He successfully lobbied for substantial campaign contributions by likening support for his party to buying insurance, "If you were confronted by from one to three years of general depression…what would you pay to be insured for a better year?"

But the essential similarity between 1888 and today is the disparity between the small number of the very rich and the large number of those for whom daily life is a financial struggle. Today, the battleground is whether to raise taxes on the highest earners. Then, the battle was over the tariff, which was the income tax equivalent of the day. Tariffs and excise taxes—that is, sin taxes on tobacco and alcohol—were the main sources of federal revenue from the country's founding until the First World War. Income taxes had been assessed briefly during the War of 1812 and in the Civil War, but a peace-time attempt to impose them was ruled unconstitutional in 1895. It took the 16th amendment to Constitution to validate them in 1913.

Tariffs are taxes on imported raw materials and manufactured products designed to raise their costs to consumers and thereby make domestic materials and products more competitive. The traditional rationale is that tariffs nurture "infant industries" until they are strong enough to hold their own in free markets. The Democrats of 1888 pointed out that US industries were no longer infants; indeed, our industrial might even in the 1880s, let alone 30 years later, was well past adolescence. Trusts, near monopolies that controlled all phases of the extraction, manufacture, and distribution of key commodities, ruled nearly all major fields of commerce. The steel industry was actually more competitive than most, yet the Carnegie Steel Company produced a quarter of the nation's steel. Its annual profits exceeded $40 million (something like $800 million in today's money), a fantastic sum back then.

The Democrats also pointed out that tariffs, far from protecting ordinary working people, were an extremely regressive tax. It's easy to see why. If the tariff on an imported product in everyday use caused its price to rise by 50%, a domestic manufacturer of the same product would simply raise his price to just under the foreign price. Moreover, the excess profit did not trickle down to the American workers who made it. An 1888 Bureau of Statistics report gave many examples of this sad fact. For instance, a pound of domestic sewing silk could be sold for $5.66 a pound. Thirty percent of the price ($1.69) was a result of simply coming close to the tariff-adjusted price of imported silk. American workers were paid just 85¢ a pound. In summary, the Democrats' position was that high tariffs enriched capital through windfall profits and impoverished ordinary citizens by raising their cost of living. Reducing tariffs would shift the economic burden from those who could least afford it and to those who could most afford it.

Republicans defended the tariff with equal fervor. Ohio representative William McKinley claimed that protective tariffs were a job-creation machine for American workers. "Every pound, every bushel, every ton, every yard of foreign product that comes into this country to compete with ours deprives American labor of what justly belongs to it." To the extent that tariffs reduced the influx of foreign goods, they strengthened American industries, provided markets for American producers, and work for American wage-earners. The Republicans argued that Democratic attacks on the tariff were no more than attempts to stir class warfare, designed to pit one group of Americans against another. Reducing tariffs would harm employers and thereby workers as well.

The denouement is instructive. The argument that Wealth should not be hampered in its mission to create jobs convinced enough laboring men to put Harrison across over the incumbent Cleveland. The Republicans emerged with small majorities in both the House and the Senate. A bill raising tariffs and named for its guiding spirit, McKinley, became law in 1890. Its effect could have been foretold—in fact, was foretold by the Democrats. Consumer prices soared, and disillusioned voters rolled back the Republicans' congressional majorities in the 1890 mid-term elections. Then, in 1892, Grover Cleveland became the first and only person to serve two non-sequential terms when he was elected the 24th President of the United States.

Unfortunately for Cleveland, his vindication soon turned bitter. Almost immediately, the economy plunged into the Panic of 1893. This catastrophe, called the Great Depression, until the 1930s, lasted all through Cleveland's term. He left office lamented by none, especially as prosperity returned soon after the inauguration of Cleveland's successor, William McKinley.

The notion that the well-to-do should be left relatively undisturbed by restrictions on their earnings dies hard. The common argument is that the American Dream, that everyone can get rich in our egalitarian society, makes even the non-rich resistant to steeply progressive tax rates. The Republican victory in 1888 did not usher in an era of high wages and cooperation between employers and employees. In fact, several of the bloodiest labor-management confrontations, including the Homestead steel strike and the Pullman strike, happened in the next few years. Lowering tariffs would not have been a panacea in 1888, and higher tax rates on incomes over $1 million won't eliminate the deficit in 2012. But policies of high tariffs then and low income taxes did nothing but exacerbate disparities in wealth. They benefited a small section of the economy for a while and hurt nearly everyone in the long run. Lincoln said, "You can fool some of the people all of the time." Will the same arguments that fooled people in 1888 work in 2012?

Two for One: Ben Bernanke’s Jackson Hole Speech

Over the years I have read many speeches—and have been privileged to attend a few—given by high officials of the Federal Reserve System. Despite the differing economic circumstances and economic views expressed, what's most remarkable is how similar the speeches are. In the first place, they are always read verbatim from a prepared text. The speakers understand the power their words have to move markets; they don't want to be blamed for a slip of the tongue or an off the cuff remark. Second, the officials realize they are public servants, so even when the speeches touch on technical subjects, they are accessible to any reasonably intelligent person. Third and most interestingly, the speeches are rarely about especially technical subjects; instead they tend to be general overviews, either of economic conditions as a whole or some specific aspect of the economy.

In consequence, the speeches can sound bland and even formulaic, leading veteran commentators to gloss over most of the content, in favor of focusing on one or two sentences or even words that seem to be new or, better yet, controversial. This is natural, but it's a mistake. These speeches are very well thought out for their overall effect. Those given in especially important venues, like the one Fed Chairman Ben Bernanke gave at a conference of top economists at Jackson Hole, Wyoming, last week, are worth a more comprehensive review. This speech was divided into two parts, "Near-Term Prospects for the Economy and Policy" and "Economic Policy and Longer-Term Growth in the United States." Economic commentary has been almost entirely taken up with the second part, though the first part is both more interesting and more revealing about our current economic problems.

In this initial part of his speech, Bernanke admits that the Fed, along with the rest of the country, has been dissatisfied with the economic recovery. In fact, the Fed, despite its hundreds of economists, was taken by surprise by the most recent data. "We have learned that the recession was even deeper and the recovery even weaker than we had thought." Not only is economic output still less than it was before the recession, but growth rates remain "insufficient to achieve sustained reductions in unemployment, which has recently been fluctuating a bit above nine percent."

Next, he explains the virtuous cycle of the typical recovery: Pent-up demand leads to increased output, which leads to more hiring, which creates more disposable income and greater willingness to borrow, which leads to more demand, and on and on. The cycle has not developed in this recovery because of "both a very deep slump in the housing market and a historic financial crisis."

The two are intimately tied together. Demand for home ownership and almost constantly increasing home values have been the main drivers of recovery from every previous recession since the Great Depression. The demand was fueled by mortgage credit, which consistently became easier to obtain. Required down payments dropped from 20% to 10% to 3% and finally to nothing at all. Creditworthiness was measured on a similarly downward sloping trajectory. The psychology that ruled for several decades was that home values always went up. If a borrower couldn't pay the mortgage, the property could be sold quickly and the lender usually got out whole. But now the psychology has completely turned around. Housing markets in virtually every part of the country are shackled by "tight credit conditions for builders and potential homebuyers, and ongoing concerns by both borrowers and lenders about continued house price declines."

We should stop a moment and consider the words "tight credit conditions." Since 2007, the Federal Reserve has been trying to ease credit conditions. They have set the target rate for overnight borrowing between banks at 0-0.25%. They have poured trillions of dollars into the economy by buying securities, all in an effort to get consumers and businesses to save less while borrowing and spending more. It hasn't worked for a very simple reason. The cost of credit is cheap, alright; mortgage rates are at all-time lows. But credit itself is far from easy. The financial crisis led to new and burdensome regulations that make getting a mortgage extremely difficult. Mortgage bankers are not even allowed to speak to appraisers—they have to go through a middleman—and the required documentation continues to increase. It's all done in the name of protecting the consumer, but the result is that record numbers of contracts to buy houses are falling through. Both new and existing home sales remain stuck at historically low levels.

Chairman Bernanke has said many times that the Fed has "a range of tools that could be used to provide additional monetary stimulus." That may be so, but the tools used so far, which are the standard, long-established methods that always worked in the past, have been ineffective. Why should we expect some secret weapon to do the trick now? The fact is that Chairman Bernanke does not expect to unveil any such weapon. In the second part of his speech, he points to the real hope for improvement.

As I mentioned earlier, this second part of the speech has been more thoroughly analyzed. In it, Bernanke tells Congress very clearly that the ball is in their court. "Without significant policy changes, the finances of the federal government will inevitably spiral out of control." That's laying it on the line. Bernanke becomes more circumspect, however, when he explains what needs to happen and how it needs to be done. He says, "Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery." The repetition of the word "fiscal" is important. Bernanke is emphasizing the distinction between the Fed, which makes monetary policy, and Congress, which makes fiscal policy. Second, though he does not say it in so many words, he is specifically urging the Republican majority in the House not to concentrate solely on cutting expenditures. "Fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs." Fiscal as well as monetary stimulus is necessary to propel the recovery forward. Rigid austerity programs, like the policies instituted by Prime Minister David Cameron in Great Britain, are not the answer.

Bernanke's last point is that "the country would be well served by a better process for making fiscal decisions." Like the President, Bernanke is calling on our elected representatives to act like grown-ups. But I think he is saying something more substantive. Bernanke must be comparing the Fed's well-organized, civil, and effective decision-making process with the pitiful spectacle that Congress made of itself this summer. What a mess monetary policy would be in if it were conducted like fiscal policy! Come on Congress, look at how the Fed does it and try to be like them. The Governors of the Fed have widely differing opinions and political backgrounds, just like you. But they make rational and timely decisions. Why can't you?

 

Empire Builder

James J. Hill was a poor boy, born in Canada in 1838 and blind in one eye. Yet, he became one of the great American railroad tycoons of the 19^th century. His signal accomplishment was building the Great Northern Railroad from his home base in St Paul to Seattle, 1700 miles away. Hill earned the nickname, Empire Builder, from this feat. In his later years, Hill became a philanthropist, donating to many religious, educational, and charitable causes, mostly in Minnesota. One of his sons, Louis W. Hill, inherited not only business acumen, but also the desire to contribute to his community. Gifts and bequests from the younger Hill provided the endowment for a charitable foundation that ultimately became the Northwest Area Foundation (NWAF).

The Foundation, which ranks in the top 1% of all US foundations by assets, operates in the eight states through which the Great Northern ran. Its goal is "to reduce poverty and achieve sustainable prosperity." This January, NWAF published a document called "Gaining Perspective: Lessons Learned from One Foundation's Exploratory Decade." It's a courageous, voluntary disclosure of a strategy that failed. In 1996, under the leadership of a new president and CEO named Karl Stauber, NWAF's board developed and announced a new goal worthy of an empire builder: "In 10 years, at least 200 communities with whom the Foundation had partnered would be demonstrably better off." It turned away from its traditional practice of providing short-term, focused grants to non-profit organizations. Instead, NWAF would become "an equal partner" with communities in comprehensive, long-term plans to alleviate poverty. NWAF committed $200 million to achieve its goal. "Gaining Perspective" tells the story of why the goal was not met.

Three ideas in the story stand out. The first is why NWAF decided to make such a radical shift at all. The reasoning of Stauber and the board was faultless: "The activist era of federal domestic policy effectively [had] ended." From Franklin Roosevelt's New Deal to Lyndon Johnson's War on Poverty, the federal government had tried to be, in the words of the old song, "the poor man's friend." By the late 1990s, the old liberalism was near the end of its run. Government programs for those least able to fend for themselves were continually being scaled back and are still at the top of the list for spending cuts. NWAF's insight was that "traditional philanthropy required an activist federal government with broad public support—neither of which exists any longer." NWAF's leap was in thinking it could fill the gap. It called its new vision a "Big, Hairy Audacious Goal," a phrase that evokes 1960's idealism and counter-culturalism. But the world had moved on; a bold vision in a good cause was not enough. NWAF became too focused on the end and lost sight of the means. As a board member who initially supported the strategy later commented ruefully, "My uncertainty was the methodology, not the goal."

The second prominent idea is the meaning of community. The most humbling lesson NWAF learned was what a slippery concept community can be. "A fundamental flaw in the Foundation's theory of change…was that the Foundation could define a given community." Despite the best of intentions, an outside agency cannot create or mold a community. Instead, the agency must bend to the community's sense of its own identity.

One of NWAF's exploratory projects involved groups of poor Latino and Indian farmworkers in Washington's Yakima Valley. When NWAF decided not to fund the groups' strategic plan, group members sued for breach of contract. They claimed NWAF led them to believe that it had obligated itself to provide long-term funding. NWAF won the suit, but only on the technicality that the plaintiffs lacked the legal standing to sue a charitable trust. NWAF's problem in Yakima was that it defined community based on common economic interest among the Valley's Hispanic, Native American, and white residents. In fact, as a board member explained to the authors of "Gaining Perspective," NWAF "eventually learned that the three ethnic groups had a history of disconnection from (and distrust of) one another that could not possibly be overcome by staff or consultants coming into the valley from outside."

The Yakima experience wasn't the worst blow to NWAF's reputation and self-esteem. Far more serious were NWAF's difficulties with what it conceived of as an Urban Indian Coalition in Seattle, Portland, Billings (Montana) and Rapid City (South Dakota). The "coalition" apparently existed more in the minds of NWAF staff than among Native American leaders and tribal groups in those cities. According to Karl Stauber, when the project began in 2003, "NWAF anticipated that it would ultimately enter into a collective long-term relationship with these urban communities and learn from the shared experience." He assumed that a shared sense of community existed among Native American across the four cities. The local groups understood something quite different. They thought that $20 million of separate program funding would be made available to help Native Americans in each city.

NWAF's attempt to impose community was compounded by miscommunication over such fundamental issues as the differences between the Foundation's and the Native American groups' definition of poverty. According to Nichole Maher, Executive Director of the Native American Youth and Family Center in Portland, "Most Native Americans do not define poverty in dollars and cents. Poverty is measured by one's ability to exist. To practice your culture. To speak your language. To get a fair and quality education. To be sufficiently housed. To not have to choose between medicine and food."

The argument was encapsulated in two articles, one by Stauber and the other by Maher, for the journal, Responsive Philanthropy, in 2006. After two years of work and an investment of $650,000, NWAF had decided not to fund the Urban Indian project. Needless to say, the Native American groups were not pleased. Maher, as the underdog, stated the Native American position with eloquence and passion: "When examining the ethics of the intervener, it is important to examine the history and collective experience of any cultural group with whom they may work. For American Indians, this history is steeped in paternalism. There is a very real legacy of historical trauma—and repercussions based on interveners' actions—in the experience of American Indians. Some of the more abhorrent examples include allotment of reservation lands, federal relocation policy, the boarding school system, and tribal termination—all of which constitute an important backdrop for any discussion of our experience." Stauber didn't have a chance. His article in response appeared pedantic, and yes, paternalistic.

Soon afterwards, Stauber left NWAF, and the board revamped its strategy, essentially returning to the earlier model as a maker of grants to non-profits, but with what it hopes is a difference. That difference is the third prominent idea. NWAF intends to "be clear about strategy before you implement." It affirms that "Understanding where you are going, and why, is critical to ensuring that all feet are marching in the right direction." In practice, the Foundation intends to focus more on what it calls the "downside of risk." NWAF will continue to seek innovative ways to alleviate poverty, but it will focus as much on the methodology, as the goal. As the new CEO, Kevin Walker, noted in the introduction to "Gaining Perspective," experimentation always entails the risk of failure, but NWAF is now committed to analyzing its risks up front. That awareness of risk was lacking in the past. Failure, writes Walker, "comes with the territory, and it comes at a cost. I believe we found ourselves unprepared for that reality from 1998 to 2008."

Walker's point is that there's an essential difference between failing with your eyes closed and failing with them open. The difference is the management of risk, both the upside and the downside. Risk management is a discipline I believe in deeply. It involves the identification of risk, the measurement of risk, the mitigation of risk, and the communication of risk to stakeholders. It does not mean that Risk, with a capital "R," can be eliminated; sometimes it doesn't even mean that mitigation can accomplish very much. And it's unfortunately true that failure hurts, whether you are prepared for it or not. It's a mistake, though, to imagine that risk management is an excuse for inaction; just the opposite. The lesson that NWAF learned is that managing "the downside of risk" is exactly what will strengthen the Foundation to move forward to new challenges.

To summarize, "Gaining Perspective" presents a fascinating insight into how a large charitable foundation tried, and failed, to build a poverty-fighting empire. Recognizing the retreat of government from the battle, it attempted to substitute a new brand of philanthropy. Its reach exceeded its grasp, but it learned in the process that community, in all its forms, cannot be imposed from above. The real poverty-fighters are those local organizations, embedded in their communities, that achieve small successes one by one, rather than a "Big, Hairy Audacious Goal." But the last insight is the most important. Don't give up. Learn from your mistakes and try again. So, let's applaud the Northwest Area Foundation for being willing to share its painful experience. That's an act of real bravery worthy of an Empire Builder.

The Picher & the Elevator Operator

Last fall a left-handed pitcher named Cliff Lee signed a $120 million, five-year contract to play for the Philadelphia Phillies. Mr Lee actually turned down more money and more years from other teams in what was this off-season's most frantic bidding war. While professional baseball players are thriving as never before, professional elevator operators are all but extinct. At one time it was inconceivable that visitors to a top-flight hotel, office building, or department store would have to push elevator buttons themselves. A uniformed elevator operator was part of the service that distinguished the first-rate from the third-rate. But that was then

The difference between pitching at the major league level and running an elevator are many and obvious. But, the two occupations have an important underlying commonality. Virtually everything about them is known to both potential employer and potential employee up front. What the duties are, the work-hours and working conditions, what constitutes success, what constitutes failure—all are clear, easy to understand and easy to measure. The common element of the two jobs is how little information about them is hidden.

Most other aspects of human life are bedeviled by hidden information. It's the cause of pointless wars and unhappy marriages. It's the reason stock and bond prices fluctuate. In any market, hidden information makes decision-making more risky. The classic hidden-information markets are horse-trading and used car sales, where sellers have much more information than buyers. This imbalance of knowledge makes it harder to come to a satisfactory agreement even when the seller is being entirely truthful about his horse or car. (How can the buyer really be sure?) But hidden information is a problem even when buyers, sellers, and the transaction process itself are doing their best to be transparent.

Today the problem is particularly severe in American employment market. It's a big reason why unemployment has remained stubbornly high and the average length of time people are out of work continues to increase. Unlike the occupations of pitcher or elevator operator, the qualifications for and expectations of many, if not most, jobs in our post-industrial society resist definition. Jobs with the same title vary significantly from company to company. Job descriptions go on for pages, and even then may not truly get at what the employer wants. Success is qualitative and lacking in standards to measure against. On the other side, resumes and similar documents are exercises in branding and marketing. The would-be employee is promoting him-or herself as a product. While (usually) not lying, she is certainly embellishing her successes and burying any failures. The hiring decision has become fraught with hidden information for both employer and employee.

Dozens, hundreds, or even thousands of people can lose their jobs immediately when a business sends jobs overseas, merges, or fails. But hiring workers is an individual decision, in a process that can often stretch out for months. From an employer's point of view, in-depth diligence and multiple interviews are rational, since the problem of hidden information does not end once a hiring decision is made. Businesses have learned to get more output from fewer workers, but that makes each hiring decision more critical. The cost of hiring the wrong person is very high; at the most senior levels, it can be catastrophic.

But, what's rational at the micro level is far from rational at the macro level, given the high cost to society of massive and prolonged unemployment. The official Bureau of Labor Statistics unemployment rate for February was 8.9% of the civilian labor force, but this significantly understates the problem. The true unemployment rate of 15.9% includes part-time workers who want but cannot find full-time jobs and those who have simply given up hope. When the US economy was functioning well, each of these unfortunate clubs was about 40% smaller. Let's leave percentages and look at the number of unemployed and under-employed people:

Category	Numbers of People per Category	Jobs Needed to Reach Normal
Unemployed	13,863,0001,000	5,545.000
Part-time seeking full-time	8,340,000	3,336,000
Persons not currently in the labor force who want a job	3,369,000	1,348,000
Total	25,572,000	10,229,000

 

 

 

 

 

Ten million is a lot of jobs, just to rebound to more normal levels of unemployment. Nor does it tell the whole story because the supply of workers continues to grow. The Congressional Budget Office estimates that, during the next 10 years, the labor force will increase by 15 million people, net after accounting for retirees and other job leavers. The second table shows how many jobs would have to be created each month over two, three and five years to return to normal employment and accommodate new entrants to the labor market:

Years	Jobs Needed to Absorb Those Currently Unemployed	Jobs Needed to Absorb Net New Entrants	Total News Jobs Needed per Month to Achieve Normal Employment
Years	426,200	125,000	551,200
3 Years	284,100	125,000	409,100
5 Years	170,500	125,000	295,500
10 Years	85,200	125,000	210,200

 

Between February 2010 and February 2011, the total number of net new jobs created in our economy was 1,269,000, an average of less than 100,000 per month. This is insufficient to absorb new entrants to the job market, even without taking more experienced job seekers, but, hidden information hurts new entrants, of whom little is known, even more than people with work histories. The numbers prove it. Between 2000 and 2010, labor force participation for males aged 20-24 dropped from 82.6% to 74.5%. For women, the percentage declined from 73.1% to 68.3%. .

The hand of hidden information in hiring can also be felt in the average length of unemployment. Currently it's an all-time record of 37.1 weeks, more than double what it was as recently as 2007. Filling 10,229,000 jobs at 37 weeks each represents 7,300,000 man-years of unproductive time.

Unfortunately, we have not yet devised a better way to fill jobs than an arduous one-by one process in which hidden information must be fought at every turn. It's an irony of modern life that, as the economy has evolved from agriculture to industry to information, the most crucial information—matching the right worker with the right job—is the most elusive.

Houses of Cards

The Obama Administration recently issued what it disingenuously calls a "plan to reform America's housing finance market." In fact, only four of the document's 31 pages constitute anything even resembling a plan, and the three options in those pages are so sketchy, so devoid of any financial analysis, and so lacking in any concrete steps forward that no reasonable person should take them seriously. All three options are variations on a theme: Except for a drastically scaled back role for the Federal Housing Administration (FHA) and perhaps a few other minor federal guarantee programs, the mortgage market, "would be driven by private investment decisions with private capital taking the primary credit risk." But, the plain and simple fact—a fact that the administration's own report, despite itself, makes obvious—is that the housing market in the United States has been, is, and must be dependent on the federal government for its very existence.

The report explains why, for the first time, the federal government intervened in the mortgage business during the Great Depression. In the 1930s, the private sector proved incapable of sustaining widespread home ownership through debt during a severe economic downturn. The Roosevelt Administration and Congress realized that only government could restart the mortgage business. The creation of the FHA, Fannie Mae, and the Federal Home Loan Banks (FHLBs), later joined by Freddie Mac, was necessary to reverse "severe mortgage market disruptions, widespread foreclosures, and sinking homeownership rates," essentially the same situation that exists today. Beyond restoring mortgage volume, the benefits of government involvement were the standardization of terms, conditions, and documentation; and the provision of liquidity to the savings & loan industry by allowing S&Ls to borrow from the FHLBs using mortgages as collateral. But the most sweeping innovation by far was mortgage securitization, which was invented in the 1970s.

Before the advent of securitization, banks and S&Ls held the lion's share of mortgages since they had no efficient way to disperse the mortgages they originated. Securitization opened up mortgages to a broad range of institutional and individual investors, not just in the US but globally. The reason investments in securitized pools of US mortgages became so widespread is that governmental agencies guaranteed the timely payment of principal and interest if the mortgage-holders themselves failed to pay. Mortgages, in their securitized form, were an investment all but free of credit risk. Investors could be certain of getting their principal returned and their interest paid except in the most catastrophic circumstances.

Because of the lack of credit risk, the market for securitized government-agency guaranteed mortgages has remained strong and vibrant through the present moment. This unabated demand has had several important consequences. One was that support for nearly universal homeownership became official US policy, championed by both Democratic and Republican administrations. Today nearly two-thirds of US households are owners, not renters. Another consequence has been huge growth in mortgage debt outstanding. The total now exceeds all US bank deposits by several trillion dollars. Even if banks wanted to fund nothing but single-family home mortgages, to the exclusion of all other types of loans and investments, they could not. Securitization evolved from an adjunct to the mortgage business to its irreplaceable core.

A third consequence was the substitution of market risk in place of credit risk in a way unique to America. For some of you, this may be a new and somewhat difficult concept, but it's critical to an understanding of why the mortgage market depends on government backing. On page 25, the administration's report summarizes research done on government mortgage support in other developed nations. The research provides little practical help: "The US system, however, is one of the only countries in the world where the mortgages are pre-payable, 30-year fixed rate mortgages." Mortgages have all sorts of terms and conditions. Why are these three--the ability of mortgage-holders to prepay at any time, the thirty-year repayment schedule, and the fixed rate of interest—singled out? The answer is that these are the qualities that create substantial market risk for investors in US mortgages.

To understand market risk, let's assume you are a mortgage investor who has bought a pool of mortgages paying 5%. If interest rates rise, the value of your investment will decline, and its long maturity will exacerbate the loss of value. Moreover, if you have to borrow money to support your investment, as a bank does by taking deposits, the rate of interest of your borrowing may come to exceed the 5% paid by the pool of mortgages. On the other hand, if interest rates fall, you as the investor do not get a commensurate benefit. Because the mortgage holders can prepay their mortgages without penalty, many of them will refinance at lower rates, thereby taking your investment away from you.

Nevertheless, the financial markets accommodated themselves to market risk because credit risk was contained. In fact, after government-guaranteed mortgage securitization became firmly established, the private sector began to securitize certain types of non-guaranteed mortgages safe in the knowledge that the health of the mortgage market was sustained by government involvement. Investment banks exploited a niche based on the ceiling Congress set annually on the size of mortgages Fannie Mae and Freddie Mac could insure. Households that could afford these large non-guaranteed mortgages, called jumbos, typically had higher incomes, better credit, and could make large down-payments. But, despite this inherent mitigation of credit risk, investors demanded higher interest rates on pools of jumbo mortgages because they lacked the biggest risk-mitigant of all: government guarantees. This should not be surprising. Credit risk invariably trumps all other risks.

The parameters changed only during a few years in the middle of the last decade when the housing mania was at its peak. Private securitizations began to include smaller mortgages with exotic structures, i.e. predatory loans. As the administration's report notes, Fannie and Freddie's market share of purchases of new mortgage originations declined from the normal 70% to 40%. Forced by the competition, the agencies lowered their standards, although in general they remained higher than the prevailing norm.

What happened when the bubble burst is instructive. Private mortgage securitization collapsed in the fall of 2007 and has never recovered. To quote from the administration's report again, "In the wake of the financial crisis, private capital has not sufficiently returned to the mortgage market, leaving Fannie Mae, Freddie Mac, FHA, and the Government National Mortgage Association (Ginnie Mae) to insure or guarantee more than nine out of ten new mortgages." (Emphasis added)

Here is the crux of the matter. No law requires any non-governmental entity to make or invest in mortgages. Thirty-year, pre-payable, fixed rate mortgages are fraught with market risk. They become a desirable investment only when credit risk is reduced to negligible levels by government guarantees or when the borrowers and properties are of the very highest quality. Without government backing, the combination of market and credit risk drives most private lenders out of the mortgage business. There are simply much less risky ways to make money. This is a fact that has been clearly demonstrated not just in the 1930s and late 2000s, but through all the years in between. The notion that the private sector can substitute for the government in maintaining the multi-trillion dollar US mortgage market is preposterous. It has never happened and there is no reason to suppose it will happen in the future.

The solution is to reconstitute Fannie Mae and Freddie Mac. They were placed into "conservatorship," whatever that means, in 2008 and the government has poured $150 billion into them since. Obviously they are still essential to the mortgage market. Unfortunately, the only definitive conclusion of the administration's report is that the two agencies are unfixable. "Fannie Mae and Freddie Mac's structural design flaws, combined with failures in management, were the primary causes of their collapse." Thoroughly demonized, they are somehow to be "wound down" in a smooth transition to a privately functioning mortgage market. I can't even imagine what morale must be like, though I am certain that every Fannie and Freddie employee is looking for a new employer. Instead of trying to fix Fannie and Freddie, the whole apparatus of government is focused on eliminating them without any credible substitute in place.

The biggest losers will be the American people. The report talks frequently about protecting taxpayers, but taxpayers and homeowners are exactly the same people. Pretending to protect "taxpayers" by making it much harder and more expensive for "homeowners" to get mortgages is a game no one can win. And the Obama Administration knows it. As I mentioned earlier, the government's intervention in the mortgage market led to a policy goal of encouraging near-universal home ownership. But consider these two sentences on pages 2 and 18, both of which follow platitudes of government support for quality affordable housing.

"This does not mean our goal is for all Americans to be homeowners."

"This does not mean all Americans should become homeowners."

They may as well have said, "Wake up! The American Dream is over."

Ineluctable Modality of the Visible

A Review of Disintegration by Eugene Robinson

James Joyce begins the third section of his novel Ulysses with the phrase "Ineluctable modality of the visible." As in much of his famously difficult prose, Joyce compresses an enormous idea in the fewest possible words. Ineluctable modality of the visible means that human beings inevitably and continually create and then adhere to patterns based on what we see around us. When we look at a house we don't see a collection of geometric shapes but a purpose, an aesthetic, and many subtle clues about its inhabitants. We see each individual house based on the patterns we have built of over years around the concept of "house." We do the same with people, reaching all sorts of conclusions based on no more than a quick first glance. We do this, or more to the point, we are able to do this, for an extremely good evolutionary reason. For most of our 200,000 or so years as a species, humans lived in very small isolated groups. Strangers were rare and dangerous. The ability to recognize them instantly was a major advantage to survival.

Since evolution works far more slowly than culture, what were once evolutionary benefits often adapt poorly to changed circumstances. The notion of "race" is a good example. Biologically, there are no human races; there is just one human race. Skin color, shapes of facial features, and hair texture are trivial differences of no more importance to human commonality than the ability to curl one's tongue (something as a child I always envied in my more fortunate classmates.) But, these minor differences are ineluctably visible. By the 19^th Century, Western science had systematized the observable differences between peoples into hard and fast racial models.

This now-discredited branch of scientific theory is referred to as Scientific Racism, but the term is not quite accurate. Racism is purely negative, comparing groups invidiously against one another. Scientific Racialism is a more precise term for a theory that sought to identify distinctions that could be either positive or negative. Racialism, in this sense, still exists today, and as Eugene Robinson tells us in his excellent new book, Disintegration: the Splintering of Black America, it leaves us with a badly distorted view of what it means to be African-American today.

Robinson argues that it is no longer useful to consider African-Americans as a single unified group. His idea has far-reaching ramifications. If true, and Robinson, a columnist for the Washington Post, makes a strong case, it means that generalizations about blacks in America have no more cohesive meaning than generalizations about left-handers in America. It means one can no longer speak of a "black community" in the singular, and that the position of "black leader" is an anachronism.

Robinson divides African-Americans into four socio-economic groups. It's important to grasp that these are groups, each with enough members to be a substantial and established part of American society. The first group is the Transcendents, the high government officials, business leaders, entertainers, and sports figures who have achieved power and wealth, not in Black America, but simply in America. Another group, which somewhat confusingly consists of two entirely separate demographics, is the Emergents. The first subgroup is of people who have recently migrated from Africa and the Caribbean. Like many immigrant groups before them, they are the self-selected, ambitious and adventurous. They are willing to work hard at jobs well below their real skill levels to get a foothold and assure their children of better lives. In large numbers, their children are responding with excellent performance in school. The other sub-group is the new biracials. Of course, the majority of African-Americans have mixed ancestry. But that happened not usually by choice, and besides, for most of American history, if you looked black you were black and that was the end of the story. Today's biracials have much more of choice in how they define themselves. Interestingly, President Obama is a Transcendent and both kinds of Emergent.

By far the largest group is the Mainstream of middle- and upper-middle class earners. Robinson stresses the very significant economic gains this group has made. Between 1967 and 2005, the percentage of black households earning more than $35,000 (in constant dollars) has risen from 25.8% to 45.3%, while the percentage earning more than $75,000 has grown from 3.4% to 15.7%. So, Robinson asks, "Why hasn't this Mainstream success penetrated the national consciousness?" The answer: "Mostly because we tend to see what we expect to see. Our eyes confirm what we 'know' and everybody 'knows' that black America is mired in intractable problems that defy solution." In other words, the ineluctable modality of the visible.

The growth of the black middle class is unequivocally good, but what about all the horrendous statistics on black unemployment, incarceration, drop-out rates, and teen pregnancy? Are they not accurate? Well, they are certainly inaccurate when applied to the Mainstream of African-Americans whose current situation and future prospects are much better. Unfortunately they are also inaccurate when applied to the roughly 25% of blacks whom Robinson calls the Abandoned. For them, the statistical percentages are much worse. Robinson describes this group as having "less hope of escaping poverty and dysfunction than at any time since Reconstruction's crushing end (in 1877)."

The Abandoned live in neighborhoods that were once economically, though not racially, diverse. In recent times, such neighborhoods were hit by the double misfortune of middle-class out-migration and the loss of working-class jobs that permitted a single (male) breadwinner to support an intact family. Their loss undermined the family structure, turning single-parenthood from the exception to the norm. Lack of economic class diversity was exacerbated as the neighborhoods became magnets for other poor blacks, either dispersed from large public housing projects or unable to afford rents in their gentrifying neighborhoods. Capping it all is racial segregation. As Robinson writes, "All else being equal, we should expect to find poor black, white, and Hispanic people living together. But this simply does not happen." Much research has shown that once the black population of a neighborhood—regardless of its location or income level—reaches about 20-25%, that neighborhood quickly becomes all or nearly all black. There are exceptions, of course, but in once-poor areas the exceptions only occur through the massive input of both private and public resources that produce gentrification.

In the latter part of the 20^th Century "the crisis of the cities" was a topic of political concern and even some action. Today, the Abandoned are truly that. They live in their own isolated worlds, commit violent crimes mostly against each other, and raise children whose early development is so meager that they enter kindergarten already far behind their middle-class peers.

Robinson offers no solutions to these problems, and it's hard to fault him since they are so challenging. But at least he faces them squarely. In this he differs from a study recently issued by the Children's Defense Fund called "The State of Black Children and Families." We can sense trouble in the title itself, which implies a homogenous Black America. The study makes some very interesting points, particularly the hopefulness of a high percentage of young African Americans, which probably reflects the fact that most of them are children of the Mainstream middle class. Coincidentally, the study ends with a section called "The Splintering of Black America." Unlike Robinson, the study deplores the breakdown of a united black community. Its authors issue a clarion call: "We must commit to working together across class lines to heal and repair our communities and our families that live and raise children in them…. Essential to making progress… is the emergences of a new coordinated Black movement that promotes justice for all Black Americans…"

But this is looking backward. Black Americans are splintering just like Irish-Americans, Italian-Americans and every other ethnic group did before them. The problems afflicting the Abandoned are not the responsibility of one particular group of Americans just because they have skin color and ancestry in common. All Americans are responsible for addressing these problems, and only when we all begin to realize it will solutions become possible.

George Jetson's Job

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“George Jetson lives in the future and he works in a factory where all he has to do is push a button. He pushes it and robots do all the work. His job is literally a joke, and the joke is, you can design all those robots to do the work, but you can't design a robot to push a damn button? “

--Leonard Richardson, 2009

The joke is not quite as funny as it was in the 1960s.  Robots are doing the work and George is out of a job.  The predicament of the quintessentially middle-class George is a near perfect symbol of the US socio-economy, a word I’ve coined to denote the deepening bifurcation of modern America.  The economy is recovering, but a large segment of the population, many of whom always considered themselves as solidly middle-class, is not.  The reason is that robots—or computers or low-wage workers in other countries or simply greater individual productivity—are now pushing the buttons.  
On November 24 we got a concentrated picture of what the new socio-economy looks like.  Because of the Thanksgiving holiday, more data releases were crammed into one morning than I can ever remember.  These data were:

Data	Source & Period
Mortgage applications, new & refinance	Mortgage Bankers Association -weekly
Durable Goods Orders	Census Bureau – October
Personal Income & Spending, Personal     Consumption Expenditures Index	Bureau of Economic Analysis – October
Initial & Continuing Jobless Claims	Bureau of Labor Statistics – weekly
Consumer Confidence	University of Michigan – November
House Price Index	Federal Housing Finance Agency – September
New Home Sales	Census Bureau - October

Altogether the data was decidedly mixed, but the markets chose to focus on the good news, especially the continuing growth in consumer spending.  The chart shows spending by consumers for services by month on a seasonally adjusted annual basis.  Spending on services represents about two-thirds of all consumer spending, with spending on non-durable goods accounting for another 22.5 %.  This propels the economy, because it means that almost 90% of what we buy today, we’ll have to buy again

tomorrow, or at least in the next year or so.  As you see, spending on services has been rising steadily since hitting a trough in the summer of 2009.   More than anything else, this is why economists have declared the recession over and why the stock market has rebounded from its March 2009 low.

The other bit of good news was that the fewest number of first-time unemployment insurance claims were filed in the week ended November 20 since the summer of 2008.  Weekly initial claims peeked at 651,000 in March 2009 and have since been trending down.  Still last week’s total of 407,000 remains well above the pre-recession average of about 325,000.  And, continuing unemployment claims, a much more significant gauge, remain unacceptably high and well over the long-term average.  Nearly 4.2 million Americans continue to collect unemployment insurance with 863,000 getting extended benefits. This compares to well under three million from 2004 through 2007.

The market chose to ignore the bad news.  Durable goods orders fell and remain far below pre-recession levels, in terms of total dollars, again on a seasonally adjusted annual rate.  Still, this data series is subject to both large monthly swings and large monthly revisions.   As a result, the markets discounted October’s drop in orders as either a normal pause in a general upward trend or simply a reporting error that would be rectified in a later revision.  

The housing reports were worse than expected, and the expectations were not rosy.  While applications for mortgages rose, home values continued to drop.  The Federal Housing Finance Agency reported that the average value of purchased homes was 1.6% lower in the third quarter than in the second and 3.2% lower than in the third quarter of 2009.   (The data comes entirely from mortgages purchased by Fannie Mae and Freddie Mac.)  At $191,000, the average home purchase price is back where it was six years ago, and 14% below its 2007 peak.

More distressing still is the continuing abysmal slump in new home sales. Calculated on the usual seasonally adjusted annualized rate, just 283,000 new homes were sold in October.  A mere 202,000 new homes were on the market, the fewest since 1968.  Existing home sales also remain at extremely depressed levels.

The picture that emerges is of a strengthening economy within a stagnant society; that is, a bifurcated socio-economy.   In every recent recession, businesses have learned how to produce more with less expense as measured by productivity per hours worked.  Businesses do not forget the lessons when they recover from the shock of the recession.  Consumers, however, forget the shock more quickly.  Those who have jobs begin spending freely again, spurred on by relentless advertising, door-busters, and other come-ons.  But following each recession, a larger pool of unemployed and under-employed is being left behind.  This time, the bifurcation is being widened. Household wealth is being squeezed by falling home values and the unavailability of traditional credit.  Consumers can still use the credit cards but bank lending remains tight, not because banks and credit unions don’t want to lend, but because their regulators won’t let them.  The big shots in Washington piously mouth their hopes for easier credit, but examiners on the ground squelch all attempts to take anything resembling risk.  The outcome is a statistical economic recovery but societal malaise.  The rich will bet richer, the poor will get poorer, while the middle class struggles in a slow-motion downward grind, their lifestyles becoming ever more difficult to maintain.   

We look back on the utopian future imagined for George Jetson in the 1960s with an odd nostalgia.  Maybe the joke was on us after all.