California Free Press

Off the Top of My Head

by John Lawrence, November 25, 2020

Why Janet Yellen is the Perfect Choice for Treasury Secretary?

Because as former Fed Chairman she knows where the bodies are buried, figuratively speaking of course. She was the first woman to head the Federal Reserve from 2014 to 2018, and now will be the first female Treasury Secretary. She knows that the Federal Reserve has the capacity to just print money and that money does not get added to the national debt or the deficit. The charade that goes on between Mnuchin and Nancy Pelosi represents an unnecessary exercise in futility The Fed has printed trillions of dollars to bail out the banks, and it has swallowed large amounts of Treasury bills if nobody wants to buy them at auction. The Fed's charter is 1) to insure full employment and 2) to check inflation. With all the money the Fed has printed so far with their policy of "quantitative easing", there has been no inflation. So money printing is a viable strategy to keep the economy functioning, but so far it has only functioned well for rich people. Now there can and should be a policy of "quantitative easing for the people." If Congress won't cooperate, Janet Yellen could do an end run around Congress and make a deal between her and the present Fed Chairman, Jerome Powell.

Joe Biden is going to need a lot of money to build green infrastructure, and Congress, if under Republican control, will deny him that money. Is that blunt enough? If MItch McConnell is leader of the Senate, he will make sure that what he did to Obama, he will do to Joe Biden, that is to deny him the wherewithal for any of his progressive programs even if they are less progressive than the left wing of the Democratic party wants. So let's expose this fiction that money is not available for a Green New Deal which amounts to doing what might not even be sufficient to forestall climate change. It would also create millions of good paying jobs by the way. What's wrong with that? Republicans will say that it will add trillions of dollars to the national debt. But did the trillions spent bailing out the big banks add trillions to the national debt? No, it didn't add a penny. That's because the Fed just printed the money, and it didn't increase inflation either. So the money is available for much needed social programs involving renewable energy and green infrastructure. A by product is eliminating unemployment and creating good paying jobs just like the Federal Reserve is tasked to do.

Fed Chairman Jerome Powell has spoken out to encourage more spending to help the economy. He knows that the Fed can and will pick up the slack by buying Treasury bills and deep sixing them on the Fed's balance sheet even as politicians keep up the fiction that Congressional leaders are concerned about the deficit:

Federal Reserve Chairman Jerome Powell on Tuesday urged Congress to spend more money to limit the economic damage of the COVID-19 pandemic, the latest in a chorus of current and past Fed officials to tell lawmakers that inaction could lengthen the recession.

“There’s a reasonable probability that more will be needed both from you, and from the Fed,” Powell told the Senate Banking Committee, echoing nudges he has made in nearly every public statement since the pandemic began.

Powell has noted that COVID-19’s economic devastation has fallen hardest on low-income workers — 40 percent of individuals making under $40,000 lost their jobs during the crisis.

Sen. Chris Van Hollen, D-Md., asked whether congressional spending would be a more effective response than the Fed’s monetary policy.

“In the short and medium term, yes: fiscal policy,” Powell said, adding that, in the long term, fiscal and monetary policies encouraging maximum employment were the way to go.

Powell’s urging has been voiced more explicitly by other Fed leaders past and present in recent days. Former Fed Chairman Ben Bernanke co-wrote a letter to congressional leadership Monday that was also signed by Janet Yellen, another former leader of the Fed, and 131 other economists.

“Insufficiently bold congressional policy responses to the Great Recession unnecessarily prolonged suffering and stunted economic growth,” Bernanke wrote, along with Washington Center for Equitable Growth CEO Heather Boushey and Cecilia Rouse, dean of the Woodrow Wilson School at Princeton. “Congress should not make this mistake again.”

In the past week, regional Fed presidents have also asked Congress to do more — not just to respond to the pandemic, but to encourage more inclusive growth as Black Lives Matter protests continue across the nation.

“Systemic racism is a yoke that drags on the American economy,” Raphael Bostic, president of the Atlanta Fed and the only African American to lead a regional Fed bank, wrote in a blog post on the regional bank’s website. “A commitment to an inclusive society also means a commitment to an inclusive economy.”

Those comments have been matched by the heads of the Fed’s San Francisco, Richmond and Dallas branches in recent days.

These comments reveal the barely disguised fiction that Congress has to act first in order to open up the flood gates of Federal Reserve money printing. However, even if that is the case, Congress needs to get off its butt. Because of arcane laws, the Fed can't act directly. Powell's barely disguised Fed speak is implying that money is available for bailing out the economy, and that the powers that be should just go ahead and use it. The argument that it would add to the national debt is null and void. The secret that some Congressional leaders want to maintain is that the Fed's trillion dollar bailout of the big banks in 2008 did not add to the national debt. Nevertheless, some Congressional leaders are aware of Modern Monetary Theory which maintains that Deficits Don't Matter. In 2014 the author of this book, Stephanie Kelton, was designated as Chief Economist for the Democratic Minority Staff of the Senate Budget Committee and later became an economic advisor to the Bernie Sanders campaign.

So money is available for a massive Green New Deal which will benefit both the economy and the salvation of the planet from global warming. Other aspects of Joe Biden's and Kamala Harris' agenda are also doable if the US can get off its butt and use the facilities that were available to bail out the big banks for the benefit of middle class and poor Americans and save the planet while doing it.

Brace Yourself for Trump’s Great Recession

by Robert Reich

Monday, July 6, 2020

Trump and businesses demanded America “reopen” to revive the economy. But we’ve  reopened too soon, before Covid-19 is under control. So we’re needing to close or partly close again, which will prolong the economic downturn and wreak even more havoc on millions of Americans’ livelihoods.

It never should have been a contest between public health and the economy, anyway. The economy has always depended on getting public health right. And we still haven’t.

Trump has downplayed the risks. He got in the way of governors trying to keep people safe. And now all of us are paying the price.

Brace yourself. The wave of evictions and foreclosures in the next 2 months will be unlike anything America has experienced since the Great Depression. And unless Congress extends extra unemployment benefits beyond July 31, we’re also going to have unparalleled hunger.

Eviction protections for federally subsidized properties run out at the end of July. In some states that enacted their own moratoria on evictions, renter protections are already running out. One study estimates that 19 to 23 million renters, or 1 in 5 people who live in renter households, are at risk of eviction by September 30th.

The people most likely to be evicted are Black and Latinx people, single mothers, people with disabilities, formerly incarcerated people, and undocumented people. This is systemic racism playing out in real time.

Meanwhile, delinquency rates on mortgages have more than doubled since March.

Unemployment itself is different than what we saw back in March and April. Today’s layoffs are permanent, the result of businesses throwing in the towel or permanently slimming down.

In the public sector, loss of state tax revenue is running up against state constitutions that bar deficits. This is putting vital public services on the chopping block – schools, childcare, supplemental nutrition, mental health services, low-income housing, healthcare – at a time when the public needs them more than ever.

In April and May alone, states and localities furloughed or laid off some 1.5 million workers, about twice as many as in the entire aftermath of the Great Recession a decade ago. These cuts will be just the tip of the iceberg if the federal government doesn’t provide more fiscal aid for states and localities.

Let me remind you: Expanded unemployment benefits are set to expire by July 31, leaving at least 21 million unemployed Americans with a 60% income reduction and no stimulus check to fall back on. 

To make matters worse, over 16.2 million households have lost employer-provided health insurance. The Census Household Pulse Survey shows large losses in income in coming months, along with high food and housing insecurity.

So what’s Trump’s and Mitch McConnell’s response to this looming catastrophe?

Do nothing. 

Don’t extend supplemental unemployment benefits beyond July 31, when they’re due to expire. 

Don’t help states and cities. 

Reject the HEROES Act, passed by the House of Representatives to keep struggling families afloat and the economy from going into a tailspin.

Trump has even asked the Supreme Court to strike down the Affordable Care Act. If the Court agrees, 23 million Americans will lose their health insurance, and the richest 0.1 percent of households with annual incomes of over $3 million will receive tax cuts averaging about $198,000 per year.

This is lunacy. The priority must be getting control over this pandemic and helping Americans survive it physically and financially. Extra unemployment benefits must be extended. 

The HEROES Act must be signed into law. Moratoriums on evictions and foreclosures must be extended. If it’s necessary to go back to sheltering in place to contain this pandemic, we must be willing to do so.

This shouldn’t be controversial. It’s the bare minimum of what our government must do to prevent an even worse economic and human catastrophe. 

Anything less is indefensible.

Off the Top of My Head

Explainer: Quantitative Easing for the People

by John Lawrence, April 19, 2020

Let's say a Wall Street bank has a mortgage that's been defaulted on. That qualifies as a "toxic asset" meaning the guy isn't paying his mortgage. The bank then pleads with the Federal Reserve to take it off its hands because the bank is running low on money that it thought would be coming in if the guy had made his monthly payments. So the Fed adds "liquidity" by saying to the bank, "Give me that mortgage. I will take it off your hands and pay you the full value of the amount borrowed, and then I will be the mortgage holder for the "toxic asset." So the bank is made whole, and the Fed is now the holder of the toxic mortgage. The Fed has "taken it on its balance sheet" and taken it off the balance sheet of the Wall Street bank. This is what happened during the Great Recession of 2008. It's what Quantitative Easing is all about. Theoretically, some day the Fed will sell this mortgage in the marketplace, but who wants to buy a mortgage that no one is paying either interest or principal on especially if the mortgagee is long gone. Instead the toxic asset disappears in what amounts to the Fed's black hole.

Although the Fed will do this for a bank especially for those banks that are too big too fail, they will not do this for Joe Blow. Joe blow, for instance, may have a toxic asset of $30,000 in credit card debt or $100,000 in student loan debt. Why couldn't Joe Blow approach the Federal Reserve and say please will you take this toxic asset off my hands? That would mean adding "liquidity" to Joe Blow's bank account by taking the credit card debt or student loan debt onto the Fed's balance sheet and paying off Joe's creditors. This would make the Fed Joe's creditor. Perhaps some day, when Joe is better off, the Fed might be able to move Joe's debt off its balance sheet and put it back on Joe's account. At least theoretically that could happen.

What is happening today with the coronavirus relief package and the stimulus checks is a variation on QE which amounts to QE for the people. Where is all the money coming from you say? Will it just be added to the deficit and the national debt, God forbid? Right now interest on the national debt is $479 billion. The more money the nation borrows, the more interest on the debt crowds out other items in the Federal budget like social security, Medicare and the military. But there is a neat little trick that is played between the Treasury department which issues the bonds that comprise national debt and the Federal reserve which has the aforementioned capacity to make debts disappear down a black hole.

Those toxic assets that the Fed took off of banks' balance sheets? Some of them were Treasury bonds. Now more than ever the Fed will be taking Treasury bonds off the big banks balance sheet for two reasons: 1) they can't be all sold in the open market because there are no buyers and 2) the US taxpayers will not have to pay interest on these bonds because although the government pays interest to the Fed on these bonds all profits the Fed makes are returned to the Treasury after deducting minimal expenses at the end of the year. So one hand really does wash the other or, if you prefer, the Federal government is playing a shill game with the Federal Reserve. The Federal Reserve monetizes the debt which is the same as saying that it disappears down a black hole on the Fed's balance sheet. The middleman in this whole operation is Wall Street since the Fed by law cannot buy Treasury bonds directly from the Treasury Department. So by monetizing the debt, the Fed is doing two things: 1) it is taking the pressure off of interest paid in the Federal budget and 2) it is guaranteeing that the Federal government will have whatever amount of money it needs to pay its bills without having to increase taxes.

Now this is good news for pandemic relief. Deficit hawks are muted because they know how this shill game is played, and it's no skin off their backs. The Fed essentially prints money (although it's doe with a couple of keystrokes on a computer) and bails out the whole economy. There is no inflation since unions which drove up the price of labor were essentially muted during the Reagan administration which saw most manufacturing jobs transferred to China. So then Fed can print away giving everyone a taste of a Universal Basic Income (UBI). (See Ellen Brown's accompanying article.) Since the cat is out of the bag there is no reason why this same game couldn't be played to relieve American consumers of student loan debt and credit card debt although you can get rid of credit card debt in bankruptcy. Not so for student loan debt.

Also money for infrastructure could be obtained this same way by having the Fed monetize the debt. This would create good union jobs according to Bernie Sanders. But this is exactly what the bond market and the Fed doesn't want - good union jobs - because that would create wage inflation. When wages go up prices go up, and the bond market would not be pleased because inflation eats up the yields on their bonds. What the Fed and the monied interest want is an economy in which workers are deeply indebted because that means a ton of interest going to the banks which are totally in cahoots with the privately owned Fed. If your a worker, the Fed is not really your friend. They are the banker's friend. The Fed was set up in the first place to bail out banks not American consumers. Now it is giving American consumers a taste of a bail out because the coronavirus presents a unique situation with everybody being out of work. When things get back to normal, the Fed will go back to just bailing out banks, and relieving pressure on the national debt.

Off the Top of My Head

The Federal Reserve's Role is to Bail Out Wall Street, Not the American People

by John Lawrence, March 21, 2020

The purpose of the Federal Reserve is to bail out the banks, not to bail out you. During the Great Recession of 2008, the Fed gave trillions to the banks. The average Joe that couldn't pay his mortgage lost his home to foreclosure. Banks only keep a portion of their money as reserves. They create loans out of thin air. If someone can't make payments on a loan, the bank will foreclose. If the loan is secured by property, that property will become the bank's property. If at the same time more people want to take their deposits out of the bank than the bank has in reserves, the bank is in trouble. That's where the Federal Reserve comes in. It floods the bank with liquidity meaning the cash to pay out to the bank's customers who want their money back. At the same time the Fed may take the bank's non performing loans onto its balance sheet. No one cares if the Fed has a bunch of non performing loans on its balance sheet. They can just stay there ad infinitum.

What happened during the Great Recession was that, thanks to financial instruments called derivatives, banks were liable for a lot more money than simple mortgages and other retail loans. They had committed to covering bets like interest rate swaps or collateralized debt obligations (CDOs) without understanding the liabilities they had agreed to. Derivatives represent gambles. A hedge fund will bet that an underlying security will go up or go down. When they win their bets, as they did in 2008, mainly due to foreclosures, it is similar to a run on the bank only a lot more money is at stake. Certain banks and financial institutions did not have the money to pay off the bet. So the Fed stepped in and paid off the bet for them. This was how the financial crisis was resolved. All the gamblers were made whole by the Federal Reserve. All the bets were paid off and very few financial institutions had to go out of business. Lehman Brothers was one institution that did go bankrupt and was liquidated.

The Fed can control how much money is sloshing around in the economy by raising or lowering the prime interest rate. That's the interest rate a bank pays to borrow money. The bank then charges the average Joe a lot higher interest rate, and they make money on the spread. Obviously, the Fed doesn't want the retail banks to make foolish loans that won't be paid back because then it will have to bail out the banks that made such loans. However, this is exactly what led to the 2008 financial crisis. The banks were making "liar loans" base on stated income. A waitress could go into the bank and just state her income was $125,000. a year. There was no checking. She was given a mortgage to buy a house. Then, when she couldn't make the payments on the house, the bank foreclosed. When the bank couldn't resell the house and get its money back, the bank's reserves were diminished and finally it couldn't meet its obligations. That's when the Fed stepped in with more liquidity. The Fed just created money out of thin air the same way the banks created money for loans, and flooded the banking system with it.

Average people lost their homes and their jobs, but investors and gamblers who had bet that the economy would collapse were paid off. This is the solution that Obama oversaw that was created by his protege Tim Geithner, Obama's Secretary of the Treasury. Now the question might be asked why the gamblers who had bet that the economy would fail were paid in full because the Federal Reserve created the money out of thin air to pay them while there was no money created to bail out the American people who had lost their homes and their jobs. Why was their no money created to alleviate the suffering? That's because that's not the Fed's job. The Fed's job is to bail out the banks. Hedge fund manager John Paulson made an estimated $2.5 billion during the crisis by betting against the housing market.

It doesn't take a genius to see that the US might have better spent its money by more widely distributing the trillions that the Fed created rather than paying off a hedge fund manager to the tune of a couple billion dollars, but again that's not the Fed's job. It should have been Obama's job to step in and demand that investor/gamblers not be paid, and that the Fed's trillions of dollars that it created go to the average John and Jayne that lost everything. But that's not how things work in the US capitalist economy. The Fed is not beholden to the American people. It's only beholden to the banks, and even there, it can decide which ones it wants to fail (Lehman Bros.) and which ones it wants to bail out (every other bank).

The trillions of dollars created by the Federal Reserve in its Quantitative Easing (QE) program go directly into the hands of investors meaning rich people. This does not "trickle down" to the American public. So it's no mystery why economic inequality is increasing, why the rich are getting richer and the poor are getting poorer. Much is made about how the Federal Reserve is "independent" from the Federal government. That's because it is a privately owned, wholly owned subsidiary of the big banks. It is literally owned by Wall Street and it's only beholden to Wall Street. It only serves the American public in the sense that it keeps the financial system operating smoothly supposedly.

Consider the alternative. A public bank, one beholden to the American people or its representatives, would have been able to direct the money flow at least partially to the direct alleviation of suffering of the American people during a recession or a depression. The Reconstruction Finance Corporation served the role during the Great Depression of getting money directly to state and local governments and to the American people. It supported banks as well, but the monies also flowed directly into the economy without having to take the form of loans created by the Wall Street banks. It was more hands on in bailing out certain industries.

A public bank, such as exists in North Dakota, can make loans directly to people and small businesses. It doesn't deal in fancy derivatives and is accountable not to the banking system but to the people in general. In North Dakota's case it's accountable to the people of North Dakota to whom it returns its profits. The Central Bank of the United States could be a public bank on the national level which would replace the Federal Reserve with the mandate of supporting the American people directly as well as the banking structure. It would not deal in derivatives which only benefit hedge funds and drive inequality.

The coronavirus could induce another Great Depression depending on how long it lasts. However, don't expect the Federal Reserve to protect the American people although it will protect Wall Street. No investor/gambler need fear losing their money. In fact the John Paulsons of the world, who have probably already taken out fantastic bets that the economy will go down, stand to make billions supplied of course by the Federal Reserve which will create the money out of thin air. This sloshing around of money will be scooped up by the billionaire class. Then the Federal government will come through on the fiscal side to supply aid of some sort to the American people while adding all this money to the national debt.

Off the Top of My Head

The Fed Gives More Money to the Rich. None to You.

by John Lawrence, March 13, 2020

The Federal Reserve just announced that it would give $1.5 trillion to the rich, and lower interest rates to zero. That means more money available for gambling in the Wall Street Casino. According to the Federal Reserve Act, "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." So the Fed traditionally raised interest rates when the economy was expanding too rapidly leading to too much inflation and reduced them when the economy was contracting and there was too much unemployment. However, what it is doing now and has been doing since 2008 is pouring money into the coffers of the big Wall Street banks with a spigot that is hardly ever turned off.

Most of the money coming from the Fed's spigot #1 never goes to the average Joe or Jane and #2 goes directly into gambling by Wall Street in an attempt to keep financial instruments such as the stock and bond markets from collapsing. There is so much money sloshing around in the coffers of rich people that it has no impact on the real economy. There is full employment and no inflation so the Fed shouldn't have to do anything because those are the twin goals it was set up to achieve. It wasn't set up to make sure the stock market never sold off. Yet this is what it is now all about. The economy has become so financialized that limiting inflation and controlling interest rates is some archaic thing that the Fed is hardly concerned with any more.

The New York Times reported:

The unscheduled move - the latest in a series of actions aimed at providing liquidity and reassurance as the outbreak grows and brings areas of the country to a veritable halt - came as U.S. stocks plunged nearly 10% in their biggest one-day losses since the 1987 market crash. The outbreak, which originally was thought to pose a limited threat to the U.S. economy, is now increasingly seen as the event that could bring a record-long economic expansion to an end, but with little clarity yet as to how severe the downturn might be.The economy is already being hit with waves of event and travel cancellations. Broadway and Disneyland are going dark and the professional sports industry is for now on hold. ...

"The Fed is likely to do more soon, including cutting rates to likely zero," Ebrahim Rahbari, chief currency strategist for Citi, said in a note to clients Thursday.

That would represent a dramatic turn of events for the Fed, reversing in a matter of months a decade's worth of effort to move interest rates back towards something like a normal level - only to see the twin shocks of a global trade war and now a global health emergency push them back down.

Interest rates at zero means pouring even more free money into the economy. That's the Fed's response to every situation now: free money for rich people. Nothing for the average Joe or Jane because if the average Joe or Jane had more consuming power, that would lead to higher prices, and, therefore, price inflation, another headache for the Fed.

Ronald Reagan did more to break the inflation of the 70s and 80s by breaking the unions. Once the country was deunionized there was no more wage inflation because workers were no longer in a position to demand higher wages. Their work was off shored to China where workers worked for pitiful wages so that American consumers could buy products at low prices. So there was no price inflation. So the Fed turned its mission instead into pouring money into the economy in the hopes that this would keep everybody working. But there is so much of this money sloshing around among rich people that they are not investing in new enterprises which is what is needed to keep the economy humming. So they are gambling with it instead and these gambles also add to GDP when they win.

Much of the American economy has to do with professional sports and entertainment. So when you have professional sports and Disneyland shut down due to the coronavirus, this naturally leads to a recession. People aren't traveling or going on cruises. This leads to a recession. Since the US GDP is 70% consumption, you can't have entertainment being shut down without diminishing consumption by a great amount. Entertainment and professional sports is a goodly percentage of consumption. Because of the coronavirus most nonessential consumption is being shut down. The bar and restaurant business is being shut down. The only businesses who are doing good are the toilet paper and bottled water industries.

So what the Fed is doing by adding $1.5 trillion to the economy at this time has nothing to do with getting people to go to events or eat out more often. It is just to satisfy the whims of rich stock and bond market investors who must be appeased at all costs.

Why Washington Is Cutting Safety Nets When Most Americans Are Still in the Great Recession

by Robert Reich

Friday, November 1, 2013

So how to explain this paradox?

As of November 1 more than 47 million Americans have lost some or all of their food stamp benefits. House Republicans are pushing for further cuts. If the sequester isn’t stopped everything else poor and working-class Americans depend on will be further squeezed.

We’re not talking about a small sliver of America here. Half of all children get food stamps at some point during their childhood. Half of all adults get them sometime between ages 18 and 65. Many employers – including the nation’s largest, Walmart – now pay so little that food stamps are necessary in order to keep food on the family table, and other forms of assistance are required to keep a roof overhead.  

The larger reality is that most Americans are still living in the Great Recession. Median household income continues to drop. In last week’s Washington Post-ABC poll, 75 percent rated the state of the economy as “negative” or “poor.” 

So why is Washington whacking safety nets and services that a large portion of Americans need, when we still very much need them?

It’s easy to blame Republicans and the rightwing billionaires that bankroll them, and their unceasing demonization of “big government” as well as deficits. But Democrats in Washington bear some of the responsibility. In last year’s fiscal cliff debate neither party pushed to extend the payroll tax holiday or find other ways to help the working middle class and poor.

Here’s a clue: A new survey of families in the top 10 percent of net worth (done by the American Affluence Research Center) shows they’re feeling better than they’ve felt since 2007, before the Great Recession. 

It’s not just that the top 10 percent have jobs and their wages are rising. The top 10 percent also owns 80 percent of the stock market. And the stock market is up a whopping 24 percent this year.  

The stock market is up even though most Americans are down for two big reasons.

First, businesses are busily handing their cash back to their shareholders – buying back their stock and thereby boosting share prices – rather than using the cash to expand and hire. It makes no sense to expand and hire when most Americans don’t have the money to buy.

The S&P 500 “Buyback Index,” which measures the 100 stocks with the highest buyback ratios, has surged 40 percent this year, compared with a 24% rally for the S&P 500. 

IBM has just approved another $15 billion for share buybacks on top of about $5.6 billion it set aside previously, thereby boosting its share prices even though business is sluggish. In April, Apple announced a $50 billion increase in buybacks plus a 15% rise in dividends, but even this wasn’t enough for multi-billionaire Carl Icahn, who’s now demanding that Apple use more of its $170 billion cash stash to buy back its stock and make Ichan even richer.

Big corporations can also borrow at rock-bottom rates these days in order to buy back even more of their stock — courtesy of the Fed’s $85 billion a month bond-buying program. (Ichan also wants Apple to borrow $150 billion at 3 percent interest, in order to buy back more stock and further enrich himself.)

The second big reason why shares are up while most Americans are down is corporations continue to find new ways to boost profits and share prices by cutting their labor costs – substituting software for people, cutting wages and benefits, and piling more responsibilities on each of the employees that remain.

Neither of these two strategies – buying back stock and paring payrolls – can be sustained over the long run (so you have every right to worry about another Wall Street bubble). They don’t improve a company’s products or customer service.

But in an era of sluggish sales – when the vast American middle class lacks the purchasing power to keep the economy going – these two strategies at least keep shareholders happy. And that means they keep the top 10 percent happy.

Congress, meanwhile, doesn’t know much about the bottom 90 percent. The top 10 percent provide almost all campaign contributions and funding of “independent” ads.

Moreover, just about all members of Congress are drawn from the same top 10 percent – as are almost all their friends and associates, and even the media who report on them.

Get it? The bottom 90 percent of Americans  — most of whom are still suffering from the Great Recession, most of whom have been on a downward escalator for decades — have disappeared from official Washington.

A Diabolical Mix: U.S. Wages and European Austerity

by Robert Reich

Wednesday, May 30, 2012

What if Europe and the US converged on a set of economic policies that brought out the worst in both – European fiscal austerity combined with a declining share of total income going to workers? Given political realities on both sides of the Atlantic, it is entirely possible.

So far, the US has avoided the kind of budget cuts that have pushed much of Europe into recession. Growth on this side of the pond is expected to be around 2.4 per cent this year. And jobs are recovering, albeit painfully slowly.

But a tough bout of fiscal austerity could be coming in six months. The non-partisan Congressional Budget Office warned last week that if the Bush tax cuts expire on schedule at the start of 2013, just as $100bn of budget cuts automatically take effect under the deal to raise the debt ceiling that Democrats and Republicans agreed to last August, the US will fall into recession in the first half of next year.

Even if these measures were to reduce the cumulative public debt, a recession would increase the debt as a proportion of gross domestic product – making a bad situation worse. That is the austerity trap much of Europe now finds itself in.

Meanwhile, real wages in the US continue to fall. A new “World Outlook” released by the International Monetary Fund last Friday showed that in the three years since the depths of the downturn in 2009, total national income has rebounded in most of Europe and in the US. But the share of national income going to workers has fallen sharply in the US, while rising in Europe as a whole.

The trend is even more striking measured from the start of the recession. It used to be that when a downturn began, profits fell faster than workers’ income because companies were reluctant to lay off employees and couldn’t easily cut wages given union contracts or the threat of unionization.

That is still the case in Europe, courtesy of stronger unions and labor-market regulations. But it is no longer the rule in the US. Since the start of the recession, the share of total US national income going to profits has risen even as the share going to the workforce has plunged. Profits in the US corporate sector are now at a 45-year high.

American workers have been willing to settle for lower wages in order to retain their old jobs or secure new ones. At the same time, US companies, intent on increasing profits, have more aggressively outsourced abroad, substituted contract workers and temps for full-time employees and replaced workers with computers and software.

The workforce’s share of total income includes the salaries of managers and professionals as well as the non-salary income of high-flying chief executives and financiers who receive capital gains, interest and stock compensation.

The widening gulf between the stratospheric compensation packages of the latter and most other Americans suggests why the median wage is dropping, adjusted for inflation, notwithstanding a growing economy and a jobs recovery.

The trend is all the more remarkable considering that the share of national income going to workers used to be substantially higher in the US than in Europe because Americans have to buy what most Europeans receive free – including university education and healthcare.

A dozen years ago, 64 per cent of US national income went to the labor force, according to the IMF, compared with 56 per cent in Europe. Today, however, the shares going to workers are converging – 58 per cent of national income goes to the workforce in the US and 57 per cent in Europe.

Political realities in Europe may be pushing policy makers in the same direction. Germany’s Chancellor Angela Merkel has finally started talking about spurring growth. Under increasing political pressure at home, she seems to have accepted the need to add measures promoting growth to the EU’s treaty on fiscal discipline.

But Ms Merkel and her conservative allies haven’t given up on austerity economics. She is still opposed to fostering growth through more spending, insisting that would only worsen Europe’s debt problems. Instead, she wants to spur growth with “structural reforms” – by which she presumably means giving companies more freedom to hire and fire, outsource jobs to contract workers and, in general, be less constrained by regulation.

That is of course the American model – which has been fueling corporate profits at the same time as it depresses wages.

If Europe were to move towards structural reforms that create a labor market similar to America’s while pursuing fiscal austerity, while America embraces fiscal austerity as US corporations continue to shrink payrolls, we are likely to experience the same results on both sides of the Atlantic. Real wages will decline, we will have less economic security and our public services will be diminished. That is not sustainable, economically or politically.

[I wrote this for the Financial Times]

How Europe’s Double Dip Could Become America’s

by Robert Reich

Wednesday, April 25, 2012

Europe is in recession.

Britain’s Office for National Statistics confirmed today (Wednesday) that in the first quarter of this year Britain’s economy shrank .2 percent, after having contracted .3 percent in the fourth quarter of 2011. (Officially, two quarters of shrinkage make a recession). On Monday Spain officially fell into recession, for the second time in three years. Portugal, Italy, and Greece are already basket cases. It seems highly likely France and Germany are also contracting.

Why should we care? Because a recession in the world’s third-largest economy, combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest.

Remember – it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are enmeshed into a global capital network extending from Frankfurt to Beijing. That means that notwithstanding their efforts to dress up balance sheets, the biggest U.S. banks are more fragile than they’ve been at any time since 2007.

Meanwhile, goods and services slosh across the globe. If there’s not enough demand for them coming from the second and third-largest economies in the world, demand in the U.S. can’t possibly make up the difference. That could mean higher unemployment here as well as elsewhere.

What’s the problem with Europe? Don’t blame it on the so-called “debt crisis.” There was no debt crisis in Britain, for example, which is now experiencing its first double-dip recession since the 1970s.

Blame it on austerity economics – the bizarre view that economic slowdowns are the products of excessive debt, so government should cut spending. Germany’s insistence on cutting public budgets has led Europe into a recession swamp.

German Chancellor Angela Merkel, who has led the austerity charge, and other European policy makers who have followed her, have forgotten two critical lessons.

First, that the real issue isn’t debt per se but the ratio of the debt to the size of the economy.

In their haste to cut the public debt, Europeans have overlooked the denominator of the equation. By reducing public budgets they’ve removed a critical source of demand — at a time when consumers and the private sector are still in the gravitational pull of the Great Recession and can’t make up the difference. The obvious result is a massive slowdown that has worsened the ratio of Europe’s debt to its total GDP, and is plunging the continent into recession.

A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it’s infinitely better than a smaller debt on top of a contracting economy.

The second lesson Merkel and others have overlooked is that the social costs of austerity economics can be huge. It’s one thing to cut a government budget when unemployment is low and wages are rising. But if you cut spending during a time of high unemployment and stagnant or declining wages, you’re not only causing unemployment to rise even further. You’re also removing the public services and safety nets people depend on, especially when times are tough.

And with high social costs comes political upheaval. On Monday, Netherlands Prime Minister Mark Rutte was forced to resign. U.K. Prime Minister David Cameron is on the ropes. The upcoming election in France is now a tossup – incumbent Nicolas Sarkozy might well be unseated by Francois Hollande, a Socialist. European fringe parties on the left and the right are gaining ground. Across Europe, record numbers of young people are unemployed – including many recent college graduates – and their anger and frustration is adding to the upheaval.

Social and political instability is itself a drag on growth, generating even more uncertainty about the future.

What European policy makers should do is set a target for growth and unemployment — and continue to increase government spending until those targets are met. Only then should they adopt austerity.

What are the chances that Merkel et al will see the light before Europe plunges into an even deeper recession? Approximately zero.

The danger here for the United States is clear, but there’s also a clear lesson. Republicans have become the U.S. party of Angela Merkel, demanding and getting spending cuts at the worst possible time – and ignoring the economic and social consequences.

Even if the U.S. economy (as well as President Obama’s reelection campaign) survives the global slowdown, we’re heading for a big dose of austerity economics next January – when drastic spending cuts are scheduled to kick in, as well as tax increases on the middle class. But the U.S. economy isn’t nearly healthy enough to bear this burden.

If nothing is done to reverse course in the interim, we’ll be following Europe into a double dip.

Flooding the World with Government Issued Fiat Money - Implications for the Dollar as the World's Reserve Currency

by John Lawrence

The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative  easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.

What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.

Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."

Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.

The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.

So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.

In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.

All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.

 

Another Face of the US Recession: Homeless Children

Published on Sunday, December 25, 2011 by Reuters

by Tom Brown

As her mother sat in a homeless shelter in downtown Miami, talking about her economic struggles and loss of faith in the U.S. political system, 3-year-old Aeisha Touray blurted out what sounded like a new slogan for the Occupy Wall Street protest movement.

 Nairkahe Touray (C) speaks with Reuters where she lives with her five children at the Chapman Partnership homeless shelter in Miamii, Florida, December 19, 2011. At left is Aeisha, 3, and at right is Yesuf, 11-months old. (Credit: Reuters/Joe Skipper)

"How dare you!" the girl said abruptly as she nudged a toy car across a conference room table at the Chapman Partnership shelter in Miami's tough and predominantly black Overtown neighborhood.

There was no telling what Aeisha was thinking as her 32-year-old mother, Nairkahe Touray, spoke of how she burned through her savings and wound up living in a car with five of her eight children earlier this year.

But how dare you indeed? How does anyone explain to kids like Aeisha and countless others how they wound up homeless in the world's richest nation?

In a report issued earlier this month, the National Center on Family Homelessness, based in Needham, Massachusetts, said 1.6 million children were living on the streets of the United States last year or in shelters, motels and doubled-up with other families.

That marked a 38 percent jump in child homelessness since 2007 and Ellen Bassuk, the center's president, attributes the increase to fallout from the U.S. recession and a surge in the number of extremely poor households headed by women.

Recent data from the U.S. Census Bureau provided a sobering backdrop. Based on new or experimental methodology aimed at providing a fuller picture of poverty, the data showed that about 48 percent of Americans are living in poverty or on low incomes.

Under the bureau's so-called Supplemental Poverty Measure for 2010, issued last month, the poverty level for a family of four was set at income anywhere below $24,343 per year.

"I see it every day," said Alfredo Brown, 73, a retired army officer and deputy director of the non-profit Chapman Partnership, when asked about child homelessness.

The organization, funded largely by a 1 percent food and beverage tax on larger restaurants to bankroll homeless programs, operates two sprawling homeless shelters in Miami-Dade County.

"I see so many children and mothers that are homeless and sleeping in their car or an abandoned building, an old bus. It's a sad situation that we live in a country that has so much and many people have so little," Brown said.

Child homelessness is a relatively new social problem in the United States, where being on the street and the stigma attached to it has long been associated with adults with alcohol or drug dependency issues.

IMPOVERISHED MOTHERS

Families accounted for less than 1 percent of the U.S. homeless population in the mid-1980s, according to Bassuk, but they now comprise about a third of the homeless population. A lot of children are dependent on poverty-stricken single moms.

"There's sort of a Third World emerging right in our backyard. You know, we talk about developing countries but look at what's going on here," Bassuk said.

To put a face to the breadth and depth of the homeless problem, a team of Reuters journalists fanned out across the country in the past week, for interviews with parents and children who are down on their luck.

From Skid Row in Los Angeles to the South Bronx in New York, a common thread of economic devastation from the recession ran throughout many of the stories these people told.

But there also was a common thread of hope running through their compressed life stories.

Little Aeisha in Miami got visibly upset as her mother spoke tearfully about the wear and tear on her children amid her struggles with a bad economy, severe depression, diabetes and chronic foot problems stemming from torn ligaments.

Touray sounded like an Occupy Wall Street protester herself, as she complained about bailout money for banks but not people. "You get treated like an animal because you're homeless," said Touray, who said she lives on just $583 a month in child support after going through a divorce last year. Her parents, who live separately in Atlanta and Chicago, are also homeless.

"Just because I'm homeless it doesn't mean that I was like nothing yesterday," said Touray, who said four small businesses she owned in Atlanta only went bust due to the recession.

She also complained about the tone-deafness of many politicians, saying they were doing nothing to ease the unemployment and inequality that have come to dominate the national conversation.

"I'm living the real deal," Touray said. "I don't need for somebody to come up here and tell me what the economy's doing. They (the politicians) need to get out here and see these children, see these parents."

RIDING THE RAILS

Across the country in Los Angeles, Reuters came across Luis Martinez, 34. A single parent, he lives with his three children at the Union Rescue Mission on a trash-strewn city block where homeless men and women stand vigil over plastic shopping carts.

But the shelter is an improvement over the time when Martinez passed nights on the L.A. subway with his children, riding the rails to nowhere.

A junior high school dropout who became unemployed after he injured his back on construction site job about six years ago, Martinez spoke proudly about how well he said his kids were doing in school.

They have a laptop computer, which they use to help do homework through free wireless connections at McDonalds and Starbucks. They also have an Xbox video game system and Martinez, who wears a necklace that says "My Kids First," has a cell phone to stay in touch with family and potential employers.

"I mean, I'm homeless but not hopeless," Martinez said.

"(It) gets easier as you go," said Jesse, Martinez's 8-year-old son.

Highlighting the shrinking middle class in America, a reporter found Tracy and Elizabeth Burger and their 8-year-old son, Dylan. The Burgers said they once earned nearly $100,000 a year combined but saw their middle-class lifestyle evaporate when Tracy lost his job in audiovisual system sales.

Unable to pay rent, they were evicted from their apartment in early 2009 and had to move into a motel. In March they moved into a cramped converted garage at Elizabeth's mother's house in Los Angeles.

Elizabeth, a former medical assistant, said she has less than six weeks left on her unemployment insurance and was anxiously watching this week's standoff in Congress over extending those payments, along with the payroll tax cut for 160 million Americans.

The congressional debate highlighted the partisan bickering that has made this a tumultuous year in U.S. politics, while throwing Washington's ability to make sound economic policy into doubt.

In central Florida, Justin Santiago, 15, said he was not surprised when he, his parents and three younger siblings landed in a downtown Orlando shelter last September.

Since the national economic collapse in 2008, his out-of-work family bounced from one relative's home to another, and left California in search of employment and stability.

"I wasn't shocked. When the economy's going down and it just drops, it's out of control," Justin said.

EYES ON THE PRIZE

In 16 years of marriage, his parents, Theresa and Timothy Santiago, managed to provide for their family by working multiple jobs, earning about $20,000 in their best year. But work dried up and the family set out for Florida last spring in search of cheaper living expenses.

After a run of more bad luck, they found their way to the Coalition for the Homeless of Central Florida shelter. But Justin is taking eighth grade honors classes now and says his family's recent experience will not keep him from pursuing his dream career in video game production and becoming an Internet success story.

"It will get better for me and my family," he said. "I'll be making billions, I know that."

Antonio Dixon, 26, knows all about things getting better. His mother, Corenthia, said he bounced between at least a dozen homeless shelters growing up in Miami and Atlanta.

He eventually won a football scholarship at the University of Miami and fought dyslexia to become the first person in his family to graduate college.

"They had me study hard every hour," Dixon told Reuters.

He has since gone on to play defensive tackle for the NFL's Philadelphia Eagles, making good on his boyhood dream.

Dixon has been sidelined by a torn tricep since early October. But he seems confident about overcoming adversity yet again and plans on being in the starting lineup next season.

His advice to homeless kids is to stay in school and get focused on whatever it is they really want to do in life.

"Just keep on doing something you like and don't give up," Dixon said. I had to work myself up from the bottom to the top. I did that. Don't let nobody stand in your way. You just got to go and get it. You can't be afraid to take a chance on life."

Bassuk, a psychiatrist and Harvard Medical School professor, said medical problems and under-achievement in school were among the things that often go hand in hand with childhood homelessness.

"These are kids who don't have any opportunities," she said. "If you look at some of the educational variables, they're doing really poorly. And they're kids who can do OK. They just don't have appropriate support.

"It just seems that on every front this is a very vulnerable group of kids," she said.

(Additional reporting by Alex Dobuzinskis, Tim Gaynor, James Kelleher, David Bailey, Michelle Nichols, Kelli Dugan and Barbara Liston; Editing by Bill Trott)

© 2011 Reuters

Depression and Democracy

by Paul Krugman

New York Times, December 11, 2011

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

On that last point, I am not being alarmist. On the political as on the economic front it’s important not to fall into the “not as bad as” trap. High unemployment isn’t O.K. just because it hasn’t hit 1933 levels; ominous political trends shouldn’t be dismissed just because there’s no Hitler in sight.

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

First of all, the crisis of the euro is killing the European dream. The shared currency, which was supposed to bind nations together, has instead created an atmosphere of bitter acrimony.

Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.

Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.

Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.

And in at least one nation, Hungary, democratic institutions are being undermined as we speak.

One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.

Fidesz won an overwhelming Parliamentary majority last year, at least partly for economic reasons; Hungary isn’t on the euro, but it suffered severely because of large-scale borrowing in foreign currencies and also, to be frank, thanks to mismanagement and corruption on the part of the then-governing left-liberal parties. Now Fidesz, which rammed through a new Constitution last spring on a party-line vote, seems bent on establishing a permanent hold on power.

The details are complex. Kim Lane Scheppele, who is the director of Princeton’s Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there’s a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.

Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.

It’s not clear what can be done about Hungary’s authoritarian slide. The U.S. State Department, to its credit, has been very much on the case, but this is essentially a European matter. The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

It’s Getting Real in the Eurozone: Self-Inflicted Recession Threatens World Economy

Published on Wednesday, November 30, 2011 by the Guardian/UK

by Mark Weisbrot

The economic news out of the eurozone is getting worse every day, and so is the contagion to the rest of the world. The OECD (Organization for Economic Co-operation and Development), the club of 34 mostly high-income countries, has now lowered its projection for eurozone growth for 2012 from 2 percent (in May) to just 0.2 percent. According to their report, the 17-member eurozone economy already “appears to be in a mild recession.” For the U.S., the forecast for next year was lowered from 3 percent to 2.1 percent.

Forecasts for China, India, and Brazil have also been lowered significantly since May. From Asia to Latin America, the problems of the eurozone are reverberating as international banks contract credit, big investment projects are canceled or postponed, stock markets and real estate prices fall, and investor and consumer confidence drops.

And the OECD projections assume that Europe “muddles through” its current financial crisis without any significant financial disaster. But as the eurozone economy worsens, this assumption gets increasingly less tenable.

The simplest solution to the crisis is for the European Central Bank (ECB) to buy enough of the Italian and Spanish debt – and possibly other eurozone countries’ debt – to push down interest rates to a safe level. On Tuesday, Italy paid a record 7.89 percent yield for three-year bonds that it auctioned, well above the 7 percent level that was seen as a threshold for Greece, Ireland and Portugal to move from market financing to the International Monetary Fund (IMF) and European authorities. With lower borrowing costs, Italy and Spain would not be facing a “debt crisis.”

In fact, this whole crisis and recession could have been prevented very easily if the European authorities had simply intervened to maintain low interest rates on the Greek debt a year and a half ago. It is possible that some restructuring might still have been necessary, but the cost would still have been very small relative to the available resources of the European authorities. Because they refused to do this, and instead shrank the Greek economy, increased its debt burden, and allowed its borrowing costs to skyrocket – the crisis spread to the weaker countries of the eurozone, including Italy.

And now capital – including American money market funds – is fleeing Europe’s banking system, threatening a systemic financial crisis of unknowable proportions.

This failure to act – then and now – shows clearly that this is not a “debt crisis” at all but rather a crisis of failed policies. Eurozone finance ministers met Tuesday but failed again to come up with any credible solution that would stabilize the situation.

ECB intervention to stabilize eurozone bond markets is the most obvious, and possibly the only practical solution for several reasons. First, it is the only institution that can move quickly to bring the situation under control at a moment in which we really don’t know how far we are from a meltdown. Nobody anticipated that Germany, for example, would have trouble selling its bonds last week – there will be other unanticipated events that could possibly set off a panic at any time. Second, the ECB can buy the sovereign bonds of Italy or Spain at no cost to the European taxpayer. This is a serious issue, since the amounts of money involved could be large enough to present a political problem in Germany and other better-off eurozone countries. Just as the U.S. Federal Reserve has created $2.3 trillion since 2008 and used it to buy securities in the United States, the ECB could do the same in Europe where such buying is much more desperately needed. And just as there was no measurable effect on inflation in the United States, we would not expect any problem with inflation in Europe. Inflation in the eurozone is currently projected to fall to just 1.6 percent for next year.

The problem is that the ECB, and other European authorities led by the German government, are still playing the same game of brinkmanship that they have been playing for the past two years. They are more worried about forcing austerity policies on the weaker eurozone countries than they are about tanking the European and global economy. They continue to see the crisis as an opportunity to force through unpopular “reforms” – such as cutting jobs and pensions, raising the retirement age, privatizations, and reducing the size and scope of the welfare state. They have already caused a recession in the eurozone and seem more than willing to let it deepen in order to get what they want. The big question now is whether their recklessness will bring on a financial crisis that triggers a world recession.

Some of us have called for the Federal Reserve to intervene before this happens and do the ECB’s job for them. It has the capacity to do so, and like its prior quantitative easing in the U.S., would be costless to the taxpayers. It might cause a bit of a political storm, but that would be a small price to pay to avoid a recession that would throw millions more people out of work – in the United States, Europe, and much of the world.

© 2011 The Guardian/UK

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research (CEPR), in Washington, DC. He is also president of Just Foreign Policy. He is co-author, with Dean Baker, of Social Security: The Phony Crisis. E-mail Mark: [email protected]

more Mark Weisbrot

The Path Not Taken

from the New York Times, October 27, 2011

by Paul Krugman

Financial markets are cheering the deal that emerged from Brussels early Thursday morning. Indeed, relative to what could have happened — an acrimonious failure to agree on anything — the fact that European leaders agreed on something, however vague the details and however inadequate it may prove, is a positive development.

But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.

Some economists weren’t convinced. One caustic critic referred to claims about the expansionary effects of austerity as amounting to belief in the “confidence fairy.” O.K., that was me.

But the doctrine has, nonetheless, been extremely influential. Expansionary austerity, in particular, has been championed both by Republicans in Congress and by the European Central Bank, which last year urged all European governments — not just those in fiscal distress — to engage in “fiscal consolidation.”

And when David Cameron became Britain’s prime minster last year, he immediately embarked on a program of spending cuts in the belief that this would actually boost the economy — a decision that was greeted with fawning praise by many American pundits.

Now, however, the results are in, and the picture isn’t pretty. Greece has been pushed by its austerity measures into an ever-deepening slump — and that slump, not lack of effort on the part of the Greek government, was the reason a classified report to European leaders concluded last week that the existing program there was unworkable. Britain’s economy has stalled under the impact of austerity, and confidence from both businesses and consumers has slumped, not soared.

Maybe the most telling thing is what now passes for a success story. A few months ago various pundits began hailing the achievements of Latvia, which in the aftermath of a terrible recession, nonetheless, managed to reduce its budget deficit and convince markets that it was fiscally sound. That was, indeed, impressive, but it came at the cost of 16 percent unemployment and an economy that, while finally growing, is still 18 percent smaller than it was before the crisis.

So bailing out the banks while punishing workers is not, in fact, a recipe for prosperity. But was there any alternative? Well, that’s why I’m in Iceland, attending a conference about the country that did something different.

If you’ve been reading accounts of the financial crisis, or watching film treatments like the excellent “Inside Job,” you know that Iceland was supposed to be the ultimate economic disaster story: its runaway bankers saddled the country with huge debts and seemed to leave the nation in a hopeless position.

But a funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

So how’s it going? Iceland hasn’t avoided major economic damage or a significant drop in living standards. But it has managed to limit both the rise in unemployment and the suffering of the most vulnerable; the social safety net has survived intact, as has the basic decency of its society. “Things could have been a lot worse” may not be the most stirring of slogans, but when everyone expected utter disaster, it amounts to a policy triumph.

And there’s a lesson here for the rest of us: The suffering that so many of our citizens are facing is unnecessary. If this is a time of incredible pain and a much harsher society, that was a choice. It didn’t and doesn’t have to be this way.

Gloom Grips Consumers, and It May Be Home Prices

from the New York Times

By BINYAMIN APPELBAUM

Published: October 18, 2011

ORLANDO, Fla. — Ernest Markey lost his stone-cutting business in 2009. He then sold his home for half a million dollars less than its value at the peak of the housing bubble and moved with his wife, Marie, to a smaller home in a less affluent suburb. They gave up two new cars and bought one. Used.

The Markeys have since patched together a semblance of their old life, opening a new stone-cutting shop. But they do not expect that they will ever recover financially from the loss of equity in their old home.

“For two years I kept thinking that things would get better,” Mr. Markey, 51, said as he stood in his empty store on a recent weekday. “Now I think the future doesn’t look so good.”

The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing.

There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.

That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.

Many say they believe that the bust has permanently changed their financial trajectory.

“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980.

In Orlando, a city that trades in upbeat fantasies, the housing crash has been particularly painful. The total value of area homes has fallen below the total mortgage debt on those homes, according to the real estate analytics firm CoreLogic. In the parlance of the real estate world, Orlando is underwater, a distinction matched by Las Vegas.

“I don’t know that it’s going to get better. We just have to get used to it,” said Sherry DeWeese, whose home in Ocoee, a northwestern suburb of Orlando, is worth less than she paid for it 13 years ago — and about a third of its value at the peak of the market. “It was nothing to buy whatever we wanted. Now we just think about what we really need.”

Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home.

This “wealth effect” is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure.

A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy.

Roy Pugsley, who owns a pool supply store in Winter Garden, another suburb here, said that he made 2,500 fewer sales during the first eight months of 2011 compared with the same period in 2007. That translates to one less person walking through the doors to buy chemicals or toys or spare parts in each hour that the store is open.

Mr. Pugsley said business actually increased in the early days of the recession; customers had told him they were spending more time at home. But now people buy only what they need for maintenance. “People realized that it wasn’t going to get any better, and they stopped spending on their pools, too,” he said.

At Milcarsky’s Appliance Center in the adjacent town of Longwood, business now comes from people remodeling their own homes rather than builders, and customers are picking cheaper models, said Doug Morey, a sales manager.

“People who might have bought that” — he taps a stove with chunky burners, designed to look like it belongs in a restaurant kitchen — “are double-thinking it. Everyone has had to cut back.”

That means Milcarsky’s has cut back too. The company, which employed 26 people three years ago, now has about a dozen workers, and they are making less in salary and commissions.

“I might like to think that I’m middle class, but I’m not. I’m not anymore,” said Rae-Anne Crotty, a customer service manager at the store. She now shops for groceries at discount stores, she said, and buys gifts for her children at Christmas but not on their birthdays.

It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up.

But many people in the Orlando area do not share this confidence, at least not when it comes to their own prospects. Instead, like the Markeys, they are settling into lives of less prosperity.

The couple moved to Orlando 12 years ago from central Massachusetts in search of opportunities. The business Mr. Markey created, Stone Giant, grew to include two factories and 60 employees, and it installed granite countertops in up to 15 new kitchens every day.

His new company, Winter Park Granite, now installs two kitchens on the average day. He has eight employees but cannot afford health insurance for them or himself. The family income last year was less than a third of the $175,000 that he and his wife made in 2007, their last good year.

And he sees little room for growth. He has stopped spending money on advertising.

“We’re never going to get that big again,” he said. “I was someone employing people and taking people to the good life. Now I’m just trying to survive.”

Recession Officially Over, U.S. Incomes Kept Falling

By ROBERT PEAR Published: October 9, 2011 by the New York Times

WASHINGTON — In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found.

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

The finding helps explain why Americans’ attitudes toward the economy, the country’s direction and its political leaders have continued to sour even as the economy has been growing. Unhappiness and anger have come to dominate the political scene, including the early stages of the 2012 presidential campaign.

President Obama recently called the economic situation “an emergency,” and over the weekend he assailed Congressional Republicans for opposing his jobs bill, which includes tax cuts that would raise take-home pay. Republicans blame Mr. Obama for the slump, saying he has issued a blizzard of regulations and promised future tax increases that have hurt business and consumer confidence.

Those arguments may be heard repeatedly this week, as the Senate begins debating the jobs bill. The full bill — a mix of tax cuts, public works, unemployment benefits and other items, costing $447 billion — is unlikely to pass, but individual parts seem to have a significant chance.

The full 9.8 percent drop in income from the start of the recession to this June — the most recent month in the study — appears to be the largest in several decades, according to other Census Bureau data. Gordon W. Green Jr., who wrote the report with John F. Coder, called the decline “a significant reduction in the American standard of living.”

That reduction occurred even though the unemployment rate fell slightly, to 9.2 percent in June compared with 9.5 percent two years earlier. Two main forces appear to have held down pay: the number of people outside the labor force — neither working nor looking for work — has risen; and the hourly pay of employed people has failed to keep pace with inflation, as the prices of oil products and many foods have jumped.

During the recession itself, by contrast, wage gains outpaced inflation.

One reason pay has stagnated is that many people who lost their jobs in the recession — and remained out of work for months — have taken pay cuts in order to be hired again. In a separate study, Henry S. Farber, an economics professor at Princeton, found that people who lost jobs in the recession and later found work again made an average of 17.5 percent less than they had in their old jobs.

“As a labor economist, I do not think the recession has ended,” Mr. Farber said. “Job losers are having more trouble than ever before finding full-time jobs.”

Mr. Farber added that this downturn was “fundamentally different” from most previous ones. Historically, other economists say, financial crises and debt-caused bubbles have led to deeper, more protracted downturns.

Mr. Green and Mr. Coder said the persistently high rate of unemployment and the long duration of unemployment helped explain the decline in income during the recovery.

In the recession, the average length of time a person who lost a job was unemployed increased to 24.1 weeks in June 2009, from 16.6 weeks in December 2007, according to the federal Bureau of Labor Statistics. Since the end of the recession, that figure has continued to increase, reaching 40.5 weeks in September, the longest in more than 60 years.

The new study by Mr. Green and Mr. Coder is based on monthly census surveys, rather than the annual data that appeared in last month’s census report on income. The monthly figures allow researchers to measure income changes more precisely during a recession or a recovery and provide more current information. The annual report is based on surveys conducted early in the following year, and people sometimes confuse how much money they are making at the time of the survey with how much they made the previous year. Additionally, recessions usually do not line up with a calendar year.

A committee of academic economists at the National Bureau of Economic Research, a private group widely considered the arbiter of the business cycle, judged that the most recent recession began in December 2007. The bureau defines a recession as a significant, broad-based decline in economic activity.

The economists said the recession ended in June 2009. In every quarter since then, the economy has grown.

Some economists see signs that the United States may be in or about to enter another recession, though the evidence is mixed.

In their new study, Mr. Green and Mr. Coder found that income dropped more, in percentage terms, for some groups already making less, a factor that they say may have contributed to rising income inequality.

From June 2007 to June of this year, they said, median annual household income declined by 7.8 percent for non-Hispanic whites, to $56,320, and by 6.8 percent for Hispanics, to $39,901. For blacks, household income declined 9.2 percent, to $31,784.

Mr. Green and Mr. Coder, who both worked at the Census Bureau for more than 25 years, found other income changes over the four-year period examined.

For example, income, after adjustment for inflation, declined fairly substantially for households headed by people under age 62, but it rose 4.7 percent for those headed by people 65 to 74, many of whom are not in the labor force. The change was negligible for those 62 to 64.

The type of employment also made a difference. Real median annual income declined to a similar degree for households headed by private-sector wage workers (4.3 percent) and government-sector workers (3.9 percent), but fell much more for the self-employed (12.3 percent).

Family households generally had larger declines in real income than other households. Men living alone showed a bigger decline than women living alone.

Education levels were also a factor. Median annual income declined most for households headed by someone with an associate’s degree, dropping 14 percent, to $53,195, in the four-year period that ended in June 2011, the report said.

For households headed by people who had not completed high school, median income declined by 7.9 percent, to $25,157. For those with a bachelor’s degree or more, income declined by 6.8 percent, to $82,846.

Profit on Wall Street, Recession on Main Street

Published on Wednesday, August 24, 2011 by The Guardian/UK

 

In America's deeply dysfunctional economy, unemployment is stuck at a 'new normal' of 9%, while corporate profits race ahead

 

by Sally Kohn

In the past few weeks alone, Bank of America, Goldman Sachs, Cisco Systems and Borders have all announced massive layoffs. Borders is closing its retail stores, auctioning off its holdings and letting go 10,000 employees as, due to online competition, the company is no longer profitable and filed for bankruptcy earlier this year. In contrast, Bank of America, Goldman Sachs and Cisco Systems have all posted profits in the last few quarters – in some cases, record highs. Alhough according to the latest data, 9.1% of Americans are unemployed, major US corporations are slashing jobs not out of necessity but out of greed.

The revived focus in Washington on creating jobs may be pointless if corporate America no longer needs workers. (photo: chantal foster)

A new report by Northeastern University's centre for labour market studies shows (pdf) that corporate downsizing, work hour reductions and the correlated growth of corporate profits directly led to the recession. Big business in America shed jobs and squeezed increased productivity from their remaining workers, but report authors Andrew Sum and Joseph McLachlan write: "None of these productivity gains was shared by wage and salary workers in the form of higher real weekly earnings." Instead, corporations increased their profits "at a higher relative rate than in any other post second world war recession."

Following the recession of the 1980s, 28% of the economic growth in recovery went to corporate profits, while 25% went to boost the wages and salaries of ordinary workers. Today, 88% of the economic recovery has gone to boosting corporate profits. As a widely cited earlier version of Sum and McLachlan's report finds (pdf), only 1% – that's one out of every $100 – has gone to wages and salaries for the folks who clearly need it most.

In the raw capitalist model, some percentage of people need to be unemployed – a point Karl Marx sharply critiqued and, later, John Maynard Keynes used to justify government's role promoting full employment. While any level of unemployment seems untenable to average Americans trying to pay their bills, economist-types have long accepted that, left to its own devices, the unemployment rate will never be zero. Ongoing 5% unemployment is considered the norm, though in February, the Federal Reserve Bank of San Francisco released a paper arguing that 6% unemployment might be the new baseline. But what if it's worse? What if we've reached a new low in unchecked capitalist greed that will perpetually drive up the unemployment rate as long as companies can keep extracting a profit?

The financial sector occupies an increasing share of America's economy. Between 1973 and 1985, the financial sector comprised 16% of domestic corporate profits. In the 1990s, it hit 30%. In the past decade, the financial industry's slice of the economy topped 41% – and it may even go higher. These businesses make money not by making things, but by making bets on other money. Employees sold separately.

Increasingly, financialisation is sweeping more traditional businesses. General Electric, which has laid off thousands of workers in the past several years, posted profit growth in the last quarter driven not by refrigerators or even missiles, but by the company's financial services arm. Even Cisco Systems, which will lay off upwards of 6,000 people this year, targets financial industry customers to buy its routers and computer networks.

Of course, companies have always played a sort of shell game with workers and revenues. The difference now may be that major players can generate profits just by playing the game, regardless of the outcome. A few blocks from where I live in Brooklyn, NY, the Maramont food manufacturing company with 150 decently paid union workers is moving operations to non-unionised Pennsylvania. The modern twist on this unfortunate but old story is that Goldman Sachs owns the small company – and if they don't make money off this scheme, they'll move the company to Bangladesh, or even get rid of workers altogether, or perhaps short their own holding and make money betting against Maramont. It's all the same to Goldman, as long as they make a buck. The workers, rather than essential parts of a productive economic engine, are now just pawns in high finance's game.

Most Americans are not Marxists. We want capitalism to work, generating earnings and opportunities – not just for Wall Street titans, but for ordinary working people. That, after all, is the essence of the American story. Yet, today's corrupt brand of capitalism would confound even Marx, who in his critique of the market's reliance on unemployment wrote, "[C]apital only increases when it employs workers." If extreme profit-making at the expense of ordinary workers continues to go unchallenged, Marx's criticism may seem more like nostalgia. If we do nothing to confront corporate greed, we will not create new jobs in America.

© Guardian News and Media Limited 2011

Sally Kohn is Chief Agitation Officer for the Movement Vision Lab

more Sally Kohn

How Austerity Is Ushering in a Global Recession

by Robert Reich

Tuesday, August 16, 2011

Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe’s strongest core economies – Germany, France, and the Netherlands – slowing to a crawl.

We’re on the cusp of a global recession.

Policy makers be warned: Austerity is the wrong medicine.

We all know about the weaknesses in Europe’s “periphery” – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying.

Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all.

What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all.

Europe depends on exports – especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.

And as the United States economy sputters, exports to America have been slowing.

But chalk up a big part of Europe’s slowdown to the politics and economics of austerity. Europe – including Britain – have turned John Maynard Keynes on his head. They’ve been cutting public spending just when they should be spending more to counteract slowing private spending.

The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal government’s original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public that’s being sold the Republican lie that less government spending means more jobs.  

Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.

Public debt has meaning only in relation to a nation’s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.

When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.

That’s what we’re seeing now.

What’s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.

With anemic growth in America and Europe, the Japanese economy comatose, and emerging markets (including China) pulling in their reins, the vicious cycle could become worldwide. If global demand for goods and services continues to fall behind the potential supply we’ll see unemployment rise further and growth slow even more — especially in Europe and the U.S.

Central banks may try to reverse this course. Ben Bernanke and company at the Fed have committed themselves to near-zero interest rates for the next two years (not exactly a rousing endorsement of America’s economic prospects in the near term). Given the sharp slowdown in Germany, the European Central Bank might now feel some pressure to lower interest rates there – or at least delay the next increase.

But when growth is slowing so dramatically and unemployment is already high, monetary policy can’t possibly do it alone.

Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.

Fiscal austerity is the wrong medicine at the wrong time.

Slouching Toward a Double Dip, For No Good Reason

by Robert Reich

Monday, August 8, 2011

Imagine your house is burning. You call the fire department but your call isn’t answered because every fire fighter in town is debating whether there will be enough water to fight fires over the next ten years, even though water is plentiful right now. (Yes, there’s a long-term problem.) One faction won’t even allow the fire trucks out of the garage unless everyone agrees to cut water use. An agency that rates fire departments has just issued a downgrade, causing everyone to hoard water.

While all this squabbling continues, your house burns to the ground and the fire has now spread to your neighbors’ homes. But because everyone is preoccupied with the wrong question (the long-term water supply) and the wrong solution (saving water now), there’s no response. In the end, the town comes up with a plan for the water supply over the next decade, but it’s irrelevant because the whole town has been turned to ashes.

Okay, I exaggerate a bit, but you get the point. The American economy is on the verge of another recession. Most Americans haven’t even emerged from the last one. Consumers (70 percent of the economy) won’t or can’t spend because their major asset is worth a third less than it was five years ago, they can’t borrow as before, and they’re justifiably worried about their jobs and wages. And without customers, businesses won’t expand and hire. So we’re trapped in a vicious cycle that’s getting worse.

But the government won’t come to the rescue by spending more and cutting most peoples’ taxes because it’s obsessed by a so-called “debt crisis” based on budget projections over the next ten years. That obsession – which serves the ideological purposes of right-wing Republicans who really want to shrink government — has even spread to the eat-your-spinach media, deficit hawks in the Democratic Party, and a major (and thoroughly irresponsible) credit-rating agency that’s neither standard nor poor.

Meanwhile, some lazy (or misinformed) commentators are linking our faux debt crisis to Europe’s real one. But the two are entirely different. Several European nations don’t have enough money to repay what they owe their lenders, or even pay the interest. That’s threatening the entire euro-zone.

But there’s no question that the United States has enough money to pay what it owes. We’re the richest nation in the world and we print the money the world relies on. The only question on this side of the pond is whether tea-party Republicans will allow America to pay its bills when the debt-ceiling fight resumes at the end of 2012.

Europe is scared of what’s happening in the United States – but it’s not America’s faux “debt crisis” that’s spooked them. It’s the slowdown here (and the likelihood of another recession), made all the worse as our debt obsession prevents the U.S. government from doing what it should. A slowdown and recession here mean fewer exports from Europe to America. When combined with their genuine debt crisis, this could push Europe’s economy over the edge.

The most important aspect of policy making is getting the problem right. We are slouching toward a double dip because we’re getting the problem wrong. Despite what Standard & Poor’s says, notwithstanding what’s occurring in Europe, and regardless of U.S. budget projections years from now — our current crisis is jobs, wages, and growth. We do not now have a debt crisis.

Every time you hear an American politician analogize the nation’s budget to a family budget (as, sadly, even President Obama has done), you should know the politician is not telling the truth. The truth is just the opposite. Our national budget can and should counteract the shrinkage of family budgets by running larger deficits when families cannot.

Americans are more frightened, economically insecure, and angrier than at any time since the Great Depression. If our lawmakers continue to obsess about the wrong thing and fail to do what must be done – and they don’t explain it to the nation – Americans will only become more fearful, insecure, and angry. 

We are slouching toward a double dip, with all the human costs that implies. We don’t have to be. That is the tragedy of our time.

More Stimulus for US, Less Austerity

Published on Monday, August 8, 2011 by Sydney Morning Herald

by Joseph E. Stiglitz

THE Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the US, not the major emerging markets, that have become mired in slow growth and high unemployment. And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fuelled substantial budget deficits. The response - massive spending cuts - ensures that unacceptably high levels of unemployment will continue, possibly for years.

The European Union has finally committed itself to helping its financially distressed members. It had no choice: with financial turmoil threatening to spread from small countries like Greece and Ireland to large ones like Italy and Spain, the euro's very survival was in growing jeopardy. Europe's leaders recognised that distressed countries' debts would become unmanageable unless their economies could grow, and that growth could not be achieved without help.

But, even as Europe's leaders promised that help was on the way, they doubled down on the belief that non-crisis countries must cut spending. The resulting austerity will hinder Europe's growth, and thus that of its most distressed economies: after all, nothing would help Greece more than robust growth in its trading partners. And low growth will hurt tax revenues, undermining the proclaimed goal of fiscal consolidation.

The discussions before the crisis illustrated how little had been done to repair economic fundamentals. The European Central Bank's vehement opposition to what is essential to all capitalist economies - the restructuring of failed or insolvent entities' debt - is evidence of the continuing fragility of the Western banking system.

The ECB argued that taxpayers should pick up the entire tab for Greece's bad sovereign debt, for fear that any private-sector involvement would trigger a "credit event", which would force large payouts on credit-default swaps (CDSs), possibly fuelling further financial turmoil. But, if that is a real fear for the ECB - if it is not merely acting on behalf of private lenders - surely it should have demanded that the banks have more capital.

The ECB should have barred banks from the risky CDS market, where they are held hostage to ratings agencies' decisions about what constitutes a "credit event". Indeed, one positive achievement by European leaders at the recent Brussels summit was to begin the process of reining in both the ECB and the power of the American ratings agencies.

Indeed, the most curious aspect of the ECB's position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event. The whole point of restructuring was to discharge debt and make the remainder more manageable. If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable.

This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least "cognitively") by the banks that they are supposed to regulate. And matters are little better on the other side of the Atlantic. There, the extreme right threatened to shut down the US government, confirming what game theory suggests: when those who are irrationally committed to destruction if they don't get their way confront rational individuals, the former prevail.

As a result, President Barack Obama acquiesced in an unbalanced debt-reduction strategy, with no tax increases - not even for the millionaires who have done so well during the past two decades and not even by eliminating tax giveaways to oil companies, which undermine economic efficiency and contribute to environmental degradation.

Optimists argue that the short run macroeconomic effect of the deal to raise America's debt ceiling and prevent sovereign default will be limited - roughly $US25 billion ($A24 billion) in expenditure cuts in the coming year. But the payroll tax cut (which put more than $US100 billion into the pockets of ordinary Americans) was not renewed and surely business, anticipating the contractionary effects down the line, will be even more reluctant to lend.

The end of the stimulus itself is contractionary. And, with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one in six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed - for the sake of balancing the budget as well. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction.

There has been much concern about financial contagion between Europe and America. After all, America's financial mismanagement played an important role in triggering Europe's problems and financial turmoil in Europe would not be good for the US - especially given the fragility of the US banking system and the continuing role it plays in non-transparent CDSs.

But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic have been reinforcing each other. The same will be true of the stagnation that those policies bring.  

Copyright © 2011 Fairfax Media

Joseph E. Stiglitz is University Professor at Columbia University. Among many books, he is the author of Globalization and Its Discontents. He received the Nobel Prize in Economics in 2001 for research on the economics of information. He is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict.  His most recent book is Free Fall: America, Free Markets, and the Sinking of the World Economy.

The Republicans’ Double-Dip, and What Must Be Done

by Robert Reich

Thursday, August 4, 2011

 

John Boehner said Tuesday the Republicans got “90 percent of what we wanted” from the budget deal. So presumably he and his colleagues are willing to take responsibility for some 450 points of today’s mammoth 513-point drop in the Dow Jones Industrial Average. 

 I’m being a bit facetious – but only a bit. It’s always dangerous to read too much into one day’s move in the stock market. 

Yet the stock sell-off – not just today’s, but that of the last days – cannot be easily dismissed. It marks Wall Street’s largest losing streak since 2008.

Republicans repeatedly assured the nation that once the debt-limit deal was done – capping spending, cutting the budget deficit, and getting “90 percent” of what they wanted — the economy would bounce back.

 Just the opposite seems to be happening.

Call it the Republican’s double-dip recession. 

Wall Street investors aren’t ideologues. They don’t obsess about budget deficits ten years from now, or the size of the government. One day doesn’t make a trend, but a giant sell-off like this is motivated by hard, cold realities.

Here are the two hard, cold realities investors are most worried about:

First, the economy looks like it’s dead in the water. The Commerce Department reports almost no growth in the first half of the year. And job growth is just about at a standstill. Far fewer jobs were generated in May and June than necessary just to keep up with the growth in the potential labor force – meaning the employment picture is actually worsening. Investors fear tomorrow’s (Friday’s) jobs report for July will show more of the same.

Secondly, investors now know the federal government’s hands are tied. The original stimulus is over; the Fed’s “quantitative easing” is over.

This week’s deal over the debt ceiling cinches it. The market is now on its own — without enough rocket power get out of the continuing gravitational pull of the Great Recession.

Now that the deal is done, Obama and the Democrats will have a much harder time passing anything close to the stimulus necessary to breach the gap between what consumers (who are 70 percent of the economy) are willing to spend and what the economy can produce at or near full-employment.

Not incidentally, the Commerce Department’s revised data for what happened to the economy in 2008 and 2009 shows the drop to have been far greater than had been supposed. The economy plunged 8.9 percent in the fourth quarter of 2008 – the steepest quarterly decline in more than half a century. And in 2009 household buying declined almost 2 percent (compared with a previous estimate of 1.2 percent). That’s the biggest contraction in almost sixty years.

This means the original stimulus should have been much larger in order to offset the drop. With cash-starved state and local governments simultaneously scaling back their own spending, the federal stimulus needed to be even bigger.

So much for Republican claims that the original stimulus “didn’t work.” Of course it didn’t, given the size of the slide.

It was never a debt crisis. The debt crisis was manufactured. It’s been a jobs, wages, and growth crisis all along. And that reality has finally caught up with us. 

Now that we’re slouching toward a double-dip recession, the only hope is voters will tell their members of Congress – who are now on recess back home – to stop obsessing about future budget deficits and get to work on the real crisis of unemployment, falling wages, and no growth.

We need a bold jobs bill to restart the economy. Eliminate payroll taxes on the first $20,000 of income for two years. Recreate the WPA and the Civilian Conservation Corps. The federal government should lend money to cash-strapped states and local governments. Give employers tax credits for net new jobs. Amend the bankruptcy laws to allow distressed homeowners to declare bankruptcy on their primary residence. Extend unemployment insurance. Provide partial unemployment benefits to people who have lost part-time jobs. Start an infrastructure bank.

And more.

The jobs bill should be number one on the nation’s agenda. It should have been all along.

We Don't Need More Stuff; We Need a Different Way of Distributing the Stuff We Have.

by John Lawrence

Everyone is talking about how to get the economy moving again and how to create jobs. President Obama talks about "winning the future." This means more education, more entrepreneurialism, more new industries, more new products for consumers to buy. Surely, all this new economic activity is exactly what we need or is it? Since the GDP of the US is dependent on consumers consuming to the tune of 70% of the entire economy, it stands to reason that for the economy to expand, consumers need to consume more. But wait a minute. We are already stuffed to the gills with products rammed down our throats by TV advertisers. Maybe what we need is less consumption. Americans are already experiencing an epidemic of obesity. We should be consuming less fast food. But that would bring the profits of McDonald's down. They might even have to lay off employees. Their stock might plummet. Wal-Mart offers us a plethora of cheap crap made in China. But if we stopped buying it, Wal-Mart's profits would go down, their stock price would tumble and the Dow Jones average might even find itself in bear market territory. Everyone agrees that this would be terrible for the economy. But it might be good for the citizens.

I say we need to participate less in the market economy and be more self-subsistent. This would result in a decrease in GDP, but an increase in citizen independence. The more we rely on ourselves to fulfill our needs, the less we rely on the market economy and the better off we are when that economy goes kerflooey. The recent economic meltdown was all about Wall Street and their shenanigans. It was of paramount importance to bail out Wall Street and then all good things would follow. Such was the conventional wisdom. Only good things didn't follow. People's homes were foreclosed on en masse even when banks couldn't prove that they held title to the houses. Main Street, the middle class - they were not protected at all. The culprits who caused the crisis were bailed out. The average citizen who lost his job and his house and maybe even his wife was not bailed out at all. In fact Republicans are doubling down on destroying what remains of the safety net which might have helped these unfortunates to maintain the skeleton of a half way decent way of life. Congress has continued to sponsor and uphold legislation that encourages corporations to outsource jobs. The budget is to be balanced on the backs of the poor and middle class and not by asking the rich to contribute a little more. We are rapidly retreating to the Dickensian era where to ask for a little more porridge was to be answered with a "certainly not!"

What we need is not more consumption of cheap Chinese produced crap or even newly minted crap from our own entrepreneurs. What we need is a better system of distributing the immense amount of stuff that we are already capable of producing. And in particular we are in need of a more widely distributed system of ownership so that profits redound to the average citizen and not to the upper .1% who are becoming immensely wealthy far beyond their needs while the poor and middle class are being reduced to penury and poverty. What we need is a government that looks out for the little guy, not one who is all for the competitive struggle to produce more and more goods and win the future that way. How about winning the future by taking back our ability to be self-sustaining? We need to return to an era when people produced a large amount of their own food by growing it themselves instead of relying on the marketplace of consumer provided food by large agricorporations which use pesticides, herbicides and hormones to provide us with food which in most cases will not kill us right away. That will take place in 30-40 years when cancer sets in. But in a lot of cases of e coli and salmonella brought on by filthy conditions for animals in factory farms, it will kill us or sicken us immediately. So profits are concentrated in the hands of a few corporations instead of being widely distributed which would take place if there were widespread family gardening which also produces healthier foods. If everyone farmed to some extent, we would all be better off but GDP and corporate profits would decline because we wouldn't be participating to such a great extent in the market economy.

Sociologists decry the fact that in many parts of the world people are living on $2. a day. But those in this category that are rural may in fact be 98% self-subsistent. In other words they are providing for their own needs without participating in the market economy or are only participating to the tune of $2. a day. On the other hand the urban poor who are living on $2. a day may not be in a position to be self-subsistent, and they are truly poor because they have to meet all their needs by means of the market economy and $2. a day doesn't go very far. Just recently many Americans met probably 75% of their needs without participating in the market economy. Take my grandparents, for example. My Grandfather lived and worked on a small dairy farm. They had chickens and hogs and a large garden. So they provided perhaps 90% or more of their own food instead of buying it at the market. They sold milk into the marketplace in exchange for dollars which they used to purchase what they could not provide for themselves. Instead of buying oil or gas, my grandfather farmed with horses and he grew the fuel that they consumed with the result that he did his own energy production and did not have to depend on Exxon Mobil or Chevron for energy. And as a bonus horses did not pollute. Since chemicals were not available, his farming was organic by default. He learned carpentry and built his own buildings with the result he didn't have to hire a contractor. They were largely self-sufficient and self-subsistent. Of course, they made their own clothes instead of buying them in a store. Women had a whole variety of functions within the household instead of vying for jobs in the marketplace, another way in which they were self-sufficient. They actually weathered the Great Depression quite well since they weren't dependent on the market economy. Even my parents who had government jobs as teachers, the kind that Republicans are attacking today, raised chickens and had a really large garden from which they provided much of their own food. And women used to bake instead of buying prepared foods.

So maybe the answer to the economic malaise that we find ourselves in today will be solved not by creating new industries to manufacture more and better stuff but by figuring out ways to be less dependent on the marketplace and more self-sufficient. Profit centers need to be more widely dispersed instead of profits ending up in the hands of the Fortune 400. Think about it: when you participate in the market economy, the money you spend ends up in the hands of a very few and select group of corporations and wealthy individuals and families. These individuals, families and corporations have effectively captured government through their paid lobbyists so that government operates solely in their interests. Jefferson envisioned a country of independent yeoman, small farmers and craftsmen. In today's America, there are hardly any such people. Instead most rely on a job to provide them with income which they use to provide for all their needs by purchasing goods and services in the marketplace. As more and more people lose their jobs because the jobs are outsourced or are replaced by automated machines, there is no place to go but down. But the self-employed, the self-sufficient and self-subsistent will be able to provide for themselves and their families irregardless of what is happening in the marketplace. Those absolutely dependent on wages to make a living are already becoming neo-serfs needing two or three minimum wage jobs to make a go of it. The worst off are dependent on charity.

 

 

The Old Superstition

by Paul Krugman

from the New York Times, June 28, 2011, 7:05 am

I picked up a copy of Lionel Robbins’s 1934 book The Great Depression in a used book shop in Norwich. It’s quite revealing: judicious in tone, full of tables and facts, clearly meant to be seen as the work of a wise observer – indeed, a Very Serious Person.

And utterly, utterly wrongheaded

“The first essential of any recovery from the position in which the world now finds itself is a return of business confidence,” declares Robbins. “But how is confidence to be restored?” He comes out against expansionary monetary policy, even to reverse the deflation of 1929-33 – he doesn’t really have any logical explanation, but having decided that the problem is “confidence”, he declares that monetary expansion would create “uncertainty” and therefore hurt confidence. He condemns exchange rate flexibility, again because it creates uncertainty and undermines confidence.

And after surveying the wreckage all around him, he declares that the cause of the depression was excessive government intervention, and the remedy, the thing needed to restore that all-essential confidence was … drum roll .. a return to the gold standard.

You can sort of see how this kind of policy analysis based on superstition might have seemed plausible in 1934, although even pre-General Theory Keynes could have explained just how wrong Robbins was (and did). But one would have hoped that we were past this sort of thing today.

The point, of course, is that we aren’t. The new BIS report is very much in the same vein as Robbins 1934, with much less excuse. Robbins suffered from the lack of a framework to make sense of events; the BIS, like so many economists, faced with exactly the economic syndrome Keynes analyzed, and for that matter even Milton Friedman would have seen as demanding strong action, has chosen to ignore that framework and play monetary Calvinball instead.

I was originally going to end this post by saying something about stupidity, but that’s not right: the people at the BIS aren’t stupid. What’s going on here is something different and worse: we’re seeing the desire for conventional respectability outweighing the lessons of history; we’re seeing vague prejudice (prejudice that just so happens to serve the interests of rentiers) trumping analysis.

History will not forgive these people.

The Swamp of Washington and the Morass of the Economy

by Robert Reich

Sunday, June 12, 2011

Washington was built on a swamp. In the summer, temperatures can reach over 100 degrees — as they did over the last few days when I made the rounds of Washington Democrats, repeatedly asking why no bold jobs plan is emerging. 

Here’s a sample of their responses:

“Dead in the water. We’ll be lucky if we get votes to raise the debt ceiling without major spending cuts this year and next.”

“Are you kidding? It’s all budget deficit, budget deficit, budget deficit. Nobody’s thinking about anything else.”

“Republicans beat us up so bad over the first stimulus there’s no way we’re gonna try for a second.”

“We got them [Republicans] cornered on Medicare. Now they want to change the subject to jobs. Forget it.”

“No need. We’ll see job growth in the second half of the year.”

“The President doesn’t want to put anything on the table he can’t get through Congress.”

And so it went. Not a shred of urgency.

This morning I was on ABC’s “This Week,” debating jobs and the economy with Republican Senator Richard Shelby of Alabama. Shelby restated the standard Republican playbook of spending cuts and tax cuts (except for one instant when he inadvertently conceded America emerged from the Great Depression only when government spent big time mobilizing the nation for World War II).

But what struck me most was the similarity between Shelby’s overall attitude and that of the Democrats I talked with — a kind of shrug of the shoulders, a sense that it’s really not all that bad out there, and that nothing can be done anyway. (In the green room, before going on, Shelby told me employment in northern Alabama was actually fairly good and the problem was near the coast.)

The recovery is stalling across the nation yet in the Washington swamp it’s business as usual. 

Americans are scared, with reason. We’re in a vicious cycle in which lower wages and net job losses and high debt are causing consumers to cut their spending — which is causing businesses to cut back on hiring and reduce pay. There’s no way out of this morass without bold leadership from Washington to rekindle consumer demand. 

If the Democrats remain silent, the vacuum will be filled by the Republican snake oil of federal spending cuts and cut taxes on big corporations and the wealthy. Democrats — starting with the President — must have the courage and conviction to tell the nation the recovery is stalling, and what must be done.

Back Toward Double Dip

by Robert Reich

Friday, June 3, 2011

The May jobs report is a disaster — the weakest reading since September. Non-farm payrolls grew only 54,000 last month, according to the Labor Department’s Bureau of Labor Statistics. Private employment rose only 83,000 — the smallest growth since last June. Government payrolls dropped 29,000.

The overall jobless rate rose to 9.1 percent.

Together with plummeting housing prices, falling wages for non-supervisory workers, a paltry 1.8 percent growth in the first quarter, and a precipitous drop in consumer confidence, the picture should be clear to anyone able to see clearly.

The recovery has stalled.

We’re not in a double dip yet, but the odds are increasing.

The question is whether all this will wake up Washington, and stop the monumental distraction of the games being played over the debt ceiling and long-term budget deficit. The Republican lie that the nation’s long-term budget deficit is responsible for high unemployment would be laughable if it weren’t so tragically irrelevant to the current situation.

The President cannot be reelected if the economy tanks. He may not even be reelected on an anemic recovery in which unemployment remains nearly this high. But all incumbents are endangered. Republican House members from swing districts are toast if they don’t show voters they’re actively working on the twin problems of jobs and wages.

Several steps need to be taken right away. Exempt the first $20,000 of income from payroll taxes for two years. Lend money to cash-starved state and local governments. Initiate a new WPA for the long-term unemployed. Amend bankruptcy laws to allow homeowners to include their prime residencies in personal bankruptcy (giving them more bargaining leverage with their lenders to renegotiate mortgage loans).

Above all: Washington needs to show Americans it’s taking seriously the ferocious problem of jobs and wages, and the trend back toward a double dip.

The Truth About the Economy that Nobody In Washington Or On Wall Street Will Admit: We’re Heading Back Toward a Double Dip

by Robert Reich

Wednesday, March 30, 2011

Why aren’t Americans being told the truth about the economy? We’re heading in the direction of a double dip – but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.

Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It’s weaker today on average than at the lowest point of the Great Recession.

The Reuters/University of Michigan survey shows a 10 point decline in March – the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board’s index of consumer confidence, just released, shows consumer confidence at a five-month low — and a large part is due to expectations of fewer jobs and lower wages in the months ahead.

Pessimistic consumers buy less. And fewer sales spells economic trouble ahead.

What about the 192,000 jobs added in February? (We’ll know more Friday about how many jobs were added in March.) It’s peanuts compared to what’s needed. Remember, 125,000 new jobs are necessary just to keep up with a growing number of Americans eligible for employment. And the nation has lost so many jobs over the last three years that even at a rate of 200,000 a month we wouldn’t get back to 6 percent unemployment until 2016.

But isn’t the economy growing again – by an estimated 2.5 to 2.9 percent this year? Yes, but that’s even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we’d expect growth of 4 to 6 percent.

Consider that back in 1934, when it was emerging from the deepest hole of the Great Depression, the economy grew 7.7 percent. The next year it grew over 8 percent. In 1936 it grew a whopping 14.1 percent.

Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop. Hourly wages are falling because with unemployment so high, most people have no bargaining power and will take whatever they can get. Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes the biggest asset most Americans own, as home prices drop most Americans feel even poorer.

There’s no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year’s budget.

In other words: Watch out. We may avoid a double dip but the economy is slowing ominously, and the booster rockets are disappearing.

So why aren’t we getting the truth about the economy? For one thing, Wall Street is buoyant – and most financial news you hear comes from the Street. Wall Street profits soared to $426.5 billion last quarter, according to the Commerce Department. (That gain more than offset a drop in the profits of non-financial domestic companies.) Anyone who believes the Dodd-Frank financial reform bill put a stop to the Street’s creativity hasn’t been watching.

To the extent non-financial companies are doing well, they’re making most of their money abroad. Since 1992, for example, G.E.’s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes). In fact, the only group that’s optimistic about the future are CEOs of big American companies. The Business Roundtable’s economic outlook index, which surveys 142 CEOs, is now at its highest point since it began in 2002.

Washington, meanwhile, doesn’t want to sound the economic alarm. The White House and most Democrats want Americans to believe the economy is on an upswing.

Republicans, for their part, worry that if they tell it like it is Americans will want government to do more rather than less. They’d rather not talk about jobs and wages, and put the focus instead on deficit reduction (or spread the lie that by reducing the deficit we’ll get more jobs and higher wages).

I’m sorry to have to deliver the bad news, but it’s better you know.

Why Obama Isn’t Fighting the Budget Battle

by Robert Reich

Friday, March 11, 2011

In the next week the action moves from Wisconsin to Washington, where the deadline looms for a possible government shutdown over the federal budget. President Obama has to take a more direct and personal role in that budget battle  – both for the economy’s sake and for the sake of his reelection. But will he? Don’t count on it.

Worried congressional Democrats say the President needs to use his bully pulpit to counter defections in Democatic ranks, such as the ten Democrats and one allied Independent who on Wednesday voted against a Senate leadership plan to cut $6.2 billion from the federal budget over the rest of fiscal year 2011. They want Obama to grab the initiative and push a plan to eliminate tax breaks for oil companies and for companies that move manufacturing facilities out of the country, and a proposal for a surtax on millionaires.

Most importantly, they’re worried the President’s absence from the debate will result in Republicans winning large budget cuts for the remainder of the fiscal year – large enough to imperil the fragile recovery.

But Obama won’t actively fight the budget battle if the current White House view of how he wins in 2012 continues to prevail.

Shortly after the Democrats’ “shellacking” last November, I phoned a friend in the White House who had served in the Clinton administration. “It’s 1994 all over again,” he said. “Now we move to the center.”

The supposed parallel between 2010 and 1994 is something of an article of faith in the Obama White House. That’s partly because so many of President Barack Obama’s current aides worked for Bill Clinton and vividly recall Clinton’s own shellacking in 1994. It’s also because the Clinton story had a happy ending, at least electorally. The fact that Bill Clinton went on to win re-election is a source of comfort to the current White House as it looks ahead to 2012.

From this, many in the Obama White House have concluded that the president should follow Clinton’s campaign script — distancing himself from congressional Democrats, embracing further deficit reduction, and seeking guidance from big business. If it worked for Clinton, it must work for Obama — or so it’s supposed.

The superficial logic that so often passes for thought in Washington typically sees causation where there’s only correlation. In fact, there’s no reason to believe that Clinton’s lurch rightward at the start of 1995 is what won him re-election the following November. He was re-elected because of the strength of the economic recovery.

By the spring of 1995, the American economy had bounced back, averaging 200,000 new jobs per month. By early 1996, it was roaring — creating 434,000 new jobs in February alone. I remember suggesting to Clinton’s political adviser, Dick Morris, that the president should come up with some new policy ideas for the election. Morris scowled. This election will be about the economy — nothing more, nothing less, he said. Morris knew that voters didn’t care much about policy. They cared about jobs. “The president,” said Morris, “is going to say, ‘You’ve never had it this good, and you ain’t seen nothing yet.’”

The 1991-1992 recession was relatively mild as recessions go. As is typical of most recessions, it had been brought on by the Federal Reserve raising interest rates too high in response to fears of inflation — meaning that a recovery would occur when the Fed reversed course and reduced short-term rates, which then-Chair Alan Greenspan obligingly did.

President Obama won’t be as fortunate. The Great Recession resulted from the bursting of a giant debt bubble. Wall Street’s irresponsible lending and speculating, negligible oversight by federal regulators, and the insatiable desire of Americans to use their homes as ATMs created a toxic mixture that exploded at the end of 2007 and continues to sicken the economy.

The Fed has kept interest rates near zero for more than a year and has opened the spigots of its discount window, without much result. Unemployment continues to hover around 9 percent. Economic growth is pathetic.

While jobs used to follow corporate profits, American corporations now rack up big profits without expanding employment. Their profits are coming mainly from buoyant sales by their foreign operations — especially in China and India — combined with cuts in jobs, wages, and benefits here in the U.S.

The richest 10 percent of Americans, who own about 90 percent of all financial assets, are buying again (sales at Neiman Marcus and Tiffany’s are way up). But most Americans still have little purchasing power. Under a huge load of debt, worried about meeting mortgage payments, and seeing their major asset — their home — continue to drop in value, they’re holding back from the malls.

A strong recovery cannot be sustained by the richest 10 percent. Before the Great Recession, the top 10 percent received about half of total income, but they accounted for only about 40 percent of total spending. Forty percent of spending isn’t enough to convince businesses to invest in new capacity and jobs, which is why corporations are still sitting on $1.4 trillion of cash.

So many jobs have been lost since Obama was elected and so many people have entered the workforce needing jobs that even if job growth were to match the extraordinary pace of the late 1990s, year after year, the unemployment rate wouldn’t fall below 6 percent until 2016. That pace of job growth is unlikely, to say the least.

If Republicans manage to cut federal spending significantly between now and Election Day while state outlays continue to shrink, the certain result is continued high unemployment and anemic growth.

Obama’s challenge in 2012 has nothing to do with Bill Clinton’s in 1996. He must fight the Republican plans to cut the budget deficit this year and next, and explain to the public why he’s doing so. And he must convince Americans that public spending during the next few years is necessary to get the economy moving, reduce the long-term debt as a portion of the total economy, and get jobs back.

Serfing USA: Corporate America is Robbing American Workers

Published on Thursday, December 30, 2010 by ThisCan'tBeHappening.net

by Dave Lindorff

Along with the staggering theft in broad daylight of Americans' assets that has occurred in the course of the ongoing financial crisis, as taxpayers funded multi-trillion bank bailouts and banks stole homes through foreclosures with the help of fraudulent paperwork, American companies have also been picking the pockets of workers more directly.

This second round of paycheck theft has come in the form of stolen productivity gains.

Historically, the relatively high and rising standard of living of American workers--both blue and white-collar--which once gave the US one of the highest standards of living in the world, has come courtesy of rising productivity, which has allowed US companies to produce more goods with less labor, and to then pass some of the enhanced profits on to workers in the form of higher wages, without having to raise prices. That has been important because, when higher wages are financed by higher prices, it tends to be a kind of zero-sum game: higher wages cancelled out by inflation.

But beginning in 2000, the old system already creaky, broke down. (It must be noted that this system was never the result of the capitalists' largesse, but rather was because of a tighter labor market and, critically, a powerful labor movement.)

The corporate onslaught against trade unions and against the minimum wage, which began with the Nixon administration in 1968, combined with so-called "free-trade" deals that allowed US companies to shift production overseas and then to freely import the products of their overseas production facilities back for sale to Americans at home, by weakening the power of workers to demand higher wages, has led to a situation where companies can just pocket all the profits from productivity gains, leaving wages stagnant, or even driving them down.

The recession that began in late 2007 has only made matters worse, giving owners and managers to opportunity to really hammer employees. With real unemployment and underemployment now running at close to 20%, employees are in no position to press for higher wages, even as those who are still working are putting in extra effort to keep their jobs, thus pushing productivity gains even higher.

The figures speak for themselves.

According to the Bureau of Labor Statistics, productivity gains during the 1990-1999 decade averaged just 2.1% per year. The prior decade, from 1980-1989, the average productivity gain was 1.5% per year. But between 2000 and 2009, when the economy suffered two recessions, the average annual productivity gain has been 2.9%, almost 50% higher than the prior decade, and almost double the rate in the 1980s.

During this same period, however, wages have actually declined. According to the BLS, wages in 2010 rose 0.1%, but inflation, running at an official (and grossly under-measured) 1%, more than ate that up. According to the Economic Policy Institute, a Washington think tank, for the whole decade from 2000 through 2009, wages actually sank for most people. In 2000, the median weekly wage for a high school graduate was $629. By the end of 2009, high school graduates were earning a median weekly wage, in inflation-adjusted dollars, of just $626--three dollars a week less than a decade earlier. A college degree didn't change things, either. In 2000, the median weekly wage for a college grad was $1030, but that had fallen to $1025 by the end of 2009.

Remember, all during that decade, companies were seeing productivity gains averaging almost 3% per year. If 50% of that gain in productivity annually had gone to workers, as might have been typical back 30 years ago when unions were stronger and before Congress gave away the store by signing onto the World Trade Organization and the North American Free Trade Act and similar trade agreements, that high school grad would have been earning $729 a week in inflation-adjusted dollars by 2009, while the college grad would have been earning $1,195.

Of course as a whole, Americans have been doing even worse, because these are just the mean wages of people who are working full weeks. In fact, many companies have been laying off workers, and making the remaining workers, desperate to hang on to their jobs, work harder to produce the same amount of product, meaning that besides not getting any pay increase, they are producing much more profit for the boss. Many workers who are still hanging onto their jobs are actually working fewer hours, and thus are taking home smaller paychecks, all of which goes into that higher productivity figure for output per worker the government is reporting.

Indeed, the Wall Street Journal recently reported glowingly that US production of goods and services had returned to its 2007 pre-recession level, but this is with unemployment running at an official rate of 9.8 percent, and an actual rate of about 19 percent.

What we're witnessing is a massive national "speed-up" which is enriching the owners of capital, while the workers are getting stiffed. It is the payoff to the ruling class for decades of hammering of trade unions, and also of trade unions cutting deals with the Democratic Party, which in turn has refused to defend workers' interests. Look at the sell-out of Labor during the first two years of the Obama administration. The union movement's one big issue--restoring some measure of fairness to the Labor Relations Act, so that it would be at least possible to organize unions and to win contracts and improved wages and working conditions--was dropped without even a fight by the Obama administration and the leadership of the House and Senate. The government, fully in the hands of Democrats, has also continued to sign trade agreements, most recently with Korea, that further shift jobs overseas, thus further weakening the position of workers here at home.

A cynic might speculate that this is also why the Democrats have refused for over three years now to come up with any real public jobs program despite the desperate straits of tens of millions of jobless people who have been without work for more than a year. The Democrats, in thrall to corporate interests, would on the evidence much rather spend $50 billion on a program of extended unemployment benefits that leaves those millions of people hungry for any real job, than spend that same sum on providing them with government jobs, as that would actually reduce unemployment and increase the bargaining power of all workers vis-a-vis employers.

Meanwhile, the national corporate media, itself viciously anti-union, continue to skew news coverage to portray unions as corrupt and greedy, so that the 90 percent of American workers who are not in a union don't even realize that any pay gains or benefits they get are because employers are trying to avoid unionization of their workforce.

Unless Americans wake up soon to how this process is impoverishing us all, we will see this shifting income and wealth to the top strata of the population continue until most of us are little more than modern-day serfs.

A start would be for people to at least recognize that this stagnation and decline in incomes we're witnessing is not some natural phenomenon. It is, no less than the fat salaries, perks and bonuses paid by corporate managers to themselves, simply another manifestation of corporate greed gone wild.

© 2010 ThisCan'tBeHappening.net

Dave Lindorff is a Philadelphia-based journalist and columnist. He is author of Marketplace Medicine: The Rise of the For-Profit Hospital Chains (BantamBooks, 1992), and his latest book "The Case for Impeachment" (St. Martin's Press, 2006). All his work is available at www.thiscantbehappening.net

Obama's Tax Cut Plan: Will it Create Jobs?

by John Lawrence

The recent bill that passed Congress that extended the Bush tax cuts for two years, funded unemployment insurance and did a few other things will undoubtedly create more "economic activity." But will it create jobs? That's the 64 trillion dollar question. Economic activity is not synonymous with job creation although that's the theory Obama is gambling his Presidency on. Economic activity is synonymous with positive GDP growth, but GDP growth has been positive since the third quarter of 2009. GDP growth has been positive for 5 straight quarters and hence by definition the US is officially not in a recession and hasn't been for the entire year of 2010. However, there is still an official unemployment rate of about 10% and an unofficial unemployment rate of 17%. At the same time job growth has been anemic. About a million jobs have been created in 2010 which is more jobs than were created during the entire Bush Presidency, but that isn't even enough to cover new entrants into the work force. About 100,000 new jobs per month are required just to stay even. That's 1.2 million jobs a year. Therefore, taking new entrants into the job force into consideration, there has actually been net negative job growth for the last 10 years including Obama's Presidency!

Something like 8 million jobs were lost during the Great Recession. Currently, there are over 400,000 initial claims for unemployment insurance every week. The statistics are ominous but, what is worse, government officials don't seem to have a clue as to why this is happening. There is no explanatory narrative, and their only theory is that increased economic activity will lead to job creation. Not necessarily so. What is certain is that the Obama tax cut plan will drill another trillion dollar hole in the national debt. And it will likely create jobs not in the US but in China and other Asian countries where labor is much cheaper than in the US. It's called labor arbitrage. When barriers to trade fall as they have with the current free trade penchant, businesses will move jobs to whatever country has the cheapest labor force and in today's world that means China. One is hard put to purchase a product not made in China. Consequently, increased economic activity will mean that GDP will increase as consumers buy more products MADE IN CHINA. That translates into few, if any, jobs created in the US.

The Obama administration is also trying to increase exports to serve the growing consumer markets in the developing countries of the world. That would arguably create jobs in the US. Only problem is that the transnational corporations, which are eager to serve those markets, prefer to locate their production plants not in the US but in those countries next to the emerging consumer markets. That way they get the best of both worlds. They get cheap labor AND they are close to the markets they want to serve. This leaves the US at a huge disadvantage. Corporations are eager to serve the US consumer market which is 70% of US GDP, but they don't want to locate production plants in the US because the cost of labor is too high.

So where does this leave the Obama administration. In a hole, likely, having added greatly to the national debt without having created many jobs, certainly not even enough to accommodate new workers entering the labor force. The Fed's attempts to get people to borrow and spend by lowering interest rates and by quantitative easing have been an abysmal failure when it comes to job creation. The money has been borrowed and invested primarily in emerging markets where profits are greater - not in the US. Government officials and the punditry seem to think that, if only they could get Americans to consume more, all would be well, but all would not be well as consumption is not correlated with job creation as long as everything Americans consume is produced elsewhere.

Automation, computerization and robotization have also decreased the need for much skilled labor. As a result the only jobs left are for those with a minimum of skills and those workers can be acquired cheaply in other countries. Professional jobs are also being outsourced to India and elsewhere as cheap internet connections make it profitable to outsource any jobs whose output is primarily paper which can be transmitted electronically to its final destination. Legal and engineering jobs, therefore, have been essentially outsourced to countries with college educated work forces which can handle professional job tasks. This makes it highly unlikely that the US can educate its way out of this dilemma. There has been much handwringing over the pitiful state of the US educational system which is inferior to those of many other countries of the world. But even improvements in education will not fix the problem that results from the fact that educated professionals in other countries will work for one tenth of the expected salaries in the US.

So what can be done about American jobs? What have other countries done? Germany, for example, has a healthy economy based largely on exports and also on the fact that German consumers buy products mainly produced in Germany. For all intents and purposes Germany has healthy tariffs although they don't call them that. Germany has a VAT tax which must be paid not only by companies producing products in Germany, but also, to be fair, by products entering the country as imports. The imports must pay the entire VAT tax in one fell swoop whereas German producers merely pay at each stage of production which spreads the tax over several companies. So imports are discouraged and German producers are encouraged. Other successful countries have in one way or another encouraged domestic producers. Government subsidies have given certain industries an edge, and, consequently, have sustained jobs in country. The US should learn from the example of other countries.

Obama and others hope that jobs will be created indirectly as a result of tax breaks. But this policy has historically proven to be a failure. It's a continuation of Reaganomics and supply side economics which was practiced by the Bush administration with the result that no net jobs were created in the entire Bush Presidency. The only jobs created by Bush were in the military and with private defense contractors. So Obama is gambling his Presidency on a failed Bush policy. One doesn't need a crystal ball to predict what the outcome will be: anemic job creation and a one term Presidency for Obama.

Other countries have industrial policies in which government works with industry in such a way as to create products both for internal consumption and for a successful export economy. This may involve intelligent subsidies instead of the lobbyist sustained subsidies in the US for malignant industries like oil and agricultural products. Other countries manage to place tariffs on imported products which compete with industries which they are trying to promote. The US penchant for free trade is only shooting itself in the foot. The US government funded itself entirely by by means of tarrifs from its founding up until the First World War - over 100 years. In short, US supply side economic and free trade policies are working to its disadvantage and to the advantage of its competitors. Meanwhile, US workers are being left out in the cold. They are being hung out to dry.

Finally, the one thing that is anathema to Republicans and Tea Partiers is direct job creation by the US government, but that may ultimately be the only alternative left to it after all the monetary and supply side economic policies have been exhausted. Franklin Roosevelt created the Civilian Conservation Corps and the Works Progress Administration which put millions of Americans to work during the 1930s. The US Congress became the country's largest employer. Much needed repairs to infrastructure were carried out as well as other beneficial projects. Today infrastructure is badly in need of repair and there are many useful potential jobs which private enterprise is loathe to undertake because they are not deemed to be profitable. Instead of just giving money to long term unemployed, they could be put to work in ways which would not only benefit the economy but would provide a source of labor for infrastructure improvement and beautification.