Monday, June 28, 2010

Hoover Is Back

Well, the early news out of the G20 heralds much misery for a lot of folks both here and in other parts of the world, especially Europe. The news includes a pledge from the largest nations on Earth to halve their budget deficits by 2013. This misplaced austerity can't come a worse time for the global economy. Krugman even brought up the "Third Depression" in his latest column. Most everyone with any credentials in economics sees the shadow of at least a double dip recession, if not full blown depression, as this scenario unfolds. It's going to get very ugly.

The reality is that such "shock-and-awe" fiscal austerity has a strongly deflationary effect. If these actions to prematurely address deficits trigger a deflationary spiral(which it likely will) we will be helpless to do anything to alleviate it. We are at the 'zero bound' with  baseline interest rates already effectively near 0%. We are out of room to affect things with monetary policy and that is bad news.

Something that doesn't get spoken to much is that such unwarranted austerity has a very negative implact on the social contract. The historic bonds of trust and reciprocal help are severely strained when so many of the social norms are severed in acts of fiscal whiplash. Free and democratic societies rely on the lubrication provided by the progressive programs of assistance that are threatened by this hysterical austerity. Couple this with the continuing massive and long term unemployment and the potential for social unrest and you have a formula that endangers the very foundations of democracies here and abroad.

This week will tell the tale so watch the news out of Toronto. We shall see if Hoover has truly risen once again. Make sure to keep an eye on the stock markets as well. The 'Haves' and 'Big Money' are on the horns of a dilmema. They are torn between screwing the little guys one more time (their favorite pastime) or stuffing more excess cash into their pockets. Tough choice and it will be interesting to see which way they swing.

While we are talking misery it might be fun to point out some of the most interesting facts in the new CBO data on changes in incomes and taxes for different income groups:

* In 2007, the share of after-tax income going to the top 1 percent hit its highest level (17.1 percent) since 1979, while the share going to the middle one-fifth of Americans shrank to its lowest level during this period (14.1 percent).

* Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation — an increase in income of $973,100 per household — compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth.

* If all groups’ after-tax incomes had grown at the same percentage rate over the 1979-2007 period, middle-income households would have received an additional $13,042 in 2007 and families in the bottom fifth would have received an additional $6,010.

* In 2007, the average household in the top 1 percent had an income of $1.3 million, up $88,800 just from the prior year; this $88,800 gain is well above the total 2007 income of the average middle-income household ($55,300).

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