In the past year the press was full of stories speculating over whether the economic recovery was well under way or beginning to falter. But most stories were economic happy talk, glowing reports of record corporate earnings without any mention of how the companies were using their windfalls of cash. The disconnect between what ordinary Americans see inside their own checkbooks and what they read or watch in the news reports is getting bigger every day. So here is our list of the most important and neglected economic stories of the year.
1. The European Debt Crisis was manufactured by big, institutional investors to punish the European Union for not fully bailing out Greece the way the US government bailed out big banks in 2008 and 2009.
Let’s admit the truth here. Sure, Greece was in serious trouble. But Spain? Italy? And now France and Germany? No way. The equation is simple, but the financial press never laid it out for anyone. Instead of bailing out Greece, the EU worked out a deal that forced private investors to take a loss on their Greek bonds, which made big institutional investors (banks and hedge funds) angry; so they dumped any and all European debt in their portfolios. A few weeks later, no European government could get a favorable rate on their short-term debt. And no government in the world can currently get a long-term loan because investors are worried that, once interest rates rise, their money will be locked into long-term bonds whose value will have fallen and whose interest rates will be super low. The European Debt Crisis didn’t ease up until December when the European Central Bank finally announced that it would do what the US Federal Reserve did in 2009: extend no-interest loans to any and all banks that want them. Mission accomplished.
2. Hidden problems in the bond market.
Here’s another simple equation for you: add together panicked investors looking for a safe investment plus a huge number of retiring baby boomers. This leads to a record amount of money poured into the bond markets, because bonds are a safe investment, right? Well, not exactly. With few medium and small businesses able to borrow money, and government debt in disfavor, we should be asking ourselves where all that bond market money is going.
Here’s a way to find out: by looking at the largest bond market index mutual funds, which buy investments to match the composition of the entire US bond market. Here’s what one such fund holds: 70% in US government agency debt, 20.7% in corporate bonds, and the last 9% is made up of municipal bonds, other sovereign debt, cash, and a few risky derivatives (to boost the fund’s rate of return).
Sounds pretty safe, right? But here’s the kicker: of that 70% of US government agency debt, only a little more than half is invested in the safest US Treasuries (US federal government debt, i.e., the much maligned “deficit”). The rest, a full 34.4% of the entire fund, is made up of bonds issued by Fannie Mae and Freddie Mac; in other words, it’s tied up in the still-sinking housing market. Many of these bonds may be worthless, because Fannie and Freddie have been doing the same things that other big US mortgage lenders have been doing: delaying the inevitable write-off for as long as possible.
In addition, of the 20.7% of the fund invested in corporate bonds, more than a third of that (36%) is invested in bonds issued by banks, brokerages, insurance companies, and real estate investments trusts, and other financial industry companies. So the total amount in the fund that’s invested in the housing market and the finance industry is 42%, which shows us exactly how big the housing market bubble still is, and how risky investing in bonds can be.
3. Nearly half of all Americans are poor or low-income.
Last year, as in past years, the US Census Bureau calculated the number of people whose incomes are below the poverty level, defined as $22,314 for a family of four. That number totaled about 49.1 million Americans. But, for the first time, the bureau also calculated the number of people whose incomes were just above the poverty level, but below the “low-income” level, defined as $44,405 for a family of four (about 200% of the poverty level). That total came to 97.3 million additional Americans, which means nearly half of all people in the United States are poor or low-income.
In addition, 1 in 4 Americans needed emergency food assistance in the past year, 57% of all children in this country are in poor or low-income families, and 62% of low income families spent more than one-third of their income on housing. Child care costs take up another 20%, which doesn’t leave much for food, transportation, clothing, school supplies, etc.
With half of our population barely able to afford basic necessities, consumer spending (which accounts for more than 70% of economic activity) will never be able to rescue the US from its economic downturn.
4. The average tax rate paid by large US corporations is really 18.5%.
Whenever anyone mentions raising taxes, a wail goes up in corporate boardrooms all across America: “We pay too much tax!” The aspirational tax rate for US corporations is 35%. Wouldn’t it be nice if the US Treasury actually collected that much? According to a study done by Citizens for Tax Justice, only one-quarter of large US corporations pay more than 30% of their income in tax. Another one-quarter pay less than 10%. Approximately 30 companies in the study paid no tax, despite earning large profits. The most notorious offenders included Boeing, which received enormous tax breaks from the US government because it’s a major defense contractor, and companies like Microsoft who, because they’ve built call centers in other countries, can list most of their profits as foreign earnings not subject to US taxes.
5. Income disparity is at record levels in the US.
The Congressional Budget Office issued a report on income disparity in the US: the richest 1% of Americans saw their income increase by 275% over the past three years, during the worst economic downturn since the 1930’s. The upper 20% of Americans took home 53% of all after-tax income (more than the other 80% of Americans combined). Most shocking was the fact that the poorest 20% of Americans took home only 5% of all after-tax income.
6. Economically, we don’t live in a post-racist America.
More figures from the Census Bureau show us the racial composition of poverty in the US. The poverty rate is the highest for African Americans at 27%. For Hispanics it’s 26%. And for white Americans it’s 9.9%. Clearly, we don’t live in a post-racist America.
The statistics on race and poverty also held one startling fact: the median annual income for a male, full-time worker (of any race) in 2010 was $47,715. In 1973, the median income for the same worker was $49,065. This erosion of earnings has benefited corporate America immensely, while creating a lost generation for American workers.
7. Mortgage fraud is still going strong.
In August, the FBI released their annual report on mortgage fraud, showing that it’s still a widespread problem in the US. An estimated $10 billion in fraudulent loans were issued in 2010. The most common problems include falsifying documents so people could qualify for loans they couldn’t afford, inflating appraisals of houses so people had to take out larger mortgage loans, and pushing people to buy investment or rental properties that they couldn’t afford—all the same practices that led to the subprime mortgage collapse.
In addition, the Associated Press reported that mortgage-style robo-signing has become a common practice on the sale documents for properties. In 2010, banks were caught rubber-stamping mortgage loan documents and, after paying a nominal fine, they agreed to clean up their act. But now the AP has discovered that the actual sale documents for houses are being processed in the same way, potentially calling into question the ownership of millions of properties that have changed hands in the past decade.
8. Take-home pay in 2010.
Who took home the biggest slice of the pie in 2010? Was it corporations, small business, workers, or investors? Of national income in 2010, 14% was claimed by corporations, the highest rate in history. Small businesses, which are often lauded as the driving engine of employment in our economy, took home only 8.3%, the lowest rate ever. Workers took home 49.9%, the first time ever that employees took home less than 50% of total national income. And the remaining slice of the pie, a full 28.4%, went to investors, most of whom don’t work for a living, and who pay only a 15% tax rate on their income.
9. Failure of the Chrysler bailout.
A couple of years ago, when the US government stepped in to bail out Chrysler, we were told that taxpayers had to pony up to save a US automaker, which would also save US jobs. In addition, this was supposed to be an investment for US taxpayers, who could earn a healthy profit on the deal.
Well, those were lies. The US Treasury sold the last of its Chrysler stock in July, and the total loss shouldered by US taxpayers was $1.3 billion. And Chrysler is no longer a US automaker; Fiat (an Italian company) stepped in to buy up most of its stock, announcing that it would lay off a large chunk of Chrysler’s workforce in the coming merger.
We must point out that, without the bailout, Chrysler would have been bought out by Fiat or another foreign automaker anyway, because of its valuable factories and equipment strategically located in one of the most important car-buying markets in the world. The main difference is that, without the bailout, Chrysler shareholders and bondholders would have taken that $1.3 billion loss, instead of US taxpayers. That’s what a bailout is: nationalization of corporate losses so shareholders and bondholders (often big banks and hedge funds) can be rescued from their stupid investment decisions. (This is what economists mean when they talk about “moral hazard”: the more we rescue investors, the stupider and riskier their investment decisions become.)
10. Where did the cash go?
With this year’s economic happy talk centering on record corporate earnings, we might well ask where all that cash is going. It’s not creating jobs, that’s for sure. In June, the New York Times printed an article entitled “Employers Spend On Equipment Rather Than Hiring.” Apparently, equipment and software costs are so cheap (most of it is manufactured abroad, where labor costs are lower) that corporations have been on a shopping spree. Buying newer equipment and software often means more efficient automation, which leads to more layoffs. In addition, while equipment and software costs have increased only 2.4% in the past couple of years, labor costs have increased 6.7%, mostly because of skyrocketing medical insurance premiums. As a consequence, hiring is up only 2% in the past two years, while equipment and software purchases are up 26%.
So that’s where all the money has been going: to buy goods made by other US companies, but not made in the US, where labor costs are still too high, in spite of the erosion of wages for US workers over the past 40 years.
The trend is obvious, if you gather the right information: more of the available resources and money is being seized by big corporations and investors, while less money is available for the rest of us–those of us who do the real work. It’s too bad that the mainstream US media can’t seem to get the message, much less spread the message.