Global Elites Getting Nervous About Skyrocketing Inequality...

...But Won't Spare a Nickel to Fix It

December 2013 | Alternet

Global elites are getting a bit antsy these days.

A new study by the World Economic Forum based on a survey of 1,592 leaders from academia, business, government, and the non-profit world suggests that all is not cheery at the top. It seems that elites believe that the second biggest problem facing Planet Earth in 2014 is widening income disparities (unrest in the Middle East and North Africa is their top worry). When it comes to economic issues, elites and ordinary folks are often at odds, but according to a recent Pew survey , they converge on identifying the gap between rich and poor as a major flaw in the system.

What’s clear is that the schemes elites have supported, from austerity policies to financial predation, are driving inequality to such extreme levels that everybody is now talking about it. The Pope is talking about it . Robert Reich made a movie about it. All over the world, people having been protesting and rioting in rolling demonstrations about it. An ugly resurgence of fascist elements in Europe is capitalizing on it. Even folks like Larry Summers, who promoted policies that stoke inequality, are publicly lamenting it.

The global elites are sittting on piles of obscene wealth, but they also have two big problems:

1. Soft demand: When people are too poor to buy goods and services, businesses suffer and the whole economy lags.
2. Prospects of increasing social unrest: When people are so squeezed that they think they have nothing to lose by taking to the streets, the wealthy have to hide behind barricades.

The global situation is crazy and probably unstable, and the 0.01 percent knows it. The question is, what are they prepared to do about it?

Not much — not yet, anyway. You can peruse the top mainstream newspapers to get a sense of how most elites feel about the growing gap between haves and have-nots. Lately there’s been quite a bit of handwringing and an uptick of articles on subjects directly related to inequality, but precious few signs that any substantial changes are on the horizon.

Case in point: Just after Thanksgiving, New York Times readers found a moving article  in the business section detailing the plight of unfortunate retail workers who don’t get paid enough to make ends meet. The author noted the hardship of food stamp cuts and described a situation so bad that companies had set up food drives for low-wage workers and dispensed tips on how to apply for public assistance (independent websites like AlterNet had been all over this story for weeks).

For a human touch, the NYT author quoted a depressed mom who works at Sears selling toys that she could never afford to buy for her own children. The author duly noted that Americans support raising the minimum wage by an overwhelming majority, but in typical mainstream media fashion, took a stance of faux neutrality and provided the opinions of two mainstream economists who disagreed on whether raising minimum wage was a good idea or not. Overall, the article seemed cautiously in favor of something that American voters overwhelmingly say they want.

Conclusion: Some elites might be willing to raise the minimum wage just a bit.

But a couple of weeks earlier, the Washington Post ran a widely reviled editorial on Social Security that showed the limits of elite concern. The vast majority of Americans, aware of an oncoming train wreck of a retirement crisis, are against cuts to Social Security, but the editorial board at the Post made it clear that elites are not on their side and laid out various specious arguments, including an irrational appeal to deficit hysteria (the deficit is actually decreasing ), to bolster its antisocial perspective. Elizabeth Warren, increasingly a thorn in the side of greedy elites, blasted the Post.

Conclusion: Elites are not really willing to pay taxes, and financiers wish to charge more fees on private retirement accounts, ergo Social Security must be cut. (Erskine Bowles and Alan Simpson, the co-chairs of Obama’s Deficit Commission, are the standard-bearers for this line, along with their backer, Wall Street billionaire Pete Peterson.)

You can also look to top establishment politicians for insight into just how much elites are willing to do to solve the inequality problem.

For instance, there’s the little matter of a giant loophole in the tax code that favors the rich. The “carried interest” loophole allows financiers like hedge fund managers, venture capitalists and partners in real estate investment trusts to pay a lower tax rate on their profits than working people pay on their earnings. It’s an unjust handout to the wealthy, and again, the American people are clear on how they feel about the tax code : the rich don’t pay their fair share.

The GOP is vehemently against closing the loophole. But despite the fact that Democrats raged against it last year to defeat Mitt Romney, it is Dems themselves who are standing in the way of getting anything done. As the Boston Globe noted in a recent article, Democrats are worried that “crusading against the ‘carried interest’ loophole at this stage would inflame an important source of campaign contributions for Democrats.”

Back when he was in the Senate, John Kerry did an elaborate dance around the issue, using his influential post on the Senate Finance Committee to seed skepticism and parrot industry warnings of dire “unintended consequences’’ and unnamed risks to the economy if the loophole were closed, even while voting in favor of the change. With Kerry now at the helm of the State Department, a host of other prominent Democrats, including President Obama and Senator Chuck Schumer, have been quietly working to see that nothing much will be done.

Conclusion: Filling campaign coffers is more important than dealing with grossly unfair policies that contribute to dangerous inequality.

So there you have it. Global elites know that they have a vital interest in solving the problem of inequality, but few are willing to pay a dime or accept substantive changes to our economic system in order to solve it.

Perhaps the megarich will simply take shelter in armed and gated communities and continue to thumb their noses at the 99 percent until a mass movement rises to stop them. But many have a vague recollection of what happened in the French Revolution. At a certain point, the barricades don’t hold.

The Economy is Falling Further and Further Behind

Defining Success Downward 

by DEAN BAKER

Proponents of austerity both in the United States and Europe are eager to claim to success for their policies. In spite of economies that look awful by normal standards, austerity advocates are able to claim success for their policies by creating a new meaning for the word.

In Europe we have the bizarre story of both George Osborne, the UK’s chancellor of the exchequer, and Olli Rehn, the European Union’s commissioner for economic and monetary affairs, claiming success for their austerity policies based on one quarter of growth. Apparently, they are arguing that because their policies did not lead to a never-ending recession, they are a success. Remarkably, they seem very proud of this fact.

In the United States we were treated to the Wall Street Journal boasting of the success of the 2011 debt ceiling agreement on the eve of another standoff on the budget and the debt ceiling. The measure of success in this case appears to be that the sequester budget cuts put in place by the agreement are still in place and that the economy has not collapsed as a result. By this standard the WSJ has a case, but as with the austerity crew in Europe, this is a rather pathetic bar.

First, it is worth noting that many of the disaster warnings about the sequester from President Obama and the Democrats were grossly exaggerated. There was no plausible story in which cutting 5 percent of the discretionary portion of the federal budget would lead to imminent disaster. Most departments have some amount of reserves in various forms that they can tap into in order to minimize the impact of these cuts over a relatively short period. This meant nothing horrible happened when the sequester first began to bite on March 1.

However this doesn’t mean that the sequester is harmless. Suppose the 5 percent cutback rule was applied to any major corporation, even a highly profitable one such as Verizon or Apple. Surely these companies could find ways to reduce their operating expenses by 5 percent. They could put off hiring workers to fill vacancies. They may delay renovating office space. Perhaps they would freeze or cut some workers’ pay.

In the short-run there would probably be little change in the company’s ability to operate. After all, much of what they do is already baked into the cake. Verizon is going to be a huge and highly profitable wireless and phone company in 2013 and 2014 even if they cut back their marketing and don’t do proper maintenance and care for their network for six months or a year. In time of course the cutbacks will take a toll and likely lead to serious loss of market share and profits.

In the case of the federal government, we will see departments that are less able to do their jobs over time. This has been highlighted most clearly at the National Institutes of Health, where many promising lines of research were abandoned because of the sequester. But there will be similar stories in other departments.

Also, while kicking federal employees is apparently great sport for many, over time these people will look for other jobs and those who will replace them will likely be less qualified. Most people don’t want to work at a job where their pay and hours can be cut at any time for reasons that have nothing to do with their performance.

Employers in the private sector understand this fact even if it too complicated for members of Congress. This means that we can expect future government employees, like air traffic controllers, meat inspectors, and FBI agents, to be less qualified and committed than the current crew. The Wall Street Journal might think it some great victory that this deterioration has not been evident six months after the sequester, but people with more knowledge of the business world might be less impressed.

But the deterioration of government services might be the less important damage done by the sequester. The more visible and certain damage is the slower growth of the economy and higher unemployment.

Businesses hire people and undertake investment when they see demand for their product and/or have a new innovative idea. Outside of Wall Street Journal editorial page land, no business increases employment or undertakes investment because the government has laid off workers and cut back spending. This means that the government cutbacks directly reduce employment and curtail growth.

In the last two years, the government sector has shed 200,000 jobs. In a comparable period in the last recovery (August 2003 to August 2005) it added more than 300,000 jobs. This difference of 500,000 jobs would have a substantial impact on the labor market, especially when we consider that spending by these workers can be expected to increase the employment impact by at least 50 percent, bringing the total gain to 750,000 workers.

We can tell a similar story about growth, which has averaged just 2.2 percent over the last two years. This pace is less than most estimates of the economy’s potential growth rate, which means that rather than making up ground lost in the recession, we have been falling further behind the economy’s potential level of output. According to the Congressional Budget Office we are losing roughly $1 trillion in output a year because of the lack of demand in the economy.

So we know the sequester will give us deteriorating government services, higher unemployment, and slower economic growth. That’s the track record which prompts the Wall Street Journal’s boasts and advocacy of more austerity.

Local Fights Against Austerity are Growing

A Movement is Afoot
by MARK VORPAHL


Between sequestration, with its damaging impact on workers and the economy, and the billions of dollars in cuts to Social Security, Medicare and other necessary social programs that President Obama is pushing, it is evident that the economic policies of both major parties are not intended to promote a recovery for working people.

You cannot lift up a nation’s economy while slashing away at its consumers’ pocketbooks. In order to justify their defiance of this elementary law, both Republicans and Democrats start talking the language of “austerity,” that is, the notion that economic policy must be guided by reducing budgetary deficits first and foremost, and that workers exclusively must be made to pay the cost.

Policies associated with austerity include the cutting of public programs, privatizing existing government assets, mass layoffs of public workers and wage freezes for those who remain, union busting in the public sector and the revising of labor laws to further enhance the power of employers at the expense of employees.

Enforcing these policies during a recession prevents a recovery. Economic theory predicts this and history demonstrates it. Why, then, would the politicians promote austerity? Because these policies assure that the 1% will be let off the hook from paying their fair share of taxes that help subsidize the social safety net, and will have vast pools of public capital opened up for their private investment.

Why worry about the overall economy when the real power brokers from the corporations and banks are making out just fine with austerity? The message seems clear: As long as Wall Street is enjoying the “recovery,” no one else gets to. Wall Street has used its vast wealth to lobby politicians for policies that are in its interests. In order for working people to climb out of the recession, they will have to organize in order to create their own power base.
Local Struggles

As already noted, austerity is being enforced on a national scale. Below the radar of news headlines, for the most part, the policies of austerity are spreading on a local level as well with even more devastating immediate impact. Along with this, there has been a growing grassroots opposition to austerity starting locally.

This is most visibly the case in Chicago where Mayor Rahm Emanuel plans to sacrifice 54 public schools on the alter of austerity and Obama’s “Race to the Top.” Thirty thousand students from primarily low-income black and Latino neighborhoods will be affected. Rising to confront Mayor Emanuel’s threats has been a grassroots opposition that was built from previous battles linking the Chicago Teachers’ Union’s interests with those of the working class communities at large. This was most evident at a large rally against the school closures on March 27.

In Detroit the movers behind austerity have taken their most politically extreme measures yet, putting the city ahead of the curve for what is likely to develop across the country. Michigan Governor Rick Synder has appointed Kevyn Orr, of Jones Day Law firm, as Detroit’s Emergency Financial Manager. Orr has the power to dismiss elected officials, tear up union contracts, privatize public assets and impose new taxes without a vote. He will use this power to enforce austerity. Though Orr has yet to unveil his plans, there have already been numerous protests and rallies, and the actions are likely to increase.

On the West coast at the end of April, hundreds rallied outside the San Jose City Hall to protest proposed cuts to neighborhood services and Mayor Chuck Reed’s threat to declare a fiscal emergency.

On April 11 in Oregon, a public budget hearing in which the Portland City Council intended to sell $21.5 million in cuts attracted over 400 Portland residents, overwhelming city staff. Many citizens spoke to the need to prevent the cuts and instead raise revenue from corporations rather than handing out taxpayer subsidies to them, an idea that received overwhelming support from attendees.

And at an Oakland City Council budget talk, a packed Chamber booed and jeered a presentation on Oakland’s fiscal future, chanting “Enough is enough!” The City Council is projecting a deficit ranging from $19 million to $26 million. Considering that there has already been a 20 percent reduction in the city’s full-time work force and that the city’s three major non-public safety unions are negotiating new contracts, there was no mood to accept the City Council’s austerity story.

In Newark, Illinois, around 1,000 high school students walked out of class last month to protest deep cuts to the district’s budget. Newark Superintendent Cami Anderson claims the district faces a $57 million deficit. Newark’s high school students, correctly, refuse to accept that they must sacrifice their education in order to fill this hole.

Growing Potential

This list over protests in the last two months is not complete. It does display some patterns, however. It shows how education, public workers and the communities they serve are the primary targets of austerity. That means a lot of people are taking hits.

The list also demonstrates how people become empowered when these constituencies work together in solidarity. Austerity promoters prefer to pit communities and/or unions against each other in a scramble to grab what remains of a shrinking budget pie. The events reported above show that a different reaction is possible — one that will strengthen people’s ability to powerfully confront their local governments.

Finally, these developments show it is necessary to go beyond the budget claims of the city government. Budget deficits are the product of allowing big business tax loopholes, obscenely low tax rates, and subsidies paid for by taxpayers. Those expected to bear the burden of cuts are not responsible for this.

In a time of high unemployment it is necessary to stimulate the economy by creating jobs. This stimulus should be paid for by the 1%.

Those uniting against austerity cuts could also demand what they stand for, that is, a budget that puts jobs, education and neighborhoods first rather than corporate profit. To effectively do so the unions and community groups fighting austerity can work together to build their own budget assembly to counter city governments’ “we are broke” excuses and popularize an alternative.

These local struggles and many more are a confirmation that austerity in the U.S. will be met with a fight. Though they are disconnected in terms of their organizing, they are a response to a national problem. This wave of local grassroots organizing shows the potential exists to galvanize a national movement against austerity.

Financial Institutions Admit Austerity Failed

The Market Giveth and Taketh Away
by KEN KLIPPENSTEIN


The first part of 2013 has been something of a confessional period for the economic managerial class. The IMF’s chief economist, Olivier Blanchard, conceded that “forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation.” (‘Fiscal consolidation’ is a polite way of saying ‘austerity’.) U.S. Treasury Secretary Jack Lew admitted that “there has to be a focus on what the impact on unemployment is” of austerity policies; also, that “you cannot be in the world where austerity just leads to more austerity”; and finally, that “the rush to do all the [austerity] front-end has actually made the problem harder in some countries.” He even suggested that “Europeans need to look as well what they can do to generate more demand in their economy.”

Managing Director of the IMF, Christine Lagarde, confessed that “we don’t see the need to do upfront, heavy duty fiscal consolidation as was initially planned”; and “the best way to create jobs is through growth.” EU Economic and Monetary Affairs Commissioner Olli Rehn said that the IMF and the US’ recent calls for less austerity “are preaching to the converted.”

Meanwhile, Carmen Reinhart and Kenneth Rogoff, the Harvard economists responsible for one of the more influential studies used to defend austerity, have admitted that “austerity is not the only answer to a debt problem.” This came after three economists at the University of Massachusetts accused them of “selective exclusion” of data. Reinhart and Rogoff have since admitted that their critics “correctly identified a spreadsheet coding error.” In my view, their most striking error is being ignored: the failure to recognize that austerity didn’t work during the Great Depression and won’t work now, during the Great Recession. Anyone can make a spreadsheet error. It takes a Harvard professor to forget basic history.

It’s not particularly interesting when doctrinal managers like Reinhart and Rogoff change positions. The ability to turn on one’s heel and switch from one ideological conviction to its opposite, like a schoolchild running the pacer test, is probably the ideological manager’s main duty. The ones who collapse from exhaustion are weeded out long before they become IMF chiefs. What’s more interesting is why the coach is having them run in the opposite direction now.

In a correspondence I had with economist Jack Rasmus, he explained the economic managerial class’ reversal:

First, it may signal a future shift to business-investor tax cuts as a preferred ‘stimulus’ (which doesn’t work either). However, since tax cuts will raise the deficit, they have to justify an increase in the deficit if they’re going to move ahead with the tax cuts. Thus, the attack on ‘austerity’ (stimulus in reverse) as not as productive as they thought is first necessary. On the other hand, it’s important to note that the shift to ‘stimulus’ doesn’t mean a shift from social spending cuts; it means a shift to more deficit via corporate tax cuts.

Second, the abandonment of austerity may represent a prelude to a still greater reliance on monetary policy. Let the central bank bear all the burden (and blame) and take the heat off politicians more visibly responsible for spending cut austerity. Monetary policy (i.e. increasing liquidity to banks, investors and businesses) has in turn two prime goals. One: to boost the stock and financial securities markets and ensure more profits for speculators, and, second, to lower their currency’s exchange value to allow competition with other currency centers…A sure sign that capitalist policymakers are getting more desperate and trying to grow by beggaring their competitors. It’s competitive devaluations—not by fiat as in the 1930s—but by liquidity-exchange rate manipulation.

Whatever the case may be, the financial institutions’ current ideological inflection should probably be regarded with suspicion. It is much too sharp an inflection to indicate any sort of honest change in thinking.

The solutions that the economic managers are advocating demonstrate a useful point. They simultaneously demand stimulus and deficit reduction. As Treasury Secretary Jack Lew put it, “We shouldn’t choose between growth and job creation and getting our fiscal house in order.” This is like a child wishing he could stay up all night and get a good night’s sleep: either choice negates the other. These mental exercises in self-contradiction further illustrate the way in which the elite must accept mutually conflicting views. Orwell called this ‘doublethink.’

Today we call it things like ‘nuance.’ Example: Reinhart and Rogoff said that “the recent debate about the global economy has taken a distressingly simplistic turn,” by which they mean austerity is finally being firmly rejected. In elite circles, ‘simplistic’ explanations are any which involve elementary truths: that authentic stimulus increases the deficit, as do corporate tax cuts; that privatization makes things unaccountable to the public; that a middle and under-class recovery requires an upper-class tax. (These simple facts are incomprehensible to the elite because they suggest a world in which extreme wealth causes injustice rather than eradicates it.) Derivatives and credit default swaps, on the other hand, are ‘nuanced’ tools which anyone without an advanced degree in finance shouldn’t comment on.

An outgrowth of this tendency toward ‘nuance’ is the peculiarly mystical tone that the economics profession has taken on. For example, the view that the business cycle will inevitably restore us to prosperity, and that the present downturn is just some sort of random misfortune. I recall a friend in university remarking that he planned to enter a PhD program in hopes of “waiting out the recession,” as though it were a spell of rain or some other act of god. The market giveth and taketh away. To suggest any sort of human agency behind these downturns—namely, a relationship between the wealth and poverty—is to commit the dreaded error of viewing economics as a zero-sum game. This of course is a fallacy, because economics is a magical process by which the concentrated wealth simultaneously diffuses its wealth (i.e. trickle-down theory).

Shrinking Expectations in the New / Old America

The Great Restructuring
by DAVID ROSEN


A series of recent reports from the Bureau of Labor Statistics (BLS), the Pew Foundation and Urban Institute detail how more and more Americans are adjusting to the new old America.

The BLS report for March 2013 was pretty bleak. Nearly 12 million (11.7 million) Americans were unemployed, roughly the same as in February. It distinguishes between a “broader” measure (at 13.8%) and a “standard” measure (at 7.6%) of unemployment. The unemployment rates were as follows: for blacks, 13.3 percent; Hispanics, 9.2 percent; whites, 6.7 percent; and Asians, 5.0 percent; and for adult women, 7.0 percent;adult men, 6.9 percent; and teenagers, 24.2 percent.

More telling, it reported that the number of people classified as “long-term unemployed” (i.e., jobless for over 27 weeks) is 4.6 million, thus accounting for approximately 4 out of 10 ten unemployed persons. Adding to this, it noted that 7.6 million people are underemployed. These are people taking part-time positions because they can’t get full-time work.

Adding these three categories, 23.9 working-age Americans are less-than-full employed. The BLS estimates the total U.S. workforce of those 16-years and older at 154 million. These people illustrate how the Great Recession is becoming a way-of-life.

Much of the media discussion about the BLS findings focused on whether the current “economic revival” has stalled or reversed. Stepping back from the immediacy of the findings suggests a more pessimistic caution, one that suggests that the U.S. may well be witness an historic restructuring.

A recent report from Pew Research, A Rise in Wealth for the Wealthy; Declines for the Lower 93%: An Uneven Recovery, 2009-2011, begins to place the BLS data in a larger context. Its findings are pretty damning with regard to current “revival”: “During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%.” Pew’s findings are based on recently released Census Bureau data.

Pew goes further and details the financial consequences of restructuring of “wealth distribution”: “the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.”

Making matters structurally worse, the wealth-gap divide is only getting greater. Pew reports: “the 8 million households in the U.S. with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.” (Household wealth is calculated by adding up personal assets like a home, car, real property, a 401(k), stocks and other financial holdings and subtracting all debts, including mortgage, car loan, credit card debt and student loans.)

The Urban Institute’s study, Less Than Equal: Racial Disparities in Wealth Accumulation, adds further resonance to the Pew findings. It warns, “in 2010, whites on average had two times the income of blacks and Hispanics, but six times the wealth.” It found, “wealth disparities have worsened over the past 30 years.” “High-wealth families (the top 20 percent by net worth) saw their average wealth increase by nearly 120 percent between 1983 and 2010, while middle-wealth families saw their average wealth go up by only 13 percent. The lowest-wealth families— those in the bottom 20 percent—saw their average wealth fall well below zero, meaning their average debts exceed their assets.”

In no uncertain terms, the Urban Institute’s argues, “there is extraordinary wealth inequality between the races. In 2010, whites on average had six times the wealth of blacks and Hispanics. So for every $6.00 whites had in wealth, blacks and Hispanics had $1.00 (or average wealth of $632,000 versus $103,000).” Making matters worse, it point out “the racial wealth gap grows sharply with age.” The older a person, the poorer s/he will likely be, especially a person of color.

And the big losers in the Great Recession? “Between 2007 and 2010, Hispanic families saw their wealth cut by over 40 percent, and black families saw their wealth fall by 31 percent,” it reflects. “By comparison, the wealth of white families fell by 11 percent.”

* * *

The Great Recession of 2008-2010 fulfilled its historic mission. It legitimized the restructuring of social and economic relations, sanctioning the unquestioned rule of the corporate plutocrats. In response, a sense of doom seeps through America not unlike that spreading through much of Europe.

The 2008 and 2012 elections of a corporatist moderate enshrined the tyranny of global financial capital and the militarist policies of a failing imperialist power. Pres. Obama’s elections formally ended the American Century.

Over the last quarter-century, the U.S. has been witness to the systematic destruction of the grand liberal moment. This was the half-century or so known as “the American Century,” from the New Deal thru the Great Society that shaped the U.S. during much of the mid-20th century. Ironically, both saw domestic “progress” intimately linked to foreign military engagement.

This period shared a kind of quasi-utopian fervor not unlike that found during the Revolution and the Civil War eras. For all their respective shortcomings, these were historical moments defined by a moral sensibility that defined the country as seeking to be a more egalitarian, more inclusive nation. As Lincoln would have said, these moments demonstrated America’s better angles. One can’t say that of Obama’s America.

Since Pres. Nixon, and with the collusion of both Republican and Democratic presidents, the utopian pendulum has steadily moved to the right, giving way to the increased tyranny of those with privilege. Pres. Obama is putting the final nails in the coffin of the vision of an egalitarian America. He is returning the nation to the worst impulses that characterized the Gilded Age, the last grand era of corporatist tyranny. On one side is the gluttony and elitism regally displayed by the well-to-do and, on the other side, a deepening hopelessness among a growing number of Americans.

As the BLS, Pew and Urban Institute reports remind us, a growing proportion of the new underclass lives a furtive existence. They can be broadly dubbed the lost souls of America, those who have essentially given up on the American dream. Many are among the new dispossessed if not homeless and have essential lost all hope. What keeps them going is one of the unasked questions of today. Among them is the growing army of vets, throw-a-ways of the military-industrial complex.

But these lost souls of America also include a growing segment of the U.S. population. A recent Associated Press-GfK poll found, for the third year in a row, only 1 in 4 Americans now expects his/her financial situation to improve over the next year.

The deeper, darker questions that these and similar reports fail to raise is: (i) what will it take to turn personal despair into political rage? and (ii) can Americans reclaim the once-inspired utopian legacy of its past for a better 21st century?

Hypocrites With Fat Wallets: CEOs Want It All

Sunday, 05 May 2013 | By Sam Pizzigati, Inequality.org

America’s top corporate executives love lecturing the rest of us about ‘fiscal responsibility.’ They want us to expect less from government. But they expect more, and a new report shows how they’re getting it.

Last week, federal unemployment benefits for the 400,000 Californians out of work since last fall dropped almost 18 percent, a $52 cut out of an average $297 weekly check. Similar cuts have already started rolling out in other states.

In all, 3.8 million long-term unemployed Americans will on average lose near $1,000 each by September 30, the date that ends the 2012 federal fiscal year.

The direct cause of all these cuts: the “sequester,” the $85 billion in federal austerity budget reductions that kicked in this past March 1.

Who deserves the “credit” for this meat-axe sequester? Credit the power suits who occupy Corporate America’s loftiest executive suites. These top corporate executives — organized in groups like “Fix the Debt” and the Business Roundtable — have been lobbying relentlessly for deep cuts in federal spending.

Only significant cutbacks in programs near and dear to average Americans, these executives proclaim, can save the nation from debt disaster.

But these same top executives, says a new report released last week, are actually running up the federal debt — purely to enrich themselves.

The giant firms these execs manage, details this new report from the Institute for Policy Studies and the Campaign for America’s Future, “are exploiting the U.S. tax code to send taxpayers the bill for the huge rewards they’re doling out to their top executives.”

How huge do these rewards go? UnitedHealth Group CEO Stephen Hemsley, a “Fix the Debt” endorser, pulled in $199 million between 2009 and 2011.

A convenient federal tax loophole — in place since 1993 — let UnitedHealth deduct $194 million of that windfall compensation on its corporate tax return. That deduction, in turn, saved UnitedHealth — and denied the federal treasury — $68 million, enough to extend full federal unemployment benefits for the rest of the 2013 fiscal year to over 65,000 jobless Americans.

The loophole UnitedHealth so lucratively exploited lets companies deduct off their taxes every dollar of “performance pay” they shovel into their executives’ personal pockets. UnitedHealth, of course, hardly stands alone here. All American corporate and banking giants play the “performance pay” game.

The 90 giant firms that belong to “Fix the Debt” play the game particularly well. Between 2009 and 2011, the deductions these 90 claimed for top executive “performance pay” added at least $953 million — and maybe as much as $1.6 billion — to America’s national debt.

The U.S. tax code’s exceedingly bountiful “performance pay” loophole has its roots in an earlier epoch of American public outrage at excessive CEO pay. Back in 1992, Bill Clinton campaigned against over-the-top executive pay in his drive for the White House. Congress, just months after Clinton’s inauguration, would go on to pass legislation that lawmakers hailed as a check on CEO excess.

The new law allowed corporations to deduct off their taxes no more than $1 million in compensation per executive. But the law had a huge escape hatch. Firms could exempt any “performance-based” pay from the $1 million limit.

The predictable result? An explosion of “performance-based” compensation, particularly in the form of stock options, an explosion that would keep CEO pay soaring. CEOs had been averaging 42 times U.S. worker pay in 1982. By 1992, the gap had jumped to 201 times. The average gap today: 354 times.

The “performance pay” loophole, the new Institute for Policy Studies and the Campaign for America’s Future report stresses, has served “as a critical subsidy for excessive compensation.”

“The larger the executive payout, the less the corporation pays in taxes,” the report explains. “And average taxpayers wind up footing the bill.”

That footing would end if legislation Representative Barbara Lee from California has introduced ever became law. Her Income Equity Act would deny corporations a tax deduction on any executive compensation that runs over 25 times the pay of a company’s lowest-paid workers or $500,000.

Interestingly, the Affordable Health Care Act enacted in President Obama’s first term sets a $500,000 cap, effective this year, on how much health insurers like UnitedHealth can deduct for executive compensation.

With this cap now law for health care execs, notes the new Institute for Policy Studies and the Campaign for America’s Future report, “taxpayers won’t have to worry so much about their hard-earned dollars going to subsidize fat paychecks for CEOs like Stephen Hemsley of UnitedHealth.”

“But,” sums up the study, “taxpayers may want to wonder why — at a time of scarce government resources — their tax dollars are subsidizing fat paychecks at any American corporate giant.”

Divided We Fall: a Tale of Two Economic Realities

The American Economy Continues to Slide, But There’s Plenty of Optimism at the Top
by JASON HIRTHLER


“Teach these boys and girls nothing but Facts. Facts alone are wanted in life.” These lines from schoolmaster Thomas Gradgrind open Charles Dickens’ Hard Times, which satirized the quantitative ethics of 19th century utilitarians. The simple premise of utilitarianism pioneered by Jeremy Bentham was that an action or policy should be judged by a single criterion: whether or not it contributed to the greatest happiness of the greatest number. It can feel, living in the early 21st century, that our leaders are operating on a principle of anti-utility, seeking the greatest happiness of the numerical few. The Washington establishment would dispute the truth of this claim, but then, as three examples will suggest, elites answer to a separate reality. To paraphrase Scott Fitzgerald, let me tell you about the very rich. Their facts are different from yours and mine.

The C-Suite and Main Street

Earlier this month, March job figures coughed up a slim volume of 85,000 new jobs, and the unemployment rate ticked down to 7.6 percent from 7.7 percent in February. As happens every month in this comical pantomime, the facts are shotgunned into the public consciousness by venerable propagandists like The New York Times and Washington Post, and the semi-articulate cable networks. The State Department then steps forward to impart a few rosy sentiments, although providing the necessary cautionary language lest our optimism overwhelm us.

The positivity of the official interpretation of the jobs report was belied by the 663,000 more citizen-consumers who slipped behind the black curtain of idle despair (47 percent of them women), not even bothering to seek work. According to Mike Gimbel, an analyst for socialist weekly Workers World, adding the decrease in the active labor force to the number of workers with insufficient part-time work, the unemployment rates skyrockets north of 20 percent. Nearly 90 million American adults are now out of the labor market, a new threshold of despair. (That’s nine times the number of unemployed at the height of the Great Depression, when there were only 123 million people in the country.) The jobs report complemented the specter of the sequester or a grand bargain still swirling overhead, promising to slice four trillion dollars from the economy over the next decade.

Yet a recent Financial Times survey of 400 global senior executives reports new optimism among business leaders, who project economic and industry improvements in the next six months. This peculiar optimism of corporate leadership, even amid the collapsing scenery of American society, is revealing on two levels. First, it evinces the degree to which Fortune 500s have uncoupled themselves from the American consumer market. The United States may be sliding toward Third World conditions, but expanding segments of Brazil and China are racing toward First World abundance. These markets, not ours, have laid claim to the attentions of corporate profiteers. What does it matter to the multinational if median income in the U.S. has climbed a mere $59 since 1966, when Brazil’s per capita income has nearly doubled since 1999? One salient example: Nearly seventy percent of Coca-Cola’s revenue comes from outside the U.S. In the first quarter of 2013, its international sales volume grew three times as fast as its American volume. Over the next five years, Coke plans to spend $30 billion on international expansion in China, India, Russian, and the Middle East. So long as one continent is in the ascendant, the fall of another is of little interest.

Second, the survey elicits the degree to which Wall Street financial markets have untethered themselves from Main Street industry. Industrial manufacturing has been in heavy decline as a percentage of American GDP, from a peak of 34 percent in the fifties to about 11 percent now. Perhaps as corollary, the GDP share held by the financial sector is on a steady uptick, now over eight percent and rising, while the total turnover of financial markets is many times our GDP. Derivatives, exempted from tepid Dodd Frank controls, are being purchased in bulk every month by the Fed, which is also holding interest rates at zero, ensuring banks can borrow for nothing, swivel on a dime and fleece credit card desperados at 18% a month. Why should corporate leaders care that it is slowly gaining a huge reserve army of American labor, to use Karl Marx’s term, which it can one day play off against some arriviste working class in a BRIC country?

Madison Ave and the 90 Million

Much like the heady delirium in the boardroom, these shadow facts too infrequently penetrate the optimistic consciousness of our vast marketing industry. As oil pipelines hemorrhage and radioactive waters sieve into the soil, we are admonished by a new nationally broadcast ad for the Acura RXL: “You wake up in your luxury bed and slide out of your luxury sheets. You get into your luxury shower and dry off with your luxury towel. You put on your luxury suit and your luxury watch. You grab your luxury coffee from your luxury coffee maker, and add some luxury sugar. You step out of your luxury house and step into your luxury car…which makes everything else seem ordinary.” Another class of commercials trots out sonorous-voiced actors like Tommy Lee Jones to lean on farm fences and talk about retirement planning, while Matt Damon’s soothing voice reminds how “common sense” is all we need to build a halcyon tomorrow. It always seems a healthy number of the wide-grinned retirees portrayed zooming down the California coast are minorities, often the African-Americans who lost half their wealth during the housing collapse.

What must the mass unemployed think as the television drones forth with this condescending drivel? The Boston Globe reports on a study by the Urban Institute that claims Generation X and Y—the two generations following the Boomers—have saved less than their parents did in their early adulthood: “Stagnant wages, diminishing job opportunities, and lost home values are behind the issue and have kept young Americans from saving even as the economy doubled from the early 1980s, the study found.”

The drear state of the economy is compound by what the young do to counteract it—take out loans. The Globe story notes, ‘’‘People in my generation are of the opinion that it’s OK to take out tens of thousands of dollars in student loans,’’ said Young, who graduated in May 2012. ‘‘That puts them in debt right away.’’’ The article concludes that, with no savings, Gen X and Y will rely more on the social safety net, the very programs millionaires Barack Obama and John Boehner are so anxious to cut. But millionaires can afford to be utopian, hence the blandishments about the road to a stronger America.

If the actor in the Acura commercial were a genuine luxury guy living a genuine luxury life, and his address were placed on a title screen at the end of the ad, I suspect a large mob drawn from the 90 million unemployed would soon descend on his luxury house. As Obama rather imperiously told a frightened assembly of derivatives kingpins during the collapse, “I’m the only thing standing between you and the pitchforks.” Of course, the commercial is just another tawdry piece of condescension foisted on the masses from Madison Avenue, but it artlessly demonstrates the second disconnect in our storyline—between the media and the masses. The Acura RXL lists at $48,450. Average per capita debt is $47,500.

The White House and the Poor House

It was Freud who said that if you wanted to know human nature, simply reverse its clearest moral injunctions. If we are forbidden to steal, it is because we are thieves. If adultery is verboten, it is because we are covetous. By that measure, perhaps we can discern the aims of Washington by reversing the desires of the American public. (Much like we can find countries that receive the most American aid by seeking out the nations with the most egregious human rights abuses.)

Testing Freud’s formula bears some interesting results. According to relentlessly consistent polling numbers, we oppose cuts to social spending such as education and Social Security and favor national health insurance provided by the government. Yet the policies we receive from either wing of the Business Party are healthcare reform that will leave millions still uninsured (but usefully fined), higher defense spending, lower education spending, and aggressive interventions across the planet. Far less than half of Americans want to prioritize immigration and gun control, but these topics dominate media coverage. We want jobs and a strong economy before a level deficit. Yet we get an austerity package designed to slow the economy and job growth. Even though our paychecks have flatlined for forty years, and our schools are growing poorer and our prescriptions dearer. Even though sixty percent of the jobs created by the stimulus were part time, and the piddling median wage in 2011 was $26,965.

At a macro level, the Freudian formula works the same. The Journal of the Academy of Arts & Sciences recently reported on the disparity between public opinion and policy. In polling, large majorities have favored federal policies to cut greenhouse emissions, even supporting tax breaks for corporations that reduce emissions—a stance that reflects global consensus on the reality of climate change and the need to do something about it. In fact, 118 countries have set national targets for renewable energy (RET). As the formula predicts, the U.S. has no national renewable energy target, placing it on the regressive right of the global political spectrum.

While nearly two thirds of Americans favorable developing renewables over oil, gas, and coal, we churn ahead with oil, gas, and coal exploration and encourage states to draft their own environmental targets. Extraction is keeping the federal government too busy to deal with such peripheral concerns. Substitute your own favorite federal failing and watch the formula work for you. Rather than prosperity, austerity. Rather than due process, solitary confinement. Instead of higher wages for Main Street, higher earnings for Wall Street. In lieu of jobs, offshoring. Instead of substance, rhetoric.

Here lies our third disconnect, between government and the people. Like the Wall Street and Madison Avenue realities, individuals in the highest echelons of federal power are wildly prosperous, moving seamlessly between the precincts of the state and the serene towers of global enterprise. They are showered with the patronage of both while employed by either, such that the distinctions between the two become opaque and nominal. The goals are common—dominion. The profits are shared—the costs socialized. And the media continually rehabilitates the profile of power like the Soviets rehabbed victims of the gulag—ex post facto. The facts of life for the obscenely rich are not like the facts for the majority. They are doing fabulously. Witness the outpouring of mawkishness in the wake of Margaret Thatcher’s death. In her first decade in power, she cut taxes on the wealthy by half while the income of the poor plummeted by forty percent. Who penned those lavish encomiums to sit atop Thatcher’s grave? Who but the survivors?

Interesting that the quote from Fitzgerald, about the rich being different from the rest of us, was from a set of short stories called All the Sad Young Men, largely about the rich and the shimmering anomie of the world they inhabited. Yet if the surveys, media, and policies on offer are any indication, all the sad young men have shed their survivor’s guilt and moved on. Life is a fairy tale waiting to be bought. Darker realities, like the distant wail of an ambulance, hardly register anymore.

The Fed, Apple, and Trickle-Down Economics: A Story for May Day

by robert reich


The Fed’s policy of keeping interest rates near zero is another form of trickle-down economics.

For evidence, look no further than Apple’s decision to borrow a whopping $17 billion and turn it over to its investors in the form of dividends and stock buy-backs.

Apple is already sitting on $145 billion. But with interest rates so low, it’s cheaper to borrow. This also lets Apple avoid U.S. taxes on its cash horde socked away overseas where taxes are lower.

Other big companies are doing much the same on a smaller scale.

Who gains from all this? The richest 10 percent of Americans who own 90 percent of all shares of stock.

But little or nothing is trickling down. The average American can’t borrow at nearly the low rates Apple or any other big company can. Most Americans no longer have a credit rating that allows them to borrow much of anything.

It would be one thing if Apple and other giant companies were borrowing in order to expand operations and create new jobs. But that’s not what’s going on. Apple, remember, is still sitting on $145 billion.

The reason big companies aren’t creating more jobs is consumers aren’t buying enough to justify the expansion. And government is cutting back on spending.

Big corporations are borrowing simply in order to push stock prices up and reward their investors.

It’s a sump pump with the Fed on one end buying up bonds to keep interest rates low, and shareholders on the other end raking in the returns.

Get it? Easy money from the Fed can’t get the economy out of first gear when the rest of government is in reverse.

Trickle-down economics is the first cousin of austerity economics. Austerity is nuts when so many millions are out of work. And as we’ve learned before, trickle-down is a fraud. Nothing ever trickles down.

Back to Recession

From Spring Swoon to the Big Crash
by MIKE WHITNEY


The media is calling it a “Spring swoon”, but it’s really just the next phase of the long slump.

After a strong showing in the first quarter (Q1), the economy is starting to lose steam for the forth year in a row. The main cause for the slowdown is –what Bloomberg calls–”the biggest federal-budget tightening in more than 60 years”. The impact of the budget cuts can already be seen in retail sales, personal consumption and consumer confidence. Eventually, they’ll be felt throughout the entire economy pushing unemployment higher and shrinking GDP by 1.6 percent or more.
Economists warned policymakers not to reduce government spending while the economy was still weak, but Congress shrugged off their advice and cleared the way for another slowdown. Activity is likely to fall off sharply as already over-stretched households try to muddle through on paychecks that are now 2 percent smaller following the restoration of the payroll tax. The deceleration should intensify into the summer months impacting other areas of the economy and, ultimately, widening the deficits due to lower tax receipts. This illustrates the futility of austerity measures, they only serve to make matters worse.

Let’s face it; the economy has never gotten better, not for working people at least. And now it’s getting worse; should we be surprised?

Not at all. The system is performing the way it’s set to perform; providing unlimited sums of money for speculators and moneybags friends of Obama, and table scraps for everyone else. Here’s a blurb from the Wall Street Journal that just confirms what everyone already knows:

“From 2009 to 2011, the average wealth of America’s richest 7% — the 8 million households with a net worth north of about $800,000 — rose nearly 30% to $3.2 million from $2.5 million, according to a Pew Research Center report that analyzed recent Census data. By contrast, the average wealth of America’s remaining 93%, some 111 million households, actually dropped by 4% to $134,000 from $140,000. Wealth is the value of what a household owns minus what it owes.”

So all the money is going upwards, but we’re expected to believe that that’s not what policymakers had in mind to begin with; that it’s all just one big accident?

Uh, huh. As Robert Reich points out, there’s never been a recovery, not really. Here’s how he puts it in his latest blog-post:

“Four years into a so-called recovery and we’re still below recession levels in every important respect except the stock market. A measly 88,000 jobs were created in March, and total employment remains some 3 million below its pre-recession level. Labor-force participation is its lowest since 1979.

Businesses won’t hire and expand unless they have more customers, but most Americans can’t spend more. Last Friday’s retail sales report showed sales down .4 percent in March. Consumer sentiment has fallen to its lowest level in nine months.

The underlying problem is the vast middle class is running out of money. They can’t borrow more — and shouldn’t, given what happened after the last borrowing binge.

Real annual median household income keeps falling. It’s down to $45,018, from $51,144 in 2010. All the gains from the recovery continue to go to the top.” (“Why This is the Worst Recovery on Record“, Robert Reich’s blog)

Okay, so you’ve heard it all a million times before. But it’s about to get worse, so you might want to know some of the details. You see, the economy was already slowing down before

Obama’s budget cuts. Retail sales are off, manufacturing is sputtering, earnings are weak, existing home sales are dropping, and durable goods are in the tank. Here’s more from the WSJ:

“U.S. orders for long-lasting manufactured goods fell sharply in March as businesses cut investment, suggesting that economic growth has cooled since the start of the year.

Durable goods orders decreased 5.7% from the prior month to a seasonally adjusted $216.28 billion, the Commerce Department said Wednesday. Economists surveyed by Dow Jones Newswires expected a 2.9% drop in March orders.

Durable goods are usually big-ticket items designed to last at least three years. Businesses and consumers typically make such purchases when they are confident about the economy….

Wednesday’s report echoes other recent data suggesting solid but slowing growth through the first quarter of the year as consumers and businesses became increasingly cautious.”

Problems in the US are compounded by growing troubles abroad, notably the slowdown in China and the ongoing Depression in Europe. Here’s more from the WSJ:

“Troubles overseas are threatening the U.S. recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

U.S. exports of goods to the European Union are declining outright. Growth in overall U.S. exports has been sputtering for months, after a three-year postrecession surge. And major U.S. companies are reporting increasingly dour overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.”

So, don’t expect any help from overseas–like an uptick in exports–because it ain’t gonna happen. China’s investment-heavy economic model is beginning to crack beneath its prodigious debt-load and the slump in Europe will persist until EU elites achieve their goal, which is to decimate the social model that provides health care, pensions and labor protections for the people in the 17-member Eurozone. That’s what this is all about. Once the EU’s working population has been reduced to third world poverty, then policymakers will return to a pro-growth strategy, but not before. But that’s going to take a while, so don’t hold your breath.

So, what’s in store for the US economy?

First we need to summarize what’s going on right now. Just take a quick look at these charts from analyst Lance Roberts at Street Talk Live in a post titled “Economy In Pictures: Have We Seen The Peak?”

This will help you see the present trajectory of the economy vis a vis wages, consumer spending, output, employment and GDP.

Wages and Salaries

Incomes are the lifeblood of the economy. In order for consumers to consume (which makes up roughly 70% of the economy currently) wages must rise at a rate to support increases in consumption.

Consumer Spending

As state above, personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation. As PCE goes – so goes the economy.

Production and Manufacturing

The chart below is the STA Economic Output Composite Index which is an index comprised of the Chicago Fed National Activity Report, ISM Composite, several Fed regional manufacturing surveys, Chicago ISM PMI, and the NFIB Small Business Survey. This is a very broad measure of the economy.

Employment

The chart below shows both the seasonally adjustment employment levels compared to a 12-month moving average of the non-seasonally adjusted data.

GDP

Do you see any glimmer of light in these charts?

I don’t. The fact is, everything is headed in the wrong direction. And this is just “big picture” stuff. If you wanted to get into the weeds and really dig through the data on other sectors, you’d see the same thing, that is, that things are progressively getting worse. And, of course, Obama’s budget cuts will further intensify the downturn, which appears to be what the politicians really want.

Have you seen this Bloomberg video of Nouriel Roubini explaining what we can expect when the sequester cuts kick in?

Here’s a clip. Nouriel Roubini:

“I’m quite concerned about the US economy. People underestimated how much…the sequester would effect the economy. …fiscal drag of 1.7%….We’re doing the wrong kind of fiscal consolidation. It’s way too frontloaded….will have a drag on consumption…so, US will have subpar growth, below trend..and unemployment will remain high. …The Fed’s QE has already created froth in asset and credit markets that could lead to another significant bubble …So, you’ll have a big party in asset prices for the next couple years, (while rates stay low) followed by a crash bigger than before.” (Bloomberg)

Oh good. So the asset bubbles are already forming, but the economy is still flat on its back. So–chances are–we’ll suffer a meltdown before the anticipated recovery ever takes hold. Doesn’t that sound like a policy that needs to be revisited?

Let’s not kid ourselves, none of this is accidental. This whole permanent Depression-thing is just part of the plan. How could it not be? I mean, is there anyone dumb enough to believe in austerity anymore? Even the right-wing Washington Post has given belt tightening the old heave-ho. Just look at this excerpt from a recent editorial:

”There’s basically no evidence that fast austerity programs, or ones undertaken during economic downturns, are even good at reducing the debt burden. It’s very clear they’re bad for growth. Austerity through spending cuts may help growth in the long run, but so do a lot of things, and if those cuts are to things known to boost growth, like early childhood education or research, they could be counterproductive. But for the time being, austerity is the wrong prescription for advanced economies.”

Even Fox on 15th Street is admitting defeat and running up the white flag. Can you believe it?

But it doesn’t matter how discredited the policy is, the politicians are going to keep ratcheting up the pressure until they get what they want, which is, more privatization of public assets, more busting up federal unions and more dismantling critical safetynet programs. (particularly, SS, Medicare, Medicaid) Present policy has nothing to do with growing the economy or putting people back to work. It’s just plain old class warfare.
So, how bad will it get?

Nobody really knows for sure, but with factory output already dropping, retail sales flagging, existing home sales down, new payrolls flatlining, consumers spending less and saving more, and the global economy on life-support, it’s hard to see how we’re going to get out of the doldrums, especially since the full effect of the tax hikes and budget cuts have yet to be felt. Clearly, the downside risks have increased exponentially, which means that any unexpected shock will push the economy back into recession.

Exploding the Debt Threshold Myth

Friday, 26 April 2013 | By Salvatore Babones, Truthout | Op-Ed

In January 2010, two prominent Harvard University economists, Carmen Reinhart and Kenneth Rogoff, published a highly influential paper in which they argued that high levels of government debt are associated with low levels of economic growth.

They concluded that above the threshold where government debt exceeds 90 percent of national income, "median growth rates fall by one percent, and average growth falls considerably more."

Following on the heels of the 2008 global financial crisis and the associated spike in government borrowing in Europe and the United States, the Reinhart-Rogoff paper quickly became a touchstone for the small-government crowd. Austerity is the order of the day. Reinhart and Rogoff are its prophets.

Now three economists at the decidedly less upscale University of Massachusetts - Thomas Herndon, Michael Ash and Robert Pollin - have uncovered a series of errors and outright blunders in the Reinhart-Rogoff results.

Not only did the trio show that Reinhart and Rogoff misinterpreted and misanalyzed their data, they also found a simple spreadsheet error that dramatically changed the statistical results. Austerity, it turns out, only works if you don't know how to use Excel.

Reinhart and Rogoff have acknowledged their errors, though they are at pains to stress that the errors are largely immaterial to their overall conclusions that government debt levels of more than 90 percent of national income are associated with low levels of economic growth.

They also disingenuously point out that "We are very careful in all our papers to speak of 'association' and not 'causality.' " Disingenuously, since their pro-austerity stance shines through all their work. After all, the title of their 2010 paper was "Growth in a Time of Debt," not "Debt in a Time of Recession."

Especially misleading is a chart in their paper that shows US economic growth rates for four different levels of US government debt, with the bars becoming alarmingly redder as the debt levels increased.

Reinhart and Rogoff analyzed 220 years of US economic history to conclude that, on average, the US economy has consistently grown at rates over 3 percent per year at all levels of government debt from 0 percent to 90 percent of national income. But when US government debt has risen above 90 percent, the US economy has contracted, they found.

Nowhere in their paper do they mention just when it was that US government debt rose above 90 percent of national income. Was it the Great Depression? No. The Bush or Obama years? No. Perhaps back in the 19th century? No.

In fact, in its 220-year recorded economic history, the United States has only ever experienced four years in which federal government debt exceeded 90 percent of US national income: 1944, 1945, 1946 and 1947.

In those four years, real economic growth was 8.1 percent, -1.1 percent, -10.9 percent and -0.9 percent, respectively. Which tells us absolutely nothing, except that after a huge world war it takes some time for an economy to readjust to peacetime production. Anyone who says that America's sudden recession in 1946 was due to government debt, not the end of the war, is either crazy, deceitful or stupid.

Carmen Reinhart is the Minos A. Zombanakis Professor of the International Financial System at Harvard's Kennedy School of Government. Kenneth Rogoff is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University. You be the judge.

Actually, Reinhart and Rogoff do recognize the warping effects of World War II - on Australia and New Zealand. In those two countries Reinhart and Rogoff found that high debt was actually associated with stronger than average economic growth. But they (correctly) wrote this off as a distortion caused by the war.

In fact, of the 20 rich countries studied by Reinhart and Rogoff, only one example shows negative growth resulting from high debt: the United States after World War II. But despite the fact that they are American, live in America and mainly study the US economy, they fail to note that the only period of high debt coupled with recession in US history was the 1946 demobilization after World War II.

Apparently war distorts the data when it makes debt look good, but war isn't worth mentioning when it makes debt look bad.

It gets worse. University of Southern California professor Richard Green raises an even bigger issue. In a column for Forbes magazine, he suggests that it may be the case that debt doesn't cause low growth. It may be that low growth causes governments to go into debt.
Green presents very preliminary statistical results in his column based on a standard econometric technique called the Granger causality test. His results suggest that the impact of high debt on economic growth is either positive or neutral, while the impact of economic growth on high debt is either negative or neutral.

This is strong first-look evidence that recessions cause debt, not the other way around. But no one - Green included - expects to solve this complex statistical issue in a 600-word column. The travesty is that Reinhart and Rogoff didn't even raise the issue in a 25-page academic paper.

Lies, damned lies, and statistics. It is easy to massage data. For example, why should one expect high government debt to have an immediate impact on economic growth? Reinhart and Rogoff could just as well have studied the impact of government debt on growth rates several years later.

If they had, they might have found that in the United States, high government debt was associated with rapid economic growth. US government debt peaked in 1945 at 112.7 percent of national income. Five years later, in 1950, the US economy was racing ahead at an 8.7 percent growth rate.

The potential lesson for today? If we borrow heavily in 2013, we can enjoy a huge growth dividend in 2018.

Of course, that lesson is no more valid than Reinhart and Rogoff's austerity lesson. But it's no less valid.

If we borrow now to invest in education, job training and infrastructure, it's likely we will have robust growth in 2018. But we don't know that from Reinhart and Rogoff's historical data. We know that from common sense.

Even if the expected economic growth doesn't materialize, we will still have the education, the job training and the infrastructure to show for our spending. That's something.

At a time when the US government can borrow for five years for less than 1 percent annual interest and for 30 years for less then 3 percent annual interest, it's crazy to be cutting government spending instead of investing in our future. Well, it's either crazy, deceitful or stupid. You be the judge.

The Excel Depression

By PAUL KRUGMAN - NY Times
Published: April 18, 2013


In this age of information, math errors can lead to disaster. NASA’s Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan Chase’s “London Whale” venture went bad in part because modelers divided by a sum instead of an average. So, did an Excel coding error destroy the economies of the Western world?

The story so far: At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper, Growth in a Time of Debt, that purported to identify a critical “threshold,” a tipping point, for government indebtedness.

Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper instantly became famous; it was, and is, surely the most influential economic analysis of recent years.

In fact, Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality.

For the truth is that Reinhart-Rogoff faced substantial criticism from the start, and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth — but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.

Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”

In response, Ms. Reinhart and Mr. Rogoff have acknowledged the coding error, defended their other decisions and claimed that they never asserted that debt necessarily causes slow growth. That’s a bit disingenuous because they repeatedly insinuated that proposition even if they avoided saying it outright. But, in any case, what really matters isn’t what they meant to say, it’s how their work was read:  

Austerity enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact and a reason to slash government spending even in the face of mass unemployment.

So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs.

What the Reinhart-Rogoff affair shows is the extent to which austerity has been sold on false pretenses. For three years, the turn to austerity has been presented not as a choice but as a necessity. Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed.  

Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to.

So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.

How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?

Tuesday, 16 April 2013 | Beat the Press

That's the question millions will be asking when they see the new paper by the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.

There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting.

But HAP tells us that we need not concern ourselves with any arguments this complicated. The basic R&R story was simply the result of them getting their own numbers wrong.

After being unable to reproduce R&R's results with publicly available data, HAP were able to get the spreadsheets that R&R had used for their calculations. It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90 percent debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6 percent, compared to the -7.6 percent that R&R had entered in their calculation.

Since R&R country weight their data (each country's growth rate has the same weight), and there are only seven countries that cross into the high debt region, correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, however the missing New Zealand years are the biggest part of the story.)

This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.

In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff. But it was the initial R&R papers that created the framework for most of the subsequent policy debate. And HAP has shown that the key finding that debt slows growth was driven overwhelmingly by the exclusion of 4 years of data from New Zealand.

If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere. It should also cause reporters to be a bit slower to accept such sweeping claims at face value.

(Those interested in playing with the data itself can find it at the website for the Political Economic Research Institute.)

Obama’s Misguided Agenda

Doing the Business of DC's Elites
by DEAN BAKER


The debate around the budget is getting ever further removed from reality. As every budget expert knows, the reason that we have seen large budget deficits in the last five years is that the economy plunged following the collapse of the housing bubble. This collapse cost us more than $600 billion in annual construction demand and more than $500 billion in annual consumption demand.

This lost demand gave us large deficits because it led to plunging tax collections and more spending on programs like unemployment insurance. We deliberately raised deficits by roughly $300 billion annually in 2009 and 2010 with the stimulus package.

These deficits were supporting the economy, making up for the loss of private sector demand. They took the deficit from a very modest 1.2 percent of GDP in 2007 to a peak of more than 9 percent of GDP in 2009.

Unfortunately, rather than deal with the reality – that we need deficits to sustain demand in a context where the private sector will not do it – the politicians in Washington have gotten hysterical. This is like complaining about our use of water when the school is on fire with the kids still inside.

In spite of the hysterics coming out of Washington, the interest burden of the debt is near a post-war low. Even if no further cuts are made, it is not projected to get back to its early 1990s level for more than a decade.

In this context, it is unfortunate that President Obama has proposed a budget that has substantial cuts to Social Security. The vast majority of seniors are already struggling. The proposed cuts would be a reduction in their income of more than 2 percent. By contrast, his tax increase last fall cut the after-tax income of the typical wealthy household by less than 0.6 percent.

The budget should be focused on expanding the economy and creating jobs, ideally through more spending in infrastructure, education and research. It should also include funding for state and local governments to reverse layoffs and cutbacks that have slowed growth and raised unemployment.

Unfortunately, President Obama has accepted the agenda of the Washington elite, putting cuts to Social Security and Medicare at the center of his budget and offering little that will help to speed the growth of the economy and create jobs.

Profits Just Hit Another All-Time High, Wages Just Hit Another All-Time Low

Henry Blodget | Apr. 11, 2013 | Business Insider


In case you need more confirmation that the US economy is out of balance, here are three charts for you.

1) Corporate profit margins just hit another all-time high. Companies are making more per dollar of sales than they ever have before. (And some people are still saying that companies are suffering from "too much regulation" and "too many taxes." Maybe little companies are, but big ones certainly aren't. What they're suffering from is a myopic obsession with short-term profits at the expense of long-term value creation).

Business Insider, St. Louis Fed

2) Wages as a percent of the economy just hit another all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" represent spending power for consumers. And consumer spending is "revenue" for other companies. So the profit obsession is actually starving the rest of the economy of revenue growth.

Business Insider, St. Louis Fed

3) Fewer Americans are working than at any time in the past three decades. The other reason corporations are so profitable is that they don't employ as many Americans as they used to. As a result, the employment-to-population ratio has collapsed. We're back at 1980s levels now.

Business Insider, St. Louis Fed

In short, our current obsessed-with-profits philosophy is creating a country of a few million overlords and 300+ million serfs.

That's not what has made America a great country. It's also not what most people think America is supposed to be about.

So we might want to rethink that.

Specifically, we might want to have the goal of our corporations be to create long-term value for all of their constituencies (customers, employees, and shareholders), not just short-term profit for their shareholders.

Meanwhile, if you want to know more about what's wrong with the economy, and why our current obsession with short-term-profit is hurting all of us, flip through these charts:

AMERICA TODAY: 3 Million Overlords, 300 Million Serfs