Employment and stock markets send conflicting signals

New housing starts are down, and the stock market goes up.

Bad news produces new profits.  That’s kind of a “man bites dog” story.

Why does negative economic news stimulate the stock market? And why does the stock market rise to record highs when employment is recovering slowly and new jobs pay less?

Before you ask why you should care about the stock market, it is worth remembering that more than half of the American people have stock market investments, either through their direct purchases or through their retirement plans.

The stock market is supposed to reflect the outlook for the economy.  When prices rise, investors buy shares of companies that they believe will become more profitable in a growing economy.

Obviously, something different is happening now.  On Labor Day weekend, perhaps it is a good idea to consider the growing disconnect between the uncertain prospects for working people and what happens in the financial markets.

First, here’s the answer to the question why bad economic news causes higher stock prices.

In the absence of any economic stimulus coming from a deadlocked Congress and a frustrated president, the Federal Reserve, the government banker, has stepped in to provide the only boost to the economy coming from Washington.

The Fed has only a limited array of measures it can deploy to boost the economy.  Its main tool has been to create more money to make available at almost no cost to lenders allowing them to offer it at low rates to borrowers to buy new homes or invest in developing their businesses.

The nation’s banker is responsible for much of the recovery in the economy as the unemployment rate has continued to decline, however slowly.

From the perspective of investors, lending their money is not a great idea when interest rates are kept so low by the Fed.  Instead, they turn to stocks, pushing their prices up as funds flow from bonds, the usual form of lending to corporations, into share ownership.

The Fed wants to avoid inflation, with its rapidly rising prices, that could result from too much money flowing into the economy.  So it will slow down its creation of more money as soon as it is sure that the economy is on the path to recovery.

Its officials have been saying recently that they see signs the economy is coming back.  They have begun talking openly about cutting back on the Fed’s support for lower rates in the belief that private lenders will take over as higher rates make loans more attractive.

That sounds like good news.  As interest rates rise, investors are putting more money into lending and send less money into stock purchases.

So the stock market, sensing the coming change, goes down simply because the Fed sees the economy improving.

This simplistic view takes hold, even against data that shows stock and bond markets have in the past been able to grow at the same time.

There is yet another contradiction between the outlook for workers and increases in stock prices. 

How can companies be booming with so many people still out of work or forced to take lower paying jobs?

The answer lies in the nature of recession itself.  It was not simply a slowdown that is often the normal part of the cycle of growth.  It marked a major change in our economy.

Goods and services are increasingly produced by technological tools, like computers and robots, and require less hands-on labor.  And the labor-intensive production that remains is mostly carried out in lower-wage countries.

The most successful companies include many that rely less on labor and more on technology.  If they seek new employees, they want people who a better educated than in the past and who are capable of devising and using the tools of technology.

In other words, many of those companies that are doing well in the stock market depend less on labor or buy it abroad where it is cheaper than in the United States.

What can turn the situation around and improve the outlook for working people?

For one thing, workers need to be better educated and trained.  For many, a high school education will no longer be enough.  And training will need to become a life-time responsibility, not one that ends when a person gets a job.

For another, a sound immigration policy that admits more people who can be customers will at the same time create more jobs to serve those customers.

Labor Day could again be a day to celebrate jobs not a day to worry about them.

Government actions threaten innocent people

Efforts to fight terrorism and crime while preserving personal liberty are becoming increasingly worrisome.

Recently, stories have appeared about National Security Agency surveillance, New York City’s “stop and frisk” law, and some governments forcing innocent people to turn over their property.

Each of these reports raises legitimate concerns about striking a reasonable balance between protecting people without making them pay an unacceptably high price for the protection.

There is no question that Edward Snowden leaked NSA data that he had pledged to protect.  But for some people, he should lauded as a whistleblower who revealed that the NSA was snooping too deeply and unnecessarily into the communications of average citizens.

Ultimately, whether Snowden should be punished for leaks, praised for whistle-blowing or both may be determined in a court.  In the meantime, however, it is clear his actions have forced the NSA to admit some questionable activities.

The agency has now acknowledged that it tapped communications of Americans using an expansive definition of its authority and may go far beyond what Snowden revealed.  The Wall Street Journal reported this week that NSA can access the contents of most Americans’ Internet communications, both emails and phone calls.

Perhaps the NSA has been justified in some or all of the data collection that Snowden revealed.  But, before Americans are subject to such scrutiny, many feel that the agency’s actions should be reviewed more fully by Congress and under better control than is exercised by the secret court that authorizes searches.

For the moment, Snowden has at least raised the question if there is a satisfactory balance between government keeping a watch on people and people keeping a watch on government.

In the New York City case, a federal judge took a careful look at the police policy of stopping people on the street usually with no obvious cause and subjecting many of them to embarrassing or even abusive public searches.

The judge found that in about nine cases out of ten the police came up with no reason to stop a person.  And those subjected to “stop and frisk” were overwhelmingly black and Hispanic.

The police defense was that members of these groups disproportionately commit crimes in the city.  While rejecting that yardstick, the judge found the police overdid it even by that standard.

But the crime rate had gone down, the police said, since the policy was put into effect.  The judge did not ban the practice, but ruled the police would need to have better evidence to avoid violating the Constitution’s prohibition of “unreasonable searches and seizures.”

Like the NSA situation, the argument that invasive policies had worked might not be sufficient in a society in which a balance is supposed to be struck between well-intentioned government action and individual rights.

The scandal in some states of what is known as “civil forfeiture” was revealed by an article in the New Yorker magazine that has stirred widespread reaction.

Civil forfeiture works this way.  You are driving along a road, and the police pull you over.  They find you have a lot of cash in the car, which you claim to be transporting to the bank for your church.  The police consider the cash suspicious and say they will charge you with carrying drug money.

They may have stopped you acting under a federal-state anti-terrorism program, though they do not charge you with being a terrorist.

They take you into the station, where they have an interesting proposition.  If you simply turn the cash over to them, you will be free to go.  If not, a cell awaits you while they file drug-related charges. You pay.

Civil forfeiture is allowed in federal matters and in most states.  It was sold as a way to fight organized crime without having to go through a full criminal trial.

In some states, the police and local governments are allowed to keep some of the proceeds they collect.  That gives them the incentive to stop anybody they can and seize anything they can.

The magazine reported that in Texas, civil forfeiture can be routine, big business and relentlessly unjust.  In Florida, one small department seized $50 million and used the money to pay for police junkets and a fancy boat.  In Maine, the money goes into general funds, removing the incentive.

These stories make it easy to understand why liberals and conservatives, though they distrust government for different reasons, are concerned about government incursions on personal rights.

They worry that being innocent may not be enough to protect people from their government.

Congress: Liberal, Moderate or Conservative and the Case of Maine

Did you ever wonder whether Maine’s congressional delegation was conservative, moderate or liberal?

Or whether on balance Congress is conservative or liberal?

Well, so did I, and I developed my own system for getting answers about the political orientation of members of Congress.

Instead of using my personal view of how to determine who is liberal and who is conservative, I turned to two organizations that rate Congress.

The American Conservative Union measures the conservatism of members of the U.S. House and Senate.  A key part of the ACU ratings is its decision about what are the bellwether issues.

Similarly, the Americans for Democratic Action picks key issues for liberals and rates members by their votes on these issues.  There is some overlap with the ACU issue selection.

I combine the ratings of the two organizations into a single rating, the only one producing a neutral result without relying on the rater’s view of what issues to include. 

The rating covers last year, so it is important to recognize that the composition of Congress has changed.  For example, Maine’s Olympia Snowe is no longer a senator, and there is no rating yet for Sen. Angus King.  Initial voting suggests he will get a liberal rating

On the House side, Rep. Chellie Pingree, Maine’s First District Democrat, got a strong liberal rating, while Rep. Mike Michaud, the Democrat from the Second District, also scored on the liberal side, though less so than Pingree.

Their ratings probably reflect the political composition of their districts.  But it is important to remember that the issues on which the ratings are based were selected by national organizations and may not reflect the issues most important to Mainers.

These ratings suggest that in next year’s election, Collins could continue to draw support from Republican, Democratic and independent voters, even if she is too moderate for some conservative members of her own party.

Pingree probably well reflects her electorate.  Michaud’s voting record has made him a comfortable choice in his home Second District, and his ratings should help in the more liberal First District which he seeks to carry in his race for governor.

For the Senate and House as a whole, the ratings reveal what probably most people would have expected.  There are relatively few moderates in either house of Congress.

Of the 100 senators, 11 turn out to have been moderates, including both Snowe and Sen. Susan Collins.  They are Republicans as were nine of the moderates. In the House, with 435 members, most of the 46 moderates are Democrats.

Generally, the Democrats get liberal ratings, the Republicans conservative.

The Senate has more liberals than conservatives and has an overall average moderate liberal rating.  The majority is Democratic.

In the House, just the opposite is true.  With a GOP majority, the conservatives greatly outnumber the liberals, and the overall average rating is moderate conservative.

Among the state delegations, combining both Senate and House members, in 2012 Maine was the second most conservative New England state.  New Hampshire was more conservative, but   the Granite State rating will undoubtedly change this year as its two Republican House members have been replaced by Democrats.

Everything is relative.  Almost all state delegations in the Northeast tend to be more liberal than the country as a whole, with Vermont the most liberal state.

One surprising result is the rating of Ron Paul, the retired Texas Republican congressman who supported libertarian positions and inspired many Maine GOP conservatives.  He rated as a moderate.

A key finding is that GOP Sen. Mitch McConnell from Kentucky, the Senate minority leader, got a relatively rare, extreme conservative rating.

Recently, his conservatism led him into a conflict with Maine’s Collins, a moderate.  She was a leader in developing a transportation bill, which provides federal highway funding, and lined up enough GOP support to get it through the Senate.

But McConnell, who faces a tea party challenger in the 2014 Republican primary, decided to oppose it.  Loyal to their leader, who can dole out choice party jobs, all other GOP senators fell in line, leaving Collins the sole member of her party to support the bill, which could not overcome a filibuster.

When there is a strong core of moderates, both houses of Congress can produce results.  When either party is led by a person with strong liberal or conservative leanings, compromise can become more difficult to achieve.

Right now, the number of moderates seems to be dwindling, making next year’s election a potentially critical test of whether Congress will be able to again produce results.

Tea party fights “socialism” against weak opposition

The political battles over the role of government continue.

The U.S. House of Representatives, where conservative Republicans set the agenda, voted for a farm bill that dropped the food stamp program.

And the House voted for the fortieth time to repeal the Affordable Care Act – Obamacare.

Soaring Medicare and Social Security costs brought calls for cutting back on these programs.

On these assistance programs, affecting the elderly, the poor and the uninsured, the battles have heated up, heading toward the 2014 elections.

The conflict has been caused by the strong and cohesive tea party movement.  Though only about a quarter of voters say they support the tea party and its demands for less government, it exercises great influence.

In Republican contests across the country, especially in GOP areas, tea party candidates either win party primaries or force more traditional Republicans to adopt their positions to avoid defeat.

The result is that the tea party view dominates the U.S. House and strongly influences what happens in the Senate, thanks to the GOP filibuster.

Obamacare could obviously stand some improvement before it goes into full effect. But any bill to make changes to the program would lead to an effort to repeal it.  So nothing happens, and the complex new program lumbers forward.

Because some focus on its imperfections or simply because some believe that government should back out of health insurance, opposition persists.  And it is far easier to oppose Obamacare than to propose an alternative that will cover almost everybody.

Much the same is true of Medicare.  The Affordable Care Act included some limits on its escalating costs, but the combination of an aging population and weak cost controls keeps pushing up its demands on the federal budget.

Food stamps were devised by farm-state legislators as a way of disposing of government financed surpluses while helping the less fortunate to have decent diets.  That’s why they have been part of the agriculture bill.

The tea party movement wants to cut government spending, so the House of Representatives voted to reduce farm supports and to eliminate the food stamp program. 

Then, there’s Social Security.  Right now, there are sufficient funds from previous contributions and current workers to finance the benefits.  But we can readily foresee that the program will run short of money during the first half of this century.

To keep Social Security going as long as possible without general tax dollars, there’s increasing talk about cutting benefits to current recipients.  The first step would be reducing annual inflation increases.

The opponents of these so-called entitlement programs say that by government providing such assistance, the country is moving toward “European socialism.”

In Europe, where such programs have long existed, they have been strongly supported by conservative governments that clearly oppose socialist objectives like nationalization of some industries.

The issue between the European (and Canadian) approach and the American view, pushed to its extreme by the tea party movement, relates to the proper role of a democracy.

In the European view, the people expect the political system to address the needs of the community as a whole.  They accept a role for government to provide or assure certain services – old-age support, universal health coverage, and help for the poor.

They do not see this role for government as “socialism,” but rather as the best practical way to ensure the welfare of the entire community.

In the American view, the purpose of the political system is to protect individual freedom.  One major way to achieve that goal is to limit government’s involvement in the lives of the people.

In the image of the free society, the non-governmental sector should be able to provide many essential services, possibly with government incentives.  It leaves open the question of what happens to vulnerable people if those services are not provided.

The European system may lack the efficiency and economy that is supposed to result from competition, while the American system may lack the compassion and inclusiveness that is supposed to result from government assistance.

In the United States, the costs of assistance programs have risen as benefits have been added.  Reform has been blocked by the threat that changing any existing program may lead to its abolition.

Instead of a piecemeal legislative approach, perhaps the country needs a full-scale debate on the appropriate role of government in assisting the old, the ill and the poor.

It takes courage to engage in such a debate, and right now only the tea party seems to have it.  There’s a need for the alternate case to be made.