AlterNet.org: Marshall Auerback https://www.alternet.org/authors/marshall-auerback en How Seriously Should the U.S. Take China's Economic 'Nuclear Option'? https://www.alternet.org/economy/chinas-nuclear-option-trade-war-isnt-threatening <!-- 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">China&#039;s &#039;nuclear option&#039; threat of economic retaliation against Trump&#039;s trade war is more akin to a toy gun.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_358873784.jpg?itok=Et9_hRQu" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">Once the trade war rhetoric heated up, it was only a matter of time before someone raised the possibility that China would begin selling its large holdings of U.S. Treasuries, causing <a href="https://www.cnbc.com/2018/04/04/if-china-sold-treasurys-could-cause-real-rout-in-bonds-stephen-roach.html">“a real rout”</a> in the bond market, according to the former chairman of Morgan Stanley Asia, Stephen Roach. Reuters followed up with a provocative headline: <a href="https://www.reuters.com/article/us-usa-trade-china-treasuries/china-holding-treasuries-keeps-nuclear-option-in-u-s-trade-war-idUSKCN1HB34M">“China, holding Treasuries, keeps ‘nuclear option’ in U.S. trade war,”</a> suggesting that China was holding its “largest import”—namely, its huge cache of $1.17 trillion of U.S. Treasuries, in reserve, should the trade war substantially escalate from here.</p><p dir="ltr">It sounds very serious, but are these claims about China actually true? Well, not according to the Chinese… yet. Vice Finance Minister <a href="https://www.cnbc.com/2018/04/04/china-wont-halt-us-treasury-buying-despite-tariffs-says-minister.html">suggested</a> that China was “a responsible international investor,” and had no intention of exercising the nuclear option, not even to give the U.S. “<a href="https://www.wsj.com/articles/amid-signs-of-a-thaw-in-north-korea-tensions-bubble-up-1515427541">a bloody nose</a>,” as Washington itself has contemplated with a Chinese ally in some of the racier moments of Trumpian diplomacy. On the other hand, as CNBC <a href="https://www.cnbc.com/2018/04/04/china-wont-halt-us-treasury-buying-despite-tariffs-says-minister.html">reported,</a> “the Chinese ambassador to the U.S. Cui Tiankai responded to a question on Treasury bond purchases simply by saying that, ‘If the other side makes a wrong choice, we have no alternative but to fight back.’”</p><p dir="ltr">Of course the problem with a “nuclear option” is that once it is exercised, all leverage is gone… along with everything else. They are like lawyers, as Danny DeVito memorably said in <a href="http://www.moviequotes.com/repository.cgi?pg=3&amp;tt=91109">“Other People’s Money”:</a> “[Y]ou use them and they fuck everything up.”</p><p>Colorful threats aside, does China actually have the economic equivalent of a nuclear deterrent via its U.S. bond holdings? Certainly, Beijing has every interest in making the threat sound as scary as possible as it gives them leverage. Call it the Chinese version of <em>The Art of the Deal</em>. And it sounds credible when you have figures like Stephen Roach suggesting that the bond market would be overwhelmed and prices would crash were Beijing to initiate large-scale liquidation of its U.S. bond holdings (which, if true, might be a classic case of China cutting its nose to spite its face).</p><p dir="ltr">But does the threat stand empirical scrutiny? As the head of currency trading at Brown Brothers Harriman, Marc Chandler, <a href="http://www.marctomarket.com/2018/04/investors-find-comfort-in-brinkmanship.html">has noted</a>, “From June 2016 through November 2016, China’s Treasury holdings, according to U.S. data fell by $200 bln, which was 15% of their holdings. What happened to the U.S. 10-year yield (as a rough and ready metric of the impact), you ask? It was virtually unchanged.” Not only that, but the Chinese currency, the renminbi (RMB), <a href="https://www.voanews.com/a/china-sells-united-states-treasury-securities-protect-yuan/3657528.html">appreciated against the U.S. dollar</a>, hardly an optimal outcome if one is trying to mitigate the impact of an adverse trade shock.</p><p dir="ltr">Recall how China gets its dollars (and Treasury cache) in the first place. They are not an “import,” obviously, but a byproduct of a market transaction. China sells, say, $1bn worth of electrical machinery to the U.S. and has those dollars credited at the Bank of China’s account at the Federal Reserve. And, as the economist Randy Wray <a href="https://www.nakedcapitalism.com/2013/11/randy-wray-what-if-china-dumps-us-treasury-bonds-paul-krugman-inches-toward-mmt.html">argues:</a> “The Bank of China rationally prefers to earn interest on dollar holdings, so these are converted to U.S. treasuries. This is nothing more than a balance sheet operation on the books of the Fed: Bank of China reserves at the Fed are debited and Bank of China treasuries are credited. There’s no net flow of dollars to the U.S. Treasury.”</p><p dir="ltr">This whole notion that China sneezes at the bond market and the U.S. catches pneumonia is predicated on a rather archaic model of capital flows in which bonds and dollars are said to “flow” across borders like ocean waves, creating a tsunami-like impact as the flows intensify. That image may have been more reflective of reality during the days of the 19th-century gold standard, but in today’s computerized world of modern finance, dollar balances (and/or Treasuries) are electronic entries on the balance sheet of the Federal Reserve. So if China wants to sell its U.S. Treasuries (which are held in a Federal Reserve “securities account,” a fancy term for “savings account”), a bank officer at the Fed presses a button, the Treasury holdings are debited from the securities account and the corresponding dollar holdings are immediately credited to a “reserve account,” which is the Federal Reserve equivalent of a “checking account.” In fact, as the economist/portfolio manager Warren Mosler <a href="https://moslereconomics.com/wp-content/powerpoints/7DIF.pdf">describes</a>, this is routinely how all U.S. debt management is done: “The Fed removes dollars from savings accounts and adds dollars to checking accounts on its books. When people buy Treasury securities, the Fed removes dollars from their checking accounts and adds them to their savings accounts.” In other words, capital doesn’t “flow.” And from the perspective of the U.S. government, if China’s dollars simply sit in the reserve accounts, it just means issuing fewer bonds, which means paying out less interest to Beijing.</p><p dir="ltr">Once China gets its dollars from an export sale, it has several options: it can let the resultant dollars accumulate in their reserve/checking account at the Fed. Or it can use the dollars to buy other U.S.-dollar denominated assets (e.g., real estate, a U.S. company, commodities, etc.), which would mean spending the money in the U.S. economy, which would also be good for the American economy. Alternatively, it can sell the dollars and swap them into another currency, such as the euro or back to the RMB itself (<a href="https://www.voanews.com/a/china-sells-united-states-treasury-securities-protect-yuan/3657528.html">which was done in the latter half of 2016</a> when China was trying to support its currency against capital flight).</p><p dir="ltr">Stephen Roach’s characterization of what happens in a bond market transaction, therefore, is mistaken. In a non-gold standard world of free-floating fiat currencies, what becomes the equilibrating factor here is not the interest rate (which used to be impacted by the physical flow of gold going inside and outside a country), but the external value of the dollar vis a vis other currencies. If Beijing neither retains its dollars, nor U.S. Treasury holdings, and instead opts to sell them, then, all other things being equal, it is possible that other private portfolio preference shifts could well be temporarily influenced by China’s actions (much as the decisions of a wealthy, well-known art dealer at an auction might well impact the actions of other participants). “All other things being equal” is the key phrase here, even though all other factors seldom are equal. These shifts in portfolio preferences <em>could</em> in turn put downward pressure on the dollar’s external value, or the price level of U.S. bonds. But not necessarily (it didn’t, for example, the last time China engaged in large-scale liquidations of its bond holdings). Of course, in the event that the dollar did decline, it would have the happy byproduct of mitigating America’s trade deficit, as it would boost the competitiveness of the country’s exporters, which was the starting point for the current outbreak of protectionist pressures in the first place.</p><p dir="ltr">No less than Nobel Laureate Paul Krugman puts paid to the notion that China truly possesses <a href="https://krugman.blogs.nytimes.com/2013/10/18/the-china-debt-syndrome/">a dangerous nuclear option</a>:</p><blockquote><p dir="ltr">“[W]hatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds—in fact, it would probably be good for America.</p><p dir="ltr">“But, you say, wouldn’t China selling our bonds send interest rates up and depress the U.S. economy? I’ve been <a href="https://krugman.blogs.nytimes.com/2013/10/03/phantom-crises-wonkish/">writing about this issue</a> a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work.</p><p dir="ltr">“Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy up those bonds.</p><p dir="ltr">“It’s true that such actions could possibly depress the value of the dollar. But that would be good for America!”</p></blockquote><p dir="ltr">Even if the Federal Reserve has no inclination to engage in a further round of quantitative easing, it has other available tools in its policy box, especially since it has started to pay interest on excess reserves (IOER), as Rob Parenteau and I <a href="http://neweconomicperspectives.org/2010/03/operation-twist-part-deux.html">outlined</a> in a 2010 article:</p><blockquote><p dir="ltr">“[T]he Fed can tell everybody that they are renormalizing the fed funds rate and take the IOER up to 100bps. Note, the Fed does not need to remove any reserves to do this—they can just do it administratively. That’s how the IOER works—it severs the link between reserves in the system and the target policy rate, right?</p><p dir="ltr">“Then, if the bond gods don’t rally Treasuries on the Fed’s efforts to renormalize the policy rate, Mr. Bernanke calls up Bill Dudley (President at the NY Fed) and gives him instruction to buy all the 10 year UST on offer until the 10 year UST yield is down to, oh, say 3.5%. It is an open market operation, which the Fed performs all the time. They won’t have to call it QE, but it is in effect the same thing.”</p></blockquote><p dir="ltr">If China’s sales were to cause long-term rates to go above a certain level, the Federal Reserve could instruct its open market desk to buy these Treasuries to counter the sales’ impact, if necessary. To <a href="https://www.pimco.com/en-us/insights/economic-and-market-commentary/global-central-bank-focus/our-currency-but-your-problem">quote</a> Paul McCulley, formerly of PIMCO (the world’s largest bond fund manager, which means the group knows a thing or two about how the bond market operates): “any market induced—foreign or domestic-driven—upward pressure on U.S. intermediate or long-term interest rates would/will be limited by the leash of the Fed’s... anchoring of the Fed funds rate. ... Put differently, there is a limit to how steep the yield curve can get, if the Fed just says no—again and again!—to the tightening path implicit in a steep yield curve.” Yes, that’s not how a “free market” is supposed to work, but by definition, a market isn’t totally “free” if ultimately dominated by a monopolist supplier dollars and treasuries. That the Federal Reserve may choose not to exercise that monopoly power is a political decision, not a capitulation to market forces in which the central bank’s actions are overridden by an onslaught of Chinese bond sales.</p><p dir="ltr">To that extent, the famous, all-powerful “<a href="https://www.cnbc.com/2017/12/18/the-bond-vigilantes-may-seize-power-in-2018-as-worldwide-debt-swells.html">bond market vigilante</a>” is in reality an astute arbitrageur, who ultimately can exploit any differential between the Fed’s stated objectives and market pricing, so long as the Fed backs up its intentions credibly, as McCulley suggests. Yes, it is true that there have been examples where markets have overwhelmed governments, but these have occurred in instances where the government (or its central bank) was trying to control an arbitrary price level in which it was not the monopoly issuer (such as would occur, say, with a currency pegged to the price of a foreign-denominated currency and therefore viable for only as long the government has sufficient stocks of said foreign currency). Or to put it another way, governments/central banks can control price or supply, but cannot control both simultaneously. The Fed has an unlimited war chest of dollars if it so chooses to defend a particular price point on the long-term bond. So does the Bank of Japan in regards to yen-denominated assets (failing to understand this basic fact, market “experts” <a href="http://beaconreports.net/en/a-yen-bug-in-search-of-a-windshield/">have been wrongly predicting disaster for the Japanese bond market for eons)</a>. Or the Bank of England in regard to sterling. This is what is meant when a government is described as being truly “<a href="http://neweconomicperspectives.org/2011/07/mmp-blog-6-what-is-sovereign-currency.html">sovereign</a>” in regard to its own currency. It means that it is the sole issuer of its own unit of account and nobody else.</p><p>In reality, then, China doesn’t possess a “nuclear option” here, <a href="https://www.nakedcapitalism.com/2013/11/randy-wray-what-if-china-dumps-us-treasury-bonds-paul-krugman-inches-toward-mmt.html">because</a> “all the dollars the Chinese have come from the U.S. There is no net supply of dollars from China.” If you don’t own the nukes, the threat, as the economist Dean Baker <a href="https://krugman.blogs.nytimes.com/2013/10/18/the-china-debt-syndrome/">has poetically phrased it</a>, becomes “an empty water pistol pointed at our head.” The Chinese have played this card effectively in the past because the U.S. has never called their bluff. Beijing is counting on the current market turbulence to pile on the pressure. Additionally, as Japan did in earlier trade wars with the U.S., China has learned to mobilize U.S. agricultural interests, and low value added industries against the defenses of our manufacturers. Hence, the reason for the retaliatory tariffs on imports of U.S. pork, leather and scrap metal. This hasn’t proved as effective as in the past so far, as Trump has responded by upping the ante by instructing the USTR to put together a plan for $100bn in additional tariffs against Beijing. In the meantime, China’s policymakers continue with an explicit import substitution policy, targeting industries currently dominated by American companies, even as the latter face constant threats of intellectual property theft and domestic joint ventures in which they are compelled to transfer valuable technology to Chinese firms, to get access to a domestic market in which China remains the favored player (actively aided and abetted by the government, as the latest USTR Report to Congress <a href="https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf?utm_source=Fareed%27s+Global+Briefing&amp;utm_campaign=9b73769633-EMAIL_CAMPAIGN_2018_04_06&amp;utm_medium=email&amp;utm_term=0_6f2e93382a-9b73769633-89263597">documents</a>). It’s a highly effective policy, as it enables China to short-circuit the move up the technology curve and avoid the high costs normally associated with research &amp; development. This is not “free trade” as the textbooks describe it, but a highly effective mercantilist strategy, one which Washington has allowed to be sustained on the basis of a bogus threat from a paper tiger.</p><p> </p> Fri, 13 Apr 2018 09:07:00 -0700 Marshall Auerback, Independent Media Institute 1090998 at https://www.alternet.org Economy Economy World China trade war Trade War or Not, China Risks a 'Minsky Moment' https://www.alternet.org/world/trade-war-or-not-china-risks-minsky-moment <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1090637'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1090637" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">Putting Trump&#039;s tariffs in perspective.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_358873784.jpg?itok=Et9_hRQu" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">The transformation of China’s economy, both in terms of GDP growth rate and poverty reduction since it started its transition to the market system in the late 1970s, has arguably been the biggest macroeconomic event of the past half-century. The model that has characterized the country’s high output growth rates has <a href="http://www.nber.org/papers/w23845">followed in the footsteps of the Asian “tigers</a>": first, its high growth rates of capital accumulation, driven by high investment-output ratios; second, a marked outward orientation through export-led growth policies; and third, the pursuit of industrialization (in particular the production and export of manufacturing goods), <a href="http://www.un.org/esa/sustdev/publications/industrial_development/1_1.pdf">a key ingredient for fast growth and development.</a> By almost every metric, China has advanced from economic backwater to the world’s second-largest GDP (<a href="https://www.bloomberg.com/view/articles/2017-10-18/who-has-the-world-s-no-1-economy-not-the-u-s">and by some measures, is now the largest economy</a>).</p><p dir="ltr">But in spite of signs of <a href="https://www.bloomberg.com/news/articles/2018-03-31/china-factory-gauge-jumps-in-march-services-remain-robust">renewed economic activity in March</a>, the country’s debt build-up has provoked increasing concern amongst Beijing’s policy makers, as it points to an underlying long-term financial fragility, particularly if trade war pressures intensify. Just last October during the Communist Party Plenary, Zhou Xiaochuan, then head of the country’s central bank, <a href="https://www.ft.com/content/4bcb14c8-b4d2-11e7-a398-73d59db9e399">warned of a “Minsky moment</a>":</p><blockquote><p dir="ltr">“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.”</p></blockquote><p dir="ltr">To elaborate on Zhou’s statement, the economist Hyman Minsky described how once the debt “disease” goes metastatic, there will come a “Minsky moment” (<a href="https://www.pimco.com/en-us/insights/economic-and-market-commentary/global-central-bank-focus/the-shadow-banking-system-and-hyman-minskys-economic-journey/">a term originally coined by economist Paul McCulley</a>) when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, policy makers are powerless to avert it, no matter how much they want to bring the punchbowl back. Governor Zhou’s public warning was no doubt in response to recent rapid increase of debt which, <a href="http://www.levyinstitute.org/pubs/pn_18_1.pdf">according to Professor L. Randall Wray</a>, “increased from 162 percent to 260 percent of GDP between 2008 and 2016,” and remains “a topic of discussion, if not deep concern.”</p><p dir="ltr">It may seem odd to warn of a Chinese slowdown, given the recent renewed surge in exports and the corresponding rise in both the manufacturing and non-manufacturing purchasing managing indices (both the manufacturing and service gauges remain above 50, and therefore <a href="https://www.bloomberg.com/news/articles/2018-03-31/china-factory-gauge-jumps-in-march-services-remain-robust">indicative of robust economic activity</a>). But these gains ought to be viewed against the backdrop of a more hostile external environment for Chinese manufactured goods. Discussing the recently imposed tariffs on steel and aluminum, the New York Times <a href="https://www.nytimes.com/2018/03/22/business/us-eu-tariffs-steel-aluminum.html">reported</a> that Trump has already provided brief exemptions to “Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea” (countries that “account for more than half of the $29 billion in steel sold to the United States in 2017”), which reinforces the idea that it is largely China that remains the major target of Trump’s economic nationalists.</p><p dir="ltr">In that context, China’s ramped-up production in March could well be interpreted as an effort to evade the tariffs by exporting products into the U.S. under the wire, <a href="https://www.bloomberg.com/news/articles/2018-03-31/china-factory-gauge-jumps-in-march-services-remain-robust">suggested economist Raymond Yeung</a> of the ANZ group. If so, that could provoke further aggressive responses from Trump’s trade hawks, especially if it results in an expansion of the bilateral trade surplus with the U.S. Adding to the pressures, <a href="https://www.reuters.com/article/us-usa-trade-china/u-s-seeks-china-trade-moves-on-autos-financials-chips-source-idUSKBN1H22QK">Reuters reports</a> that “Top Trump administration officials are asking China to cut tariffs on imported cars, allow foreign majority ownership of financial services firms and buy more U.S.-made semiconductors in negotiations to avoid plans to slap tariffs on a host of Chinese goods and a potential trade war.”</p><p>But how serious are these threats? Are they simply a case of “smoke and mirrors,” as the economist Dani Rodrik <a href="https://twitter.com/rodrikdani/status/976861895411068928">has suggested</a>? China itself appears to be taking the risk of a trade war seriously, <a href="https://www.nytimes.com/2018/04/01/world/asia/china-tariffs-united-states.html">imposing retaliatory tariffs of up to 25 percent on 128 food imports from the U.S.</a>, an understandable negotiating posture given its position as a major creditor nation. But the very fact of its creditor status might presage problems for Beijing. If anything, history has shown that it is trade surplus nations, not debtors, that tend to be the biggest casualties of trade wars, as this account of America’s ill-fated Smoot-Hawley tariff imposition <a href="https://fee.org/articles/the-smoot-hawley-tariff-and-the-great-depression/">illustrates</a>:</p><blockquote><p dir="ltr">“World War I… made America the world’s creditor. The center of the financial world moved from London to New York, and billions of dollars were owed to large U.S. banks. The Smoot-Hawley Tariff threw inter-allied war-debt repayment relations into limbo by shutting down world trade. An international moratorium on debtor repayments to the United States froze billions in foreign assets, thus weakening the financial solvency of the American banks. Specifically, over $2 billion worth of German loans were obstructed by Germany’s inability to acquire dollars through trade to repay its debts. This same scenario played out in many other countries as well.”</p></blockquote><p dir="ltr">China today occupies a creditor position comparable to the U.S. in the 1930s. Trump was certainly exaggerating when he <a href="https://www.cnbc.com/2018/03/02/trump-trade-wars-are-good-and-easy-to-win.html">suggested that</a> “trade wars are good and easy to win.” But the U.S. is a largely self-sufficient economy; China is not—which is what Trump was implicitly highlighting when he made his comments (albeit, typically oversimplified and ignoring the fact that the U.S. itself still has quasi-bubbleized assets and very high levels of indebtedness). </p><p dir="ltr">Even if the trade war threat turns out to be more talk than action, there are other ways in which Beijing might risk a Minsky-style deflation. There is a very old idea from business cycle theory prior to the Second World War that private sector over-investment can become so unsustainably high that even without a fiscal/monetary shock, there could be a fall in autonomous investment. Once that begins, accelerator multiplier dynamics can lead to a cumulative economic contraction even if interest rates plummet and monetary conditions ease.</p><p dir="ltr">There are grounds for thinking this is an idea whose time has come again. Though fixed investment is very low in the U.S., it is not so globally, especially in China, which has a condition of over-investment that is historically unprecedented. A decline in global autonomous investment that threatens accelerator and multiplier dynamics should follow.</p><p dir="ltr">Some would argue that the global capex overinvestment problem is purely a product of low interest rates, but in China’s case, it is also a product of their economic model. Although the reforms undertaken over the past few decades have given China the appearance of a market economy, it is not in many important aspects, notably in regards to the allocation of capital, which is not market-determined.</p><p dir="ltr">In essence, China’s economy is a historical blending of three distinct strands: First is the old Communist, command-style economy, which, on the most conservative measure, accounts for at least one-third of China’s GDP (and possibly higher, <a href="http://www.eastasiaforum.org/2016/05/17/chinas-soe-sector-is-bigger-than-some-would-have-us-think/">according to some studies</a>). This sector is comprised largely of the old “white elephants,” the state-owned enterprises (SOEs). </p><p dir="ltr">Second is the East Asian model, whereby the government directs investment into particular areas via the aegis of private companies, but with considerable state backing. This “dirigisme” is a variant of the old Japanese “MITI administrative model,” wherein the government essentially targets priority sectors (such as agricultural products, high-speed rail, aerospace, semiconductors, robotics, AI, and civil aviation). You can see evidence of this “state-directed capitalism” in the country’s recently published "<a href="http://www.scmp.com/tech/enterprises/article/2138680/what-happens-made-china-2025-trade-war-fears-grow">Made in China 2025</a>" document, an explicit policy of import substitution designed to make the country largely self-sufficient in a broad range of industries by 2025. (Import substitution is a red flag for trade hawks, especially as many of Beijing’s newly designated priority sectors are areas currently dominated by the U.S., and seeking to expand exports into China.)</p><p dir="ltr">Essentially, here the Chinese state often acts as “loss leader” as it tries to develop national champions, mobilizing the financial resources of large oligopolistic conglomerates to enable them to make long-term investments in research. (As an aside, this used to be a model embraced by the U.S. until the anti-government attitudes of recent decades took hold; the private sector was thought to be unable to make sufficient large-scale R&amp;D investments because no single company on its own would have the resources/longevity to exploit the potential financial returns.) China has already done this in areas such as solar power, and it is one of the reasons why global solar costs have fallen so precipitously over the past decade (as well as contributing to the <a href="https://www.reuters.com/article/us-solyndra/u-s-solar-firm-solyndra-files-for-bankruptcy-idUSTRE77U5K420110906">bankruptcy of Solyndra</a> here in the U.S. back in 2011). </p><p dir="ltr">Third, and finally, is China’s “wild west capitalism,” which has been manifested in areas such as property speculation, “wealth management products,” the shadow banking system, and the country’s comparatively young capital markets (including a <a href="https://www.bloomberg.com/news/articles/2018-03-25/china-s-oil-futures-are-finally-here-what-you-need-to-know">newly established oil futures market</a>). Odd that despite the Asian Financial Crisis of 1997/98 and the global meltdown of 2008 (both products of global financial liberalization), China persists in expanding this “third leg,” given the challenges the country has experienced attempting to curb its speculative excesses, while simultaneously seeking to restructure the state sector.</p><p dir="ltr">In any case, the challenge for China is clear: If policy makers move too aggressively in countering any one of these vulnerabilities, they risk setting in motion a huge debt deflation dynamic. This is especially dangerous, given that overall capital expenditure in China <a href="https://www.cfr.org/report/return-east-asian-savings-glut">is still in excess of 40 percent of GDP</a>. By way of comparison during Japan’s bubble years, <a href="https://www.cfr.org/report/return-east-asian-savings-glut">capex as a percentage of GDP got as high as 32 percent,</a> and that was considered bubble-like territory, while U.S. capital expenditure as a percentage of GDP has typically stood around 15-17 percent.</p><p dir="ltr">So China’s policy makers have a fine line to tread. In essence, they have been using the old command economy to arrest any incipient debt deflation dynamics in the free market segment. The problem is that the command economy is home to all of the white elephants, notably construction, heavy machinery, bulk chemicals, steel, coal, and shipbuilding, all of which contribute significantly to global overcapacity. As Jianguang Shen, chief Asia economist at Mizuho Securities Asia, <a href="https://www.ft.com/content/253d7eb0-ca6c-11e5-84df-70594b99fc47">notes</a>:</p><blockquote><p dir="ltr">“SOE reform, debt, overcapacity and ‘zombie companies’ are all deeply connected issues. For private companies in overcapacity industries, after several years of losses there’s no way to continue. The owner will shut them down or sell them off, but at SOEs they can keep getting bank loans or government support.”</p></blockquote><p dir="ltr">Shutting down these companies would create mass unemployment. So the government keeps them going, via subsidies, bailouts, and low interest rate loans. Excess capacity, therefore, gets dumped on China’s trading partners, thereby imparting an ongoing deflationary bias to the global economy, while China builds up global champions at home, which will ultimately squeeze out foreign competition.</p><p dir="ltr">This is in effect what Trump is seeking to counter right now via his <a href="https://www.cnn.com/2018/03/22/politics/donald-trump-china-tariffs-trade-war/index.html">latest salvo against China.</a> But will the threat of more tariffs prove effective against Beijing? Bear in mind that China’s political imperatives are considerably different than those of the U.S. In the U.S. (as well as most other western democracies), if a governing party screws up, it can be voted out of office. In China, the entire political legitimacy of the Communist Party is tied up with the country’s economic prosperity. They miscalculate, and the party risks losing its monopoly on power, party members get arrested, and probably a few are shot as well. <a href="https://www.theatlantic.com/international/archive/2015/05/chinese-democracy-isnt-inevitable/394325/">There are limits to political liberalization</a>.</p><p dir="ltr">Shutting down excess capacity in the state-owned enterprises in response to tariff threats, then, would likely risk a severe economic downturn in China. It would create the prospect of mass layoffs, heightening domestic turmoil, while simultaneously undermining the political standing of the ruling party. To avert this outcome, we should therefore expect that China’s policy makers will respond as they always have: continuing to guide financing to all of these white elephants, effectively exporting deflation to the rest of the world and risking a trade backlash. Hardly ideal, but understandable, given the competing domestic political imperatives. For all of today’s market chatter about “creeping inflation” in the U.S., then, this will likely prove ephemeral if China continues to dump much of its excess capacity on the rest of the world to offset the political fallout from tackling its own domestic bubbles. The resultant pressures China’s competitors will face could engender a tougher response in line with that of Trump, which is what appears to be happening right now. So while today’s political machinations may well appear to be nothing more than a high-stakes game of poker bluffs, the longer-term dynamics suggest that it could well herald the start of a dangerous dynamic in which China and the rest of the world are fated “<a href="https://en.wikipedia.org/wiki/May_you_live_in_interesting_times">to live in interesting times</a>,” as the apocryphal Chinese curse exhorts.</p><p> </p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1090637'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1090637" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 05 Apr 2018 13:47:00 -0700 Marshall Auerback, AlterNet 1090637 at https://www.alternet.org World Economy World China economics trade war donald trump Is It Time to Delete Facebook? https://www.alternet.org/economy/regulate-or-delete-facebook-after-cambridge-analytica <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1090353'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1090353" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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 overly social network comes to terms with unhappy users.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_1051545083.jpg?itok=2NNgtnm7" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">Cambridge Analytica’s systematic harvesting of Facebook user preferences to create detailed models of voter emotions appears to have played a significant role in the election of Donald Trump and the victory of the “Brexiters” on the referendum on whether the United Kingdom should leave the European Union or not. There is shock and anxiety <a href="https://www.theguardian.com/news/series/cambridge-analytica-files?utm_source=esp&amp;utm_medium=Email&amp;utm_campaign=GU+Today+USA+-+Collections+2017&amp;utm_term=268538&amp;subid=18244427&amp;CMP=GT_US_collection">at the revelations</a> about how a few right-wing ideologues were able to exploit Facebook’s database and then use it to justify populist campaigns fronted by publicity hounds of dubious moral and financial principles (Donald Trump, Steve Bannon and Nigel Farage immediately spring to mind).</p><p>Whether the Facebook fiasco conclusively proves either Russian involvement in the 2016 election (or the UK’s Brexit referendum), or simply highlights the violation of campaign finance laws, is yet to be determined. But what is certainly beyond dispute from the apparently unauthorized use of Facebook’s database <a href="https://www.theguardian.com/news/2018/mar/17/cambridge-analytica-facebook-influence-us-election">of some 50 million users</a> is that longstanding Madison Avenue advertising techniques worked equally well when applied to majority voting instead of employee practices or consumer spending. One possible outcome is that centralized repositories like Facebook—or Google, or Amazon—could become a ripe target for regulation and/or anti-trust action. Another possibility is that the voluntary participation on which Facebook is built will collapse spontaneously via consumer rejection.</p><p>That course of action is <a href="https://www.bloomberg.com/view/articles/2018-03-21/facebook-s-mark-zuckerberg-has-no-way-out-of-this-quagmire">currently being advocated by WhatsApp co-founder Brian Acton, who is spearheading a #DeleteFacebook campaign</a>.</p><p dir="ltr">In one sense, there is nothing new in what Facebook and Cambridge Analytica have done. Way back in 1957, author Vance Packard’s <em><a href="https://smile.amazon.com/Hidden-Persuaders-Vance-Packard/dp/097884310X/?tag=alternorg08-20">The Hidden Persuaders</a></em> described <a href="http://thepriceofeverything.typepad.com/the_price_of_everything/2018/02/a-complete-and-utter-disgrace.html">how</a>:</p><blockquote><p dir="ltr">“Large-scale efforts are being made, often with impressive success, to channel our unthinking habits, our purchasing decisions, and our thought processes by the use of insights gleaned from psychiatry and the social sciences. Typically these efforts take place beneath our level of awareness, so that the appeals which move us are often, in a sense, ‘hidden.’”</p></blockquote><p dir="ltr">But in a world in which we have all become reliant on the internet for our information, our searches and declared preferences are constantly recorded. Therefore an uncanny amount about us can be learned in a manner that is far more centralized and prone to manipulation than traditional forms of advertising. A wave of shrinkage in traditional advertising firms has correspondingly occurred as the robotic, targeted advertising has become the new norm, largely because it is both cheaper and more effective.</p><p dir="ltr">Facebook in particular is a social media way of harnessing interpersonal linkages through the net. Its model must be using those links and the information they generate to create value for advertisers. Any user of Facebook (or Amazon) can easily see how fast browsers insert ads related to one’s most recent searches. So it becomes manifestly clear that these companies are tracking us for common advertising purposes.</p><p dir="ltr">Politics has always looked into the underlying motivations of voters to manage them. But using the data as documented <a href="https://www.theguardian.com/news/2018/mar/17/data-war-whistleblower-christopher-wylie-faceook-nix-bannon-trump">by the Guardian</a>, this went to a new level of political detail in 2016 that fueled the faster cycle of hard-hitting Trump campaigning. Facebook, Google, Amazon, Twitter, etc., have all become huge aggregators of this information. Facebook CEO Mark Zuckerberg’s <a href="http://money.cnn.com/2018/03/21/technology/mark-zuckerberg-apology/index.html">recent apologies notwithstanding</a>, the companies are either being naïve in proclaiming shock that their data can be misused or, more likely, have been so obsessed with building market share and watching their company market caps explode into the hundreds of billions of dollars that they willfully ignored the scope for abuse. Either way, the information seems to have reached a threshold of importance where governments will step in and disrupt the existing mode, especially now that the full power of this database has been recognized and exploited by a successful political candidate, whether via regulation or antitrust measures. Otherwise, the demands will rise for Facebook to give the data to all, because it cannot guarantee that it has been erased everywhere, which has disturbing implications for our privacy (as well as threatening to destroy Facebook’s business model, the success of which is predicated on the exclusive use of the data aggregated from the user base).</p><p dir="ltr">However much someone like Brian Acton, who was made a billionaire courtesy of Facebook’s purchase of his company, might like others to embrace his #DeleteFacebook campaign, that appears problematic, given how successfully the use of Facebook’s model operated in the political context. But there is growing international political momentum to strip the "<a href="http://www.imdb.com/title/tt1285016/">social network</a>" and its targeted advertising model of much of its abilities to record and use customer data. Former President Barack Obama <a href="https://www.cnet.com/news/barack-obama-warns-facebook-and-google-during-mit-speech/">hinted at this at a recent speech at MIT</a>:</p><blockquote><p dir="ltr">“I do think the large platforms—Google and Facebook being the most obvious, Twitter and others as well, are part of that ecosystem—have to have a conversation about their business model that recognizes they are a public good as well as a commercial enterprise. They’re not just an invisible platform, they’re shaping our culture in powerful ways.”</p></blockquote><p dir="ltr">Obama did not explicitly state what he had in mind for these companies, but he did <a href="https://www.cnet.com/news/barack-obama-warns-facebook-and-google-during-mit-speech/">suggest</a> that at a minimum, “the government should have ‘rules of the road’ to create a level playing field.” Even if users find they can’t do without their daily Facebook fix, Google search, or Amazon shopping spree, the former president is right. A price will be paid as these companies’ activities are increasingly scrutinized.</p><p dir="ltr">There are defenses that have been mounted in favor of an unregulated market for Big Data, notably by People Analytics, an organization run by Alex Pentland and his colleagues at MIT’s Media Lab. <a href="https://www2.deloitte.com/content/dam/insights/us/articles/sandy-pentland-mit-interview/DR15_Sandy_Pentland.pdf" target="_blank">Pentland feels</a> the very centralized nature of the aggregated data is what makes these companies such excellent research targets:</p><blockquote><p dir="ltr">“With the advent of big data and machine learning, researchers actually have enough data and sufficient mathematical tools to build predictive mathematical models. ... If you talk to other people and see what they are doing, you can improve your own performance, and as you talk to more and more people, you continue to do better and better.”</p></blockquote><p dir="ltr">What is not to like? Better decision-making, higher productivity, more efficient communication networks: It looks like a win-win all around. Of course, it was under the guise of research that Cambridge Analytica allegedly got the Facebook data in the first place. It can be used as cover for less benign purposes.</p><p dir="ltr">Going further, Pentland cleverly <a href="https://hbr.org/2014/11/with-big-data-comes-big-responsibility">invokes</a> a “New Deal on Data” that allows for the “rebalancing of the ownership of data in favor of the individual whose data is collected. People would have the same rights they now have over their physical bodies and their money.”</p><p dir="ltr">In theory, this allows the individual discretion as to how much he/she will share with corporations and government regulators. Pentland goes on to suggest that, “the economy will be healthier if the relationship between companies and consumers is more respectful, more balanced. I think that’s much more sustainable and will prevent disasters.”</p><p>Pentland’s optimism sounds somewhat naïve in the wake of Edward Snowden’s revelations, as well as the current Facebook controversy. Of course, anything that further legitimizes this intrusion on our privacy will be welcomed by these entities. How much do we, the owners of our own personal data, actually control it? As far as the government goes, not much, <a href="http://www.bbc.com/news/world-us-canada-23123964">Snowden’s revelations</a> (or those of WikiLeaks) illustrated. And surely the current Facebook and Cambridge Analytica imbroglio undercuts this benign picture that Pentland describes of a happy, informed consumer who autonomously shares his data with various companies, with a view toward building a more "balanced" relationship.</p><p>On the contrary, the Facebook fiasco highlights that there exists a thoroughly unequal partnership between the aggregators of information and the information owners, making abuse almost inevitable. Indeed, it is highly doubtful that most consumers and users are even aware of the extent to which their habits, thoughts, and overall private space are monitored by these companies (to say nothing of the more obvious government and law enforcement agencies, even if we’re not terrorists).</p><p dir="ltr">In general, the notion of a level playing field of information or data that the market can freely and efficiently price has been debunked successfully by Nobel Laureates George Akerlof and Joseph Stiglitz. Both have challenged the "<a href="https://en.wikipedia.org/wiki/Efficient-market_hypothesis">efficient market hypothesis</a>," which holds that market prices or odds reflect all known information, mitigating the need for intrusive government intervention/regulation. If information asymmetry exists, the obvious implication is that there is a need for some form of overriding regulation to rectify this imbalance. This would also seem to apply to Pentland’s New Deal on Data.</p><p dir="ltr">Edward Snowden has made us question whether the data and corresponding privacy can be adequately safeguarded from more scrutiny by governments. The more relevant question from the point of view of, say, Silicon Valley and its high tech moguls is whether governments will move more aggressively to control the aggregators themselves, and whether the revelations of their abuses will provoke a backlash, which will impact their companies’ growth and profitability.</p><p dir="ltr">Already, as Reuters reported, “<a href="https://www.reuters.com/article/us-nordea-sustainability-facebook/nordea-says-its-sustainable-funds-wont-buy-more-facebook-stock-idUSKBN1GX140">Nordea, the Nordic region’s biggest bank, will not let its sustainable funds buy more Facebook shares</a> for the time being.” The European Union <a href="https://pro.creditwritedowns.com/2018/03/facebook-cross-platform-privacy-leakage.html?utm_medium=ppc&amp;utm_source=adwords&amp;utm_campaign=snow%20boots&amp;utm_content=durable%20%25snow%25boots">has fined Facebook €110m</a> “for ‘incorrect or misleading’ information regarding data sharing between Facebook and WhatsApp” (even though Facebook acquired the latter). And the EU <a href="https://www.reuters.com/article/us-eu-tax-digital/eu-proposes-online-turnover-tax-for-big-tech-firms-idUSKBN1GX00J">has also proposed</a> that “companies with significant digital revenues in Europe will pay a 3 percent tax on their turnover on various online services in the European Union,” legislation that will cover Facebook (as well as Amazon and Google). Although the tax doesn’t actually address the issue of the database abuse itself, the Cambridge Analytica scandal has dissipated valuable political capital for these companies, which will make it harder for them to stop these attacks on their business model and underlying profitability.</p><p dir="ltr">Indeed, the focus on taxing turnover, as opposed to profits, is telling, because sales records are far more difficult to doctor and conceal via accounting subterfuge than profits. In effect, this is tantamount to the EU stating to these tech giants, “Don’t even think about making a transfer payment to Ireland and leaving yourself with an operating loss in our jurisdiction so you can pay no tax.”</p><p dir="ltr">As the Brexit referendum illustrates, the Facebook and Cambridge Analytica scandal itself goes well beyond the U.S. Consequently, we can expect an attack on all fronts—the U.S., the EU, and likely Asia as well. At this point it is too early to judge if this will have any impact on the ongoing Mueller investigation, but the economic implications already seem evident. The U.S. equity boom has been partly in reaction to deregulation in banking and elsewhere. The tech industry has largely escaped any kind of regulatory or antitrust scrutiny and has benefited accordingly. As Edward Harrison of the site Credit Writedowns <a href="https://pro.creditwritedowns.com/2018/03/facebook-cross-platform-privacy-leakage.html?utm_medium=ppc&amp;utm_source=adwords&amp;utm_campaign=snow%20boots&amp;utm_content=durable%20%25snow%25boots">has observed</a>:</p><blockquote><p dir="ltr">“Some of the best performing stocks in the US are the large Internet-centric technology stocks like Facebook. There is even an acronym, FANG, to describe Facebook, Amazon, Netflix and Google. Add Apple and, together, these five stocks account for one quarter of the Nasdaq’s total market capitalization. They are huge. And Facebook’s data breach represents a threat to them.”</p></blockquote><p dir="ltr">Could it be that public indignation at the Facebook profile harvesting scandal will lead to new regulation that could impede the value of some tech-based advertising models? Will it lead to a consumer backlash that slows the growth of the companies themselves? Certainly, it is easier to attack a wealthy and powerful company, if and when it becomes Public Enemy #1, even though many of these politicos will find themselves attacking the instruments of their own political success (or fundraising sources). Facebook or Google would no doubt argue that their platforms are just a facilitation of the communities inherent in the internet and that they have benefited by exploiting <a href="https://en.wikipedia.org/wiki/First-mover_advantage">first mover advantage</a>. But a centralized, monopolistic exploitation of these interpersonal links is inviting public intervention, especially as the technology can also survive on a distributed, competitive basis. In the eyes of many, these companies are unlikely to escape the opprobrium of helping to allow the Trump disaster to descend upon us. Overseas, they could well be scapegoated if the British economy falters as a result of leaving the European Union. On a broader scale, this scandal may well destroy any last vestiges of “techno-optimism,” seeing how it has highlighted the misuses of technology and the human damage it can continue to inflict on us far more profoundly than ever before.</p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1090353'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1090353" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Fri, 30 Mar 2018 11:58:00 -0700 Marshall Auerback, AlterNet 1090353 at https://www.alternet.org Economy Economy Election 2016 News & Politics hidden persuaders marketing facebook Cambridge Analytica WhatsApp #deletefacebook social media big data donald trump brexit The Fed Is on the Verge of Making a Major Policy Error https://www.alternet.org/news-amp-politics/fed-verge-making-major-policy-error <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1090038'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1090038" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">Policymakers have helped to perpetuate an economic model that is ultimately unsustainable.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_240665893.jpg?itok=tJthmvML" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--><p dir="ltr">We recently learned that “Total nonfarm payroll employment increased by 313,000 in February” in the U.S., <a href="https://www.bls.gov/news.release/empsit.nr0.htm">according to the Bureau of Labor Statistics</a>—which, when combined with the ostensibly big fiscal policy stimulus introduced in February, would seem to justify the <a href="https://pro.creditwritedowns.com/2018/03/fed-brainard-faster-tightening.html">Federal Reserve’s increasingly hawkish outlook on interest rate rises</a>.</p><p dir="ltr">The Fed, newly led by Jerome Powell, looks set to hike rates as early as this Wednesday. Yet there is a lingering sense that the current strength in the U.S. economy is more apparent than real. The employment data is not as strong as it looks on the surface, nor is fiscal policy as stimulatory as has been commonly assumed. Hence, the country’s monetary authorities might well be on the way to making a serious policy error that could abort the economy’s momentum, just as some of the non-1% are finally beginning to experience tangible gains from the recovery.</p><p dir="ltr">Let’s break these points down in a bit more detail. First, last month’s “blow-out” employment number: On the face of it, the employment situation report is anomalous. We saw a huge jump in goods producing (100K), mostly construction (+61K). But in the service jobs sector, 124K of the 187K of jobs created were in low-wage/low-hours sectors (retail, admin/waste, leisure, and health care). That would largely help to explain why, in spite of such an ostensibly large gain in the nonfarm payrolls, wage gains remained virtually unchanged, with hourly earnings actually coming in below expectations (in other words, a surprisingly tepid number relative to the overall growth in jobs in February). And even as we are adding higher-wage construction and manufacturing jobs, the overall constellation of the data implies a continuation of change in the mix of American jobs toward low-wage/low-hours employment, which helps to explain the tepid wage increases.</p><p>In fact, a closer look at the data gives us a picture of an economy where discouraged workers are finally returning to the workforce. This is one of the takeaways one can draw from the three-tenths jump in both the labor force participation rate and the employment population ratio; it shows that a lot of people are being drawn into a more active, and therefore more hopeful, employment situation.</p><p>This also marks the first rise in the participation ratio since September 2017 in the wake of two strong months of employment growth. But as labor economist Bill Mitchell points out, “in assessing the overall state of the labour market, we have to bear in mind that the... [current] participation rate... [of about 63 percent] is <a href="http://bilbo.economicoutlook.net/blog/?p=38000">still far below the peak in December 2006 (66.4 percent</a>),” which implies that there is still a large portion of underemployed workers, whose re-entry into the workforce could easily act as a break on wage gains.</p><p>Mitchell continues:</p><blockquote><p dir="ltr">“Adjusting for the aging effect… the rise in those who have given up looking for work for one reason or another since December 2006 is around 3.7 million workers.</p><p dir="ltr">“If we added them back into the labour force and considered them to be unemployed (which is not an unreasonable assumption given that the difference between being classified as officially unemployed against not in the labour force is solely due to whether the person had actively searched for work in the previous month)—we would find that the current US unemployment rate would be around 6.23 percent rather than the official estimate of 4.15 percent.”</p></blockquote><p dir="ltr">Now, 6.23 percent is certainly not a disaster by any stretch (especially compared to where we were in 2009, at the height of the Great Recession), but it hardly constitutes “full employment.” Nor is it indicative of a “red-hot economy” that is about to burst into inflationary flames unless the Fed douses it with further monetary tightening. Furthermore, if one examines <a href="https://data.bls.gov/timeseries/LNS13327709">even broader classifications of labor underutilization</a>, <a href="https://data.bls.gov/timeseries/LNS13327709">the so-called U-6 measure</a> (“Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers”), that stands today at 8.2 percent, marginally above the 8 percent rate reached prior to the onset of the 2008 crisis. Again, this illustrates the real costs associated with the Great Recession.</p><p dir="ltr">We should also highlight that the job gains remain concentrated in the bottom segment of the workforce, which places minimal pressure on overall wage gains, meaning that the Fed’s hawkishness could abort any real wage gains. To go further into Mitchell’s <a href="http://bilbo.economicoutlook.net/blog/?p=38861#more-38861">analysis</a>, for the vast majority of the workforce, there have been virtually no wage gains to speak of:</p><blockquote><p dir="ltr">“Production and nonsupervisory workers have barely seen movement in their hourly wage outcomes over the last several years (note the BLS revised the January growth figure down in the latest release)…</p><p dir="ltr">“Total nominal average hourly earnings rose by 2.5 percent in the 12 months to November 2017, then 2.7 percent, then 2.4 percent, then 2.5 percent in the 12 months to February 2018.</p><p dir="ltr">“The unrevised January figure was 2.9 percent and it was this acceleration that led commentators to introduce on the ‘wages breakout’ thesis. The problem is that they didn’t examine the data carefully enough even before the data revision.</p><p dir="ltr">“Production and nonsupervisory employees accounted for 103,681 workers in February 2018 in the non-farm sector. Total private non-farm employment in February 2018 was 125,819.</p><p dir="ltr">“In other words, 82.4 percent of private US non-farm employment are accounted for by production and nonsupervisory employees… for these workers—the predominant majority in the US labour market—wages growth has been largely flat since 2013 with a dip in 2015.”</p></blockquote><p dir="ltr">The other story, of course, has been the fiscal stimulus. The Republican tax giveaway is now swinging into effect, with a drop in income and corporate taxes by $21 billion from the year before, along with tax cuts largely tilted toward the wealthiest. This additional stimulus is undoubtedly a factor behind the Federal Reserve’s predisposition to hike rates more aggressively, based on the premise that the tax cuts and additional funding measures introduced to prevent another government shutdown last month will in aggregate introduce huge new inflationary pressures at a time when today’s measured inflation is running at around 2.2 percent.</p><p dir="ltr">But as in the case of the latest employment data, the manner in which the government’s fiscal resources are being deployed must be assessed more closely before racing to such conclusions. As we have <a href="https://www.alternet.org/news-amp-politics/lies-behind-deficit-hysteria">noted before</a>, “a large chunk of the latest tax cuts still goes to groups with the largest propensity to save, rather than spend.” Speaker of the House Paul Ryan inadvertently gave the game away on the Trump tax bill when he celebrated the example of a worker who would gain an additional $1.50 per week, which as Paul Krugman <a href="https://www.nytimes.com/2018/02/04/opinion/let-them-eat-french-fries.html">wryly observed</a>, is “roughly the price of a <a href="https://www.fastfoodmenuprices.com/mcdonalds-prices/?redir">small French fries</a> at McDonald’s.” Maybe great for McDonald’s, but hardly likely to set the U.S. economy alight with huge inflationary pressures.</p><p dir="ltr">So after a decade of financial contagion, trillions of dollars of lost economic output, stagnating wages, and growing inequality, we’re still nowhere close to full employment, and we have a tax reform that largely confers benefits on those with the highest savings propensities. Given the extent to which income has stagnated over decades, a huge number of households have had to rely on debt and draw down their savings in order to be able to afford expenses such as housing, health care and education. The shared prosperity of the post-World War II era is but a distant memory. For the present, most of the private debt that we had in 2007 still exists. Some of it has been repaid, and there have been some defaults, but the bulk of it is still around.</p><p dir="ltr">Higher interest rates may be the trigger that halts the economy’s momentum, but it is important to note that the rentier style of capitalism that aided and abetted financial instability, wage stagnation and inequality has not been significantly transformed post-Great Recession. If anything, big banks have become bigger and their trading activity in exotic derivatives is as strong as ever, and there is a lot of masked leverage in the system. Yet policymakers quiver because of a marginal uptick in wages for the bottom rungs of our society, demonstrating little concern for how badly skewed the fruits of this “recovery” have been. And maybe that’s not by miscalculation. The dirty little secret of our economy is that policymakers have used “an army of unemployed” as a means of moderating wage pressures, thereby helping to perpetuate an economic model that is ultimately unsustainable. Perhaps we have to wait for an actual new Great Depression for this particular dynamic to change in a meaningful way.</p><script src="https://actionsprout.io/embed.js"></script><script> <!--//--><![CDATA[// ><!-- window.ActionSproutEmbed('5D089B'); //--><!]]> </script><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1090038'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1090038" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Tue, 20 Mar 2018 15:21:00 -0700 Marshall Auerback, AlterNet 1090038 at https://www.alternet.org News & Politics Economy Labor News & Politics Rentiers economy the fed unemployment donald trump jerome powell Meet the Democratic 'Dirty Dozen' Working to Gut Financial Reforms https://www.alternet.org/economy/democrat-dozen-senators-help-trump-gop-gut-dodd-frank <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1089705'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1089705" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">This act of regulatory vandalism highlights everything that is corrupt about our political system.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_394431961.jpg?itok=5lHO2xhJ" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">As if to maximize the possibility of another major financial crisis, the Trump administration and the GOP have recently been busy undercutting the limited safeguards established a decade ago via Dodd-Frank. The latest example of this stealth attack on Wall Street reform is the Economic Growth, Regulatory Relief, and Consumer Protection Act, appropriately sponsored by Republican Senator Mike Crapo of Idaho, chairman of the Senate Banking Committee. Appropriate, because this is literally a “crapo” bill. It provides a few “technical tweaks” to Dodd-Frank in the same way in which protection payouts to organized crime provide businesses with “insurance” against property damage. In reality, it is an act of regulatory vandalism, which highlights everything that is corrupt about our political system.</p><p dir="ltr">We have grown to expect no less from the GOP, whose sole r<em>aison d’etre</em> these days seems to be filling the trough from which America’s fat cats can perpetually gorge themselves. What is truly disturbing, however, is that the Republican effort is being given bipartisan cover by more than a dozen Democratic senators: Doug Jones (Ala.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Jon Tester (Mont.), Mark Warner and Tim Kaine (both from Va.), Claire McCaskill (Mo.), Joe Manchin (W.Va.), Gary Peters (Mich.), Michael Bennet (Colo.), Chris Coons (Del.), and Tom Carper of Delaware. To this esteemed group, we should also add Senator Angus King (ME), an Independent who regularly caucuses with the Democrats. So, in reality, it’s a filibuster-proof “Baker’s Dirty Dozen.” Digging into the details, perhaps this is what Senator Mitch McConnell had in mind when he <a href="https://www.politico.com/story/2017/12/22/mitch-mcconnell-bipartisanship-2018-315825">predicted more bipartisanship in Congress this year</a>. In co-sponsoring this bill, the 13 senators are providing cover for the GOP when the inevitable fallout comes, dissipating the Democrats’ political capital with the electorate in the process.</p><p dir="ltr">Yes, we get it: some of these senator incumbents are in red states that voted heavily for Donald Trump in the last election. And <a href="https://www.axios.com/axios-surveymonkey-big-warning-signs-senate-democrats-09986026-50aa-46df-8094-574cfe5065a3.html?utm_source=newsletter&amp;utm_medium=email&amp;utm_campaign=newsletter_axiosam&amp;stream=top-stories">the latest polls</a> suggest many are vulnerable in this year’s elections. But the last time we checked, there didn’t seem to be an overwhelming wave of populist protest demanding regulatory relief for banks. All 50 states—red and blue—suffered from the last financial crisis, and it’s hard to believe voters in Montana, West Virginia, North Dakota, Indiana or Missouri would be more likely to support Senators Tester, Manchin, Heitkamp, Donnelly or McCaskill because they backed a bank deregulation bill (which in reality goes well beyond helping small community banks). Nor do the 2018 races factor as far as Senators Warner, Coons, or Bennet are concerned, given that none are up for re-election this year.</p><p dir="ltr">No, the more likely answer is money, plain and simple. The numbers aren’t in for 2017, but an analysis of the Federal Election Commission data from the 2016 election appears to explain what is driving this newfound solicitousness toward the banks. <a href="https://newrepublic.com/article/147247/democrats-helping-trump-dismantle-dodd-frank">The Center for Responsive Politics (CRP) points out that</a> “nine of the twelve Democrats supporting the deregulatory measure count the financial industry as either their biggest or second-biggest donor.” (At least now we have a better understanding as to why Hillary Clinton’s "<a href="https://www.theatlantic.com/politics/archive/2016/07/clinton-kaine/492824/">responsibility gene</a>" induced her to select running mate Tim Kaine, who <a href="http://wallstreetonparade.com/2018/03/democrats-gutting-wall-street-reform-follow-the-money/">received</a> “large contributions from Big Law partners that represent Wall Street,” as opposed to a genuine finance reformer, such as Senator Elizabeth Warren. Senator Warren is vigorously opposing the new bill.)</p><p dir="ltr">We also know (<a href="http://wallstreetonparade.com/2018/03/democrats-gutting-wall-street-reform-follow-the-money/">courtesy of the CRP</a>) that Mark Warner’s last campaign in 2014:</p><blockquote><p dir="ltr">“included among his 20 largest donors the mega Wall Street banks Goldman Sachs and JPMorgan Chase. Goldman’s employees and PACs gave Warner’s campaign $71,600 while JPMorgan Chase gave the Warner campaign committees $50,566… Senator Heidi Heitkamp is also up for reelection this year and her number one contributor at present is employees and/or PACs of Goldman Sachs which have contributed $79,500 thus far.”</p></blockquote><p dir="ltr">Naturally, all of the senators claim their motives are pure. With no hint of irony, a <a href="https://newrepublic.com/article/147247/democrats-helping-trump-dismantle-dodd-frank">spokesman for Tim Kaine suggested that</a>, “Campaign contributions do not influence Senator Kaine’s policy positions.” Likewise, an aide for Mark Warner <a href="https://newrepublic.com/article/147247/democrats-helping-trump-dismantle-dodd-frank">vigorously contested</a> the idea that campaign donations from Wall Street ever influenced the Virginia senator’s decision-making on policy matters. Sure, and it was shocking to find out that gambling took place in Rick’s Café.</p><p dir="ltr">It is true, as Senator Jon Tester (another co-sponsor) <a href="http://www.chicagotribune.com/news/nationworld/politics/ct-senate-banking-rules-20180304-story.html">notes</a>, that the proposed changes introduced in the Crapo bill (notably the increase in the asset size from $50 billion to $250 billion of those banks that are considered “systemically important” and therefore subject to greater oversight and tighter rules) do not affect the likes of Wall Street banks such as Citigroup, JP MorganChase, Bank of America, Goldman Sachs and Morgan Stanley, all of which are still covered by the most stringent oversight provisions of Dodd-Frank. But the increased asset threshold does exempt the U.S. bank holding companies of systemically significant foreign banks: Deutsche Bank, UBS and Credit Suisse, all of whom were implicated in multiple violations of both American and international banking laws in the aftermath of the 2008 crisis.</p><p dir="ltr">Deutsche Bank alone has paid billions of dollars for its role in perpetuating mortgage fraud, <a href="https://www.nakedcapitalism.com/2016/09/deutsche-bank-and-a-10bn-money-laundering-nightmare-more-context-than-you-can-shake-a-stick-at.html">money-laundering</a> and interest rate manipulation (the LIBOR scandal), which ideally should invite more regulatory scrutiny, not less. Instead, a new law ostensibly crafted to provide a few “technical fixes” for Dodd-Frank is now reducing the regulatory oversight of a bank that <a href="https://www.imf.org/external/pubs/ft/scr/2016/cr16189.pdf">has been cited</a> in an IMF report as one of Germany’s “global systemically important financial institutions.” Translating the couched-IMF-speak, the report suggests that Deutsche Bank on its own has the potential to set off a new global contagion, given the scale of its derivatives exposure. Not only too big to fail, but evidently too big to regulate properly either, aided and abetted by members of a party who claim to be appalled at the level of corruption in the Trump administration.</p><p dir="ltr">Another side-effect of raising the regulatory threshold to $250 billion in assets is that it diminishes the chance of obtaining an early warning detection signal from somewhat smaller financial institutions. As the experience of Lehman Brothers or Bear Stearns illustrated, smaller problems that remain hidden in the shadows can ultimately metastasize if left alone, and become much bigger—and more systemically dangerous—later.</p><p dir="ltr">So when Senator Kaine nobly <a href="https://newrepublic.com/article/147247/democrats-helping-trump-dismantle-dodd-frank">suggests</a> that he is merely providing relief for “small community banks and credit unions” in his home state, or Jon Tester argues that he is only helping local banks suffering from Dodd-Frank’s regulatory overkill, both are being extraordinarily disingenuous. The reality is that increasing the oversight threshold by 500 percent does not just help a few “small community banks and credit unions” crawl out from a thicket of onerous and costly regulation. Even former Fed Chairman Paul Volcker, who favored some regulatory relief for community banks, felt that $250 billion threshold <a href="https://www.morningstar.com/news/market-watch/TDJNMW_20180306225/update-volcker-angelides-in-opposition-on-regulatory-rollback.html">was excessive</a>ly lax.</p><p dir="ltr">In fact, (<a href="http://blog.ourfinancialsecurity.org/2017/12/banks-are-not-charity-cases-stop-acting-like-they-are-senators/">per the Americans for Financial Reform</a>), the increase “removes the most severe mandate for 25 of the 38 largest banks,” which <a href="http://blog.ourfinancialsecurity.org/2017/12/banks-are-not-charity-cases-stop-acting-like-they-are-senators/">together</a> “account for over $3.5 trillion in banking assets, more than one-sixth of the U.S. total.” Additionally, as Pat Garofalo <a href="https://www.usnews.com/opinion/thomas-jefferson-street/articles/2018-03-05/why-are-senate-democrats-backing-the-gops-bank-deregulation-bill">writes</a>: “The bill also includes an exemption from capital standards—essentially the amount of money that banks need to have on hand in case things go south—that benefits some big financial firms, and even more are lobbying to be included.” In other words, this isn’t just George Bailey’s friendly neighborhood bank that is getting some regulatory relief here.</p><p dir="ltr">All of this newfound regulatory laxity comes at a time when many of the largest Wall Street banks have again resurrected the same practices that almost destroyed them a decade ago. Bank credit analyst Chris Whalen <a href="https://www.theinstitutionalriskanalyst.com/single-post/2017/10/01/CDO-Redux-Credit-Spreads-Financial-Fraud">observes</a>: “The leader of this effort is none other than Citigroup (NYSE:C), which has surpassed JP MorganChase (NYSE:JPM) to become the largest derivatives shop in the world. Citi has embraced the most notorious product of the roaring 2000s, the synthetic collateralized debt obligation or ‘CDO’ security, a product that fraudulently leverages the real world and literally caused the bank to fail a decade ago.”</p><p dir="ltr">Another example: Trump and his henchman, Mick Mulvaney, have also joined the big banks in attacking the Consumer Financial Protection Bureau, which by virtue of the Crapo act, will be <a href="https://www.huffingtonpost.com/entry/democrats-banks-racial-discrimination_us_5a96e489e4b0e6a523042fc8">blocked</a> “from collecting key data showing when and where families of color are being overcharged for home loans or steered into predatory products.”</p><p>Let’s be honest here: even in its original form, Dodd-Frank was the bare minimum the government could have done in the wake of the 2008 disaster. But lobbyists, paid-for politicians and co-opted bank-friendly regulators have been busy “applying technical fixes” to the bill virtually from the moment it was passed a decade ago. The upshot is that the much-trumpeted Wall Street reform is a joke when compared to the comprehensive legislation passed in the aftermath of the Great Depression (which set the stage for decades of relative financial stability). Under Dodd, the banks are purportedly subject to “meaningful stress tests” (<a href="https://www.vox.com/policy-and-politics/2018/3/6/17081508/senate-banking-bill-crapo-regulation">in the words of Federal Reserve Chair Jerome Powell</a>), but the tests are neither particularly stressful, nor do they adequately reflect today’s twin dangers of off-balance sheet leverage and the concentration of big banks’ on-balance sheet assets in relatively low-return loans.</p><p dir="ltr">What should have been done after the global financial crisis? Professors Eric Tymoigne and Randall Wray <a href="https://books.google.com/books?id=cWAqAAAAQBAJ&amp;pg=PT246&amp;lpg=PT246&amp;dq=%22Any+of+the+%E2%80%9Ctoo+big+to+fail%E2%80%9D+financial+institutions+that+needed+funding+should+have+been+required+to+submit+to+Fed+oversight.%22&amp;source=bl&amp;ots=zjGv0k0CMN&amp;sig=vSKtLRVf3PlzukgZ8TUUxCrmivk&amp;hl=en&amp;sa=X&amp;ved=0ahUKEwinmc3R5NjZAhVkT98KHTrsCsEQ6AEIKDAA#v=onepage&amp;q=%22Any%20of%20the%20%E2%80%9Ctoo%20big%20to%20fail%E2%80%9D%20financial%20institutions%20that%20needed%20funding%20should%20have%20been%20required%20to%20submit%20to%20Fed%20oversight.%22&amp;f=false">proposed the following</a>:</p><blockquote><p dir="ltr">“Any of the ‘too big to fail’ financial institutions that needed funding should have been required to submit to Fed oversight. Top management should have been required to proffer resignations as a condition of lending (with the Fed or Treasury holding the letters until they could decide which should be accepted—this is how Jessie Jones resolved the bank crisis in the 1930s). Short-term lending against the best collateral should have been provided, at penalty rates. A comprehensive ‘cease and desist’ order should have been enforced to stop all trading, all lending, all asset sales, and all bonus payments until an assessment of bank solvency could have been completed. The FDIC should have been called-in (in the case of institutions with insured deposits), but in any case, the critically undercapitalized institutions should have been dissolved according to existing law: at the least cost to the Treasury and to avoid increasing concentration in the financial sector.”</p></blockquote><p dir="ltr">A number of conclusions can be drawn from this whole sordid episode. An obvious one is that our model of campaign finance is completely broken. While it is encouraging to see some Democratic politicians increasingly adopting the Sanders model of fundraising, <a href="http://nymag.com/daily/intelligencer/2018/02/gillibrand-and-booker-swear-off-corporate-cash.html">swearing off large corporate donations</a>, not enough are doing so. Democrats are united in their concern pertaining to foreign threats that pose risks to the integrity of U.S. elections, but the vigorous opposition to Vladimir Putin and the Russians isn’t extended to the domestic oligarchs destroying American democracy (and the economy) from within.</p><p dir="ltr"><a href="https://theintercept.com/2018/03/02/crapo-instead-of-taking-on-gun-control-democrats-are-teaming-with-republicans-for-a-stealth-attack-on-wall-street-reform/">The whole history behind Senator Crapo’s bill</a> shows how quickly bank lobbyists can routinely exploit their financial muscle to turn a seemingly innocuous bill into something which pokes yet more holes into the Swiss Cheese-like rules already in place for Dodd. The Baker’s Dirty Dozen have accepted donations from Wall Street that not only constrain their ability to implement genuine reforms in finance (and other areas) but also discourage the mobilization of voters, who see this legislative horror show, and consequently opt out of showing up to vote at elections because they know that the system is rigged and dominated by corporate cash (making their votes irrelevant).</p><p>Ironically, no less a figure than Donald Trump exploited that voter cynicism in 2016. In striking contrast to every other Republican presidential nominee since 1936, he attacked globalization, free trade, international financiers, and Wall Street (and made effective mockery of Hillary Clinton’s ties to Goldman Sachs) and thereby mobilized blue-collar voters in marginal Rust Belt states, giving him his path to the presidency. Of course, we now know that this was all bait-and-switch politics, likely facilitated by forces outside the U.S., along with large corporation donations from domestic elites. We’ve probably reached the endgame as far as this "<a href="https://www.ineteconomics.org/uploads/papers/Ferg-Jorg-Chen-INET-Working-Paper-Industrial-Structure-and-Party-Competition-in-an-Age-of-Hunger-Games-8-Jan-2018.pdf">investment approach to politics</a>" as it disintegrates into a cesspool of corruption and further financial fragility. It may take another crash before this problem is truly fixed.</p><p>In the meantime, this bipartisan subversion of Wall Street reform not only risks making the next crisis at least as bad as 2008, but also reinforces the notion that both parties are equally corrupt, <a href="https://www.alternet.org/americans-are-sick-death-both-parties-why-our-politics-worse-shape-we-thought">catalyzing the collapse of the American political order</a>. In a further sick twist of fate, the twin corrosive forces of “golden rule politics” (i.e., he who has the gold rules) and a rapidly deflating “bubble-ized” economy could all come to a head under the watch of Donald the Unready. But he won’t own this disaster alone, thanks to the help of compromised Wall Street Democrats.</p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1089705'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1089705" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sat, 10 Mar 2018 11:35:00 -0800 Marshall Auerback, AlterNet 1089705 at https://www.alternet.org Economy Economy News & Politics dodd-frank banks donald trump campaign finances Why Trump Is So Clumsy About Fighting 'Free Trade' https://www.alternet.org/economy/free-trade-problem-or-it-something-else <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1089598'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1089598" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">There are better ways than simply slapping tariffs on imported goods.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_196597025_1.jpg?itok=BV0EVPeO" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--><p dir="ltr">President Trump announced last week that he plans to impose 25 percent tariffs on imported steel and 10 percent on imported aluminum. It’s important to note that any policy pronouncement from this president is done within the paradigm of a real estate wheeler-dealer who sees deals of any kind as a zero-sum game. I win, and you lose; there is no such thing as a good trade deal that works as a win-win for both sides.</p><p dir="ltr">Expressing the opposite view is Paul Krugman, <a href="https://www.nytimes.com/2018/03/03/opinion/trade-war-what-is-it-good-for-absolutely-nothing.html">who writes</a>, “Trade isn’t a zero-sum game: it raises the productivity and wealth of the world economy.” And the corollary also applies as well: any action taken to disrupt the free flow of goods between countries is likely to provoke a counter-reaction, the result being a trade war in which every country loses out (there are already early indications of the latter, as seen in a <a href="https://twitter.com/IvanTheK/status/971007022899646464?s=19">tweeted headline from a UK paper</a>, “Hit the Chevy with a Levy, Tax your Whiskey and Rye”).</p><p dir="ltr">Given that Krugman won a Nobel Prize for his work on international trade, it is unsurprising that he gives a <a href="http://faculty.som.yale.edu/peterschott/files/international_readings/620_krugman_jep_1987.pdf">full-throated endorsement of free trade</a>:</p><blockquote><p dir="ltr">“If there were an Economist’s Creed, it would surely contain the affirmations ‘I understand the principle of Comparative Advantage’ and ‘I advocate Free Trade.’ For one hundred seventy years, the appreciation that international trade benefits a country whether it is ‘fair’ or not has been one of the touchstones of professionalism in economics. Comparative advantage is not just an idea both simple and profound; it is an idea that conflicts directly with both stubborn popular prejudices and powerful interests. This combination makes the defense of free trade is close to a sacred tenet is any idea in economics.” (pg. 131)</p></blockquote><p dir="ltr">The two “sacred tenets,” free trade and comparative advantage, are inextricably linked. After all, a “comparative advantage” begets the question, compared to what? We export goods to other nations when we can do that <em>relatively</em> better than they can and likewise import goods or services that we have a comparative disadvantage in producing. So tropical fruit is exported from, say, Mexico or Chile, rather than from Canada. And Australia’s abundance of natural resources explains why it has become a mining superpower. Of course, this classical model of trade and comparative advantage breaks down somewhat in an ultra-globalized world in which capital accounts have been largely liberalized (thereby allowing businesses to “arbitrage” wage rates/regulation by migrating to offshore manufacturing facilities with lower regulatory thresholds and cheap labor), and where technology is highly mobile and can be used to diminish natural advantages such as climate or natural resources. Technology and labor skills can also be altered by national development strategies of the kind exemplified by the countries of Asia (South Korea being a prime example), as Robert Wade illustrated in his seminal work, "<a href="https://press.princeton.edu/titles/4724.html">Governing the Market</a>."</p><p dir="ltr">The bottom line is that it is a mistake for a country simply to follow an idealized playbook from an economics textbook on free trade/comparative advantage, and allow itself to be out-gamed via strategic trade policy/national development decisions taken elsewhere—particularly when the economy is not operating at full employment, which is key to optimizing the benefits of free trade. It’s all very well to argue that cheaper imported goods are benefits, but it is hard to consume those benefits when one is unemployed against a backdrop of rusting unused factories that have been shuttered, and where the jobs have been sent to Mexico. As misconceived as Trump’s actions might appear, then, one senses that the latter dynamic is the source of his angst when he talks about the U.S. getting “a bad deal” from countries like China (although frankly, this president seems to think that any country with whom the U.S. runs a trade deficit <a href="https://goodcountry.org/global-vote/elections/us-presidential-election/candidates/donald-trump">is ripping off America</a>).</p><p dir="ltr">Within the Trump administration, when the discussion turns to trade imbalances, it almost invariably turns to China. Whether it was economic nationalist <a href="http://www.scmp.com/news/china/policies-politics/article/2127088/starting-all-encompassing-war-china-topped-trump">Steve Bannon</a>, or the current director of trade and industrial policy, and the director of the White House National Trade Council, <a href="https://www.cnbc.com/2018/03/05/peter-navarro-may-have-won-battle-against-pro-trade-voices.html">Peter Navarro</a>, Beijing is generally seen by these two trade hardliners as the epicenter of America’s trade problems (even though Bannon has left the administration, his economic nationalism, along with that of Navarro, appears to be in the ascendant at this juncture).</p><p dir="ltr">Here is the economic nationalist case against Beijing: China manipulated its exchange rate via the purchase of U.S. bonds. The undervalued exchange rate resulted in a high savings rate in China, while the U.S. government used the proceeds of its bond sales to stimulate the domestic economy and support wars in Afghanistan and Iraq, which built up yet more debt. China produces goods at very low cost due to extremely low wages and sells them to U.S. citizens via its undervalued exchange rate. They obtain dollars that they recycle in similar fashion over and over again. The U.S. accumulates goods via this vendor financing, while the vendor accumulates dollars that are invested in bonds. Meanwhile China dumps goods into the U.S., destroying valuable jobs at home.</p><p dir="ltr">The process described above continued uninterrupted for years, increasing debt in the U.S. and building up large foreign exchange savings in China. All the while, Uncle Sam financed the housing market, resulting in an historic housing bubble. That housing bubble resulted in a false signal of a wealth gains that were then invested in the stock market leading to a stock market bubble, both of which financed over-consumption, and the buildup of yet more trade imbalances, until the entire system came crashing down in 2008, destroyed the savings of millions of Americans (including among others, <a href="http://www.businessinsider.com/steve-bannon-dad-stock-selling-jim-cramer-economic-nationalism-2017-3">Steve Bannon’s father</a>).</p><p dir="ltr">But was the resultant fiasco a product of “unfair” trade, or was it symptomatic of a broader problem of financialization? If the latter, then Beijing might be the wrong target, and protectionism the wrong policy response. This is a particularly germane question, given that the perpetuation of our current system of finance—along with the corresponding refusal/failure to fix this after 2008—has led to yet more private debt accumulation and the re-emergence of the trends that led to the 2008 crisis: a capitalism characterized by securitization, globalization, the proliferation of complex financial derivatives, deregulation and a corresponding reduction in supervision and legal oversight (even the modest regulations introduced via Dodd-Frank are <a href="https://www.mercurynews.com/2018/03/04/senate-prepares-to-roll-back-banking-rules/">steadily being gutted a mere 10 years later</a>).</p><p dir="ltr">In that context, here is why trade deficits can hurt: If households attempt to net save by spending less than they are earning, businesses attempt to net save (reinvesting less than their retained earnings), <em>and</em> a country runs a large trade deficit, then nominal incomes and real output will fall, <em>absent a robust fiscal policy response that focuses on employment</em> (as opposed to tax subsidies for already profitable businesses—see Amazon.com—or tax cuts for the rich). The government has already dropped the ball on fiscal policy (with a “tax reform” heavily tilted toward the 1 percent). As L. Randall Wray and Eric Tymoigne <a href="https://books.google.com/books?id=PVgqAAAAQBAJ&amp;pg=PA75&amp;lpg=PA75&amp;dq=%22The+government+has+also+dropped+the+ball+in+terms+of+tax+structure+(steep+decline+in+progressiveness),+education+(preference+for+loans+over+grants),+welfare+(preference+for+workfare)+and+many+other%22&amp;source=bl&amp;ots=T487CVs_Dr&amp;sig=JAE3-7stkRFJUmXJeTm7HqqBsF0&amp;hl=en&amp;sa=X&amp;ved=0ahUKEwjSyu_A-tXZAhVSGt8KHSAbBS0Q6AEIKDAA#v=onepage&amp;q=%22The%20government%20has%20also%20dropped%20the%20ball%20in%20terms%20of%20tax%20structure%20(steep%20decline%20in%20progressiveness)%2C%20education%20(preference%20for%20loans%20over%20grants)%2C%20welfare%20(preference%20for%20workfare)%20a">have highlighted</a>, “the essential point is that the United States government has been willing to become less involved in economic affairs and the improvement of the economic welfare of its population,” which has been exacerbated by trade deficits. Cheap imports are great if you’ve got a job and the spending power to buy the goods. But the de-emphasis of activist fiscal policy has meant that a larger share of the burden of improvement and maintenance of the standard of living has been put on the private sector, especially households, via debt accumulation (aided and abetted by the vendor style financing arrangements, which were exemplified in our trading relationship with Beijing).</p><p dir="ltr">Trade deficits, then, create demand leakages, which have to be offset from somewhere. You can do this via the government sector (fiscal policy), or dissipation of yet more private sector dis-saving (and debt accumulation). As far as the latter goes, market strategist Robert Parenteau <a href="http://neweconomicperspectives.org/2009/07/coherently-confronting-us-macro.html">has suggested</a>, “that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies—that is, unless creditors are generously willing to renegotiate existing debt contracts en masse” (the creditors clearly haven’t done that yet, and no reason to expect that to change imminently, given the current political configuration).</p><p dir="ltr">Turning trade deficits to surpluses is another way to mitigate the problem, but how to achieve this when the U.S. has not run sustained trade surpluses for decades? Additionally, as Krugman and other critics of Trump’s proposed policy response have pointed out, a blunt resort to protectionism is likely to prove self-defeating, given the probable retaliation from America’s trade partners, the concomitant disruption of global supply chains, and the corresponding rise in imported goods prices, which cuts into consumers’ buying power (by acting as a functional tax hike). In other words, it’s a “lose-lose” proposition.</p><p dir="ltr">The other problem in relying on trade to improve growth and employment is that, put simply, it takes two to tango. To reduce its trade deficit or, more unrealistically, to run a trade surplus, the U.S. would have to secure cooperation from its trading partners (the use of tariffs seldom achieves this and it is also hard to believe that countries like Germany or China would readily abandon their mercantilist model, simply to help the U.S.). Furthermore, a reliance on trade to promote fuller employment renders U.S. economic performance subject to the vagaries of other countries’ policies. Domestic fiscal policy, by contrast, does suffer from these twin deficiencies.</p><p dir="ltr">However, even those who understand that trade imbalances can create job shortages or demand shortages often argue for more stimulus spending (or tax cuts), with little concern for how the stimulus is distributed throughout the economy because of that canard that “national planning” will subvert the workings of the free market. There are, however, a number of problems with leaving everything in the hands of the amorphous market—for example, if the government stimulus merely ends up in the pockets of firms as profits and there is no guarantee that those profits spur hiring of more workers (which is why <a href="https://www.alternet.org/economy/replace-work-medicaid-guaranteed-jobs">we have proposed</a> a program that supports direct employment via a <a href="https://www.levyinstitute.org/topics/job-guarantee">Job Guarantee</a>). Yes, it is true that a fiscal program of this sort may not replace all of the manufacturing jobs lost due to persistent trade deficits. But (<a href="https://www.google.com/search?q=%22But%20there%20are%20at%20least%20as%20great%20in%20the%20area%20of%20public%20services,%20including%20aged%20care,%20preschools,%20playground%20supervision,%20clean-up%20of%20public%20lands,%20retrofitting%20public%20and%20private%20buildings%20for%22">per Tymoigne and Wray</a>), “there are [needs] at least as great in the area of public services, including aged care, preschools, playground supervision, clean-up of public lands, retrofitting public and private buildings for energy efficiency, and environmental restoration projections.”</p><p dir="ltr">As U.S. producers have increasingly struggled with a renewed flood of cheap Chinese imports, the result has often been the closure or offshoring of manufacturing plants and the consequent loss of employment of thousands of American workers. Trump has explicitly addressed his hawkish trade stance to these constituencies (even if his actions hitherto have done much to address their complaints). But there are better ways to address the problems than simply slapping tariffs on imported goods. If we refocus government fiscal policy to create full employment, then most trade issues would become a sideshow and the “flood of cheap imports” would be viewed less as a job threat, and more a means of enhancing the consumption preferences of a fully employed workforce. Surely, this is preferable to penalizing the population via trade wars, or of forcing the poor and unemployed to bear the entire burden of adjustment as and when trade liberalization takes place. A resort to protectionism is crude, but free trade’s champions cannot simply dismiss the realities of job displacement without a viable policy response beyond the assertion that free trade itself is a sacred tenet of economics.</p><script src="https://actionsprout.io/embed.js"></script><script> <!--//--><![CDATA[// ><!-- window.ActionSproutEmbed('3436EF'); //--><!]]> </script><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1089598'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1089598" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 08 Mar 2018 11:44:00 -0800 Marshall Auerback, AlterNet 1089598 at https://www.alternet.org Economy Economy News & Politics free trade President Trump trade war Even McKinsey Gets It: High Wages Improve Economic Performance https://www.alternet.org/economy/mckinsey-report-high-wages-improve-economic-performance <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1089314'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1089314" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">Economic stagnation is the outcome of conscious policy choices.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_270193067.jpg?itok=Pu82lyD9" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">“<a href="http://www.mckinsey.com/productivitypuzzle">After a year-long analysis of seven developed countries and six sectors</a>,” global management consultancy company McKinsey has “concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.” Which means—surprise, surprise—higher wages for the workforce. The report by James Manyika, Jaana Remes and Jan Mischke was published in the <a href="https://hbr.org/2018/02/the-u-s-economy-is-suffering-from-low-demand-higher-wages-would-help">Harvard Business Review</a>. Their analysis marks a shift from the prevailing paradigm of the past several years in which poor productivity growth was viewed as largely a function of supply-side factors such as excessively "rigid" labor markets (hence the call to make it easier to hire and fire workers, and reduce unionization), insufficiently low tax rates (hence the drive to reduce corporate tax rates), a largely unskilled labor force (hence the push for more H1-B visas for Silicon Valley jobs), and too little global competition (hence the need for more, not less free trade).</p><p dir="ltr">If deficient demand (and a concomitant commitment to full employment) is not considered relevant as far as productivity goes, the policy framework is very different. Fiscal policy is diminished because there is little point in "wasting" limited financial resources on fiscal stimulus, higher real wages, or a restructuring of the private debt overhang. And economic inequality doesn’t even factor into the equation at all. Rising inequality, growing polarization and the vanishing middle class have all been seen as unfortunate, but inevitable byproducts of globalization, rather than drivers of slow potential growth.</p><p>By contrast, the McKinsey analysis leads to a very different policy outcome—one that places demand management and full employment at the heart of macroeconomic policy-making. In fact, there is a historical basis to support the authors’ view that demand does matter when considering the issue of productivity. The post-WWII period until the OPEC induced recessions of the early-1970s was a time during which wage gains grew in line with productivity increases. The resultantly higher wages thus provided an incentive for firms to invest in labor-saving machinery, with the upshot that productivity growth surged further as a result. That all began to change some 40 years ago, as market fundamentalism and "supply-side" policies began to supersede traditional Keynesian demand management. The link between productivity and wage gains was severed (more national income went to corporate profits) and wage gains were suppressed (because labor was seen simply as a cost input, rather than a source of demand).</p><p>This redistribution of national income in favor of corporations away from the workforce removed the incentives businesses had to invest in the modernization of their capital stock (ultimately impacting productivity growth). Even as profits rose, incomes remained stagnant for a large proportion of the population. Globalization and offshoring entrenched this new low wage-growth orientation of businesses, in combination with domestic labor market deregulation and de-unionization. Fiscal policy was gradually de-emphasized in favor of 'independent' central bank-led monetary policy, but the problem of deficient demand and wage stagnation was masked for a time as the use of financial engineering pushed ever-increasing debt onto the household sector (as they used borrowing to compensate for stagnant growth in income). As <a href="http://bilbo.economicoutlook.net/blog/?p=18959">Bill Mitchell wrote in 2012,</a> “Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit.” Mitchell <a href="http://bilbo.economicoutlook.net/blog/?p=18959">also wrote</a>, “The household sector, already squeezed for liquidity” by virtue of non-existent wage growth, was “enticed by the lower interest rates and the vehement marketing strategies of the financial engineers” to take on more debt.</p><p dir="ltr">Meanwhile, the increasing financialization of the global economy enabled the rich to have their cake (profits) and eat it (by channeling them to offshore tax havens). Corporate CEOs, the so-called "risk-takers," increasingly negotiated to have their compensation packages tied to stock price appreciation, which incentivized companies to use cash flow for stock buybacks, rather than invest in plant and equipment. The scale of these buybacks was analyzed by economics professor William Lazonick, who <a href="https://www.forbes.com/sites/aalsin/2017/06/20/qa-economist-william-lazonick-on-stock-buyback-mania-thats-threatening-the-american-economy/#7912b34b5263">documented</a> that between 2003 and 2012, the 449 companies who comprised the S&amp;P index “used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market.” As stock prices rose, so too did the CEO/directors’ overall compensation packages until the whole system cracked in 2008.</p><p dir="ltr">The only real surprise is that it took so long for the likes of McKinsey to recognize what was blindingly obvious to most people for decades. Without a hint of irony, the authors of the report cite the famous example of Henry Ford in the early part of the 20th century. Ford had the rare insight among the entrepreneurs of his day that workers were not simply a cost input, but an important source of demand for the products they were producing: “When other employers followed suit, <a href="https://hbr.org/2018/02/the-u-s-economy-is-suffering-from-low-demand-higher-wages-would-help">it became clear that Ford had sparked a chain reaction</a>. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity.”</p><p dir="ltr">But Ford was not the originator of this insight. John Atkinson Hobson, a British economist in the latter part of the 19th century and first part of the 20th century, was one of the first to champion a high wage economy. Reflecting the insights of the McKinsey authors some 150 years earlier, Hobson <a href="https://archive.org/details/theevolutionofmo28284gut">argued</a> that wage suppression was unhealthy and immoral. He advocated redistributing income to low earners—that is, moving toward greater equality—which he argued would reduce the capacity of the wealthy to save and place more spending power into the hands of those with higher consuming propensities. He also supported greater labor unionization and was one of the early advocates of social welfare and public education (providing support, for example, to David Lloyd George’s "<a href="http://www.historytoday.com/richard-cavendish/house-lords-rejects-1909-people%E2%80%99s-budget">People’s Budget</a>" introduced by the future British prime minister when he was chancellor of the exchequer in 1909). Essentially, Hobson promoted the notion of a “high-wage economy” to mitigate the problem of “<a href="https://ia902701.us.archive.org/19/items/physiologyofindu00mummuoft/physiologyofindu00mummuoft.pdf">an accumulation of Capital in excess of that which is required for use, and this excess will exist in the form of general over-production</a>."</p><p>Hobson and his co-author, A.F. Mummery, made the case that if productivity growth outstripped real wages growth, you would have “under-consumption,” the upshot being that overproduction would ensue. (Of course, as Bill Mitchell <a href="http://bilbo.economicoutlook.net/blog/?p=34668">has trenchantly observed</a>, the authors were developing these insights a century before financial deregulation and the democratization of credit facilitated private debt binges, both of which masked and deferred the effects of under-consumption, while simultaneously increasing financial fragility, as the 2008 crisis illustrated.)</p><p dir="ltr">In any case, the insights of Hobson, Henry Ford and later Keynes are finding resonance today. We have an economy where workers, who have traditionally relied on real wages growth to fund consumption growth, have found themselves increasingly cut off from the fruits of national prosperity as their wage gains have been suppressed in the interests of securing higher profits. The usual justification for this shift in income away from workers to corporations is that the latter use the resultant profits to stimulate investment, which will ultimately benefit the company as a whole (including its workforce). But another byproduct of overly financialized economies is that corporate profits historically used for productive ventures <a href="https://smile.amazon.com/Profits-Without-Prosperity-Harvard-Business/dp/B00NGZS17A/?tag=alternorg08-20">have instead gone into stock buybacks</a>, fueling the speculative asset bubbles that have percolated across the global economy.</p><p>It is also clear that the thrust of policies antithetical to labor continues unabated under Trump and his oligarch supporters, the most recent manifestation being the <em><a href="http://www.scotusblog.com/case-files/cases/janus-v-american-federation-state-county-municipal-employees-council-31/">Janus v. AFSCME</a></em>, now being heard by the Supreme Court. This is a case that has the potential to strip unions of a major source of income, the latest blow to a movement where only 9 percent of the American workforce is currently unionized. These oligarchs (the Koch brothers, the Mercer family, the Bradley Foundation, etc.) have long buttressed successive federal governments (and a number of “right to work” states), which have supported their agendas via privatization, outsourcing, the removal of any campaign finance restrictions, and welfare-to-work requirements, to list a few of the most pernicious examples.</p><p>The substantial redistribution of national income toward capital over the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to debt, and increasingly hindered the economy’s growth capacity. But the "<a href="http://larrysummers.com/category/secular-stagnation/">secular stagnation</a>" described by economists such as Lawrence Summers is a phenomenon that is the product of conscious policy choices, not some kind of inevitable fate that afflicts helpless economic actors as in an ancient Greek tragedy. Rather, economic stagnation and sluggish productivity are the outcomes of conscious policy choices. They reflect a profound failure of sensible macroeconomic demand management. McKinsey is the latest to affirm this economic reality. But will policy-makers act on their insights, or do we have to wait for the onset of yet another global economic crisis before the problems they describe are truly addressed?</p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1089314'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1089314" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sat, 03 Mar 2018 10:43:00 -0800 Marshall Auerback, AlterNet 1089314 at https://www.alternet.org Economy Economy Labor News & Politics janus Janus v. AFSCME john atkinson hobson wages Harvard Business Review henry ford a.f. mumford Bill Mitchell economics donald trump macroeconomics mckinsey Trump’s Bogus Infrastructure Plan Takes the U.S. Further Down the Road of Rentier Capitalism https://www.alternet.org/economy/trumps-bogus-infrastructure-plan-takes-us-further-down-road-rentier-capitalism <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1089000'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1089000" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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 public-private partnerships Trump proposes are a sick neoliberal joke. </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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/screen_shot_2017-12-13_at_12.09.39_am.png?itok=Nv3wGnFa" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">President Trump presented his infrastructure plan last week. If you’re keen on the idea of out-of-control privatized utilities gouging customers and manipulating energy markets, or consortia building overpriced, expensive toll roads (until they go bust), then you’ll love the president’s proposals. His mooted public-private partnerships are another variant of socialism for the rich and free market discipline for the rest of us. PPPs are like a religion that offers its adherents the promise of capitalist heaven via tax breaks, subsidized funding, and guaranteed returns, minus the discipline of private bank credit arrangements or potential bankruptcy, the costs of which are invariably borne by a public already experiencing the hell of significantly more restricted access (think toll roads and bridges), higher user fees or “slower lane” traffic (think the end of net neutrality), and the costs of bailouts if and when the venture goes bust.</p><p dir="ltr">There is no question that Trump is tapping into a big need for the country when he calls for more public infrastructure investment, but as usual with this president the devil is (literally) in the details. The American Society of Civil Engineers (ASCE) estimates that there are <a href="https://www.infrastructurereportcard.org">$4.6 trillion</a> worth of needed investments to maintain and upgrade infrastructure throughout the U.S. But the president’s proposed plan offers up a mere $200 billion in direct federal funding over the next 10 years. This is to be complemented with another $1.3 trillion in spending from cities, states, <em>and private investors</em> for a total of $1.5 trillion, which is still massively insufficient relative to the needs outlined in the latest ASCE report card (<a href="https://www.infrastructurereportcard.org/">which currently grades U.S. infrastructure at D+</a>).</p><p dir="ltr">So why bother to offer a mere $200 billion figleaf? The paucity of direct federal government funding tells you that this is certainly not going to be a New Deal 2.0. In theory, the involvement of the private sector allows the public sector to transfer the risk associated with delivery, obtain ‘value for money,’ and allows an increased quality of public infrastructure compared to traditional ‘inefficient’ public sector provision, where under-investment is the norm. The PPP literature maintains that access to services and utilities remains equitable and that positive benefits associated with the asset continue to flow onto society. In practice, however, the experience with these types of joint ventures is very different: There are major deficiencies in accountability as public goods are converted into private rents, the transition to which substantially increases personal costs and undermines economic efficiency. Value is extracted from the underlying asset in the form of big salaries to CEOs and board directors, dividend payments to private shareholders, while the promised investment is seldom delivered in full. No private market discipline is enforced on management because in most cases they are given control of what was once a public monopoly, which is simply converted into a private one. It’s rentier capitalism, plain and simple.</p><p dir="ltr">Back to first principles: <em>Public</em> infrastructure has long been the backbone of the private economy, as any developer knows. <a href="https://www.counterpunch.org/2018/02/14/trump-privatizes-america/">Michael Hudson, distinguished professor of economics at the University of Missouri, Kansas City, notes</a>:</p><blockquote><p dir="ltr">“But it’s not like labor, land, and capital, because the role of public infrastructure is not to make a profit. Its role is to provide public services that are basic for the economy’s living standards and capacity to produce, and to provide these at a subsidized rate. That’s how America got rich and came to dominate the world industrial economy: by publicly subsidizing its basic costs: Low-cost roads, and low-cost other infrastructure.”</p></blockquote><p dir="ltr">A good infrastructure enables the economy to maximize productivity (just think of how much is lost today via endless subway delays or traffic jams on the way to work, as a small example). Historically, Hudson continues, “the government... [has borne] these costs so that public infrastructure would subsidize the economy to lower the cost of doing business,” thereby increasing overall prosperity for society as a whole, rather than using the infrastructure to guarantee a profit stream to a limited number of private entrepreneurs or bankers.</p><p dir="ltr">Consistent with this goal, government-funded public works projects have long had broad bipartisan respectability from the days of Alexander Hamilton and Abraham Lincoln to those of Franklin D. Roosevelt and John F. Kennedy. If Democrats can brag about the proud heritage of the Works Progress Administration and the Public Works Administration from the era of the Great Depression (under which 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and 1,000 airfields were constructed), there are still a few Republicans who remember the Golden Age of interstate highway construction that commenced in the 1950s with President Dwight D. Eisenhower. The resultant quantum rise in living standards and economic well-being puts paid to the idea that these were wasteful government boondoggles.</p><p dir="ltr">In comparison, Trump’s promise "<a href="https://www.counterpunch.org/2018/02/14/trump-privatizes-america/">to spur the biggest and boldest infrastructure investment in American history</a>" is modest in terms of funding provision and financially problematic in terms of funding structures. Very much like his own private real estate interests, the president proposes using minimal "equity" (via direct public funding), instead deploying "leverage" to get most of that $1.5 trillion spent (largely by the private sector). That will inevitably drive up the cost as hedge funds, private equity players and bank credit will add interest charges and incur capital gains charges, management fees and other overhead charges (such as exorbitant salaries for CEOs of these ventures). All these costs would be factored into the prices that the new infrastructure would be required to charge its users with a host of tax breaks, all so as to guarantee a fixed equity return that is pledged to induce the private sector to invest. You can see where this is going: Higher costs are ultimately borne by the public, for whose benefits the infrastructure/services were provided in the first place. In many instances, public entities are outright sold to private groups (or the asset is leased for a long period of time, thereby in theory reducing the cost of funding, but in practice enabling the private groups to backload it, while extracting as much value from the quasi-monopoly in the interim).</p><p dir="ltr">Surprisingly, for a country that likes to think of itself as a bastion of free-market capitalism, the U.S. has been (thankfully) slow to embrace PPPs, relative to countries such the United Kingdom. So it’s worthwhile considering the experience of the UK to get a sense of what’s in store should Trump’s plan be implemented as he has outlined. Research by the British group Corporate Watch published in 2014 <a href="https://corporatewatch.org/energy-rail-and-water-privatisation-costs-uk-households-250-a-year/">concluded that</a>:</p><blockquote><ol><li>Households across the UK would have saved £250 each on their electricity, gas and water bills and train fares had the services remained publicly owned and financed.</li><li>Private electricity, gas, water and rail companies were paying out £12bn a year to investors and shareholders in interest and dividends.</li><li>Had these operations remained totally in the public sector, cheaper government borrowing rates would have saved the UK public £6.5bn: £4.2bn on energy, £2bn on water and £352m on rail.</li></ol></blockquote><p dir="ltr">Corporate Watch also noted that on all metrics—reliability, punctuality, attention to complaints, etc.—services deteriorated across the PPPs, even as costs continued to escalate:</p><blockquote><p dir="ltr">“To satisfy investor expectations, the bills and fares charged by the privatized companies continually outstrip inflation. Between 2007 and 2013, household gas and electricity bills rose in real terms by 41% and 20% respectively. In real terms, water bills have increased by 50% since privatisation, while rail fares are 23% higher than they were in 1995.”</p></blockquote><p dir="ltr">All the while, the promises held out by the proponents of private sector participation in these ventures, in the form of better services, more public patronage, higher efficiency and revenue, and lower public outlays, failed to materialize. Thanks to the government’s promise to maintain ongoing public subsidies, the funding structures allowed private investors to lay off risk to the public sector, while maximizing value extraction from the assets themselves. Governments, meanwhile, effectively assumed the operating risk, covering operating deficits and supplying investment funds, all the while maintaining guaranteed profit margins for the private firms that assumed operation of these services.</p><p dir="ltr">There are the other problems that are particularly germane to the U.S.: First, the communities with the greatest needs (e.g., Flint, Michigan, and its lead water crisis) are largely those that are poor and minority-dense. And they will likely get nothing because the profits to help these communities is likely to be inadequate to attract sufficient private sector participation. Second, in more affluent communities, local and state governments are often controlled by developers, and the manner in which these PPPs are adjudicated and allocated is rife with cronyism, as <a href="https://popularresistance.org/the-corruption-of-mike-pence-and-the-privatization-of-infrastructure/">the experience of Indiana’s toll road under then-Governor Mike Pence illustrated.</a> In fact, the vice president is leading the charge on Trump’s infrastructure proposals, even as the much-vaunted privatized toll road that he aggressively promoted as governor subsequently filed for a ‘pre-packaged’ Chapter 11 bankruptcy.</p><p dir="ltr">We should also recall, as further warnings of what likely lies in store, the experience of recently deregulated electric utilities (recall Enron, which deliberately aggravated California’s crippling 2001 blackouts with the aim of raising prices), as well as the prospects of more pay-through-the-nose broadband charges (the elimination of net neutrality is almost certainly likely to exacerbate this problem, as variable charges are affixed to slow and faster broadband ‘lanes’). Ultimately, the combination of private funding costs, and ever-rising bills used to sustain the PPPs profits, will have the effect of destroying America’s competitiveness instead of contributing to it. The global experience shows that public-private partnerships vastly raise the day-to-day cost of living as public goods morph to private economic ‘rents’—returns in excess of what investments would yield in a competitive economy, where fat margins are quickly whittled away by competition.</p><p>Of course, this does not extend to the private firms involved directly. They do very well—enjoying the best of both worlds—a captive monopoly infrastructure, which enables them to gouge consumers via excessive fees, charges, or fares, with no real need to keep the quality of service up to acceptable standards, amid sustained public subsidies and tax breaks. And if that is insufficient, and the operating firms go bust, the government is usually left to pick up the tab and clean up the resultant mess.</p><p dir="ltr">In essence, these public-private partnerships are one of the sick jokes that the neoliberal era visited on all of us in the name of economic efficiency and responsible government—a ‘joke’ because the beneficiaries of all this public largesse have been laughing all the way to the bank as stupid public officials continue to fall prey to their lobbying as they joyfully hand over the keys to the public purse. Trump is simply perpetuating the trend of allowing governments to continue to abrogate their true responsibilities to pursue and safeguard public purpose. Governments should never have become agents of private profit. But under PPPs of the sort proposed in Trump’s infrastructure deal, public purpose disappears and governments simply become underwriters of private profit, while assuming any contingent losses. Society gets more expensive toll roads, toll bridges, more sprawl, more cars, more rake-offs and in the end, more financial trouble and more bail-outs. The fact that governments have become active facilitators of this process gives another reason why our huge global economic and social crisis shows no end of respite.</p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1089000'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1089000" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 22 Feb 2018 12:45:00 -0800 Marshall Auerback, AlterNet 1089000 at https://www.alternet.org Economy Economy News & Politics economy donald trump infrastructure Government Shutdown Once Again Shows the Lies Behind Deficit Hysteria https://www.alternet.org/news-amp-politics/lies-behind-deficit-hysteria <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1088756'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1088756" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">It&#039;s just an excuse not to help poor people.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_193917977b.jpg?itok=HjT7Gbl3" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--><p dir="ltr">Another day, another temporary government shutdown and then finally a long-term “bipartisan compromise” so beloved of the punditocracy is reached. Early last Friday morning, the president signed a new funding bill that was narrowly passed in Congress only a few hours earlier. All told, the deal authorizes about <a href="https://www.cnbc.com/2018/02/09/trump-signs-massive-spending-deal-into-law-and-ends-years-second-government-shutdown.html">$300 billion</a> in new discretionary spending over the next two years.</p><p dir="ltr">“While neither side got everything they wanted, this compromise provides critical funding that will go towards improving the VA, CHIP, the opioid epidemic, and infrastructure spending,” <a href="http://www.nationalreview.com/morning-jolt/456258/government-shutdown-everyone-gets-spending-boost?utm_source=Sailthru&amp;utm_medium=email&amp;utm_campaign=180209_Jolt&amp;utm_term=Jolt">said Senator Thom Tillis, a North Carolina Republican</a>. “I look forward to now working with my colleagues on a solution for DACA, border security, and immigration policy.”</p><p dir="ltr">Yes, there were enough goodies to avoid a long drawn-out shutdown. But the most striking thing about the agreement was how few alarms were raised about the estimated increase in the budget deficit, even by the vaunted Tea Party wing of the GOP, whose rise allegedly came about in protest to the “unsustainable” growth in public spending. Certainly, there were a few deficit scolds here and there, who decried the latest "<a href="http://www.nationalreview.com/morning-jolt/456258/government-shutdown-everyone-gets-spending-boost?utm_source=Sailthru&amp;utm_medium=email&amp;utm_campaign=180209_Jolt&amp;utm_term=Jolt">spending spree” and the “unsustainable” growth in the nation’s debt</a>. But for the most part, those voices played little factor in the moves to prevent a lengthy cessation of government operations.</p><p dir="ltr">That was clearly not the case a few weeks earlier when the Trump tax cuts were passed and Democrats in particular vociferously sounded off on the dangers of increasing the federal debt to the tune of $1.5 trillion. Nothing from Chuck Schumer; even less from Nancy Pelosi, who several weeks earlier had <a href="https://twitter.com/nancypelosi/status/926258800214073344?lang=en">tweeted</a>, “A GOP tax bill that explodes the deficit by $1.5 trillion means dumping $4600 in debt on every man, woman &amp; child in America.”</p><p dir="ltr">Well, it’s great that Ms. Pelosi can do basic arithmetic. But at a time when the Republicans have been (hypocritically) abandoning deficit terrorism to advance their own political agenda, it’s uninspiring that the Democrats could do no better than reinforce the ‘deficits are bad’ meme.</p><p dir="ltr">Because the truth is, there is nothing insidious or inherently sinister about these deficits per se. As the economist Stephanie Kelton <a href="https://www.nytimes.com/2017/10/05/opinion/deficit-tax-cuts-trump.html">argues</a>:</p><blockquote><p dir="ltr">“Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of pluses and minuses, and their minuses become our pluses. When the government spends more than it gets in taxes, a ‘deficit’ is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent surplus in another part of the economy.”</p></blockquote><p dir="ltr">Obsessing about government budget deficits is as absurd as an accountant only paying attention to one half of a balance sheet ledger when conducting an audit. And the public, frankly, is more interested in the ways in which we spend, rather than whether we should spend at all.</p><p dir="ltr">It is obvious now that the GOP cynically used deficit hysteria as a means to kill off the Obama agenda at birth during the latter’s presidency, as Jonathan Chait recently <a href="http://nymag.com/daily/intelligencer/2018/02/obamas-gone-so-republicans-stopped-sabotaging-the-economy.html">noted.</a> Even in the last days of the Obama administration in 2016, Senate Majority Leader Mitch McConnell was describing the national debt as "<a href="https://www.nytimes.com/2018/02/09/opinion/republicans-deficit-budget.html">dangerous and unacceptable</a>." But let’s recall that previous Democratic presidencies were also complicit in perpetuating the narrative of an out-of-control national debt. <a href="http://www.politifact.com/truth-o-meter/statements/2010/sep/23/bill-clinton/bill-clinton-says-his-administration-paid-down-deb/">Bill Clinton has long boasted about paying down public debt</a> during his presidency (as did his wife during her presidential campaigns). Both Clintons trumpeted the policy “achievement” of running budget surpluses (even as a dangerous private debt buildup was developing to offset the resultant contraction in government spending). And within two months of being elected to the White House (and despite being in the midst of the gravest financial crisis since the 1930s), <a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/01/15/AR2009011504114.html">President Obama was arguing</a> that that the nation's long-term economic recovery could not be attained unless the government got control over its most costly entitlement programs. He went to convene a “fiscal responsibility summit” and then later set up the Simpson/Bowles Commission on “entitlement reform” (which is usually code for cuts to Social Security and Medicare).</p><p dir="ltr">The point is certainly not to absolve the Republicans for their blatant cynicism, or lay the blame on either Obama or Clinton, but merely to highlight that when one accepts a prevailing (and profoundly misguided) paradigm on deficits, it opens the door to all sorts of political mischief and bad policy-making. Implicit in the idea of “unsustainable public spending” is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs.</p><p dir="ltr">In reality, the financial crises of the past several decades have clearly demonstrated that excessive private sector debt buildup has played a far more destabilizing role in the global economy than fiscal profligacy. But it’s very hard to make that case if we focus incessantly on public debt and thereby perpetuate the notion that government deficits per se are the root of all economic evil. In many respects, the argument over deficits and public debt echo the prayers of St. Augustine on chastity: “Oh Lord give me chastity, but do not give it to me yet.” The Democrats’ problem (from the point of view of the debate on government deficits) is that they have long conceded the virtue of “fiscal chastity,” which therefore makes it virtually impossible to construct a strong argument in favor of government fiscal stimulus programs to combat unemployment, the health care crisis, or decaying infrastructure. Framing the budget issue within the Augustinian framework makes the question of budget cuts an issue of when, not whether. And that has given the Republicans the political initiative in terms conveniently invoking the cudgel of budget cuts whenever they feel like it.</p><p dir="ltr">In truth, politicians of both parties should stop weaponizing the deficit in this manner. We have to look at the entire economic pie (the government sector, private households and corporations, and trade—exports and imports) before pronouncing on the wisdom of a certain kind of fiscal policy approach. And we also have to look at the economic context, rather than approach the problem with some vague pre-existing notion of what is “fiscally sustainable.”</p><p dir="ltr">In fairness, some economists are doing this, such as Jason Furman. Furman, who was the chairman of the White House Council of Economic Advisers during the second term of the Obama administration, has estimated that <a href="https://www.newyorker.com/news/our-columnists/does-the-economy-need-the-trump-gop-stimulus?mbid=nl_Daily%20020918%20Control&amp;CNDID=46338521&amp;spMailingID=12905201&amp;spUserID=MTcxNjg3MDg2NDE4S0&amp;spJobID=1340827079&amp;spReportId=MTM0MDgyNzA3OQS2">the overall effect of the Trump tax bill and the recent spending deal to avoid a government shutdown roughly equates to 1.25 percent of GDP for this calendar year</a>, and two percent for the next. Those are not insignificant numbers, and Furman expressed the concern that, given the magnitude of the impending surge in spending at the stage of the economic cycle, the U.S. economy could ultimately experience significantly greater inflationary pressures (as well as a more hawkish monetary policy response from the Federal Reserve).</p><p dir="ltr">Is Furman right? <a href="https://data.bls.gov/timeseries/LNS14000000">The unemployment rate has dropped to 4.1 percent</a>, which at first glance seems to imply that we are pretty close to a full employment economy. But outside the cocoon of Wall Street or Silicon Valley, GDP growth and re-employment have still not transmitted to material wage growth for the entirety of the recovery. Furthermore, the employment-population ratio for prime-aged workers remains depressed. Economic commentator Doug Henwood <a href="https://lbo-news.com/2018/02/08/about-that-stock-panic/">writes</a>: “If the same share of the population were working now as at the 2006 pre-recession peak, 8.4 million people more would be employed.” In other words, there is still an army of underemployed workers to be drawn back into the workforce, which likely moderates wage pressures going forward.</p><p dir="ltr">As for the much-hyped average wage gains of last week, which is cited as the reason for the recent fall in equity prices, it has gone overwhelmingly to managerial workers (it goes without saying that wage stagnation for most Americans the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to private debt). And a large chunk of the latest tax cuts still goes to groups with the largest propensity to save, rather than spend. Finally, the bulk of the new expenditures used to avoid another government shutdown will simply go to expand the defense budget, with correspondingly little multiplier impact in the civilian economy.</p><p dir="ltr">In truth, this whole debate about <a href="https://www.nytimes.com/2018/02/08/opinion/republicans-hawks-markets.html?action=click&amp;contentCollection=Opinion&amp;module=RelatedCoverage&amp;region=EndOfArticle&amp;pgtype=article">fiscal profligacy and “getting one’s house in order</a>" are red herrings used to mask the fact that wage shares have fallen and more and more national income has been concentrated toward the top tier, giving us an economic model that is both inefficient (because the marginal propensity to save is higher amongst the “rentier class” than it is amongst lower income groups), and politically unsustainable (especially as it relies on perpetual wage stagnation to sustain profits). The real questions surrounding deficits are not ones of affordability or solvency, but whether we are deploying the stimulus dollars productively. Do we use the deficits to generate more employment (and, hence, bring more taxpayers into the system who contribute revenue to the federal government); do we use the dollars injected to rebuild our decaying infrastructure; can we structure tax cuts in a way that helps to reduce income inequality (thereby putting the economy on a more sustainable footing as it means less reliance on credit and debt)?</p><p dir="ltr">With those questions in mind, the answer appears to be a resounding <em>no</em>. The recently passed tax “reform” and the funding agreement to reopen the government appear to channel the benefits disproportionately toward corporations, high-income earners, and the military, whilst providing little relief for low-income Americans, who have been enduring cuts to welfare and flat wages growth for years (and <a href="https://www.nytimes.com/2018/02/12/us/politics/white-house-budget-congress.html?hp&amp;action=click&amp;pgtype=Homepage&amp;clickSource=story-heading&amp;module=first-column-region&amp;region=top-news&amp;WT.nav=top-news">possible cuts to Medicare</a>, despite repeated promises to the contrary by Trump). Unemployment and underemployment remain a big problem. Our national infrastructure is falling apart and damaging productivity. Many communities are struggling without access to basic services, including health care. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to discuss and resolve them honestly. Unfortunately, if the recent debates are anything to go by, we are still a far way off from having that kind of a discussion, let alone reforms that would address the problems directly.</p><script src="https://actionsprout.io/embed.js"></script><script> <!--//--><![CDATA[// ><!-- window.ActionSproutEmbed('3436EF'); //--><!]]> </script><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1088756'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1088756" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Wed, 14 Feb 2018 13:49:00 -0800 Marshall Auerback, AlterNet 1088756 at https://www.alternet.org News & Politics Economy News & Politics government shutdown deficits gop We Just Witnessed One of the Biggest Indictments You'll Ever See of a Country's Health Care System https://www.alternet.org/economy/we-just-witnessed-one-biggest-indictments-youll-ever-see-countrys-health-care-system <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1088469'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1088469" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">Jeff Bezos, Warren Buffett and Jamie Dimon can learn a lot from Medicare, if they&#039;re serious about a health care company.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/untitled_design_48.jpg?itok=DI-taVaZ" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--><p dir="ltr">Warren Buffett has long decried the ballooning cost of health care as a “<a href="https://www.forbes.com/sites/paulmartyn/2018/01/30/healthcare-consumerism-taming-the-hungry-tapeworm/#412919e96a0f">hungry tapeworm on the American economy</a>,” eating up the country’s wealth from within. Evidently, Jeff Bezos and Jamie Dimon all feel the same way, as evidenced by the recent joint announcement by their three companies, Amazon, Berkshire Hathaway and JPMorgan Chase, of their plan to form a new entity that will tackle the high costs associated with U.S. health care. In a tortuously phrased press release, the announcement proclaimed that the new company would be “<a href="http://www.berkshirehathaway.com/news/jan3018.pdf">free from profit-making incentives and constraints</a>,” but an Amazon spokesperson declined to comment on whether the entity would actually be a non-profit.</p><p>It seems a pretty squirrely way of admitting that our current system, dominated by for-profit private insurance, does not represent the optimal means of delivering health care. The call to action also implies that the three executives have little faith that the magic of the market on its own will somehow manage to provide insurance so cheap that everyone will be able to afford it whatever their income and medical status. Buffett himself has long been in the skeptics’ camp. As early as 2010, he <a href="http://www.omaha.com/money/berkshire-amazon-jpmorgan-to-create-company-geared-toward-reasonable-health/article_c1817c4c-cc49-5cef-94dd-f090bd389ee7.html">opined that the current system</a> was “hurting the U.S. economy in relation to other developed nations where costs are lower, even though there are more doctors, nurses and hospital beds per person… we have a health system that, in terms of costs, is really out of control. And if you take this line and you project what has been happening into the future, we will get less and less competitive. So we need something else.”</p><p>But what is that “something else”? First, if we want a system “free from profit-making incentives,” it makes little sense to construct it around the for-profit private health insurance oligopoly as we have today. That’s long been the flaw behind the current U.S. health care system. Neither Obama’s Affordable Care Act, nor the subsequent GOP efforts to repeal and replace it, have fundamentally uprooted that structure, which largely came about via a historic quirk, rather than a conscious policy decision. Second, it’s unlikely that reform can be achieved by these three companies alone, because as big and powerful as they are (employing more than 1.1 million people), they likely don’t have enough leverage to force health care providers (who have tens of millions of customers) to do things differently.</p><p>In reality, if we want to find another way to simplify the complexity of our current system and also have the leverage to force cost reductions, we already have a pretty good model in existence. It’s called Medicare, a government program handling health care for anybody over age 65 (even as the delivery of that care remains largely in private hands). Furthermore, the people who run Medicare, unlike Amazon, Berkshire Hathaway, and JPMorgan Chase, have worked extensively in administering health benefits, and in managing doctors, hospitals or pharmaceutical companies. Medicare has enough customers to act as an effective single-payer. And unlike a private monopoly, Medicare does not tend to use its market power to reduce service, jack up prices, and inflate executive pay.</p><p>The mere mention of “single-payer” almost inevitably brings forth a chorus railing against the evils of “socialized medicine,” which is a misnomer, as in reality only our insurance is socialized. Insurance has been socialized for a good reason: we do not want insurers to exclude coverage because of pre-existing conditions, or deny treatment for expensive chronic illness. Hence, each insurer needs a pool of young and healthy people to buy into the system to subsidize the unhealthy. That was the rationale for the mandate under the ACA. Of course, it doesn’t sit well when one is mandated to pay what is functionally a tax to a private health insurer. So the best way to ensure maximum diversification (as well as greater popular legitimacy) is to put the entire nation’s population under one pool, which is what we already do for people over the age of 65 under Medicare.</p><p>As well as socializing the risk (and thereby helping to contain health care costs), health economist Robert H. Frank <a href="https://www.nytimes.com/2017/07/07/upshot/why-single-payer-health-care-saves-money.html">notes that Medicare’s administrative costs are substantially lower than a private health insurer, averaging only about 2 percent of total expenses</a>, which is <a href="http://www.accuracy.org/release/medicares-50-years-of-low-overhead-vs-acas-increasing-bureaucratic-bloat-merger-mania/">less than one-sixth the corresponding percentage for many private insurers</a>. Frank explains that this occurs in large part because Medicare does not pre-screen anybody, and because the program:</p><blockquote><p dir="ltr">“spend[s]virtually nothing on competitive advertising, which can account for <a href="https://www.ama.org/publications/MarketingNews/Pages/insurance-companies-spend-marketing-make-more.aspx">more than 15 percent of total expenses for private insurers</a>.</p><p dir="ltr">“The most important source of cost savings under single-payer is that large government entities are able to negotiate <a href="https://www.washingtonpost.com/news/wonk/wp/2013/03/26/21-graphs-that-show-americas-health-care-prices-are-ludicrous/?utm_term=.771fc1af2ce1">much more favorable terms with service providers</a>. In 2012, for example, the average cost of coronary bypass surgery was more than $73,000 in the United States but less than $23,000 in France.”</p></blockquote><p>France, incidentally, <a href="http://www.commonwealthfund.org/publications/issue-briefs/2015/oct/us-health-care-from-a-global-perspective">has better health care outcomes than the U.S</a>.</p><p>It is worth recalling that Social Security is also a single-payer system, and both SS and Medicare remain two of the nation’s most popular entitlement programs. If you don’t believe that, see how many politicians successfully campaign on a platform of reducing or eliminating either program.</p><p>Bezos, Buffett and Dimon’s complaints about the rising costs of U.S. health care point to another issue: Why should the U.S., unique amongst western countries, continue to make health care a marginal cost of doing business in America by largely placing the burdens for health care provision on employers, rather than offering health care as a public good (especially as private employer-based health insurance is largely a product of historical accident rather than conscious policy on the part of either employers or the government)?</p><p>That historic quirk is outlined in the <em><a href="https://smile.amazon.com/Health-Care-Mess-Into-What/dp/067402415X/?tag=alternorg08-20">The Health Care Mess</a></em>, a book co-authored by Julius Richmond and Rashi Fein. They describe how the current system arose out of the labor shortages created during World War II, which, in the absence of controls, would have left employers in a position to bid aggressively against one another in order to attract workers. The government introduced controls that prevented a wage spiral but did not include health care benefits, a loophole exploited by employers as a means of competing for workers. And <a href="http://www.nybooks.com/articles/2006/03/23/the-health-care-crisis-and-what-to-do-about-it/">as Paul Krugman and Robin Wells have noted,</a> these medical benefits proved to be an attractive form of compensation for workers to the extent that they protected them from risk; additionally, employers liked the fact that the benefits were not deemed to be part of workers’ taxable income, thereby helping to moderate wage demands. This tax loophole is another factor that has contributed to rising costs.</p><p>Rising costs and waste were not a problem in 1960, <a href="http://www.nybooks.com/articles/2006/03/23/the-health-care-crisis-and-what-to-do-about-it/">when health care represented approximately 5 percent of GDP. Today, at 15 percent</a>, it exposes U.S. businesses to substantially higher competitive pressures relative to other nations, which clearly provoked the response of Amazon, Berkshire and JPMorgan Chase.</p><p>Given the system’s immense profitability to Big Pharma and the private health insurers, no doubt they will mobilize aggressively against fundamental changes to the current system, whether it comes from the government or the private sector. However, the joint announcement from Bezos, Buffett and Dimon represents the latest acknowledgement that costs are still spiraling out of control and becoming economically unsustainable for American businesses. Even with the implementation of the ACA, U.S. health care provision remains far more expensive (as a percentage of GDP) than that of other developed capitalist countries, with no better outcomes—indeed, countries like Canada, France, Australia, etc., achieve similar outcomes while spending as little as half as much. Other countries use a wide variety of methods of provisioning and paying for health care, ranging from full-on “socialization” with government ownership of the hospitals (the UK), to market-based private ownership of medical practices. Many use a single-payer system (like Canada). Others, such as Australia, or Germany, use private insurers. As economist Randy Wray <a href="http://www.levyinstitute.org/pubs/pn_17_3.pdf">writes</a>, “What is unique about the United States is that it relies so extensively on private for-profit insurers—in other countries that allow participation by private insurers, these are run more like heavily regulated, not-for-profit charities.”</p><p>There is nothing wrong with providing health insurance per se. Indeed, <a href="http://www.nybooks.com/articles/2006/03/23/the-health-care-crisis-and-what-to-do-about-it/">as Krugman and Wells note</a>, the intrinsic costs of providing insurance are relatively low, with one proviso: the entire population be offered insurance in the absence of screening, with the annual premium struck at a level that covers the average person’s health care expenses and the insurance company’s administrative costs. This is effectively what Medicare does. But the rest of our U.S. health care system does not do this, even after the reforms introduced under Obamacare, as Dr. Stephanie Woolhandler, professor at CUNY-Hunter College and co-founder of Physicians for a National Health Program, <a href="https://www.democracynow.org/2017/6/23/support_grows_for_single_payer_medicare">remarked in a radio interview last June:</a></p><blockquote><p>“[T]he ACA made some modest improvements to the healthcare system, and the Republicans would pull those all back. But the Affordable Care Act was never a very good bill. It left 28 million Americans completely uninsured and tens of millions more with these unaffordable gaps in their coverage, like copayments and deductibles and uncovered services. And that’s why the Affordable Care Act has been vulnerable to these Republican attacks, because people look at their own situation and say, ‘Even under Obamacare, under the Affordable Care Act, healthcare [is] still not affordable to me.’”</p></blockquote><p>Even though Obamacare largely survived last year’s GOP efforts to eliminate it, some of its provisions have still been weakened under the recently passed Trump tax bill because of the repeal of the individual mandate (scheduled to come into effect in 2019). As unpopular as it was, the mandate had a certain logic behind it. It required most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, the elimination of which potentially reintroduces the “free rider” problem—the incentive to stay uninsured until or unless you get sick. If the young and healthy stay out, government subsidies must be higher, or premiums rise, or the insurers simply choose not to participate. The only other alternative of the insurance companies is routine denial of coverage for expensive treatments or medicines, or gradually breaching the rules pertaining to excluding people who have pre-existing conditions.</p><p>There are already signs of the latter. Last week, <a href="https://www.wsj.com/articles/idaho-to-allow-new-insurance-plans-outside-of-federal-health-law-1516887331">the Wall Street Journal reported</a> that the Idaho Department of Insurance said that it would allow insurers in the state to begin offering “state-based plans” to consumers:</p><blockquote><p dir="ltr">“These products could leave out some of the benefits mandated by the ACA for individual coverage. Insurers would be able to consider enrollees’ medical history in setting their premiums… which isn’t authorized under the ACA. The new state-based plans could also include dollar limits on total benefit payouts, which the ACA banned.”</p></blockquote><p>The ability to “consider enrollees’ medical history in setting their premiums” sounds suspiciously like screening for pre-existing conditions which, the WSJ article notes, is illegal under the ACA. Given Trump’s oft-stated preference for letting Obamacare die, it is not inconceivable that he will tacitly connive with the “death by a thousand cuts” approach of Idaho (the Article II requirement that the president “take care that the laws be faithfully executed” notwithstanding, Trump has displayed little enthusiasm for the niceties of the Constitution since elected).</p><p>If our private health insurance model is indeed “a tapeworm” eating at the insides of the U.S. economy, then why not eliminate the parasite as a first step? <a href="https://www.alternet.org/story/154779/america_needs_healthcare%2C_not_health_insurance">Randy Wray and I have argued in this space in the past</a>:</p><blockquote><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?”</p></blockquote><p>Health <em>care</em> is not synonymous with health <em>insurance</em>. And health insurance is very different from other forms of insurance. Generally, when one purchases insurance, be it home, fire, earthquake, valuables, etc., it is done with the hope that one never collect the benefits, whether that be because of a car accident, a fire to one’s home, or break-in where something of value is stolen. It’s a bad deal, but it’s supposed to be.</p><p>Personal health is different. Women “<a href="http://samuel-beckett.net/Waiting_for_Godot_Part2.html">give birth astride of a grave, the light gleams an instant, then it’s night once more</a>,” poignantly observed Samuel Beckett in “Waiting for Godot.” In other words, we are born, we get sick, and eventually we die. One can mitigate the effect of illness or poor health, but one cannot insure against death. While we do face health care expenses due to unexpected accidents, most of our health care needs are day-to-day routine things inextricably tied up with coping with the limitations of our mortality and genetic imperfections. In contrast to other forms of insurance, we buy health insurance, knowing full well that we’ll have to use it, often to prevent greater calamities later. And what insurers call “pre-existing conditions” is what the rest of us would call “genetic makeup,” a bundle of conditions we were born with, some better than others. Advances in genetic screening can be life-enhancing, but in the hands of a private health insurance company, one can imagine it becoming a recipe for exploitation in the form of variable premiums, depending on how well one scored in the genetic lottery.</p><p>Medicare is a program that commands huge political legitimacy and by and large works well. Yes, it is also understandably growing in costs, because its insured pool is restricted to the most elderly and potentially infirm in our society. If the young and healthy were introduced into the program, that would address this problem. Additionally, <a href="http://www.levyinstitute.org/pubs/pn_17_3.pdf">argues Professor Wray</a>, “there is no possibility of shunting high-cost patients off to some other insurer. And total costs are lower because billing is simplified, administrative costs are reduced, and no profits are required for operating the payments system.” If Messrs. Bezos, Buffett and Dimon are serious in their professed goal putting their “<a href="https://www.forbes.com/sites/johnnosta/2018/01/30/healthcares-tipping-point-amazon-berkshire-hathaway-and-jp-morgan-chase-take-on-care-and-cost/#32f5eb995af2">collective resources behind the country’s best talent [that] can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes</a>,” Medicare for All would be a good starting point.</p><p> </p><script src="https://actionsprout.io/embed.js"></script><script> <!--//--><![CDATA[// ><!-- window.ActionSproutEmbed('3436EF'); //--><!]]> </script><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1088469'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1088469" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Wed, 07 Feb 2018 13:39:00 -0800 Marshall Auerback, AlterNet 1088469 at https://www.alternet.org Economy Economy Personal Health health care Jeff Bezos jamie dimon warren buffett Trump's Jobs-for-Medicaid Scheme Is Based on Warped Logic—Here's What Might Actually Work Instead https://www.alternet.org/economy/replace-work-medicaid-guaranteed-jobs <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1088249'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1088249" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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 Job Guarantee would offer a job to any American who was ready and willing to work at the federal minimum wage.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_134935040.jpg?itok=R2Hyhjx6" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">Earlier this year, the Trump administration said it would support state efforts to require able-bodied adults to work or participate in other “community engagement activities” as a future condition of eligibility for Medicaid. States are already taking up the president’s offer: On January 12, Kentucky became the first U.S. state to require that Medicaid recipients work or get jobs training, after submitting a waiver for federal approval in 2016. Others, such as Maine, Utah and Wisconsin, are making similar noises.</p><p dir="ltr">The professed goal behind the measure is to save the states some money, especially as the Affordable Care Act gave them the option of expanding Medicaid to cover more poor Americans under the health insurance mandate. There is also an ideological component to the proposal, given that many still see programs like Medicaid as a lucrative benefit that discourages poor people from looking for jobs.</p><p dir="ltr">So, goes the thinking, get the "undeserving poor" to work if they want to keep those benefits. But here’s the thing: you can’t demand work as a precondition for receiving a benefit like Medicaid if the work isn’t available in the first place. If you want to help people become less dependent on government benefits, why not tackle the problem more directly via a <a href="http://www.levyinstitute.org/topics/job-guarantee">Job Guarantee</a> with a living wage and benefits package, including contributions to Social Security, receipt of Medicaid, and other health care benefits?</p><p dir="ltr">The JG would not constitute a radical departure for the federal government, as it could be modeled along the lines of old New Deal programs, such as the Works Progress Administration (WPA, in existence from 1935-1943 after being renamed the Work Projects Administration in 1939) and the Civilian Conservation Corps (1933-1942). It 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. At the very least, with a Job Guarantee, we’ll at least get a sense of how big the scale of involuntary unemployment truly is, which will form a more rational basis for determining how much, if any, abuse of government benefits actually exists.</p><p dir="ltr">One distinguishing feature from the New Deal: The JG would remain a permanent feature of the economy. The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. The kernel of this idea comes from Australia, where the federal government provided guarantees to the Australian Wool Corporation that the price of wool would remain within a price band by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high. As <a href="http://bilbo.economicoutlook.net/blog/?p=23719">economist Bill Mitchell notes</a>, by being prepared to hold "buffer wool stocks" in low demand and release it again in times of high demand, the government was able to attenuate the boom-bust nature of the wool cycle and thereby guarantee incomes for the farmers.</p><p dir="ltr">This buffer stock, Mitchell notes, works just the same for labor resources—the federal government unconditionally offers to buy all labor at a stated fixed wage, thereby putting a floor on the price of labor, while keeping a fully employed labor force ready to be bid back into the private sector, as and when private demand revives. 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 more attractive to employers (additionally, when employers review job applicants, there is also ample evidence to suggest that those who are already gainfully employed are generally more appealing than those who have gaps in their work experience).</p><p dir="ltr">The Job Guarantee 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 insurance 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 dir="ltr">Employment is also better for one’s health, which should please the states worried about strained budgets, as a result of the ACA Medicaid expansion. There are ample <a href="https://academic.oup.com/eurpub/article/25/4/662/2398865">studies that demonstrate strong correlation between long-term unemployment and poor health outcomes</a>. Want to reduce the need for Medicaid use? Get people a job. Moreover, such unemployment does not just affect the unemployed themselves; it also harms their children, their families, and the communities in which they live. It is a causal factor in malnutrition and growth stunting, as well as contributing to urban blight and economic crimes (as well as incarceration, in itself a significant cost for government).</p><p dir="ltr">The Job Guarantee program is an idea that is steadily gaining traction. The <a href="https://www.americanprogress.org/issues/economy/reports/2017/05/16/432499/toward-marshall-plan-america/">Center for American Progress has recently proposed a jobs guarantee</a> to counter the effects of reduced bargaining power, technical change, globalization, and the Great Recession. Richard Dien Winfield, a candidate for Congress in Athens, Georgia, is running under the slogan “Guaranteed Jobs, Fair Wages.” So is <a href="https://www.facebook.com/Whalen23NY/posts/403912536695620" target="_blank">Charles Whalen, a Democrat running in New York’s 23rd District, with his “USA Jobs Program”</a> proposal. And, of course, the <a href="http://www.levyinstitute.org/topics/job-guarantee">Levy Institute at Bard College</a> and the <a href="http://bilbo.economicoutlook.net/blog/?p=23719">Centre for Full Employment and Equity (CofFEE) in Australia</a> have done considerable scholarly work in this area for many decades.</p><p dir="ltr">Note as well that the proposed JG program would not be one of those bogus "public-private" partnerships, along the lines touted by Trump for his much-vaunted infrastructure program. In the outline of Trump’s infrastructure program, the federal government is offering minimal direct funding, replacing that with tax breaks and guaranteed returns to the private sector while further privatizing public programs and assets—the classic hallmarks of a rentier economy. In a true JG program, financing would come directly from the federal government (which would also alleviate the concerns of the 50 states that the funding costs for a new federal program were being dumped on them). Furthermore, the wage would be periodically adjusted to reflect changes in the cost of living and, equally important, linked to rising national productivity so that real living standards for all Americans would rise (the break between wages and labor productivity is a significant factor contributing to wage stagnation and growing income inequality).</p><p dir="ltr">Even if funded directly via the federal government, the administration and operation of the program can and should be decentralized to the state and local level. There is no need to create a new overweening federal bureaucracy. Registered not-for-profit organizations 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. 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 dir="ltr">There is no question that the private sector plays an invaluable and dynamic role in providing employment, but it cannot always ensure enough jobs to keep up with population growth or speed economic recovery—much less achieve the social goal of full employment for all Americans, where they all become taxpayers who contribute to aggregate social welfare programs, not simply consume the benefits. Even at the peak of a business cycle, there are <a href="http://www.levyinstitute.org/pubs/wp_895.pdf">more people in need of jobs than there are jobs available</a>. And even if one generously conceded a job multiplier effect as a result of the policies hitherto undertaken by Trump and the Republican-dominated Congress, the impact is muted by the fact that they are exclusively supply-side measures—subsidies to reduce labor costs and to promote exports, corporate tax cuts—to incentivize the businesses community to hire workers to produce for customers that either do not exist or do not have the requisite purchasing power because of subsidence wages.</p><p dir="ltr">Why make work a precondition to receiving benefits like Medicaid? It’s politically palatable because of a still prevailing notion that mass unemployment and welfare are the fault of the unemployed themselves, rather than a systemic failure of the economy, in the face of deficient demand. From this warped (and sometimes racist) perspective follows that all that needs to happen is for the unemployed to try harder and be more diligent, more disciplined, just as a person who is out of shape should start exercising more.</p><p dir="ltr">This is a surprisingly pervasive ideology, even existing at the highest levels of "respectable" policy-making. As transcripts from the <a href="https://theintercept.com/2017/01/27/federal-reserve-bankers-mocked-unemployed-americans-behind-closed-doors/">Federal Reserve’s meetings back in 2011 illustrate, members enjoyed poking fun at those left behind</a> in the wake of the crisis (this at a time when the unemployment rate was still a shocking 9 percent):</p><blockquote><p dir="ltr">“'I frequently hear of jobs going unfilled because a large number of applicants have difficulty passing basic requirements like drug tests or simply demonstrating the requisite work ethic,’ said Dennis Lockhart, a former Citibank executive who ran the Atlanta Federal Reserve Bank. ‘One contact in the staffing industry told us that during their pretesting process, a majority—actually, 60 percent of applicants—failed to answer ‘0’ to the question of how many days a week it’s acceptable to miss work.’</p></blockquote><blockquote><p dir="ltr">“The room of central bankers then broke into laughter.</p></blockquote><blockquote><p dir="ltr">“Charles Plosser, the president of the Philadelphia Federal Reserve, cited ‘work ethic’ as a common complaint he heard in his district, both in rural and inner city areas. A contact of his who owned 60 McDonald’s restaurants said ‘passing drug tests, passing literacy tests, and work ethic are the primary problems he has in hiring people.'"</p></blockquote><p dir="ltr">One would hope that the Fed actually appreciated that we live in an economy that is vulnerable to periodic declines in overall demand for goods and services that can create serious unemployment. Businesses lay people off when their customers stop buying, for any reason. When sales go down, jobs are lost, and when sales go up, jobs go up, as businesses hire to service all their new customers. Back in 2008 when the collapse of the credit system started to engender job losses in excess of 500,000 per month, our workforce didn’t become a lot lazier or less diligent all of a sudden. Of course, after many months of unemployment, a worker’s skill can degrade (with all of the accompanying social pathologies that often accompany long-term unemployment), which is why a Job Guarantee is preferable to a system of unemployment insurance or even a universal basic income (UBI).</p><p dir="ltr">The current system we have relies on an “army of unemployed” and excess capacity to try to dampen wage and price increases. Our government programs pay unemployed labor for not working and allow that labor to depreciate and develop behaviors that act as barriers to future private-sector employment. Potential taxpayers become social welfare recipients. How does that save money? Governments are subsidizing the effects of unemployment, rather than proactively trying to prevent its rise in the first place. And we create a whole new host of economic insecurity if we start making access to Medicaid conditional on finding a job on top of that.</p><p dir="ltr">The JG program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption. It would also command broad political legitimacy, as Americans place a high value on work as the means through which individuals earn a livelihood. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to JG employees. Employment security would be enhanced. And it would likely create greater bipartisan support for social welfare programs, by minimizing crude perceptions of the undeserving poor scrounging for the proverbial free lunch.</p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1088249'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1088249" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sun, 04 Feb 2018 13:21:00 -0800 Marshall Auerback, AlterNet 1088249 at https://www.alternet.org Economy Economy News & Politics trump medicaid jobs economy Job guarantee Amazon Is a 21st-Century Digital Chain Gang https://www.alternet.org/labor/amazon-21st-century-digital-chain-gang <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1087974'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1087974" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">Amazon&#039;s high-tech sheen hides its abusive labor practices.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/2265816229_a7c158ec8a_z.jpg?itok=kgLWQrTV" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--> <p dir="ltr">When Amazon announced plans to locate a $5 billion, 50,000-employee complex as its second headquarters somewhere in North America, state governments and municipalities fell over themselves offering billions of dollars in tax abatements and corporate subsidies to secure the prize. It might behoove the remaining 20 cities that have made the final cut to heed the warning from Virgil’s Aeneid: “I fear the Greeks, even when they are bearing gifts.” Especially when the gifts come in the form of a modern-day digital chain gang.</p><p dir="ltr">Amazon likes to see itself as a cutting-edge, 21st-century growth company, always working to expedite delivery to its customers, whether by means of a drone, or eliminating queueing and bagging at its newly acquired Whole Foods stores with a new smartphone app. Beneath this high-tech sheen, however, the online retailer and tech giant engages in labor practices that provoke comparisons to a 19th-century sweatshop. The company routinely pays wages barely above the poverty line, while using intrusive surveillance systems to monitor the workforce, fence them in with elaborate rules, set target times for their warehouse journeys, and then measure whether targets were met. All of this information is made available to management in real time, and if Amazon’s “employee-athletes” fall behind schedule, they receive a Big Brother-like text message pushing them to reach their targets or suffer the consequences. Failure to do so is met with a “three strikes and release” discipline system—being a euphemism for getting sacked.   </p><p dir="ltr">In essence, you’ve got a $550-billion-plus global conglomerate with virtually unchecked market power and no sign that its legally advantageous position will be challenged anytime soon via vigorous anti-trust enforcement—and certainly no encouragement of unionization to combat its abusive and intrusive work practices. Companies like Amazon have been aided and abetted by a sequence of "pro-business" governments that for decades introduced harsh industrial relations legislation to reduce the trade unions’ ability to achieve wage gains for their members, while lavishing billions in tax cuts and subsidies, which deprives the region of vitally needed revenue for the provision of essential public services.</p><p dir="ltr">Even before this latest municipal beauty competition, Amazon has received almost $123 million from the state of Ohio in cumulative tax breaks, plus $2.9 million in cash grants. That has been a great deal for the company, but what about the people of Ohio? A new study by <a href="https://www.policymattersohio.org/press-room/2018/01/05/more-ohio-amazon-workers-relying-on-food-aid">Policy Matters Ohio</a> found that more than 700 Amazon employees receive food stamps, or more than 10 percent of the tech giant’s 6,000-strong workforce in the state. That’s because the jobs provided by Amazon in exchange for these tax breaks <a href="http://(https://newrepublic.com/article/146540/amazon-thriving-thanks-taxpayer-dollars">barely pay above the $26,208 poverty line</a>. So much for the much-vaunted “multiplier effect” supposedly created by this panoply of government largesse.</p><p dir="ltr">Or consider the state of New Jersey, where Chris Christie’s last move as governor was his effort to pass legislation authorizing up to $5 billion in tax credits to Amazon, should it choose to move its second headquarters to the state. There’s a perverse symmetry to Christie’s actions, considering that one of his very first measures when he commenced his governorship was rejecting a desperately needed commuter rail tunnel that, in his view, threatened cost overruns in the range of $2-5 billion, something deemed "<a href="http://www.ibtimes.com/political-capital/chris-christie-canceled-tunnel-over-price-tag-now-pushes-offer-amazon-5-billion">unacceptable” by the former governor</a>. Ironically, Amazon listed viable public transport as a key criterion for its proposed second headquarters; one wonders whether its management team has kept abreast of the litany of commuting challenges that have arisen as a result of the rising shortfalls in funding infrastructure upgrades for the NY/NJ public transport system.  </p><p dir="ltr">In reality, the main effect of these economic development incentives is to create a zero-sum game. They pit communities against one another as they pony up the subsidies, while correspondingly starving the regions of needed funds for essential public services. <a href="https://www.bloomberg.com/news/articles/2017-10-26/amazon-is-getting-a-good-deal-in-ohio-maybe-too-good">Bloomberg</a> reported last October that emergency responders visit the Amazon warehouse in Licking County, Ohio, at least once a day to attend to an injured worker. Local residents have to fund those forays because Amazon pays no property tax in Licking County under its subsidy deal, forcing voters to offset this subsidy by <a href="https://newrepublic.com/article/146540/amazon-thriving-thanks-taxpayer-dollars">approving a $6.5 million property tax levy</a> last November to keep the fire department operational.</p><p dir="ltr">Then there are the actual working conditions at Amazon itself, which were discussed by author Simon Head in his book <a href="https://smile.amazon.com/Mindless-Smarter-Machines-Making-Dumber/dp/0465018440/?tag=alternorg08-20" target="_blank"><em>Mindless: Why Smarter Machines Are Making Dumber Humans</em></a>. Head describes Amazon’s modern-day use of the “functional foreman,” a figure first introduced by Frederick Winslow Taylor (the pioneer of “Scientific Management”) into the workshops of the Pennsylvania machine-tool industry in the 1890s. In the modern-day Amazon version, Head writes:</p><blockquote><p dir="ltr">“The functional foreman would record how often the packers went to the bathroom and, if they had not gone to the bathroom nearest the line, why not. The student packer also noticed how, in the manner of Jeremy Bentham’s nineteenth-century panopticon, the architecture of the depot was geared to make surveillance easier, with a bridge positioned at the end of the workstation where an overseer could stand and look down on his wards. However, the task of the depot managers and supervisors was not simply to fight time theft and keep the line moving but also to find ways of making it move still faster. Sometimes this was done using the classic methods of Scientific Management, but at other times higher targets for output were simply proclaimed by management, in the manner of the Soviet workplace during the Stalin era.”</p></blockquote><p dir="ltr">If Taylor’s “Scientific Management” was Amazon’s progenitor, it is one built on a lie. Taylor typically would spend a few days watching people work, his stopwatch and slide rule in hand. Afterwards, he would issue a report telling the laborers how to do their work faster, and then <a href="https://www.newyorker.com/magazine/2009/10/12/not-so-fast">submit a huge bill to the company for his services</a>. But as a recent book by former management consultant Matthew Stewart illustrated (<a href="https://smile.amazon.com/Management-Myth-Debunking-Business-Philosophy/dp/0393338525/?tag=alternorg08-20" target="_blank"><em>The Management Myth: Why the Experts Keep Getting It Wrong</em></a>), Taylor fudged his data and inflated his record of success. The resultant exploitation of the increasingly stressed employees had an unpleasant byproduct for most of the employers who paid for Taylor’s bogus services: it engendered profound mistrust between management and employees, as well as catalyzing a movement toward increased unionization.</p><p dir="ltr">Luckily for Amazon (not its workers), there has been no increased evidence of unionization at many of its plants in the U.S. or U.K., and hence, no independent employee voice to contest management’s demands for increased output unmatched by increases in real wages. This occurs against a backdrop whereby each region is more than happy to filch jobs from another with the promise of yet more new tax breaks. </p><p dir="ltr">Amazon masks its work practices with euphemisms that would make George Orwell blush. It calls its employees “athletes” with an emphasis on endurance and speed (what CEO Jeff Bezos terms “bias for action”). Collective performance is measured with a goal to defy limits. Amazon’s Allentown, Pennsylvania, plant was the subject of a series in the local newspaper, “<a href="http://www.mcall.com/news/local/amazon/">The Morning Call</a>,” which revealed the lengths to which Amazon was prepared to go to keep costs down and output high:</p><blockquote><p dir="ltr">“Workers said they were forced to endure brutal heat inside the sprawling warehouse and were pushed to work at a pace many could not sustain. Employees were frequently reprimanded regarding their productivity and threatened with termination, workers said. The consequences of not meeting work expectations were regularly on display, as employees lost their jobs and got escorted out of the warehouse. Such sights encouraged some workers to conceal pain and push through injury lest they get fired as well, workers said.”</p></blockquote><p dir="ltr">The paper also revealed that ambulances were stationed on hot days at the Amazon center to take employees suffering from heat stroke to the hospital. </p><p dir="ltr">In response to the adverse publicity, Amazon has since installed an air-conditioning system in the plant, but the broader work culture has remained the same. As recently as January 2018, Guardian journalist Donna Ferguson recorded the experiences of one <a href="https://www.theguardian.com/money/2018/jan/20/amazon-worker-warehouse?CMP=twt_gu">particular worker, Aaron Callaway</a>:</p><blockquote><p dir="ltr">"I work four nights a week in an <a href="https://www.theguardian.com/technology/amazon">Amazon</a> warehouse near my home in Southend-on-Sea. It’s quite a cold place to work and, apart from two half-hour meal breaks, I’m on my feet for 10 and a half hours. I scan the items the trucks bring in from distributors and place them into the right cart for the robots to take to the correct place in the warehouse.</p><p dir="ltr">"I have to put away each item in 15 seconds or less, and get through 250 in an hour, or I’ll be given a warning by a manager. Stepping away from my station to, say, get a drink of water can have a big impact on my performance.</p><p dir="ltr">"During my half-hour breaks I rush downstairs to have something to eat. It’s stressful – and it definitely affects my health, standing up for hours on end. I worry I may pass out if I don’t rest during my meal breaks. I’ve lost a lot of weight since I started."</p></blockquote><p dir="ltr">Silicon Valley enthusiasts have long argued that IT liberates the workforce, helping to bring self-managed work teams and decentralized decision making. But the Amazon workplace experience suggests that the very opposite has happened. And the harsh and often unstable work regime of re-engineering also undermines the security of employees and weakens their bargaining power in the workplace.</p><p dir="ltr">All of which should encourage governments to consider what kind of a “gift” they are getting from Amazon’s proposed new investment.</p><p dir="ltr">John Atkinson Hobson was an English economist whose work spanned the latter half of the 19th century through to 1940. Noting today’s parallels with that period, the labor economist Bill Mitchell recently remarked that Hobson provided some excellent insights into how rising income inequality, mass unemployment and increased poverty could destabilize the economic system through its <a href="http://bilbo.economicoutlook.net/blog/?p=34668">impacts on lowered consumer expenditure</a>. Hobson challenged the prevailing ideology of the day, which considered wage suppression to be good for business and society.</p><p dir="ltr">In the 1920s and '30s, John Maynard Keynes expressed much the same view, noting that cutting wages may well reduce unit costs (if you make the generous assumption that the impact on morale doesn’t undermine productivity growth), but if done on a national scale it also undermines growth by impairing an important source of demand. Growth can be sustained for a time via elaborate financial engineering and private debt accumulation, although the fallout from 2008 should remind us that this is a profoundly misguided model even as many of today’s governments continue to embrace it. Ideally, real wages should grow in proportion to labor productivity for spending levels to be maintained without undue reliance on credit and savings drawdowns.</p><p>The subsistence wage model practiced by Amazon is ultimately self-sabotaging. Longer term, if the output of each worker (what economists call “labor productivity”) is rising so strongly but the ability to purchase (the real wage) is lagging badly behind, how does economic growth sustain itself? And what benefits accrue to governments? They offer subsidies, miss out on tax revenue, starve their citizens of vital social services, and fatten the profits of these modern-day robber barons, who treat their workers like serfs as they drive out existing local businesses. The “benefits that Amazon offers, then, are as illusory as the Greeks' Trojan horse. The 20 remaining cities might do well to look this Amazon gift horse in the mouth.  </p> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1087974'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1087974" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Fri, 26 Jan 2018 08:36:00 -0800 Marshall Auerback, AlterNet 1087974 at https://www.alternet.org Labor Labor amazon Jeff Bezos labor economy Does Bitcoin Have a Future? https://www.alternet.org/local-peace-economy/future-bitcoin <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1087711'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1087711" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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">It&#039;s a recipe for fraud.</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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/20495933676_35087663ca_z.jpg?itok=xemyJXU0" /></div></div></div><!-- BODY --> <!--smart_paging_autop_filter--><p dir="ltr">Is the bitcoin craze another in a series of history’s most infamous bubbles, or is it a genuine harbinger of a new global financial architecture? In spite of recent market turbulence, its champions see bitcoin (and its cryptocurrency peers) as an ideal market-generated solution as questions arise about the future viability of paper currencies in a global economy characterized by sky-high indebtedness and bloated government/central bank balance sheets. The enthusiasts behind cryptocurrencies produce debt clocks that relentlessly tick over to get us to believe that a Weimar–style hyperinflation is imminent. By creating an alternative store of value outside the control of easy-money-peddling central banks, and their corrupt Wall Street handmaidens, they assert that bitcoin offers a way out of this looming destruction of our savings.  </p><p dir="ltr">Certainly one can appreciate the appeal of anything that purports to prevent an economic Armageddon. No less a figure than Frederick Hayek, the Austrian Nobel prize-winner known for his work on the theory of money and demigod of free-marketers, called for the elimination of state-controlled money and the abolition of “money-printing” central banks. He considered fiat currencies and the inflationists predominant in the post-gold-standard policy-making world as the root causes of destructive financial bubbles.  </p><p dir="ltr">If bitcoin and its equivalents could deliver what its champions promise, what’s not to like? Even allowing for the recent gyrations, if you had bought $100 in bitcoin back in 2011, your investment would be worth millions today. But intuitively, it hardly seems believable that an instrument that bears many of the hallmarks of a classic speculative bubble realistically represents a cure for the ills described by Hayek. Having risen to a high of around $20,000 by mid-December, the price has recently fallen by almost half. The real question now seems to be whether this fall will have broader implications for the economy as a whole.</p><p dir="ltr">Let’s first do a quick ABC on these newfangled “cryptocurrencies.” To use the most famous example, bitcoin: It is a digital currency coupled with an online ledger, called a block chain. The “block chain” records all transactions that have occurred since the inception of the bitcoin system. The system is set up so that every ten minutes or so a new page—called a transaction <a href="https://en.bitcoin.it/wiki/Block">block</a>, or just block—is added to the ledger. This new page refers to all past transactions requests (by referring to the immediate previous block) and records all the new transaction requests.</p><p dir="ltr">To use a simple example from <a href="http://neweconomicperspectives.org/2013/12/fair-price-bitcoin-zero.html">Eric Tymoigne, the monetary economist</a>:</p><blockquote><p dir="ltr">“Mr X. uses the bitcoin payment system to send a request to buy a pizza from Joe’s Pizza. Joe’s Pizza wants to make sure that this is a valid transaction. That requires verifying that Mr. X holds enough bitcoins to pay for the pizza (the ledger will tell from which past transactions he got his bitcoins), and that he is not trying to double spend the bitcoins. This verification process is done by the accountants of the system, who are called the ‘<a href="https://en.bitcoin.it/wiki/Mining">miners</a>.’ Usually Joe’s will wait for confirmation from several miners (the rule of thumb seems to be six confirmations) before agreeing to sell the pizza (‘<a href="https://en.bitcoin.it/wiki/Confirmation">confirmation</a>’ means that a recorded transaction request is included in following blocks). Anybody can be a miner, you just need a computer.”</p></blockquote><p dir="ltr">Sounds great, doesn’t it? You get rid of bankers, credit card companies and all sorts of pesky financial intermediaries, who extract their pound of financial flesh from the consumer with regularity. Again, what’s not to like?</p><p dir="ltr">Well, for one thing, as bitcoin usage has grown, the math problems computers must solve to make more bitcoin (the “mining”) have become more and more difficult—a wrinkle intended to control the currency’s supply. That’s good in the sense that limiting the supply helps to preserve the underlying value of the currency. The bad news is that “mining” for currency is almost as environmentally unfriendly as traditional mining, because of the high amounts of computing power required, which guzzle energy. You wouldn’t believe it, but bitcoin’s fatal flaw is an electricity problem. In fact, there is a “<a href="https://digiconomist.net/bitcoin-energy-consumption">bitcoin energy index</a>” that shows that each bitcoin transaction requires the same amount of energy used to power nine houses. There are many pejoratives one can ascribe to central bankers, but “environmental vandal” is usually not one of them.</p><p dir="ltr">Of course, many of the libertarian champions of bitcoin and its ilk are in the climate change skeptics’ camp, so it’s unclear that this fact would bother them. It’s doubtful they would welcome “green initiatives” if it meant the end to their precious bull market in cryptocurrencies. But the truth is that the aggregate computing power required to sustain Bitcoin makes it, all by itself, unviable in the developing world, where electricity shortages are a fact of life. At the same time, what good is a currency if it creates a resource constraint that hinders global growth and prosperity? The appeal of most monetary instruments is that they avoid the inflexibility associated with the old gold standard or fixed exchange rate systems. This inflexibility prevented governments from introducing policies that generated the best outcomes for their domestic economies.</p><p dir="ltr">Proponents would argue that environmental concerns notwithstanding, the ongoing price rise validates bitcoin’s growing acceptance as an alternative store of value. The counter-argument is that much the same might have been said about Dutch tulips in the mid-17th century. At least tulips (or flowers of any kind) have some sort of aesthetic value. You can see them at any marketplace, buy them, and put them in a vase, where they’ll last for a few days. And they represent a nice gift for a loved one.</p><p dir="ltr">What do you actually get when you exchange dollars (or yen, sterling, or euros) for a cryptocurrency? Drill down to the essentials, and they are, in effect, no more than digital, decentralized, partially anonymous currencies, not backed by any government or other legal entity, and not redeemable for gold or other commodities.</p><p dir="ltr">But, say the defenders, any paper or “fiat” currency, be it dollars, yen, pounds sterling or euros, are all created digitally via computer keystrokes and also have no intrinsic value since we’ve moved off the gold standard. The paper currency issued in the U.S.—the dollar—proclaims on its face, “This note is legal tender for all debts, public and private.”  And that’s all it says. It does not say “backed by the gold stored at Fort Knox.”</p><p dir="ltr">There is, however, one crucial distinction between, say, a bitcoin and a dollar: One of the most important powers claimed by sovereign governments (perhaps the most important) is the authority to levy and collect taxes (and other payments made to government, including fees and fines). Tax obligations are levied in the national money of account—dollars in the U.S., Canada, and Australia, yen in Japan, yuan in China, and pesos in Mexico. Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In all modern nations, it is the government’s own currency that is accepted in payment of taxes.</p><p dir="ltr">In the words of the American economist Abba Lerner, from his essay in the 1947 edition of the <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.434.3005&amp;rep=rep1&amp;type=pdf">American Economic Review</a>:</p><blockquote><p dir="ltr">“The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.”</p></blockquote><p dir="ltr">The modern state, then, imposes and enforces a tax liability on its citizens and chooses that which is necessary to pay taxes. The unit of account has no real value if not ultimately sanctioned by use from the state. By extension, the state is never revenue-constrained because it alone determines what constitutes “money.” The tax (and the corresponding ability to enforce payment) is what gives an otherwise worthless piece of paper with pictures of dead presidents on it its value. Even though this paper is not “backed” by anything, taxes function to create the notional demand for said paper dollars. Value is imparted by requiring it to be used to fulfill a tax obligation. Seen in this context, the idea of “denationalizing” money, as Hayek advocated, makes about as much sense as divorcing childbirth from procreation.</p><p dir="ltr">Ironically, if governments were to allow bitcoins (or other cryptocurrencies) to be used to extinguish existing tax liabilities, this would certainly entrench them as a viable alternative currency, since they would automatically become designated legal tender. It would, however, be an irony of historic proportions were the bitcoin bubble to be preserved by the very governments whom its libertarian enthusiasts purport to despise. Although they believe that the cryptocurrency heralds a new age of sound money separate from the debt and corruption of the dollar-hegemonic world, paradoxically the only real means of salvaging said currency is via its incorporation into this very world they wish to escape.</p><p dir="ltr">Put in those terms, why on earth would the government voluntarily surrender this monopoly privilege? In fact, many countries—notably, China, Vietnam, Sweden—have already banned cryptocurrencies on the grounds that it enables criminals and terrorist organizations to move value around the world out of sight of national governments and law enforcement.</p><p dir="ltr">National security concerns aside, as appealing as it sounds to have a monetary system that stands apart from the “tyranny” of government and central banks, bitcoins and their peers violate all of the rules of finance. To quote <a href="https://tinyurl.com/y7anajhh" target="_blank">Tymoigne</a> again:</p><blockquote><p dir="ltr">“There is no central issuer guaranteeing payment at face value to the bearer; in fact, there is no underlying face value, and subsequently no imputed value at maturity, which means they are completely impractical for use in servicing of debt. The fair price of bitcoins as measured by the discounted value of future cash flows is zero.”</p></blockquote><p dir="ltr">Of course, that hasn’t stopped our modern-day financial engineers from jumping on a good bubble when they see one. The Chicago Board Options Exchange (CBOE) has already launched the first bitcoin futures market. Rival exchanges such as Chicago Mercantile Exchange (CME) and the over-the-counter NASDAQ are expected to follow, and it is certainly only a matter of time before the City of London jumps in unless regulators begin to adopt a more proactive stance.</p><p dir="ltr">Yes, innovation can be a good thing. But recent experience should make us understandably wary about the consequences when it is applied in banking and finance. To the extent that cryptocurrencies such as bitcoin contaminate the credit system, they represent a real and present danger to our economic well-being. It is true, as venture capitalist William Janeway has argued (<a href="https://smile.amazon.com/Doing-Capitalism-Innovation-Economy-Speculation/dp/1107031257/?tag=alternorg08-20" target="_blank"><em>Doing Capitalism in the Innovation Economy: Markets, Speculation and the State</em></a>), some speculative bubbles, such as the railways, or the dotcom boom, do not have as malign an impact. When these kinds of manias exhaust themselves, at least society is left with innovations scattered across the landscape for our use. But bubbles that take root in the very credit system itself (such as the housing mess) leave behind a literal wasteland.</p><p dir="ltr">It’s early days, but so far, bitcoin’s cataclysmic fall does not seem to be triggering any systemic concerns, which would suggest, thankfully, that it has not yet taken root in the credit system. But again, what’s to like? Anything that enables participants to exchange a legal tender dollar or some other real asset for a cryptocurrency, which has no intrinsic value or yield, is environmentally toxic, trades in cyberspace, outside of the regulated world of banks and financial payments is a recipe for fraud. And haven’t we had our fill of that for a while?</p><p dir="ltr"> </p><script src="https://actionsprout.io/embed.js"></script><script> <!--//--><![CDATA[// ><!-- window.ActionSproutEmbed('3436EF'); //--><!]]> </script><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2018 Alternet'; var icx_content_id = '1087711'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1087711" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 18 Jan 2018 08:27:00 -0800 Marshall Auerback, AlterNet 1087711 at https://www.alternet.org Local Peace Economy Local Peace Economy cryptocurrency bitcoin blockchain money economy Trump Shows How Global Trade Has Devastated American Jobs; Immigration, Not So Much https://www.alternet.org/election-2016/trump-shows-how-global-trade-has-devastated-american-jobs-immigration-not-so-much <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '1053576'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=1053576" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/5440993294_8ce1bc6d9e_z.jpg?itok=EzpD9cuc" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2016 Alternet'; var icx_content_id = '1053576'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=1053576" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sat, 02 Apr 2016 09:10:00 -0700 Marshall Auerback, AlterNet 1053576 at https://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 https://www.alternet.org/economy/high-tech-wall-street-rip-setting-media-fire <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '977853'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=977853" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/wallsstreetcrook.jpg?itok=Y7TQ5_ME" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2014 Alternet'; var icx_content_id = '977853'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=977853" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Wed, 02 Apr 2014 09:59:00 -0700 Marshall Auerback, AlterNet 977853 at https://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 https://www.alternet.org/economy/tea-party-and-europe <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '924752'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=924752" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/AFP/photo_1327383703620-2-0.jpg?itok=_fZFaYgt" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2013 Alternet'; var icx_content_id = '924752'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=924752" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Fri, 15 Nov 2013 13:18:00 -0800 Marshall Auerback, AlterNet 924752 at https://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 https://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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/managed/storyimages_1333404006_georgiaunemploymentline.jpg?itok=6OZICWES" /></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 https://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? https://www.alternet.org/economy/cyprus-fallout-your-money-safer-mattress <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '814220'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=814220" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/moneymattress.jpeg?itok=DdZNxgQ_" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2013 Alternet'; var icx_content_id = '814220'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=814220" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sun, 24 Mar 2013 10:28:00 -0700 Marshall Auerback, AlterNet 814220 at https://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 https://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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_116560858.jpg?itok=bbnEf0v3" /></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 https://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 https://www.alternet.org/economy/how-economic-quacks-promoting-austerity-will-increase-deficit <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '802302'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=802302" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/bad_math.jpg?itok=59bUPvzH" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2013 Alternet'; var icx_content_id = '802302'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=802302" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 28 Feb 2013 14:10:00 -0800 Marshall Auerback, AlterNet 802302 at https://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 https://www.alternet.org/economy/how-conservatives-who-block-minimum-wage-hikes-are-destroying-economy <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '794858'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=794858" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_109577882_0.jpg?itok=qVcNMtjU" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2013 Alternet'; var icx_content_id = '794858'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=794858" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 14 Feb 2013 08:39:00 -0800 Marshall Auerback, AlterNet 794858 at https://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! https://www.alternet.org/economy/credit-ratings-agencies-are-pimps-wall-street-its-time-ban-them <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '789671'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=789671" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/shutterstock_95108743.jpg?itok=PuidDKXi" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2013 Alternet'; var icx_content_id = '789671'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=789671" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Tue, 05 Feb 2013 11:54:00 -0800 Marshall Auerback, AlterNet 789671 at https://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 https://www.alternet.org/news-amp-politics/obamas-new-treasury-secretary-has-work-public-not-wall-street-hustlers <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '773753'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=773753" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/wallstreetsign.jpg?itok=pSwdQFk1" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2013 Alternet'; var icx_content_id = '773753'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=773753" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Wed, 09 Jan 2013 07:14:00 -0800 Marshall Auerback, AlterNet 773753 at https://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 https://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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/recession.jpg?itok=a86V8_NI" /></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 https://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 https://www.alternet.org/election-2012/populist-revolution-how-bold-new-voter-coalition-can-reshape-nation <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '741342'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=741342" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/people_power.jpg?itok=tyopkvQg" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '741342'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=741342" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 08 Nov 2012 07:07:00 -0800 Marshall Auerback, AlterNet 741342 at https://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 https://www.alternet.org/world/why-unstable-middle-east-could-mean-environmental-and-economic-catastrophe <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '710930'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=710930" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/managed/topstories_oiladdiction3.jpg?itok=-IfQALPq" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '710930'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=710930" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sat, 15 Sep 2012 04:12:00 -0700 Marshall Auerback, AlterNet 710930 at https://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! https://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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/managed/topstories_teacher.jpg?itok=iGAJuLBy" /></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 https://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 https://www.alternet.org/election-2012/gop-party-hates-women <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '698670'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=698670" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/republican_0.jpg?itok=j6-xRDrr" /></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> <!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '698670'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=698670" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Fri, 24 Aug 2012 08:58:00 -0700 Marshall Auerback, AlterNet 698670 at https://www.alternet.org Election 2016 Economy Election 2016 LGBTQ 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 https://www.alternet.org/economy/top-5-reasons-why-raising-minimum-wage-good-you-and-me <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '680015'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=680015" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/managed/storyimages_1343158482_happypeople.jpg?itok=qNaFC8rf" /></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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '680015'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=680015" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Tue, 24 Jul 2012 08:00:00 -0700 Marshall Auerback, AlterNet 680015 at https://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! https://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 <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '671685'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=671685" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '671685'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=671685" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Sun, 15 Jul 2012 20:00:01 -0700 Marshall Auerback, AlterNet 671685 at https://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 https://www.alternet.org/story/156115/big_trouble_for_u.s._europe%27s_banking_crisis_moves_closer_to_a_lehman_brothers_moment <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '671566'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=671566" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '671566'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=671566" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Mon, 02 Jul 2012 04:00:01 -0700 Marshall Auerback, AlterNet 671566 at https://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 https://www.alternet.org/story/155915/5_reasons_greece_and_the_rest_of_the_eurozone_are_on_the_road_to_hell <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '671256'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=671256" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/managed/storyimages_1340042310_grimreaper.jpg?itok=z9CDm0-A" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '671256'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=671256" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Mon, 18 Jun 2012 17:00:01 -0700 Marshall Auerback, AlterNet 671256 at https://www.alternet.org Economy World Economy greece austerity eurzone A World of Trouble if the Spanish Banking Crisis Spreads https://www.alternet.org/story/155834/a_world_of_trouble_if_the_spanish_banking_crisis_spreads <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '671169'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=671169" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/images/managed/storyimages_1339450850_globalcrisis.jpg?itok=fqKw7mlC" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '671169'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=671169" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Mon, 11 Jun 2012 18:00:01 -0700 Marshall Auerback, AlterNet 671169 at https://www.alternet.org Economy World Economy eurozone austerity spanish banking crisis European People Have Rejected Austerity Madness: Will the U.S. Get the Message? https://www.alternet.org/story/155302/european_people_have_rejected_austerity_madness%3A_will_the_u.s._get_the_message <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '670723'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=670723" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '670723'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=670723" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Mon, 07 May 2012 14:00:01 -0700 Marshall Auerback, AlterNet 670723 at https://www.alternet.org Economy Economy Visions france greece austerity eurzone Why Low Minimum Wages Kill Jobs and Crush Living Standards for Everyone https://www.alternet.org/story/155132/why_low_minimum_wages_kill_jobs_and_crush_living_standards_for_everyone <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '670495'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=670495" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '670495'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=670495" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Tue, 24 Apr 2012 05:00:01 -0700 Marshall Auerback, AlterNet 670495 at https://www.alternet.org Economy Labor Economy jobs crisis minimim wage The Truth Revealed About Debt and Deficits https://www.alternet.org/story/155040/the_truth_revealed_about_debt_and_deficits <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '670391'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=670391" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '670391'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=670391" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Wed, 18 Apr 2012 00:00:01 -0700 Marshall Auerback, AlterNet 670391 at https://www.alternet.org Economy News & Politics Economy debt deficits great recession America Needs Healthcare, Not Health Insurance https://www.alternet.org/story/154779/america_needs_healthcare%2C_not_health_insurance <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '670135'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=670135" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '670135'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=670135" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Fri, 30 Mar 2012 18:00:01 -0700 Marshall Auerback, L. Randall Wray, AlterNet 670135 at https://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 https://www.alternet.org/story/154568/goldman_sachs_takeaway%3A_fix_our_financial_system_or_get_ready_for_the_next_horrific_collapse <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '670088'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=670088" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '670088'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=670088" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Thu, 15 Mar 2012 07:00:01 -0700 Marshall Auerback, AlterNet 670088 at https://www.alternet.org Economy Economy Visions wall street regulation goldman sachs financial reform broken windows A Giant Game of Chicken in the Eurozone https://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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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 https://www.alternet.org Economy Economy germany greece eurozone fiscal policy German Economic Striving at the Expense of Workers and Neighbors Will Backfire https://www.alternet.org/story/154231/german_economic_striving_at_the_expense_of_workers_and_neighbors_will_backfire <!-- iCopyright Horizontal Tag --> <div class="icopyright-article-tools-horizontal icopyright-article-tools-right"> <script type="text/javascript"> var icx_publication_id = 18566; var icx_content_id = '669624'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/horz-toolbar.js"></script> <noscript> <a class="icopyright-article-tools-noscript" href="http://license.icopyright.net/3.18566?icx_id=669624" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://license.icopyright.net/images/icopy-w.png"/> Click here for reuse options! </a> </noscript> </div> <div style="clear:both;"></div><!-- iCopyright Tag --> <!-- 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="https://www.alternet.org/sites/default/files/styles/story_image/public/story_images/default.jpg?itok=wQcwl0WS" 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><!-- iCopyright Interactive Copyright Notice --> <script type="text/javascript"> var icx_publication_id = 18566; var icx_copyright_notice = '2012 Alternet'; var icx_content_id = '669624'; </script> <script type="text/javascript" src="http://license.icopyright.net/rights/js/copyright-notice.js"></script> <noscript> <a style="color: #336699; font-family: Arial, Helvetica, sans-serif; font-size: 12px;" href="http://license.icopyright.net/3.18566?icx_id=669624" target="_blank" title="Main menu of all reuse options"> <img height="25" width="27" border="0" align="bottom" alt="[Reuse options]" src="http://http://license.icopyright.net/images/icopy-w.png"/>Click here for reuse options!</a> </noscript> <!-- iCopyright Interactive Copyright Notice --> Tue, 21 Feb 2012 06:00:01 -0800 Marshall Auerback, AlterNet 669624 at https://www.alternet.org Economy Economy germany eurozone harz reforms labor unions. social safe