In our current economic malaise it is probably not too sensible to allow the cuts to expire, and so Congress is gearing up to extend them for a while, and maybe even make some permanent. That’s where the fun begins.

The Obama administration is pressing to have the high end tax rates revert to their pre-Bush levels, and to leave the lower ranges unchanged. This is being positioned as a tax increase on the wealthy and as continued relief for the “middle class”.

The problem with this is that it ignores basic arithmetic.

Yes, people in lower tax brackets will be left unaffected. But those folks in the top tier, those with taxable incomes over $250,000 will still be much better off than they were under the Clinton regime.

Why?

Because they are also subject to taxation in the lower tax brackets.

Those lower brackets are being left alone for all tax payers, not simply the lower level wage earners. Someone making $500,000 will still get the benefit of the first tranche of income being subject to 10% as it is under the Bush law, rather than 15% as it was under the Clinton law. The same goes for all the other intermediate income ranges up to the $250,000 threshold. It is only income above that threshold that will be subject to an increase in tax. All the rest, the first $250,000, will still be taxed the Bush way.

The effect of this is that the “relief” given to the middle class by keeping the Bush cuts in place, actually benefits the rich much more than anyone in the middle class.

Someone earning between $200,000 and $500,000 will be $6,743 better off if only the top levels of tax are restored to their pre-Bush levels, than if the entire structure, lower levels and all, are restored. Meanwhile a truly middle class family in the $50,000 to $75,000 range will is $1,132 better off.

So even though the proposal is being positioned as a tax hike for the rich, the fact remains that the main effect of the Bush tax cuts stays the same: they were designed to benefit the rich disproportionately. Obama’s proposal doesn’t unwind that bias at all.

He’s right of course.

$200 billion is simply too little. Mea culpa. I clearly have fallen prey to the very noxious weakness I accuse Obama of!

Apologies to all.

And thanks to Stephan for putting my spine back in order.

Meanwhile he has a suggestion: the Treasury should simply send out checks to the lowest wage earning families. He sees $750 each as doing the job. Send the checks out in time for Christmas.

Good luck getting that one through Congress. But it would make for great politics. How could the Republicans object to Santa Claus dropping cash off along his route?

Bah Humbug.

That is, if it ever truly existed and wasn’t some creation of Hollywood or Walt Disney.

My friend John sent me a long e-mail in which he wondered why it is that so many Americans have no clue as to where they stand in terms of wealth. Far too many, he opined, think they are “well-off”. This illusion would have no consequences for the rest of us were it not the part progenitor of perverse political affiliations. Many of these folks who think they are well-off side with Republicans and the pro-market philosophy they imagine is the underpinning for their supposed wealth.

The sad part is that, since they are not truly wealthy, the effect of their political support of pro-market policies has had the effect of making them relatively more poor. In other words they are voting continuously against their own interest.

This is a phenomenon much commented upon during the post Reagan years. The hordes of so-called Reagan democrats who deserted the old Democratic party and fell for the saccharine of the hard right, and openly racist, Reagan established the trajectory of our modern economy. That bulk of voters, who became willing to vote against their own wellbeing in the futile hope that they could participate in the wealth being generated by the lopsided economy, is the single reason we are now in the impasse we are.

We have created – deliberately – the world’s largest banana republic.

The most telling statistic to back up this claim is the current distribution of income.

The top 1% of Americans now dominate our economy. The rest really don’t count for much. In 1915 the top 1% of income earners accounted for about 18% of total income. That was when the ruthless and anti-social activities of the Rockefeller’s, Carnegie’s and Vanderbilt’s was attracting socialist ire and riots in the streets. Now the top 1% account for 24%. The family of the founder of Wal-Mart accounts for as much wealth as the poorest 120 million of their fellow citizens. We have an aristocracy. Where are the riots?

The concentration in incomes has been spectacular over the past three decades. We can run a simple calculation to calculate exactly how skewed things have become. If we begin with the distribution of incomes as it was back in 1979, at the end of a long period of concentration during which the bottom and top tiers converged, and then fast forward to today, we can contrast today’s inequality with what it would have been had the 1979 distribution held constant. The result is astonishing. The top 1% of earners raked in an average of $1,319,700 per year in 2007. It would have been $578,800 if the 1979 averages had held up. But the skew of policy towards the rich over the past three decades has produced an enormous switch: to the tune of an additional $740,900 per person in that top tier. No other group comes even remotely close. Not even the next 5% down from the top. They picked up a skew of a mere $38,100. All other groups lost. The middle getting hammered the most.

The numbers simply don’t lie: the American middle class has lost ground relentlessly over the last three decades. While the rich have plundered the economy in unprecedented  abandon. No wonder anger is palpable. No wonder our politics are so volatile.

The damage is even more startling in percentage terms: the middle fifth of income earners pulled in an average of $55,300 in 2007, which was a full $9,400 down from what it would have been had the 1979 distribution held. That loss of $9,400 is equivalent to around 15% of income. That’s a hefty loss. When we consider that average incomes, adjusted for inflation, hardly rose at all throughout much of the last decade or so, that 15% looms very large as a factor in today’s discontent.

Further it helps explain why middle America plunged into debt with so deeply: debt was the only way to finance a rising standard of living. Incomes alone couldn’t provide the necessary lift. The recent debt riddled implosion is partly explained by that shift in incomes towards the top. The middle class was systematically and deliberately being destroyed by the very policies that attracted those middle class voters to the Republican side of the ledger.

When we couple this extraordinary descent into inequality of incomes with the parallel effort by successive Republicans to gut the safety net, and we see the other element in an exquisite pincer move. Not only were the GOP attacking the middle class from above, by degrading it’s share of the national income pie, but they were simultaneously eroding the protection from below that the government had provided during the postwar era. The middle class was being hung out to dry.

By itself.

And that’s the true shocker.

Why on earth would middle America vote relentlessly to destroy itself?

The Reagan illusion.

The only explanation that holds water is that voters are not good at seeing the consequences of policy. They look at the more obvious changes – lower taxes for instance – and fail to grasp the re-distribution implied by the policy over the longer term. They failed to grasp the importance of government in underwriting the entire edifice of middle class lifestyle. They failed to understand just how meager their lifestyle was when compared with the rich. And when pressed on the subject they fell back on silly homilies like the “American dream” or the “land of opportunity” as a crutch. With a near religious fervor they repeated the incantations of those homilies in the vague belief that they applied to the middle class. The story was told that if we all work hard we too can share in the riches. But we didn’t. The rich skimmed it off for themselves. Leaving the middle class threadbare and betrayed.

Yet still they cling to the dream.

No amount of number crunching can disabuse them.

American inequality is now a national shame. We rank up there with places we deride. Venezuela, Nicaragua, and Guyana all have less inequality. We rank alongside paragons of democracy as Uruguay and Ecuador. This is plainly bizarre. And it is massive threat to democracy.

Put another way: those much laughed at “Old European” countries riddled through with class rigidities are all, without exception, more equal than we are. More to the point – and this really hurts – the poor in those Old European nations all have a better chance of making it to riches than the poor of America.

So much for the land of opportunity.

The defenders of laissez faire all argue that income inequality doesn’t matter. What matters to them is mobility. The opportunity counts, and if someone manages to exploit the opportunity they should be allowed to reap the rewards. I agree. The problem is that we have constructed a society where that isn’t happening. Our economy is more rigid than any other western rival. We are fast building the most regressive class riddled society ever. Ever.

The opportunities for the children of the rich are being quickly skewed to protect the elite. Education at a top university is prohibitive for most middle class families. Financial aid is being whittled away. The great state schools, whose emergence was so key to the postwar creation of the American advantage in technology, are being starved of funding by conservative efforts to reduce government. The provision of health care is highly dependent upon incomes: fully a third of Americans treat the emergency ward as their family doctor. Why? Because our health care system is skewed towards after-the-fact cures, not before-the-fact prevention. And preventative care is expensive for many families. Further: middle class Americans rely on subsidies for health care. Those subsidies come in the form of employer provided insurance. And employers have been steadily cutting their share of the cost. The escalation of health acre cost has undermined another plank of the illusion.

Middle America could always pretend that it had good health care because it was subsidized. The government gave business big tax breaks so that business could provide benefits. When health care costs rose so high that even this government subsidy was insufficient, businesses started to reduce coverage. This exposed the middle class to the stark reality that it had never paid for its own care. It always relied on the government as a backstop.

Likewise in real estate. Americans are obsessed with owning a home. But many could only ever do so as long as the government chipped in to help. That infamous mortgage interest tax relief is welfare for the middle class.

These are instances of just how dependent the middle class is on the government for its standard of living. Yet the middle class has sought, for three straight decades, to neuter government.

The only people who are able to withstand the loss of government assistance are the very rich.

And they have been busy stacking the game to their advantage.

This cannot end well for America.

Income inequality on the scale now apparent here is a surefire way to undermine society. We are seeing the edges of such discord now with the Tea Party and its extremism. Social instability centered on middle class discontent tends towards the right in politics. That’s why I refer periodically to the current Weimar like tone in our politics. If the right of center party fails to stop its drift ever rightwards we will end up in even worse trouble. The middle class will become ever more susceptible to the allure of the anti-government policies it perceives as defending it from predation by the “freeloaders” and “others” such as illegal immigrants or the welfare queens who are thought to syphon off tax dollars unfairly.

And if the left of center party fails to find the resolve to defend its constituency, the poorer strata of society, the rightwards drift will accelerate. Ideological system failure lies ahead. With no fire in its belly the left will seek to appease continuously. The middle class voters will continue to vote against their interests because the left fails to articulate the damage being done. In that sense the left is complicit: too many of the left have bought into the pro-market dogma and laissez-faire political paradigm. The Obama administration’s reaction to the 2007/2008 recession is a case in point. Rather than articulate the need to attack inequality, they caved into to the call for yet more tax breaks. Even now they are laggardly in re-instituting the pre-Bush tax regime.

Let me end by giving a more concrete example of how the middle class undermines itself.

The Clinton era welfare reforms.

The urge to reduce welfare rolls was a right of center priority. Somehow welfare was conflated with laziness and was seen as an affront to hard working folks. Clinton caved in. Welfare rolls were purged. The result? A tide of newly desperate poor looking for work at any wage. The advantage in hiring shifted decisively to the employer. Consequently wages were driven down. This is one of the biggest single reasons why wages for the lower levels of wage earners failed to advance throughout the late 1990’s and into the 2000’s. The social contract was re-written. By a left of center government trying to appease the right.

And so it goes.

America is now distorted sufficiently that even economic policy is affected. One reason why it is hard to get the economy going again is that incomes are so skewed towards a group that sees little need for marginal consumption – it already has sufficient – and the vast mass we need to kick into gear just doesn’t have the necessary margin for error. When the middle class is plunged into survival mode, the nation is in trouble. It’s very hard to stimulate an economy so out of balance.

I wonder whether we can fix this before the riots begin in earnest. Up until now we’ve only looney parades and marches.

I have my doubts.

With the extent of corruption in American politics – the volume of cash that flows at election time is unhealthy for democracy – it is little wonder that the agenda seems to be tilted away from a community oriented perspective. How can the middle class voice be hear when the rich can drown it out with a flood of money?

Income inequality is an insidious disease that destroys the least balanced societies. It has become our issue. How we handle it will determine the course of our politics for decades. Do we want to head more in the direction of Latin America and its perpetual upheavals? Or do we want top head back towards the period between 1950 and 1979, the golden era for the American middle class? It’s our choice.

But, as John points out, it’s hard to choose wisely if you live in a dream world, or if you delude yourself into believing you are well-off when you’re not.

The American Dream is dead. The issue is how to resurrect it.

Still, here we are. Obama is now touting more stimulus.

Better late than never.

True to form, his suggestion is almost derisory in its proposed scale. $50 billion for construction and infrastructure projects. Given the enormous bureaucracy that has to be cranked into gear, and the inevitable political infighting that is a certainty as we head towards yet another election, I doubt any of this money will turn up in the economy until well into next year.

Which is why I think it absurd we waited this long.  As for the amount being talked about: $50 billion is about a quarter what I would like to see.

The caution with which this administration works is extraordinary. I cannot explain it. The boldness necessary to galvanize the country is completely lacking. Not that I expect it.

We are also seeing references to a tax holiday for business. The amount being tossed around is $200 billion. Basically the idea is to give businesses a 100% tax deduction for certain kinds of investments in order to encourage business spending. Don’t forget that businesses are sitting on extremely large piles of cash at the moment. They are not investing because of fear. So this tax inducement is designed to help kick start a surge in business activity. The actual long term stimulus is much less than the headline number, however, since businesses right down investments through a depreciation deduction in any case. So what the administration is calling for is really a timing switch, it is shifting the tax hit to the Treasury from future years to the next two. So the total cost is limited to the timing difference, which I imagine will be in the order of $30 billion.

One good aspect of this effort is that the  administration aims to make the tax change permanent. Up until now, regardless of the party in charge, most of the tax breaks being proposed have been temporary. This makes it hard for a business to plan, and reduces the effectiveness of the tax break as a stimulus.

Another idea being tossed about is a tax holiday for payroll taxes. Here the idea is to encourage small businesses to hire workers. One of the arguments always thrown around by right wingers is that the existence of payroll tax makes employers very careful to re-hire after a recession. The total cost of a new employee is much larger than the wage rate. It also includes payroll tax, benefit charges and so on. So to the extent that payroll taxes can be reduced or eliminated for a while is supposedly an inducement to employers. I don’t buy it entirely. The counter argument is that any business will see beyond the temporary tax relief and look at the time when the tax is re-instated. The calculation has to be about what profit opportunity exists during a ‘normal’ tax regime. If those profits aren’t there, no amount of temporary inducement will get employers to hire. This is one reason that business tax breaks – unless they are permanent – are not good as part of a stimulus.

It’s the thought that counts.

I suspect that the tax reduction proposal is designed for political rather than economic purposes. It seems that the administration is already expecting the Republicans to vote ‘no’ to anything. That seems to be a sensible expectation given that the GOP apparently would prefer the economy to cave in rather than run the risk of falling short in the upcoming election. Such is GOP extremism nowadays that we need to expect and factor in GOP anti-social activity. As the Republicans are always vulnerable to tax cutting, it is a good strategy to throw them a tax cut to oppose. The Chamber of Commerce has been twittering on about the anti-business stance of this administration – despite record profits for many businesses – so it should make for good theater to watch the GOP explain why it votes against tax breaks for its key constituency.

Politics will determine whether any of this matters.

Which means that nothing will be done any time soon.

Meanwhile our unemployed fellow citizens are left to wallow in poverty.

It could have been better.

A great nation would have made it so.

My worldview is largely informed by my own experience and education. No news in that. But it is heavily influenced by my interpretation of my family’s recent history. I use that history as a measuring stick. My grandmother plays a pivotal role since she is the farthest back that I can reach. She thus becomes the starting point in my analysis.

She started adult life as a servant in a small time aristocratic English family home. Think “Upstairs Downstairs”. She married the aristocrat’s personal jockey, who died before I was born so I have no memory of him. At some point she escaped the life of a servant and established herself as a single mother, self reliant and, as I recall, very independent. She successfully raised my mother and her 5 siblings on what was a meager living, and at a time when single mothers were not well received by society. She became the first woman in her town to vote. And she was the first woman in her town to own her own home. She had to suffer through the humiliation of “being allowed” to own a home as a single woman. Such was the backward attitude of society back then.

By “back then” I mean the 1920’s/1930’s. Not that long ago.

Since then my family has progressed steadily. First my parents emerged into solid middle class status, and then I was able to go even better. At least in terms of affluence. So I look back at this trajectory and see a family throwing off the shackles of working class limitation, and achieving, in less than 75 years, a typically well-off middle class life style. The question becomes what next?

And that’s where my anger at Obama surges to the surface.

As I survey the economy and America in general I see many families like mine. And I see far too many in retreat. The progress that my family has made in three generations is in jeopardy. We are at risk of falling backwards for the first time in a century. In the face of this retreat I can hear my grandmother’s words ring clearly in my ear:

“Peter” she told me once “Be careful, they can always take this way from us. We have to fight for everything.” And she meant “fight”. She didn’t mean discuss.

Why I needed to know this, I was around ten years old, I have no idea. But her words echo strongly nowadays. Because they are taking it away from us.

For thirty plus years the American middle class has plunged into a slow motion suicide. It has fallen prey to the illusion that it doesn’t need the help and protection of government in order to maintain its progress. This is despite all the evidence from the 1950’s and 1960’s when the growing affluence of the new middle class was underwritten entirely by  constant intervention by the government in economic affairs. The returning World War II veterans were educated by the government; trade, and other policies were established to help recovery; huge stimulus was pumped into the economy to prevent the return of depression – one of the greatest fears coming out of WWII was that a slump was almost certain; and a stand-off between unions and management made sure that a good share of the surge in postwar productivity flowed to workers. Times were good and well balanced.

Keynesian economics was built in an attempt to protect capitalism form its self destructive tendency. A tendency amply demonstrated by the depressions of the 1800’s and then in the 1930’s. Keynes’ great project was to fend off the tendency towards extremism engendered by the fear felt by the middle class when its wealth is threatened. He realized that the poor have different fears – they have little to lose. And he realized the wealthy don’t care – they have the resources to protect themselves. It is the middle that is most vulnerable because its grip on wealth is the most tenuous. It is this middle that can swing rapidly towards extreme politics in an attempt to protect itself from the decline back to poverty. His big lesson was that stable democracies need to protect the middle class from predation by the elite. To do that he argued the government needs to play a role in maintaining economic stability.

Else “they can take it away from us.”

The problem is that during the boom of the post war era the memory of the fight for affluence faded. Affluence was taken for granted as if it were the natural state of an modern economy. The machinery that enabled the creation of the middle class was derided as inefficient and corrupt. The culminating event that allowed “them” to retake power was the oil shock of the mid 1970’s, after which normal economic policy appeared to fail. The postwar boom faded and the middle class was threatened. It sought reassurance that it would not fall back. This opened a chink for the right wing resurgence. Keynesian economics was attacked by the ideologically-driven alternative spelled out by Milton Friedman and his disciples – most of all Robert Lucas – at the University for Chicago. They argued for a return to classical economic theory that had no place for the government. Between them they articulated a theory of economics that enabled and legitimized the Reagan illusion. The purpose was to cut away the Keynesian style props, and allow the economy to fly free. The elixir sold to justify this was the great tax cut scam.

Reagan cut taxes and was the first President in American history to plunge the country into a peacetime debt. We prefer not to remember that now, especially given Reagan’s saintly status with his followers. But he sold the middle class a bill of goods. The facts are simple: since Reagan started America on its debt binge the only reason the middle class has not relapsed to prewar poverty is the steady accumulation of debt. Both private and public. Keynes would have been horrified since he argued the government should pay down debt when the economy was going well in order to be able to go into debt to stave off depressions. And his key disciples – notably Hyman Minsky – also argued that a reliance of finance, which a debt based economy becomes, is highly unstable due to the very nature of the way in which banking takes place.

We chose to ignore the wisdom drawn by the likes of Keynes from his direct experience of the Depression. We chose to ignore the warnings of people like my grandmother who had lived through the fight for equality and a chance to be free of poverty. We bought the illusion.

But all illusions end. Mostly in unhappy circumstances.

That’s where we are today.

The bubble burst. The middle class has learned that its reliance on debt to maintain its lifestyle is a sure road to ruin. Yet it reflects on its hard work and wonders where the rewards are. Why is it that education and health costs have spiraled out of control? Why is it that wages have not kept up with inflation for three decades? Why is it that home prices surged, then crashed? Why is it the we hear about endless deficits even while we are supposed to be rich and powerful? Why is it that America has reputedly poor education despite the money we spend? Why is it that our infrastructure is decaying? Why is it that we don’t live as long as our European cousins? Why are jobs so insecure? Why are profits booming even as we see unemployment rising? Why, in short, are we so insecure?

Because of the illusion.

We fell for the bait and switch.

We forgot that it is only the government – we the people – who have the collective strength to ensue that we are not taken advantage of.

We forget that untrammeled capitalism – true “laissez faire” – has been tried and rejected everywhere precisely because it undermines the middle. Nowhere in a true laissez faire economy is there room for a middle. All you end up with is a very small privileged top and a vast bottom. To give some dimension to that statement: the current estimated wealth of the family of the founder of Wal-Mart is equivalent to that of the poorest 120 million Americans added together. One family. Our very own aristocracy.

My grandmother would shudder.

We have worked so hard to escape massive and debilitating inequality, why would we willingly go back?

But go back we did.

America is now the most unequal society in the West. It suffers as a consequence. Poor people tend to be sicker, more stressed, and live shorter than rich people. Sure we can hide from the steady decay of standards for a while, but sooner or later, when enough middle class folks have fallen backwards things catch up. That’s where we are. At a tipping point. The degradation of the middle class life has reached a critical level. The loss of government help has steadily removed our lines of defense and now we are truly exposed.

The last two recessions have both been followed by jobless recoveries. Our economy now creates a bulk of low paying jobs balanced by a few very well paying ones. Our educated elite cluster into those well paying jobs and is thus able to pretend that nothing is amiss. Indeed our elite is now able to skim of the rewards of growth for itself: the distribution of incomes and wealth has returned to there prewar levels. American society is bifurcating at an alarming rate. The quickening of productivity over the last two decades has gone into profits not wages, which is the exact opposite of the experience of the early postwar years. There are no unions to force a better distribution. And government has been sidelined. Banks who were destitute two years ago, and entirely reliant on taxpayer aid have just – in 2009 – had their best year of profits ever. Ever. Yet we are mired in a crisis of their doing.

No wonder America is angry. No wonder the Tea Party attracts the white middle class. The fear is palpable. And Weimar Germany warns us that the political fall out of a betrayed middle class can be extreme.

Using my family history as yardstick: we have let my grandmother down. We have let “them” take it away. The postwar trajectory has been interrupted. The illusion is exposed as a fraud.

Or it should be.

And this is where Obama enters the story.

There is nothing novel in my narrative. Countless books, essays, and papers have been written about the demise of middle class America. The story is over-dramatized for effect, but contains the seeds of truth. A decade ago we could be accused of naysaying for attention. Nowadays it is hard not to say I told you so. The degeneration was foreseeable. The facts were accumulating. It was too easy to sell voters on the free market myth: after all why should we begrudge the wealthy their just due from their efforts? Isn’t that the American way?

Well no.

It never was.

There was always a healthy push back against inequality. Especially when it reached excess. American populism rears its head whenever the economy fails to benefit a big enough section of the voting public. Like now.

Obama could have seized this moment of populist upswell and channeled it into a constructive reconstruction of the role of government. He could have led us back towards a better division of the spoils or our collective hard work. He could have punished the banks for bringing down the economy, and thus he could have drawn the sting from the anger the industry justly created. He could have redirected our attention back to the days when America was not a military based economy – he could have heeded Eisenhower’s warning. He could have poured his political capital into fighting the free market myth from the outset, instead of restricting himself to policies that admitted defeat before they were announced. His was an opportunity to rebuild the middle class and stop its suicidal tendency.

He failed.

He didn’t put up much of a fight.

He tacked and trimmed.

He let the decline continue.

He let my grandmother down. Her legacy, and those of millions like her, is in doubt. He failed the very constituency who so dearly wanted him to succeed. The betrayal is enormous and probably irreparable.

Why?

Because his was the moment we could arrest the spread of extremism. His was the chance to make positive what was tending towards the negative. The continual shift to the right of the Republican party is a danger for us all. We need an intelligent right of center party. The health of democracy requires dialog and debate, not vitriol and hate. It requires sober argument and understanding, not pure obstructionism and volatile thoughtless riposte. He could have drawn a line and told the country that anything beyond that line was beyond the pale of decency. He could have offered a rehabilitated left of center narrative – the kind that Eisenhower as well as Truman would have recognized. He could have engaged on our behalf, and given expression to the accumulated frustration of those in the middle class who are not persuaded by the Tea Party.

He didn’t.

So the voices of unreason continue to build and we treat the affront of the recent gathering on the anniversary of Martin Luther King’s great speech as something we cannot fight.

We are leaderless at a time when leadership is both needed and crucial to the very fabric of the country.

I look around the Upper East side and see the vast array of wealth flaunted there. I see the new rich with their nannies and other help. I see a service economy manifest in the return to the days when my grandmother was a servant. Only we dare not call these nannies servants, even though that is exactly what they are. We fought so hard to create an economy where people like my grandmother could avoid being in service to others. Where jobs were available to provide a dignified and reasonably prosperous life for the mass we call the middle class. That was the achievement of the two generations before mine. And what have we done? Regressed to the days of inequality. We gave up. We sold my grandmother down the river.

The elite sold out. They are the ones with the servants now. Why should they protect us? The intelligentsia never had it so good, why should they attack inequality? But as the gap yawns wider the reaction is setting in. The Tea Party may be a minor phenomenon, but I wonder just how minor it will be if the drift towards greater inequality continues.

In the face of the threat of extremist politics we have a choice: fight back or capitulate. Obama capitulated.

That’s his failure: no fight.

The facts are these: payrolls dropped by 54,000 in August; the unemployment rate edged up to 9.6%; but hidden in the mix was a rise of 67,000 in non-government payrolls.

Naturally the stock market rallied based upon that last snippet. The private sector hired more than it fired by a decent margin.

The market swept aside the poor 121,000 government workers who lost their jobs as being insignificant. And that little uptick in total unemployment was treated with disdain.

So much for reality.

What do we more sober types make of this?

Obviously any time the private sector creates rather than destroys jobs we should be happy. So August was a good month in that regard. Plus we all knew that the government was going to shed jobs because a mass of temporary census workers were coming out of contract as the census effort winds down. I think it is telling of our fear of failure that most analysts on Wall Street had predicted a much worse private sector outcome and so they were carried away by what appeared to be great news.

Let’s keep our feet on the ground: for an economy this far into recovery the number of jobs created in August was paltry. It was insufficient to keep up with population growth. I have said before that we need to create over 100,000 jobs a month just to keep even. Having said that any growth is good growth. So let’s not be churlish.

This, I think, is the ongoing difficulty we are having: none of the good news is so good that we can breath a sigh of relief. Instead we are stuck in a series of apparently endless “mixed” messages. The drift is palpable. The economy just cannot get into a high gear.

The reason is clear: the defensive posture of both households and business self-perpetuates itself. As we shed debt, which is a rational thing to do, we cripple our ability to spend. This limits growth and presses down on us. So we shed more debt. And so on. The last great de-leveraging period in American history was the Great Depression. This time is not quite as bad due to the fiscal and monetary stimulus which has the effect of mitigating the reduction in debt and thus keeps cash flowing. Nonetheless we are running the risk of crashing the second we stop the stimulus. It looks as if the private sector has not yet completed its reduction, this increase in jobs is a sign of tentative rather than buoyant business expectation. The conversation is far too biased towards fear of the next bad news rather than the next good news.

Fear is corrosive because it enervates. It prevents investment and induces individually sensible, but collectively destructive behavior. Only the government can step in to stop the rot.

More stimulus is needed. Today’s jobs report confirms that.

Such is the state of our economy that even modest numbers are greeted as the next great breakthrough.

The simple facts are these:

Any reading in the index over 50.0% suggests – it is not an exact science – that the manufacturing sector is expanding. We have now seen 13 straight such readings, so we can say with near certainty that manufacturing is, indeed, well beyond the recession. But that reading is still well below that of a full throttle recovery. Instead it is much more suggestive of a sideways crawl.

Still, let’s not pour cold water on the yahoos on Wall Street. Allow them their fun.

My take is somewhat less euphoric. The data says we are out of recession. We have known that for a long time. It also says that we are still limping. We know that too. More importantly is also tells us that we are not declining either. Factories are getting more, not less, busy. One of the hidden statistics in last week’s revision of GDP was the domestic final demand growth of over 4.0%. That growth was masked by bad – actually awful – trade figures, and weakness in State government spending, but it is sufficient to feed into increased factory activity.

What does this mean?

That growth is still ongoing. It is weak, in the 1.0% to 2.0% range, but it is tangible. More to the point: every time we read an economic statistic that stays steady or increases we are reminded that the much discussed “double dip” recession is still a talking point not an actuality. We are avoiding a new downturn by the skin of our teeth. So us grown-ups should stay calm and keep on with our modest expectations.

As for the reaction on Wall Street? They’re just spoiled children. Let them play. And take no notice of their tantrums.

Huh?

A little late maybe?

There is a great deal of post summer chatter already building in anticipation of this fall’s elections. All the evidence points to a disaster for the Democrats. A well deserved disaster in my opinion. Amidst all the noise is a common theme: voters who are traditional Democratic party supporters are unlikely to vote. A close look at the polls suggests that the impending implosion of the Democrats is more a function of their supporters unwillingness to vote than a surge towards the GOP. Why is this?

One word: Obama.

He has turned out to be a failure on the single most important issue. The economy.

His post election strategy has been persistently wrong. His priorities were backwards. His effort negligible. And his leadership weak.

The huge push last year to legislate health care reform is a classic example. The effort was always to going to meet huge and vitriolic resistance from a Republican party whose recent – post-Reagan – history is relentlessly anti-social. None of us should forget that the GOP has never forgiven FDR for the New Deal or Johnson for the Great Society. In some parts the civil rights act still stings. It was Reagan who told us that social security would undermine the moral fiber of the country and turn the US into an insipid Euro-style mess. His anti-government rhetoric laid the groundwork for the emergence for today’s extreme right wing version of Republicanism. A version that Eisenhower and even Nixon would disavow.

So the election of a black president, and occasion for celebrating America’s diversity, became a lightening rod for the resurfacing of America’s ugly past and its tendency to veer sharply to the right in times of change.

The stage was set for a massive show of intolerance and pettiness.

Into which Obama threw himself and his party with gusto.

Except, he retreated immediately and left the party in the hands of Reid and Pelosi, who were consequently demonized as they tried to steer health care reform between the Scylla of GOP vitriol and hatred, and the Charybdis of left wing disillusionment occasioned by Obama’s apparent disappearance from the field of battle. The upshot was a long and bloody campaign at the end of which a very unpopular reform was passed into law. Unpopular on the right because it offended the anti-social worldview of the conservative base. Unpopular on the left because it represented a cobbled together set of half measures, and left the hated insurance industry relatively unscathed. From an economic point of view the legislation makes sense: it reduces the Federal deficit substantially. The problem is that all the benefits are off in the future and the nastiness, hatred, and extremist ranting remains current.

Anyone who reads this blog regularly knows that I supported health care reform. I am not a fan of the law, it is inadequate and is full of the kind of compromise that Congress creates because of its undemocratic structure. Nonetheless it is a start.

The blood spilled to pass reform would not have, alone, been enough to send Obama and the Democrats to the doom that seems to be awaiting this fall. Both were aware of the political capital being spent. That capital had to be replenished if they were to come out even.

And this is the failure of Obama.

On no other issue did he succeed sufficiently to rebuild that capital.

On the contrary he slid even further behind.

His weakness was exposed as economics. Sometimes presidents can get away with being unsophisticated with respect to economics. Voters never punished George W. Bush for his inept management of the economy. His indifference to the budget and economic problems are legendary. Yet he managed to escape unscathed. We may have ridiculed him for his cartoon like view of life and his buffoonery, and we never had a chance to hold him accountable for the 2007/2008 crisis. We were numbed by the bail outs of the banks. But the low level of competency of the Bush regime was so normal we simply waited to be saved. And we allowed Bush to slide into history, hoping that he never resurfaced.

The problem is that, from the very start, Obama failed to take charge of the economic issues threatening his administration. There is much rewriting of history going on as the failure of policy over the last two years exposes Obama’s weakness. The current argument is that the stimulus was too small, but that no one realized the depth of the crisis. WE can only realize the stimulus’s inadequacy retrospectively. So the story goes. Sorry but that’s plain wrong. There were plenty of us arguing that the stimulus was too small. There were plenty of us invoking the research that tells us that recessions following a financial crisis are very different from ‘normal’ recessions. There were plenty of us warning of the employment disaster that could emerge were we not strong and decisive in our actions.

Rewriting history just won’t do.

Yes, the stimulus worked within its limitations. No, it was nowhere near the powerful response the country needed.

The lack of imagination and strength is what has allowed the crisis to linger. And as the crisis lingers so the Democrats and Obama have been exposed as either naive, inept, or just plain feckless.

They have repeatedly caved in to GOP anti-social activity.

Why?

The fall election is the return on the investment in leadership that Obama has [not] made.

And it isn’t as if there were not chances for redemption. Financial system reform was such a chance. He muffed it. The nation was screaming for revenge against the banks that caused the crisis. Instead we were given insipid reform that left the mega-banks as they were. Yes there were tweaks. Yes some red tape was burnished and put back onto the deregulated rodeo that banking had become. But the trajectory was not altered. The banks still are enormously powerful. They dictate rather than receive policy. They dominate legislation through their donations. They took a hit, but their profits in 2009 were at an all-time high. Bonuses are back. And the unemployment siutation is not improved. Ordinary Americans are still paying the price for Wall Street’s follies, while traders bitch about being slightly cramped within their third, fourth or fifth homes.

Obama deserves to lose and lose big. The Democrats deserve to be trounced.

They both forgot that they represent the hopes and aspirations of the underprivileged. That’s why they are supposed to stand firm against the behemoths of Wall Street.

So the twin failures of spine: the inability to face down GOP anti-social politics over the stimulus, and the capitulation to big money over bank reform, turned into lost opportunities to restore the capital used up over health care reform.

The odd thing, in my view, is that both of these opportunities were tailor made for a left of center government. They were laden with populist attraction. Taking on the big banks and saving working households from disaster are the stuff of a classic script about the triumph of ordinary folks over the rich. A real all-American story was waiting to be played out. What might have been provides a stunning contrast with what is.

Obama muffed his chance to write history in big letters. Instead he muddled along bureaucratically and tinkered timidly. He lacked the spine to fight. And we needed a fight.

The fight should have cleansed us of the Reagan illusion and the sickness of selfish, anti-government, anti-social, market biased, and militarisitic belligerence that have typified America for three straight decades.

The only thing that stood between ordinary people and the horrors of depression was the government. Did Obama make that case firmly? No. Did he attempt to stuff the anti-government rhetoric of the GOP back into the past where it belongs? No. Did he pursue big banks on behalf of the little folks? No. Did he beat down the obstructionism of the Republicans? No. Did he badger wayward Democrats? No. Did he even make that case that he is saving capitalism from itself? No.

He was being nice when we needed nasty.

And nice loses every time when a crisis requires steadfast.

The sad part is that Obama’s failure is our failure. We will soon be living with a fired up Republican Congress intent on attacking the weak, the underprivileged, and the unemployed. This was our chance to redress the damage of the Reagan illusion. This was our chance to undo the huge skew in wealth created by the right wing since 1980. This was our opportunity to rebuild the America of the post war years and revitalize the drooping middle class. We could have claimed the future for our children and burnished the economy to hand on to them the opportunity we received from our parents. But no. It appears we are doomed to continue to wither.

Too bad. Too, too bad.

That’s Obama’s failure.

So while it sounds like a nasty bout of internecine academic sniping, the war between economists is crucial to our welfare.

Nowhere is that war more manifest than at the Federal Reserve Board. And nowhere will the verdict be more important.

If you follow the financial news carefully you will have noted that the big Fed annual shindig took place in Wyoming last week. Bernanke’s speech there was given a ton of coverage as being indicative of how the Fed saw the state of the economy. More to the point his speech was supposed to give us insight into what the Fed was prepared to do if the economy failed to break free of its current becalmed and weak state.

The quick answer is the he said nothing of note.

This failure to make profound announcements has befuddled many. It shouldn’t. The problem is the war between economists.

The simple matter of fact is that the Fed is horribly and, perhaps, irretrievably, divided between neoclassical and Keynesian policy advocates. The division has spilled over into a very public fight, and has embroiled all the usual suspects.

The central question seems to be: do we need more support for the economy? or do we now prepare to undo the work we have done so far? Bernanke himself appears to be stuck between the two.

Looking at the economy from a Keynesian perspective one thing screams out: the unemployment level is too high and we have the tools to make the correction. So why aren’t we?

From the neoclassical perspective the answers are totally different. The actions taken so far have destabilized the economy and we are about to plunge into an inflationary and bad money crisis of our own making.

Essentially the difference boils down to the diagnosis. Do we have a demand deficiency, which is the Keynesian answer; or a supply deficiency, which is the neoclassical answer. Policy responses are radically different depending upon the side you take in the argument.

What is especially disappointing to me is that this debate was resolved a long time ago. My own education typifies that resolution. Anyone who learned economics in the aftermath of the Depression, and relied on Samuelson’s text or a text in the same genre, would look at today’s crisis and know immediately that the response is to prime demand. That means government spending and deficits etc. But all that was expunged after the monetarist debates led by Friedman and the “new classical” approach of Lucas. Their victory meant that anyone educated after the 1980’s would never respond in a Keynesian manner. They would never have read any Keynes. He was eliminated from the curriculum.

So the debate that has resurfaced has already been had. And was already won. That we are wasting time on it is both an indictment of economics, and a truly awful indictment of the post 1980’s years of illusion. The so-called great moderation of the thirty years since Volcker squeezed away inflation was not a function of the victory of the theories of Friedman and Lucas, but was an aberration caused by the coincidence of global and domestic trends that are now being undone.

We are back to the 1930’s.

Let’s hope that Keynes wins again. Otherwise the Great Sleep will continue, possibly for a decade or more.

The fact that consumer sentiment rose slightly according to the Conference Board survey for August means very little to anyone with an eye on the underlying economy. Only superficial analysts, like those infesting Wall Street, could be cheered by a consumer confidence reading of 53.5. That’s weak this far into a recovery, and masks some fairly startling numbers at the more detailed level. For instance: the business conditions outlook survey registered a slight decline in optimism. That’s probably not a surprise, we seem to be bumping around nowadays with the word slight defining most movements. No. The really interesting number is not the decline, but the absolute level. Only 8.7% of those surveyed said that business conditions are “good”. That’s awful. And it shows the depth of the drop in attitudes across the economy. People truly are mired in a swamp of negative and fear ridden feelings that totally obliterate anything optimistic. We are a surly and angry bunch hunkered down and expecting the worst. No wonder the economy is sluggish.

Even when there is supposedly good news it can be picked apart to reveal a more depressing truth. Today’s Case-Shiller report on home prices gave another lift to the short term minded folks on Wall Street – they latch onto any news and over react with gusto. Home prices edged up for the third straight month, with 17 of the 20 major markets measured by Case-Shiller showing increases. The overall increase for the nation as a whole was only 1.0% at an annual rate, so this is nothing to get excited over, but it is being written about as marking the end of the great decline. Stability is the new watchword. I am not so sure. A closer look at the numbers shows that the biggest boost came in areas where the Federal tax credit for first time home owners had the biggest impact. PLus those three straight months of price rises coincide exactly with the peak of activity generated by the tax credit. That makes me wonder what will happen when the effects of the tax credit are eliminated. As in the August figures we will see next month. It will not be a shock were prices to fall once more. Perhaps not by a lot, but the post-bubble trend may well assert itself once again. That means the tendency will be for home prices to continue to languish and decline, rather than show a steady increase.

The juxtaposition of the consumer confidence numbers with the  home price data makes for a telling narrative. The economy is becoming becalmed in a Sargasso like sea of self-imposed constraints from which it will be incredibly difficult to break free. The deeply defensive attitude of households and business is steadily being translated into an economic reality that brings to reality the exact imagined mess that we should be trying to avoid. We are trapped in a period of mediocrity and low growth because that’s what we are expecting to deal with. We have created the very conditions that our actions are designed to avoid.

Such is the nature of economic activity. What comes into being is that we imagined. Failure of imagination begets the current bleakness. We have only ourselves to blame. This economy is our doing, and I suspect that the consumer confidence and home price data is a very accurate reflection of the limitations we now have imposed on ourselves.

Households are retrenching quickly in order to pay down debt and bolster themselves against the perceived loss of wealth form the fall in home prices and the uncertain employment outlook. Yet, in truth, that wealth from home price inflation was always an illusion, and the chances of losing a job are still small for those currently employed. So illusion abounds, fear is overblown, and thus we are reduced to inertia instead of healthy activity.

Nothing good can come from the persistence of this negative outlook. Until attitudes change to a more ebullient trajectory we should expect to see sideways moving data, and an economy unable to move into a high enough gear to create wealth and jobs at a healthy rate. At the same time enough recovery has occurred that we are unlikely to subside further: neither the consumer sentiment data, nor the home price data suggested an imminent decline.

The economy is in a coma. Not dead, and not alive. It just is.

And that’s the problem: “just is” can last a very long time. Ask the Japanese.