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World economic slump heralded by the Wall Street Crash in 1929 leads to widespread unemployment
Ramsay MacDonald's Labour government came in for sharp criticism over it's handling of the UK jobless crisis, following the Wall Street Crash. It paid the ultimate price and was voted out of office in 1931. A new coalition government continued the battle against high unemployment, which began to fall towards the end the decade
Not a decade ago, the Republican evangelists of fiscal rectitude were defending budget deficits – in order to cut taxes
These days, no Republican, not even Paul Ryan, chairman of the House budget committee and author of the draconian Ryan plan for lowering the federal debt, makes the case for deficit reduction more passionately than Mitch Daniels, Indiana's popular governor, who is suddenly being talked about as a presidential candidate. Speaking at the annual Conservative Political Action Conference (CPAC) in February, Daniels labelled the federal government's debt "the new red menace".
Especially in the state that produced Senator William E Jenner, Joe McCarthy's staunchest congressional ally in the "red scare" days of 1950s, there is no mistaking Daniels's analogy: those who are soft on debt reduction are as dangerous to America as those who were "soft on communism" during the cold war.
The irony is that, like so many other Republicans who held power during the George W Bush era, Daniels was not terribly concerned about deficit reduction when his party was in office. As Bush's director of the Office of Management and Budget, Daniels presided over a historic turnaround in the nation's fiscal fortunes, in which the $5.6tn surplus that emerged from the Clinton administration morphed into a 10-year forecast for a $2.1tn deficit by early 2003.
The unpaid-for expenses of the Iraq war soon made the country's deficit worse than predicted, but even before the war, Daniels defended going into debt. "It is not the top, let alone the only priority," he observed of the deficit in 2003, when President Bush submitted a budget with a $304bn shortfall. "Would you not try to spur economic growth?" Daniels asked Democrats who complained that Bush's tax cuts, which heavily favoured the wealthy, were going to those who did not need them – and did not take into account an impending war.
Daniels was not the only prominent Republican willing to defend the Bush deficits. Senator Charles Grassley of Iowa, the conservative chairman of the finance committee, took the same stance. "In this budget, President Bush charts a straight forward course for peace and prosperity in America," he declared in 2003.
Democrats, by contrast, were the party that in 2003 opposed increasing the debt to pay for more tax cuts. "Budget deficits – the fiscal Frankenstein that shackles economic growth – are back with a vengeance," House Democratic whip Steny Hoyer of Maryland complained, as the 2003 Bush budget was being debated.
Hoyer's opposition to increasing the government's debt in order to reduce taxes was consistent with proposals that President Clinton had made four years earlier, when the Congressional Budget Office estimated that the surplus for fiscal year 1999 would be $76bn. Before Congress went ahead with tax cuts, Clinton wanted to use the government's surplus to shore up social security. "Like any family with long-term financial needs," Clinton observed, "we have to plan for the future."
That Republicans and Democrats both have amnesia about the recent past is hardly surprising. But the seeming reversal of their position does not mean they have changed their thinking. What it points to, instead, is that the deficit reduction is not an ultimate priority for either party.
Reducing taxes has always been the true focus of Republicans, who now insist, in the words of Senate minority leader Mitch McConnell of Kentucky, "There will be no tax increases in connection with raising the ceiling." For Democrats, on the other hand, maintaining the modern welfare state, begun in the 1930s under Franklin D Roosevelt and expanded in the 1960s when Lyndon Johnson was president, has always been key.
How much do deficits and the debt matter, in fact? After the second world war, the federal debt was 109% of GDP, and the country did just fine. Beginning in 1948, the Marshall Plan even paid for Europe to get back on its feet. The one idea voters can console themselves with, perhaps, as the 2012 election approaches, is that the United States can go into debt and still prosper – if it gets its economy revved up.
Mitch DanielsRepublicansGeorge BushUS politicsDemocratsPublic financeUS taxationUS economyUnited StatesPaul RyanUS CongressNicolaus Millsguardian.co.uk• Treasury secretary Tim Geithner urges Congress to raise limit
• Federal pension fund payments suspended to avoid default
The US government hit its $14.3 trillion debt ceiling on Monday, triggering a series of "extraordinary measures" to stave off a default while politicians argue over raising the borrowing limit.
Treasury secretary Tim Geithner announced that he was suspending payments into two federal pension funds, after the government reached its maximum legal borrowing limit. Geithner said the suspension should allow the US to avoid a default before 2 August and urged Congress to agree to raise the debt ceiling before this 11-week deadline expires.
"I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens," said Geithner in a letter to Congress. "I again urge Congress to act to increase the statutory debt limit as soon as possible."
Under Geithner's plan, the US government will temporarily stop payments into the civil service retirement and disability fund and liquidate certain CSRDF assets to fund government business. It will also cut payments into the federal employees retirement system. Both funds provide retirement benefits to federal employees. The CSRDF funds a defined-benefit scheme that was superseded by the FERS in 1987.
Geithner pledged to repay the lost funds once Congress has approved a higher debt ceiling. But there has been little progress in recent weeks over this issue.
The US administration has insisted it needs to be able to push national debt above $14.3tn as it navigates the financial crisis. President Barack Obama said last week that without a higher limit, investors would lose faith in the country's ability to service its debts. This, he warned, might "unravel the entire financial system", while Geithner has predicted that the US would fall back into recession.
Obama's opponents have demanded major budget cuts in return for permission to borrow more. House speaker John Boehner, the Republican congressman for Ohio, has argued that "everything should be on the table except raising taxes", as this would hamper the US recovery.
The debt limit was created in 1917, when Congress allowed the treasury to borrow up to $11.315bn to fund US participation in the first world war. Before that, Congress would authorise certain loans for particular projects. The rules were relaxed further in 1939. Since 1962, Congress has raised the debt ceiling on 74 separate occasions.
The extent of US borrowing was under fresh scrutiny last month when Standard & Poor's cut its outlook on the country's AAA-rating from "stable" to "negative".
There is still a strong appetite for US debt in the bond markets. The yield or interest rate demanded by traders on 10-year government debt remained low at around 3.165%, only slightly above Germany. UK 10-year bonds were trading at a yield around 3.38%.
Federal Reserve chairman Ben Bernanke, who also supports raising the debt ceiling, said the US should try to boost growth through increased government spending on research and development.
• This article was amended on 17 May 2011. The original said that the administration needs to be able to push national debt above $14.3bn. This has been corrected.
US Government borrowingTimothy GeithnerUS economyEconomicsUS CongressObama administrationUS politicsUnited StatesGraeme Weardenguardian.co.ukAfter the country reported a rare trade deficit for the start of this year, China has showed a strong rebound for April but it is likely to fuel US calls to revalue its currency
China reported an unexpectedly large April trade surplus, in an announcement that is likely to fuel US pressure over currency controls and market access as American and Chinese officials hold high-level talks in Washington.
China's global trade surplus widened to $11.4bn (£7bn) as import growth fell amid government efforts to cool an overheated economy and exports rose by nearly 30%, data showed on Tuesday. The gap exceeded forecasts of $5bn to $10bn and was a strong rebound after China reported a rare trade deficit in the first quarter of this year.
China's trade gap has angered Washington and other trading partners who blame currency controls and other policies which they say are hampering trade and a global recovery.
At the start of two days of talks in Washington, US treasury secretary Timothy Geithner pressed China's envoys on Monday to allow the yuan to rise faster against the dollar. That might help to boost Chinese imports, narrowing the American trade surplus with China, which hit an all-time high last year.
China's commerce minister, Chen Deming, responded that yuan appreciation was being carried out in a "very healthy manner". He said the United States needed to change its policies on hi-tech sales and investment to spur American manufacturing.
Beijing has allowed the yuan to rise about 5% against the dollar since it promised more exchange rate flexibility last June but American manufacturers and others say the currency still is undervalued. The yuan's link to the dollar means it has declined against the euro as the American currency weakened over the past year.
China's April trade surplus with the United States rose 52% over a year ago to $15.1bn. The gap with the European Union, China's biggest trading partner, narrowed slightly to a still large $10.3bn.
Foreign manufacturers complain that China's trade surplus also is swelled by policies that hamper imports and encourage companies to shift production to China.
The country's global trade gap, up from just $1.7bn in April 2010, reflected a slowdown in demand for imports as Beijing tries to cool an economy that grew by 9.7% in the first three months of this year.
China's trade surplus usually narrows early in the year as manufacturers restock following the Christmas export rush. This year's decline was unusually large due to high prices for oil and other commodities.
China recorded a trade deficit for the first three months of 2011 and a surplus of just $140m for March.
Still, analysts expect China to show a global trade surplus for the year of $160bn to $200bn. Last year, China ran a trade surplus of about $16bn a month.
International tradeEconomicsChinaGlobal economyCurrenciesUS economyguardian.co.ukUS property prices fell for the 57th consecutive month in March – and showed their biggest fall in three years, according to analysts at Zillow
US house prices dropped by 3% in the first quarter of 2011 – their worst fall in three years, according to housing analysts Zillow.com.
American property prices have declined for 57 consecutive months. Values fell 1% between February and March and 8.2% from March 2010. The cumulative decline in house prices since the market peak in June 2006 is now 29.5%.
A record proportion of homes sold in March (37.7%) went for a loss and negative equity reached a new high – with 28.4% of all single-family homes with mortgages underwater.
Almost the entire country continued to suffer over the first quarter – with Detroit, Atlanta, Ocala in Florida and Pueblo in Colorado the worst hit.
Those lower down the property ladder were hit hardest. Prices in the bottom tier fell 13.9% year-on-year, homes in the middle tier fell 8.7% and homes in the top tier fell 4.3%.
Nearly three-quarters (74.5%) of homes in the US lost value from the first quarter of 2010 to the first quarter of 2011. That was up from the final quarter of 2010, when 69.2% had lost value, but is down substantially from a peak of 85.5% in the first quarter of 2009.
The housing market showed some signs of improvement last year with the rate of decline slowing in some markets. The improvements were spurred by government programmes that gave buyers up to $8,000 (£5,000) in tax credits but the subsidies' impact proved fleeting.
The Zillow figures follow Standard & Poor's/Case-Shiller Composite 20-City Home Price Index, which showed prices are now 33% below the 2006 peak.
US housing and sub-prime crisisUS economyDominic Rusheguardian.co.ukTeamsters union to tackle National Express about recruitment blocking while activist shareholder Elliott pushes for non-exec nominees
National Express's US troubles will deepen this week when the Teamsters trade union joins an activist shareholder in agitating for change at the transport group's annual general meeting.
A delegation from the Teamsters will confront National Express over alleged blocking of union recruitment efforts in school bus depots. And New York-based Elliott Advisors, the group's largest shareholder, with 17.5%, is still pushing for a strategic overhaul. Elliott was locked in talks with the National Express board, which has resisted Elliott's nomination of a slate of three non-executive directors.
National Express admitted last week that one of Elliott's nominees, former DHL executive Chris Muntwyler, had been shortlisted for a boardroom role. Talks centre on the appointment of two more non-executives with experience in the US or continental Europe.
National Express's fourth-largest shareholder, L&G, became the latest institutional investor to back National Express against Elliott on Friday. However, the Teamsters will ensure that Tuesday's AGM, at which Elliott is urging investors to vote its candidates on to the board, will not pass off peacefully. The union said: "In the UK, National Express accepts union representation, but in the US it has a strong anti-union stance."
The Teamsters claims managers at the group's school bus unit, Durham School Services, have resorted to tactics such as the distribution of memos casting doubt on the benefits of union membership. The role of unions in the US has been a subject of fierce debate ever since the governor of Wisconsin, Scott Walker, ended collective bargaining rights for the majority of the state's public employees.
James Hoffa, general president of the Teamsters, told the Observer: "Middle-class working Americans are under constant attack from big business. This war on workers must stop before every right we have fought so hard to gain is lost."
A National Express spokesman said: "National Express Group's publicly available workplace rights policy expressly protects the rights of employees to join – or not join – a union."
National ExpressUS economyUS unionsDan Milmoguardian.co.ukUS employers added 244,000 jobs last month, far more than expected, non-farm payrolls data showed on Friday. Find out what economists made of the figures
Rob Carnell, economist at INGDepending on your personal bias, the April labour report was either good, suggesting the Fed is dropping behind the curve in response to employment growth and wages, or bad, with falling employment and falling wages growth justifying the Fed's lack of movement on policy.
The optimistic view stems from the non-farm payrolls numbers, which rose a very respectable 244,000 (surprisingly strong private payrolls growth of 268,000), with substantial upwards revisions to past months suggesting that employment growth has been somewhat stronger than realised. And although hourly wages growth is still falling, upwards revisions here suggest that the rate of slowdown itself is slowing, and at a rate that is above that previously reported. Not so deflationary then.
Adding to the sense that the US is not falling back into a sustained patch of weakness, the duration of unemployment seems also finally to be falling.
Against this, the household survey of employment showed a monthly employment loss of 190K – almost the complete opposite of payrolls. We doubt that this is an accurate reflection of what has happened in the labour market this month, but then the payrolls numbers also fly in the face of much softer, though still positive labour indicators for April.
The result of the household survey loss is a jump in the unemployment rate back to 9% from 8.8%, with little other than the fall in employment (labour force little changed) to explain this. We suspect that this is an aberration, but it will take several more months of labour market data to disentangle exactly what is going on in the US labour market. Until then, markets will have to take their cues from other sources – more choppiness beckons.
Kathy Bostjancic, director for macroeconomic analysis, The Conference BoardIs the labor market really this strong? The labour market turned in a third straight strong monthly gain. But it is likely to turn a little choppy over the next few months. Expecting it to stay consistently strong in the face of just meager growth in domestic demand seems like wishful thinking. Moderate consumer spending, even with strong business investment and with strong exports, can only deliver moderate job growth. However, embedded in this story is the apparent business assessment that they can maintain healthy profits while adding to payrolls. If that is true, the labor market is truly on the way back, even if it's a long way back.
Paul Ashworth, chief US economist, Capital EconomicsThe 244,000 increase in US non-farm payrolls in April will come as something of a relief to the financial markets, particularly after the surge in initial jobless claims reported yesterday and the slump in the ISM non-manufacturing index on Wednesday. The consensus forecast was 185,000 but, judging by the reaction in the Treasury market, investors were braced for something a lot worse. Private payrolls increased by 268,000 last month, the biggest monthly gain in five years. Manufacturing employment increased by 29,000, retail was up 57,000, professional & business services expanded by 51,000, education & health increased by 49,000 and leisure & hospitality improved by 46,000. Public sector employment continued to shrink, falling by 24,000 in April, due principally to job cuts by State and local governments.
There was no evidence of any knock-on impact from the disruptions to production in Japan: employment in the US autos sector increased a little and hours worked were unchanged. April's employment report wasn't all positive, however. The dip in temporary workers is a bit of a concern. The bigger problem is the rebound in the unemployment rate to 9%, from 8.8%. In stark contrast to the payrolls figures, the household survey measure suggests that employment fell by 191,000 last month, with the labour force expanding by 235,000. Overall, very encouraging, although the rebound in the unemployment rate underlines how far we still have to go.
Peter Morici, professor at Smith School of Business, University of Maryland School, and former chief economist at the US International Trade CommissionAfter adding 235,000 and 221,000 jobs in February and March, this should indicate the economy is finally accomplishing momentum; however, rising gas prices and sluggish consumer demand clouds the outlook. A surge in April first time jobless claims indicate growth is stuck at depressed, first-quarter levels, and some businesses are growing more reluctant to hire.
Gains from February through April, were in sharp contrast to weaker jobs creation the previous 13 months, and largely resulted from stronger private sector jobs growth.
The economy began adding jobs January 2010, but gained only 78,000 jobs a month through January 2011. Too many of those jobs were created by stimulus spending, temporary business services, and health care and social services, which are heavily subsidized by government reimbursements. Job gains in the core private sector—private employment less temporary business services, and health care social services and temporary business services--averaged only 49,000 a month.
Core private sector jobs are so important, because those have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring. In February, March and April, this barometer of private sector vitality gained 222,000, 158,000 and 229,000 new positions, respectively. Similarly strong core private sector gains will be needed to continue adding 200,000 or more new jobs each month going forward and that would still not be enough to push unemployment down to acceptable levels.
The economy must add 13 million private sector jobs over the next three years — 360,000 each month — to bring unemployment down to 6%. Core private sector jobs must increase at least 300,000 a month to accomplish that goal.
Since the recovery began, the economy has expanding at a 2.8% annual rate. This is hardly enough to hold unemployment steady, because the working age population increases 1% a year, and productivity advances about 2%. Coming out of a deep recession, growth in the range of 4% to 5% is needed and possible to get unemployment down to 6% over the next several years.
Continued dependence on high priced foreign oil, the growing trade deficit with China, and health care and tax policies that penalize the location of businesses in the United States are responsible for slower jobs creation than has been accomplished during past recoveries.
Simply, more jobs could be created by drilling for more domestic oil now, which would keep money here that American drivers send to the Middle East; taxing dollar-yuan conversion to offset China's undervalued currency and 35 percent subsidy on its exports; genuine health care reform that lowers drug, insurance, administration and tort burdens rather than subsidizing a system that costs 50% more than private systems in Germany and elsewhere; and replacing the corporate income tax and elements of the personal income and social security tax with a value-added tax.
US unemployment and employment dataEconomicsUS economyUnited Statesguardian.co.ukHopes rise that the world's biggest economy is at last on course to emerge from the deep recession caused by the financial crisis
Hopes for a sustained recovery in the US economy received a boost on Friday with news that an additional 244,000 jobs were created last month.
The closely watched non-farm payroll data released in Washington showed that strong growth in demand for labour from the private sector was behind a better-than-expected employment performance last month.
An increase of 268,000 in private-sector employment - the biggest increase in more than five years - was the main factor behind the improvement.
The US Labour Department also revised up its estimates of non-farm jobs growth in February and March, adding to the belief that the world's biggest economy is at last on course to emerge from the deep recession caused by the financial crisis of 2007-08.
In a sign that consumers are once again returning to the shopping malls, the 57,000 jobs created in retailing last month were the highest since April 2000, when the US was in the last throes of the dotcom boom.
One slight disappointment for the Obama administration was that despite the increase in jobs the unemployment rate rose from 8.8% to 9%.
US unemployment and employment dataEconomicsUS economyUnited StatesLarry Elliottguardian.co.uk
Let’s demolish this poor housing policy | Dean Baker
The Obama administration's reform of Freddie Mac and Fannie Mae would merely subsidise mortgage middlemen with our taxes
A child learns the dangers of fire by getting his hand burned. Washington policy wonks are not as quick learners. This is demonstrated by the reports that the Obama administration is about to come forward with a plan to replace Fannie Mae and Freddie Mac, the two mortgage giants that are now in conservatorship, with five mini Fannies and Freddies.
There are differences in the proposed structure of these new public/private entities and the pre-crisis Fannie/Freddie, but these details are less important. The more basic question is why the government feels the need to create a special financial system to subsidise housing. If there is a good answer, nobody has bothered to bring it up in public debates.
Just to be clear, the claims that Fannie and Freddie were the primary culprits behind the inflation of the housing bubble and the flood of fraudulent mortgages is nonsense. I say this as someone who was sharply critical of these mortgages giants throughout the runup of the bubble and warned of their collapse as early as 2002.
Fannie and Freddie were not good actors during the bubble. If they had acted responsibly, they would have refused to buy mortgages for homes purchased at bubble-inflated prices, as determined by the price-to-rent ratio. Had either or both of them taken this position, it likely would have been sufficient to deflate the bubble before it grew large enough to sink the economy when it collapsed.
They deserve blame for failing to recognise and respond to the bubble. Housing is their only business and if they had understood the housing market, they would not be in conservatorship today.
However, the worse junk mortgages were not bought and securitised by Fannie and Freddie. These were packaged and sold by the investment banks, Goldman Sachs, Lehman, Citigroup and the rest. Fannie and Freddie got into junk mortgages late in the game, and even then, their primary motive was to regain lost market share. It had little to do with a desire to promote homeownership among moderate income households.
But even if Fannie and Freddie were not the primary culprits, the crisis and their collapse gives us a serious opportunity to rethink housing policy. Fannie Mae, when it was originally created in the Depression, served a useful purpose. It created a secondary market in mortgages, allowing banks to sell their mortgages and get the capital necessary to issue new mortgages. This reduced the disparity in interest rates across regions, ensuring that homebuyers had access to mortgages at a reasonable price.
Given the development of the national banking system over the last 75 years, the same concerns no longer exist today. There are plenty of mechanisms for transferring funds across regions. Therefore, we no longer have to worry about parts of the country being denied access to housing credit.
The question is whether there is any reason to provide some sort of government guarantee in order to subsidise home mortgages. And more specifically, is there a reason to subsidise the securitisation of mortgages, which is what the Obama administration proposal would do.
There is an argument for subsidising homeownership – which we already do through the mortgage interest deduction. This benefit could be restructured to be more generous to moderate income homeowners, and less so to the higher income people who derive most of the benefit from the deduction in its current form. It is difficult to see why, for instance, taxpayers should give Bill Gates $25,000 a year to help pay for his mansion on Lake Washington.
Since we can use tax policy to make homeownership subsidies as generous as we want, why should the government also subsidise homeownership through a second channel in the financial system? Furthermore, even if the government were going to subsidise housing finance, why have the subsidy only apply to mortgage-backed securities?
The policy being considered by the Obama administration, which would guarantee the mortgage-backed securities issued by mini Fannie and Freddies, is effectively handing taxpayer dollars to the intermediaries in the housing finance process. That's a good policy if the point is to give taxpayer money to financial intermediaries; it makes zero sense as housing policy.
The incompetence of economic policymakers in the last decade has given us the worst downturn since the Depression. Tens of millions of people are going to be suffering ill-effects from this crisis for many years to come. The folks who brought us this disaster should have been fired, but almost all of them are still on the job. That's the way things work in Washington.
As a second-best solution, we should expect that these policymakers have at least learned something from their failure. But in Washington, no one in a position of power ever seems to learn from mistakes, which is why we are destined to repeat them.
Freddie Mac and Fannie MaeHousingHousing marketUS economyUnited StatesObama administrationMortgage lending figuresUS economic growth and recessionEconomic policyDean Bakerguardian.co.uk