TIME global economy

There’s a Class War Going On and the Poor Are Getting Their Butts Kicked

Orange Farm Residents Protest Over Service Delivery
A South African man hurls a burning tire in Johannesburg during protests over squalid living conditions in 2010. Conditions for the poor are worsening around the world Gallo Images—Getty Images

Although they say they're concerned about inequality, economic policymakers continue to pummel low-income families and the jobless, and that’s bad for all of us

A year ago I asked if Karl Marx was, in certain respects, right about capitalism, and argued that class struggle was making a comeback.

The German philosopher believed the capitalist system was inherently unjust. Capitalism, Marx predicted, would inevitably concentrate wealth in the hands of a few while impoverishing everyone else. There is ample evidence that Marx’s theorizing is becoming reality.

According to a recent report from the International Monetary Fund, income inequality has risen in nearly all advanced economies over the past two decades. In the U.S., the share of income captured by the richest 10% of the population jumped dramatically from around 30% in 1980 to 48% by 2012, while the portion grasped by the population’s richest 1% more than doubled, from 8% to 19%. Other data shows that since 2009, the 1% captured 95% of all income gains; the bottom 90% of people got poorer.

The good news is that more politicians and policymakers are waking up to the problem. “Inequality has deepened. Upward mobility has stalled,” U.S. President Barack Obama said in this year’s State of the Union Address. “Our job is to reverse these trends.”

There is an emerging consensus, furthermore, that such extremes of inequality are bad for overall economic health. “We now have firm evidence … that a severely skewed income distribution harms the pace and sustainability of growth over the longer term,” IMF Managing Director Christine Lagarde warned in a February speech.

But here’s the bad news. The talk hasn’t translated into action. Economic policy for the most part is still biased against the poor — in some ways, it is becoming increasingly antipoor.

The war against the poor may be most pronounced in the U.S. Washington sliced $8.7 billion from the food-stamp program in February, even though nearly 47 million people, or about 1 out of every 7 Americans, currently rely on it. A new bill to extend emergency unemployment benefits is almost definitely dead on arrival in the Republican-controlled House of Representatives.

The standard conservative argument against such welfare programs is that they make people dependent on “nanny states” and discourage initiative. But statistics say otherwise. According to the Center on Budget and Policy Priorities, more than 60% of families with children who receive food stamps have a member who works. The problem is that too many people with jobs don’t earn enough to buy sufficient food and other necessities — they’re the “working poor.” But don’t expect any sympathy from Congress. The Republicans are dead set against a hike in the minimum wage that would allow these folks to buy their own food.

Meanwhile, in Europe, politicians and bankers are breathing sighs of relief that the region’s debt crisis has been quelled. But the reality is that, for tens of millions of Europeans, it hasn’t. Unemployment in the euro zone in February was a gut-wrenching 11.9% — almost unchanged from 12% a year earlier. In Greece, the latest rate is a staggering 27.5%. No wonder angry Spaniards protested in the streets of Madrid in March, more than five years after the economic crisis began. Yet the European Union remains wedded to a policy of austerity rather than growth. What happened to the emergency leadership conferences that were so common when the governments themselves were in trouble? Apparently, Europe’s impoverished aren’t worth such efforts.

In Japan, new policies by Prime Minister Shinzo Abe aimed at restarting a stalled economy are instead squeezing the Japanese people. In an attempt to shake Japan from damaging deflation, Abe is using the central bank to flood the economy with cash to raise prices. Meanwhile, to contend with giant budget deficits and rising government debt, he is also increasing the consumption tax. Yet even though corporate profits have soared — thanks to a weakened yen, also engineered by central-bank policy — those profits haven’t trickled down to the average worker. A combination of higher prices and taxes, and flat wages, means that Japanese families are getting poorer.

Even in China, policymakers talk about closing the country’s gaping rich-poor gap, but many of the necessary reforms have yet to materialize. Interest rates in the banking sector are still controlled in a fashion that punishes savers to subsidize industry, so the return on bank deposits is so meager it barely keeps up with inflation. That hurts China’s low-income families the most. Policy also continues to discriminate against the country’s 262 million migrant workers, who are deprived of proper social services.

Before anyone attacks me as a liberal opposed to free enterprise — the usual slander slapped on those who think the destitute deserve better — please be clear that I see pro-poor policies not as charity, but simply good business and smart economics. Improving the financial health of the average family can build a stronger foundation for economic growth. The soccer mom in Wichita, Kans., who stops by her local bakery to buy a birthday cake for her 5-year-old son, or purchases a new Ford from her local dealer, is every bit as important to the overall economy as any Manhattan tycoon.

What I find baffling is how business leaders and economists fret over retail-sales figures and consumer-confidence surveys, but then advocate practices and policies that crimp people’s incomes and ability to spend. Companies won’t pay a living wage and then wonder where their customers have gone. This isn’t just a matter of improving current economic growth, but our future economic potential as well. U.S. Congressman Paul Ryan recently lambasted America’s school-lunch program, which provides meals to poor kids, as offering “a full stomach — and an empty soul.” Yet is it fair to expect a student with an empty stomach to perform as well on exams as those with full bellies? Ryan isn’t encouraging hard work. He wants to tilt the playing field in favor of the wealthy.

The same is true around the world. Why Abe thinks a poorer population can restart Japanese growth is hard to fathom. China won’t be able to reshape its broken economic model and produce more sustainable growth without pro-poor reforms. With astronomical youth unemployment, Europe is looking at a segment of its population possibly facing economic peril for years, perhaps decades, to come. Is it any surprise euro-zone GDP is expected to grow a mere 1% this year?

The fact is that there is a class war going on, and the little guy is losing. Perhaps that won’t result in revolution, as Marx assumed. But until our politicians and CEOs understand that the average family on Main Street is as critical to the global economy as the bankers on Wall Street, our economic outlook will be just as grim.

TIME Federal Reserve

The Fed Is Right to Worry About ‘Kitchen-Table Economics’

File photo of U.S. Federal Reserve Vice Chair Yellen testifying on her nomination to be the next chairman of the Fed during a Senate Banking Committee confirmation hearing in Washington
Janet Yellen during a Senate confirmation hearing on her nomination to be the next chairman of the U.S. Federal Reserve in Washington, D.C., on Nov. 14, 2013 Joshua Roberts—Reuters

Under Federal Reserve chief Janet Yellen, community development, which has always been part of the Fed’s mandate, though an oft-neglected one, seems to be coming back in vogue

Anyone who was worried — based on Fed chair Janet Yellen’s recent comments about interest rates rising as early as 2015 — that she was turning hawkish should be reassured by a speech she gave today in Chicago. Her comments focused on what the Fed should still be doing at this point in the recovery to promote a stronger labor market. She made it very clear that she sees our lingering post-financial-crisis unemployment problems as cyclical, rather than structural. In other words, there’s a lot of slack in the labor market, and there’s more the Fed can do to fix that. “The government has the tools to address cyclical unemployment,” Yellen said. “Monetary policy is one such tool.” That’s why the market shouldn’t take the Fed’s recent scale back of its asset-buying program as evidence that it’s giving up — merely that it’s changing its focus.

What’s interesting is where Yellen seems to be throwing her attention: community development. Her speech in Chicago was given at the National Interagency Community Reinvestment Conference, and kicked off a day that the chairwoman will spend touring the City Colleges of Chicago high-tech manufacturing program. Now, I’m not a Fed historian, but I’m willing to bet that this in the first time in quite a while that any Fed chair has done a community college and manufacturing tour. Ben Bernanke and certainly Alan Greenspan would have been more likely to hang out in the circles of power on Wall Street and in Washington, D.C., either by choice or by force.

But under Yellen, community development, which has always been part of the Fed’s mandate, though an oft-neglected one, seems to be coming back in vogue. As I wrote in a column a few months ago, America’s central bankers are giving it more and more attention, now that the effects of an easy-money environment seem to be spent. Boston Fed president Eric Rosengren was a catalyst for the Working Cities challenge, which offered up grant money to Massachusetts cities that could come up with the most politically collaborative ways to bolster job growth. (The fact that the winners had to demonstrate cross-aisle cooperation in economic development was an interesting nudge to a dysfunctional Washington.) The Kansas City Fed is starting a similar program. The San Francisco Fed is partnering with the Low Income Investment Fund, a community-development institution that bridges the gap between low-income borrowers and private capital.

All of this speaks to the fact that over five years on from the financial crisis, banking has still not been remoored in the real economy. Wall Street isn’t really interested in grassroots lending or economic development, no more so than before the crisis. Why should it be, when trading is so much more profitable? But Yellen is clearly taking her role as America’s banker in chief seriously, and acting on the sort of “kitchen-table economics” she promised when she spoke to TIME on the day of her confirmation. Today’s speech and the increasing Fed action around economic community building shows that, as she put it, “the scars from the Great Recession remain” and that the Federal Reserve owes it to the American people to bail out not just banks, but workers too.

TIME climate change

Warming World Threatens Us All, Warns U.N. Report

Polar Bears Struggle In Norway
A polar bear scans the area from the top of a large piece of glacial ice in Svalbard, Norway Rebecca Jackrel—Barcroft Media/Getty Images

A new U.N. report illustrates the impact that rising temperatures will have on crop yields, water supplies and sea levels

There have been thousands and thousands and thousands of studies published on climate change since 2007, when the U.N.’s Intergovernmental Panel on Climate Change (IPCC) published its fourth major assessment on global warming. It has taken hundreds and hundreds of scientists to comb through all that research. But the broad, basic message of all those studies is clear enough: climate change is real, it is happening, and unless we’re very lucky, we’re not doing anywhere near enough to adapt to it.

That’s the underlying message of chapter two in the IPCC’s fifth assessment of climate-change science, which was released on Monday morning in the Japanese city of Yokohama. Focusing on the impacts of climate change — ranging from the effects on endangered species to changes in agriculture — the new report demonstrates just how wide-ranging the effects of a warming world will be. “We have assessed impacts as they are happening in natural and human systems on all continents and oceans,” said Rajendra Pachauri, the chair of the IPCC, which was jointly established by the U.N. and the World Meteorological Organization. “No one on this planet will be untouched by climate change.”

So the report predicts with high confidence that the negative impacts of warming on crop yields will outweigh any potential positive impacts; that violent conflict will exacerbate the effects of global warming; that glaciers will continue to shrink as the climate warms, which has major impacts for downstream water supplies; that species on land and in the sea are shifting their range in response to warming and that some will face an increased risk of extinction; that health impacts will be felt from heat waves and from floods in low-lying areas; that the seas will continue to acidify, destroying coral reefs.

But it matters — greatly — exactly what those effects will be. And in this way, at least, the newest IPCC report is marked by a sense of humility, as the world’s scientists come to grips with just how difficult it is to predict precisely how the planet will respond to rising carbon emissions and rising temperatures. Unlike the 2007 IPCC report — which was marred by a handful of errors, including one predicting that Himalayan glaciers would melt by 2035, centuries earlier than any such change is likely to unfold — this year the IPCC is much more conservative about what can and cannot be known about a changing climate.

That means language that might seem less precise. Gone are confident predictions that climate change will definitely make hurricanes in the Atlantic stronger and more intense, as are projections that warming will place 250 million Africans at greater risk from water insecurity. Instead, the IPCC admits that warming will increase water stress and impact crop productivity, noting that “the fraction of the global population experiencing water scarcity and the fraction affected by major river floods increase with the level of warming in the 21st century.”

The report notes there are major uncertainties about the vulnerability of the world to climate change and how both natural and human systems will respond to warming, in part because those systems are so complex. In particular the report admits that the economic effects from climate change are “difficult to estimate,” ranging from 0.2% to 2% of global income.

Does this mean we don’t have anything to worry about from global warming? Not in the least. The IPCC isn’t telling us that the danger posed by global warming has fallen in the seven years since its last assessment report. Rather, the scientific body is more realistically putting climate change in the context of the countless other risks humanity faces — which is important, because climate risks and social risks can interact and amplify each other. Take conflict: the IPCC report notes that a warming world may make violent conflict more likely, but it also makes the case that countries already struggling with conflict will be less able to respond to climate change. Global warming is likely to make poor parts of the world even poorer, but existing poverty will worsen other impacts of climate change. “Climate-related hazards constitute an additional burden to people living in poverty, acting as a threat multiplier,” the report’s authors write.

A planet with 7 billion people and change is already a place that’s on the edge — and unchecked warming could help push us over.

TIME Economy

The Economic Outlook Just Got a Little Better

Labor Secretary Thomas Perez and Shake Shack CEO Randy Garutti laugh with an employee helping Perez make a milkshake as he toured a Shake Shack restaurant in Washington on March 21, 2014 to promote raising the federal minimum wage.
Labor Secretary Thomas Perez and Shake Shack CEO Randy Garutti laugh with an employee helping Perez make a milkshake as he toured a Shake Shack restaurant in Washington on March 21, 2014 to promote raising the federal minimum wage. Nicholas Kamm—AFP/Getty Images

Higher than expected consumer spending meant the economy grew more than previously thought in the last three months of 2013

The economy is looking a bit sunnier, and just in time for spring.

Dual economic indicators released Thursday offered some good news for the U.S. economy coming out of this year’s harsh winter. The Commerce Department said the economy grew by 2.6 percent in the fourth quarter of 2013, more than previously thought, as consumer spending beat previous estimates. In all of 2013, the economy grew 1.9 percent.

Also on Thursday, the Department of Labor said applications for unemployment benefits—a key indicator of the U.S. job environment—fell last week to a near-four-month low. Jobless claims fell 10,000 to 311,000 in the week ending March 22, while economists surveyed by Bloomberg expected a slight uptick.

 

 

 

TIME Economy

Globalization in Reverse

What the world’s trade slowdown means for growth in the U.S.—and abroad

Recent conflicts everywhere from Ukraine to the Middle East and the South China Sea remind us (as Robert D. Kaplan wrote in TIME’s March 31 cover story) that geography still matters, even in a globalized age. Politically, the world is certainly not flat. New economic figures show how increasingly rocky our world is becoming economically too. Globalization is often defined as the free movement of goods, people and money across borders. Lately, all of those have come under threat–and not just because of sanctions limiting travel and the flow of money among Russia, the U.S. and Europe. Over the past two years, global trade growth has been lower than global GDP growth. It’s the first time that has happened since World War II, and it marks a turning point in the global economy, with sweeping implications for countries, companies and consumers.

There are many reasons global trade is growing more slowly than it has in the past. Europe is still struggling to end its debt crisis, and emerging markets are expanding more slowly than they were. But one of the biggest factors is that the American economy is going through a profound shift: the U.S. is no longer the global consumer of last resort. As HSBC’s chief economist, Stephen King, pointed out in a recent research note, during postwar recoveries past, “the U.S. economy acted as a giant sponge,” absorbing excess goods and services produced by the rest of the world. Booms would bust; markets would crash and recover. And whenever they did, you could be sure that Americans would start spending again, and eventually our trade deficit–the level by which imports exceed exports–would grow. That’s now changing. After nearly five years of recovery, the U.S. trade deficit isn’t growing but shrinking. In fact, it was down by about 12% from 2012 to 2013.

That’s not necessarily a bad thing for us. Part of the reason the deficit is shrinking is that our shale-oil and gas boom means we are buying less foreign fossil fuel, and our manufacturing sector is growing. But part of it is that wages haven’t come up since the crisis, and consumer spending is still sluggish. In order for the U.S. and the world economy to keep growing, somebody has to shell out for the electronics, cars and other goods we used to buy more of.

Unfortunately, no one is doing that. Europeans, still stuck in a debt crisis, probably won’t spend again for another five years. Emerging-economy countries, in various levels of turmoil, are growing at roughly half the rate they did precrisis. The Chinese, who picked up a lot of the global-spending slack after the financial reckoning of 2008, are now in the midst of a financial crisis of their own. Japan did its bit last year, but Abenomics–the government’s plan to encourage spending, named for Prime Minister Shinzo Abe–is running out of steam. Everywhere, says Mohamed El-Erian, chief economic adviser to insurance giant Allianz, “there is a mismatch between the will and the wallet to spend.”

With global economic integration seemingly in reverse, at least for the moment, many economists and trade experts are beginning to talk about a new era of deglobalization, during which countries turn inward. Some of the implications are worrisome. Complaints to the World Trade Organization about protectionism, intellectual-property theft and new trade barriers are rising. Trade talks themselves are no longer global but regional and local, threatening to create a destructive so-called spaghetti bowl of competing economic alliances.

Yet deglobalization isn’t necessarily all bad. As U.S. Trade Representative Michael Froman said at an economic summit in Washington recently, it also “means companies are looking at their extended value chains, supply chains, and deciding whether they want to move some production back to their home country.” That’s already happened in the U.S. A study by the Boston Consulting Group found that 21% of all manufacturing firms in the U.S. with $1 billion or more in sales are actively reshoring, and 54% say they are considering it.

Whether or not those jobs will help boost wages is something the Federal Reserve will be watching carefully. One of the hallmarks of the past 30 years of globalization was an easy-money environment. As Fed Chair Janet Yellen indicated at her latest press conference, we are coming to the end of that era. In this new economic age, not all boats will rise equally or smoothly. Markets, which had more or less converged for the past 30 years, will start diverging along national and sectoral lines. Our economic landscape, like our political one, will become more volatile and less predictable. Get ready for a bumpy ride.

TIME Jobs

Long-Term Unemployed Face 1 in 10 Odds of Getting Hired Each Year

unemployment
Getty Images

A new Princeton study reveals that 1 in 10 people who have been unemployed for six months or longer are hired annually, which underscores the struggles of those seeking to re-enter the job market after being laid off

Only one in 10 long-term people who have been unemployed for six months or more are hired every year, according to a Princeton study that affirms the bleak outlook for many long-term job seekers.

With the unemployment rate near five-year lows amid a post-recession recovery, the long-term unemployed are still struggling to find jobs. Even in regions with the strongest job markets, the rate of hiring for the long-term jobless is no better.

Alan Krueger, lead researcher and a former chief White House economic advisor, told CNBC that long-term job seekers are prone to becoming discouraged and putting less effort into finding a job. Meanwhile, employers can be skeptical of potential hires who have not worked for six months.

“A concerted effort will be needed to raise the employment prospects of the long-term unemployed, especially as they are likely to withdraw from the job market at an increasing rate,” Kreuger wrote in the paper.

[CNBC]

TIME

Gallup: Houston Has the Country’s Best Job Environment

A new Gallup Economy survey of job environments in the U.S. top 50 metropolitan areas finds that businesses are overall hiring more people than they are firing. Here are the five best—and worst—locations to work

Houston has the best job environment of any of the top 50 metropolitan areas in the U.S., according to a survey released Thursday by Gallup Economy.

The report found that businesses in cities across America are hiring more than they are firing, the latest marker that companies are recovering from the recession. The national unemployment rate fell to a five-year low of 6.6% in January, before ticking up slightly amid the winter chill in February.

Cities in the South demonstrated the healthiest job environments, with Texas claiming three of the top ten cites: Houston, San Antonio and Austin. Charlotte, North Carolina, saw the greatest improvement from Gallup’s 2011 report, followed by Houston.

On the bottom end, California and the Northeast were most represented. The ten cities with the bleakest job environments comprised four cities in California, including fiftieth-ranked San Diego, but even in those cities more respondents said their company was hiring than firing.

The New York metropolitan area, the largest in the country, ranked No. 49 on the list of fifty cities.

Here are the metropolitan areas with the top five job environments:

  1. Houston-Sugar Land-Baytown, Texas
  2. Columbus, Ohio
  3. Salt Lake City, Utah
  4. Orlando-Kissimmee, Fla.
  5. Phoenix-Mesa-Scottsdale, Ariz.

And the bottom five:

  1. Sacramento-Arden-Arcade—Roseville, Calif.
  2. Riverside-San Bernardino-Ontariao, Calif.
  3. Providence-New Bedford-Fall River, R.I.-Mass.
  4. New York-North New Jersey-Long Island, N.Y.-N.J.-Pa.
  5. San Diego-Carlsbad-San Marcos, Calif.

The survey asked at least 1,000 people in each city if their company or employer was adding jobs or letting people go. See the poll here.

TIME Federal Reserve

Give Janet Yellen a Break

The naysayers have it wrong, the Fed chair is doing her job

The consensus among Fed-watchers is that at Federal Reserve Chair Janet Yellen’s first news conference on Wednesday, she made her first gaffe. If you can spot what she did wrong, maybe you have what it takes to be a Fed-watcher.

OK, here’s the setup. The Fed had announced that after completing its efforts to buy bonds to juice the economy, it will maintain rock-bottom interest rates to juice the economy for “a considerable period.” Yellen was asked what “a considerable period” meant, and that’s when she supposedly slipped up.

“It’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing,” Yellen said. “But, you know, it depends.”

Was her mistake being too vague? Was it watering down her answer with six separate qualifiers? Was it general incoherence?

No, sorry, central bankers are supposed to be vague and incoherent. Yellen’s alleged error, believe it or not, was excessive specificity. Fed-watchers objected to “six months,” no matter how much she qualified it with “hard to define,” “probably,” “something on the order of,” around,” “or that type of thing,” and “it depends.”

At this point, you might think that Fed-watchers are a bit silly. You would not be wrong. Yellen was talking about decisions she won’t confront until early 2015 at the earliest. The overwhelming thrust of her remarks was that the Fed is basically staying the course, keeping its foot on the economic gas with extremely loose monetary policy for the foreseeable future. But even aside from her gaffe, markets and market analysts reacted as if she had announced she was tapping the brakes.

Let’s just review where things stand. The Fed’s key interest rate has been essentially zero for more than five years, and the Fed expects it to stay that way for quite a while. The Fed is providing additional monetary stimulus through “quantitative easing,” buying government securities to boost economic activity. In December, the Fed announced it would “taper” its bond-buying, and it has reduced its purchases by $10 billion a month, but it will still blast another $55 billion into the economy in April. It’s not tapping the brakes; it’s just applying a smidgeon less gas.

Ever since former Chairman Ben Bernanke started talking about the taper almost a year ago, Fed-watchers have been wigging out about the end of easy money. The fear was that the taper would boost long-term interest rates and kill the recovery. But since the taper began, long-term interest rates have not gone up at all. The stock market has done fine. The labor market has improved modestly.

The downside of loose monetary policy is that it can trigger inflation. But after years of extraordinarily loose policy, inflation is still well below the Fed’s 2 percent target. It’s too low. And 6.7 percent unemployment is still too high. The Fed had suggested last year that it would consider tightening policy after unemployment dropped to 6.5 percent, but Yellen put the kibosh on that on Wednesday. Instead, the Fed will monitor the data and react accordingly, as it always does.

Nevertheless, Fed-watchers seemed to conclude that Yellen was being more hawkish than expected, showing too much confidence in relatively optimistic Fed forecasts that have been overly optimistic in the past. “Yellen Debut Rattles Markets,” the Wall Street Journal reported. “Federal Reserve Lays Groundwork For First Interest Rate Hike,” the Washington Post concluded.

Well, someday, sure. If you parse her words carefully enough, maybe Yellen’s rhetoric was marginally more hawkish than expected. But she was also explicit: Her main concern is jobs, not inflation, and loose money is still appropriate.

“Unemployment is still elevated,” she said. “Underemployment and long-term employment remain significant concerns. Inflation is still running significantly below [our] objective. These conditions warrant the continuation of highly accommodative policy.”

There weren’t any qualifiers in that statement. Yellen just said the Fed is going to keep doing what it’s doing. Unless you’re playing in the bond markets, or have some other business reason to focus on potential quarter-point differences in 2015 interest rates, that’s pretty much all you need to know. But if you think Yellen’s clear statement of policy means more than her off-the-cuff, highly-hedged, inscrutable definition of “a considerable time,” well, you’ll never be a Fed-watcher.

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