AlterNet.org: Marshall Auerback http://www.alternet.org/authors/marshall-auerback en Trump Shows How Global Trade Has Devastated American Jobs; Immigration, Not So Much http://www.alternet.org/election-2016/trump-shows-how-global-trade-has-devastated-american-jobs-immigration-not-so-much <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">We need to talk about globalization.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/5440993294_8ce1bc6d9e_z.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>In the post-Cold War era, the dominant force in the development of the world economy has been globalization. The inexorable trend toward greater global integration took somewhat of a hit with the onset of the Asian Financial Crisis of 1997/98, but momentum was clearly re-established with China’s entry into WTO. Distance simply evaporated as a concept. Businesses moved to China, India, Latin America and other emerging markets in search of cheaper places &amp; ways to produce goods &amp; services for the Western economies. Several hundred million people in underdeveloped economies were lifted into urbanization from centuries of debilitating rural poverty. </p><p>At the same time, globalization created losers or at least relative losers. Revolutionary technological advances have enabled an unprecedented outsourcing by American companies seeking to maximize profits by employment of low cost foreign labor. The scale of the outsourcing has been made possible because of advances in technology, global trade treaties and capital account liberalization. And for all of the vaunted gains in profitability, it is unclear that globalization has been the huge win-win, as its apologists all argue. Internationally, the richest 5 percent of people receive one-third of total global income, as much as the poorest 80 percent, according to research by Professor Branko Milanovic, a visiting presidential professor at CUNY’s Graduate Center and a senior scholar at the Luxembourg Income Study Center. While a few poor countries are catching up with the rich world, the differences between the richest and poorest individuals around the globe are huge and likely growing.</p><p>And domestically, U.S. workers have been semi-permanently replaced by low cost foreign workers. Prior to these great advances in technology, displacement of the current labor force could only have occurred through immigration of workers into the country. The upshot is that a huge number of Americans have experienced stagnant wages and incomes for over a quarter of a century. Trade agreements have exacerbated this problem, and the results of this unconcern are evident today in the campaigns of Donald Trump &amp; Bernie Sanders.</p><p>Trump, however, has taken this one stage further with his hardline stance on immigration. For all of the media attention being devoted to walls along the Mexican border, or an outright ban on Muslim immigration, there is method to Trump’s madness, which goes well beyond racism (even though there is much of that in his rhetoric). By linking immigration and trade, however crudely, Trump has exposed the broader paradox and inherent contradictions, which lurk between the two.</p><p>Historically, immigration law has concerned itself with many considerations, the most of which is the displacement of U.S. workers. By contrast, advocates of free trade ignore this consideration, or blithely suggest that the resultant unemployment in a displaced sector (e.g., the automobile industry), is a “negative externality,” which is generally offset by the resultant gains in competitive efficiency, and lower cost goods. Cheap imports, then, outweigh the displacement of workers.</p><p>But we do not extend this logic to immigration, or we would move straight to a policy of open borders. Historically, the answer to the question as to why we do not have open borders is because it would substantially drive down the wages of American workers. Low costs for traded goods is okay; low cost labor, not so good (at least that is implicit in the application of our current immigration policy).</p><p>Businesses have sought to evade this inconvenient immigration restriction via offshoring manufacturing facilities, the result of which has been the displacing of U.S. workers by low cost foreign labor. The economic impact subverts the policy goal behind American immigration policy. In many respects, it mirrors the impact of a hypothetical open borders policy, in effect creating a “synthetic immigration,” which has the impact of reducing employment and lowering wages as investment is increasingly outsourced abroad.</p><p>Globalization advocates argue that the resultant profits to U.S. corporations spur re-investment, which in turn creates employment. In reality, the profits that accrue to U.S. corporations do not go toward domestic re-investment (and, hence, more jobs), but to increasing investment abroad (that is, of course, when they are not using corporate cash to buy back stock and inflate share prices and CEO executive compensation). In fact, it’s worse: Ex China, the evidence is strong that corporations have been net savers. Companies have been net savers, and increasingly using their record high profits relative to GDP to buy stock. That means they are actually liquidating. That fact has been masked by acquisitions. And this is a long-standing trend. It was evident in the United States as of the early 2000s.</p><p>To offset the economic drag that outsourcing and synthetic Immigration impose, policymakers have been pursuing a reckless and increasingly ineffective program of Quantitative Easing (QE) in unprecedented amounts both absolutely and relative to GDP. This policy, designed to stimulate consumption and ultimately investment by pumping up housing and stock markets, have resulted instead in a weak real economy with persistently high underemployment and non-existent wage growth. </p><p>In regards to free trade, we think nothing of displacing tens of thousands of automobile workers in Michigan because we attach primacy to the goal of being able to buy the cheapest cars available (the theory being that the resultant savings will generate sufficient demand elsewhere to offset the impact of displaced workers). The implicit assumption is that this “ good” outweighs all other considerations, even though the relative consumption problem that occurs as one person buys the lower cost good creates a consumption equivalent to Keynes’s “paradox of thrift”—insofar as consumers fail to realize that if they all do it then many more of them ultimately end up unemployed or underemployed. </p><p>Consider a thought experiment: Imagine a country that had only one worker and that worker was the sole consumer. It is obvious the worker would understand that by consuming foreign made goods produced by the synthetic immigrant, he would soon have no income and as a consequence, no consumption. In the real world, people want to maximize their welfare and most do so by maximizing current consumption, which is said to be one of the benefits underlying free trade. Maximizing current consumption means purchasing the lowest priced goods at any particular level of quality. In that way, the volume of consumption can be increased and one’s utility maximized. Relative consumption behavior increases this behavior. One’s (call him Joe) sense of values quickly decays when he sees his neighbors increasing their utility at his expense. The neighbor’s foreign-made flat screen TV is so nice and was so cheap that Joe decides he must have one too even though as a union member he well understands his purchase will result in a job loss in the U.S. </p><p>This behavior cascades because in the short-run the increased standard of living offered by low cost goods swamps the longer-term effects of chronic job losses. Thus, the paradox of consumption is the idea that a rational person in a one-person world would never behave in the same way as many rational utility-maximizing individuals behave even if the many understand the possible outcome. So, in the world of many individuals creeping Synthetic Immigration progresses as a result of the paradox of consumption until a crisis occurs. Of course, it is the responsibility of the sovereign to prevent the proliferation of the paradox of consumption and synthetic Immigration. </p><p>In periods prior to globalization, this was not a problem because displacement by immigrants generally began at the most menial level of the labor force, and policy changes adopted in the aftermath of each successive immigration wave (at least until 1965) generally prevented massive amounts of displacement and consequently, stopped the migration of jobs at the menial labor level. This is because immigration policy has generally considered the impact of immigrants on the domestic job market. The trade-off has widely been characterized as one between greater consumer happiness (lower prices) and job displacement, which is in marked contrast to the trade-offs we consider when introducing trade agreements.</p><p>The ethics debate regarding immigration is similar to that regarding trade. Should policy be constructed with respect to domestic or global welfare? For the most part, it seems as if domestic concerns dominated immigration policy; whereas trade policy, haunted by misconceptions regarding the Smoot-Hawley Tariff of the 1930s is generally obsessed with global considerations. Today false ideas about great prospects for exporting into the enormous Chinese market hinder national policy and enable employee displacement. Because of technological advances, today’s trade policies are effectively an immigration policy. </p><p>There are differences to be sure, but those differences work to the detriment of American workers. Typically low cost labor attracted long-lived capital investment. Today, Synthetic Immigration via global outsourcing leads to capital investment in the immigrant’s country (China) resulting in a greater capital stock there and increased competitiveness. So, in a very simple model, Synthetic Immigration means less revenue for the U.S. government but comparable expenses in the form of social welfare costs associated with under-employment and lower paying jobs, and correspondingly lower tax revenues. This process in turn has led budget austerians to call for greater cuts in Social Security, Medicare, state pension funds for public sector employees, the very social supports that have somewhat offset the deleterious impact of globalization.</p><p>It is and always has been the government’s duty to provide for and protect its citizens. Immigration policies differ everywhere and change as the government’s responsibility to its citizens is enforced. Protection of U.S. workers from synthetic immigrants is long overdue and the cost of government neglect is huge. And yet we never apply the same principles that underlie our immigration policy for trade. At least until now, where it has become a major feature of the Trump campaign, likely catapulting him to the GOP presidential nomination this year.</p><p>So what is the right policy response? Clearly, there has been a backlash against trade agreements, such as the Trans-Pacific Partnership. As Thomas Frank has recently <a href="http://www.theguardian.com/commentisfree/2016/mar/07/donald-trump-why-americans-support">noted</a>:</p><blockquote><p>Trade is an issue that polarizes Americans by socio-economic status. To the professional class, which encompasses the vast majority of our media figures, economists, Washington officials and Democratic powerbrokers, what they call “free trade” is something so obviously good and noble it doesn’t require explanation or inquiry or <a href="http://fair.org/blog/2014/02/18/what-does-tom-friedman-know-about-tpp/">even thought</a>. Republican and Democratic leaders alike agree on this, and no amount of facts can move them from their Econ 101 dream.</p></blockquote><p>To the remaining 80 or 90 percent of America, trade means something very different. There’s a <a href="https://www.youtube.com/watch?v=Y3ttxGMQOrY">video</a> going around on the internet these days that shows a room full of workers at a Carrier air conditioning plant in Indiana being told by an officer of the company that the factory is being moved to Monterrey, Mexico, and that they’re all going to lose their jobs.</p><p>And Trump has used this video in his campaign. As Frank has noted, “Trump is making a point of assailing that Indiana air conditioning company from the video in his speeches. What this suggests is that he’s telling a tale as much about economic outrage as it is tale of racism on the march.” And the reaction against immigrants may well appeal to racists, but it also overlaps with the economic concerns of people who have been displaced by decades of trade and immigration liberalization, both real and “synthetic”.</p><p>Outsourcing is the source of creeping synthetic immigration and synthetic immigration is the source of unemployment. Since unemployment is the source of the extended pay benefits provided by the government, perhaps the government should permanently tax the source of the unemployment—U.S. corporations producing abroad. Doing so will help restore a permanent incentive to invest in plant and equipment in the U.S. and create additional revenues to rebuild America’s decaying infrastructure (as one possible source of domestic employment). At the very least, we need to wean U.S. policymakers off destructive monetary fixes that largely relied on indirect transmission mechanisms (such as QE) that subsidize financial intermediaries and create bubbles. Policymakers believed that human behavior would respond to increased prices of assets (Keynesian “Animal Spirits”) and the subsidization of consumption via unemployment benefits. </p><p>Those companies that first exploited the opportunities afforded by globalization and outsourcing did very well, because it provided them with a first mover advantage. Profits grew for those companies that exploited very low cost foreign labor and a much undervalued exchange rate relative to the dollar. At the extreme, all manufacturers must know that a rational public policy would reject outsourcing as un-American and destabilizing. That is certainly a sentiment that Trump continues to exploit in his campaign. As the putative GOP frontrunner says, “we have rebuilt China and yet our country is falling apart. Our infrastructure is falling apart … Our airports are, like, Third World.” (Frank, ibid)</p><p>As globalization has intensified, companies have increasingly competed with each other. Those with substantial low cost advantages have generally prevailed and eliminated competitors which sought to preserve well-paying American jobs. Therein lays the paradox of outsourcing. Again, it is the responsibility of the U.S. government to construct policies that stop or least restricts the cascading of outsourcing because of its adverse impact on employment in the U.S. and the negative incentives outsourcing imposes on domestic investment. We have historically considered these factors in our immigration policy. Why is trade so sacrosanct? The candidate who has been most persistent, however crudely and coarsely, in asking these questions is Trump. His unexpected success this election shows that populist backlash against the Washington Consensus is no longer the preserve of a lunatic fringe.</p> Sat, 02 Apr 2016 09:10:00 -0700 Marshall Auerback, AlterNet 1053576 at http://www.alternet.org Election 2016 Economy Election 2016 Labor World donald trump election 2016 trade immigration globalization The High-Tech Wall Street Rip-Off Setting the Media on Fire http://www.alternet.org/economy/high-tech-wall-street-rip-setting-media-fire <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Dangerous and predatory high-frequency trading is bad for markets, bad for regular people and bad for society.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/wallsstreetcrook.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>A brand-new book by Michael Lewis, author of <em>Liar’s Poker</em> and <em>Moneyball</em>, has set the media on fire. In <em>Flash Boys: A Wall Street Revolt,</em>Lewis argues that not only do the liars on Wall Street play poker, but the poker game itself is completely rigged against the little guy.</p><p>You, my friend, are the little guy. So am I. And so is everyone else who does not have access to a supercomputer.</p><p>Lewis contends that the U.S. stock market — you know, that famous system which impacts how much money is in your 401(k) — is rigged in favor of high-speed electronic trading firms, which use their advantages to rip off investors to the tunes of billions of dollars a year. These firms engage in a widespread practice known as high-frequency trading (HFT). Let's explore why this is very bad for you and me. (Be sure to check out Lewis' <a href="http://www.cbsnews.com/news/is-the-us-stock-market-rigged/"><em>60 Minutes</em> interview</a>, which also features young Brad Katsuyama, the Canadian trader who helped suss out the problem.)</p><p><strong>What the Heck Is High-Frequency Trading?</strong></p><p>High-frequency trading is trading on steroids. It has exploded onto Wall Street over the last decade, now accounting for 60 percent of the equity action. The firms that do it typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies — and that’s how the profits roll in. The practice attracted the attention of regulators after the so-called "flash crash" in May 2010, when the Dow Jones Industrial Average briefly lost almost 1,000 points and scared the crap out of everyone.</p><p>Right now, both the Federal Bureau of Investigation and the NY State Attorney General, Eric Schneiderman, have started investigating whether U.S. stock exchanges and alternative trading venues provide improper advantages to high-frequency traders.</p><p><strong>Financial “Innovation” Is Very Expensive for Main Street</strong></p><p>Wall Street loves to brag about its innovative capacity. But somehow, that innovation often points to one outcome: Main Street gets ripped off.</p><p>By simply monopolizing a huge chunk of the stock market’s volume, big firms that engage in high-frequency trading generate very nice profits for themselves. But why should they be allowed to have this advantage? Capturing minute price disparities hardly seems like the reason we set up capital markets in the first place. In the old days, these markets existed for the purpose of providing capital to Main Street to help the latter grow and create more jobs and prosperity. But not all innovation in finance is useful, not all trading plays a useful social role, and a bigger and faster financial system is not necessarily a better one.</p><p>High-frequency trading undermines our financial system in a number of ways. For one thing, it’s bad for market transparency, because institutional investors tend to divert some of their trades to what folks in the finance community call “dark pools.” In these privately run stock markets, traders conduct business anonymously and they escape proper regulatory oversight.</p><p>A lot of high-frequency trading is done by small proprietary trading firms, which are subject to less oversight than brand name financial institutions. That provides even greater scope to rip off retail investors. Then there’s the unethical practice of “front-running,” which happens when traders are able to purchase orders in front of you and then sell them back to you when you want to buy. The sheer speed of these high frequency trades makes front-running much harder to prove. Finally, high-frequency trading breaks down trust in markets. Thanks to recent high-frequency-trading-related debacles like the flash crash and Kraft’s first trading day at NASDAQ, when its initial trades had to be cancelled, retail investors are wary—and rightly so.</p><p>So what if you tend stay away from the stock market? Why should you care what a bunch of nerds are doing with supercomputers? Well, if you hold a 401(k) account or you have a pension, you’re probably caught up in this game whether you like it or not.</p><p>High-frequency trading might just drive up the price of stocks a penny here and a penny there in the short run, but over time, it’s going to make a difference. That 8 percent you should have earned becomes 7.9 percent. In one year, that doesn’t matter. In 20 or 30 years, it certainly does, perhaps tens of thousands of dollars worth. The money skimmed off by high frequency traders is money you can’t reinvest. What you lose, they win.</p><p>Ultimately, this steroid-trading is self-defeating because if the public continues to think the game is perpetually rigged against them, they won’t bother placing their chips in the casino any longer. (In fairness, my analogy is probably unfair to Vegas, since the house occasionally does lose and the government is not expected to backstop the losses. Plus, the casino industry as a whole is probably better regulated than Wall Street these days.)</p><p><strong>Let’s Ban High-Frequency Trading</strong></p><p>High-frequency trading should be banned because it’s bad for markets, bad for regular people and bad for society.</p><p>Anybody interested in the functioning of markets should be worried about high-frequency trading, because it has the potential to cause market crashes that could vaporize trillions of dollars of wealth. Even if you are a devout believer in so-called free markets, you’d have to be against something that gives one trader an advantage over another. How is there any real competition when both sides are clearly not armed with a high-powered computer that buys access to the price of a product 2 seconds before anybody else?</p><p>As we’ve discussed, those dark pools that let traders buy and sell stock under the radar make a mockery of transparency. Neither buyers nor sellers should have private information that can be hidden, just as when you go to a bank to borrow money, the bank knows everything about your project, and you aren’t allowed to hide any negative information nor embellish positive information. Those are the rules everyone else is expected to play by in the financial realm. Why should Wall Street traders be exempt?</p><p>High-frequency trading rips off ordinary people who rely on their 401(k)s and pensions for a decent retirement. Wall Street has been making a killing soaking these precious funds in a variety of ways for several decades now, and it’s time to tell them we aren’t going to stand for it.</p><p>In the big picture, high-frequency trading is really bad for society. Profitability is not equal to soundness, and the fairy tale that market forces will do most of the job of weeding out unsustainable and harmful business practices vanished with the crash in 2008.We need to remember something called public purpose, and demand that our regulators and supervisors do the job of promoting a safe and sound financial system. It's true that some entrepreneurial folks, like former trader Brad Katsuyama, who is featured in Lewis's book, are working on alternative exchanges that can bypass the HFT network. But bypassing the system is akin to creating a new bypass to a still rotten heart. The truth is that the whole thing should be destroyed.</p><p>Finally, high-frequency trading is getting the scrutiny it deserves. The best move is to get rid of it: the SEC should move to end exchange access speeds that one player advantage over anybody else. Of course, given the lack of enthusiasm with which the SEC and other regulatory bodies have approached any kind of reform, banning the practice seems unlikely. At the very least, introducing a <a href="http://www.nakedcapitalism.com/2012/10/its-time-for-a-tax-to-kill-high-frequency-trading.html">financial transaction tax of one basis point on securities transactions</a> would severely dent the profitability of this practice and effectively tax it out of existence. And as former CFTC Commissioner Bart Chilton <a href="http://www.cftc.gov/PressRoom/SpeechesTestimony/opachilton-72">suggested</a>, fines ought to be levied on those who engage in unethical practices:</p><blockquote><p>“If you’re making millions in seconds, then you should be liable for fines for bad conduct, counted in seconds. I know this is a revolutionary way of thinking about money penalties, but I believe it’s a necessary step to take in order to both deter illegal conduct and assess sufficient penalties to bad actors in our markets.”</p></blockquote><p>Ultimately, high-frequency trading is the symptom of a much broader problem. We have an overly financialized economy, dominated by a few mega-institutions which have corrupted our political system and poisoned our economy. After the Great Depression, the greater involvement of the federal government in the economy through spending, taxing, discounting, and regulation provided a more stable economic and financial environment for the private sector.</p><p>Over the past 30 years, the quality of government involvement has declined dramatically and the political system has become a money-for-hire whorehouse. If anything the “reforms” which have been introduced since the Great Financial Recession of 2008 have allowed large financial institutions to consolidate their power as a result of the crisis, largely through government assistance. In this kind of environment, it is unsurprising that high frequency trading has thrived.</p><p>We’ve become a society marked by high private indebtedness, an over-reliance on financial markets as a source of income, income inequality and predatory capitalism. As high-frequency trading illustrates, the sooner we downsize the financial sector, the better.</p> Wed, 02 Apr 2014 09:59:00 -0700 Marshall Auerback, AlterNet 977853 at http://www.alternet.org Economy Economy Bart Chilton business CFTC Commissioner commissioner Contact Details Dow 30 economics eric schneiderman Federal Bureau of Investigation finance Financial economics financial markets financial transaction tax flash crash Flash High-frequency trading investment banking kraft Lee Shepherd Mathematical finance michael lewis NY State Attorney General Person Career Quotation stock market Stock trader trader U.S. Securities and Exchange Commission united states yves smith author bank banking big bank federal government finance community call Think the Tea Party Is Crazy? Europe's Rising Neo-Fascism Is a Taste of What's Coming If Austerity Prevails in America http://www.alternet.org/economy/tea-party-and-europe <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Cutting social programs and government investment is a recipe for the growth of fascism. </div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/AFP/photo_1327383703620-2-0.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>American political dysfunction looks pretty bad — but just take a look at what’s going on across the Atlantic. A poisonous wave of right-wing, neo-fascist parties is emerging in response to the continent’s ongoing austerity and hugely ineffectual policy response to the resulting jobs crisis. </p><p>The U.S. could be headed in the same direction if the austerity-pushers have their way. Europe is a case study in what happens when mainstream parties on both the right and the left fail to deliver relief to the people. Extremists seize the opportunity to assert themselves, and things get ugly very fast.</p><p>Bringing countries together in the European Union was supposed to make violent nationalist conflict a thing of the past. Member countries were supposed to prosper economically. But now countries like Greece and Spain are fracturing politically and falling into a downward economic spiral. </p><p>The creators of the euro were like parents fixing an arranged marriage. They knew that they were locking together countries with very different economies and political cultures. But they hoped that, over time, the new partners would grow together and form a genuine bond.</p><p>The European Union was banking on three forms of convergence: economic, political and popular. At the time the euro was launched, there was much hopeful talk that a surge in trade and investment between the euro zone nations would create a truly unified European economy, in which national levels of productivity and consumption would converge on each other.</p><p>It was also assumed—or perhaps just hoped—that the euro would create political unity. Once Europeans were using the same notes and coins, they would feel how much they had in common, develop shared loyalties and deepen their political union. The designers of the single currency were also hoping that elite and popular opinion would come together. They knew that in certain crucial countries, in particular Germany, the public did not share the political elite’s enthusiasm for the creation of the euro. But they hoped that in time, this would change.</p><p>Enter reality.  At first, people saw most regulations and orders coming from Brussels as annoying and occasionally inconvenient. Rulings on things like what kind of fat chocolate may contain seemed objects of ridicule, not the stuff of revolution. The European Commission was seen as something distant with little day-to-day relevance for the lives of most citizens living within the European Union. But everything changed with the Great Recession of 2008. Ruinously destructive austerity policies took hold in the councils of Europe, notably in the form of economic austerity packages demanded of Greece, Spain, Ireland, Portugal, etc. The consequences have been monstrous.</p><p>Politically, the implementation of the euro-zone’s stability pact has been largely left in the hands of unelected bureaucrats—the so-called “Troika," in particular the IMF and European Central Bank, operating out of institutions that are devoid of any kind of democratic legitimacy. They implement “fiscal rules” on the basis of some arbitrary numbers that have no foundation in economic theory or reality. </p><p>Here’s a perfect example. A former senior budget ministry official in the government of former French president François Mitterrand was recently revealed as being the inventor of a phony "rule" repeated by governments both right or the left that the public deficit should not exceed 3 percent of the national wealth. The French official had this to say when asked about the origins of the 3 percent rule:</p><blockquote><p>"We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money… We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity."</p></blockquote><p>So highly paid unelected bureaucrats in Brussels pull magic numbers out of the air, and then policy makers use them to call for nations to cut welfare, wages, jobs and the like. The result? People have already started dying in riots in Athens, Madrid and Rome. Backlash in France produced Marine Le Pen’s surprisingly successful candidacy in the last French presidential election for the Front Nationale (FN). If the name sounds familiar, it’s because fascism runs in the family: She is the youngest daughter of the French politician <a href="http://en.wikipedia.org/wiki/Jean-Marie_Le_Pen" title="Jean-Marie Le Pen">Jean-Marie Le Pen</a>, former president of the FN and currently its honorary chairman. In last year’s French presidential election, she polled some 18 percent in the first round and finished in third position behind winner François Hollande and the previous incumbent president Nicolas Sarkozy.</p><p>Anti-EU parties of the sort Le Pen represents are <a href="http://www.nytimes.com/2013/11/09/world/europe/right-wings-surge-in-europe-has-the-establishment-rattled.html?hp&amp;_r=0">on the rise</a> across continental Europe. They are growing precisely because the mainstream parties conspicuously continue to ignore the prevailing social disasters they are imposing on their respective electorates.  As the <em>New York Times</em> recently reported, the far right is quickly gaining ground:</p><blockquote><p>"In France, according to a recent opinion poll, the far-right National Front has become the country’s most popular party. In other countries — Austria, Britain, Bulgaria, the Czech Republic, Finland and the Netherlands — disruptive upstart groups are on a roll."</p></blockquote><p>While the European leaders are now talking about moving to a fully fledged political union (a "United States of Europe") they are doing so within a culture of austerity, which simply exacerbates the prevailing social stresses and leads to further populist challenges to the mainstream.</p><p>Time is not on the side of Europe’s policy makers. The stock of private debt remains very high and policy makers are beginning to fret about the possibility of a genuine Great Depression-style debt deflation leading to another lost decade. That was the hidden message behind the ECB’s recent cut in interest rates, although the real answer must surely lie in a fiscal response that will break the fall in incomes and preserve living standards.  </p><p>That’s the main reason America has not seen a comparable rise in fascism. In this country, we still have institutions, such as Social Security and Medicare, which were designed during the New Deal and the Great Society and by and large work extremely well. Europe, unfortunately, seems determined for now to go in an opposite direction, reviving old historic enmities and rivalries in the process. That could be in store for us if we follow a similar route, which would make the Tea Party seem like a tea party in comparison.</p> Fri, 15 Nov 2013 13:18:00 -0800 Marshall Auerback, AlterNet 924752 at http://www.alternet.org Economy Economy The Right Wing Visions World america athens austerity austria brussels bulgaria czech republic euro europe European Central Bank european commission european union finland Fran france François Mitterrand French people germany Great Society greece International Monetary Fund ireland Jean-Marie Le Pen madrid Marine Le Pen medicare Mitterrand National Front netherlands new york times Nicolas SarkozyAnti Person Career Person Communication Politics of France portugal presidential election Rome spain tea party united kingdom united states ZERO continental Europe fracturing honorary chairman incumbent President official politician president previous incumbent president the Great Society the New Deal the new york times A Bold Plan for All the Detroits Out There http://www.alternet.org/economy/detroit-bailout <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">A bailout is not the answer. What&#039;s needed are jobs and decent demand in the economy.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/managed/storyimages_1333404006_georgiaunemploymentline.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>Should the federal government bailout Detroit?  That’s the question everyone is debating.  We think the discussion should be expanded well beyond this narrow question.  Detroit is the canary in the coal mine, but it’s symptomatic of a bigger problem, which is the lack of jobs and decent demand in the economy.</p><p>The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community.  So they’ll be all of this talk about “incentive zones”, we’re sure for Detroit.  And here he is committing one of the few big <a href="http://www.levyinstitute.org/pubs/ppb78.pdf">policy blunders from Lyndon Johnson’s War on Poverty</a>. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans. He <a href="http://www.freep.com/article/20110905/NEWS15/110905019/Read-Obama-s-Labor-Day-speech-Detroit">told a Labor Day crowd in Detroit</a>a few years ago that he wants to match the more than 1 million construction workers with an infrastructure-related rebuilding program to <a href="http://www.infrastructurereportcard.org/a/#p/home">improve the nation’s roads and bridges</a>. That is an improvement over his efforts to date, but it falls far short of the 20-plus million jobs we need.</p><p>So what should be done?  Well, the three of us (and <a href="http://www.levyinstitute.org/pubs/wp_542.pdf">others</a>) have long proposed <a href="http://www.truthdig.com/report/item/with_300_billion_the_president_can_reduce_unemployment_to_zero_20110908/">a longer term solution to deal with all of the Detroits that are out there</a>: The government could serve as the “<a href="https://en.wikipedia.org/wiki/Employer_of_last_resort">employer of last resort</a>” under a <a href="https://en.wikipedia.org/wiki/Job_guarantee">job guarantee program</a> modeled on the <a href="http://en.wikipedia.org/wiki/Works_Progress_Administration">WPA</a> (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the <a href="http://en.wikipedia.org/wiki/Civilian_Conservation_Corps">CCC</a> (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.</p><p>The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/15/companies-wont-even-look-at-resumes-of-the-long-term-unemployed/">making them easier to re-employ when activity picked up</a>. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.</p><p>Funding for the job guarantee program must come from the federal government—and the wage should be periodically adjusted to reflect changes in the cost of living and to allow workers to share in rising national productivity so that real living standards would rise—but the administration and operation of the program should be decentralized to the state and local level. <a href="http://www.levyinstitute.org/pubs/pn_12_02.pdf">Registered not-for-profit organizations</a> could propose projects for approval by responsible offices designated within each of the states and U.S. territories as well as the District of Columbia. Then the proposals should be submitted to the federal office for final approval and funding. To ensure transparency and accountability, the Labor Department should maintain a website providing details on all projects submitted, all projects approved and all projects started.</p><p>To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program.</p><p>The program would take workers as they were and where they were, with jobs designed so that they could be performed by workers with the education and training they already had, but it would strive to improve the education and skills of all workers as they participated in the program. Proposals would come from every community in America, to employ workers in every community. Project proposals should include provisions for part-time work and other flexible arrangements for workers who need them, including but not restricted to flexible arrangements for parents of young children.</p><p>That’s the approach we would take on behalf of all of the Detroits out there.</p> Mon, 22 Jul 2013 16:06:00 -0700 Marshall Auerback, Stephanie Kelton, L. Randall Wray, New Economic Perspectives 872467 at http://www.alternet.org Economy Economy america Conservation Corps department of labor detroit district of columbia economics Employment compensation Human resource management Job guarantee labor day Labor economics labor Labour relations Like Johnson macroeconomics minimum wage Person Location Quotation unemployment united states Work Projects Administration Works Progress Administration federal government longer term solution president Cyprus Fallout: Is Your Money Safer in a Mattress? http://www.alternet.org/economy/cyprus-fallout-your-money-safer-mattress <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">As long as banking activities are allowed to run against the public good, deposits will always be at risk. </div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/moneymattress.jpeg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>So it now looks as though Cyprus, a bucolic island of some 860,000 people in the heart of the Mediterranean, really does matter. </p><p>Here’s how things stand: Bullied by the the European Union, the ECB and the IMF (the unholy trinity of neo-liberalism), Cyprus has now agreed to impose a levy of 20 to 25 percent on large bank accounts as it seeks to overcome final obstacles to a financial rescue and avoid a chaotic bankruptcy. The levy would be applied to deposits exceeding €100,000 at the country’s largest bank, Bank of Cyprus. In exchange, account holders would receive shares in a restructured bank, although government officials have acknowledged that this would imply sharp losses.</p><p>The principle of deposit insurance, at least up to 100,000 euros, appears to be upheld. It looks like only the uninsured deposits above that threshold will be taxed. So can we now go to sleep comfortably, knowing that we don’t have to stick our hard-earned savings into what the <em>Financial Times</em>’ John Dizard termed “<a href="http://www.ft.com/intl/cms/s/0/71bc9bec-6a32-11e2-a7d2-00144feab49a.html#axzz2OJbyrFzV">Banco de Mattress</a>”?</p><p>Almost certainly not.</p><p>Regardless of the ultimate form this bailout takes, it is increasingly hard to view Cyprus as a “one-off,” which has no implications for us here in the US. What Cyprus has demonstrated is that even with deposit insurance, your deposits are not in fact a risk-free guaranteed asset, but actually simply another branch in the creditor tree in relation to your bank if it fails. That was made abundantly clear by no less than the Bank for International Settlements (BIS), the central bankers’ bank back in the heart of the financial crisis. The BIS noted that bank failures had become increasingly expensive for governments and taxpayers and therefore recommended an “Open Bank Resolution,” which would ensure that, as far as possible<strong>, “</strong>any future losses are ultimately borne by the bank’s shareholders and creditors." (See <a href="http://www.nzba.org.nz/assets/Uploads/111004-OBR-Submission-NZBA.pdf">primer on the Open Market Resolution</a>concept by the Reserve Bank of New Zealand.)</p><p>Why does this matter? Because, you, as a depositor are legally considered a “creditor” of your bank, not simply a customer who may have entrusted your entire life savings with the very same institution.  As <a href="http://en.wikipedia.org/wiki/Fractional_reserve_banking - via Ellen Brown (http://seekingalpha.com/article/1294151-a-safe-and-a-shotgun-or-public-sector-banks-the-battle-of-cyprus">Wikipedia notes</a>:</p><blockquote><p>In most legal systems ... the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet. Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.</p></blockquote><p>What banks do with your money is far more germane than you might have thought. They not only can blow up the institution through the creative use of toxic derivatives, but could well get you standing in the queue waiting to get paid out if the range of their activities are not strongly circumscribed. </p><p>True, it looks like the small depositors in Cyprus now will in fact receive their deposit insurance guarantees. But how credible is a guarantee coming from a country that doesn’t create its own currency? That, by the way, is the problem afflicting <em>all</em> of the countries in the Eurozone. At least in the US, Canada or the UK, such deposit insurance guarantees can be made credible because they are ultimately backstopped by the issuer of the currency. Not so in Cyprus, Spain, Portugal, even France or Germany, because they gave up their currencies for the euro, which is now issued solely by the European Central Bank (ECB). A European-wide system of deposit insurance which does not have the explicit backing of the ECB is as problematic as, say, New York state seeking to backstop all of the deposits of the American banking system without the US Treasury behind it.</p><p>That institutional peculiarity aside, the Cyprus experience demonstrates that deposit insurance is something ultimately built on <em>trust</em> between a people and its government. When the government arbitrarily undercuts the promise of insurance via tax or other forms of expropriation, it further undermines the stability of the banking system. Yes, governments should do all that they can to avoid bailouts which include penalties against depositors (both insured and uninsured). But the best way to do that is not to create ill-conceived bailout packages in the middle of the night in response to a financial crisis. The thing to do is to restrict the range of activities that created the crisis in the first place. Rather than creating an increasingly complex regulatory system in response to a bunch of newfangled products, which bankers constantly game, we should remember that banks' primary functions should be to facilitate a payments system and provide loans to credit-worthy customers. Attention should always be focused on what is a reasonable credit risk and that should be the starting point for true financial reform. </p><p>So in an ideal world, how should we do proper financial reform and prevent the recurrence of another Cyprus? In the first instance, the banks:</p><ul><li>should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit.</li><li>should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.</li><li>should be prevented from having “off-balance sheet” assets, such as finance company arms which can evade regulation.</li><li>should never be allowed to trade in credit default insurance. The banker should profit in the success of the borrower, not speculate on his potential for failure. That means “hedging,” such that it occurs, is done via good old fashioned credit risk assessment, not toxic derivatives. If the customer is a bad bet, then don’t extend the loan!</li><li>should be restricted to the facilitation of loans and not engage in any other commercial activity.</li></ul><p>The government can also play a role here by dampening demand for credit by increasing the price of reserves and/or raising taxes/cutting spending.</p><p>The issue then is to examine what risk-taking behavior is worth keeping as legal activity. Governments should ban all financial risk-taking behavior that does not advance public purpose (which is most of it), as well as legislating against derivatives trading other than that which can be shown to be beneficial to the stability of the real economy.</p><p>Given the importance of financial needs in order for the economic process to start, financial institutions are essential components of the system at all stages of the economic process in order for the economy to grow properly. But the paradox is that for a proper functioning free market economy, the banks have to be tightly regulated.  Otherwise, an unshackled financial sector will engender instability, in particular, by promoting the position-making desk (i.e. traders) and reducing the role of the loan-officer desk.</p><p>Absent regulation which severely curtails the dangerous practices of financial institutions systemic instability will be an ongoing problem, and our deposits may well be safer hidden in our collective mattresses. Simply trying to respond to each financial crisis by layering on an increasingly complex set of new regulations doesn’t work (as Dodd-Frank is already demonstrating). Indeed, many rapidly become obsolete, because they are insufficiently flexible enough to deal with financial innovations. Innovations are usually used by financial institution to bypass existing rules so unless innovations can be accounted for as they appear, regulations will not work properly to prevent the growth of financial fragility induced by the growth of leverage and/or the decline in the quality of leverage. The end result of the latter is an ever more complex banking system, constantly prone to financial disasters and, ultimately, threats to your very deposits. </p><p>Of course, in our current political environment, none of this seems remotely possible short of another major financial crisis. But there will be another one; you can bet on that. Every time we dismantle yet more seemingly “anachronistic” regulations in the interests of “free markets,” we put more and more depositors and taxpayers at risk a la Cyprus. This tendency becomes all the more strong in today’s context, where mega-financial institutions, with lobbying power and key positions in governments, can prevent the implementation of rules to curtail effectively the growth of financial fragility, as they clear have done in the European Union as well as the US.</p><p>Over a long period of stability, this change in the state of mind leads to deregulation, de-supervision and de-enforcement of existing laws, which promotes moral hazard. Thus, contrary to what the usual haters of government argue, it is not the existence of a government and a central bank acting as lender of last resort that is the source of moral hazard. Rather, it is the simplistic belief in minimal regulation and free-market fundamentalism which has led to yet more complacency, leniency and ignorance of existing laws, which in turn has led to massive frauds and moral hazard.  </p><p>Until we get serious about aligning banking activities again with broader public purpose, you should expect more Cyprus-type eruptions in the future.</p> Sun, 24 Mar 2013 10:28:00 -0700 Marshall Auerback, AlterNet 814220 at http://www.alternet.org Economy Economy News & Politics World Banco de Mattress Bank of Cyprus bank banking business canada Central banks Cyprus deposit insurance ECB EUR Economic bubbles Economic history economics European Central Bank european union Financial Fragility Financial crises financial crisis france germany International Monetary Fund John Dizard Late-2000s financial crisis mediterranean natural disaster new york portugal Reserve Bank of New Zealand spain Systemic risk US Treasury united kingdom united states bank acting bank failures banker credit default insurance deposit insurance guarantees finance company arms large bank legal systems restructured bank the Financial Times Why America Doesn't Want "Bipartisan" Budget Agreements http://www.alternet.org/economy/why-america-doesnt-want-bipartisan-budget-agreements <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">If Democrats and Republicans get along in Washington, you can kiss economic recovery good-bye.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/shutterstock_116560858.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>The lamentable state of American political parties has become common sport amongst the chattering classes in DC and beyond. Although, one wonders whether this dysfunction has really been such a bad thing, when considering how united bipartisan “responsible” action always seems to result in yet more budget cuts.</p><p>By virtue of the fact that Congress and the Obama Administration couldn’t agree on much for the past few years, America’s deficits got large enough to put a floor on demand. The transfer payments via the automatic stabilisers worked to stabilise private sector incomes and allowed a general, albeit tepid, recovery in the economy.</p><p>But since the beginning of the year, Democrats and Republicans have put aside a lot of their differences. And what has been the result? Well, first we got the deal to avert the so-called “fiscal cliff,” the upshot being tax increases (and not just on wealthy people, but via the regressive payroll tax hike), which took around .5% out of GDP. This despite the fact that the deficit, as a percentage of GDP, had already fallen from 10% to 7% — one of the fastest 3 year falls on record.</p><p>Since that time, it feels like we’ve been witnesses to a slow motion train wreck.  We’ve had the sequester, which will suck a further 1 – 1.5% of GDP out of the economy. True, the data which has come out recently has continued to be pretty robust: the February manufacturing ISM index showed significant improvement since December. The forward-looking new orders component is better than the overall index by a decent margin. The employment index is moderate and stable. The non-manufacturing is even better. And ADP showed companies added more workers than earlier projected in February, indicating the U.S. job market will keep expanding this year.</p><p>Of course, all of this momentum could go out the window if and when the programmed fiscal restriction (much of which was only introduced on March 1st) continues throughout the year.</p><p>Not content to leave well enough alone, we now learn that President Obama has reportedly invited a handful of moderate GOP lawmakers to dinner on Wednesday night in a bid to reach a “grand bargain” to reduce the budget deficit. The olive branch (as it’s called in the press – more like a poisoned chalice for the US economy) comes less than a week after Congress failed to reach a deal to replace the so-called sequester, allowing $85 billion in painful, across-the-board spending cuts to begin taking effect.</p><p>There isn’t, in fact, a “long-term deficit problem.” For what it’s worth, so long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilise and even decline (not that this should be a preoccupation of governments). But if we start reintroducing cutbacks, just as the US economy is beginning to show faltering signs of recovery, all of the recent gains on the budget deficit will go by the wayside. Why? Because fiscal austerity deflates economic activity, causing tax revenues to plunge and social welfare payments — unemployment insurance, welfare, food stamps — to explode. The perverse impact, then, is that deficits get larger — precisely the opposite of what the “austerian” brigade desires, but which is happening in earnest in places like Greece and Spain.</p><p>At the end of the day, deficits are a symptom of a problem, rather than the problem itself. That is, when the economy slides into a recession, tax revenues start falling as economic activity declines. Social transfer payments, particularly unemployment benefits, on the other hand, increase, again automatically, as more people lose their jobs. Calling the deficit a “national security problem” is akin to blaming the thermometer when it records the temperature of a patient suffering from the flu. Similarly, cutting government investment at a time of still high unemployment is as futile as breaking the thermometer, rather than treating the underlying illness. Your doctor would be rightly sued for medical malpractice, if that was the treatment he recommended. Shouldn’t we have a similar standard in place for economic quacks who advocate policies designed to make our deficits higher? </p><p>Yet again, the President seems determined to snatch defeat from the jaws of victory.</p> Fri, 08 Mar 2013 12:30:00 -0800 Marshall Auerback, New Economic Perspectives 806454 at http://www.alternet.org Economy Economy News & Politics adp america Automatic stabilizer business congress dc economic policy economics Economy of the United States fiscal policy Government budget deficit greece ISM macroeconomics obama administration obama Person Career president public finance republican party spain USD united states food stamps manufacturing non-manufacturing unemployment insurance How the Economic Quacks Promoting Austerity Will Increase the Deficit http://www.alternet.org/economy/how-economic-quacks-promoting-austerity-will-increase-deficit <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The deficit has been falling, but cuts in government investment will only blow it back up.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/bad_math.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>Congress will not avert the dreaded sequester – the government’s latest wheeze to deal with the phony “deficit crisis.” Never mind that the very same deficit is projected to fall under $1 trillion this year for the first time since 2008, according to the CBO. Politicians and the chattering classes rail about the deficit, while in the meantime, Americans can’t find jobs. Our neighbors, friends and fellow citizens have suffered from a persistently high unemployment rate of 8 percent through 2012, and worse, an underemployment situation of around 15 percent. Why doesn’t this very real crisis generate concern? Why all of the fuss about a nonexistent emergency?</p><p>Conservatives talk indignantly about government profligacy to justify their deficit obsession. But our large deficits (which peaked some three years ago) can almost always be expected to result from recessions because of what economists call “automatic stabilizers.” These are safeguards that have been in place since the Great Depression – things like unemployment insurance, welfare, food stamps and the like. These programs were introduced precisely to avoid the kind of human misery a great many of our citizens experienced during that earlier catastrophe. These income transfers are also the reasons -- not the bailouts to our banks -- why the economy has escaped the kind of freefall experienced in the early 1930s.</p><p>A major consequence of this policy choice, which is supported by the vast majority of Americans, is that budget deficits in the US are largely automatic and non-discretionary. So recessions create budget deficits, much as private sector booms reduce deficits.</p><p>True, we are not booming by any stretch today. But even against this sluggish backdrop, over the last three years, the deficit has experienced a 30 percent drop as a percentage of GDP. That suggests the patient is slowly recovering, but not fast enough. The current rate of job creation is not only insufficient to replace the jobs lost since the crisis, but can’t even keep up with labor force growth. At the recent pace of job creation, we only fall further behind. Withdrawing the medicine prematurely risks creating a relapse in the economy.</p><p>And there is much more to do. We need to use this period of historically low interest rates to borrow so as to improve our productive capacity as an economy going forward. As anybody who wanders around major American cities can see, the country has fallen into disrepair. Just ride in any New York City taxi cab and see how well your back survives the journey. But before we can rebuild our pothole-ridden roads, repair our decaying grids, or deal with energy or climate change, we must challenge and reject all of the nonsense about long-term budget deficits, national bankruptcy or insolvency, and even “fiscal responsibility” that we are hearing from Congress and the chattering classes. </p><p>The real fiscal responsibility lies in understanding how we invest in the future with jobs, education and decent roads and bridges. Letting our country fall apart, on the other hand, is the height of irresponsibility.</p><p>If the US continues to make headway on the jobs front, it will do even better on the deficit front, which is why any sensible economist will tell you that deficit reduction <em>per se</em> should never be an object of government policy. In a market economy, employment is the main source of income for most of the population. Economic growth creates jobs. Without paying jobs, individuals are unable to pay taxes.  In capitalist, wage-labor societies, therefore, joblessness creates a long list of other kinds of waste that Congress never talks about—the breakup of families, rising alcoholism and drug addiction, higher crime rates, absolute and relative poverty, damage to social status and self-respect, adverse psychological and physical health effects, stress, suicide, crime and other anti-social behavior.</p><p>During WWII, the government’s deficit -- which one year reached 25 percent of GDP -- raised government’s public debt ratio above 120 percent, much higher than the ratio expected to be achieved by 2015. Further, in spite of the siren songs warning of the evils of high national public debt, US growth in the postwar period was robust—it was the golden age of US economic growth. And guess what? The debt ratio came down rather rapidly, mostly not due to budget surpluses and debt retirement, but rather due to rapid growth that raised the denominator of the debt ratio.</p><p>There isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. But if we start reintroducing cutbacks just as the US economy is beginning to show faltering signs of recovery, all of the recent gains on the budget deficit will go by the wayside. Why? Because fiscal austerity deflates economic activity, causing tax revenues to plunge and social welfare payments – unemployment insurance, welfare, food stamps – to explode.  The perverse impact, then, is that deficits get larger – precisely the opposite of what the “austerian” brigade desires, but which is happening in earnest in places like Greece and Spain.</p><p>At the end of the day, deficits are a symptom of a problem, rather than the problem itself. That is, when the economy slides into a recession, tax revenues start falling as economic activity declines. Social transfer payments, particularly unemployment benefits, on the other hand, increase, again automatically, as more people lose their jobs.Calling the deficit a “national security problem” is akin to blaming the thermometer when it records the temperature of a patient suffering from the flu. Similarly, cutting government investment at a time of still high unemployment is as futile as breaking the thermometer, rather than treating the underlying illness. Your doctor would be rightly sued for medical malpractice if that was what he recommended. Shouldn’t we have a similar penalty in place for economic quacks who advocate policies designed to augment human misery?</p> Thu, 28 Feb 2013 14:10:00 -0800 Marshall Auerback, AlterNet 802302 at http://www.alternet.org Economy Economy News & Politics Business cycle business congress economics Economy of the United States Environmental Issue Financial crises fiscal policy Government budget deficit Government debt great depression greece macroeconomics Public economics recession spain USD unemployment united states energy food stamps unemployment insurance How Conservatives Who Block Minimum Wage Hikes are Destroying the Economy http://www.alternet.org/economy/how-conservatives-who-block-minimum-wage-hikes-are-destroying-economy <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Raising the minimum wage helps the real job creators: ordinary, hard-working Americans.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/shutterstock_109577882_0.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>It was good to see President Obama calling on Congress to raise the federal minimum wage to $9 an hour from $7.25 and to automatically adjust it with inflation in last Tuesday’s State of the Union Address. Given today’s massive income inequalities, it was the bare minimum the President could ask for. As a new paper by Emmanuel Saez <a href="http://www.scribd.com/doc/125269359/Getting-Richer-Edmund-Saez">explains</a>, the income gains to the top 1 percent from 2009 to 2011 were 121 percent of all income increases. How did that happen? As Naked Capitalism’s Yves Smith <a href="http://www.nakedcapitalism.com/2013/02/yes-virginia-the-rich-continue-to-get-richer-the-1-got-121-of-income-gains-since-2009.html#8soh8AJAOT7XT7SR.99">notes</a>, it happened because incomes to the bottom 99 percent fell by 0.4 percent.</p><p>Seen in that context, the President’s proposal, aimed at increasing the earnings of millions of cooks, janitors, aides to the elderly and other low-wage workers is small beer, but still highly unlikely to make it through today’s plutocrat-dominated Congress. Even though federal income taxes are still marginally progressive, most Americans have had no significant after-inflation wage increases since the early 1970s. At the same time we've seen redistribution of income (and wealth) of biblical proportions toward the top. In recent years, toward the toppest of the top – the so-called 1 percenters.</p><p>At the current pace of redistribution, it won't be long before we realize the dystopian vision of H.G. Wells’ <em>The Time Machine</em>, comprising a celestial dwelling Eloi, who live in elegant futuristic dwellings and do no work, and a cave-dwelling group of Morlocks, who live in darkness underground, operating the machinery and industry that makes the Eloi’s paradise possible.</p><p>Although many seek to justify this growing income inequality on the fact that the “1 percenters” are the entrepreneurs, the dynamic risk-takers, who create the employment for the rest of us, the truth is rather more prosaic. The real job creators are the bottom 90 percent, including those right at the bottom rung who would benefit from a minimum wage--consumers, those who spend nearly all of their income on real goods and services and hoard very little of it. And truth be told, without spending there are no sales; without sales there are no profits; without profits there is no demand for workers; without demand for workers there is no job creation; and without job creation there is no recovery!</p><p>A minimum wage is but a small minnow in an ocean of deficient aggregate demand – that fancy term economists use to describe society’s collective spending power. The response against the minimum wage invariably starts with the proposition that unemployment is a “supply side” problem and that raising the minimum wage somehow creates additional supply side barriers which impedes the ability of the one percenters to hire more workers. That allows them to define neat equilibrium solutions which lead them to tell our policy-makers in Congress that wage cuts and pernicious welfare-to-work remedies are required to cure mass unemployment. This myth allows them to make the leap – if unemployment is a “supply side” problem then increasing the minimum wage will not help, especially given (so goes the story) that most of them are scroungers sucking at the teat of big government via food stamps and welfare. Yes, it is true that lower-income people receive food stamps and the like, but that's because the legal minimum wage is far too low to feed a family even if the bread-winner works full time.</p><p>Just whose fault is that? Well, mostly conservatives who block minimum wage hikes. The fantasy is also extended to suggest that a modest provision of unemployment benefits allegedly increases the attractiveness of leisure, which allows these “scroungers” to relax on the beach, or sit on their couches drinking beer and watching TV all day courtesy of the hard-working people at the top.</p><p>The truth is far more prosaic. Most people would love to escape from the underclass of wages that currently fails to offer people a living wage, and leaves these people struggling to avoid unemployment, loss of community, and a collapse in self-esteem.</p><p>When the wealthiest of our society screw up royally -- for example, by causing a global financial crisis -- we think nothing of spending trillions of dollars to safeguard their privileges and standard of living. By contrast, we have done next to nothing for ordinary, hard-working people for decades, essentially leaving the minimum wage unchained, or unattached to increases in the cost of living.</p><p>Interestingly, if the supply side fantasists were correct, leaving minimum wage low is supposed to bring on a splurge of additional hiring by allowing employers to get away with slave wages. But, reality doesn't work that way. What happens in the real world is that low-wage workers go down to the shops and see that everything is more expensive. They are worse off than before, because the real wage has fallen, and therefore they consume less, which adds to our deficient demand problem. The economy gets worse.</p><p>Advised by a class of professional economists who are trained to explain why this is the best of all possible worlds as long as the corporations can do whatever they want, no CEO will think to do what Henry Ford did when he introduced the $5 day for workers. As Jon Rynn has <a href="http://globalmakeover.com/sites/economicreconstruction.com/static/SRAArticles/The%20Rise%20and%20Decline%20of%20the%20Great%20American%20Corporation%20%20SANDERS%20RESEARCH%20ASSOCIATES%20LTD.htm">noted</a>, Ford justified his largesse by pointing out that his workers could now afford to buy his cars. Although a marginal minimum-wage increase will certainly not open up the floodgates for more automobile sales, it would inject marginally more spending power into an economy that still needs to create millions of new jobs to get us back to full employment. In that sense, the President’s proposal should be viewed as the barest of minimums for the most marginalized of our society.</p> Thu, 14 Feb 2013 08:39:00 -0800 Marshall Auerback, AlterNet 794858 at http://www.alternet.org Economy Economy Labor News & Politics business ceo congress economic inequality economics Emmanuel Saez Employment compensation employment henry ford Human resource management income distribution Jon Rynn Labor economics labor living wage minimum wage obama Person Career president Product Issues Quotation socialism Socioeconomics The Time Machine USD unemployment yves smith demand problem food stamps machinery neat equilibrium solutions Credit Ratings Agencies Are Pimps of Wall Street: It's Time to Ban Them! http://www.alternet.org/economy/credit-ratings-agencies-are-pimps-wall-street-its-time-ban-them <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Firms like Standard &amp; Poor, charged with fraud by the DOJ, are criminally incompetent and serve no public purpose.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/shutterstock_95108743.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>Is Eric Holder’s “See No Evil, Hear No Evil” Department of Justice finally getting serious about investigating fraud on Wall Street? At first glance, it would seem so, given the news that the Department of Justice has filed civil fraud charges against the nation’s largest credit-ratings agency, Standard &amp; Poor’s, accusing the firm of <a href="http://dealbook.nytimes.com/2013/02/04/u-s-and-states-prepare-to-sue-s-p-over-mortgage-ratings/">inflating the ratings of mortgage investments and setting them up for a crash</a> when the financial crisis struck.</p><p>On the one hand, there is no question that without the credit rating agencies the Wall Street guys would not have been able to pull off this colossal heist against the American people, and the ratings agencies cannot be excused.  In fact, Standard &amp; Poor’s employees openly joked about the company’s willingness to rate deals “structured by cows” and sang and danced to a mock song inspired by “Burning Down the House” before the 2008 global financial collapse, according to the DOJ lawsuit. On the other, the ratings agencies are simply the gift wrappers. DOJ has yet to go after the banksters who created these packages in the first place and who seem to be in the clear as a result of a series of unconscionably low settlements recently reached with the Justice Department.</p><p>I suppose we ought to be grateful for these baby steps in the right direction. The ratings agencies themselves have admitted to US government enquiries recently that they took money in return for ratings that were not based on any fundamental assessments other than the cash they were being paid. They have lied about the risk of default in many corporate cases and then marked down debt when the game was up further destabilizing the financial system. Hence, to say that their behavior was at the heart of the great crisis is absolutely correct.</p><p>Of course, that inevitably begets the obvious question: what took you so long and why leave it at S&amp;P? As early as September 2004, the FBI warned that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial crisis if it were not stopped. It was not contained. Everyone agrees that the mortgage fraud epidemic expanded massively after the FBI warning and still not one Wall Street figure of any note has gone to jail.</p><p>Under Treasury Secretary Geithner, and the Keystone Cops of the Department of Justice, led by Eric Holder and Lanny Breuer, we established a doctrine of “too big to jail” for the very institutions which perpetrated massive frauds on millions of Americans. Those who called for regulations that would take even that most minimal of steps necessary to reestablish the rule of law and restore our nation’s democracy and financial stability were essentially ignored. Geithner’s express rationale was that the financial system's extreme fragility made vigorous investigations of the elite frauds too dangerous, in effect giving the banksters a get-out-of-jail-free card and in effect enshrining crony capitalism and imperiling our economy, our democracy, and our national integrity.   </p><p>So what’s changed? Well, obviously one has to ask if the departure from Treasury of Mr. Geithner, along with the ignominious resignation of the odious Lanny Breuer at the DOJ heralds a new approach, or are there are other motives in mind? </p><p>There is a school of thought which suggests that this lawsuit is an attempt by the US government to intimidate the ratings agencies against any further US debt downgrades. If so, it’s a pretty stupid shakedown. The truth is that sovereign governments like the US empower these agencies simply by listening to them, in the same way they listen to the IMF, and put the interests of these undemocratic and crooked agencies ahead of their own national interests.</p><p>In our economy, the Federal Reserve sets interest rates, not the bond markets, although the latter may impact on the prices and yields of longer-term investment assets.</p><p>But in general, the Bank of Japan showed in the period from the mid-1990s onward that they can keep interest rates very low (zero) and issue as much government debt as they wanted even in the face of consistent credit rating agency downgrades, by organizations of dubious ethics.</p><p>So when a government stands up to the agencies, the impact is likely to be minimal. Here's another idea: they can just outlaw them.  This may seem draconian, but consider that the FDIC puts criminally run banks out of business all of the time. It’s hard to see why the ratings agencies, as their enablers, should be treated any differently. The reality is that the so-called Big Three – S&amp;P, Fitch and Moody’s -- were all criminally incompetent. They prostituted themselves in a pay-to-play scheme in which they would give to garbage securities any rating sellers desired, so long as the assessed fees were sufficiently high.</p><p>At a very minimum one would have thought we could introduce reforms that would align incentives, with buyers of rated securities paying for assessment of risk. The ratings agencies like S&amp;P never actually looked at any of the mortgages that collateralized the securities they rated (it was all too pedestrian for them). As we now know from internal emails, they neither checked the loan tapes (the data provided by borrowers), nor the expertise in rating mortgages (all of their experience was in rating corporate and government debt), nor took the time to assess credit risk. And they have never understood how to rate sovereign government debt, failing to consider that there is no default risk for a country that issues its own currency. And yet the ratings agencies have provided higher ratings to low-quality NINJA loans (short for <a href="http://en.wikipedia.org/wiki/No_Income_No_Asset">No Income No Job No Assets</a>) than to countries with riskless sovereign debt!</p><p>Sadly, Congress and the Obama administration, in their deliberations to “reform” our financial system via Dodd-Frank, did nothing then to reform the ratings agencies. They worried that somehow, by introducing widespread reforms to the ratings agencies, they would reduce business for the monopolies. Hence, the bill contains no significant changes required of ratings agencies, which are encouraged to continue pimping their ratings.</p><p>Perhaps this lawsuit signals a chance. In any case, it is time to wean the private financial markets off these agencies by eliminating their role as gatekeepers to the thousands of financial products on which they provide in their Papal-like declarations. It's time to leave it to individual institutions themselves to do their own credit analysis. We should go further and simply make them illegal, and mandate that all financial institutions with access to the Fed’s lending as well as any financial institution with Treasury guarantees on liabilities (such as FDIC insurance) would be prohibited from selling or buying any derivatives. All assets would be carried on bank books through maturity -- with full exposure to interest rate, currency and default risk. That provides the correct incentives to protected lending institutions as opposed to relying on some flimsy rationale provided by a highly conflicted rating agency.</p><p>If our pension funds, and financial fiduciaries truly think they need an objective third-party agency to rate Wall Street paper, then at a minimum Congress and the President should be required to purchase ratings services from arms-length professionals, with the top three monopolists specifically excluded because they have demonstrated their inability to provide unbiased ratings. Furthermore, make ratings agencies liable for improper ratings, imposing a fiduciary responsibility to actually evaluate any instruments that are rated.</p><p>Better yet, prohibit banks and other government-protected institutions from buying this crap in the first place or prosecute them to the full extent of the law for using them to rip off millions of American consumers. If we’re going to go after the gift wrappers, we might as well after the original source of the fraud in the first place as well. In that regard, one can hope that yesterday’s lawsuit signals a fresh approach by the Holder Department of Justice, but don’t hold your breath waiting for it.</p> Tue, 05 Feb 2013 11:54:00 -0800 Marshall Auerback, AlterNet 789671 at http://www.alternet.org Economy Corporate Accountability and WorkPlace Economy News & Politics Occupy Wall Street Bank of Japan business congress Credit rating agency debt department of justice Dodd–Frank Wall Street Reform and Consumer Protection Act Economic history economics Economy of the United States eric holder fdic Federal Bureau of Investigation Financial economics geithner International Monetary Fund lanny breuer Late-2000s financial crisis obama administration Person Career president See No Evil Hear No Evil standard & poor treasury secretary US Federal Reserve US government United States public debt united states bank books financial products law suit ratings services Obama's New Treasury Secretary Has to Work for the Public, Not Wall Street Hustlers http://www.alternet.org/news-amp-politics/obamas-new-treasury-secretary-has-work-public-not-wall-street-hustlers <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">We desperately need to downsize our financial system, but Citigroup alumnus Jack Lew is not the man for the job.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/wallstreetsign.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>As Tim Geithner packs his bags, America will be treated to a new Treasury Secretary. It seems that Citigroup alumnus <a href="http://online.wsj.com/article/SB10001424127887324081704578231594235065054.html?mod=WSJ_hps_LEFTTopStories">Jack Lew is President Obama's pick</a>. What can we expect? What sort of Secretary do we need? And what are we likely to get?</p><p>Straight from the <a href="http://www.treasury.gov/about/role-of-treasury/Pages/default.aspx">horse’s mouth</a>, this is how the U.S. Department of the Treasury describes its mission: </p><blockquote><p>Maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combating threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively.</p></blockquote><p>Note what the mission statement does not say; that Treasury exists only to preserve the vestiges of a crony capitalist system. Or that it’s only about saving financial players rather than enforcing the law. Or that it’s supposed to be incompetent in bailout negotiations. Yet somehow since the days of the Clinton administration, the Treasury Secretary has morphed into the custodian of Wall Street interests, paying little or no heed to the concerns of Main Street on matters of economic growth or employment. This new-fangled Secretary tends to ignore the mandate to establish a genuinely stable financial system. It’s all about papering over cracks and simply setting us up for a bigger financial crisis down the road.</p><p>If one is to judge from the discussions of the likely new Treasury Secretary, it appears that nothing will change. It is sadly ironic that the last person to occupy this office who cared at all about US interests outside of finance was James Baker.  Even under the presidency of George W. Bush, Enron executives were jailed, yet over the past few years we have read much of widespread criminality and a total disregard for ethics and values. Led by Treasury, however, the authorities have seen fit to go soft on the banks and will prosecute only a few rogue traders when it seems many were involved. The point is that we are not talking about the isolated act of a rogue trader or two. Criminality and greed is embedded in the culture of the financial sector and only major reform will get rid of it. Unfortunately, the Obama administration, largely through the actions (or non-actions) of Tim Geithner, has been a major impediment to adopting the kinds of reforms that would allow the Treasury to genuinely fulfil its mission statement.</p><p>We have a financial system today in which the volume of financial transactions in the global economy is 73.5 times higher than the entire world economic output (GDP). The overall increase in financial trading is exclusively due to the spectacular boom of the derivatives markets. Most of the financial flows comprise wealth-shuffling speculation, transactions that have nothing to do with the facilitation of trade in real goods and services across national boundaries, as <a href="http://bilbo.economicoutlook.net/blog/?p=22181">economist Bill Mitchell has noted</a>.</p><p>In fact, we’ve really done nothing but tread water economically since the onset of the Great Recession of 2008. In the United States, financial institutions are still failing and as of May 2012, a whopping 441 FDIC-insured banks had failed. The employment-population ratio has dropped sharply. Nine million jobs were lost from the peak of January 2008, and at the current pace of sluggish job creation, it will take at least seven and half years to regain them; only in the Great Depression did it take longer for employment to recover in the U.S. Worldwide, as of May 2012, 50 million jobs are still missing compared to the pre-2008 crisis. According to the International Labor Organization, they are not expected to be regained until late 2016.</p><p>After his re-election last November, almost immediately President Barack Obama again stressed (as he did in 2008) that he would continue to work non-stop to help middle-class families and those striving to reach the middle class. Given the recent negotiations with Congress, it appears that the new Obama is much like the old Obama. Anyway you measure his resolution of the so-called fiscal cliff, and it is clear that we’ve got a fairly big fiscal restriction coming up. And that’s not even factoring in what is to come. And for all of the talk of making the wealthy pay its fair share, it’s particularly worth noting that the payroll tax hike is the biggest component of the deal, saving $124 billion in 2013. By contrast, the higher tax rate on the wealthy is $60 billion. </p><p>If the president were serious about genuinely changing course, then the new Treasury Secretary would be the polar opposite of Timothy Geithner. The nomination presents an opportunity for a White House course correction, finally putting Main Street ahead of Wall Street. But it doesn't look like that's going to happen.</p><p>We need a Treasury Secretary who recognizes that simply saving big financial institutions does not save the economy. The financialization of the economy of successive treasury secretaries since Rubin has led to a financial sector that is at least three orders of magnitude too big. If anything, all the efforts directed toward saving Wall Street have only made the economy more fragile. Another financial crash is inevitable because the financial system is still too large to be supported by the economy -- even if the economy could recover. We need a Treasury Secretary who recognizes that the best course of action is to downsize the financial system. Jacob Lew  is not that guy.</p><p>And we need a Treasury team that understands government finance. The current team is hopelessly confused, and still operates under the baleful influence of the Rubinites, all of whom continue to believe that the Clinton boom was due to federal budget surpluses, not recognizing that it was actually due to an unsustainable boom of household borrowing. The new team must have no connection to Rubin (or billionaire Pete Peterson) and his anti-deficit hysteria. The Great Depression of the 1930s only ended with the massive spending of WWII, when the budget deficit reached 25 precent of GDP. Our current situation is not yet that severe, and it is likely that a sustained recovery can be obtained long before the budget deficit reaches such a level. However, the more we continue to get Rubin clones in charge of Treasury, the greater the probability that this could still turn into another Great Depression.</p> Wed, 09 Jan 2013 07:14:00 -0800 Marshall Auerback, AlterNet 773753 at http://www.alternet.org News & Politics Economy News & Politics Occupy Wall Street america American International Group barack obama Bill Mitchell business Candidate Position citigroup clinton administration congress Contact Details Council on Foreign Relations Department of the Treasury Economic history economics Economy of the United States enron fdic Federal Reserve System george w. bush Group of Thirty International Labor Organization Jacob Lew james baker Late-2000s financial crisis Late-2000s recession obama administration Person Career pete peterson Presidency of Barack Obama president Quotation tim geithner timothy geithner treasury secretary treasury u.s. government USD united states white house bank custodian economist finance government finance Why Even a Deal on the Budget Is Bad for the American Economy http://www.alternet.org/economy/why-even-deal-budget-bad-american-economy <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Outcomes range from slowdown to outright recession. And it&#039;s all totally unnecessary.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/recession.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>Looking at the latest US data, business sentiment and capital spending have been eroding, and given the lagged impact of capital expenditure, that trend looks set to continue for the next few months. Against that, a number of consumer sentiment indicators remain upbeat and housing looks like it is in a firmly established uptrend, after a 5 year bear market.  In fact, the existing home inventory to sales ratio is as low as it ever gets, and that is with still very depressed sales. If sales pick up further, given low inventories and with new housing starts still below the replacement rate, home prices could lurch forward.</p><p>That said, the markets have been fairly upbeat given the rising perception of a deal to avert the US falling off the ‘fiscal cliff’. But even a deal that drains, say, 1-1.5% of GDP will have negative consequences for the US economy.  Bear in mind that the U.S. still has a very high ratio of private debt to GDP. Therefore any such fiscal restriction as contemplated by the two parties may result in a significantly lower economic growth rate than the average 3% rate of the last five quarters (which is what the revised economic data of the past few quarters will eventually show).</p><p>Of course, if there is no compromise, the impact could be calamitous.  The IMF projects as much as a 4% decline in GDP if there is a full fiscal cliff. In 1936-37 there was a fiscal cliff of almost 6% of GDP. It was followed by a 36% non annualized decline in industrial production in a mere eight months in late 1937/early 1938. More recently, all of the European countries fiscal restriction has had a more negative impact on GDP than had initially been forecast.</p><p>So the range of likely outcomes ranges from slowdown to outright recession and the silly thing is that it is all so unnecessary.  Social Security, Medicare and Medicaid impose no real burdens, even with a rising proportion of ageing baby boomers.  In fact, one could plausibly make the case that an aging society could help to generate favorable conditions for achieving sustained high employment with high productivity growth. As the number of aged rises relative to the number of potential workers, what is required is to put unemployed labor to work to produce output needed by seniors. Providing social security benefits to retirees will generate the necessary effective demand to direct labor to producing this output. Just as rapid growth of effective demand during the Clinton boom allowed sustained growth of the employment rate, even as productivity growth rose nearer to United States long-term historical averages, tomorrow’s retirees can provide the necessary demand to allow the United States to operate near to full employment with rising labor productivity—a “virtuous combination” of the high productivity growth model followed by Europe and Japan from 1970–95 and the high employment model followed by the United States during the 1960s, as well as during the Clinton boom.</p><p>Here’s what most members of Congress (and, indeed, the media and the public) fail to appreciate:  Policy formation must distinguish between <em>financial</em>provisioning and <em>real</em>provisioning for the future; only the latter can prepare society as a whole for coming challenges. While individuals can, and should, save financial assets for their individual retirements, society cannot prepare for waves of future retirees by accumulating financial trust funds. Rather, society prepares for aging by investing to increase future real productivity.  Unfortunately, no such discussions are taking place, which is likely to lead to a bad to horrific policy outcome.</p><p>They are transfers in current time. They meet today’s commitments to seniors, survivors, dependents, the disabled and the ill – commitments they have earned through work – providing them with income and services at the expense of others also currently alive.  This any community can always do, to the full extent of its will and resources.</p><p>The fiscal austerians are literally strangling the baby in the crib today by denying a sensible fiscal response for the current generation’s plight, while hyperventilating that fiscal deficits will do the strangulation of the next generation tomorrow.  All of which exacerbates a problem of economies facing intense global headwinds from private sector deleveraging.</p><p>Viewed from that perspective, the terms of the debate have been truly twisted around. Granted, it is obviously more difficult to make the case for more government spending when legitimate distrust reasonably exists of dysfunctional financial and governmental systems.  That said, what really matters is whether the economy will be able to produce a sufficient quantity of real goods and services to provide for both workers and dependents several generations down the road.  The financial aspects of demographics per se should not play a role in policy formulation.</p><p>Any reforms which seek to address growth in the context of private sector debt deleveraging and demographics ought to be made with a focus on increasing the economy’s capacity to produce real goods and services today and in the future, rather than on ensuring positive actuarial balances through eternity. Unlike the case with individuals, social policy <em>can</em> <em>provision for the future in real terms—</em>by increasing productive capacity in the intervening years. For example, policies that might encourage long-lived public and private infrastructure investment could ease the future burden of providing for growing numbers of retirees by putting into place the infrastructure that will be needed in an aging society: nursing homes and other long-term care facilities, independent living communities, aged-friendly public transportation systems, and senior citizen centers.</p><p>Education and training could increase future productivity. Policies that maintain high employment and minimize unemployment (both officially measured unemployment, as well as those counted as out of the labor force) are critical to maintain a higher worker-to retiree ratio. Policy can also encourage seniors of today and tomorrow to continue to participate in the labor force. The private sector will play a role in all of this, but there is also an important role to be played by government.</p><p>On balance, if we were to focus on only one policy arena today that would best enhance our ability to deal with a higher aged dependency ratio tomorrow it would be to ensure full employment with rising skill levels. Such a policy would have immediate benefits, in addition to those to be realized in the future. This is a clear “win-win” policy, unlike the ugly trade-off promoted by both parties, who only differ in the degree to which today’s workers and future seniors are to pay for the mistakes of the banksters through misguided proposals to “reform” entitlements and put our future on a “fiscally sustainable” path.</p> Mon, 26 Nov 2012 12:41:00 -0800 Marshall Auerback, New Economic Perspectives 750326 at http://www.alternet.org Economy Economy News & Politics business congress economic growth economics Economy of the United States europe International Monetary Fund Japan labor medicare productivity unemployment united states dysfunctional financial and governmental systems forward public transportation systems them with income and services Populist Revolution? How a Bold New Voter Coalition Can Reshape the Nation http://www.alternet.org/election-2012/populist-revolution-how-bold-new-voter-coalition-can-reshape-nation <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Minorities, independent women, gays, working-class white voters, and younger people overcame through high turnout a fierce social conservative block. </div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/people_power.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>Tuesday's election will be regarded as a pivotal one in US history. For 30 years the top 1 percent has manipulated the masses to vote against their own interests. It was able to do that because the feelings of the white middle and lower classes about social issues overwhelmed their economic considerations.</p><p>But something interesting happened this year: high levels of minority and young voter turnout, together with an increased Obama-tilt among all voters earning less than $50,000 a year, routed the GOP. In one sense, the election represents the triumph of the Reverend Jesse Jackson and his “Rainbow Coalition." The Reverend Jackson was the first serious challenge of a black man for the presidency, and with his Rainbow Coalition, he ran for the Democratic nomination in 1984 and in 1988, with a platform that represented an anthology of progressive ideas from the 1960s. He attracted a large number of supporters, many of them from the white working-class. Each time his movement looked like it was gaining electoral traction, the Democratic Party establishment would invariably mobilize against him and elect feeble white liberals – Mondale and Dukakis – who plummeted to defeat by Reagan and George Bush Sr. </p><p>It would be absurd to suggest that today’s Wall Street-dominated Democratic Party is the natural outgrowth of this coalition. That said, Jackson provided the template on how to counter the onslaught of conservative, big money politics (which helped to produce the Reagan presidency). It was Jackson, after all, who first devoted considerable resources toward increasing black registration for national elections, a pattern increasingly being replicated for other minority blocs, which are soon likely to become the majority as we move toward an increased “browning” of America. But Jackson’s appeal went beyond race, as he was the first to see the value of building a progressive coalition which espoused many of the ideas now articulated by groups such as Occupy Wall Street, notably income inequality and the taboo subject of class. Jackson knew that you can’t build an effective coalition around identity politics. You have to bring people together through their shared economic interest.</p><p><strong>T</strong>his populist focus was best illustrated during <a href="http://www.thenation.com/article/rainbows-gravity?page=0,2">Jackson’s visit to Camp Solidarity in Virginia in the late 1980s</a>, meeting largely white miners who were in the midst of the historic Pittston strike:</p><blockquote><p>“Rich Trumka, then president of the United Mine Workers, told them, ‘Y'all probably wondering why Jesse Jackson is here. Last year we were told to be scared of him. And this year the folks we gave our money to are nowhere to be seen. So I want you to ask yourselves, Which would you rather have, a black friend or a white enemy?’</p><p>“It was a question other Southern white trade unionists had raised during the campaigns with their memberships, many of them Reagan Democrats. As elsewhere, the miners listened and responded enthusiastically. Jackson always maintained that a progressive candidate could reach such Democrats with straight talk, empathy, class-angled economics and an appeal to common human values--what veteran activist Anne Braden, who'd organized Rainbow rallies in Appalachia that drew thousands of poor white nonvoters or registered Republicans, called ‘appealing to the best instincts of Southern whites as opposed to the worst, which is what Bill Clinton played to.’”</p></blockquote><p>Braden could very well have added that this is the group to which the GOP has played to for the past 50 years, since the days of Richard Nixon.</p><p>If this had been a squeaker maybe one couldn't draw conclusions. But the new coalition of Democrats comprised of minorities, independent women, gays, working-class white voters, and younger people in general overcame through high turnout an increasingly threatened and fierce social conservative block. The demographics and trends in cultural change will just keep tipping the electorate toward the new coalition. Their positions are as deep-seated as those of the social conservatives. Obama and the Democrats did this with the considerable headwind of 8 percent unemployment.<br /><br />What this means is that the coalition of the top 1 percent and the social conservatives that would go with them even though it hurt them economically is now in relative decline. Unlike the 1984 and 1988 campaigns of Jackson, this time the progressive coalition won. True, it would be unrealistic to suggest that President Obama is the avatar of this new movement, but his operation was able to surmount people like the Koch brothers who no longer have a sufficient bloc of fools they can manipulate to achieve their ends. They had on their side the Supreme Court decision of <em>Citizens United</em>. They had 8 percent unemployment. They had a presentable pathological liar who had no compunction about saying anything to try and fool the white electorate to keep acting against their own interests.<br /><br />People just do not understand that this infernal and inherently contradictory GOP coalition was what the Republicans needed to sustain their tenuous grip on power. It now seems that a new coalition from the broad masses has emerged that can out-vote them even with the unprecedented money the other side had. Witness the success of progressives such as Senator Sherrod Brown in Ohio, and Elizabeth Warren in Massachusetts and all of the big money mobilized against them. And this coalition will gain increasing relative strength as people age. This election looks like the end of the GOP revival that goes back to Reagan that has led to the skewing income distribution and the financial capitalism that has replaced efficient goods markets with corrupt financial speculation.</p><p>One can criticize Obama for being too much of a compromiser, which I think he is. And in many respects, this election was like eating at a restaurant where you've got no good choices on the menu, and you just take the least unappetizing main course instead of one which will give you food poisoning. It is also the case that much of the turnout was a product of fear, rather than enthusiasm: blacks infuriated by the GOP’s repeated voter suppression schemes, slapped down in the Florida and Pennsylvania courts, Hispanics annoyed by the Republicans’ visceral hostility to immigrants and the championing of storm trooper law enforcement tactics by the likes of Sheriff Joe Arpaio, and women angered by repeated GOP attempts to colonize their bodies.</p><p>That said, it took a very clever and effective politician to pull it off with the logistical expertise to mobilize large elements of the coalition pursued by Jackson. Someone less politically skilled than Barack Obama would have lost. The dying GOP coalition would have come into power and done as much damage as they could do frustrate the new majority. The Supreme Court would have been the greatest casualty because they would have packed it with social conservatives who would have placed great roadblocks to the objectives of the new coalition destined to eventually take political power.</p><p>There is no doubt that the short term is still problematic. One can almost certainly expect to see the return of “Mr. Grand Bargain,” as the Democrats offer up on a silver platter their signature social achievements of the last century, Social Security and Medicare. But there are straws in the wind that suggest this is a last gasp of the old neo-liberal Washington consensus, as opposed to a harbinger of yet more of the same. </p><p>Consider what happened in California on Tuesday. Against the usual moneyed interests, the state passed Proposition 30, so for the first time that California was able to get past the intense financial lobbying that usually occurs during these referenda. Instead, it followed the advice of Governor Jerry Brown and passed a tax increase to increase funding for public education. Remember, California used to have the best public school system in the country until it was gutted by Prop 13. And that too was a harbinger of what was to follow.</p><p>Even better news is that the Democrats won super majorities in both houses of the California legislature. If this holds, which it seems to be doing, the Republicans can no longer keep the state in dysfunction with a one-third-plus-one vote. And California almost always points the way to the future. Prop 13 was the start of this neo-liberal anti-government crusade.</p><p>So this could very well set the stage for a new kind of future for the country some 30 years after Jesse Jackson began his progressive crusade.</p> Thu, 08 Nov 2012 07:07:00 -0800 Marshall Auerback, AlterNet 741342 at http://www.alternet.org Election 2016 Economy Election 2016 News & Politics Occupy Wall Street america Anne Braden barack obama bill clinton California legislature california Camp Solidarity Company Labor Issues Conservatism in the United States democratic party democrats elizabeth warren florida george bush sr governor grand bargain jerry brown jesse jackson joe arpaio massachusetts medicare ohio pennsylvania Person Career Person Location Pittston Political parties in the United States politics Quotation Rainbow Coalition Reagan Bush republican party Rich Trumka richard nixon ronald reagan sheriff sherrod brown social issues supreme court USD united states virginia washington activist dysfunction food poisoning politician president storm trooper law enforcement tactics Why an Unstable Middle East Could Mean an Environmental and Economic Catastrophe http://www.alternet.org/world/why-unstable-middle-east-could-mean-environmental-and-economic-catastrophe <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">As the Arab Spring gives way to heated conflict, look for high gas prices and more pollution. </div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/managed/topstories_oiladdiction3.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>We don’t yet know the full implications of the new eruptions of violence in the Middle East. The crisis does appear to be spreading well beyond Libya and Egypt, and given the increasing absence of strongman dictators, who would (at the behest of the White House) use the full weight of the state’s security apparatus to shut down these protests, the situation has the feel of Iran, circa-1979. We don't have a crystal ball, but oil supply is always a concern when conflict arises in oil-rich countires, which may well trigger high gas prices and increased environmental dangers.</p><p>Let's take a look back at that earlier period of Middle East crisis and instability. Demonstrations against the Shah commenced in October 1977, developing into a campaign of civil resistance that was partly secular and partly religious, and intensified in January 1978. Between August and December 1978, strikes and demonstrations paralyzed the country. The Shah left Iran for exile on Jan. 16, 1979 as the last Persian monarch. In the resulting power vacuum two weeks later, Ayatollah Khomeini returned to Tehran, to be greeted by several million Iranians. That ushered in today’s Iran, especially after a national referendum discontinued the monarchy and approved an Islamic Republic on April 1, 1979. In December 1979, Khomeini became Supreme Leader of the country. It produced radical change at profound speed with secular westernized monarchy ultimately replaced by a fundamentalist Islamic dominated theocracy. Iran has since become one of the hardliners of the OPEC cartel and a recurrent source of instability in the Middle East, as we see today.</p><p>The current wave of protests and violence spreading through the Middle East have already awakened worry about oil supplies. It would nice to think that such a situation would spark the U.S. to embark on a grand Manhattan Project-style national program dedicated to the growth of alternative energy sources. Of course, that’s a pipedream, and highly unlikely in the post-<a href="http://topics.nytimes.com/top/news/business/companies/solyndra/index.html">Solyndra Solar</a> world which we inhabit today.</p><p>It's troubling news to environmentalists, but I suspect that there will be a lot more attention paid to areas like the Canadian oil sands projects over the next few years<strong>.</strong> The bitumen-based heavy oil is dirty, consumes lots of water and does produce enormous emissions (which is one of the reasons why virtuous Canada has been one of the persistent violators of the Kyoto protocols).  But it’s Canadian and it’s secure. Over the past 10 years, Canadian crude production has risen by 600,000 barrels per day while Mexico’s has fallen by about that same amount.  As dirty as this kind of oil production is, the recent eruptions in the Middle East are almost certainly going to change the political calculus in favor of yet more production. After all, the question will rise, wouldn’t you rather have a reliable, long-term supply of crude from Canada than rely on unreliable OPEC-based suppliers in countries full of Islamic extremists?</p><p>How long can we rely on the Canadian oil sands? Probably for decades. The resources there are estimated at over 100 billion barrels. </p><p>As far as the proximate cause of the riots now all over the region, we know that there were almost no protesters before the Libyan attack occurred. The attack itself was done with heavy weapons and was well-coordinated, which suggests the possibility of a planned 9/11 anniversary attack by a highly armed group of extremists.</p><p>The Libyans themselves had elected a non-Muslim government, and in the aftermath there has been an outpouring of pro-U.S. sentiment in the country. Still, it would be wrong to say that Libya is free of the scourge of Islamic extremism. After all, among the groups that overthrew Gaddafi's regime were the Benghazi Islamists whom we supported during the uprising, much as we supported the Taliban during their war against the Soviet Union. The town of Derna, which lies east of Benghazi, sent more jihadists to fight against the U.S. in Iraq than any other place in the Middle East. So the existence of an ostensibly moderate pro-West new government in Tripoli does not negate the fact that the country still harbors extremists who could have been behind the attacks. Libya is full of weapons, and it may be that the pro-U.S. government is unable to control extremists.</p><p>The violence is now spreading across the Middle East; there have been expanding attacks on US Embassies in Yemen, the Sudan, Egypt and other parts of North Africa. And as the protests have spread, it seems increasingly less likely that a mere YouTube video is the driving factor. As the <a href="http://www.guardian.co.uk/world/2012/sep/14/embassy-attacks-salafis-jihadists">Guardian reports</a>:</p><p> “Very few of the people setting fire to the German embassy in Khartoum, attacking the American school in Tunis or torching a KFC in Beirut will have even seen the <em>Innocence of Muslims</em>. If the prophet had really been insulted, you would see 100 million in the streets. Instead we only see a few thousand.”</p><p>Then there is Egypt, which is potentially even more grave, not only home to the Suez Canal, but also the largest and most influential branch of the Muslim Brotherhood. As Egypt’s Supreme Council of the Armed Forces (SCAF) took the reins of power in February 2011, many observers believed that a tacit understanding existed between the powerful Egyptian military and the Brotherhood, the most organized political and social group in Egypt. For the next 18 months, this complicated and largely behind-the-scenes contentious relationship between these two powerful entities had its ups and downs.</p><p>When SCAF sided with millions of Egyptians in ousting Hosni Mubarak in early February 2011, it was not to advance the objectives of the revolution but rather to sacrifice the president in order to save his regime. But newly elected President Morsi, the Muslim Brotherhood’s reluctant stand-in candidate, appears to have outflanked the military and other security forces, and instead consolidated the dominance of the dominant Brotherhood, which has deep roots in the country.</p><p>There are serious concerns here from a Western perspective. The Arab Spring was initially dominated by seemingly modern, moderate, pro-Western people. But they are a minority in a country which is now more likely to be overwhelmed by the Brotherhood in the context of weak democracies. The facts that 1) it has been uncovered that the maker of the film was an Egyptian Christian Coptic who has a long record of being jailed in the U.S. for illegal money-making schemes; and 2) there were no Israelis or wealthy Jews behind the film are not going to be heard by the crowds on the streets. The Brotherhood may well use this event as a pretext so it can move in a more viscerally hostile anti-Western direction.</p><p>So why does this matter for you? Well for one, you’re certainly likely to be paying more at the pump as the violence spreads and risk premiums get built back into the oil price (which is now up some 25% from its lows of the spring). And if the Arab Spring turns less benign, then it is going to become more anti-American and anti-West than anyone could have possibly envisaged a few months ago. </p><p>The day of the dictators appears to be over, which means it can’t be shut down, much like the Ayatollah Khomeini’s influence in Iran in the late 1970s and early 1980s. If this is indeed the future, then down the road this could well pose a threat to Arab oil supplies to the West. That would be a very big negative to the economy acting as a quasi tax rise, which could easily offset any benign supply/demand forces stemming from increased domestic production. The latest <a href="http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_a.htm">Department of Energy data</a>on U.S. liquids production has shown an ever rising trend in year over year liquids production.</p><p>You can imagine how the champions of King Coal will exploit this opportunity, as well as the companies minting it coin and fist as they pollute the states’ water aquifers via fracking. Because when it comes to crises in the Middle East, ready access to cheap energy always trumps environmental concerns. The unfortunate upshot of this is that oil isn’t going anywhere. American oil consumption — as a percentage of its total primary energy consumption — now stands at about 37 percent. That’s the exact same percentage as in 1949. Today’s Middle Eastern tensions will almost certainly guarantee that this percentage won't be going down anytime soon.</p> Sat, 15 Sep 2012 04:12:00 -0700 Marshall Auerback, AlterNet 710930 at http://www.alternet.org World Economy Environment World Armed Attack asia beirut canada Christian Coptic coal Contact Details department of energy Derna egypt Egyptian military egyptian revolution German embassy in Khartoum hosni mubarak iran iraq Islam in Egypt islamism Kyoto protocols kyoto libya manhattan project mexico middle east Morsi muslim brotherhood natural disaster north africa Organization of Petroleum-Exporting Countries Person Career politics soviet union sudan Suez Canal suez Supreme Council of the Armed Forces Supreme Leader taliban tehran tripoli Tunis united states white house yemen bitumen-based heavy oil energy consumption energy sources energy Memo to the Punditocracy: Public Sector Jobs Are Real Jobs! http://www.alternet.org/economy/memo-punditocracy-public-sector-jobs-are-real-jobs <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Full employment should be front and center on our national agenda. So why are even liberals attacking public jobs and vocations?</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/managed/topstories_teacher.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>In 1976 at a time when economists thought more about unemployment, the US economist Charles C. Killingsworth wrote a paper entitled “<em>Should full employment be a major national goal</em>”. He was a long-time advocate of public employment programs and understood how deficient the economics profession was when it came to caring about people.</p><p>I thought about this paper recently upon reading an article in the Daily Beast by the always insightful Michael Tomasky, <em>“<a href="http://www.thedailybeast.com/articles/2012/09/02/the-real-obama-needs-to-fight-five-gop-myths-about-the-imaginary-obama.html?utm_medium=email&amp;utm_source=newsletter&amp;utm_campaign=cheatsheet_morning&amp;cid=newsletter%3Bemail%3Bcheatsheet_morning&amp;utm_term=Cheat%20Sheet">The Real Obama Needs to Fight Five GOP Myths About the Imaginary Obama</a>”</em> .  Tomasky discusses the myths that Obama needs to dispel during his party’s upcoming convention.  One in particular caught my attention:  the idea that the President needed to confront the myth that he allegedly believes that jobs comes from government.</p><p>What’s wrong about that? In one sense, it is a myth:  to the extent that jobs are an outgrowth of sales, which are a function of aggregate demand, it is wrong to say that the public sector per se creates jobs.  But demand (and, by extension, sales) is more robust when employment rates are higher and, in that sense, it matters not to the restaurant owner, or the engineering firm, whether the source of that demand comes from a private or public sector job.  The teacher’s cash is just as good at the cash register as the accountant’s.</p><p>So why does the president even need to disparage the notion that good jobs and vocations cannot come from public employment in order to prove to American voters that he’s not some kind of radical Marxist?</p><p>The USA used to value the idea of public service.  Remember, “Ask not what your country can do for you – ask what you can do for your country”?  That was the essence of much of the idealism underlying the Kennedy era.  Peace Corps, not leveraged buy-outs; public works, instead of credit default swaps. This was before the beginning of the neo-liberal onslaught that evolved in the late 1970s into the vapid and rabid belief that self-regulating markets would deliver the highest wealth to all of us. The privatisation and deregulation accompanied that mantra, much of which is the source of our present misery and income inequality, as public goods have rapidly become converted into private rents.</p><p>Over the past 30 years, any notion that the government might use fiscal policy for direct job creation has been attacked with arguments that it would cause spiraling inflation and, eventually hyperinflation, or that interest rates would soar as bond markets lost faith in government debt issues.  This propaganda has become so extreme that it has now got to the point where even a sympathetic liberal columnist like Michael Tomasky suggests that it is good electoral strategy for Obama to trumpet the fact that public sector hiring has shrunk by 3% since the start of his Administration! This at a time when overall unemployment is still above 8% and combined with underemployment takes us to something closer to 15%.</p><p>By contrast, Charles Killingsworth unapologetically asserted that the US definitely should make full employment a major national policy. He said that:</p><blockquote><p>“[T]oo many of us have been intimidated for too long by the many prestigious economists and others who have been telling us that manpower programs don’t work; that the only way to reduce unemployment is to cut taxes; and that if you cut taxes enough to approach full employment, you will have an inflation and destroy the country.”</p></blockquote><p>As Killingsworth argued, the economics establishment was wrong about this diagnosis, as it has been wrong so many times before in the last several years.  But given the current love affair with “fiscal sustainability”, and the threatened arrival of the “fiscal cliff”, it is easy to envisage how the country could slip further into a Third World type of fortress society, where the wealthy live in high class ghettoes manned by private security forces, and drive around in bullet-proof limousines to protect their offspring from being kidnapped from an increasingly desperate, bitter, dangerous underclass outside.  Certainly, we’re not that far away from the horrifying images evoked in H.G. Wells’s late 19th century classic, “<em>The Time Machine”,</em>whose protagonist ventures forward in time to a place where we have the brutish Morlocks, who live in darkness underground and surface only at night, whilst the leisured classes have become the Eloi, an ostensibly elegant people, who reside in communitarian comfort in the light above, but live off the labor of the downtrodden Moorlocks on whom they depend for their prosperity.</p><p>That’s where we could be headed if we fail to make full employment a major goal of this great country and start moving in the direction of a stronger, more secure country and a better quality of life for all of us.</p><p>Killingsworth was a strong advocate of public employment (PSE) programs to relieve unemployment and provide a better life for everyone. In his essay he said that “a ten billion dollar public service employment program … can increase gross national product bu at least as much as a ten billion dollar tax cut. That is elementary macro-economics.”</p><p>In fact, it would increase GDP by considerably more because some of the tax cut will be lost to saving and it is highly likely the marginal propensity to consume of those given wages in the program would be higher than the national average.</p><p>He recognized that the unemployed do not “benefit direct from tax cuts because they don’t pay income taxes” and that a Public Service Employment program could be concentrated on the most disadvantaged. He believed that PSE programs were much easier to scale down, and could be terminated much more readily than a tax cut could be reversed.  As last year’s debates over the Bush tax cut expirations indicated, Killingsworth proved very prescient.</p><p>Killingsworth wasn’t naïve.  Even in the mid-1970s, he was aware of the stereotyping of public sector programs that formed the basis of the conservative criticism. He noted that:</p><blockquote><p>“I do want to say that I’m aware that a great many people have a kind of knee-jerk adverse reaction to the idea of creating more government jobs. I think that a mental image appears of a clear sitting down at a desk between coffee breaks, moving pieces of paper from the in-box to the out-box, and leaving a half hour before quitting time. Now I don’t care much for that kind of job either. If that’s public service employment, I not really enthusiastic about it. But I think that image is the product of a poverty of imagination.”</p></blockquote><p>He then described the way, as an example, the way the public education system had been reduced by bean counters intent on budget savings. The type of jobs eliminated included teacher aides and paraprofessionals, non-core jobs which add to the efficiency of the core jobs (the teachers).</p><p>He noted that “the first casualties of budget cutting across the country in public education have been precisely” these type of jobs. He noted that “they have disappeared by the tens or hundreds of thousands all across the country …”</p><p>He closed that section of his talk by saying that public sector work programs are not the “panacea” but part of an overall solution to restore full employment.  That they could be socially useful jobs, as Keynes himself earlier recognized.  During the Great Depression, Keynes famously remarked that if the government could find nothing better to do, it could hire one group of workers to dig holes to bury money, and then hire another group to excavate the money that would be used to pay their wages. This might seem to be a rather silly policy proposal, and Keynes meant it to be just that.</p><p>Unfortunately, Keynes’s comments here have been used as a weapon by conservatives with which to caricature anybody advocating using government expenditures to promote employment.  Try telling that to a police officer the next time your home is robbed.</p><p>In reality what Keynes was saying is that first, given the low levels of effective demand and the high levels of unemployment in the 1930s, virtually any paid work would be an improvement—it would provide jobs and incomes to the unemployed, raising aggregate demand and stimulating the economy. Thus, even something as seemingly useless as digging holes would be beneficial. Second, he was using such a ridiculous example to spur policy-makers to come up with more useful projects—surely even the dumbest politicians or economists could come up with something better than digging holes!</p><p>The point is that no capitalist society has ever managed to operate at anything approaching true, full, employment on a consistent basis. Further, the burden of joblessness is borne unequally, always concentrated among groups that already face other disadvantages: racial and ethnic minorities, immigrants, younger and older individuals, women, people with disabilities, and those with lower educational attainment. Since markets do not operate to achieve full employment, and because markets tend to leave behind the least advantaged members of society, government should and must play a role in providing jobs to achieve social justice.  There is nothing to be ashamed about in acknowledging this fact.  In reality, it is a goal that we should embrace with the same kind of passion Kennedy evoked when he promised a man on the Moon by the end of the 1960s. The real myth, of course, is that President Obama is afraid to make this case, a tragic omen if we are to avoid the dystopian future feared by visionaries such as John Maynard Keynes and Charles Killingsworth.</p> Wed, 12 Sep 2012 08:24:00 -0700 Marshall Auerback, CounterPunch 709001 at http://www.alternet.org Economy Economy Labor British people Charles C. Killingsworth English people full employment john maynard keynes Labor economics labor Labour economics macroeconomics Michael Tomasky Obama Needs to Fight Five Peace Corps Person Career president Quotation republican party The Time Machine USD unemployment united states accountant economist overall solution Police officer sympathetic liberal columnist teacher GOP: A Party That Hates Women http://www.alternet.org/election-2012/gop-party-hates-women <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Romney and Ryan envision an anti-woman economy and society, but women are increasingly key to winning elections.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/republican_0.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--> <p>Missouri GOP senatorial candidate Todd Akin's absurd comment that women's bodies can prevent pregnancies in cases of "legitimate rape" is disgusting. It also points to a deeper problem within the GOP.</p><p>Plainly, this is a party that hates women. And given the huge gender gap opening up in favor of President Obama over the presumptive GOP candidate, Mitt Romney, this has important implications for economic and social policy going forward. Because if they win, the Democrats are less likely to embrace the draconian fiscal austerity proposals now advocated by Romney’s advisors, along with the party’s regressive social agenda.</p><p>The current Republican Party is a perverse coalition of the top 1 percent and the socially conservative right. The latter are not well off for the most part. The Koch brothers (and others of that ilk) have managed to convince the have-not religious fundamentalists to vote against their own economic interests and support their internal colonialism through economically regressive policies which are exacerbating the country’s mounting economic inequality.</p><p>This is untenable over the long run. Skewing income distributions by shoveling money to the top always ends in a big political upheaval. The social conservatives are older and aging and becoming less of the total electorate. Someday the GOP’s infernal combination will blow apart because the top 1 percent will be rejected by the masses and the numbers of the social conservatives will dwindle too much.</p><p>Why? Largely because of today’s new generation of women. Although they represent varying degrees of economic progressivism to conservatism, this generation is largely rejecting the social conservatism of the Creationists and hardcore fundamentalists on the right. President Obama continues to outpoll Mitt Romney by substantial margins among women voters. I would guess that this will more than offset the appeal Romney holds among angry white males, increasingly alienated by a country that is becoming less white, more socially diverse, a veritable rainbow coalition of different ethnicities rather than a Caucasian-dominated nation.  An older generation of women who saw no other way than to be dependent and kept and sexually repressed is dying out.</p><p>This will change the economic landscape. Why? Well, take a look at the latest bit of "economic wisdom" from the Romney campaign (I owe this observation to economist Bill Mitchell), which has just put out an economic paper, <a href="http://www.glennhubbard.net/papers/407-the-romney-program-for-economic-recovery-growth-and-jobs.html" title="http://www.glennhubbard.net/papers/407-the-romney-program-for-economic-recovery-growth-and-jobs.html">The Romney Program for Economic Recovery, Growth, and Jobs</a>, written by Stanford’s John B Taylor, Harvard’s Greg Mankiew, Columbia’s Glenn Hubbard, and Kevin Hassett from the American Enterprise Institute. These men make the following claims:</p><p><em>America took a wrong turn in economic policy in the past three years. The United States underperformed the historical norm shown in the administration’s own forecasts, and its policies are to blame …</em><em>These short-term stimulus packages were ineffective, leaving the nation with higher debt, which acts as a drag on long-term growth because households and businesses understand that the administration must raise taxes significantly to pay off that debt.</em></p><p>Romney’s economic team also claims that “uncertainty over policy” (i.e. the large deficits and the private fear of large tax hikes) is preventing a sound recovery in private spending. This has been a common theme among the conservatives since the governments decided to deploy fiscal stimulus.</p><p>True, President Obama also retains an unhealthy obsession with "long-term fiscal sustainability" and "entitlement reform" (i.e. shredding the social safety net). But for the most part, he has avoided the worst of the excesses of the fiscal austerity fanatics in Europe and those of the Tea Party in the U.S. As a consequence, the U.S. economy has continued to grow. True, it is below trend, but it is still growing and generating some jobs, in marked contrast to what is occurring on the other side of the pond.</p><p>Mainstream economic theory claims that that private spending is weak because we are scared of the future tax implications of the rising budget deficits. But the overwhelming evidence shows that if you own a business, you’re not going to invest while consumption is weak. And households will not spend because people are scared of becoming unemployed and are trying to reduce their bloated debt levels. Above all else, businesses need sales to encourage them to hire workers. A restaurant doesn't lay anyone off when it's full of paying customers, no matter how much the owner might hate the government, the paper work, and the health regulations; A department store doesn't lay off workers when it's full of paying customers; and an engineering firm doesn't lay anyone off when it has a backlog of orders.</p><p>And guess what?  Women are not only more than half of the electorate, but they are a huge part of the overall aggregate demand for goods and services. Under the Republican agenda, women could well revert to a kind of economic serfdom, whose labor expended can be considered surplus to that required to maintain the survival of the man and his family.  </p><p>In fact, if Romney's plan were to be introduced now or, worse yet, the automatic budget sequestration cuts proposed in the Budget Control Act from last fall were actually implemented, (which mandates across-the-board cuts to reduce the deficit by $1.2 trillion over 10 years), then we'd likely experience a double-dip recession in the U.S. next year. Support for this view has been expressed by no less than the Congressional Budget Office (CBO) which argued in a report the other day, that the U.S. economy would slide into recession in fiscal 2013 if Congress fails to act to maintain current tax rates and avert deep cuts to federal spending.</p><p>Austerity advocates like Romney and Ryan are obsessed with putting the squeeze on public spending, especially broad social welfare and education. Their plans mean that workers get trapped in a low-skill, low-pay circle of disadvantage. The increasingly casualized labor market is reinforcing that pathology, particularly for women.<br /><br />As strange as it sounds, the worst of these effects may well be thankfully nullified by the GOP's ongoing war on women voters -- the probable difference-makers in the upcoming election. Nat Silver of the <a href="http://fivethirtyeight.blogs.nytimes.com/">FiveThirtyEight blog</a> is the ultimate wonk pollster, and the best guestimates now are that President Obama today is only ahead by around 3 to 4 percent. I think it is a little more. I think Obama will do better as Romney’s tax issues bring more revelations and the GOP war on women becomes center stage. Given the desultory state of the economy today, if the president wins by anywhere near the same margin as in 2008, the handwriting will truly be on the wall for the party of social conservatives, angry older white men and the 1 percenters themselves.</p><p>The changes that are occurring in the overall population as the next generation -- particularly women -- takes over will be death to the past Republican coalition. The GOP will eventually realize that its anti-choice stance and all that goes with it is a huge problem. The party will find that its viscerally anti-feminist rhetoric and policies will be even more of a killer in the future. And a byproduct of that will be that the corporate predators who comprise so much of the top 1 percenters will also realize that they can no longer govern with the support of social conservatives who vote against their own interests.</p><p>I think this election will make everyone realize that the future of the U.S. has already begun.</p> Fri, 24 Aug 2012 08:58:00 -0700 Marshall Auerback, AlterNet 698670 at http://www.alternet.org Election 2016 Economy Election 2016 Gender News & Politics misogyny abortion america American Enterprise Institute bain capital Bill Mitchell business Candidate Position columbia congress Congressional Budget Office Conservatism in the United States europe Glenn Hubbard Greg Mankiew harvard John B Taylor Kevin Hassett Latter Day Saint movement massachusetts mitt romney obama Person Career Person Location politics Pratt–Romney family president republican party social issues stanford tea party The Church of Jesus Christ of Latter-day Saints todd akin united states advisors by-product candidate economist Top 5 Reasons Why Raising the Minimum Wage Is Good for You and Me http://www.alternet.org/economy/top-5-reasons-why-raising-minimum-wage-good-you-and-me <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">A raise in the minimum wage is smart economics and beneficial to society. So what are we waiting for?</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/managed/storyimages_1343158482_happypeople.jpg" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>In recent months, a number of states have again taken the lead on measures to raise the minimum wage. Massachusetts is moving toward a minimum of $10 per hour. Other measures are on the table in New York, Illinois, New Jersey, Connecticut and Missouri. Meanwhile Sen. Tom Harkin, D-Iowa, is pressing for the federal minimum wage to rise to $9.80 per hour by 2014.<br /><br />This is far more sensible policy than symbolic nods to the left through gimmicks such as the so-called Buffett Rule, which might raise new revenues from the mega-wealthy through taxes, but will likely amount to very little because gazillionaires can hire clever accountants to help them get around it. No, we need policies that clearly do something for hard-working people who have been clobbered by a financial crisis they didn't create.</p><p>Here are five reasons why we should cheer for working America getting a raise.<br /><br /><strong>1. Good for Families</strong>: <a href="http://(http://www.foreignpolicy.com/articles/2012/01/03/7_raise_the_minimum_wage_a_lot?page=full">According to economist James Galbraith</a>, raising the minimum wage would raise the incomes of 28 million Americans. Women would particularly benefit because they tend to work for lower wages than men. As Galbraith sees it, raising the minimum wage is family friendly policy:</p><blockquote><p>“With more family income, some people would choose to retire, go back to school, or have children, making it easier for others who need jobs to find them. Working families would have more time for community life, including politics; Americans would start to reclaim the middle-class political organization that they once had. Because payroll- and income-tax revenues would rise, the federal deficit would come down. Social Security worries would fade.”</p></blockquote><p><strong>2. Good for Economic Recovery</strong>: To get the economy back on track, spending power has to be in the hands of those who actually spend in the real economy. That means regular people, not the super-wealthy who tend to hoard wealth or invest in financial products. The minimum wage story is not just a story about income inequality, but rather it’s about an elite that has hijacked the economic system and made it work less productively than before while redistributing more of what is working to themselves.<br /><br />The problem with our economy today is that the growing gap between the real wages and productivity has violated the traditional relationship between real wages and consumption. So if the productivity of each worker is rising strongly, yet that worker’s capacity to purchase (the real wage) is lagging badly behind – how does economic recovery which relies on growth in spending sustain itself?<br /><br />Which is why policy should be more directed toward programs that increase the minimum wage and less of discredited neoliberal “trickle-down” economics. Trickle-down economics is largely counterproductive because it shifts more resources into the hands of those who have less propensity to spend and keep the economy moving.<br /><br /><strong>3. Helps People Get Out of Debt</strong>: During the early part of the post-war period, particularly the 1950s and 1960s, entrepreneurship was more concerned with building productive capacity and putting workers to work actually making useful things as opposed to creating financial Frankenstein products like credit default swaps.<br /><br />As our economy has become increasingly directed toward Wall Street and the so-called FIRE (finance, insurance, real estate) sectors, more wealth has migrated to the top 1 percent. On top of that, real wages have increasingly lagged behind the growth in productivity. It is also clear that hours worked and persons employed in the “productive” sector have been in decline over the last few decades.<br /><br />Prior to the 1970s, when flawed neo-liberal ideas started to gain prominence, the growth of real wages largely tracked productivity growth, which meant that as the productive capacity of the system expanded, the capacity of the workers to maintain consumption standards out of wages also grew in proportion. There were high incomes produced, but these typically came from success in building things and spreading the gains (somewhat to workers).</p><p>Today, high incomes come from the financial sector capturing an increasing share of national income and using it to shuffle financial assets in the financial markets casino which adds about zero to productive output.<br /><br />An increase of a couple of dollars per hour or more in the minimum wage could make huge improvements in the difficult existence of the working poor, perhaps allowing them to exit the debt treadmill and stand a better chance of eventually rising into a revitalized middle-class. Admittedly, corporate profits might suffer a little and some businesses at the lowest end might disappear. That said, corporate profits as a percentage of national economic output are already at an all-time record levels. And it's questionable whether such levels of profitability can be sustained. Firms have lots of unused capacity lying around because people can't afford to buy products and services. Sluggish sales growth is directly connected to lagging wage rates. <br /><br />At the same time, dependence on food stamps has surged by over 14 million over the same period. And “financial engineering” has helped to create a significant escalation in debt being borne by the private sector, particularly consumers. Surely we need a better model than that?<br /><br /><strong>4. Protects Workers From Abuse:</strong> A higher minimum wage would also help to mitigate the abusive, exploitative working practices of a number of employers, who take advantage of the currently low minimum wage to seek cut-rate help. Such employers often use undocumented labor, which further undermines America’s working poor.<br /><br /><strong>5. Justice for Working Americans:</strong>Most of all, a big jump in the minimum wage would be a reparation. Because let’s be clear: class warfare has already been undertaken on behalf of the 1 percent. The past 30 years have witnessed a dramatic redistribution of national and personal income in favor of profits for the rich. At the same time, this period has been associated with a dramatic decline in the performance of the US economy. To raise the minimum wage would be literally the minimum we could do for those who have suffered from the economic crisis: the working population. It would be an act of justice.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter--><p>Marshall Auerback is a market analyst and commentator.</p> </div></div></div> Tue, 24 Jul 2012 08:00:00 -0700 Marshall Auerback, AlterNet 680015 at http://www.alternet.org Economy Economy Labor labor gop economy minimum wage economic growth productivity income inequality neoliberal economics economic recovery warren buffet 1% So-Called Fiscal Cliff Is Baloney; Our Economy Can Recover if Obama Focuses on What We Really Need: Jobs! http://www.alternet.org/story/156304/so-called_fiscal_cliff_is_baloney%3B_our_economy_can_recover_if_obama_focuses_on_what_we_really_need%3A_jobs%21 <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Talk about deficits and tax cuts distracts us from the great New Deal lesson: An economy recovers when people go back to work.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p> Here's something you're unlikely to hear when you turn on the TV. Deficits are not the problem in our economy. And tax cuts for those making less than $250,000 a year are not the solution. What America really needs is a serious national program to put people back to work. That's the key to saving the economy. So why don't we ever hear this in pundit-land?</p> <p> The pundits are too busy talking about dreaded “fiscal cliff." At the end of 2012, they warn, many temporary but significant tax cuts are going to expire. The resultant increase in taxes means consumers will have less to spend which in turn will cause the economy to suffer. <br /><br /> Of course, both the president and Congress could easily extend these cuts. But there's a widespread -- and misguided -- fear that doing so will damage the country’s long-term fiscal health by failing to deal with imaginary dangers of what they call a “fiscally unsustainable” path. Both branches of government sadly embrace this misguided paradigm, and the arguments relating to the extension of the tax cuts (i.e. whether it should be for everybody, as the Republicans argue, or simply for those Americans making under $250,000 a year, as President Obama recently suggested).<br /><br /> When it comes to federal budget deficits there appear to be only two respectable positions, which are both, unfortunately, wrong. The first is the “deficit hawk” position that argues that budget deficits are never acceptable because they only lead to complete crowding-out: every dollar of government spending, so the story goes, is offset by a dollar of private spending. In this view, long-run problems occur because government debt will have to be repaid in the future, which means higher taxes and less private spending. So they continually claim that the stimulus package did not save any jobs and will actually cost us jobs later. This is a minority view among economists and policy makers, although it remains popular among those Republicans who have a political interest in denying that the Democrats and the Obama administration have done anything right.<br /><br /> The second view—the “deficit dove” position--is that deficits are probably acceptable for the short run, and perhaps even necessary to save the economy from another great depression. However, say the deficit doves, the benefits we receive today are partially offset by costs in the future when we will need to tighten our belts to repay the debt. Even President Obama has repeated the line that deficits today leave our grandchildren with a heavy burden, which is why he has retained this tragic obsession with entitlement reform. The pain is said to be compounded by the imminent retirement of baby-boomers, which will increase “entitlement” spending. So the deficit doves tell us that we need to get the budget “under control” as quickly as possible. <br /><br /> James Carville is one of the few who pushes back on the deficit doves. He has <a href="http://www.realclearpolitics.com/video/2012/07/10/carville_dems_made_fundamental_error_conceding_deficit_is_biggest_problem.html">argued</a>that the Democrats made a "fundamental error" backing off on their steadfast support of entitlement programs to give way to the idea that they need trimming in order to cut the deficit. That, as Carville has noted, is a political loser for the Democrats, and it’s also bad economics. <br /><br /> Why is that the case? Because Democrats end up embracing a form of Augustinian “fiscal chastity” (“Oh Lord, make me fiscally chaste, but not yet”), which leads us down the same path the Republicans want to take. A world with an eviscerated social safety net; where our homeless remain house-less in spite of today’s housing glut; where our sick and elderly get inadequate healthcare and are precluded from living the last years of their life in relative dignity.<br /><br /> President Obama’s focus on retaining tax cuts for those earning under $250,000 is laudable in terms of focusing on the goal of alleviating the vast income disparities that exist today in the U.S., but simply redistributing the burden of the fiscal austerity (for example, by taxing high-income earners more) will have no hope of providing a net stimulus to American consumption, which is what we need to get the economy going again.<br /><br /> The reality is that the whole “debt crisis” is a manufactured issue designed to destroy entitlement spending once and for all. The truth is that for the 82-year period since 1930, the U.S. government’s budget has been in deficit of varying proportions of total economic output 67 of those years (that is, 84 percent of the time). Each time the government tried to push its budget into surplus, a major recession followed that forced the budget back into deficit because automatic stabilizers like social welfare payments, unemployment insurance, food stamps, etc. had to kick in.<br /><br /> These deficits have provided a floor for private domestic saving over most of this period. In times of past crisis – the Great Depression and World War II – the U.S. deficit grew relatively large and national debt followed it upward as a percentage of GDP. Then, as growth resumed and stability was re-established, the deficit fell back as a percentage of GDP to the level required to support private domestic saving and maintain reasonable levels of spending power to support relatively high employment levels. <br /><br /> Today’s job market is one where employment growth momentum appears to be slowing down. Unemployment is officially at 8.2 percent, but it is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.<br /><br /> At the rate we’re growing jobs, it will take at least a decade before the employment levels of the mid-2000s are reached.  By contrast, in the 1930s, the jobs lost in the aftermath of the Great Crash had been fully restored within seven years. The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and CCC (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939, and the Civilian Conservation Corps, 1933-1942). Even Ronald Reagan did a better job in the 1980s, when 8 percent unemployment was still considered to be politically unacceptable.<br /><br /> The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA and the CCC. The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.<br /><br /> The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers. </p> <p> It would, at the very least, act as an transitional job, enhancing the ability of workers to move back to the private sector as and when private sector demand revived and job recruitment efforts intensified. The latter would have a pool of “shovel ready” labor on which to draw, rather than an army of unemployed with corresponding deteriorating job skills, which invariably set in with longer-term unemployment.<br /><br /> As for the canard that only private sector jobs are “real” jobs, that’s bunk. Businesses don’t really care who’s on the buying end of the transaction. They just want to sell everything they produce. It can be bought by domestic households, foreign households, domestic government or foreign government. Makes no difference. What they need – what benefits them – is an environment that maximizes the probability that there will be a demand for what they are trying to sell. If there isn’t enough total spending in the economy, then the government can cut taxes or raise government spending (good deficits) to induce the right amount (non-inflationary) of spending.</p> <p> Unlike the household sector, the government sector (with a sovereign currency) can sustain its deficit spending in the long run. And that spending will ultimately generate the growth that will generate the incomes and jobs, which will enhance tax receipts and reduce the deficit. It’s a win-win, if only the president would have the courage to make the case, rather than meekly fighting his campaign on the GOP’s intellectually tarnished and politically dishonest ground.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Sun, 15 Jul 2012 20:00:01 -0700 Marshall Auerback, AlterNet 671685 at http://www.alternet.org Economy Labor Economy democrats gop economy obama tax cuts government jobs new deal wpa deficit franklin roosevelt bush tax cuts Big Trouble for U.S.? Europe's Banking Crisis Moves Closer to a Lehman Brothers Moment http://www.alternet.org/story/156115/big_trouble_for_u.s._europe%27s_banking_crisis_moves_closer_to_a_lehman_brothers_moment <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The recent euro summit did nothing to alleviate the problems that created the crisis in the first place.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p> The recent euro summit in Brussels was supposed to make things better for the European economy. And if you listen to the mainstream press spin, you hear that a growing Mediterranean alliance, led by France's new president, Francois Hollande, Spain's Mariano Rajoy and Italy's Mario Monti, forced Germany to cave. We are led to believe that Germany has capitulated on things like less fiscal austerity, the sharing of debt, and direct recapitalization for ailing banks through the European Stability Mechanism (ESM). We are also supposed to accept at face value the claim that the European Union as a whole will work toward some form of common deposit insurance to arrest the prevailing bank run.</p> <p> This is all bunk. But why does that matter to you? Well, recall for an instance what happened to the global economy when Lehman Brothers went bust in 2008. The world’s entire credit system froze up. Now consider the implications for the U.S. if the currency union in the world’s largest economic bloc was to blow apart. Do you think the fallout might wind up in your backyard?  Economist Simon Johnson recently gave a warning on the impact on U.S. banks in the event of a dissolution of the euro:</p> <blockquote> <p> [I]n recently released highlights from its so-called living will, JPMorgan Chase &amp; Co. <a href="http://www.law.harvard.edu/programs/about/pifs/symposia/europe/baer.pdf" title="Open Web Site">revealed</a> that $50 billion in losses could hypothetically bring down the bank. .. The Fed is convinced that its recent stress tests show U.S. banks have enough capital even though these tests didn’t model serious euro dissolution risk and the effect on global derivatives markets. The striking thing about JPMorgan’s recent London-based proprietary trading losses is not the amount per se. If the world’s largest bank can lose $2 billion to $3 billion in a relatively calm quarter through incompetence and neglect on the fringes of its operations, how much does it stand to lose when markets really turn nasty across a much broader range of its activities? And how might that harm the U.S. economic recovery?</p></blockquote> <p> So, measures designed to save the euro are something we should pay attention to here in the U.S. They also help to explain why President Obama remains in persistent contact with Europe’s key political players, notably German Chancellor Angela Merkel.</p> <p> In contrast to previous summits to "save the euro," expectations for this one were set <em>very</em> low by the time this meeting started, leading you to assume that <em>any</em> bit of good news would be sufficient to induce a market rally. At the same time, if you ignore the spin and actually read the text of the statement released after the summit, it does not appear that the package announced does anything to alleviate the problems that created the crisis conditions in the first place, especially the bank run.</p> <p> So what was actually agreed? Let's concede one positive point at the start: It seems to be that any monies used to recapitalize Spanish banks (which are now at the heart of Europe’s systemic instability) won't rank higher than other forms of bonds, which removes one disincentive to buy more Spanish bonds, which in turn could mitigate Spain's own funding strains.</p> <p> However, the decision to award private creditors the same status as the Eurozone bailout fund in the Spanish rescue means that German taxpayers will have to join the queue to get their money back, which in turn threatens Germany's own credit rating.   Accordingly, the German media were quick to howl that Merkel was putting the German taxpayer on the line for the success or failure of banks in Madrid. The concession might also be unconstitutional, given recent rulings by Germany’s Constitutional Court.</p> <p> It is also important to note that what was conceded here by Berlin is tightly circumscribed. Funds may be given directly to Spanish banks, but the same provision does not apply to other nations in the Economic and Monetary Union (EMU) such as Italy. Furthermore, money being given to Spain’s banks will only come in the form of <em>loans</em>, not additional equity, which means that Madrid’s overleveraged banks are being forced to take on yet more debt to sort out an existing debt problem.</p> <p> Hardly a satisfactory conclusion to the summit! Spain's banks need <em>equity</em> -- and lots of it -- so that they can withstand the impact of writing off an increasingly large number of worthless real estate loans. Yes, the loans to Spain’s banks might eventually be converted into capital, but this conversion will be highly conditional, as the final communique makes clear:</p> <blockquote> <p> Following a regular decision, (the ESM could) have the possibility to recapitalise banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which would be institution specific, sector specific or economy wide.</p></blockquote> <p> For at least the next several months, the Spanish banks will receive debt funds, not equity, until sometime in 2013. Even then, conversion into capital will be iffy and perhaps very selective, and again, subject to a German veto. And given the flak that Mrs. Merkel is taking at home in the aftermath of the summit, she is unlikely to feel particularly philanthropic for a while. So the "concession," such that it is, is unlikely to change the current adverse behavior by banks and their depositors over the balance of this year.</p> <p> In contrast to what the international press has been saying, the actual statement released in the aftermath of the summit shows that nothing has been introduced that would credibly backstop Spain and Italy, and thereby prevent rising bond yields which are threatening the solvency of both countries.</p> <p> Another key point: There was no progress toward German acceptance of debt sharing (whereby the stronger countries in effect use their balance sheet to help the weaker countries, much as the US Treasury uses federal funds to help backstop economically weaker American states). There was no mention whatsoever of American-style FDIC deposit insurance. It will be at least a year, possibly several, before the "banking union" is operating properly, but the financial crisis is occurring now.</p> <p> The bank run, therefore, will almost certainly continue. Remember, in the U.S. we have 50 states and one central bank. Likewise in other federal systems such as Canada and Australia. In all these cases, there are fund transfers across states (or provinces). And these are permanent institutional arrangements. It is highly likely that West Virginia or Mississippi will remain long-term recipients of federal transfer payments, even if they remain “uncompetitive” compared to states with stronger economies, like Texas or New York.</p> <p> In a country like the U.S., which has this system of shared economic fate, there's no chance that a state will opt out and bring with it its own devalued currency. So there is no incentive for people to take their deposit from banks in one state or region to another. That means that the private markets, with a little help from the Fed, will close the financial circuit to the extent there are such fund transfers.</p> <p> The European Monetary System was supposed to work that way. And as long as no one worried about any country leaving the euro, it did. But once the risk of euro exit on Europe’s periphery raised its ugly head, the euro system became completely different. Peter Garber, a strategist at Deutsche Bank, has argued that given such a perceived prospect, the euro system was a perfect mechanism for a deposit run. And once doubts arose in 2009 about a possible euro exit by Greece and Ireland, a deposit run began – and in earnest.<br /><br /> It has been troubling to hear the triumphalism that has characterized some of the post-summit talk, with marked anti-German overtones. This is very unhelpful to Angela Merkel, who still faces significant constitutional hurdles and was greeted home by the sight of German papers castigating her surrender. One can only imagine that this will strengthen the hands of the anti-euro faction in Germany, which is prepared to countenance a substantial hit to Germany's GDP in order to prevent much worse in their eyes from occurring later. Even those sympathetic to the European Project in Germany might find it more difficult to rally public support to take on the likely huge burdens needed to keep the euro project afloat, given the graceless reactions in Madrid, Paris and Rome.</p> <p> In the end, much depends upon whether there is an ongoing and escalating bank run. If there is, the outcome of the euro summit has done nothing to solve the most threatening immediate problem. One can actually sympathize with Germany's concerns about being enveloped in a series of institutional structures that might have the effect of tainting the country's credit rating and possibly raising its own cost of borrowing from the markets. It would be akin to asking several states to help bail out Illinois without any help from the US Treasury (which is the issuer of the dollar). All the more reason why the ECB, as the issuer of the euro, must remain at the center of a solution. Funding and deposit insurance guarantees and the like must come directly from the central bank in the Eurozone because it is the issue of the currency.</p> <p> Absent a role for the ECB, we have a sort of logic whereby we are robbing Peter to pay Paul. To reiterate: The ECB is the currency-issuer of the euro. It can never run out of euros. At an intrinsic level, it has no need for capital. It could operate forever with a balance sheet that if held by a private bank would signal insolvency.</p> <p> Judging from last week's euphoric reaction in the aftermath of the meeting, the financial markets might see it differently for a while. But this summit genuinely appears to be a case of much ado about nothing. The only difference is that Shakespearean comedy has a happy ending. By contrast, if the last few years have shown us anything, Europe is heading inexorably toward tragedy.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 02 Jul 2012 04:00:01 -0700 Marshall Auerback, AlterNet 671566 at http://www.alternet.org Economy World Economy germany angela merkel euro lehman brothers greece eurozone austerity 5 Reasons Greece and the Rest of the Eurozone Are On the Road to Hell http://www.alternet.org/story/155915/5_reasons_greece_and_the_rest_of_the_eurozone_are_on_the_road_to_hell <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Despite mainstream press claims to the contrary, the crisis has by no means been averted.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/managed/storyimages_1340042310_grimreaper.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p> Sunday's elections in Greece brought victory to the center-right New Democracy, which has favored a bank-friendly bailout of the economy, over the leftist Syriza party. The middle class, it seems, got scared of losing everything and looked to the conservatives for protection. So what will the New Democracy party do with the harsh austerity package Greece has been handed? Will it even be able to form a government? Will Greece get any real relief? And what does it all mean to you and me?<br /><br /> For the short term, it appears we won't have a "Grexit" (a Greek exit from the euro), which has led many commentators to suggest (laughably) that a crisis has been averted. A typical Bloomberg article takes that line: “<a href="http://www.businessweek.com/news/2012-06-17/greece-avoids-chaos-but-very-big-hurdles-loom">Greece avoids chaos; Big Hurdles Loom</a>.” But how, exactly, is the acceptance of an ill-advised austerity program (even if cosmetic adjustments are made) going to help, say, hospitals get access to <a href="http://www.guardian.co.uk/world/greek-election-blog-2012/2012/jun/12/greek-crisis-funding-health-social-services">essential medical supplies?</a> If the Greek government is made to enforce a program that is killing its private sector by cutting spending and not paying legitimate bills, and the unemployment rate creeps toward 25 percent in general and 50 percent for youth, you can be sure that the social fabric in Greece will continue to fray. <br /><br /> To paraphrase Pete Townsend, meet the new chaos, same as the old chaos. Greece and the entire eurozone are continuing down a road to hell where financiers are the highway robbers and ordinary people are attacked at every step. Here's why.<br /><br /><strong>1. Pretend Politics.</strong>Prior to the June 17 vote, Greek voters were intimidated with a massive number of threats from Germany and elsewhere of what would happen if they didn't vote "the right way" (i.e. anybody but the "radical leftists" in Syriza who would have negotiated harder with the financiers). The conservatives barely led the vote count from their main anti-austerity rival. Yet New Democracy leader Antonis Samaris suggested in his victory speech that the results reflected a vote for "growth." There is more than a touch of Orwell at work when you can redefine the kinds of programs the Greeks will be forced to swallow as "growth policies." Germany's suggestion to cut the minimum wage, for example, will only take more money out of the pockets of regular people, which, as Keynes taught us, further weakens the economy.<br /><br /> But it looks like the Greek government will continue to plug away at austerity. And the "Troika" -- the three organizations that have the most power over Greece's financial future, namely the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) -- will continue to pretend that such policies will ultimately lead to a Greek economic recovery. There will be some fake advertising about Europe making it easier on the Greeks, but it will be a "something" without substance.<br /><br /> Then things will get worse to the point where New Democracy leader Antonis Samaras might have to take a helicopter to flee the crowds.<br /><br /> From the Opposition Syriza's perspective this is not the worst outcome, since the third place Pasok (Greece's ostensible "socialist" party) is likely to join New Democracy (despite some posturing which suggested that they wouldn't join a coalition in the absence of Syriza's participation, thereby ensuring that all parties are tarred with these awful austerity policies). In that event, both Pasok and New Democracy will have to watch as Syriza leads the opposition and probably wipes them out in another election within a year. Maybe even, within the year.<br /><br /><strong>2. Nothing Fundamental Will Change.</strong> In the meantime, nothing fundamental will change in Greece. It can't, given that the circuits of credit in Greece are so badly damaged that even efficient, profitable firms have been cut out of not only the capital markets, but also out of the international markets (their suppliers will no longer accept the Greek bank guarantees, without which Greek firms cannot import raw materials, as economist Yanis Varoufakis has <a href="http://yanisvaroufakis.eu/2012/06/18/greek-election-result-an-assessment/">pointed out</a>). I asked Varoufakis why those profitable Greek businesses don't simply shift their deposits to, say, a German bank, in order to get "reputable" letters of credit, and his response was that a German bank would simply not issue a guarantee on these businesses if they are registered in Greece.<br /><br /> So the upshot will be that even profitable businesses will be forced to sell out to outside interests, after which the letters of credit will be forthcoming. If this isn't an example of "<a href="http://www.amazon.com/Confessions-Economic-Hit-John-Perkins/dp/1576753018">hit-man economics</a>," it's hard to know what is.<br /><br /><strong>3. Wrong Diagnosis, Deadly "Cure."</strong>In the eurozone we have a solvency problem <em>and</em> a crisis of people not having enough money to spend on goods and services, which stalls the economy. Unfortunately, within the European Monetary Union (EMU) these twin crisis ultimately fall entirely in the realm of the <em>issuer</em>of the currency -- the  ECB -- and not the<em>users</em> of the currency -- the euro member nations. So without the ECB, directly or indirectly, underwriting the currency union, solvency is always an issue, whether that be Greece, Portugal, Spain, Italy, or indeed, Germany. Likewise deficient spending power has been exacerbated by the austerity imposed as a condition of the ECB's help. The patient (Greece) can't recover under these circumstances, and the "cure" will only cause more agony.</p> <p> <strong>4. Flaw in the Euro Architecture.</strong> Nobody seems to want to acknowledge that the eurozone has a fundamental architectural flaw. Right now, there is no fiscal authority over member nations that can adequately respond to economic crises. This has been the story of Greece, the rest of the European periphery and now the disease is spreading into the core (Dutch April retail sales were down 11 percent year-over-year, so this is no longer a "north vs south" problem in the eurozone). A good economy with rising public deficits and ECB support to keep it all going isn't even a consideration at this point. The eurozone apologists have painted themselves into an ideological corner, as Europe's banking system continues to suffer from the throes of a massive bank run. The Greek election results won't change that fact.<br /><br /><strong>5. The German Problem.</strong> German Chancellor Angela Merkel may actually understand the nature of the problem, and it is likely that she is also aware (via her economic advisers) of the extent of the eurozone's bank run, which is now massive (probably in the trillions of euros). But to draw attention to the real problem risks highlighting Germany's <a href="http://neweconomicperspectives.org/2012/06/germanys-constitutional-conundrum.html">legal conundrum</a> in which unintended losses to the German people due to risks involved in bailing out countries like Greece may go against their constitution. Ironically, the more Mrs. Merkel says "Nein" to any genuine proposal that could avert a solvency crisis, the more likely that these risks become real. Merkel rejects policies that would be better for the eurozone because they are politically unpalatable and because she hasn't been honest with her own electorate in spelling out the real implications of Germany's position if the eurozone blows up. She's in a corner.</p> <p> Back to Greece. It looks like the economic torture chamber of mass unemployment can persist indefinitely in practice, even in the face of massive political resistance. Increasing evidence in the last few weeks or so suggest that the public deficits across the EU are propping up demand just enough to stop the currency union from blowing up.</p> <p> But the actions of the Troika are neither politically desirable, nor sustainable over the longer term. The recent election results, not just in Greece, but all across Europe, continue to demonstrate this. Note that the Socialists claimed a huge majority in France's Parliamentary elections held this past weekend. And thank goodness for that! Because if misguided austerity economics continues, the crisis will surely spread to America's shores, just at a time when the American ideological soulmates of Europe's austerity brigade are seeking to shred what's left of our own social safety net through a manufactured fiscal crisis. </p> <p> You know the drill by now. The financiers create an economic crisis; their political puppets demand budget cuts; and the rest of us are left holding the bag while the fatcats pop the champagne.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 18 Jun 2012 17:00:01 -0700 Marshall Auerback, AlterNet 671256 at http://www.alternet.org Economy World Economy greece austerity eurzone A World of Trouble if the Spanish Banking Crisis Spreads http://www.alternet.org/story/155834/a_world_of_trouble_if_the_spanish_banking_crisis_spreads <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Until flaws in the euro are addressed, the crisis is likely to simmer on.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/images/managed/storyimages_1339450850_globalcrisis.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p> Spain's banks are in a world of trouble, as you've undoubtedly heard. They are strained by loans made over the course of a a building boom that went bust in 2008, two recessions in the last three years, and the highest unemployment rate among developed nations. Misguided austerity policies have only made things worse. Everybody is biting their fingernails, trying to figure out if the bailout Brussels recently concocted will work. Stocks are reacting in an up and down roller-coaster ride. Depositors are taking their money out of banks in the most vulnerable countries. The biggest fear is that if the bailout fails, the contagion will spread even further into Europe's core and eventually to the shores of the US itself.</p> <p> That fear is justified.<br /><br /> The 100 billion euro proposed recapitalization for Spanish banks is not a small number. It would be like a $1.6 trillion capital injection into the U.S. banks if it was projected onto the scale of the U.S. economy. That is greater than everything that was done by the Fed and the Treasury to shore up the capital of U.S. financial institutions during the Great Crisis. Nonetheless, I judge that compared to the size of Spain’s non-financial private debt and the size of its bank run, this is a mere bandaid. And remember, even during the darkest days of the Great Recession of 2008/'09, the U.S. did not have a bank run.<br /><br /> Even though Spain's authorities have trumpeted the fact that the "assistance" (as Madrid's leaders laughingly keep calling their bailout) comes without conditions, it is worth recalling that the Spanish government is in the midst of a huge fiscal retrenchment over the next year. They are trying to take government spending as a percentage of GDP from a deficit to GDP ratio of 8.9 percent in 2011 to under 3 percent in 2013 at a time that GDP is forecast to decline by a further 1.7 percent. That's a bad thing. Econ 101 says that when you take spending power from the economy, a crisis is almost certain to worsen.<br /><br /> Like Ireland, Spain has faced declining real estate values as a result of the housing bust, and these declines are closely connected to banking losses due to things like foreclosure and bad loans. The key difference between Ireland and Spain is that Ireland has now experienced three years of wrenching austerity. In the case of Dublin, there is some degree of confidence that real estate prices have bottomed out. As Yanis Varoufakis <a href="http://yanisvaroufakis.eu/2012/06/10/spains-blood-wedding-irelands-muted-rage-europes-tragedy/#more-2355">notes</a>, at least this gives the Irish some clarity, despite a poor outlook. Not so in Spain:</p> <blockquote> <p> <em>In Spain, by contrast, the downward dynamic of real estate prices is nowhere near a resting point. Some say that real estate has another 40% to lose before it reaches equilibrium. Which means that the banks’ black holes may be much larger than it seems.</em></p></blockquote> <p> What Spain teaches us is that the crisis of the euro is spreading into Europe's largest economies. Last month, the Spanish Prime Minister was denying there was a bank crisis in his country. The Greeks said much the same thing over a year ago. Likewise, the Irish authorities promised an end to that country's problems -- before they sold their people down the river to the austerity hawks now running economic policy in Brussels, particularly the Germans. The Germans, you see, didn't want to force losses on private unsecured bank bond holders, which included German pension and insurance funds.</p> <p> So today we have yet anther leader, Spanish Prime Minister Rajoy, who is telling his country that the crisis is "resolved" and the euro's credibility restored. It's like a broken record. Given the response of the markets, these assurances are clearly running a bit thin.</p> <p> The heart of the real crisis in the Eurozone is the euro itself. Until the deep flaws in the design of the European Monetary Union (EMU) are addressed, the crisis will simmer on. The EU leadership can do one of two things: either establish a credible and functional federal fiscal authority and allow it to run deficits that are commensurate with the gaps in private sector spending now existing in the zone -- or abandon the currency union altogether.</p> <p> Right now, the first option would require such an authority to run deficits continuously for many years into the future, which were well in excess of the rules of the Stability and Growth Pact (<span class="st">an agreement among the 27 member states of the European Union developed in the '90s)</span>. Those harmful rules should be abandoned and a growth strategy with direct job creation programs (especially for youth) prioritized.</p> <p> Unfortunately, the EU elites are pushing through a new fiscal compact which is an even harsher version of the Pact. Which means that they are not even close to understanding the reality and what is required.</p> <p> In last Saturday's <em>Financial Times,</em>authors Niall Ferguson and Nouriel Roubini published an <a href="http://www.ft.com/cms/s/0/175fcc8c-9b7f-11e1-8b36-00144feabdc0.html">article</a> titled “Is it one minute to midnight in Europe?” They discussed the bank run that has been happening as depositors take their money out of troubled European banks:</p> <blockquote> <p> <em>On a recent visit to Barcelona, one of us was repeatedly asked if it was safe to leave money in a Spanish bank. This kind of process is potentially explosive. What today is a leisurely 'bank jog' could easily become a sprint for the exits. In the event of a Greek exit, rational people would ask: who is next?</em></p></blockquote> <p> So what is “one minute to midnight” in Europe? A leisurely “bank jog." What is “midnight” in Europe? When the bank jog becomes “a sprint for the exits”?</p> <p> Ferguson and Roubini report that Greeks have withdrawn more than 700 million euro from their banks in the past month. That's what we might call a "jog." Charles Dallara, <span class="st" dir="ltr">managing director of the Institute for International Finance,</span> <a href="http://www.telegraph.co.uk/finance/financialcrisis/9270754/IIFs-Charles-Dallara-says-Greek-exit-somewhere-between-catastrophic-and-armageddon.html">tells us</a> there was more than 170 billion of euro lender of last resort financing of the Greek banks by the European Central Bank (ECB) through the end of April. Given the fact that Greece’s money supply has contracted by perhaps 50 billion euros, the implied total deposit run might be well in excess of 200 billion euros. In plain English, that sounds more like a sprint toward the exits.</p> <p> Amazingly, Ferguson and Roubini are being fooled about the extent of the Greek deposit run because they are looking at the money supply data, which actually tells you nothing about the extent of the bank run. Why is that? Because when a Spanish depositor takes his or her money out of a local bank in, say, Barcelona, and re-deposits it down the street with a local German banking subsidiary, it doesn't change the money supply data. Therefore it masks the amount of deposits fleeing the Spanish banking system. The true magnitude of the run can only been understood by closely examining the ECB's so-called "Target 2" payments system (through which the national central banks of member states provide payment and settlement services for intra/euro area transactions) and the ECB's so-called "Emergency Liquidity Assistance" (ELA). Both of these have been growing exponentially.</p> <p> Just this past week alone, there is Target 2 data reporting a 68.4 billion euro ECB injection of funds into Spain. That is more than half of the now-much discussed 100 billion euro Spain bank bailout. That also sounds like a sprint for the exits.</p> <p> Therefore, we are not one minute to midnight in Europe. At these rates of deposit flight, it is midnight.</p> <p> The bells are chiming, but like the deaf Quasimodo, nobody in Europe appears able to hear. If policy-makers continue fail Econ 101, the problems in the banking system will spread across the entire European financial sector, hitting fragile banking systems in places like Italy first, and then potentially poisoning those in healthier countries like Germany and France. That, in turn, would cause banks to cease lending, and spark more economic pain around the world. The United States would certainly not be immune, and during a time of halting recovery, that could throw us right back into recession.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 11 Jun 2012 18:00:01 -0700 Marshall Auerback, AlterNet 671169 at http://www.alternet.org Economy World Economy eurozone austerity spanish banking crisis European People Have Rejected Austerity Madness: Will the U.S. Get the Message? http://www.alternet.org/story/155302/european_people_have_rejected_austerity_madness%3A_will_the_u.s._get_the_message <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The Greek and French elections show that the electorate wants real income growth and jobs -- and they are clear that austerity is undermining both.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>So the voters of Europe have spoken, and surprise, surprise: they are not too keen on fiscal austerity. France’s president, Nicolas Sarkozy, became the first incumbent to lose since 1981. In Greece, the mainstream parties that have been happily participating in the country's national suicide were soundly rejected by the electorate (who finally had a say on the country’s economic course after being the unwilling recipients of a European Union/International Monetary Fund-sponsored financial coup d’etat over the last several months).<br /><br /> Governments in Europe have been caught up in the fiscal austerity narrative that the neo-liberals imposed on failing economies everywhere. They believe that if they demonstrate misguided “fiscal responsibility” through the maniacal pursuit of a budget surplus, the electorate will reward them for being good managers. However, as the Greek and French elections vividly demonstrate, the electorate is more concerned about real income growth and employment opportunities and they are clear that the current strategy is undermining both.<br /><br /> What Europe’s technocratic elites fail to grasp is that it is folly to pursue a budget surplus at a time when the economy is slowing. In a weak economy, what economists call "automatic stabilizers" kick in (payments like unemployment benefits) to keep things from going into freefall. When the government has to make those kinds of emergency expenditures, and people are out of work, tax revenue plunges. So budget deficits are to be expected, and trying to pursue cuts in the face of that reality is very irresponsible fiscal management.<br /><br /> One would think that American politicians would take note. And yet precisely the opposite lessons are being drawn in the US.<br /><br /> In the US, there has been much discussion recently of what's known as the “fiscal cliff.” That's what we may be headed over on the first day of 2013, when the Bush-era tax cuts revert back to previous levels, and the more than $1 trillion in arbitrary budget cuts Congress approved last year are scheduled to begin. Some would call the policies that have produced this scenario “responsible fiscal management.” I would argue that it would represent a self-inflicted wound of historic proportions. Even the International Monetary Fund has <a href="https://mninews.deutsche-boerse.com/content/imfs-lagarde-us-fiscal-debate-dark-cloud-global-recovery">expressed such grave concerns</a> that lawmakers will drive over the cliff that it ranks the possibility as a threat equal to that posed by the European debt crisis. <br /><br /> In the US, it might be sensible to get some kind of balance between high income earners and the 99 percent. But it isn’t a matter of taxing the rich more to get the funds to reduce the deficit. Deficit reduction should not be an object of policy, period. The urgent problem is that we need to support the demand for goods and services in our economy. If we pursue budget cuts that take money out of the pockets of consumers, then people stop spending, businesses stop hiring, and we get into the death spiral that has played out so tragically in European countries.</p> <p>The macroeconomic urgency at present is to escape the austerity mindset and get growth going. In fact, it is only because of those “horrible” budget deficits which policy-makers continue to describe as “unsustainable” that the US continues to grow at all (in stark contrast to the Eurozone). Policy abominations such as those pushed by Alan Simpson and Erskine Bowles, who call for so-called "entitlement reform," are exactly the opposite of what is required for a healthy economy. Reaching into the pockets of hard-working people does not drive economic growth -- and at some point, when they are squeezed beyond endurance, the people will push back.<br /><br /> It is clear that the US fiscal stimulus -- the trillions spent in response to the financial crash -- supported the confidence of businesses and consumers. While I am not a supporter of the way the Obama administration chose to spend the stimulus funds (excessively supporting the financial sector), the fact remains that there was an attempt to limit the damage of the collapse in private spending, and that attempt likely averted a much greater catastrophe. But if we return to an obsession with the federal budget deficit, we will exacerbate the problem which is truly hampering the economy -- the high unemployment rate.<br /><br /> It is only political ineptitude at present that is saving the US economy -- because if the Republicans could have their way, the austerity programs would be accelerating more than is obvious from the recent <a href="http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm">GDP data release</a>, which showed 2.2 percent growth for the first quarter of 2012.<br /><br /> Not so in Europe. The Euro experiment has largely failed to meet the needs of the people who use it. The misconceived currency union has torn apart any sense of common purpose in Europe, with the wealthier north now driven persistently against the poorer south. The crisis has conclusively proven that the common currency zone is incapable of withstanding significant negative demand shocks without imposing massive costs on the less advantaged and without extraordinary intervention (bailouts, massive ECB bond purchases, etc.) that actually exacerbate today’s crisis, because they are invariably tied to the conditionality of further economic austerity.</p> <p>The very fact that austerity is being widely advocated will generate the conditions that will see it fail as a growth strategy. <br /><br /> Austerity means that income is withdrawn from an economy. That, in turn, means that consumers and businesses have less overall spending power. Businesses, for example, understandably lay people off when their customers stop buying products and services. Contrary to what Republicans try to tell us, the reason we lost millions of jobs almost all at once back in 2008 wasn't because all of a sudden all those people decided they'd rather collect unemployment checks than work. The reason all those jobs were lost was because sales collapsed.</p> <p>It's very simple: when sales go down, jobs are lost, and when sales go up, jobs go up, as business hires to service all its new customers.</p> <p>If governments continue to pursue austerity, yet more unsold inventories will appear and firms will start to lay off workers because the production level is too high relative to demand.</p> <p>By contrast, if the national government can step in to fill the “spending gap," then products are sold and firms are happy to keep the employees that created them. And guess what else? Tax revenues will go up and the deficits will go <em>down</em>.</p> <p>Unlike the European Monetary Union (where nations surrendered their respective fiscal sovereignty when they gave up their national currencies to join the Eurozone), the US still is a sovereign state and so we have the flexibility to create fiscal policies that stimulate the economy. We could introduce WPA-like programs that would put Americans back to work building infrastructure and other much-needed improvements tomorrow if we summoned the political will to do so.</p> <p>The message is coming in loud and clear in Europe. We’ve reached fiscal austerity endgame, whether Europe’s elites recognize it yet or not. The clock is now ticking. Will the US pay heed?<br />  </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 07 May 2012 14:00:01 -0700 Marshall Auerback, AlterNet 670723 at http://www.alternet.org Economy Economy Visions france greece austerity eurzone Why Low Minimum Wages Kill Jobs and Crush Living Standards for Everyone http://www.alternet.org/story/155132/why_low_minimum_wages_kill_jobs_and_crush_living_standards_for_everyone <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Contrary to right-wing propaganda, decent pay for workers helps the economy and boosts job creation.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Senator Tom Harkin, Democrat of Iowa, has introduced a bill to raise the federal minimum wage to $9.80 from its present level of $7.25. Polls are showing many voters<a href="http://stamford.patch.com/articles/poll-voters-support-death-penalty-raising-minimum-wage-9f40b48b">in favor,</a> though they are confused about what it would mean for the job market. The truth is that a move would be good for a slow economy and have a positive impact on the jobs crisis. Naturally, this has led to the usual cries of opposition, largely based on the notion that raising the minimum wage hurts the very people it is supposed to help. Typical of this view is a letter to the <em>New York Times</em>from Michael Saltsman, a fellow at the Employment Policies Institute, a business-backed nonprofit research group (surprise!). <br /><br /> Saltsman <a href="http://www.nytimes.com/2012/04/21/opinion/what-are-the-effects-of-raising-the-minimum-wage.html?_r=1">trots out the old canards</a> against the minimum wage, claiming that research indicates that a minimum wage increase "simply doesn’t help the poor — in fact, it hurts them." He cites studies which showed that states with their minimum wages between 2003 and 2007 found no associated decline in state poverty rates. Saltsman gives three reasons for this:</p> <ol><li>A majority of working-age individuals who live in poverty don’t work, and thus cannot benefit from the raise.</li> <li>A clear majority of those who do earn the minimum wage live in households that aren’t in poverty.</li> <li>Less skilled and less experienced employees lose employment opportunities when the cost to hire and train them rises as a result of a minimum-wage increase.</li> </ol><p>Let’s take these arguments in turn. Implicit in the first point is that a majority of working-age individuals don’t work because they choose not to (i.e. they are lazy scroungers), or because unemployment is caused by laziness or lack of training. The argument they often use is that “I can get a job, therefore all the unemployed could get jobs if only they tried harder, or got better education and training.”<br /><br /> The way I go about demonstrating that fallacy is a dogs-and-bones example. Say we have 10 dogs and we bury nine bones in the backyard. We send the dogs out to find bones. At least one dog will come back without a bone. <br /><br /> We decide that the problem is lack of training. We put that dog through rigorous training in the latest bone-finding techniques. We bury nine bones and send the 10 dogs out again. The trained dog ends up with a bone, but some other dog comes back without a bone (empty-mouthed, so to speak).<br /><br /> The problem is that there are not enough bones and jobs to go around. The “bones” in the jobs discussion are insufficient spending power in the economy. It is certainly true that a well-trained and highly motivated jobseeker can usually find a job. But that is no evidence that aggregate unemployment is caused by laziness or lack of training. And besides, we could easily determine how much unemployment is truly voluntary. The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements. <br /><br /> It's hard to believe that reducing or even eliminating the minimum wage (which is the corollary of Saltsman’s point), would actually enhance employment, when the problem is a basic lack of demand. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month until there exists sufficient spending power in the economy to induce them to hire those workers. How is retaining a static, or reduced minimum wage, going to achieve this? <br /><br /> Higher wages means higher income and thus higher consumption spending, which induces firms to employ more labor. So the truth is that economic theory does not tell us that raising minimum wages will lead to more unemployment, indeed, theory tells us it can go the other way—raising the minimum wage could increase employment. That’s one of the reasons why Henry Ford believed in paying his workers a decent wage: so that they could buy his product.<br /><br /> To be sure, even an increase in the minimum wage to $12 or $15 an hour is not going to provide the means to purchase a Ford (or GM) today. And so what if, as Saltsman argues, the workers earning this minimum wage are not living in poverty? Does that mean they wouldn’t spend the money derived from an increased minimum wage? I wonder if Saltsman would also argue that tax cuts across the board are unnecessary because most of the people who receive them are not living in poverty?</p> <p>That argument is a red herring. The truth is, if you earn your money through wages (unlike many of the 1 percent, who earn through things like investments and a tax system biased in favor of capital gains over income) then a higher wage, minimum or otherwise, would mean that you'd spend the additional dollars, creating jobs for other workers. You'd pay down your mortgages and car loans, getting yourself out of debt. You’d pay more taxes — on sales and property, mostly — thereby relieving the fiscal crises of states and localities. More teachers, police and firefighters would keep their jobs. America would get a virtuous cycle toward higher employment and, more importantly, the cycle would be based on a policy which creates higher incomes, not higher debt via credit expansion.</p> <p>Then there's the common belief that minimum wages cause unemployment, which relates to Saltman’s third point – namely that less skilled and less experienced employees lose employment opportunities when the cost to hire and train them rises as a result of a minimum-wage increase. It is at least partly true that for an individual firm, higher wages reduce the number of workers hired. But we cannot extrapolate that to the economy as a whole. The issue of eroding wage competitiveness, which allegedly follows from a higher minimum wage, doesn’t really apply to jobs which offer the minimum wage. It might apply to areas such as manufactured goods and traded services like insurance and banking. But these are sectors in which most people already earn far more than the minimum wage.</p> <p>As far as the minimum wage goes, the jobs we’re talking about are in non-traded services like checkout clerks, haircutters, domestic help, and food-service workers. When checkout clerks and cooks earn more in wages, then businesses start getting the sales required to induce them to hire more workers. And if sales are robust enough, then guess what? Even more workers will be hired, or wages will actually be increased.</p> <p>The point is: wages are a source of demand, as well as a cost input. Reduce wages and demand plummets, which more than overrides any cost savings derived from paying less to workers (especially given today's paltry minimum wage, which is hardly a living wage for any American).</p> <p>Let's be clear; Americans have never embraced welfare. For better or worse, our nation has always preferred a more libertarian path: self-help, personal responsibility, individual initiative. As a result, our welfare programs have always been stingy, temporary and purposely demeaning. But maintaining the minimum wage at today’s ridiculously depressed level does not enhance anybody’s employment prospects. In fact, it makes it worse, because it sucks demand out of the economy and minimizes the chances of those now receiving unemployment benefits or other assistance to quickly get back into the workforce, to "pull themselves up by their own bootstraps," as conservatives like to say. They cannot do that when our work force continues to focus on policies which merely enhance the incomes of the top 1 percent.</p> <p> </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Tue, 24 Apr 2012 05:00:01 -0700 Marshall Auerback, AlterNet 670495 at http://www.alternet.org Economy Labor Economy jobs crisis minimim wage The Truth Revealed About Debt and Deficits http://www.alternet.org/story/155040/the_truth_revealed_about_debt_and_deficits <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Spending and debt are necessary in any economy. The key question is which sector should carry the burden: families and businesses, or the government?</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>It’s hard to open a newspaper or turn on the TV without being bombarded with narratives suggesting that fiscal policy didn’t work and that we therefore need discipline in the form of balanced budget amendments and debt limits. Even those who see themselves as moderates on the issue are embracing a commitment to “eventually” slash deficit spending once recovery gets underway.</p> <p>But most of this talk arises from a fundamental misunderstanding about the way debt and deficits actually operate.</p> <p><strong>Private v. Public Debt</strong></p> <p>When people talk about reducing the deficit, the message is that the U.S. government is running out of money. Virtually everyone in Washington accepts this idea—from the progressive think tanks to the nuttiest free marketeers; from the politicians to NPR’s reporters; from Pete Peterson’s hedge fund cronies to organized labor. All present a unified front against budget deficits—particularly those that supposedly result from “entitlements.”<br /><br /> They all warn we have to cut excessive debt. But what kind of debt? Public or private? And excessive in relation to what? Time? Some threshold?</p> <p>The truth is that a holder of private debt, like a household, has a very different relationship to debt than a government like the United States, which issues its own currency. For families and businesses, paying back debt means they have to sacrifice current consumption (spending). But the government doesn’t have this same constraint. You’ll rarely hear this stated, but the government’s ability to spend now is actually independent of how much debt it holds and what it spent yesterday. That situation can never apply to a household or business firm.</p> <p>In today's economy, private debt loads --those carried by families and businesses -- remain too high while income and employment continue to fall, and delinquencies and foreclosures continue to rise. Even at current depressed prices, assets are overvalued. And because people are continuing to have trouble servicing their private debt loads, that means they can’t spend money, which will further slow down economic activity.</p> <p>But federal government debt is a different story. Unlike private actors who don’t have the capacity to create money, the government can issue money at the tap of a keystroke, which means that debt service per se is never an issue. The federal government can always create the dollars to ‘fund’ its spending. Consequently, it can spend much more freely to get the economy going. In troubled economic times, that’s just what government needs to do.</p> <p>Wait—what about inflation? True, if the economy is running closer to full capacity and the government still continues to spend aggressively, this can lead to real resource constraints (and, hence, inflation). And we don’t want that. But this issue, while important, is distinct from the issue of national solvency in the U.S., despite the claims of many disingenuous economists and politicians to the contrary.</p> <p><strong>Budget Deficits Simply Reflect Economic Activity</strong></p> <p>Think of federal budget deficits themselves as barometers of economic activity: when economic activity declines, tax revenues plunge and social welfare expenditures rise as more people are thrown out of work. As a consequence, in bad economic times, there are higher deficits; conversely, when prosperity returns, deficits decrease. This dynamic means that social welfare expenditures are even more necessary during difficult economic times because they help people buy goods and services, which has to happen unless we want the economy to come screeching to a halt and head towards another Great Depression.</p> <p>Let’s take a look at the onset of the current crisis. In the aftermath of the Great Recession of 2007, the U.S. government budget moved sharply to large deficits. While many attributed this to various fiscal stimulus packages (including bail-outs of the auto industry and Wall Street), the largest portion of the increase in the deficit came from what economists call “automatic stabilizers”—things like unemployment benefits that have to kick in when a downturn occurs. They had little to do with discretionary spending.</p> <p>And if we go back even earlier, the boom times of the 1990s and the 2000s was largely a product of massive private sector debt growth, <em>not</em>excessive or "unsustainable" government spending.</p> <p>During the Clinton years, the federal government was running the biggest budget surpluses it has ever run. Everyone thought this was great because it meant that the government’s outstanding debt was being reduced. Clinton even went on TV and predicted that the budget surpluses would last for at least 15 years and that every dollar of government debt would be retired.</p> <p>Everyone celebrated this accomplishment, and claimed the budget surplus was great for the economy. But the reality was that the budget surplus meant that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds.</p> <p>By the same token, the expansion had been led (mostly) by the 2000s housing boom, during which households borrowed (and spent) on an unprecedented scale. In other words, it was private debt that created the conditions for the boom.</p> <p>The household sector spent more than its income. Both the Clinton boom and the 2000s boom caused the budget deficit to fall (and to actually move into a large surplus during the Clinton years). Since the recent financial crash, the household sector has retrenched (as it always does in recession), and savings have grown again. As for public debt, slow growth has been the major cause of the rapidly growing budget deficit—and the slow growth, in turn, is due to a high propensity to save by the retrenching household sector.<br /><br /> So the next time someone starts railing about the evils of “debt” and then immediately advocates yet more government spending cutbacks, ask how we reduce our private debt loads at the same time. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation for people to default on their debts and suffer widespread insolvencies. This would change, of course, if creditors were generously willing to renegotiate existing debt contracts en masse. But this has clearly not been the case thus far during the “recovery."</p> <p><strong>How Can Families and Businesses Pay Down Debts?</strong></p> <p>If we had a boom in exports, our economy would certainly get humming again. Possibly, the public budget balance could actually go towards surplus and households and businesses could save.</p> <p>But here’s the problem: It’s all very well to suggest that we in the U.S. should export more, but it takes two to tango, and if our trading partners (such as Germany, Japan or China) do not want to increase U.S. imports, there’s very little we can do. There is also the issue of restrictions we impose on ourselves. China would glad buy tons of our military hardware, but we restrict its sale on the grounds of national security. Since this is one of the areas where the U.S. literally has a “cutting edge”, it makes export growth even more problematic.</p> <p>Finally, you run into the old fallacy of composition argument: not every country can be a so-called “export superpower” as our president keeps urging. As an example, consider Germany, which refuses to even run a current deficit with its fellow European Union “partners” (even though this is arguably in Germany’s economic self-interest, as it would mitigate some of the strains currently being experienced in the eurozone periphery). Do we seriously expect the Germans to run big trade deficits with the U.S.?</p> <p>Which brings us back to the government again: The whole boom of the 2000s (and more broadly the growth process that emerged at the end the early 1980s) was based on household borrowing and the continuation of people spending above and beyond their income. Because of the large sums of debt that households and businesses took on, they are now having to save. A good place to start recovery efforts, therefore, would be by promoting policies that favor full employment so that households have money to pay down their debts and the ability to consume again.</p> <p>Spending and debt are necessary in any economy. The key question is which sector should carry the burden: families and businesses, or the government? When we try to cut all kinds of debt at the same time, public and private, we invariably place substantially greater burdens onto families and businesses and, in the process, raise government deficits. A pretty nonsensical approach, isn’t it?</p> <p> </p> <p> </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Wed, 18 Apr 2012 00:00:01 -0700 Marshall Auerback, AlterNet 670391 at http://www.alternet.org Economy News & Politics Economy debt deficits great recession America Needs Healthcare, Not Health Insurance http://www.alternet.org/story/154779/america_needs_healthcare%2C_not_health_insurance <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Ironically, the Roberts Court could actually be the instrument that leads us toward something approaching a rational, affordable healthcare provision.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>In Friday's <em>New York Times</em>, Paul Krugman argues that the Supreme Court conservatives grasping for reasons why Congress lacks the power to do anything that they don’t like have forgotten an important distinction: the one between a judge and a politician. We're not sure this is correct. It's always been the case that for all of their lofty protestations of being "above politics," the Supreme Court has been political, whether it be the Warren Court or today's Roberts Court.</p> <p>That said, we're not sure the Supremes are wrong to question the constitutionality of a private health insurance mandate that <a href="http://www.nytimes.com/2012/03/30/opinion/krugman-broccoli-and-bad-faith.html?_r=1&amp;utm_source=Daily+Digest&amp;utm_campaign=6720f19dcd-DD_3_30_123_29_2012&amp;utm_medium=email">Krugman seems so keen to defend</a>, asking: "Is requiring that people pay a tax that finances health coverage O.K., while requiring that they purchase insurance is unconstitutional?"</p> <p>Historically, Krugman has been one of the most eloquent critics of the insurance-based model. Yet he makes the mistake common to many progressive defenders of Obama’s healthcare bill: He conflates two distinct issues and thereby masks the fundamental flaw underlying the entire approach. Private health insurance is <em>not</em> synonymous with healthcare. There is a big difference between levying a tax for a <em>public good</em> (i.e. healthcare) versus forcing people to buy a service from a private health insurance company, which is by no means synonymous with healthcare.</p> <p>Using insurers to provide funding is a complex, costly and distorting method of financing healthcare. Imagine sending your weekly grocery bill to an insurance clerk for review and having the grocer reimbursed by the insurer to whom you have been paying “food insurance” premiums—with some of your purchases excluded from coverage at the whim of the insurer. Is there any plausible reason for putting an insurance agent between you and your grocer? No. Then why should an insurer stand between you and your healthcare provider? And why should you be forced to contribute to such an arbitrary scheme?</p> <p>Furthermore, it is important to note how unusual the United States is—no other comparable nation (in terms of high per capita income) lacks universal healthcare coverage, and many nations that are much poorer provide universal access. And in most of the nations that are similar in other respects to the United States, government plays a much bigger role in healthcare delivery and in financing the system.<br /><br /> “Reform” measures actually promote the status quo by pulling more people into an expensive healthcare system that is managed and funded by insurers. Since two-thirds of household bankruptcies are due to healthcare costs, forcing people to turn over an even larger portion of their income to insurance companies will further erode household finances and exacerbate the problem. This is despite the fact that <a href="http://truth-out.org/opinion/item/8195-all-parties-ignore-the-one-way-to-reduce-healthcare-costs">research by, among others, David U. Himmelstein and Steffie Woolhandler</a>, demonstrates that single-payer reform could save about $380 billion annually that's currently wasted on insurers' overhead and the unnecessary paperwork (and screen-work) they inflict on hospitals, doctors and patients. <br /><br /> Even under today’s “reforms” in the Affordable Health Care Act, healthcare remains a function of employment, which preserves a significant cost disadvantage for U.S. corporations and is particularly unappealing during periods of high unemployment.<br /><br /> The U.S. is the only country in the world where healthcare has become a marginal cost of doing business, thereby putting American corporations at a significant cost disadvantage vis a vis their foreign competition.</p> <p>The reality is that healthcare is not a service that should be funded by insurance companies. An individual should insure against expensive and undesirable calamities: tornadoes, fires, auto accidents. These need to be insurable risks, or insurance will not be made available. This means the events need to be reasonably random and relatively rare, with calculable probabilities that do not change much over time. We need to make sure that the existence of insurance does not increase the probability of insured losses. This is why we are not allowed to insure our neighbor’s house.</p> <p>Insurance works by using the premiums paid in by all of the insured to cover the losses that infrequently visit a small subset of them. Of course, insurance always turns out to be a bad deal for almost all of the insured—the return is hugely negative because most of the insured never collect benefits. The insurance company’s operating costs and profit margins are more or less equal to the net losses suffered by its policyholders.<br /><br /> Ideally, insurance premiums ought to be linked to individual risks; if this actually changed behavior so that risk fell, so much the better. That would reduce the costs to those policyholders who do not experience insured events, and would also increase the insurance companies’ profitability. Competition among insurers would then reduce the premiums for those whose behavior modifications had reduced risks.</p> <p>In practice, people are put into classes—say, “over age 55 with no accidents or moving violations” in the case of auto insurance. Some people are uninsurable—the attendant risks are too high. For example, someone who repeatedly wrecks cars while driving drunk will not be able to purchase insurance. The government might help out by taking away the driver’s license, in which case the insurer could not sell insurance even if it were willing to take on the risk. Further, one cannot insure a burning house against fire because it is, well, already on fire. And even if insurance had already been purchased, the insurer could deny a claim if it determined that the policyholder was at fault.</p> <p>The insured try to get into the low-risk, low-premium classes; the insurers try to sort people by risk and to narrow risk classes. To be sure, insurers do not want to avoid all risks—given a risk/return trade-off, higher-risk individuals will be charged higher premiums. Problems for the insurer arise if high-risk individuals are placed in low-risk classes and thus enjoy inappropriately low premiums. The problem for many individuals is that appropriately priced premiums will be unaffordable. At the extreme, if the probability of an insurable event approaches certainty, the premium that must be charged equals the expected loss, plus the insurance company’s operating costs and profits.</p> <p>However, it is likely that high-risk individuals would refuse insurance long before premiums reached that level, since they will be better off paying out of pocket. With costs skewed toward the less healthy part of the population that bought this insurance, the insurance company would invariably seek to mitigate this impact on cost through a process of prescreening to identify those likely to require expensive treatment, and either rejecting their applications or charging significantly higher premiums to compensate.</p> <p>Again, this tends to guarantee that the uninsured pool is the most at risk. In any event, once an insurance policy is written, the insurer does its best to deny claims. It will look at the fine print and try to find exclusions and uncover preexisting conditions (say, faulty wiring) that would invalidate the claim.</p> <p>From the narrow perspective of the insurance companies, all of this is good business practice. Even under a system which denies coverage on the basis of pre-existing conditions (the quid pro quo for the mandate), the legislation gives ample scope for the insurance companies to limit coverage. Sarah Palin was right. There are death panels in our healthcare system: they’re called health insurance companies.</p> <p>And the reality is that as human beings we are all a bundle of “pre-existing conditions.” From the day of our birth, each of us is a little bundle of preexisting conditions—congenital abnormalities and genetic predispositions to disease or, perhaps, risky behavior. Many of these conditions will only be discovered much later, probably in a doctor’s office. The health insurer will likely remain in the dark until a bill is submitted for payment. It then must seek a way to deny the claim. The insurer will check the fine print and patient records for exclusions and preexisting conditions. Often, insurers automatically issue a denial, forcing patients to file an appeal. Again, good business practice for an insurance company, but lousy if the objective is guaranteed healthcare provision.</p> <p>Given today’s political constraints, perhaps a full “single-payer” option might not be feasible, but one earlier variant of the proposed healthcare legislation did feature a Medicare buy-in. In effect, if the Supreme Court does strike down the major provisions of the Obama healthcare plan, Congress could easily use Senate reconciliation and expand Medicare via the Senate’s buy-in provisions (the House can approve this on the basis of a simple majority vote). The Congressional Budget Office has already signed off on this as a means of saving money (“budget savings” is in some respects a nonsensical concept, but it provides the necessary political cover to deploy what is essentially a budgetary procedure).</p> <p>More important, the expansion of Medicare would provide a genuine “public option” that, by competing against private insurance companies (which would presumably no longer have any genuine cost constraints given that the ban to deny coverage on the basis of pre-existing conditions would likely be struck down with the individual mandate), would help control costs. It would also help solve the problem of preexisting. And because Medicare does not deny coverage on the basis of pre-existing conditions, it is actually far more cost effective than private health insurance. As James K. Galbraith notes in <em>The Predator State</em> (2008):</p> <blockquote> <p>“Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general is therefore intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision. “</p></blockquote> <p>In other words, this brings us closer to the “ideal” low-cost universal insurance plan that has long been advocated by people like Paul Krugman. Allowing a Medicare buy-in to Americans under age 65 would give people a genuine alternative to private health insurance and thereby render the whole issue of denying coverage on the basis of preexisting conditions moot. And it would substantially enhance the global competitiveness of American corporations.</p> <p>A Medicare buy-in would also have the added benefit of getting us closer to a single-payer system, which is a far more rational way to control healthcare costs, largely due to the administrative complexity associated with our current patchwork system and the corresponding inability to bargain with suppliers, especially drug companies, for lower prices. Residents of the United States notoriously pay much higher prices for prescription drugs than residents of other advanced countries, including Canada. This proposal would also give American healthcare consumers far more bang for their buck than the current legislation. It would indeed be the height of historic irony if the Roberts Supreme Court was the instrument that led us away from a private health insurance based system toward something approaching a rational, affordable healthcare provision.  </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. L. Randall Wray is professor of economics at the University of Missouri-Kansas City. </div></div></div> Fri, 30 Mar 2012 18:00:01 -0700 Marshall Auerback, L. Randall Wray, AlterNet 670135 at http://www.alternet.org Economy News & Politics Economy health care health insurance Goldman Sachs Takeaway: Fix Our Financial System or Get Ready for the Next Horrific Collapse http://www.alternet.org/story/154568/goldman_sachs_takeaway%3A_fix_our_financial_system_or_get_ready_for_the_next_horrific_collapse <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Only an overhaul in our broken banking and financial system will prevent the next collapse. Goldman Sachs&#039; misdeeds are merely a symptom of a much bigger problem.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Greg Smith's <a href="http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=1&amp;emc=eta1">mea culpa</a> about Goldman should not come as a surprise to anybody who has a remote connection with the financial services industry. But to suggest that the allegations made by Mr. Smith are unique to Goldman's culture is ludicrous. They are symptomatic of a much broader problem embedded in Wall Street culture as a whole. Goldman's major sin was being more astute at exploiting this system than most of its competitors.<br /><br /> The toxic derivatives sold to what employees of Goldman derisively referred to as "muppet" clients (since when was being a "muppet" such a bad thing?) were certainly neither a trend unique to GS, nor was it a recent phenomenon. The truth is that this activity has been embedded in Goldman's culture since the days when Robert Rubin was co-CEO of the company and advocated GS taking <a href="http://www.guardian.co.uk/business/2010/jan/21/proprietary-trading-wall-street-banks">proprietary</a> positions (trading for its own account), even if it meant betting against their clients.<br /><br /> Goldman was a successful company and success tends to breed imitation. Eventually, everybody on Wall Street was doing the same shitty business. Goldman, for example, wasn't the only one selling these toxic mortgage products, which helped to blow up the world's global economy in 2008, but they were smart enough to hedge them. <br /><br /> Why is all this so dangerous? Think of the recently deceased James Q. Wilson's "Broken Windows" thesis, which he largely used as his model for "blue collar" crime. Wilson thought that it was necessary to tackle even small signs of crime and decay in a community in order to prevent larger, more system criminal activity from emerging. You see a broken window, you go after the culprit. In the elite white collar crime context we have been following the opposite strategy of that recommended under the theory.<br /><br /> As the economist/criminologist Bill Black recently noted in a <a href="http://www.alternet.org/economy/154426/what_if_the_%26ldquo%3Bbroken_windows%26rdquo%3B_theory_were_applied_to_wall_street/">piece discussing Wilson's theory</a>, the whole story of the past two decades has been that we have persistently excused those in finance who persistently break the windows. Indeed, we have praised them and their misconduct.<br /><br /> But as Black has noted, "The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context. The squeegee guys make tiny amounts of money and are hated and politically powerless. The mediocre financial CEO who engages in accounting<a href="http://en.wikipedia.org/wiki/Control_fraud">control fraud</a>because it is a 'sure thing' causes the bank to report record (albeit fictional) profits and becomes wealthy and politically powerful. He uses his wealth to make charitable and political contributions that make him far harder to sanction. He claims that any crackdown on him is 'class warfare' by 'neo-Bolsheviks'."<br /><br /> Incredibly, the Department of Justice, the press, and the economic profession persistently ignore those who become wealthy by breaking windows, communities, and economies. In fact, they are lionised by no less than our President, who once <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&amp;sid=aKGZkktzkAlA">termed</a>both Lloyd Blankfein and Jamie Dimon "pretty savvy businessmen." Yes, and Al Capone was a pretty savvy businessman -- who just happened to be sloppy on his tax returns.<br /><br /> Realistically, what is required is a wholesale shift in our banking culture. In the old days, a banker “hedged” his credit risk by doing (shock!) CREDIT ANALYSIS. If the customer was deemed to be a poor credit risk, no loan was made. But if the loan was made, and turned out to be profitable, both lender and borrower made money, which is how banking should work.<br /><br /> It goes back to a point I have made many times: Creditworthiness precedes credit. You need policies designed to promote job growth, higher incomes and a corresponding ability to service debt before you can expect a borrower take on a loan or a banker to extend one. And, as the economist Hyman Minsky used to point out, in the old days, banking was a fundamentally optimistic activity, because the success of the lender was tied up with the success of the borrower; in other words, we didn’t have the spectacle of vampire-like squids betting against the success of their clients via instruments such as credit default swaps.<br /><br /> The main problem is that “finance” simply became too big. At the peak it captured 40 percent of all corporate profits (it recovered that share by the beginning of 2010 thanks to the bail-out and “creative” or even fraudulent accounting), and about a fifth of value-added to GDP. Interestingly, we find the same phenomenon in 1929, when finance received 40 percent of the nation’s profits. Apparently that represents a practical maximum and thus a turning point at which the economy collapses.<br /><br /> Perhaps of equal importance, finance virtually captured government, with Wall Street alumni grabbing an unprecedented proportion of federal government positions that have anything to do with the financial sector—including Treasury—under three consecutive presidents (from Clinton through Obama). It is not surprising that Wall Street gets deregulation when it wants, and that in spite of the scale of the current financial crisis—which has wiped out an estimated $50 trillion in global wealth—there has been no significant reform to date.</p> <p>Real reform will likely have to wait for another collapse. When it comes, it will wipe out even more wealth, and will bring on even more intolerable suffering. Looking at today's situation that context, Greg Smith's letter is interesting, but ultimately it will be a sideshow unless it wakes us up to the bigger picture. The entire system demands overhaul.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Thu, 15 Mar 2012 07:00:01 -0700 Marshall Auerback, AlterNet 670088 at http://www.alternet.org Economy Economy Visions wall street regulation goldman sachs financial reform broken windows A Giant Game of Chicken in the Eurozone http://www.alternet.org/story/154317/a_giant_game_of_chicken_in_the_eurozone <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">As financial operatives and politicians play games to protect their interests, the future of ordinary Europeans is held hostage.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>The Europeans evidently thrive on instability and the ongoing threat of systemic risk. There is nothing else to explain the renewed hardline stance adopted by both Mario Draghi of the ECB and the German government on fiscal policy, just as the markets appeared to be calming down again.</p> <p>In response to the question as to whether Greece was a “one-off”, or a deal which would presage similar claims on the part of the other Mediterranean debtor nations, there has been a growing prevailing belief that either the terms demanded of Greece would be so punitive (“pour decourager les autres”) or that, if Greece were to default, a sufficiently large firewall would be constructed by the Troika to ensure that the contagion wouldn’t extend to other countries. This is what Greek economist Yanis Varoufakis has called “<a href="http://yanisvaroufakis.eu/2012/02/14/cauterise-and-print-germanys-newest-plan-a-cauterise-and-print-germanys-newest-plan-a/">cauterize and print</a>”:</p> <blockquote class="tr_bq">"Germany’s belated epiphany is that, without a major redesign of the euro architecture, a number (&gt;1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin’s conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system.<a href="http://yanisvaroufakis.eu/Users/a/Documents/BLOG/CAUTERISE%20AND%20PRINT%20-%20Germany">[2]</a> The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed."</blockquote> <p>Well, the 2nd leg of that strategy seems to be falling apart, even as Greece is slowly being severed from the euro zone (because let’s be honest: Greece has insincerely accepted yet more impossible conditions for implementing another unworkable fiscal adjustment plan, which suggests that both sides are simply playing for yet more time). <br /><br /> In the meantime, the UK’s <em>Daily Telegraph</em> has reported that Germany's ruling parties are to introduce a resolution in parliament blocking any further boost to the EU’s bail-out machinery, vastly complicating Greece’s rescue package and risking a major clash with the International Monetary Fund. <a href="http://www.telegraph.co.uk/finance/financialcrisis/9102404/German-showdown-with-IMF-looms-as-Bundestag-blocks-rescue-funds.html">According to Ambrose Evans-Pritchard</a>: </p> <div><blockquote class="tr_bq">“'European solidarity is not an end in itself and should not be a one-way street. Germany’s engagement has reached it limits,' said the text, drafted by Chancellor Angela Merkel’s Christian Democrats and Free Democrat (FDP) allies.</blockquote> <blockquote class="tr_bq">“'Germany itself faces strict austerity to comply with the national debt brake,”'said the declaration, which will go to the Bundestag next week. Lawmakers said there is no scope to boost the EU’s 'firewall' to €750bn, either by increasing the new European Stability Mechanism (ESM) or by running it together with the old bail-out fund (EFSF)."</blockquote></div> <div>In one sense, the sentiment behind the draft is right. European solidarity should not be a one-way street. But that’s exactly the nub of the issue: As with all of the “rescue plans” introduced thus far, the latest does not allow the Greek government to help its people cushion the blow from 5 years of depression, but simply provides a mechanism to bail out banks and bondholders. Invoking Aesop’s famous fable about the ants and the grasshoppers, Yanis Varoufakis <a href="http://yanisvaroufakis.eu/2011/12/15/never-bailed-out-europes-ants-and-grasshoppers-revisited/">describes</a> the crux of the problem:<br /><blockquote class="tr_bq">“The problem (for those seeking to understand a Crisis) with attractive allegories is that the latter can be as much of a help as a hindrance. In this post I wish to argue that Aesop’s timeless tale, however appropriate it may seem at first glance, contributes more to Europe’s current problems than to their solution. My reason is simple: The ants and the grasshoppers are to be found in both Greece and in Germany, in the Netherlands and in Portugal, in Austria as well as in neighbouring Italy. But when we assume that all the ants are in the north and all the grasshoppers in the south, the remedies we introduce are toxic.</blockquote> <blockquote class="tr_bq">Yes, it is true, the Crisis has placed a disproportionate share of the burden on the back of Europe’s ants. Only Europe’s ants are not exclusively German or Dutch or Austrian; and nor are the grasshoppers exclusively Greek, Iberian or Sicilian. Some ants are German and some are Greek. What unites Europe’s ants, north and south, east and west, is that they struggled to make ends meet during the good times and they are struggling even more now during the bad times. Meanwhile, the grasshoppers, both in the north and in the south of Europe, lived the good life before the Crisis and are doing fairly well now, keen as always to privatise the gains and distribute the pain (to the ants).”</blockquote> That message evidently has not got through to either the Merkel government or the Bundesbank. The proposed draft of Merkel’s government is a political response to mounting German frustration at the current direction of European Union economic policy. There is, however, no corresponding appreciation that her coalition is fomenting this very anger through the ongoing perpetuation of a failed fiscal policy response which, as Varoufakis notes, continues to rewards lazy grasshoppers in both Germany and the south, whilst making all of Europe’s ants work harder and harder for less and less. It is perfectly understandable as to why ordinary German citizens, as well as those in other parts of the EU, should question why all of their hard work is not translating into a better life, when “their money” is actually going down a sinkhole to fund insolvent countries given no means of growing themselves out of debt trap dynamics. <br /><br /> By the same token, left without the lever of a countercyclical fiscal growth policy, the ECB has responded somewhat grudgingly with an escalating and rapidly expanding balance sheet, which has the Weimar hyperinflationistas up in arms, but at least has prevented the whole system from blowing up. Even Germany’s erstwhile allies, the Finns and the Dutch, are prepared to countenance an increase in the EU firewall to €750bn as they are beginning to appreciate the dangers of heading non-stop toward the iceberg.<br /><br /> But while Germany’s erstwhile allies are backing off their hardline fiscal austerity somewhat, the IMF has hinted that it may cut its share of Greece’s €130bn (£110bn) package and warned that its members will not commit more in funds to ring fence Italy and Spain unless Europe itself beefs up its rescue scheme. The Fund has argued (rightly) that the Europeans have more than adequate resources to create a sufficiently large firewall, and that further recourse to the IMF is, in fact, totally unnecessary. <br /><br /> The US Treasury seems to agree with the IMF’s assessment, already indicating that it is unprepared to contribute more to the Fund’s resources. The Treasury is also right, given that the ECB has the capacity to create infinite euros to deal with any looming solvency issues. </div> <div><br /> We therefore have the makings of a giant game of chicken: The IMF is nervous about its share of Greek bailout and its broader EU exposure And the Germans won't expand the firewall without a bigger IMF contribution because they want the IMF as their prime counterparty risk, NOT the ECB. This looming impasse probably also explains why ECB President Mario Draghi is <a href="http://www.ecb.int/press/key/date/2012/html/sp120224.en.html">starting tosound so Prussian again</a>by pushing the line that the Mediterranean periphery has to cut living standards because it has been living beyond its means. While acknowledging that “there has been greater stability in financial markets” over the past several weeks, Draghi completely ignores the constructive role played by the ECB in creating this stability and instead ascribes it all to renewed commitments of fiscal discipline on the part of all of the euro zone’s members:</div> <div><blockquote class="tr_bq">“Many governments have taken decisions on both fiscal consolidation and structural reforms. We have a fiscal compact where the European governments are starting to release national sovereignty for the common intent of being together. The banking system seems less fragile than it was a year ago. Some bond markets have reopened.”</blockquote> The new head of the ECB is, we presume, an intelligent man, so one can only assume that he is being disingenuous in the extreme here. The renewed stability in the financial markets has NOTHING to do with fiscal consolidation and everything to do with the expansion of the ECB’s balance sheet. The consolidated assets of the European system of Central Banks are now 4.4 billion euros or $5.7 billion. In effect, the consolidated ESCB balance sheet has grown exponentially, and its increase over the last 6 months is almost equal to the entire increase in the Fed’s balance sheet over the last several years. <br /><br /> In contrast to his public statements suggesting institutional and legal limits in terms of what the ECB cannot do, Draghi has been using the bank’s balance sheet far more aggressively in order to prevent a banking meltdown and combat the EMU’s ongoing solvency crisis (a product, as we have indicated many times before, of the euro zone’s flawed financial architecture). And he has done so whilst (until this point) keeping Germany onside. Of course, one could argue that in reality all the ECB is doing is providing lending to the likes of Italian (or Greek, or Spanish) banks so they can pay German exporters and transfer deposits fleeing to Germany (or Switzerland)! <br /><br /> That perverse effect aside, Draghi has hitherto been able to carry out his operations with the quiescence of the Germans, who have presumably remained relatively quiet, whilst the Greek negotiations were being conducted (although that didn’t stop Finance Minister Wolfgang Schauble from lobbing a few rhetorical grenades via the press, hinting that it might be better if Greece were to default outright rather than take the deal on offer). But nobody else has said anything for fear of jeopardizing the deal on the table (which will almost certainly become a source of fresh contention for the other Mediterranean periphery countries, as they will almost certainly begin to ask for comparable haircuts on their own debts). <br /><br /> What is the source of this German angst? They worry, particularly the Bundesbank, that they have a credit with the ECB, not with the PIIGS countries. But they are concerned that the ECB now has low-quality collateral so this is risky if the ECB ceases operations (although why this should happen is unclear as the ECB can never run out of euros). <br /><br /> Hence the BUBA desire for the IMF, as a counterparty, even though the IMF itself is a political fig-leaf, given that the Fund’s “special drawing rights” are drawn directly from each of the central banks. In other words, the IMF gets its euros from the ECB, although by standing in the middle of the transaction, Germans can happily pretend that their counterparty risk lies with the IMF, and that they will therefore get repaid (and if this means involving the Fed, the Bank of Japan, Bank of China and Bank of England, so much the better).<br /><br /> The IMF, under Christine Lagarde, is evidently getting tired of playing this game, so it has refused to ask for more funding to deal with the euro zone’s ongoing crisis, in effect putting the ball back into Mr. Draghi’s court, who in turn has to deal with the Bundesbank. Hence, the renewed public relations campaign on behalf of “responsible” fiscal policy and the “new and improved” Stability and Growth Pact: <br /><br /> [I]t is encouraging to see that important steps have recently been taken … strengthens both the preventive and the corrective arm of the Stability and Growth Pact and establishes minimum requirements for national budgetary frameworks … a new ‘fiscal compact’ with a view to achieving a more effective disciplining of fiscal policies. Major elements of the fiscal compact are the strengthening of the role of the balanced budget rule and a further tightening of the excessive deficit procedure. It is of utmost importance, that the rules are now fully implemented in the spirit of this agreement. All these measures aim to ensure that individual countries live up to their responsibilities to bring their public finances in order. <br /><br /> As Bill Mitchell wryly <a href="http://bilbo.economicoutlook.net/blog/?p=18363">observed</a>: “The EMU is in the worst downturn for 80 years and its only ‘response’ is to make it worse because it has introduced voluntary rules that require nations in deep aggregate demand shocks to inflict further spending cuts.” Austerity in the euro zone has consisted of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination has resulted in a decline in sales, which translates into fewer jobs and reduced private sector income, which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it. <br /><br /> My bet is the IMF ultimately folds and commits more, because even the Fund recognizes the stupidity of imposing pro-cyclical fiscal policy in the midst of a recession, but not until the European markets begin to fail again and systemic pressures become more acute. Either way you have to congratulate the Germans for an exceptional game...with a weak hand they have everyone running around while they" mercant" their way to growth and others support the casualties they throw on the fire....</div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 27 Feb 2012 08:00:01 -0800 Marshall Auerback, New Economic Perspectives 669684 at http://www.alternet.org Economy Economy germany greece eurozone fiscal policy German Economic Striving at the Expense of Workers and Neighbors Will Backfire http://www.alternet.org/story/154231/german_economic_striving_at_the_expense_of_workers_and_neighbors_will_backfire <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The export-obsessed Germans have created an economic race-to-the-bottom in which no one can win. But there&#039;s a better way.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Unemployment in Germany is now at a 20 year low and the country’s economy seems to be impervious to the strains afflicting its neighbors in the economic periphery- notably, Greece, Portugal, Italy and Spain. So shouldn’t everyone else be copying Germany’s model? In a recent speech in Berlin, Angel Gurría, the secretary general of the Organization for Economic Co-operation and Development (OECD), a group of 34 developed countries, gave Germany <a href="http://www.nytimes.com/2012/02/17/business/global/the-rest-of-europe-vs-germany.html?_r=1">a big thumbs up</a>, saying that the country’s “growth model has been so successful in navigating through the stormy waters of the crisis.”</p> <p>But hold on a minute. Germany’s model is badly flawed. And because it impoverishes workers, the model will ultimately be a drag on the European economy. Contrary to conventional wisdom, building economic growth by squeezing workers is not a recipe for success. Here’s why.</p> <p><strong>Who Needs a Mini Job?</strong></p> <p>The Germans have always been obsessed with export competitiveness. In the period before the euro, they would devalue the Deutschmark so that they could increase the sales of their products to their neighbors. Once the Germans lost control of the exchange rate by signing up to the Economic and Monetary Union (EMU), they couldn’t perform this trick anymore. They had to manipulate other “cost” variables in order to sell goods cheaply. So starting in 2002, they focused on wage suppression and cutting into the social safety net for workers through something called the Hartz package of “welfare reforms,” named after Peter Hartz, a key executive from German car manufacturer Volkswagen.</p> <p>Unlike the American Henry Ford, who created good, well-paying jobs because he knew that having a secure middle class was essential to having a market for his cars, Peter Hartz views the relationship between wages and the economy very differently. In his view, squeezing workers is the way to keep a country “competitive.”</p> <p>The Hartz reforms have been extremely far reaching in terms of the labor market policy that had been stable for several decades. Bill Mitchell and Ricardo Welters <a href="http://e1.newcastle.edu.au/coffee/pubs/wp/2007/07-16.pdf">noted</a> that while the reforms appeared to be successful in early 2003, with lots of jobs created, there was a downside: “From the bottom of the cycle, in mid-2003, employment grew much less quickly than in previous upturns. And much of the rise took the form of ‘mini jobs’ – part-time posts paying no more than €400 a month, regardless of hours.”</p> <p>The “reforms” actually decreased regular employment. Workers got stuck with so-called “mini/midi” jobs – a new form of low wage part-time employment. Such jobs were hailed as “flexible” and “efficient” by their champions, while detractors noted that they were part-time jobs characterized by heightened insecurity, lower wages, and poorer working conditions.</p> <p>Floyd Norris of the <em>NY Times</em> <a href="http://www.nytimes.com/2012/02/17/business/global/the-rest-of-europe-vs-germany.html?_r=1&amp;pagewanted=all">captures this trend</a> well in a recent piece on “Germany and the rest of Europe”:</p> <p>“Not all is rosy in the German labor market. Felix Hüfner, an O.E.C.D. senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have ‘fixed-term contracts,’ which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a ‘two-class society,’ with most older workers in a protected group and most younger ones outside of it.”</p> <p>In the wake of Germany's ill-conceived reforms, the private saving caches that were accumulated over years of hard work for many will have been reduced significantly as wages stagnate and millions of citizens (the youth of today) will be without work experience and adequate skills.</p> <p>Over the last 30 years, neoliberals have typically framed discussions of western economic policy as arguments against the power of labor unions and their embrace of “inflexible” working practices. Policies based on such arguments tend to transfer profits from workers to employers, which in turn results in a massive rise in corporate profitability, but a corresponding impoverishment of the middle class and rising income inequality. This systematic redistribution of income – aided and abetted by governments in a number of ways through privatization, outsourcing, pernicious welfare-to-work, and industrial relations legislation -- has been one of the building blocks of the global economic crisis. And Germany has been at the forefront of this via the Hartz reforms.</p> <p>Germany could move away from the obsession with exports and instead promote growth based on domestic investment in things like education, technology, infrastructure, and the creation of decent jobs. But the Maastricht Treaty, one of the founding treaties of the European Union, places explicit limits on the ability of member governments to spend. Sadly, this is a highly self-defeating strategy, because during recessions, the private sector cuts spending and tries to increase savings, moving the government balance further into deficit territory as automatic payments like unemployment benefits kick in that are meant to stabilize the economy. The so-called “Stability and Growth Pact” limits government deficits to 3% of GDP, and overall public debt levels are restricted to 60% of GDP. This has led to increased unemployment and high private debt throughout the eurozone.<br /><br /><strong>A Race to the Bottom</strong></p> <p>Germany has responded to these restrictions by championing wage cuts, demolishing working conditions, and abandoning job security. The theory is that given the structure of the euro, the only way that these nations can become export competitive is to squeeze workers, however painful. But here’s the rub: labor productivity may be rising strongly. But workers have less money in their pockets, and so they can’t afford to buy anything. That’s not a formula for long-term economic growth.</p> <p>The German economic model leads to a “race to the bottom” as far as wages go. Germany, as the exporting nation in the EU, constantly has to drive down domestic wages to ensure that the exports remain internationally competitive. Everybody works harder, but people have less money to spend. Meanwhile, Germany chastises its neighbors for their “profligacy” but relies on their “living beyond their means” to produce a trade surplus that allows its government to run smaller budget deficits. For now, people in Greece and Italy buy the German exports because they are cheap, but they certainly can’t embrace Germany’s economic model because it’s ultimately self-defeating. If the exporting nation continues to drive wages down, then products become increasingly expensive. And there’s another problem. In order to retain higher profit margins, German manufacturers will almost certainly migrate to lower cost manufacturing centers if unions fail to stop “deregulation” of the kind which simply lowers their take home pay further. In this scenario unemployment numbers in Germany will go up.<br /><br /> Instead of hurting its neighbors and hurting itself in the process, the Germans might look back in history and see that there are better ways of doing business.<br /><br /> If Americans had adopted a similar “beggar thy neighbor” philosophy after emerging victorious from World War II, the German economy could not have recovered. But the victorious Americans did not preach austerity, despite the fact that Germany had clearly lived well beyond its real resource limits during the War. Even after the devastation that Germany caused as a result of its misguided territorial ambitions and heinous ethnic policies, the Marshall Plan, the large-scale American program to aid Europe, sought to build the German economy rather than to destroy it. The Germans were faced with a massive destruction of public and private infrastructure and knew that a return to very fast economic growth was necessary to minimize the damage and contain it in historical time. The upshot of the Marshall Plan was a period of unparalleled economic growth in Europe. That’s the ideal that should guide economic policy makers going forward.</p> <p> </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Tue, 21 Feb 2012 06:00:01 -0800 Marshall Auerback, AlterNet 669624 at http://www.alternet.org Economy Economy germany eurozone harz reforms labor unions. social safe Are the Ratings Agencies Abandoning Fiscal Austerity? http://www.alternet.org/story/153794/are_the_ratings_agencies_abandoning_fiscal_austerity <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Despite downgrades, even ratings agencies may be figuring out the economies in peril can&#039;t be helped by mindless cuts and contractions.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>So the ratings agencies have finally followed through on the big threat and downgraded a number of the eurozone’s credit ratings, including France and Austria, both of which have now lost their coveted Triple AAA status. Italy, Portugal and Spain were downgraded a further two notches.</p> <p>What does this mean and why does it matter?</p> <p>Investors (often badly informed) use ratings agencies like Fitch, Moody’s and S&amp;P as an indicator of default risk of a country. Countries that receive lower credit ratings are at a disadvantage when they sell bonds because buyers will not pay as much for bonds from a country perceived to be at risk. In effect, ratings agencies are able to bully countries into adopting policies that are friendly to the ratings agencies’ investors. A compliant government often reacts like Pavlov’s dog to the threat or implementation of a downgrade, putting aside the interests of its citizens and starting to introduce discretionary contractions in its net spending, which it does by either raising taxes or cutting spending.</p> <p><strong>The Eurozone’s Financial House of Cards</strong></p> <p>My take is that the ratings downgrade causes a vicious cycle in which countries will end up adopting policies that will put their economies even more at risk than they were already. The reason for this is that in Europe, you’ve got a flawed financial structure that can’t be fixed by austerity measures because it is incapable of dealing with huge external shocks to the demand for goods and services on the part of consumers.</p> <p>Eurozone countries have faced two types of problems by entering the euro regime that have made them unstable.</p> <p>First, they have given up their monetary sovereignty by giving up their national currencies and adopting a supranational one. By divorcing the fiscal authority (that which governs a country’s public treasury) from the monetary authority (that which governs the supply of money) member countries have relinquished their public sector’s capacity to provide high levels of employment and output because they are restricted in what they can spend and how they can introduce stimulation in the form of jobs programs or infrastructure projects.</p> <p>Second, by entering the eurozone, these countries have also agreed to abide by something called the Maastricht Treaty, an agreement which created the European Union and led to the creation of the euro in 1992. This treaty restricts each member country’s budget deficit to only 3 % and debt to 60% of GDP. Therefore, even if a country is able to borrow and finance its deficit spending, like Germany and France, it is not supposed to use fiscal policy above those limits. So countries have resorted to different means to keep their national economies afloat, from trying to foster the export sector, as Germany does, to cooking the books through Wall Street wizardry, like Greece and Italy did. Nations that exceed the limits by the greatest amounts are punished with high interest rates that drive them into a vicious death spiral because deficits rise and lead to further credit downgrades. That is what has happened to Greece, Ireland, Portugal, etc., and now threatens Italy and Spain. Vultures will soon be looking further into the core to places like France.</p> <p>By contrast, a sovereign government which issued its own currency (such as the US or Canada) could respond to a huge drop in economic activity by expanding fiscal stimulus, or allowing the currency to fall (thereby enhancing growth through exports). On the other hand, eurozone governments ceded their national currencies to the European Central Bank (ECB), the sole entity that can issue unlimited amounts of euros. That is why we’re left with a situation in which the solvency crisis can only be solved by the ECB: It is the only entity which is in a position to buy unlimited quantities of national sovereign bonds in order to ensure that these countries do not continue to pay ruinous rates of interest and suffer further declines in economic activity as a consequence. Fiscal austerity only adds to the problem.</p> <p><strong>Deficits are the Symptom, Not the Cause of Slow Growth</strong></p> <p>Instead of understanding the true nature of the problem, however, European leaders will likely yet again focus on the fake problem of "runaway government spending" and fail to see that the rising deficits are a <em>symptom of slower economic growth, and not the cause</em>. Blaming slow growth on deficits is kind of like blaming the thermometer for recording a temperature when the patient has the flu. Sadly, if the current trajectory of austerity policies continues, you'll get even<em>slower</em> economic growth, lower tax revenues, and higher social welfare expenditures, which will expand the deficits even further. This will happen all throughout Europe.</p> <p>So far, countries like Greece and Spain have been the hardest hit by the eurozone crisis. But even Germany is starting to feel the harmful effects of austerity politics. Despite relatively low unemployment, Germany has recorded a negative quarter of growth in Q4, with worse expected in the coming months. The lagged effect of declining economy activity in the eurozone’s periphery, which a big source of German exports, is starting to impact on the core countries, such as Germany and France. Germany can make all the cars it wants, but eventually, if its neighbors can’t afford to buy them because austerity measures have made them poorer, then it, too, will suffer. Yet the euro elites continue to offer the economic equivalent of more mediaeval style blood-letting, even as the patient continues to hemorrhage further, economically speaking.</p> <p><strong>Solving the Real Crisis</strong></p> <p>Ironically, even the dreaded ratings agencies are beginning to recognize that the eurozone’s national solvency crisis cannot simply be solved through further simpleminded cuts in government spending. So what are they proposing? Well, Fitch, a rival of Standard &amp; Poor, is now <a href="http://www.smh.com.au/business/world-business/fitch-warns-of-cataclysmic-euro-collapse-20120112-1pw7s.html">suggesting</a> that the ECB “ramp up its buying of troubled euro zone debt to support Italy and prevent a ‘cataclysmic’ collapse of the euro.” Fitch argues that a collapse of the euro would be “disastrous to the global economy” and urged the ECB “to abandon its current reluctance to scaling up its purchases of troubled euro zone debt … and drop its resistance to the bloc’s bailout fund, the EFSF, borrowing directly from it.”</p> <p>In other words, the ratings agencies are recommending stimulative measures on the part of Europe’s Central Bank – just what the austerity hawks advise against!</p> <p>Despite the flawed design of the eurozone’s financial house, the ECB could improve the situation by dealing the financial markets out of the game immediately. All that would be required would be for the ECB to announce – explicitly – that it was prepared to buy all government debt at a stated interest rate. If it did that, the so-called “financial” crisis would evaporate.</p> <p>The real crisis would take longer to solve because employment has to rise and the private sector has to repair its credit-binged balance sheet through saving. This would require on-going and fairly substantial net public spending support for at least the next 10 years – exactly the opposite to the direction imposed by the European Commission and the Troika (the three-part decision-making body which consists of the European Union, the International Monetary Fund, and the European Central Bank).</p> <p>And what about inflation? That’s a main fear of the folks who call for austerity measures as opposed to stimulative policies. Interestingly, Fitch also said that the ECB “had plenty of scope to expand its balance sheet without unleashing a wave of inflation across the Eurozone.” In fact, there is no sign that the ECB's buying of euro denominated government bonds has resulted in any kind of inflation thus far. For inflation to take hold, you need expanded spending. However, in this case, the ECB’s bond buying operations come only with reduced spending through its imposition of fiscal austerity as the quid pro quo for buying the bonds. And reduced spending reduces consumer demand for goods and services.</p> <p>When the ECB is buying bonds in the secondary market, the bond holder who sells the bonds receives the proceeds of the bond sale, which then sit as a deposit in the central bank in the form of reserves. And, as JJ Lando from Nomura Securities has <a href="http://moslereconomics.com/2012/01/12/important-sidebar-about-central-banking/">noted</a>:</p> <p>“Commercial banks and people do NOT have the capacity to destroy those reserves. Once the Fed or ECB wires the money or creates that asset line item on its spreadsheet, there is an equal and offsetting liability on its spreadsheet called reserves. This spreadsheet cannot be broken. All that commercial banks can do is lending, which moves some of those reserves from ‘excess’ to ‘required’ but they are still there. Commercial Banks make this lending decision based upon regulatory capital and profit motives, not based upon reserves. They have a ‘captive audience’ in their Central Banks, who MUST create the necessary reserves (a floored amount) to prevent interest rates from going to infinity.”</p> <p>Some might argue that the ECB's balance sheet would be impaired by buying up the government debt of countries in distress. But this is not true, because by definition, the “profligates” cannot default. In fact, as the monopoly provider of the euro, the ECB could easily set the rate at which it buys the bonds (say, 4% for Italy) and eventually it would receive a profit on those loans.</p> <p>It is also important to note that the ECB wouldn’t be doing this forever. The markets would <a href="http://www.voxeu.org/index.php?q=node/7158">eventually</a> come to do the ECB’s heavy lifting for them: Convinced that the ECB was serious about resolving the solvency issue, the markets would begin to buy the bonds again. The bonds would not be trading at these distressed levels if not for the solvency issue, which the ECB can easily address if it chooses to do so. But this is a question of political will.</p> <p>What I’ve proposed might seem politically impossible for the ECB. But democracies don’t “do” deflation very well. Contrary to conventional wisdsom, it’s the eurozone’s currently ruinous fiscal austerity policies that are truly politically unsustainable. They will not only cause more economic and social misery, but they undermine much of the residual political support for the common currency. Consider the case of Austria, which lost its AAA rating along with France. The leader of Austria’s far right FPÖ, H.C. Strache, has embraced an explicitly anti-euro position, and he is gaining political traction in the polls, as is Marine Le Pen, leader of the National Front in France, where Presidential elections are due to be held in 3 months’ time.. Both oppose the euro — to be fair — for the right reasons. The only problem is that the rest of their policies are a dystopian nightmare. Similarly, in an interview with German daily <em>Die Welt</em> (and the choice and location of publication is extremely important), the new head of Italy’s “technocratic” government, Mario Monti, lamented that despite Italy’s considerable fiscal austerity measures, they aren’t seeing lower interest rates. Fiscal austerity in the midst of a recession is bad policy at the best of times, but Monti did what he was told and now he’s got nothing to show for it. Has he become the victim of a German “Italian Job” (all you Michael Caine fans will know what I’m talking about here).<br /><br /> Monti has pointed to the threat that Italian sentiment is finely balanced. Make the wrong decision now, he said, and the populists will take control. With that in mind, observe that the Italian Social Democrat party commented last week that it would like to see Italy leave EMU.</p> <p>Are we about to reenact the 1930s? Will Mario Draghi, Angela Merkel and Nicolas Sarkozy, the current champions of fiscal austerity in the eurozone, pay attention to the ground cracking beneath their feet?</p> <p> </p> <p> </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 16 Jan 2012 11:00:01 -0800 Marshall Auerback, AlterNet 669143 at http://www.alternet.org Economy World News & Politics Economy economy deficits eurozone austerity ratings agencies Why Are US Job Numbers Better Than Europe’s? Thank the Deficit! http://www.alternet.org/story/153716/why_are_us_job_numbers_better_than_europe%E2%80%99s_thank_the_deficit%21 <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Americans should quit listening to austerity hawks and embrace time-tested economic logic.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Last Friday, Eurostat released the latest European unemployment data for November 2011. The results were horrific, with unemployment rates in Spain now close to 23 percent (as at November 2011 and rising) and Greece 18.8 percent (as at September 2011) and rising. Greece’s unemployment rate rose 4.8 per cent in the first 9 months of last year. By contrast, the US jobless rate dropped to a near three-year low of 8.5 percent.</p> <p>Looking at the US data one certainly does not see a boom, but there is a pervasive pattern of improvement that is not consistent with anything seen in Europe. So why would the US data look better even though we are programmed for some fiscal restriction, the household savings rate is too low, the global economy has weakened, and there is no big increase in equity and home prices?</p> <p>The answer could be very, very simple. Three years of “horrible” budget deficits in excess of 8 percent of GDP have managed to do something critical to help the economy. How? Mainly in the form of what economists call “automatic stabilizers” – things like unemployment insurance and food stamps that put money in the hands of consumers during a downturn. By running deficits, we have been able to put a floor on demand and generate at least a modicum of economic momentum, which is slowly leading to an improving job situation.</p> <p>Of course, you wouldn’t know this if you turned on the TV.</p> <p><strong>Deficits 101</strong></p> <p>When it comes to federal budget deficits there only appear to be two respectable positions in the mainstream media. The first is the “deficit hawk” position that argues that budget deficits are never acceptable because they only lead to complete crowding-out: every dollar of government spending is offset by a dollar of private spending. The second view—“deficit dove”--is that deficits are probably acceptable for the short run, and perhaps even necessary to save the economy from another depression. This view maintains that the benefits we receive today are partially offset by costs in the future when we will need to “tighten our belts” to repay the debt.</p> <p>But neither view is correct: Right now, the US economy faces such strong headwinds that a huge fiscal expansion is required—and this will mean deficits even larger and perhaps more prolonged than those now projected. Contrary to the position of the fiscal deficit hysterics such as billionaire Pete Peterson and the Concord Coalition who endlessly repeat the fiction that deficits are always evil, it’s better to think of the deficits as the one thing which is saving us from the grim fate now experienced in Europe, where double digit unemployment is the norm virtually throughout the continent. And we don't have to worry about eliminating them in the future, as growth (with correspondingly higher tax revenues and lower social welfare payments) will take care of the "deficit problem," much as it did following World War II and also during the early 1980s.</p> <p>Let’s be clear: I’m not a Pollyanna hailing the rebirth of the US economy. There have been over 15 million jobs lost since the financial crisis of 2008 and today’s growth is insufficient to bring up back to full employment. If you like, the US economy is the least ugly person at the dance, and a lot more fiscal stimulus likely necessary to turn the American economy into the belle of the ball.</p> <p><strong>How We Recovered From the Great Depression</strong></p> <p>We have had the biggest recession since 1932, but no strong recovery. By contrast, in the four years after 1932, the US economy had its strongest economic growth on record. Why? In the mainstream media, you’ll often hear that the slow nature of the current recovery is a consequence of the overhang of private debt and the unwillingness of banks to lend. But wait, in the early 1930s the ratio of private debt to GDP was higher than it is now because <em>inflation-adjusted GDP fell by fifty percent in the Great Depression</em>. Additionally, bank lending continued to contract until mid 1935. Yet the economy grew at a rate in excess of 10 percent of GDP in the first two years of the recovery.</p> <p>And if you look at President Roosevelt’s fiscal stimulus, you’ll find that it only began after the recovery was well under way (Industrial production and other measures of economic activity were already rising by 1932). From that, we can conclude that the existence of shrinking debt and bank restraint affects the SPEED at which a recovery occurs and how long the recession lasts (because larger private debt burdens induced people to put off consumption or investment to pay off existing debts). But these factors are in themselves not always a sufficient barrier to a strong recovery unless you get the trends continuing. If private debt is reduced sufficiently and private savings begin to stabilize, then you can start to recover (which is what is happening in the US right now). And the public deficits are the reason why this is occurring, because PUBLIC deficits (as opposed to private) facilitate private sector debt deleveraging. Remember, unless some other sector can take up the slack (say, via higher exports) or the government increases its deficit spending (as with the federal budget balance of late) then the mere attempt by the domestic private sector to net save out of income flows, given the existing private debt overhang, can prove very economically disruptive.<br /><br /> Part of the explosive nature of the recovery in the early thirties can be attributed to the overshooting of the stock adjustment. In other words, the inventory of goods and stock of consumer durables and producer durables were cut to the bone relative to demand and output. Industrial production rose by 62 percent in the first year of that recovery, as the lean nature of all three led to a slingshot in the demand for goods. Additionally, after a year of recovery there was no doubt a big swing in public sentiment from extremely depressed levels. People began to feel more optimistic.</p> <p>In this instance there has been a long lag. I think the eruption of systemic threats in the eurozone had a lot to do with this, but the adjustment process has still continued apace in the US. So now one has to ponder whether the improved numbers in the US, which are not dramatic but quite pervasive, isn't telling us that the adjustment is complete and sentiment is being healed by time and forgetfulness. If that’s true, then the US economy is going to do better than the consensus expects.</p> <p>But as Jonathan Wilmot, strategist at Credit Suisse recently noted at the firm’s Global Macro Conference in Asia last week, the consensus on the US remains very negative. Why? Because economists, investors, market practitioners and the like remember Lehman Brothers and its aftermath and are looking for a repeat. This time they expect the repeat to occur in Europe. But such very unusual events don't tend to repeat, at least over the shortish run. And each time we get to the cliff's edge in Europe, the European Central Bank (ECB) steps in and writes the check to sustain the euro’s viability. It's not enough to prevent a recession in Europe (because, as noted above, the ongoing embrace of fiscal austerity is killing demand), but it's doing enough to prevent the euro from evaporating. The European Central Bank’s actions in respect of the eurozone are akin to watering a flower enough to keep it from withering and dying, but not enough to let it grow properly.</p> <p><strong>US Outlook is Good -- if We Can Reject Austerity</strong></p> <p>So let's go back to the US: What happens if the US neutralizes most of the programmed fiscal restriction and the US economy grows above trend? And what if the European economy has an overall muddle through recession which everyone now discounts and the Chinese put on the gas again (which I think they'll do because their economy is decelerating quickly)?</p> <p>It seems to me that the US could still do better than the consensus, <em>so long as it doesn't embrace the doomed fiscal austerity policies of Europe</em>. And let’s celebrate this fact. America’s budget deficits are not an aberration.</p> <p>If you look back to 1776, the federal budget has run a continuous deficit except for seven short periods. The first six of those were followed by depressions—the last time was in 1929 which was followed by the Great Depression. The one exception was the Clinton budget surplus, which was followed (so far) only by a recession. While one cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should create some pause amongst our fiscal hawks pushing for budget cuts now. As counter-intuitive as it sounds given the prevailing "conventional wisdom," balancing federal budgets and pushing for surpluses weakens the economy.</p> <p>In fact, each time the government tried to push its budget into surplus, a major recession followed which forced the budget right back into deficit as those automatic stabilizers kicked in. Eliminating the so-called "scourge of public debt" has been a disaster throughout our history, even as the "experts" continue to applaud it.</p> <p>Deficits have certainly helped the US from falling into Great Depression 2.0. If our policy makers would stop treating these deficits as the economic equivalent of Norman Bate’s mother in the Bates Motel attic, then this might (emphasis on MIGHT) actually lead to some coherent policy making going forward.</p> <p> </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Mon, 09 Jan 2012 11:00:01 -0800 Marshall Auerback, AlterNet 669059 at http://www.alternet.org Economy World News & Politics Economy economy jobs unemployment deficit eurozone austerity Why Spain’s New Government is Drinking Austerity Kool-Aid and How This Threatens the Global Economy http://www.alternet.org/story/153640/why_spain%E2%80%99s_new_government_is_drinking_austerity_kool-aid_and_how_this_threatens_the_global_economy <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">European elites push economic myths that benefit the rich and screw the rest. Spain&#039;s program means even higher public deficits, fewer jobs, and slowed growth.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Spain's new government said late last month that this year's budget deficit would be much larger than expected and announced a slew of surprise tax hikes and wage freezes that could drag the country back to the center of the eurozone debt crisis. The government plans to enact public spending cuts of 8.9 billion euros ($11.5 billion) and tax hikes aimed at bringing in an additional 6 billion euros a year to tackle the shortfall. Given what has happened to Greece, and now Italy, it is almost certain that this will have the opposite impact of that which the Spanish government wants: there will be HIGHER public deficits at the end of the day, as the cuts curtail economic growth even further.</p> <p><strong>Self-inflicted Catastrophe</strong><br /><br /> Spanish employment fell by a whopping 72,075 in November, which came on the heels of an even bigger 82,944 decline in October. The Spanish employment data is really terrible. To get a feel for these numbers, you have to realize that Spain’s employment is about one-eighth that of the U.S. We are talking about employment declines in the last two months that would correspond to monthly declines of more than 600,000 if it were the U.S. economy. In the prior three months Spain’s employment declines corresponded to the equivalent of almost 300,000 job declines a month in the U.S. Would anyone doubt that the U.S. was in a deep recession if it reported such horrible employment data? Of course not.<br /><br /> The eurozone, indeed, the entire global economy, continues to experience a self-inflicted catastrophe, largely because of dangerously destructive myths about fiscal policy. In spite of the shrill rhetoric of the fiscal austerity brigades, the evidence in Europe continues to mount that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards. Unless you want an economic disaster.</p> <p>Let’s look at some macroeconomic issues in a simplified form: <br /><br /> 1. In any given country, how many sectors are there that can spend? Answer: three.<br /><br /> 2. What are they? Answer: The foreign sector, the private domestic sector, and government sector.<br /><br /> 3. What happens if firms in the private domestic sector cannot sell their goods and services because people can’t afford to buy them? Answer: They lay off workers and refuse to spend on new equipment, etc.<br /><br /> 4. What happens if income in the local economy is lost to the foreign sector – that is, is not recycled back into domestic demand? Answer: Drain on growth, fewer exports, more imports.<br /><br /> 5. If the economy is looking bad, what happens to private domestic sector households? They will not spend.<br /><br /> 6. If the foreign sector isn’t spending on a country, and the domestic sector isn’t spending, either, then the economy will ground to halt unless the one remaining sector fills the breach: <strong>the government sector.</strong> This is true, regardless of what the anti-government mythologists from Germany, the University of Chicago, and others, argue to the contrary. <br /><br /><strong>Free Market 'Miracles' are a Myth</strong><br /><br /> This is particularly true in a situation when an economy is suffering from the after-effects of a PRIVATE SECTOR debt bubble. And let’s set aside this nonsense about the miracles of “letting the ‘free’ markets work. The notorious ‘Invisible Hand’ –that mythical self-regulating aspect of the market–turns out to look like 1995-2000 with all that wonderful allocation of capital to tech and telecom, or perhaps more along the lines of 2000-6, with the brilliant decisions made by hundreds and thousands of equity investors, bank loan officers, and credit analysts made regarding real estate allocations (of which Spain was a notable example). Doesn’t work too well in reality -- and ordinary people are left holding the bag.<br /><br /> It’s time to wake up. Market allocation of investment has proven just plain idiotic too many times over the past two decades (plus) for anyone to believe such neoliberal fibs, except maybe the wettest behind the ears on Wall Street. The markets so glorified by free market fundamentalists are presently optimally designed to breed nonsense asset bubbles that make financiers as much money as they can before it all falls down. Everyone knows this. We've seen it in the deregulation of the financial sector, the failure of regulative oversight of real estate markets (including allowing private citizens to fund mortgages in foreign currencies), a bias towards budget austerity (under the European Union's  <a href="http://en.wikipedia.org/wiki/Stability_and_Growth_Pact">Stability and Growth Pact</a>) which meant that growth had to rely largely on private credit expansion – etc. <br /><br /> The behavior of governments leading up to the global financial crisis was based on exactly the same logic that is driving the fiscal austerity: that free markets are best and government should have as small a footprint as possible. This game is over, except, it appears, in the minds of Europe’s policy making elites, which continue to champion this form of economic Kool-Aid.<br /><br /><strong>Government Investment Must Fill the Breach</strong><br /><br /> Remember, it wasn’t government overspending which created the financial crisis of 2008. In the <a href="http://www.paecon.net/PAEReview/issue58/Koo58.pdf">words</a> of Nomura economist, Richard Koo: <br /><br /><em>“When a debt-financed bubble bursts, asset prices collapse while liabilities remain, leaving millions of private sector balance sheets underwater. In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt. This act of deleveraging reduces aggregate demand and throws the economy into a very special type of recession.”</em><br /><br /> The private sector in Spain is now undergoing massive deleveraging. Its economy does not run a trade surplus, which leaves the government as the only entity which can offset the slack. A basic macroeconomic rule is that spending creates income and output which then stimulates employment. Leakages from the spending stream (for example, via saving) have to be offset or you slide right back into recession. But the new Spanish government is doing precisely the opposite and, even more perversely, is being applauded for “picking up the baton” and accelerating the spending cuts of the last Socialist administration while its GDP is plunging. It’s the economic equivalent of mediaeval blood-letting, with the same likely ultimate impact for the “patient” – in this case, the Spanish economy: weakness and possibly death.<br /><br /> Unfortunately, Spain’s new government is setting a policy plan for fiscal austerity which is likely to set yet another precedent for policy failure and yet more increases in unemployment and social misery. Forcing fiscal austerity onto an already weak economy will guarantee that the problem morphs into a full-blown crisis.</p> <p><br />  </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Tue, 03 Jan 2012 05:00:01 -0800 Marshall Auerback, AlterNet 669005 at http://www.alternet.org Economy World News & Politics Economy economy deficits unemployment eurozone economic theory Eurozone Catastrophe: How Saving the Euro Could Mean Blood on the Streets http://www.alternet.org/story/153297/eurozone_catastrophe%3A_how_saving_the_euro_could_mean_blood_on_the_streets <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The whole future shape of Europe must be resolved in a week or so. It’s a high-stakes game of poker that the Germans are determined to win--at the expense of misery for many.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>The eurozone story is changing by the hour. Here's what you need to know to understand developments that will impact the entire global economy and potentially cause major social upheaval.</p> <p>The eurozone is facing two distinct, but related, problems: Problem #1 is a national solvency issue, which only the European Central Bank (ECB) can solve. Problem #2 is deficient "aggregate demand" (a fancy term for the spending power of consumers), which calls for a stronger fiscal policy response to offset declining investment and purchases in the private sector.</p> <p>As it stands, the ECB is the only show in town to save the eurozone from a very drawn out and damaging recession. Why is that? Well, because the individual member states in the European Economic and Monetary Union (EMU) cannot spend without taxation revenue or debt-issuance, because they are <em>users</em>of their currency, rather than <em>issuers</em>. This is a key distinction, and one often missed in media coverage. Their position is in sharp contrast to, say, the US, the UK, Canada, and Australia, all of which are <em>issuers</em> of their own currency and therefore not subject to the same kind of solvency risk because they are in control of their own money supply. The only institution in the EMU that can spend without recourse to prior funding is the ECB. That is the consequence of the flawed design of the monetary system that the neo-liberal conservatives in Europe forced upon the member states at the inception of the common currency.</p> <p>As the issuer of the euro, only the European Central Bank is in the position of backstopping the eurozone nation’s bond markets, which allows these countries to fund themselves without paying the usurious rates of interest now being demanded for countries such as Greece. The problem is that the ECB is only willing to do so for countries willing to submit themselves to harsh austerity measures as a quid pro quo. This strategy might well save the euro, as it will diminish the markets’ concerns about national solvency. But the cost is likely to be yet even more depressed economic activity, higher unemployment, lower tax revenues, higher social welfare expenditures and, consequently, <em>even higher public deficits</em>. And isn’t that precisely what the Germans in particular most fear?</p> <p>That gives you problem #2. If you have a continent full of consumers who have no money to spend and lack of competitiveness in the “PIIGS” countries (Portugal, Italy, Ireland, Greece, and Spain), then you'll consequently have years of sub-par economic growth. And unless the EMU's architecture moves in a much more pro-growth direction, then the continent will be afflicted with years of high unemployment and mounting social strains. Unfortunately, the EMU is captive to the same kind of thinking as the Germans, who continue to view this crisis as one which has been caused by fiscal profligacy in the periphery countries, rather than seeing it for what it is: a crisis of the euro’s institutional design itself.</p> <p>For those nations unwilling or unable to subject themselves to the rigors of so-called Teutonic discipline, there might well be an exit from this newly-reconfigured eurozone – in effect creating a two-tier or multi-tier Europe, with a smaller eurozone and a host of competing national currencies for the “outs.” On the one hand, there would be a “hard currency” bloc led by Germany and the so-called “Benelux” countries (Belgium, the Netherlands, Luxembourg), all of which have largely converged with Germany’s economy. Then you'd have a “soft currency bloc," which could devalue its way back to prosperity through exporting cheap goods.</p> <p>The problems here are that there are no real mechanisms in place to do this in an orderly way, so there would be a risk of a complete breakdown in the existing payments system. Additionally, countries such as France would likely get hurt if they were to join the hard currency bloc. Even though France likes to think of itself as a disciplined Teutonic style country, the reality is that its industrial/manufacturing/social profile is much more like a Mediterranean country such as Italy. Were France to join arms with Germany in a smaller currency bloc, it could face huge competitive threats from Italian industry (which would presumably not be part of this new German economic bloc). It is also questionable whether the French populace as a whole would withstand the kinds of restraints to living standards which the Germans themselves accepted in the wake of their country’s reunification in the 1990s.</p> <p>Would Germany itself benefit from the introduction of a two-tier Europe? That's highly questionable. Germany could well suffer from a huge trade shock, as a result of the likely appreciation of the new currency, let's call it the “neuro.” A new system might also affect the living standards of the average Germans as well, as German multinationals might simply move manufacturing facilities to the new, low cost regions of Europe to preserve market share and cost advantage or, at the very least, use the threat of moving to extort cuts in wages and benefits to German works as a quid pro quo for remaining at home. If you go for the two-speed Europe, ultimately countries like Italy can devalue their way back to prosperity as their goods become vastly more competitive against German exports. Clearly, if a newly reconfigured Italian lira (or the introduction of some other soft currency) were substantially lower in value against a much stronger "neuro," this provides Italian manufacturers with a chance to sell their goods at substantially lower prices than their German competitors.</p> <p>But wait! Germany’s large manufacturers originally bought into the currency union because they felt it would <em>prevent</em> the likes of chronic currency devaluers to use this expedient to grab a higher share of world trade at Germany’s expense. In fact, it is doubly ironic that Germany chastises its neighbors for their “profligacy” but relies on their “living beyond their means” to produce a trade surplus that allow its government to run smaller budget deficits. The truth is that Germany is structurally reliant on indebtedness and borrowing in other parts of the eurozone <em>in order to grow at all.</em> Over-spending of southern states is the only thing that has allowed Germany’s economy to prosper. It is mindless for Germans to be advocating harsh austerity for the southern states and hacking into their spending potential and not think that it won’t reverberate back onto Germany.</p> <p>In the end, a "United States of Germany" under the guise of a United States of Europe, actually better suits German aspirations to dominate Europe politically and economically.<br /><br /> Now, of course, German Chancellor Angela Merkel may not consciously know all of these things. But it's clear to me that the political quid pro quo for greater ECB involvement in dealing with Europe's national solvency crisis is German control over the overall fiscal conduct of countries like Greece, Italy, etc. ECB head Mario Draghi is Italian, but he is playing a German game of chicken: he is embracing exactly the strategy that Angela Merkel's political director, Klaus Schuler, laid out to me two weeks ago: holding out for fiscal union commitments from the weaker "Med" countries, in return for turning the ECB into a lender of last resort. It's high stakes poker, and questions that affect the whole future shape of Europe need to be resolved in a week or so. Obviously this is one reason the Germans felt so comfortable in naming an Italian to the ECB. Trojan horses apparently don’t just come in Greek form these days. A Europe where countries such as Italy and Greece become client states provides a very effective outcome for Germany.</p> <p>My base view remains that Europe is headed to a blood in the streets outcome. There is no plan B. The game is to just keep raising taxes and cutting spending even as those actions work to cause deficits to go higher rather than lower. So while the solvency and funding issue is likely to be resolved, the relief rally won't last long as the funding will continue to be conditional to ongoing austerity and negative growth. And the austerity looks likely to not only continue but also to intensify, even as the eurozone has already slipped into recession.<br /><br /> From what I can see, there's no chance that the ECB would fund and at the same time mandate the higher deficts needed for a recovery, because the Germans will never allow it. In which case the only thing that will end the austerity is blood on the streets in sufficient quantity to trigger chaos and a change in governance. <br /><br />  </p> <p> </p> <p> </p> <p> </p> <p><br />  </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Fri, 02 Dec 2011 06:00:01 -0800 Marshall Auerback, AlterNet 668669 at http://www.alternet.org Economy World News & Politics Economy debt germany deficits eurozone austerity Failure of the Super Committee Might Be the US's Best Hope for Economic Recovery http://www.alternet.org/story/153132/failure_of_the_super_committee_might_be_the_us%27s_best_hope_for_economic_recovery <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">&quot;Drawing blood” from the economy by cutting government expenditures at a time of high unemployment and underused resources will only ensure the patient’s death, not recovery.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>The bipartisan super committee will probably fail to meet the self-imposed November 23rd deadline to enact $1.2trillion of cuts over the next ten years. That failure, as Paul Krugman <a href="http://www.nytimes.com/2011/11/18/opinion/krugman-failure-is-good.html?_r=2">notes</a> in the <em>New York Times</em>, is a good thing: “Any deal reached now would almost surely end up worsening the economic slump. Slashing spending while the economy is depressed destroys jobs, and it’s probably even counterproductive in terms of deficit reduction, since it leads to lower revenue both now and in the future.”</p> <p>If the super committee fails to come up with an alternative plan by Thanksgiving, the cuts will hit defense and domestic programs equally. But those cuts won’t begin to go into effect until January 2013, two months after next fall’s election, which also means that the programmed fiscal restriction planned for next year won't come into effect. The likelihood of failure is provoking a negative reaction in both the markets and the mainstream press. But in spite of that, failure might be the difference between sluggish, moderate growth in the U.S. and double dip recession.</p> <p>The travails of the euro zone are perpetual front page news right now, but let's try to put them aside for a moment and focus solely on the U.S. The latest U.S. economic data suggests that the economy has continued to muddle along at a positive rate of growth somewhat below its trend rate of growth. This has happened even though an unwind of the 2009 $860 billion stimulus package is now leading to moderate reductions in government spending.</p> <p>October core retail sales were up +0.6%. The three-month annualized change now stands at +6.6%. This is consistent with personal consumption expenditure growth of perhaps +3.0%. The increase is consistent with the above trend U.S. economic growth.<br /><br /> Dallas Fed President Richard Fisher <a href="http://dallasfed.org/news/speeches/fisher/2011/fs111021.cfm">thinks</a> such growth is sustainable. He expects U.S. economic output to grow +2.5% to +3.0% in this quarter and expects it to improve next year.<br /><br /> But not if the super committee goes big and enacts huge budget cuts. In that kind of scenario, economic growth in the U.S. next year will be held back (or worse) by programmed fiscal restriction as even greater amounts of income are withdrawn from the economy, especially if cuts are implemented in programs such as Social Security. Lower incomes means lower sales, and sales are what ultimately drive economic activity. Remember: businesses lay people off when their customers stop buying, for any reason. So the reason we lost 8 million jobs almost all at once back in 2008 wasn't because all of a sudden all those people decided they'd rather collect unemployment than work. The reason all those jobs were lost was because sales collapsed.<br /><br /> I am also skeptical of the validity of the recent strong trend in consumer spending because it appears to be a product of consumers drawing down on savings, which began to be rebuilt in the aftermath of the 2008 crash. Unfortunately, consumers no longer have the credit availability to do that. Nor do they have the incomes to sustain taking on ever increasing burdens of private debt, as was the case in the 1990s.</p> <p>And let’s be clear: Despite the distortions floated by many politicians and pundits in the mainstream press, most of the growth of the government’s deficit can be attributed to the rotten economy–which destroyed jobs and thus tax revenue. As the U.S. private sector retrenched to rebuild its balance sheet, the government’s balance moved toward deficit. This had very little to do with “excessive” and “unsustainable” entitlement programs. The positive contribution of the U.S. fiscal stimulus (with supporting monetary policy) cannot be overstated, even though many notable mainstream economists (such as Robert Barro, or Greg Mankiw) claim it made the recession worse. Without the two-pronged attack – first of shoring up the financial system to ensure the banks could lend and second, the substantial increase in government net spending (which was both the product of discretionary fiscal decisions and what economists call "automatic stabilizers" like unemployment benefits) – the world economy would have collapsed into Depression. That is not to say that the fiscal interventions were sound and well designed. I generally think they were unsound in the sense that they did not support job creation as much as they should have. But that is a separate issue.</p> <p>The outlook for 2012 then depends very much on fiscal policy. Right now according to the Congressional Budge Office (CBO), we are programmed for fiscal restriction of perhaps 2.5% of GDP or more in 2012. That could overcome the natural tendency of economies to grow, especially with real interest rates at negative levels. The question then arises, will we really go through an election year with so much fiscal restriction? The answer, of course, is in the hands of the politicians. As it now stands, the President wants a $447 billion dollar jobs plan. That is equal to almost 3% of GDP. He wants most of it to be financed with borrowings in 2012, with offsetting tax increases in future years. Passage of all of this jobs plan would turn programmed fiscal restriction into marginal fiscal stimulus. <br /><br /> The Republican position has been that, even if they go along with parts of this job stimulus plan like an extension of the payroll tax cut, they demand offsetting greater expenditure cuts. In other words, even if they concede to some of Obama’s demands, they insist on maintaining the overall fiscal restriction that is now programmed because they say that demonstrating a commitment to “budget discipline” will enhance business confidence and allow the private sector to create more jobs.</p> <p>So let’s assume that the GOP is right: imagine a new government being elected on the promise of cutting national debt and in its first budget outlines a very clear plan to seriously cut the national budget deficit, reduce taxes (but definitely not put them up), cut public employment and free up the regulative environment. And let's say that such a government also pronounced its “pro-business” credentials (self-styled).</p> <p>In that situation, if the Republican view was correct, we would expect to observe within a few months (certainly within a year) of the new government a reduction in private uncertainty, which, if the concept has any operational application, should influence discretionary behavior such as spending and employment.</p> <p>It would be reasonable to expect business confidence to rise, which should mean that private investment would accelerate as business owners anticipate a consumer revival. It would be reasonable to expect firms to be keen to get staff in place to meet the renewed expectations of increased orders. It would be reasonable to expect consumers to become more confident and this confidence to translate into their consumption expenditure.</p> <p>So... how does one explain the UK, which continues to deteriorate in spite of making very clear its plans and implementation for budget cutting? And how does one explain Australia, which has also been working toward reducing government spending, even as its unemployment rate has begun to tip up again?</p> <p>The economics of the super committee, indeed that of virtually all of the mainstream Washington policy establishment, is still predicated on the economic equivalent of Medieval blood-letting. Continuing to “draw blood” from the US economy via ongoing cuts in government expenditure at a time of high unemployment and underused resources will ensure the patient’s death, not recovery.</p> <p><br />  </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Auerback is a market analyst and commentator. </div></div></div> Sat, 19 Nov 2011 09:00:01 -0800 Marshall Auerback, AlterNet 668515 at http://www.alternet.org Economy News & Politics Economy economy deficit super committee fiscal stimulus If We Don't Solve the Jobs Crisis We May End Up With Our Streets in Flames and Society Dysfunctional http://www.alternet.org/story/153000/if_we_don%27t_solve_the_jobs_crisis_we_may_end_up_with_our_streets_in_flames_and_society_dysfunctional <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Unless our policy makers can make job creation the top priority, the mass riots and burning streets of Europe may be coming soon to a neighborhood near you.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Employers <a href="http://www.bloomberg.com/news/2011-11-04/u-s-payrolls-increased-by-80-000-in-october-as-jobless-rate-falls-to-9-.html">added fewer jobs</a> than was forecast in October, which has lots of folks scratching their heads over what to do about it.</p> <p>In response to the latest unemployment figures, our nation’s central bank, the Federal Reserve, has again begun talking about additional stimulus measures, such as the purchases of mortgage backed securities (MBS) or a bond-buying program known as “QE3”. But neither of these measures worked before, so why should we expect more success this time?</p> <p>The Fed’s policies are akin to putting a Band-Aid on a massive bleeding wound. Right now, the US economy is crushed by massive private indebtedness and sluggish job growth. What we really need are policies designed to promote job growth, so that people can service their debts and become open to spending again. Admittedly, the Fed isn’t the only problem. Our whole constellation of policy makers – the Fed, Congress, the Treasury and the White House – keep obsessing about the faux “costs” of the growing budget deficit, rather than the real costs of long term unemployment. And if they don’t give up this flawed economic thinking, then the burning streets and mass riots happening in Europe may soon be coming to a neighborhood near you.</p> <p><strong>The Fed’s Misguided Focus</strong></p> <p>Let’s start with the Fed. Ben Bernanke is a noted Great Depression scholar who ought to know a thing or two about unemployment crises. But when he looks at Japan’s long-term unemployment problem, for example, he unfortunately learns the wrong lessons. In 1999, Bernanke <a href="http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf">dubbed</a>Japan’s <a href="http://topics.bloomberg.com/japan/">struggling economy</a>“a case of self-induced paralysis” that could only be solved through cutting government spending and deficit reduction. In reality, too much government spending hasn’t been Japan’s problem, but rather stop-start spending that seesawed the economy between hopeful improvement and harmful austerity measures that took money out of the hands of consumers. The great mistake in Japan has been the failure to jump-start its weak economy by putting people back to work.</p> <p>In the US, the Fed has cut interest rates aggressively, and while this has marginally helped to reduce borrowing costs, it has also robbed savers, such as pensioners, of income from the resultant lower interest rates.</p> <p>Along with the Treasury, the Fed has provided a plethora of “<a href="http://americanhistory.about.com/library/glossary/blglossnewdeal.htm">alphabet soup</a>” programs – <a href="http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program">TARP</a>, <a href="http://www.reuters.com/article/2011/09/15/us-eurozone-talf-idUSTRE78E64Y20110915">TALF</a>, <a href="http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/hamp.aspx">HAMP</a>, “<a href="http://en.wikipedia.org/wiki/Quantitative_easing">QE</a>” and, most recently, “<a href="http://www.npr.org/blogs/money/2011/09/21/140643696/operation-twist-explained-in-4-easy-steps">Operation Twist</a>,” a maneuver in which the central bank concentrates its purchases on long term bonds in order to bring these down and thereby (in theory) lower borrowing costs. Trillions of dollars were offered up in the form of hidden financial guarantees and subsidies to Wall Street. In effect, the banks got risk-free money with which to speculate (in things like energy and food, which also diminished Main Street’s discretionary spending power).</p> <p>In the case of the two installments of quantitative easing (“QE1” and “QE2”), the Fed bought trillions of assets from the banking system for the ostensible purpose of encouraging banks to make more low cost loans to consumers. How’s that working out for you so far?</p> <p>Meanwhile, in the real world, unemployment remains stuck at 9%, and underemployment of 16% - hardly boom-time conditions. And now, realizing it's done about all it can do, the Fed admits that monetary policy can't do it all –which is exactly what Bernanke should have learned by looking at Japan.<br /><br /><strong>Where do jobs come from?</strong></p> <p>At the same time, the Federal Reserve, like the President, Congress, the Treasury Secretary, and a slew of mainstream economists (most of whom completely missed the 2008 crisis) all disparage the one thing that could work – namely a large-scale jobs program. They all maintain the mistaken belief that the government's focus should be reducing the deficit instead of unemployment. Trying to reduce the deficit will never work because in times of economic decline, what are called “automatic stabilizers” kick in to keep the economy from going into free fall -- things like unemployment benefits or food stamps. A government can’t make these kinds of payments without increasing its deficit in the short-term. And that’s as it should be, because what you’re trying to do is get some money into the hands of consumers, whose purchases begin to help the economy adjust itself. But this reality, which a Great Depression scholar should certainly know, has been obscured by several decades of fantasy economics promoted by conservatives. That this kind of thinking persists is perhaps the greatest obstacle we face in boosting the economy.</p> <p>The United States is in a much better position to deal with its economic problems than a country like Greece because it has its own currency. When you have your own currency, and don’t operate under the constraint of a gold standard, you can actually respond to a collapse in the demand for goods and services by increasing government spending on job creation. This has been done many times in history, with positive results, such as FDR’s Works Progress Administration (WPA). It has been 80 years since the Great Depression, and fortunately, it would now take exceptionally poor policy responses for even the current severe recession to deteriorate into a depression. But misguided and overly tight fiscal policies have unfortunately prolonged the restoration of output and employment.</p> <p>The head of the International Labour Organisation (ILO) recently <a href="http://www.ilo.org/global/about-the-ilo/press-and-media-centre/news/WCMS_163835/lang--en/index.htm">stated the obvious</a>: “Employment creation has to become a top macroeconomic priority.”</p> <p>Bottom line: consumers have to have money in their pockets. If it doesn’t come from private sector growth, then it has to come through government spending. We often hear that businesses create jobs. But in reality, sales and demand are the main source of jobs. No matter how cheap labor is, firms will not employ if they do not have sales for the production. Restaurants won’t hire another employee if the tables sit empty. That is a fundamental reason why John Maynard Keynes and others opposed wage cutting as a way of stimulating employment.</p> <p>Right now, we’re in a state of emergency. The country’s economic output is still below levels reached in 2007. We need 15 million more jobs just to replace what was lost in the last 3 years. Employment remains stagnant, but we are told to tighten our belts and stop "living beyond our means." We are squeezed, and squeezed again. We hear talk about "unsustainable entitlement programs," such as Social Security and Medicare as if these programs had something do to with the collapse in the US economy. They didn’t. The collapse occurred because the private credit bubble burst and households and firms began the long journey that will be necessary to restore the health of their balance sheets. It collapsed because the demand for goods and services was being driven by credit growth instead of real wages growth. That was always going to be an unsustainable growth path. Which can only mean one thing – there has to be more public spending – which should be targeted at maximizing the growth of decent and stable jobs.</p> <p><strong>What’s at Stake</strong></p> <p>The losses involved in enduring this persistent unemployment are so large that such interventions should be a priority. The majority of advanced nations are currently paralyzed by the political impasses and/or vehement pursuit of fiscal austerity. There is such a divide between what is needed and what is being done that it beggars belief.<br /><br /> Decades from now, historians may well wonder how we got so badly trapped into flawed economic thinking that the very things caused the problem in the first place are now being touted as the solution. Somehow we have got to remember the lesson that maximizing employment and output in each period of economic crisis has been a necessary condition for long-term growth.</p> <p>Many of our young people will enter adult life having never worked and having never gained any productive skills or experience. If we don’t start thinking differently, we may end up with our streets in flames and our society dysfunctional. In trying to avoid becoming the next Greece, we ironically risk precisely that.<br />  </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a market analyst and commentator. </div></div></div> Wed, 09 Nov 2011 22:00:01 -0800 Marshall Auerback, AlterNet 668427 at http://www.alternet.org Economy World News & Politics Economy economy japan europe job creation unemployment crisis quantitiative easing Which Party Poses the Real Risk to Social Security's Future? (Hint: It's Not Republicans) http://www.alternet.org/story/147862/which_party_poses_the_real_risk_to_social_security%27s_future_%28hint%3A_it%27s_not_republicans%29 <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Social Security remains one of the greatest achievements of the Democratic Party. Why don&#039;t Democrats champion and protect it from GOP attacks?</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter--><p>Social Security remains one of the greatest achievements of the Democratic Party since its creation 75 years ago. Although Republicans have historically fulminated against the program (Ronald Reagan once <a target="_blank" href="http://www.americanrhetoric.com/speeches/ronaldreaganatimeforchoosing.htm">likened it</a> as something akin to “socialism”), they have actually made little headway in touching this sacred “third rail” in American politics. President Bush <a target="_blank" href="http://www.americanprogress.org/issues/2005/05/b668125.html">pushed</a> for partial privatization of the program in 2005, but the proposal gained no policy traction (even within his own party) because Social Security continues to be hugely popular with American voters. It’s a universal program that benefits all Americans, not a government handout to a few privileged corporations.</p> <p>Which is why it’s odd that Democrats seem almost embarrassed to continue to champion the legacy of FDR. The party frets about long-term deficits and the corresponding need to “save” Social Security from imminent bankruptcy and, in doing so, opens the gate to radical cuts in entitlements that will do nothing but further destroy incomes and perpetuate our current economic malaise. It is true that some Republicans have signed on to the idea of privatization, notably a <a target="_blank" href="http://thinkprogress.org/2010/08/12/lungren-ryan-roadmap/">proposal</a> championed by Rep. Paul D. Ryan (Wis.), the senior Republican on the House Budget Committee. But only a handful of GOP lawmakers have actively embraced the measure and, in the aftermath of the worst shock to the financial system since the Great Depression, many Republican lawmakers would just as soon see the idea forgotten.</p> <p>So why don’t the Democrats leave well enough alone? Why bother even setting up “bipartisan commissions” to discuss the issue of Social Security? At the risk of sounding like one of those ungrateful members of the “Professional Left”, whom Robert Gibbs <a target="_blank" href="http://www.csmonitor.com/USA/Politics/The-Vote/2010/0810/Robert-Gibbs-mocks-the-professional-left-Is-it-war">recently decried</a>, I note that it was President Obama who most recently re-opened this issue by setting up a commission on reducing long term budget deficits and dealing with the long term issue of entitlements, including Social Security. In the Commission’s remit, nothing is off the table, including Social Security and Medicare. (Of course, given that one of the members is a director of Honeywell, it’s hard to envisage any suggestions of defense cuts). I also note that according to the <a target="_blank" href="http://www.washingtonpost.com/wp-dyn/content/article/2010/02/16/AR2010021605515.html">Washington Post</a>, “Democrats said Simpson and Bowles are uniquely equipped to blaze a path out of the fiscal wilderness — and to forge bipartisan consensus on a plan likely to require painful tax increases as well as program cuts.” No mention of Republicans getting on board. This is self-immolation, plain and simple. And Obama wonders why voters remain unhappy?</p> <p>Now that the President has opened this Pandora’s Box, it is hard for him credibly to make the case, as he <a target="_blank" href="http://www.washingtonpost.com/wp-dyn/content/article/2010/08/14/AR2010081400858.html?wpisrc=nl_headline">attempted to do</a> in last Saturday’s weekly radio address, that “some Republican leaders in Congress want to privatize Social Security.” In fact, it is an idea enthusiastically embraced by a number of Wall Street Democrats who are funded with huge campaign contributions from Wall Street itself. (Candidate Obama received more money from Wall Street in 2008 than Hillary Clinton.) These contributors would be the Rubinites who for decades have played a huge role in allowing for greater financial leverage ratios, riskier banking practices, greater opacity, less oversight and regulation, consolidation of power in ‘too big to fail’ financial institutions that operated across the financial services spectrum (combining commercial banking, investment banking and insurance) and greater risk. Privatization of Social Security represents the last of the low hanging fruits for Wall Street. Who better to provide this to our captains of the financial services industry than their major political benefactors in the Democratic Party?</p> <p>The issue of privatization is germane when one considers the members of the Commission approved by the President. There are questions of possible conflicts of interest. As James Galbraith <a target="_blank" href="http://www.newdeal20.org/2010/08/16/2010/06/30/why-the-fiscal-commission-does-not-serve-the-american-people-13742/">has noted</a>, the Commission has accepted support from Peter G. Peterson, a man who has been one of the leading campaigners to cut Social Security and Medicare. It is co-chaired by Erskine Bowles, a current Director at North Carolina Life Insurance Co (annuity products are a competitor to Social Security and would almost certainly be beneficiaries of the partial privatization). Mr. Bowles’ wife, Crandall Close Bowles, is on the Board of JP Morgan, and she is also on the “<a target="_blank" href="http://www.thebusinesscouncil.org/">Business Council</a>,” a 27 member group whose members include <a target="_blank" href="http://en.wikipedia.org/wiki/Dick_Fuld">Dick Fuld</a>, <a target="_blank" href="http://en.wikipedia.org/wiki/Jeff_Immelt">Jeff Immelt</a>, <a target="_blank" href="http://en.wikipedia.org/wiki/Jamie_Dimon">Jamie Dimon</a> and a plethora of other Wall Streeters.</p> <p>At the very least, these kinds of ties raise questions in regard to proposals for dealing with Social Security. Many members of the Commission stand to become clear direct and indirect beneficiaries of the privatization that the President is now warning against. It’s disappointing that these ties have not been fully explored by the press, and it is extraordinary that the President would exhibit such political tone deafness in making these kinds of appointments. It tends to undercut the message of his last radio address.</p> <p>I’ll leave aside the nonsensical arguments in regard to Social Security’s “solvency,” because Professor Stephanie Kelton has dealt with them conclusively <a target="_blank" href="http://neweconomicperspectives.blogspot.com/2010/07/why-dean-baker-has-gone-off-rails-on.html">here</a>. The only point I would add is in regard to the alleged issue of deficit spending today burdening our grandchildren. In reality, we will be leaving our grandchildren with government bonds that are net financial assets and wealth for them. As Randy Wray and Yeva Nersisyan have <a target="_blank" href="http://www.levyinstitute.org/pubs/hili_111a.pdf">recently argued</a>, even if government decides to raise taxes in, say, 2050 to retire the bonds (for whatever reason), the extra taxes are matched by payments made directly to bondholders in 2050. We can question the wisdom of whether it is right to make this <strong>political</strong> argument in favor of bond holders over tax payers. But it is a decision to be made at that time (not before) by future generations as to whether they should raise taxes by an amount equal to those interest payments, or by a greater amount to equal retirement of debt.</p> <p>In the meantime, President Obama’s <a target="_blank" href="http://www.gallup.com/Home.aspx">approval ratings</a> continue to plummet. His scaremongering has little credibility, given the disparity between his rhetoric and his actual policies. At the risk of further upsetting Robert Gibbs, we’ll try to explain why Obama isn’t finding stronger support from his base despite having passed, for instance, a health care bill, a fiscal stimulus bill and a financial regulation bill. For a start, follow the money: with the President and leading Democrats having taken the most campaign dollars from corporate interests those bills purport to challenge, and having gutted the most progressive elements in the bills themselves (see Matt Taibbi’s <a target="_blank" href="http://www.rollingstone.com/politics/news/17390/188551?RS_show_page=0">latest</a> as a perfect illustration of the phenomenon), it is clear that those signature pieces of legislation do not fundamentally challenge the structure of power at a time when that’s what Americans most want. The only “change” most Americans might experience is a reduction in their Social Security benefits from a President currently presiding over one of the most regressive wealth transfers in history. They’ll be receiving nothing but pocket change if a serious attack on entitlements is legitimized by this commission. A scaremongering radio address doesn’t do a whole lot to change that or to alter the country’s current economic trajectory. To paraphrase one of his <a target="_blank" href="http://en.wikipedia.org/wiki/Sarah_palin">leading political opponents</a>, Mr. Obama would do well stop practicing the cynical “politics as usual” that his Presidency was supposed to “refudiate”.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator. </div></div></div> Mon, 16 Aug 2010 12:00:01 -0700 Marshall Auerback, NewDeal 2.0 663275 at http://www.alternet.org Economy Economy democrats republicans social security What Could Go Wrong in 2005? http://www.alternet.org/story/21058/what_could_go_wrong_in_2005 <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">A list of economic threats for the year to come represents nothing more than a longstanding catalog of policy-making run amok.</div></div></div> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-story-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even"><img typeof="foaf:Image" src="/files/styles/story_image/public/story_images/default.jpg" alt="" /></div></div></div> <!-- BODY --> <!--smart_paging_autop_filter-->In his 1849 novel, <i>Les Guepes</i>, Alphonse Karr penned the classic line: "The more things change, the more they stay the same." In the case of the United States in 2005, however, the opposite might be true: The more things stay the same, the more they are likely to change...for the worse. In that regard, compiling a list of potential threats to the U.S. this year has a strangely déjà-vu-all-over-again feeling. After all, such a list would represent nothing more than a longstanding catalogue of economic policy-making run amok. Virtually the same list could have been drawn up in 2004, or 2003, or previous years.<br /><br />Such threats would include: a persistent and increasing resort to debt-financed growth and a concomitant, growing imbalance in the trade deficit, leading the U.S. ever further into financial dependency and so leaving it dangerously indebted to rival nations, which could (at least theoretically) pull the plug at any time. This, in turn, is occurring against the backdrop of an increasingly problematic, Vietnam-style quagmire in Iraq, against imperial overstretch, and against a related ongoing crisis in energy prices, itself spurring an ever more frantic competition for energy security, which will surely intensify existing global and regional rivalries.<br /><br />Just as a haystack soaked in kerosene will appear relatively benign until somebody strikes a match; so too, although America's longstanding economic problems have not yet led to financial Armageddon, this in no way invalidates the threat ultimately posed. For economy watchers in 2005, the key, of course, is to imagine which event (or combination of them) might represent the match that could set this "haystack" alight – if there is indeed one "event" which has the capability of precipitating the bursting of a historically unprecedented credit bubble.<br /><br />The odd thing about credit bubbles is that they have no determined resolution, nor is there anything about such a dynamic that specifies the path by which it will be reversed; nor is there some specific level of financial excess guaranteed to eventually put an end to it. The beginning of that end could potentially be set off at any level at any time. Nevertheless, it is possible to sketch out several scenarios which could conceivably, in the eleven months left to 2005, trigger such a reversal or even something approaching economic collapse.<br /><br /><b>Debt: A Policy on Steroids</b><br /><br />The Achilles heel of the American economy is certainly debt. It is generally assumed that increases in credit stimulate consumer demand. In the short run that is true, but the long run is another matter altogether. When debt levels are as high as those the U.S. is carrying today, further increases in debt created by credit expansion can come to act as a burden on demand. Signs of this are already in the air – or rather in what has been, by historic standards, only feeble economic growth in the U.S. economy over George Bush's first term in office.<br /><br />Think of the present mountain of national debt as the policy equivalent of steroids. It has so far managed to create a reasonably flattering picture of economic prosperity, much as steroid use in baseball has flattered the batting averages of some of game's stars over the past decade. But unlike major league baseball, forced to act by scandal and Senate threats, America's monetary and financial officials still refuse to implement policies designed to curb the growth of a steroidal debt burden. If anything, addiction has set in and policy has increasingly appeared designed to encourage ever larger doses of indebtedness. Each bailout or promise of a government safety net has only led to more of the same: the Penn Central crisis; the Chrysler and Lockheed bailouts; the rescue of much of the savings and loan as well as commercial banking system in the early 1990's; the 1998 bailout of the hedge fund Long Term Capital Management; and the persistent reluctance of U.S. officials to regulate the country's increasingly speculative financial system, which has led not only to fiascos like Enron – the 21st century poster child for what ails the U.S. economy – but speaks to the dangers of excessive debt, corrupt financial practices, highly dubious accounting and endless conflicts of interest.<br /><br />The result of this reluctance to confront the consequences of America's credit excesses – a federal government debt level that is now at $7.5 trillion. Of this, $1 trillion is ancient history; the other $6.5 trillion has built up over the past three decades; the last $2 trillion in the past eight years; and the last $1 trillion in the past two years alone. According to the economist Andre Gunder Frank, "All Uncle Sam's debt, including private household consumer credit-card, mortgage etc., debt of about $10 trillion, plus corporate and financial, with options, derivatives and the like, and state and local government debt comes to an unvisualizable, indeed unimaginable, $37 trillion, which is nearly four times Uncle Sam's GDP [gross domestic product]." This rising level of indebtedness will become a huge deflationary weight on economic activity if debt growth should seriously slow – which is the economic equivalent of a catch-22.<br /><br /><b>The "Blanche Dubois" Economy</b><br /><br />The situation of the American economy becomes yet more precarious when you consider that the country's major creditors are foreigners. Today, the U.S. economy is being kept afloat by enormous levels of foreign lending, which allow American consumers to continue to buy more imports, which only increase the already bloated trade deficits. In essence, this could be characterized in <i>Streetcar Named Desire</i> terms as a "Blanche Dubois economy," heavily dependent as it is on "the kindness of strangers" in order to sustain its prosperity. This is also a distinctly lopsided arrangement that would end, probably with a bang, if those foreign creditors – major trading partners like Japan, China, and Europe – simply decided, for whatever reasons, to substantially reduce the lending.<br /><br />China, Japan, and other major foreign creditors are believed willing to sustain the status quo because their own industrial output and employment levels are thought to be worth more to them than risking the implosion of their most important consumer market, but that, of course, assumes levels of rationality not necessarily found in any global system in a moment of crisis. All you have to do is imagine the first hints of things economic spinning out of control and it's easy enough to imagine as well that China or Japan, facing their own internal economic challenges, might indeed give them primacy over sustaining the American consumer. If, for example, a banking crisis developed in China (which has its own "bubble" worries), Beijing might well feel it had no choice but to begin selling off parts of its U.S. bond holdings in order to use the capital at home to stabilize its financial system or assuage political unrest among its unemployed masses. Then think for a moment: global house of cards.<br /><br />Already China has given indications of its long-term intentions on this matter: Roughly 50 percent of China's growth in foreign exchange since 2001 has been placed into dollars. Last year, however, while China saw its reserves grow by $112 billion, the dollar portion of that was only 25 percent or $25 billion, according to the always well-informed Montreal-based financial consultancy firm, Bank Credit Analyst.<br /><br />Beijing has already made it clear that it will spread its reserves and put less emphasis on the dollar. As one of America's largest foreign creditors, China naturally has the upper hand today, like any banker who can call in a loan when he sees the borrower hopelessly mired in IOUs. If such foreign capital increasingly moves elsewhere and easy credit disappears for consumers, U.S. interest rates could rise sharply. As a result, many Americans would likely experience a major decline in their living standards – a gradual grinding-down process that could continue for years, as has occurred in Japan since the collapse of its credit bubble in the early 1990s.<br /><br />Even if China, Japan, and other East Asian nations continue to accommodate American financial profligacy, a major economic "adjustment" in the U.S. could still be triggered simply by the sheer financial exhaustion of its overextended consumers. After all, the country already has a recession-sized fiscal deficit and zero household savings. That's a combination that's never been seen before. In the early 1980's, when the federal deficit was this size, the household savings rate was 9 percent. This base of savings enabled the government to finance its vast deficits for a time through a huge one-time fall in net savings, the scale of which was historically unprecedented and not repeatable today in a savings-less America.<br /><br /><b>At the Edge: Imperial Overstretch</b><br /><br />A restoration of national savings is fundamentally incompatible with continued economic growth, all other things being equal. And the United States can ill-afford even lagging economic growth, given the magnitude of its burgeoning – and expensive – overseas military commitments, especially in an Iraq that is beginning to look like Vietnam redux.<br /><br />President Bush likes to compare his combination of economic, military, and diplomatic strategies with President Reagan's blend of tax cuts, military assertiveness, and massive borrowing in the 1980s. His economic advisers, especially Vice President Dick ("deficits don't matter") Cheney, appear to believe that the present huge trade and fiscal deficits will prove no more disruptive in the next decade than they were in the Reagan years.<br /><br />But if we turn to the Vietnam parallel, we find a less comforting historical precedent: the decision, first by President Johnson and then by President Nixon, to finance that unpopular conflict through borrowing and inflation, rather than higher taxes. The ultimate result of their cumulative Vietnam decisions was not just a military humiliation but also a series of economic crises that first caught up with the country in the late 1960s and continued periodically until 1982.<br /><br />In a sense, the dollar's continuing fall last year (especially against the euro) in spite of significant interventions by central banks in the global foreign exchange markets, reflects a similar loss of respect for U.S. policy-making – and especially for the linking of the dollar and the Pentagon through an endless series of foreign adventures. In addition, a national economy that cannot itself produce the things it needs and invests instead in military "security" will eventually find itself in a position in which it has to use its military constantly to take, or threaten to take, from others what it cannot provide for itself, which in turn leads to what Yale historian Paul Kennedy has described as "imperial overstretch":<blockquote>[T]hat is to say, decision-makers in Washington must face the awkward and enduring fact that the sum total of the United States' global interests and obligations is nowadays far larger than the country's power to defend them all simultaneously.</blockquote>That descent into imperial overstretch explains how in the early 1940s an America much weaker in absolute terms, fighting more evenly matched opponents, could nonetheless prevail against its enemies more quickly than a state with an $11-trillion gross domestic product and a defense budget approaching $500 billion (without even adding in the $80 billion budgetary supplement for Iraq and Afghanistan that the Bush administration is reputedly preparing for the current fiscal year) fighting perhaps 10,000-20,000 ill-armed insurgents in a state with a pre-war GDP that represents less than the turnover of a large corporation. The U.S. today is a nation with a hollowed-out industrial base and an increasing incapacity to finance a military adventurism propelled by the very forces responsible for that hollowing out.<br /><br /><b>Oil: The Dividing Line of the New Cold War</b><br /><br />And then there is the problem of crude which, despite predictions from ever optimistic financial analysts, has once again begun to approach $50 a barrel. The one thing Mr. Bush has never mentioned in relation to his Iraq war policy is oil, but back in 2001 former Secretary of State James Baker presciently wrote an essay in a Council on Foreign Relations (CFR) study of world energy problems that oil could never lurk far from the forefront of American policy considerations:<blockquote>Strong economic growth across the globe and new global demands for more energy, have meant the end of sustained surplus capacity in hydrocarbon fuels and the beginning of capacity limitations. In fact, the world is currently precariously close to utilizing all of its available global oil production capacity, raising the chances of an oil supply crisis with more substantial consequences than seen in three decades. These choices will affect other U.S. policy objectives: U.S. policy toward the Middle East; U.S. policy toward the former Soviet Union and China; the fight against international terrorism.</blockquote>The CFR report made another salient point clear: "Oil price spikes since the 1940s have always been followed by recession." In its current debt-riddled condition, further such price spikes could bring on something more than a garden-variety economic downturn for the U.S., especially if some of the major oil-producing nations, such as Russia, follow through on recent threats to denominate their petroleum exports in euros, rather than dollars, which would substantially raise America's energy bill, given the current weakness of the dollar.<br /><br />The most recent spike in the price of oil was not simply a reflection of rising political uncertainty and conflict in the Middle East. There are other reasons to expect higher energy price levels over the next two to three decades – the most notable among them being strong demand from emerging economies, especially those of China and India.<br /><br />The parallel drives for energy security on the part of the United States and China hold the seeds of future conflict as well. Yukon Huang, a senior advisor at the World Bank, recently noted that China's heavy reliance on oil imports (as well as problems with environmental degradation, including serious water shortages) poses a significant threat to the country's economic development even over the near-term, the next three to five years.<br /><br />China's already vigorous response to this challenge is likely to bring it increasingly up against the United States. Venezuelan President Hugo Chavez, for instance, returned from a Christmas trip to China where he apparently sold America's historic Venezuelan oil supplies to the Chinese together with future prospecting rights. Even Canada (in the words of President Bush, "our most important neighbors to the north") is negotiating to sell up to one-third of its oil reserves to China. CNOOC, China's third largest oil and gas group, is actually considering a bid of more that $13 billion for its American rival, Unocal. The real significance of the deal (which, given the size, could not have been contemplated in the absence of Chinese state support) is that it illustrates the emerging competition between China and the U.S. for global influence – and resources.<br /><br />The drive for resources is occurring in a world where alliances are shifting among major oil-producing and consuming nations. A kind of post-Cold War global lineup against perceived American hegemony seems to be in the earliest stages of formation, possibly including Brazil, China, India, Iran, Russia and Venezuela. Russian President Putin's riposte to an American strategy of building up its military presence in some of the former SSRs of the old Soviet Union has been to ally the Russian and Iranian oil industries, organize large-scale joint war games with the Chinese military, and work towards the goal of opening up the shortest, cheapest, and potentially most lucrative new oil route of all, southwards out of the Caspian Sea area to Iran. In the meantime, the European Union is now negotiating to drop its ban on arms shipments to China (much to the publicly expressed chagrin of the Pentagon). Russia has also offered a stake in its recently nationalized Yukos, (a leading, pro-Western Russian oil company forced into bankruptcy by the Putin government) to China.<br /><br />In a one-superpower world, this is pretty brazen behavior by all concerned, but it is symptomatic of a growing perception of the United States as a declining, overstretched giant, albeit one with the capacity to strike out lethally if wounded. American military and economic dominance may still be the central fact of world affairs, but the limits of this primacy are becoming ever more evident – something reflected in the dollar's precipitous descent on foreign exchange markets. It all makes for a very challenging backdrop to the rest of 2005. Keep an eye out. Perhaps this will indeed be the year when longstanding problems for the United States finally do boil over, but don't expect Washington to accept the dispersal of its economic and military power lightly.<br /><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers --> <div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter-->Marshall Auerback is an international strategist with David W. Tice &amp; Associates, LLC, a U.S. Virgin Islands-based money management firm. He is also a contributor to the Japan Policy Research Institute. His weekly work can be viewed at <a href="http://www.prudentbear.com">prudentbear.com</a>. </div></div></div> Sun, 23 Jan 2005 21:00:01 -0800 Marshall Auerback, TomDispatch.com 612282 at http://www.alternet.org News & Politics