The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Herewith a potpourri of unrelated items I’ve found on my never-ending voyage through the internet. Grab a cup of coffee and pull up a chair.

Seen This Movie Before

First up, an excerpt from a speech given by Teddy Roosevelt in December 1906. I was taken by the opening line and the third paragraph. Indeed, his opening line could probably have been used countless times since he spoke it, most recently six or seven years ago:

As a nation we still continue to enjoy a literally unprecedented prosperity; and it is probable that only reckless speculation and disregard of legitimate business methods on the part of the business world can materially mar this prosperity.

But the third paragraph was really the jaw-dropper for me:

I again recommend a law prohibiting all corporations from contributing to the campaign expenses of any party. Such a bill has already past one House of Congress. Let individuals contribute as they desire; but let us prohibit in effective fashion all corporations from making contributions for any political purpose, directly or indirectly.

I’m always fascinated by how little we seem to learn and how likely we are to simply ignore history’s lessons. I wish I had more time to study our country’s history via the infinite documents and archives that have made their way on to the internet. So much to learn, so little time.

Maybe We’re Not So Lazy After All

I took Senator Jon Kyl to task here (March 2010) for an offensive comments about lazy Americans who would prefer to remain on unemployment benefits than be gainfully employed (“In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”). It’s worth re-running the chart I used at the time:

We now see, in a newly issued report, via the Wall St. Journal that:

“Any negative effects of the recent unemployment insurance extensions on job search are clearly quite small, too small to outweigh the benefits of transfers to people who have been out of work for over a year in conditions where job-finding prospects are bleak,” according to the report. [...]

There’s a chance extended benefits actually increase the number of Americans who find new jobs, according to the study. By one calculation, unemployment insurance extensions increased the share of workers who became reemployed by about 1.3 percentage points in January 2011 by reducing the fraction who excited [sic] the labor force.

Industrial Production and Private Sector Jobs

The change in year-over-year Industrial Production (INDPRO) and Private Sector Jobs (USPRIV) have a correlation of 0.83 over the past 50 years. Industrial Production seems to have put in a peak and, if my eyes don’t deceive me, I see payrolls just starting to rollover:

Buy-Side: Not Much Better Than Sell-Side

I posted here back in early August about Street-wide year-end S&P500 forecasts. I will say that I’ve breathed a sigh of relief as it’s become clear over the last six weeks that those forecasts were too optimistic and have been chopped across the board. I then posted here about one month ago when the first batch of 2012 S&P earnings estimates were published (Median: $104). I suspect it’s only a matter of time before those start getting pared, if they haven’t already.

I decided to take a look through the Barron’s archives to see what the seers were saying year-end 2010, and found the following graphic. What really jumped out at was the extent to which the consensus was looking for the 10-year in the range (generally) of 3.50 – 4.00% at YE 2011. Of course, it is only September, but I’d say that call’s as shaky as S&P1400. I also noted that the buy-side doesn’t look much better than the oft-maligned sell-side.

Fed Flow of Funds

The Fed released its Z.1 Flow of Funds report which, although always a bit stale, is a treasure trove of data. I never tire of finding ways to look at the data presented in the report.

Here, from Table B.100, are Household Real Estate (Line 4) and Corporate Equities (Line 24) as a percent of Total Household Assets (Line 1)

Here are Treasury Securities as a still-insignificant part of the American household’s financial assets (not total assets, just financial assets):

In terms of dollar holdings, Treasuries are now $835 billion on the household balance sheet versus financial assets of $49 trillion and total assets of $72.3 trillion. Liabilities stand at $13.9 trillion. Household real estate stands at $16.2 trillion, down some $6.6 trillion from the 2006Q4 high of $22.8 trillion.

Here’s Owners’ Equity as a Percentage of Household Real Estate:

On the chart above, we have made no progress since since the fourth quarter of 2008, when we sat at 40.1 (we’re now at 38.6 for two quarters running).  This decline in homeowners’ equity speaks to the credit expansions that allowed Americans to live beyond their means while incomes — as we saw when the Census released its report last week — have been stagnating.

Last but not least, here’s Liabilities as a Pct of Disposable Income:

Though we’re below the upward sloping trendline on this file, the average over the period shown is 102%, which is a further shedding of about $2.25 trillion in liabilities (or similar gain in income, which we plainly know is simply not happening).

Are We Beyond Civil Discourse?

As has been noted in several places, it appears we have moved as a country toward something that I find unrecognizable:

1. Rick Perry’s inappropriate claim that Ben Bernanke’s actions as Fed chair could be “treasonous” and that he’d be treated “pretty ugly” in Texas drew approvals.
2. The mention that Perry has presided over more state-run executions than any other governor in modern times drew rousing (and to me, shocking) applause.
3. Wolf Blitzer’s question to Ron Paul as to whether a hypothetical comatose citizen without insurance should be left to die were met with audience hoots of “Yeah!”
4. Noise was made about offsetting the cost of emergency relief in the wake of Hurricane Irene.

Via Mediaite:

Jon Seidl at The Blaze tries to get the Tea Party audience some room to wiggle out of this ghoulish display, theorizing, alternately, that it was a delayed reaction to something Paul said earlier (not unless those folks were watching on their portable DVRs), or that the hoots were from liberals, cheering on Blitzer’s “Gotcha!” (which would make them the quietest bunch of liberals in the world for the rest of the debate)

The reactions of three or four audience members at a debate isn’t all that meaningful on its own, but this outburst follows last week’s Death Penalty Ovation at the Reagan Library debate, and another ugly moment at the Tea Party debate in which the crowd cheered for fed chairman Ben Bernanke to be tried for treason, a capital crime.

I’m still trying to figure out exactly what’s going on here. While Perry’s presiding over 234 state-run executions during his terms as governor may speak to our adherence to the rule of law (much as I may wish we had no such law), should we really be applauding the fact that our government puts people to death? Similarly, should the uninsured — specifically those who can afford but choose not to buy insurance — be left to die should something happen to them? And how far have we drifted from our moral moorings that we have a president (Obama, not Bush) who unilaterally orders the extra-judicial execution of American citizens? These developments are all deeply troubling, and speak to a society that has lost its way.  It’s almost as though we can no longer distinguish between “reality TV” and reality.

~~~

I found myself in complete agreement with Phil Angelides in this interview with Bloomberg’s Lisa Murphy.

~~~

Catch up with me on Twitter: @TBPInvictus

(Source: Census.gov)>

If we were all to become suddenly rich tomorrow, the government’s revenue problems are solved at the current tax rates, so no worries in that case. But I place long odds on that, so let’s move on to what’s actually happening.

It’s as if the entire country has turned into Lake Wobegon, as if we’ve been overcome by an epidemic of illusory superiority.  As I’ve watched the Republican debates, I’ve listened closely for the applause lines, paid close attention to the questions and answers. I also keenly read a variety of papers and  occasionally watched Fox News.

My conclusion?

I am convinced that when President Obama mentions raising taxes on “the wealthiest Americans,” everyone thinks he is talking about them. I’m sure of it. I suppose I should be surprised, but when citizens admonish politicians to “Keep the government out of [their] Medicare,” I guess anything’s possible (like, say, an audience applauding the mere mention that Rick Perry has presided over more state-run executions than any governor in modern times).

Perhaps folks are thinking, “Well, my taxes might not go up now, since I’m making the median income, but my wages are going to quintuple any day now, I just know it.  And when they do, I’ll be damned if I’m going to pay one more plug nickel in taxes.  I also need to protect the loopholes for corporate jet owners, as I’ll surely soon be one.”  Folks, can we have a reality check here?  Pull out your most recent IRS Form 1040 and see exactly where you stand and whether or not you’re among the “wealthiest Americans” to which Obama has been referring.  There is no doubt that some of you are, but I am equally sure that the vast majority of you are not, even if TBP may draw a somewhat higher income cohort.  (As I read the comments to my recent post on the Census release (having already almost completed this post), I guess what I’m trying to say is summed up by Dogfish, who paraphrases Taibbi’s Griftopia:  “”…tea party types like Joe the Plumber identify with the rich because they think “they are one clogged toilet away from being millionaires.”"  News flash: they’re not.)

To quickly demonstrate the faulty thinking that must be at play here, let’s have a look at some economic statistics from the area in which Monday night’s debate took place.  Specifically the zip code in which the Florida State Fairgrounds resides — 33610.  Seems fair, since the audience was certainly enthusiastic enough about the slate of debaters and most definitely jazzed not to have their taxes raised.  (With all credit to The Reformed Broker for his astute observation, it did seem as though most of the audience arrived at the Fairgrounds in their Medicare-funded Rascal Scooters.)

Unfortunately, the American Community Survey (ACS) covering the 2010 Census won’t be released until Sept. 22, so we’ll have no choice but to use data from the 2000 Census (I’ll make a note to revisit this data in a couple of weeks).  So what do we learn about all those folks in 33610 (click through for Census fact sheet) who seem deathly afraid of having their taxes raised?

Give or take, it would seem there are probably just over 100 or so households (out of 12,000) that might see their taxes rise if some of what Obama proposes gets passes.  All the others, not so much.  We’ll have an updated number within the next two weeks, when the ACS is updated.  So let’s get a collective grip here, splash some cold water on our faces, and have an understanding about what is being proposed and whom it’s going to impact.

Having gotten that off my chest, below is another of the more distressing charts that appeared in the deck that accompanied the recent Census conference call on the Income/Poverty/Health Insurance release.  Neither chart (at the top or immediately below) really needs much by way of explanation.  It would be an understatement to call the trends disturbing.

~~~

~~~

Lastly, might as well get it out there that I’m making an effort to have a presence on Twitter.  I’m @TBPInvictus if you’re interested; it’s almost exclusively economy and markets related.  You’ll be wealthier for the follow.

The Census Bureau released its annual report on Income, Poverty, and Health Insurance Coverage: 2010 (full PDF)  this morning.  Barry has posted the slide presentation that staff went through during the conference call over in the Think Tank (please have a look).  The (very ugly) bullet points from the release can be found here, and the centerpiece graph is below.

As time allows, I intend to do some work on the numbers in the updated report, but here are a few things that jumped out at me (straight from the summary):

1. Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median.
2. Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999.
3. In spring 2011, 5.9 million young adults age 25-34 (14.2 percent) resided in their parents’ household, compared with 4.7 million (11.8 percent) before the recession, an increase of 2.4 percentage points.
4. It is difficult to precisely assess the impact of doubling up on overall poverty rates. Young adults age 25-34, living with their parents, had an official poverty rate of 8.4 percent, but if their poverty status were determined using their own income, 45.3 percent had an income below the poverty threshold for a single person under age 65.
5. Based on the Gini Index, the change in income inequality between 2009 and 2010 was not statistically significant, while the changes in shares of aggregate household income by quintiles showed a slight shift to more inequality. The Gini index was 0.469 in 2010. (The Gini index is a measure of household income inequality; zero represents perfect income equality and 1 perfect inequality.)

More to come.

We’ll see what ultimately happens, but he clearly used the appropriate language given the stated purpose of the speech.

>

Click through for larger graphic.

I posted here about the government’s plan to discontinue the 133-year-old Statistical Abstract, an invaluable tool for individuals and businesses alike.  Regardless one’s political or economic stripes — Dem or Repub, Keynes or Hayek — there’s consensus about the importance and value of the Statistical Abstract.

So, I ask the TBP readership to let their collective voice be heard by writing to the director of the Census Bureau, one Robert M. Groves (Robert.M.Groves(AT)census.gov).  Be respectful and don’t be a potty-mouth.

And if you’ve got an extra five minutes to kill, let your congress person know that you’d like the Abstract to be saved, apparently the budget that kills it has not yet been passed.

Thanks.

There is a huge Washington Post special report on Breakaway Wealth in the US. More than most other industrialized nations, the US has seen the top 0.1% compensated in vastly disproportionate numbers versus the rest of the populace.

There are at least several reasons to be concerned about this, beyond basic fairness: 1) Nations that have extremes wealth disparities tend towards social unrest. Usually, its banana republics and dictatorships, but it could happen in a corporate-owned quasi democracy as well. 2) CEOs and other company insiders have been engaging in a massive grab of shareholders wealth for decades. Its gotten appreciably worse in the 2000s. 3) Management is now trying to hide their compensation from the business owners — the firm’s shareholders

Making matters even more outrageous, these CEOs are trying to pass legislation that would legally allow them to not to disclose executive compensation at public companies:

“Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker. Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.

The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee. The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company “useless.”

But some Democrats and investors say the information should be issued to highlight the growing income disparity in the United States. They add that opponents of disclosure merely want to hide the outrageous scale of executive pay packages.”

Legalized theft of shareholder assets, approved by a corrupt Congress. What little respect I had left for the GOP is now completely gone. This is not “business friendly” — its utterly corrupt theft of shareholders.

The charts below (click for larger graphics) show exactly how absurd this has become. The rumors you may have heard about class warfare have been greatly exaggerated . . .

>

US Compared with other countries

Who makes up the top 0.1%?

Rising executive pay

Growing share of income for the rich

Charts via Washington Post

>

Sources:
Special Report: Breakaway Wealth
An ongoing Washington Post series about how the rich are pulling away from the rest of America
http://www.washingtonpost.com/breakawaywealth

Business group: Public companies shouldn’t have to compare CEO and worker pay
Peter Whoriskey
Washington Post, June 24 2011
http://www.washingtonpost.com/business/economy/business-group-public-companies-shouldnt-have-to-compare-ceo-and-worker-pay/2011/06/23/AGGMcFjH_story.html

Some of the factors that have landed us in the mess we’re in have been building for decades, and there’s ample evidence on which to draw to demonstrate that fact.  In looking at a few of these issues, I’ll draw on some charts I’ve presented both here and elsewhere before.  A couple are replicated from this outstanding study in January’s Monthly Labor Review (MLR).

Let’s begin by referencing a recent piece by Stephen Roach that accurately assesses what’s really wrong with our current economy, summed up in one number:

The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.

Here’s a graphic representation of what Mr. Roach is talking about:

We’ve gone, 14 quarters from the start of the recession, from an index value of 100 to a current index value of 100.7, which is an average annualized growth rate of 0.2 percent.  Anemic.  Given that consumer spending represents some 70 percent of GDP, a wobbly consumer — note the flatline over the past two quarters — is problematic.  And at the risk of turning blue in the face, I’d point out yet again that we know small businesses cite “Poor Sales” as their number one single biggest problem.  So, to the extent very little (anything?) has been done to help the consumer, the mess in which we find ourselves should come as absolutely no surprise.  Corporations, which are flush with cash, are spending that cash on such things as mergers, acquisitions, share buybacks, and dividend hikes.  While that’s all well and good for the investor class, it does virtually nothing for Joe Six Pack on Main St.

That said, let’s peel the onion a bit and look at factors that are behind the our weak consumer.

First up, Labor Share, which the MLR defines as:

Labor share is the portion of output that employers spend on labor costs (wages, salaries, and benefits) valued in each year’s prices. Nonlabor share—the remaining portion of output—includes returns to capital, such as profits, net interest, depreciation, and indirect taxes.

Here’s what has become of Labor Share:

(NOTE:  BLS provides (and FRED captures) this series as an Index, not a Level, with 2005 = 100.  BLS advises me that the 2005 Level = 60.6.  Therefore, I have taken the entire Index (Series identified above) and multiplied it by .606 to get the percent Labor Share above.  It continues to bewilder me that more is not made of this troubling metric.)

As the MLR points out:

Labor share averaged 64.3 percent from 1947 to 2000. Labor share has declined over the past decade, falling to its lowest point in the third quarter of 2010, 57.8 percent. The change in labor share from one period to the next has become a major factor contributing to the compensation–productivity gap in the nonfarm business sector.

The decline in Labor Share can also be looked at in the context of the growing impotence of unions in the United States, as well as declining union membership (for which I could not find an adequate chart).  Here is a chart showing the number of work stoppages annually since 1947:

While Labor Share has recently plummeted to all-time lows since record keeping began, Median Household Income has stagnated for the past 12 years.  In the last recession (2001), incomes had only begun to decline.  I’m sure back then no one contemplated the possibility that the decline would last (certainly not for a decade), credit was still widely available and, as we know now, being freely tapped (see the PCE chart above for evidence of how normal consumer spending remained during that period).  One decade later, Labor Share has collapsed, incomes have gone nowhere, and credit availability — to say nothing of consumers’ attitudes toward it — has all but vanished except for the most creditworthy.

To add insult to injury, Output — or Productivity — has far outstripped Compensation since ’70s, no doubt due in very large part to advances in technology.  The gap is even wider in the manufacturing sector of the economy (see Chart 6 in the MLR study).  Producing more for less and with less has become a hallmark of good corporate management at the expense, of course, of the American worker.  It is a lynchpin of the great American mantra of “maximizing shareholder value.”

The chart below is a natural log chart (which should please the readers who have occasionally suggested the use of log charts) in which both metrics were indexed to 100 at the earliest measurement .

There may — operative word “may” — be a glimmer of hope on the horizon for consumers, though I think it’s fair to say the administration’s previous forays into the housing market have been generally ineffective.  I’ll outsource some commentary and number crunching to David Rosenberg:

Finally, at a time when we are all looking for Bernanke for a solution to the economy’s woes, there is a push for something potentially exciting for the housing market that does not require an FOMC meeting or a congressional vote for that matter.  Have a look at U.S. May Back Refinance Plan For Mortgages on the front page of the NY Times.  Now this is a proposal that may work — allowing the millions of homeowners who currently do not qualify for a mortgage refinancing the opportunity to do so.  There is an estimated $2.4 trillion in mortgages that are currently yielding over 4.5% (and rates are at 4%).  This plan would potentially free up $85 billion in cash flow for mortgage households, and that is equivalent to a 1% pay hike.  [...]

The bottom line is the lack of refinancing response to lower rates has been a huge transfer of wealth from homeowners and government (they have credit risk) to holders of agency MBS.  An effective refinancing program would level the playing field and would be a very effective policy tool and accentuate the impact of the Fed’s ultra low rate policy in terms of the transmission mechanism for the mortgage market.  This could end up being big in terms of releasing vital cash flow to the household sector at a time of still-soft labour market conditions.  Who ends up getting hurt?  In all likelihood, MBS holders (holders of higher coupon MBS) would be the victims, but for a good social cause, don’t you think?

I’d hasten to point out that there are doubts about the plan over at Calculated Risk.

We are now squarely face-to-face with the consequences of the decades long gutting of the middle class that was the backbone of our economy for so long.  Without taking some solid, clearly-defined steps, the middle class will undoubtedly move from an endangered species to extinction.  The tipping point may already have been passed and, even if it hasn’t, I’m still not optimistic there’s any interest in D.C. to make the requisite policy changes.

On a somewhat related note as Irene barrels up the eastern seaboard and warnings of widespread power outages are sent far and wide, I can’t help but wonder (yet again) why no consideration is ever given to burying our power lines in the northeast.  Is it too common sense, too potentially stimulative, too money-saving in the long run, or all three?

Painting by Anthony Freda: www.AnthonyFreda.com

Corruption At The Top Leads To Lawlessness By The People

I’ve repeatedly noted that corruption and lawlessness by our “leaders” encourages lawlessness by everyone else. See this, for example.

Peter Oborne – the Daily Telegraph’s chief political commentator – wrote yesterday:

The criminality in our streets cannot be dissociated from the moral disintegration in the highest ranks of modern British society. The last two decades have seen a terrifying decline in standards among the British governing elite. It has become acceptable for our politicians to lie and to cheat. An almost universal culture of selfishness and greed has grown up.It is not just the feral youth of Tottenham who have forgotten they have duties as well as rights. So have the feral rich ….

***The so-called feral youth seem oblivious to decency and morality. But so are the venal rich and powerful – too many of our bankers, footballers, wealthy businessmen and politicians.

***

The sad young men and women, without hope or aspiration … have caused such mayhem and chaos over the past few days. But the rioters have this defence: they are just following the example set by senior and respected figures in society. Let’s bear in mind that many of the youths in our inner cities have never been trained in decent values. All they have ever known is barbarism. Our politicians and bankers, in sharp contrast, tend to have been to good schools and universities and to have been given every opportunity in life.

Something has gone horribly wrong in Britain. If we are ever to confront the problems which have been exposed in the past week, it is essential to bear in mind that they do not only exist in inner-city housing estates.

The culture of greed and impunity we are witnessing on our TV screens stretches right up into corporate boardrooms and the Cabinet. It embraces the police and large parts of our media. It is not just its damaged youth, but Britain itself that needs a moral reformation.

Osborne also gives specific examples of corruption, such as the prime minister’s involvement in the Murdoch scandal, and members of parliament abusing expense accounts.

Indeed, the rioters themselves agreed. As Reuters notes:

Speaking to Reuters late on Tuesday, looters and other local people in east London pointed to the wealth gap as the underlying cause, also blaming what they saw as police prejudice and a host of recent scandals.

Spending cuts were now hitting the poorest hardest, they said, and after tales of politicians claiming excessive expenses, alleged police corruption and bankers getting rich it was their turn to take what they wanted.

“They set the example,” said one youth after riots in the London district of Hackney. “It’s time to loot.”

(Indeed, looting by the bankers has been shown by a Nobel prize winning economist as being the root cause of the S&L crisis and today’s economic crisis).

Austerity Leads To Rioting And Unrest

I’ve previously argued that the British riots are due to bad economic policy which has created rampant inequality. (As I’ve noted for years, raging inequality and policies which help the big boys at the expense of the “little people” are causing unrest – not just in Egypt – but worldwide.)

As the above-quoted Reuters article notes:

“I don’t think the implications of this have been fully thought through or accepted yet,” said Pepe Egger, western Europe analyst for London-based consultancy Exclusive Analysis.

“What we have here is the result of decades of growing divisions and marginalization, but austerity will almost certainly make it worse. Yes, the police can restore control with massive force but that is not sustainable either in the long term. You have to accept that this may happen again.”

***

Analyst Louise Taggart at security consultancy AKE said that in time urban unrest worries could make it harder to cut other programs as well, including sorely needed education and community services. It went well beyond Britain, she said.”Across Europe, we’ve already seen some incidence of civil unrest,” she said, saying it would almost inevitably impact policy. “There’s definitely a likelihood that similar scenes might erupt when austerity cuts really start to be felt.”

Indeed, a study this month by economists Hans-Joachim Voth and Jacopo Ponticelli shows that – from 1919 to the present – austerity leads to violence and instability:

Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures.

As CNN notes:

Studying instances of austerity and unrest in Europe between 1919 to 2009, Ponticelli and Voth conclude that there is a “clear link between the magnitude of expenditure cutbacks and increases in social unrest. With every additional percentage point of GDP in spending cuts, the risk of unrest increases.”

“Expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, general strikes, political assassinations, and attempts at revolutionary overthrow of the established order. While these are low probability events in normal years, they become much more common as austerity measures are implemented.”

Corruption And Austerity = Global Unrest

Time Magazine’s Global Spin blog sums up these two threads nicely:

Simply working hard and playing by the rules is no longer a path to prosperity or even a dignified future in much of the industrialized West, where neoliberal economic policies have funneled most of the wealth created in recent decades to a small, already wealthy elite, while shrinking the middle class finds its living standard steadily declining, and more than one in five young people is unemployed with no prospect of finding work in the foreseeable future.The looters respond to their circumstances by simply breaking the rules and grabbing whatever they can, while the moment — and their capacity to hurt anyone who gets in their way — allows it. The protestors, who are far more numerous, despond by demanding that the rules be changed, and they’re on the streets because they believe that even the democratic political system has failed them, producing governments in thrall to the interests of financial elites regardless of which party dominates. And the British anti-austerity programs are echoed on the streets of Madrid and Barcelona, Rome and Lisbon, Athens and Tel Aviv — an Austerity Intifada is sweeping Europe.

The term “looting” commonly describes the actions of those who help themselves to the merchandize of stricken stores when social order breaks down. But many of those in the more orderly protests on the streets of Europe accuse the Western world’s bankers of doing the same to the state, demanding bailouts to save them from the consequences of their catastrophic mistakes, leaving them sitting pretty while public debt balloons and the middle class and poor are expected to shoulder the burden of austerity.

Whether they respond with disciplined protest or nihilism and criminality, millions of young people in Europe today see playing by the rules of the socio-economic and political status quo as offering them no decent future. Politicians may comfort themselves with the notion that the social unrest on the streets is simply a problem of a “culture of irresponsibility” and deviance, but if mainstream society is unable to integrate whole swathes of its youth population and give them a stake in playing by the rules, it’s going to face growing discontent.

***

The protests that have shaken Spain, Greece, Portugal, France, Israel and Britain this year (even before this week’s rioting) suggest that the pattern continues. The orgy of looting and vandalism that Britain suffered this week may have been simply the ugly Halloween face of a far broader wave of social unrest that expresses not simply economic discontent, but the declining legitimacy of the political system in the minds of millions of people who see it as serving the interests of a narrow elite at the expense of the majority.

More vigorous policing will drive the thugs off the streets and restore a tenuous calm. But keeping them off the streets, and integrating them — and the hundreds of thousands who have poured onto the streets in peaceful protests — into a socio-economic system that offers them a future and a stake in social stability is a challenge that may be nearing crisis proportions.

Obama had one shot at a stimulus package when the economy was reeling from the near economic collapse of 2008.  Some members of his team argued it needed to be bigger (it did), but for whatever reasons they did not prevail.  What was needed then — as now — was to put money to work in such a way as to get the best bang for the buck and put as many people to work as possible.  It’s been my long-held contention that infrastructure would have been an ideal use of stimulus funds.  Consider (much more data at the link):

With 45 percent of roads in less than good condition and 12 percent of bridges structurally deficient, the U.S. faces severe infrastructure needs that significantly impact the nation’s economy.

More than 150,000 miles—or 45 percent—of federal highways and major roads in the U.S. are not in good condition, according to the Federal Highway Administration.

More than 71,000 of the nation’s bridges—12 percent—are rated as structurally deficient. More than 78,000 are rated as functionally obsolete.

More than 20 states this year will likely reduce transportation investments because of federal inaction on a new surface transportation authorization bill.

So, perhaps we could have used some money to give our highways and streets some needed attention.  Other areas that come to my mind as good candidates for construction are:  Public Safety, Sewage & Waste Disposal, Water Supply, and Educational.  Sadly, it seems as though not much money went to these necessities.  Thanks to some data sets recently picked up by FRED, we can take a look at all of these areas.  First up, Highway & Street and Educational construction spending.  What I’d really like to see here is a spike — a big one — which would indicate stimulus funds had been allocated to these crucial areas.  Do you see a meaningful spike?  Neither do I, and what’s worse is that both series are now on the decline.

(NOTE:  These expenditures all have to do solely with construction spending)

Let’s look at the other areas I mentioned (I broke the data into multiple charts to keep similar dollar expenditure levels together and thereby render greater detail).

No signs of a meaningful spike here, either.

One last look, this time at Transportation (like, say, the high speed rail I’ve always hoped Obama would embrace):

So, nothing significant has really been done on any of these files, and now Obama’s out of bullets.  The beauty of construction spending is that you wind up with things — roads, bridges, tunnels, rails, schools, sewage treatment plants, power plants, airports, dams — that last for decades and get passed from one generation to the next.  Now that opportunity has been squandered — DC is in full-on austerity mode, and the states and municipalities are having their own issues.

I wrote in June 2010:  “And, for the record,  I’ll state here that I think Obama and his team badly misallocated the stimulus in ways that did little to create jobs, unarguably its most important objective.  And that will cost him dearly (as evidenced by yesterday’s third defeat of an unemployment benefits extension?).” Nothing that has happened in the past 14 months has caused me to waver from that position.

Final note:  As I was wrapping up this post, I received an alert that the Philly Fed’s Leading Index series had been updated, so of course I took a gander.  The contours of our two “soft patches” are clear.  The difference is that last year at this time The Bernank was announcing QE2.  It remains to be seen whether or not Ben has another rabbit to pull out of another hat.

UPDATING, Aug 3, 10:24AM:  In his daily today, David Rosenberg makes the same point regarding the stimulus:

The overhang of excessive debt burdens is still with us today and the problem with the government stimulus programs that were put into place is that they were not designed properly; the multiplier impacts never did kick in.  So we can’t “grow” our way out.

I thought it might be interesting and instructive to visualize the ongoing debate over how to solve our debt and deficit problems, so I’ve taken to FRED to put some of these issues in pictures.

Before getting to that, though, I’d like to go on the record to state that I think any politician — Democrat or Republican — who signs a pledge (any pledge) is making a huge mistake, for the simple reason that there are only two ways to deal with having made such a commitment:  either one abides by it, or one reneges on it.  It forecloses on the notion of compromise, the key ingredient to getting things done in Washington.  Beyond that, it’s fairly juvenile, and I look forward to the day when our politicians will bind themselves via pinky swears and/or double-dares.  Really, it’s all so third grade.

Second, let’s talk about whether we have a “spending” problem or a “revenue” problem.  Since politicians — up to and including President Obama — like to equate the federal government to the average family (a truly pathetic comparison), let’s look at it in that light:  Say your household is spending $70,000/year on a $100,000/year gross (pre-tax) household income.  Well, it’s easy to say you have a “spending” problem that would be solved if you took your spending down to, say, $40,000/year.  Conversely, though, you might also solve the “problem” by getting a new job for $140,000/year (not saying that’s easy, of course, but certainly possible).  The notion — espoused by countless politicians — that the problem resides solely on spending and not also on revenues is absurd on its face.  Catherine Rampell has a very nice piece about this over at the NY Times website:  “But there is, in theory, a happy solution to our debt troubles. It’s called economic growth.  No need to raise taxes or cut programs.  Just get the economy growing the way it used to.” Indeed.

Okay, that said, let’s look at some charts that crystallize our predicament.

Above are current government receipts and expenditures.  The area leading into 2001 recession — where the blue line breaks above the red — is the period during which we were running surpluses, which was regrettably very short-lived.  The gap now is, clearly, the largest it’s been during the period I presented, but it strikes me as absurd to try closing it solely by focussing on the red line while simply ignoring the blue (the position being taken by certain pledge-takers).  As commenter Joel826 pointed out in the recent Rosie v Krugman discussion, professor Krugman has correctly pointed out that Fractions Have Denominators!  Obsessing over only the numerator or denominator in any ratio instead of looking at both is — I’m sorry to say it again — juvenile, but seems to be exactly what some pledge-signers are determined to do.

Let’s look at the data above in a bit of a different context — expenditures and receipts as a percent of GDP:

Going back to 1947 (not seen in the chart above), expenditures have run, on average, 19.6% of GDP while receipts have run, on average, 18.0% of GDP.  Which is to say that, historically, we’ve generally spent a bit more than we’ve taken in relative to GDP (visible below).  (Again, the surplus is clearly visible in the area circa 2000, where the red line breaks above the blue.)

Relative to each other, here’s a historical look at how much we take in versus how much we spend:

It would appear we’ve peaked and begun trending lower here, although adding a trendline would produce a disturbing result, to be sure.  In any event, as expenditures decline (stimulus done, wind down the wars, etc.) and revenues rise, the chart above captures the essence of what Catherine Rampell was getting at in her story — we could grow our way out of our problems…if we could only grow!

Now here’s a look at the public debt and its relationship to GDP — Debt/GDP will surely soon cross 100%, as we have all been told repeatedly.  But again, I’m quick to point out that Debt/GDP is a ratio that is influenced by both its numerator and its denominator.  We can — and should — shrink the numerator while simultaneously growing the denominator.

I’ve got nothing profound to say about the situation, other than my belief that compromise always seems a better route than intransigence.