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The Labor Department's rate of labor underutilization is 14.8% of thepotential workforce, much higher than the 8.1% unemployment rate. Which means that a lot of workers are not able to make the fullest use of their skills. If unemployment stays high for a very long period some workers lose their skills and become less employable. THat could leave the floor for unemployment at amuch higher level. Something like this is happening now and stay with us as the unemployment rate grows and the underutilization of labor rate with it. Physiscists call it "hysteresis"., a kind of laggard impact of some sustained force. An example is if you squeeze a nerf ball for so long that it doesn't bounce back when you release it. Higher underutilization of labor which could hit 20% by 2010 at the rate at which job losses are ocurring of half a million a month, would mean pressure on wages and fears of deflation, lower tax revenues and fears of persistent deficits, less cash to invest and companies having less capital to invest leading to lower earnings. And falling behind the curve is what Krugman fears could be happening now, even with the large stimulus and budget of the new President, because of a series of problems ocurring at the same time and reinforcing each other. And the efforts of the government still not large or effective to meet the scale of the challenge. See the link to this. ...

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The IMF's changing views on the value of fiscal austerity. In the current debate about the value of fiscal austerity, there is the IMF view, a German view based on its own experience, and the views of other countries in Europe. The IMF's view has shifted over time. The IMF World Economic Outlook 2010, describes its view of the effects of austerity measures in the form of spending cuts and tax increases- "Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1% of GDP typically reduces GDP by about 0.5% within 2 years and raises the unemployment rate by about 0.3% percentage points." Over the longer term there are benefits as the private sector is not crowded out in the search for captal funding by the excessive government borrowing. The IMF's economic models suggest that it would take 5 years before reaching the breakeven point when the benefits of austerity measures exceed the effects of austerity. The German view held by German central bankers is that the actions stimulate growth in the short term. Manfred Neumann, professor emeritus at the Institute for Economic Policy at the University of Bonn, says this is called the "German hypothesis" as it reflects the experience of Germany from austerity actions taken by Germany. Laurence Ball, professor of Economics at John Hopkins University, is critical of the "German hypothesis" and its application across Europe in different situations. Germany is a large exporting nation and exports helped counterbalance the effects of austerity measures. Within the eurozone with fixed exchange rates the exports of less competitive countries cannot be boosted through devaluing the currency to gain price competitiveness. The other problem is that with interest rates close to zero in the euro zone the central banks cannot cut rates aggressively to counteract the effects of spending cuts. The problem gets compounded when a number of countries are taking austerity measures at the same time accentuating the downturn....

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A Tax Policy Center study (joint project of the Brookings Institution and the Urban Insitute) shows $157 billion would be generated in the first year from an increase in taxes on the top 1% of income earners in the U.S., about 1.13 million households earning average $2.1 million, by increasing the federal tax rate from current 33.4% for this group to 40%. This could pay for a program to provide tution free education in America's colleges and universities. Even increasing the federal tax to 40% on the 115,000 households earning over $9.4 million on average, the top 0.1% of American households, would generate $55 billion in the first year, enough to pay for the $47 billion cost of tution free education at all of America's public colleges and universities, according to the Tax Policy Center. Economists including Stiglitz and others, point to significant impact of revenue generated from such a tax when applied to improving educational opportunity for the middle class and lower income groups. Education is a great leveler of income disparities as seen in the U.S. after World War II. During recent decades the highest income groups weren major beneficiaries of tax and economic policy, at the very time the middle class and factory workers were hit hard by global competition which lowered wages and exported jobs. The interest rate policies of the Fed after boom bust cycles also favored large investors in equity markets over smaller income earners with savings account deposits, whose savings experienced little growth under interest rates close to zero. ...

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Krugman points to the connection between the failure to achieve debt reduction through debt forgiveness and the sluggish economic growth in the eurozone and U.S., five years after the global banking and financial crisis of 2009 and four years after the beginning of the eurozone debt crisis in 2010. In the U.S. debt reduction for homeowners was delayed with a wave of foreclosures, and in Europe austerity budgets were the norm as Germany pushed hard for austerity policies. In 2014 small relaxation of austerity to give relief to voters took place in Greece, France, Italy and Spain, with austerity budgets still in place. Growth also slowed in Germany to slight contraction in the third quarter and no growth in the fourth quarter of 2014. This is leading to the formulation of new policy to address growth challenges in the eurozone. Debt to GDP is growing in eurozone countries and Britain because of lack of growth, even though spending cuts have been made, showing the need for rethinking policy. ...

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Wallsten describes the tense and now frayed relationship between Obama and immigration groups and the way this has evolved from idealism to frustration to mere coexistence amid loss of faith. Obama's frustration expressed in words such as "I am not a king." And the immigration groups voicing their concerns about Obama's loss of credibility, as minorities especially Hispanics have fared poorly during his adminsitration, hit by rising deportations, foreclosures and the impact of high unemployment in construction and other sectors.

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Zombrun describes the effect of low interest rates on savings for the bottom half of households in the U.S., the pressure to invest in stocks without the skills and experience of the better educated part of households in the top 20% of households by wealth and income. This resulted in a negative effect, a depletion of savings compared to an increase under a higher interest rates scenario with less pressure to take risks in a volatile stock market. This is the direct cost of the crises in stock and financial markets of 2000 caused by a internet bubble, and the larger crisis of 2008-2009 caused by the bubble in mortgages and housing. The secondary effects of the mortgage price bubble and faulty mortgage securities was in the millions of homeowners who went into foreclosure in 2009-2013, which further depleted wealth and savings of households in the bottom half lacking the experience and skills to navigate this type of housing market. The failure of the Obama administration to stem the foreclosures with practical steps which would have helped not hurt the banking sector, as suggested by FDIC's Sheila Bair and Harvard economist Martin Feldstein in many WSJ op-eds in 2010-2012, added to the erosion of savings and wealth of the bottom half. Minorities in particular were hit hard. A third effect is of communities across America that are feeling the effects of job migration to emerging markets such as China that has been underway as part of the globalization of the last three decades. A fourth effect in the rising cost of education, particularly since 2000, has reduced the opportunities for struggling working class people to enter the middle class and enjoy the higher incomes in precisely the very period when the divergence of incomes between less educated, less killed people and the more educated and better skilled people was taking place. The last two effects were neutral as part of the overall process of emergence of a globalized economy with a premium on more skills and education, requiring action by the government, universities and business for a concerted effort to mitigate in some places the negative effects and enhance in other places the positive effects. The first two effects were man made crises which required managing in constructive and positive ways for the entire American people, taking risks where necessary such as fears about the financial system if foreclosures did not go through. The risks of a long period of extremely low interest rates for savers and the middle as well as working class were poorly understood by the Fed since 2000. A similiar crisis is being faced in Europe with extremely low interest rates. Janet Yellen was only doing the honest thing by acknowledging how far and how different the situation is now compared to the period of three decades following 1945- a question not just of values cherished in America, also of the need for societies to advance through creation of wealth across all sectors of society or regress, as described by Smith in the Wealth of Nations....

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The new budget in France is designed around two goals. The first is to take aggressive action to bring the deficit down to 3% by 2013, not a gradual program but one intended to send a strong message to capital markets that France under a Socialist government is dead serious when it comes to the deficit and debt reduction. Every 0.1% increase in France's borrowing rate would mean $260 million going into interest payments on the debt, according to Pierre Muscovici, the finance minister. France's borrowing rate is close to Germany's 1%, and the French are determined to keep it this way. The other goal was stated by Mr. Muscovici: "I don't want a policy of austerity, hitting salaries, weakening the state and turning it into a pauper." The idea being that hitting the common man would mean decline in consumer spending and lower growth and tax revenues that would create the kind of negative spiral facing Spain of declining growth and rising unemployment, worsening deficits, and higher debt payments. The way Muscovici raised the $39 billion- beyond the $9 billion in higher taxes and savings already implemented for 2012- is through $13 billion in new taxes on corporations, and additional $10 billion from new income taxes, including a higher tax rate of 45% on incomes over $193,000. Additional $13 billion will come from a freeze in public spending, so that some ministries take cuts adjusted for inflation keeping the overall budget the same. Spending cuts could come later to balance the budget as growth picks up to 2% in 2014, is the government reasoning, softening the impact. The new budget is well received by German public opinion as showing the resolve of Germany's key partner in the EU. Part of the reason the French are able to get business and people with higher incomes to contribute is that France is unique in that there is a greater consensus than in other countries on the steps needed and a sense that austerity measures targeting the middle class would be counterproductive. The aggressive action with considerations for equity and fairness also gives France the chance for a faster turnaround and avoid the problems plaguing Spain and Italy, which French public opinion and business appears to have grasped and the government's experienced ministers for the economy have successfully presented. ...

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The riots in Athens as the Greek parliament voted to support the passage of an EU plan of austerity cuts, including a 22% cut in the minimum wage, pension cuts and large cuts in the number of government employees. The Popular Orthodox Rally party in the governing Greek coalition withdrew its support, 22 members of the Socialist party and 21 members of the New Democracy party in parliament opposed the measures. Elections are planned for April, 2012. Antonio Samaras, head of the New Democracy party, told parliament that he supported the measure only so that Greece could continue using the euro and have "the possibility tomorrow to negotiate and change the policy that is being imposed on us today."

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The May 6 episode of the stock market plunge of 900 points in the U.S. and then recovering had the effect of rattling investors nerves especially retirees. The impact of this episode is recorded in the experience of one Charles Schwab broker office in Englewood, Colorado. By the end of that day this broker had 50 calls on his answering machine from a fifth of his clients, all seeking to know what happened. Charles Schwab, who helped launch a period of individual investing in the U.S. after 1982 by cutting fees and going after the average investor, (along with others like Jack Bogle of Vanguard Funds), is also on edge. He says he has not seen anything like this since his early days. Schwab confirms Yale Prof. Shiller who says (see link) that his index for markets shows a lot of nervousness. Saying that 98% of people are still very concerned, coming after the May 6 incident, and the Greece and eurozone crisis that impacted US stock markets. One other factor he points out is the constant flow of headlines that suggest certain business people engaged in fradulent practices, something that fuels a lack of trust. Charles Schwab ponders from his office across the San Francisco Bay Bridge, whether words like safety and soundness mean anything anymore. Another factor of concern, Bogle points out, is that institutional investors now own 70% of American corporations, up from 35% in 1975. And the advantage has veered sharply in their direction as institutions, hedge funds, and investment banks trade on their own account, with wealth moving in that direction. This leaves the individual investor and especially the retiree or those about to retire in a severe predicament....

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Krugman says austerity measures alone won't work as the economies in the eurozone shrink in 2012.

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Von Mark Schieritz of Germany's Zeit Online describes the changes underway following the election campaigns in the U.S., and France, and the Brexit vote in Britain, all signalling the discontent of people left behind by the tech, capitalism, trade and globalization changes of the last two decades. The appeal of one time fringe politicians using racist slogans and divisive rhetoric to appeal to those left behind, appealing to people lacking intergenerational mobility, and without much hope for a better future, is a serious concern. People who are gullible enough, lack college education, or racially isolated so that they are not likely to look carefully at what is being offered in terms of programs and change of competing parties, and likely to overlook the hard and difficult road for corrective course of action, because of anger and pentup fears. Schieritz cites as part of this change the unanimously approved conclusion in its final declaration at the G-20 meeting in Chengdu, China- "The benefits of growth need to be shared more broadly within and among countries to promote inclusiveness." Yet this can be a sort of "too little, too late."  Bankers who are cited in an email going around Wall Street lack credibility with groups on Main Street, to people adversely affected by tech, trade and globalization changes that have been persistently ignored for over a decade, close to two decades. More convincing is the tone of Theresa May, the British prime minister's first statement outside 10 Downing Street- who spoke of the "burning injustices" and her determination to make this a top priority of her government. Still more convincing are the programs to invest $275 billion over 10 years in infrastructure put forward by the leading candidate in the U.S. presidential election of 2016, to provide easier access to public universities and colleges to those left behind, as a sure way to create new jobs and address intergenerational mobility. In fact every leading candidate had made the loss of upward mobility their central plank already in 2015, long before Trump and Sanders started their campaign. The real hope lies in western leaders Merkel, May, and Clinton, all keenly aware students of changes, all women by the way who have sensed the injustice and have the ability to come up with something new and promising for the future, after learning the lessons of the past. ...

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U.S. President Obama's 2013 State of the Union address focussed on the problems facing the U.S. middle class, calling it "our generation's task" to tackle this problem. Economic changes have changed the patterns of economic growth and jobs, growth, income growth, that prevailed from the end of the Second World War to about 1989. But he offered few solutions beyond increasing the minimum wage to $9.00 from $7.25 to reduce poverty.

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Krugman points to some striking data in a U.S. Federal Reserve study, showing 47% of Americans do not have the money to meet an unexpected expense of $400 without selling something they own or borrowing. The is the 2nd year of this Federal Reserve study. It shows alarming information about the condition of retirement savings- about 30% of nonelderly Americans say they have no retirement savings or pension, and reported going without some kind of medical care because they could not handle the expense. About 25% say they or a family member experienced financial hardship this year.

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Kristof says social ills- the lack of stable marraiges, drug use, poor day care resources- compound the problems of lack of education beyond high school in America's white underclass. The lack of good manufacturing jobs and lower wages have hit people with only a high school education the hardest. Two decades of decline in good manufacturing jobs with globalization have hit this part of the population in the U.S. hard creating increasing inequality in America. He sounds a Moynihan type call to the plight of America's poorest white communities.

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Strikers at a Honda transmission factory in Hoshan, 100 miles northwest of Hong Kong are asking for raises of $117 or 800 renminbi in cash above the $132 a month or 900 renminbi that they are now paid. About 950 of 1900 workers at the plant are trainees, young people from vocational schools or high schools earn $132 a month. Older employees earn upto 1500 renminbi or $220 a month. The significance of this strike is that the Chinese government is tacitly encouraging the strike as it begins making moves to increase domestic consumption and make the economy less dependent on exports. This requires consumer's having larger purchasing power and higher wages. It also means that China will not remain the low cost manufacturer for manufacture goods makers around the world for very long. Consider the size of the increase and the policy change of the government and this implies a significant shift by China.

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France's central bank chief Christian Noyer, says public spending to create jobs has the drawback of creating yesterday's jobs, but lasting job creation has to look at today and the future for effective job creation. Once government spending crosses a certain level, about 55% of GDP, a level France has crossed, further spending becomes counterproductive, reducing public confidence in the economy, as higher future taxes are anticipated canceling any benefits.

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Brenner of McGill University and Fridson of S&P say the Bernanke Federal Reserve in the U.S. is doing what President Truman and Treasury Secretary Snyder did in the war and postwar years- paying down the U.S. debt as cheaply as possible by inflating the money supply. There are no new monetary insights here, and even though the policy is maintained outwardly as one to promote economic growth and employment, the main focus is to keep the cost of paying down the debt as cheaply as possible with low rates. This hurts savers and retirees earning very little on savings. They cite Bernanke's writings that show he is imitating the policy of the war years when the U.S. held down interest rates and succeeded in doing this for a decade.

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Robert Gordon of Northwestern University describes the problems in American Education and how this is the first generation which will not do better than its parents in educational attainment. The cost says Gordon comes in lower potential economic growth rates.