Conservatives do not object to Keynesianism -- as long as it involves the military
BY MICHAEL LIND - TUESDAY, SEP 14, 2010
When American conservatives denounce Keynesianism and socialism, it is difficult not to detect a note of jealous resentment on their part. After all, since Reagan, the American right has made Keynesian fiscal policy and the socialization of American industry its own specialty. Conservatives are rhetorical libertarians but operational Keynesians, when they are not operational socialists -- military socialists.
The old Republican Party of Robert Taft and Dwight Eisenhower was a fiscally conservative party of Northeasterners and Midwesterners who favored balanced budgets and viewed foreign wars and military spending with suspicion; recall Eisenhower’s warning about the "military-industrial complex." The Republican Party of Ronald Reagan and his successors is based in the Southern and Western "Gun Belt," whose economy of military contracting and subsidized agriculture and energy was largely created by New Deal Democrats in World War II and the Cold War. The Republican Party seeks a permanent alliance with the Wall Street financial industry, which, however, flirts with neoliberal Democrats like Bill Clinton and Barack Obama.
Both the Wall Street and the red state wings of the GOP depend on right-wing Keynesianism and right-wing socialism, in different forms. Right-wing Keynesianism for Wall Street consists of low interest rates that stimulate speculation and encourage inflation of the assets of the rich, like stocks and bonds. Right-wing socialism for Wall Street consists of "too big to fail" policies, which guarantee that over-leveraged financiers can keep their profits, while any losses will be socialized and paid for by the public.
If the Wall Street wing of the GOP is factored out, the red-state Republican economy is the military-industrial complex -- or, to be more specific, the agro-energy-military-industrial complex. As the political heirs of the right-wing Southern Democrats of the 1940s and 1950s, today’s red-state Republicans have inherited the old Southern Democratic trick of combining denunciations of big government with support for federal government spending that benefits their constituents. Those constituents include not only well-paid military contractors, who for all practical purposes are government bureaucrats in a socialist economy, but also ordinary men and women in the ranks, where conservative white Southerners are over-represented.
If you are a right-wing white Southern Republican, you can spend your entire life as a ward of the state. You can serve in the socialist economy of the military and then, as a retired officer, you can go to work for a semi-socialist major defense contractor. Both in your active-duty career, your career in the pseudo-private defense contractor sector and your retirement, you will be one of the privileged Americans who enjoy a system of socialized, single-payer healthcare -- the Veterans Administration. And throughout your career as a state functionary in the socialist military sector, you can grumble about big government and denounce liberals who don’t understand private enterprise. If this is Orwellian Doublethink, it is no different from that of progressives who vote for candidates who promise a new New Deal and then attack middle-class entitlements, govern on behalf of Wall Street and support multinationals that seek to offshore even more industrial jobs.
Indeed, while progressives talk endlessly about protecting American industry, conservatives actually do it -- as long as the industry is military. As Floyd Norris pointed out in a story for the New York Times (chart here), between 2000-2009 military manufacturing increased by nearly 125 percent, while civilian manufacturing contracted by roughly 25 percent. The military, which was responsible for only 3 percent of durable goods orders in 2000, grew to account for 8 percent in 2008, before the crash.
Military Keynesianism includes infrastructure spending. To be sure, the infrastructure is in countries that the U.S. has bombed into chaos like Iraq and Afghanistan, but building foreign infrastructure generates contracts for American firms like Halliburton. Conspiracy theorists to the contrary, the Iraq and Afghan wars were motivated by misguided conservative strategy, not by rewards to contractors, but those rewards are real nonetheless.
Few conservative Republicans confess to their policy of military Keynesianism. As long as they are out of power, Republicans theatrically pose as fiscally conservative enemies of big government. If the GOP recaptured Congress or the presidency, however, Ron Paul would be locked in the attic again and Paul Ryan’s plans for downsizing the federal government would be shelved in a locked cabinet in one of those secret government warehouses depicted in "The X-Files" while even more money was shoveled at the Pentagon.
Martin Feldstein has given the game away. Feldstein, now a professor at Harvard, was the chairman of President Reagan’s Council of Economic Advisers. For the last few years, he has been campaigning to raise defense spending to 6 percent of GDP a year (it is now 4.7 percent of GDP and reached a low of 3.0 percent in 1999-2000, after the Cold War and before 9/11). In his articles and Op-Eds, Feldstein makes minimal and unconvincing attempts to justify defense spending in terms of actual threats -- jihadists, Iran, North Korea, Russia, China, whatever. It is clear that he is chiefly interested in military Keynesianism for its macroeconomic results.
In December 2008, Feldstein called for a massive Keynesian stimulus in the form of defense spending. He denounced fiscal conservatives who called for cutting spending during the recession:
That logic is exactly backwards. As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting. That's why the Obama team will propose a package of about $300 billion a year in additional federal government outlays and grants to states and local governments.
A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.
…A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military's annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year.
…Military procurement has the further advantage that almost all of the equipment and supplies that the military buys is made in the United States, creating demand and jobs here at home.
Even before the Great Recession began, Feldstein was campaigning for defense spending at levels near those of the Cold War. In an essay for Foreign Affairs in 2007, Feldstein wrote: "Defense spending rose rapidly during the presidency of Ronald Reagan, rising to 6 percent of GDP by 1986 -- a trend that helped to bring about the collapse of the Soviet Union ... [I]t is useful to consider the 6 percent target achieved during the Reagan years as a spending target."
An obvious question is: Why stop with the Cold War? Most economists agree that U.S. military spending during World War II pulled the U.S. out of the Great Depression. In 1944, mostly military federal spending was 37.8 percent of GDP. If military spending works such wonders, why not devote 40 percent of the economy to it, and not just 6? If military Keynesianism is considered such a success by conservatives, they can hardly balk at what the Prussian military, during World War I, called "war socialism."
The logic of military Keynesianism may explain why the same conservatives who denounce allegedly wasteful civilian stimulus spending are silent about the cost overruns in the military sector. R.L. Schreadley, a retired Navy commander, asks:
Is it credible to spend a billion dollars for one destroyer? Fifteen billion (or more) for an aircraft carrier? Multi-millions for one fighter plane? No, it is not. Nor is it credible for the sea service to have two or more admirals for every ship in the fleet.
From the perspective of military Keynesianism, such costs appear to be acceptable if they stimulate the economy and provide contracts or employment for Republican voters and donors. The fact that healthcare costs have been growing faster than the economy as a whole is treated as cause for alarm. And yet here is Feldstein in 2006, calling for defense spending to rise faster than economic growth: "Increasing defense spending at a faster rate than the rate of GDP growth requires raising the share of GDP devoted to defense."
In that same speech at West Point, Feldstein told a largely military audience that the money for military Keynesianism could come from cuts in Social Security and Medicare programs for elderly Americans:
The final hurdle to increased defense spending will be the effect of the population aging on the cost of Social Security and Medicare ... That’s one more good reason, in my judgment, to focus on transforming the current pure tax-financed, pay-as-you-go systems for financing Social Security and Medicare to a mixed system that combines a tax-financed basic program with individual investment-based accounts in a way that can avoid that tax increase.
Undoubtedly, many of the military personnel in Feldstein’s audience nodded in agreement. The soldiers, after all, have generous military pensions and the Veterans Administration to provide their socialized healthcare in their old age.
The U.S. economy increasingly resembles the dual economy of the Soviet Union, with an overfunded military sector and a chronically weak, dysfunctional civilian sector. Like the Soviet Union in its decline, we are bogged down in an unwinnable conflict in Afghanistan. The Soviet system was supported to the end, however, by Soviet military and intelligence personnel and defense factory workers and managers. Their equivalents exist in America. Conservatives are not being irrational, when they ignore the civilian economy while fostering the military economy that provides orders and jobs to many of their constituents. Theirs is the logic of Soviet-style conservatism.
"Watch what we say, not what we do," Richard Nixon’s Attorney General John Mitchell famously remarked. Out of power, the Republican Party preaches Ron Paul-style libertarianism. In power, the party practices Martin Feldstein-style military Keynesianism and military socialism -- and Hank Paulson-style financial sector Keynesianism and socialism.
During the 2008 campaign, Republican presidential candidate Mitt Romney not only opposed closing Guantánamo but called for even more Guantánamos. Think of all the jobs that would be created.
Monday, September 20, 2010
Japan Intervenes to Bail Out America.com
By: Peter Schiff - Friday, September 17, 2010
This week, after the Japanese yen had surged to a fifteen-year high against the US dollar, the Japanese government decided to intervene in the foreign exchange market. To great fanfare, the Bank of Japan initiated a vigorous campaign to buy US dollars, thereby stemming the rise of the yen and pulling up the greenback. The effects were immediate, with the yen falling an astonishing 3% on the day of the announcement. At a time when American politicians are growing increasingly vocal about China’s currency manipulations, Washington was strangely silent on the Japanese move. This was completely overlooked by the hawkeyed media.
While missing this blatant irony, the media spin doctors cast the Japanese decision as an attempt by the island state to prop up its own fragile economy. More accurately, the intervention was done to help American consumers buy more cars and electronics from Japan. In truth, although more American purchases would nominally benefit some Japanese exporters, a weaker currency is a detriment to the overall Japanese economy.
The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. The bailout takes the form of a direct transfer of purchasing power from Japanese savers to American consumers, so that Americans can continue buying products they couldn’t otherwise afford. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.
The tendency for governments to sacrifice the needs of the general population in favor of entrenched corporate interests is not unique to Japan. In the United States, we have taken similar measures on behalf of our dominant industries. However, instead of manufacturers and exporters, whose political clout has waned along with their economic prospects, Washington has moved to protect the profits of the financial, retail, and real estate industries– the true heavyweights of the American corporate world. These industries profit when Americans borrow money to buy things they can’t afford. To keep this behavior going, the government must make it possible for consumers to take on more debt; but, in so doing, these policies have left us with an ailing economy in need of deep and drastic restructuring.
In a way, what the Japanese government is doing for American consumers is very similar to what our government is doing for American homebuyers. Rather than let home prices fall, the US government subsidizes homebuyers so they can continue overpaying for houses they cannot actually afford. The beneficiaries of these moves are those selling, building, and financing overpriced homes. Unfortunately, the last thing we need as a nation is to build, buy, or finance more homes. Our economy would improve if the resources devoted to the real estate market could be devoted to other, more needed industries.
Japan should allow the dollar to fall, which would force their manufacturers to adapt to a changing global market where Americans consume less, and those in emerging markets consume more. Instead, it is vainly trying to preserve the status quo and appease entrenched political factions.
Just like here in the US, Japanese politicians take cover by falsely claiming that the intervention “saves jobs.” However, the jobs that are saved come at the expense of more productive jobs that are either lost or not created. If Americans cannot afford to buy Japanese products, it makes no sense for the Japanese to continue selling them to us. Rather they should devote their time, effort, savings and resources to selling products to customers who can actually afford to pay.
Japan’s bailout of American consumers is nothing more than international vendor financing. This is the same technique used by telecom companies during the Internet boom of the late ‘90s. In order to pump up short-term profits, manufacturers of communications gear loaned money to cash-strapped Internet startups so they could buy switches and routers. Of course, when the dot-coms went bankrupt, all those phony sales were written off; then, the stocks of those companies doing the financing, like Cisco, Lucent, and Nortel, collapsed as well (though they did not collapse to zero like the dot-com companies). Although their performance would have lagged during the boom, the equipment manufactures would have been in far better shape fundamentally if the phony sales had never been made.
The same fate awaits the US and Japan. In this analogy, Japan is Cisco and the United States is Pets.com. Sooner rather than later, both Japan and China will realize that they have been hoodwinked by a fast-talking sock puppet without a credible plan to pay them back. When that happens, they will take the write down and let us fend for ourselves.
This week, after the Japanese yen had surged to a fifteen-year high against the US dollar, the Japanese government decided to intervene in the foreign exchange market. To great fanfare, the Bank of Japan initiated a vigorous campaign to buy US dollars, thereby stemming the rise of the yen and pulling up the greenback. The effects were immediate, with the yen falling an astonishing 3% on the day of the announcement. At a time when American politicians are growing increasingly vocal about China’s currency manipulations, Washington was strangely silent on the Japanese move. This was completely overlooked by the hawkeyed media.
While missing this blatant irony, the media spin doctors cast the Japanese decision as an attempt by the island state to prop up its own fragile economy. More accurately, the intervention was done to help American consumers buy more cars and electronics from Japan. In truth, although more American purchases would nominally benefit some Japanese exporters, a weaker currency is a detriment to the overall Japanese economy.
The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. The bailout takes the form of a direct transfer of purchasing power from Japanese savers to American consumers, so that Americans can continue buying products they couldn’t otherwise afford. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.
The tendency for governments to sacrifice the needs of the general population in favor of entrenched corporate interests is not unique to Japan. In the United States, we have taken similar measures on behalf of our dominant industries. However, instead of manufacturers and exporters, whose political clout has waned along with their economic prospects, Washington has moved to protect the profits of the financial, retail, and real estate industries– the true heavyweights of the American corporate world. These industries profit when Americans borrow money to buy things they can’t afford. To keep this behavior going, the government must make it possible for consumers to take on more debt; but, in so doing, these policies have left us with an ailing economy in need of deep and drastic restructuring.
In a way, what the Japanese government is doing for American consumers is very similar to what our government is doing for American homebuyers. Rather than let home prices fall, the US government subsidizes homebuyers so they can continue overpaying for houses they cannot actually afford. The beneficiaries of these moves are those selling, building, and financing overpriced homes. Unfortunately, the last thing we need as a nation is to build, buy, or finance more homes. Our economy would improve if the resources devoted to the real estate market could be devoted to other, more needed industries.
Japan should allow the dollar to fall, which would force their manufacturers to adapt to a changing global market where Americans consume less, and those in emerging markets consume more. Instead, it is vainly trying to preserve the status quo and appease entrenched political factions.
Just like here in the US, Japanese politicians take cover by falsely claiming that the intervention “saves jobs.” However, the jobs that are saved come at the expense of more productive jobs that are either lost or not created. If Americans cannot afford to buy Japanese products, it makes no sense for the Japanese to continue selling them to us. Rather they should devote their time, effort, savings and resources to selling products to customers who can actually afford to pay.
Japan’s bailout of American consumers is nothing more than international vendor financing. This is the same technique used by telecom companies during the Internet boom of the late ‘90s. In order to pump up short-term profits, manufacturers of communications gear loaned money to cash-strapped Internet startups so they could buy switches and routers. Of course, when the dot-coms went bankrupt, all those phony sales were written off; then, the stocks of those companies doing the financing, like Cisco, Lucent, and Nortel, collapsed as well (though they did not collapse to zero like the dot-com companies). Although their performance would have lagged during the boom, the equipment manufactures would have been in far better shape fundamentally if the phony sales had never been made.
The same fate awaits the US and Japan. In this analogy, Japan is Cisco and the United States is Pets.com. Sooner rather than later, both Japan and China will realize that they have been hoodwinked by a fast-talking sock puppet without a credible plan to pay them back. When that happens, they will take the write down and let us fend for ourselves.
Montana GOP policy: Make homosexuality illegal
By MATT VOLZ
9/18/2010
HELENA, Mont. — At a time when gays have been gaining victories across the country, the Republican Party in Montana still wants to make homosexuality illegal.
The party adopted an official platform in June that keeps a long-held position in support of making homosexual acts illegal, a policy adopted after the Montana Supreme Court struck down such laws in 1997.
The fact that it's still the official party policy more than 12 years later, despite a tidal shift in public attitudes since then and the party's own pledge of support for individual freedoms, has exasperated some GOP members.
"I looked at that and said, 'You've got to be kidding me,'" state Sen. John Brueggeman, R-Polson, said last week. "Should it get taken out? Absolutely. Does anybody think we should be arresting homosexual people? If you take that stand, you really probably shouldn't be in the Republican Party."
Gay rights have been rapidly advancing nationwide since the U.S. Supreme Court struck down Texas' sodomy law in 2003's Lawrence v. Texas decision. Gay marriage is now allowed in five states and Washington, D.C., a federal court recently ruled the military's "don't ask, don't tell" policy unconstitutional, and even a conservative tea party group in Montana ousted its president over an anti-gay exchange in Facebook.
But going against the grain is the Montana GOP statement, which falls under the "Crime" section of the GOP platform. It states: "We support the clear will of the people of Montana expressed by legislation to keep homosexual acts illegal."
Montana GOP executive director Bowen Greenwood said that has been the position of the party since the state Supreme Court struck down state laws criminalizing homosexuality in 1997 in the case of Gryczan v. Montana.
9/18/2010
HELENA, Mont. — At a time when gays have been gaining victories across the country, the Republican Party in Montana still wants to make homosexuality illegal.
The party adopted an official platform in June that keeps a long-held position in support of making homosexual acts illegal, a policy adopted after the Montana Supreme Court struck down such laws in 1997.
The fact that it's still the official party policy more than 12 years later, despite a tidal shift in public attitudes since then and the party's own pledge of support for individual freedoms, has exasperated some GOP members.
"I looked at that and said, 'You've got to be kidding me,'" state Sen. John Brueggeman, R-Polson, said last week. "Should it get taken out? Absolutely. Does anybody think we should be arresting homosexual people? If you take that stand, you really probably shouldn't be in the Republican Party."
Gay rights have been rapidly advancing nationwide since the U.S. Supreme Court struck down Texas' sodomy law in 2003's Lawrence v. Texas decision. Gay marriage is now allowed in five states and Washington, D.C., a federal court recently ruled the military's "don't ask, don't tell" policy unconstitutional, and even a conservative tea party group in Montana ousted its president over an anti-gay exchange in Facebook.
But going against the grain is the Montana GOP statement, which falls under the "Crime" section of the GOP platform. It states: "We support the clear will of the people of Montana expressed by legislation to keep homosexual acts illegal."
Montana GOP executive director Bowen Greenwood said that has been the position of the party since the state Supreme Court struck down state laws criminalizing homosexuality in 1997 in the case of Gryczan v. Montana.
BP Finally Seals Leaking Gulf of Mexico Oil Well
by Harry R. Weber - Sunday, September 19, 2010 by the Associated Press
A cement plug has permanently killed BP’s runaway well nearly four kilometres below the sea floor in the Gulf of Mexico, five agonizing months after an explosion sank a drilling rig and led to the worst offshore oil spill in U.S. history.
Retired Coast Guard Adm. Thad Allen, the federal government’s point man on the disaster, said Sunday that BP’s well “is effectively dead” and posed no further threat to the Gulf. Allen said a pressure test to ensure the cement plug would hold was completed at 6:54 a.m. EDT.
The gusher was contained in mid-July after a temporary cap was successfully fitted atop the well. Mud and cement were later pushed down through the top of the well, allowing the cap to be removed.
But the well could not be declared dead until a relief well was drilled so that the ruptured well could be sealed from the bottom, ensuring it never causes a problem again. The relief well intersected the blown-out well Thursday, and crews started pumping in the cement on Friday.
The April 20 blast killed 11 workers, and 780 million litres of oil spewed.
The disaster caused an environmental and economic nightmare for people who live, work and play along hundreds of kilometres of Gulf shoreline from Florida to Texas. It also spurred civil and criminal investigations, cost gaffe-prone BP chief Tony Hayward his job, and brought increased governmental scrutiny of the oil and gas industry, including a costly moratorium on deepwater offshore drilling that is still in place.
Gulf residents will be feeling the pain for years to come. There is still plenty of oil in the water, and some continues to wash up on shore. Many people are still struggling to make ends meet with some waters still closed to fishing. Shrimpers who are allowed to fish are finding it difficult to sell their catch because of the perception — largely from people outside the region — that the seafood is not safe to eat. Tourism along the Gulf has taken a hit.
The disaster also has taken a toll on the once mighty oil giant BP PLC. The British company’s stock price took a nosedive after the explosion, though it has recovered somewhat. Its image as a steward of the environment was stained and its stated commitment to safety was challenged. Owners of BP-branded gas stations in the U.S. were hit with lost sales, as customers protested at the pump.
And on the financial side: BP has already shelled out more than $8 billion (dollar figures U.S.) in cleanup costs and promised to set aside another $20 billion for a victims compensation fund. The company could face tens of billions of dollars more in government fines and legal costs from hundreds of pending lawsuits.
BP took some of the blame for the Gulf oil disaster in an internal report issued earlier this month, acknowledging among other things that its workers misinterpreted a key pressure test of the well. But in a possible preview of its legal strategy, it also pointed the finger at its partners on the doomed rig.
BP was a majority owner of the well that blew out, and it was leasing the rig that exploded from owner Transocean Ltd.
(I'm still skeptical that the leak is stopped.--jef)
A cement plug has permanently killed BP’s runaway well nearly four kilometres below the sea floor in the Gulf of Mexico, five agonizing months after an explosion sank a drilling rig and led to the worst offshore oil spill in U.S. history.
Retired Coast Guard Adm. Thad Allen, the federal government’s point man on the disaster, said Sunday that BP’s well “is effectively dead” and posed no further threat to the Gulf. Allen said a pressure test to ensure the cement plug would hold was completed at 6:54 a.m. EDT.
The gusher was contained in mid-July after a temporary cap was successfully fitted atop the well. Mud and cement were later pushed down through the top of the well, allowing the cap to be removed.
But the well could not be declared dead until a relief well was drilled so that the ruptured well could be sealed from the bottom, ensuring it never causes a problem again. The relief well intersected the blown-out well Thursday, and crews started pumping in the cement on Friday.
The April 20 blast killed 11 workers, and 780 million litres of oil spewed.
The disaster caused an environmental and economic nightmare for people who live, work and play along hundreds of kilometres of Gulf shoreline from Florida to Texas. It also spurred civil and criminal investigations, cost gaffe-prone BP chief Tony Hayward his job, and brought increased governmental scrutiny of the oil and gas industry, including a costly moratorium on deepwater offshore drilling that is still in place.
Gulf residents will be feeling the pain for years to come. There is still plenty of oil in the water, and some continues to wash up on shore. Many people are still struggling to make ends meet with some waters still closed to fishing. Shrimpers who are allowed to fish are finding it difficult to sell their catch because of the perception — largely from people outside the region — that the seafood is not safe to eat. Tourism along the Gulf has taken a hit.
The disaster also has taken a toll on the once mighty oil giant BP PLC. The British company’s stock price took a nosedive after the explosion, though it has recovered somewhat. Its image as a steward of the environment was stained and its stated commitment to safety was challenged. Owners of BP-branded gas stations in the U.S. were hit with lost sales, as customers protested at the pump.
And on the financial side: BP has already shelled out more than $8 billion (dollar figures U.S.) in cleanup costs and promised to set aside another $20 billion for a victims compensation fund. The company could face tens of billions of dollars more in government fines and legal costs from hundreds of pending lawsuits.
BP took some of the blame for the Gulf oil disaster in an internal report issued earlier this month, acknowledging among other things that its workers misinterpreted a key pressure test of the well. But in a possible preview of its legal strategy, it also pointed the finger at its partners on the doomed rig.
BP was a majority owner of the well that blew out, and it was leasing the rig that exploded from owner Transocean Ltd.
***
Elizabeth Warren In Office - But Not In Power
(The Consumer Financial Protection Bureau--or whatever it's called--is just a bureau within the Federal Reserve? What good is it, then? The Federal Reserve is a private bank, not a government institution. For crying out loud, it's like putting a corrupt bunch of senators on the Senate Ethics Committee. Elizabeth Warren was perfect to lead this bureau if it was independent, but it's not, and she has been reined in to keep her "out of trouble." Obama's economic team (Geithner, Summers--Emanuel sucks, too) is abysmal.--jef)
Banksters Cheer Tepid Rules on Anniversary of Lehman's Fall
For the Obamacrats, this is a good move in political terms because the White House had been battered by the Democratic base to appoint the outspoken Warren to the job. Asked about the issue at his recent press conference, he was his usual coy and cautious self. He said he hadn't decided.
Now he has-but not to appoint her to the job she deserves but to a post in the Executive Branch under his control and with oversight by Tim Geithner, Larry Summers, and Rahm Emanuel et al. (The White House worries that they could not win a protracted confirmation battle.)
So she's in, but hardly in charge, or able to be an independent force. Remember that quote from the Godfather taken from Chinese military strategist Sun Tsu: "Keep your friends close, and your enemies closer."
The usually on-target blog, Naked Capitalism, suggests that the Warren appointment was just a way to sideline her, not put her in a position of real power. In any event, the new Bureau's rules will not be in effect until 2012, if then. So much for urgency!
At the same time, Warren has posted positively about her new job on The White House website and reports having had several meetings with President Obama.
At the same time, economics analyst Yves Smith warns, don't believe the hype:
And, so much for the international bankers at Basel forcing their American kin to impose the tough rules that are needed. What they have achieved has been characterized as bringing forth a mouse. There is nothing in place that will stop a recurrence of the Lehman collapse two years this week, There is no real debate about whether more institutions will fail, only when,
I watched an interview on BCC's Hard Talk program with the head of Britain's Hedge Fund Association who told a hostile interviewer (or maybe an interviewer posturing as hostile") that
The Financial News reported that the men (and some women) once labeled the "big swinging dicks" on Wall Street are doing well, thank you. The magazine features a "where are they now" spread showing that many of the top CEOS responsible for the loss of Trillions have landed on their feet, and are now in jobs/sinecures in new firms, and live free of any fear of prosecution.
In fact the new compromised and watered down rules has actually helped the banks prosper. Here's one headline in the FT:
Earlier this week in Britain, Mervyn King the Governor of the Bank of England spoke to the Trade Union Congress. He admitted that it was unfair when banks were bailed out while there was no help was provided to workers who lost jobs when factories were closed.
Nevertheless, he appealed to the workers to accept tough austerity measures that will lead to public service cutbacks and job losses.
One union leader attacked the TUC for inviting him, calling him the devil and comparing his own union convention to church that invites Satan to give the sermon.
So called "conservatives" in the US are promoting austerity policies similar to the ones being pursued in Britain including those tax cuts for the rich. Meanwhile, there is push back as 300 economists and analysts warn that the "deficit hawks" who appear to be gaining the upper hand in our economic debates are threatening to turn an already deeply painful recession into a full-blown depression.
A group called One Nation is mobilizing a march on Washington for jobs and justice on October 2. Will it be big enough and noisy enough to make a difference?
***
by Danny Schechter - Monday, September 20, 2010 by CommonDreams.org
"This sounds so bleak when I say it, but we need some delusions to keep us going."Hooray, Elizabeth Warren is to become a Special Assistant to President Obama in charge of setting up the Consumer Protection Bureau that she conceived. Alas, it is not to be the independent agency she wanted but a bureau within the Federal Reserve Bank, a branch of government that is really run by big banks which and did virtually nothing to protect consumers when they needed help the most.
-- Woody Allen in the New York Times
"The former chairman of Lazard in London who is now chairman of Barclays, once said that the only two things that would survive a nuclear war were cockroaches and Lazard. On the evidence of the past few years, he underestimated the tenacity of the rest of the investment banking industry"
-- William Wright, Editor, Financial News, London
For the Obamacrats, this is a good move in political terms because the White House had been battered by the Democratic base to appoint the outspoken Warren to the job. Asked about the issue at his recent press conference, he was his usual coy and cautious self. He said he hadn't decided.
Now he has-but not to appoint her to the job she deserves but to a post in the Executive Branch under his control and with oversight by Tim Geithner, Larry Summers, and Rahm Emanuel et al. (The White House worries that they could not win a protracted confirmation battle.)
So she's in, but hardly in charge, or able to be an independent force. Remember that quote from the Godfather taken from Chinese military strategist Sun Tsu: "Keep your friends close, and your enemies closer."
The usually on-target blog, Naked Capitalism, suggests that the Warren appointment was just a way to sideline her, not put her in a position of real power. In any event, the new Bureau's rules will not be in effect until 2012, if then. So much for urgency!
At the same time, Warren has posted positively about her new job on The White House website and reports having had several meetings with President Obama.
At the same time, economics analyst Yves Smith warns, don't believe the hype:
"It is now official that Warren is at best a placeholder; she cannot have much impact. She can't make much in the way of policy or personnel choices; that would encroach on the authority of an incoming director. And even her ability to influence the choice of a nominee is questionable. Her taking the advisory role now assures that the nomination of the permanent director will come after the midterm Congressional elections. Given the virtual certainty of Democratic losses, the odds are high that Team Obama will settle on a "conservative" meaning "won't ruffle the banking industry" choice, and argue its hands were tied.
On the right, Warren, a former Republican, is pictured as a bring down the banks revolutionary. The financial industry hates her, perhaps because she is too smart for them,
Progressive critics fear the Consumer Protection Bureau is only a way to placate the public by containing abuses but without doing too much harm to the bankers. One example: Credit card "reforms" do not roll back usurious interest rates. Requiring disclosure is not the same as ordering the restructuring of loans to make them affordable.
The banksters are publicly unhappy but privately know they are getting off easy. According to the Financial Times, "The full impact of the new global bank capital rules announced at the weekend is likely to be 30 per cent tougher than the headline ratio suggests, according to regulators and industry participants who have studied private banking data."Just 30 percent! Most Americans don't realize the global dimensions of the crisis and the fact that many in the world are suffering more than we are because of unchecked speculation on Wall Street.
And, so much for the international bankers at Basel forcing their American kin to impose the tough rules that are needed. What they have achieved has been characterized as bringing forth a mouse. There is nothing in place that will stop a recurrence of the Lehman collapse two years this week, There is no real debate about whether more institutions will fail, only when,
I watched an interview on BCC's Hard Talk program with the head of Britain's Hedge Fund Association who told a hostile interviewer (or maybe an interviewer posturing as hostile") that
(a) The industry realizes regulation is in its interest and
(b), the reforms in America are not that tough."When you hear a banker say that, you know that regulations so far are more of a show than anything else.
The Financial News reported that the men (and some women) once labeled the "big swinging dicks" on Wall Street are doing well, thank you. The magazine features a "where are they now" spread showing that many of the top CEOS responsible for the loss of Trillions have landed on their feet, and are now in jobs/sinecures in new firms, and live free of any fear of prosecution.
In fact the new compromised and watered down rules has actually helped the banks prosper. Here's one headline in the FT:
"US financials boosted by new bank rules."At the same time, as the economy continues its jobless non-recovery, the overall situation is bleak according to a more substantive report in the same newspaper:
"Big US banks are nearing the end of another disappointing quarter for their trading businesses that has deepened fears over job losses on Wall Street."New figures show a significant rise in poverty with one in seven barely making it. That represents 44 million people. 47 million Americans are on food stamps. One out of five children are in this group.
Earlier this week in Britain, Mervyn King the Governor of the Bank of England spoke to the Trade Union Congress. He admitted that it was unfair when banks were bailed out while there was no help was provided to workers who lost jobs when factories were closed.
Nevertheless, he appealed to the workers to accept tough austerity measures that will lead to public service cutbacks and job losses.
One union leader attacked the TUC for inviting him, calling him the devil and comparing his own union convention to church that invites Satan to give the sermon.
So called "conservatives" in the US are promoting austerity policies similar to the ones being pursued in Britain including those tax cuts for the rich. Meanwhile, there is push back as 300 economists and analysts warn that the "deficit hawks" who appear to be gaining the upper hand in our economic debates are threatening to turn an already deeply painful recession into a full-blown depression.
"The experts warned that the American economy now stands at a crucial juncture. They acknowledged that public debt is mounting, and presented a choice of two different paths to right the ship: imposing fiscal "austerity" today, in the midst of the most serious downturn since the Great Depression, or investing in the American economy -- with public spending over the short term -- in order to grow our way out of the red ink."The alternatives are clear. Which side are you on? Denial is no longer an option
A group called One Nation is mobilizing a march on Washington for jobs and justice on October 2. Will it be big enough and noisy enough to make a difference?
War Steals From the Poor and Unemployed
by Tom Turnipseed - Monday, September 20, 2010 by CommonDreams.org
Military spending is causing huge deficits and wasting money needed for education, housing, healthcare, infrastructure, and developing clean, renewable energy. 14.9 million Americans are unemployed. 50.7 million Americans did not have health insurance and 43.6 million or 14.3% lived beneath the poverty level in 2009, according to the Census Bureau and the numbers are even higher now. Expenditures for our bloated war complex are about 55% of all discretionary spending. We have spent more than a trillion dollars on the wars in Iraq and Afghanistan since 2001 and much more in bribes to government officials, and tribal chiefs and payments to corrupt private contractors. According to the Democratic Leadership Council, US military spending accounted for 44% of all money spent globally on war, weapons and the military in 2009. Our military spending is as much as all of the next 15 countries combined. The number of people killed in the Iraq and Afghanistan wars is anywhere from 100,000 to a million or more depending on who does the estimates. Statistics on the number of civilians and military personnel killed are often distorted by military propaganda.
Glorification of the mass terrorism of war by media, politicians, weapons makers and other violence peddling war profiteers is depressing. Killing people by war and willful violence is the most demented activity of our species. War is intrinsically evil. Peacemakers like Jesus, Mother Theresa, Gandhi and Martin Luther King are real heroes rather than the war complex hyped "warriors" who "fight for our freedom" by killing people in Iraq and Afghanistan so the US can control their governments and natural resources. Metaphors like the war on poverty seem inappropriate in describing anti-poverty programs, which are diminished by the diversion of resources to make war. Lyndon Johnson took on the pervasive poverty of the 1960 by promoting broad anti-poverty social programs like civil rights, education, Medicare and Medicaid as part of his Great Society.
Rather than advocate more social programs that provide jobs, Obama wants to tinker with middle class tax cuts and a roll back on tax breaks for the fat cats, but how much will trickle down to poor and unemployed people? When a reporter asked Obama to discuss his views on the poverty agendas of LBJ and Dr. King, he answered, "I think the history of anti-poverty efforts is that the most important anti-poverty effort is growing the economy. It's more important than any program we could set up. It's more important than any transfer payment we could have." Economic growth and tax cuts that increase corporate profits will not eliminate poverty. Such praise of Reagan's supply side economics isn't new for Obama.
During the presidential campaign in 2008, Obama said, "I think Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way that Bill Clinton did not. He put us on a fundamentally different path because the country was ready for it. I think they felt like with all the excesses of the 1960s and 1970s and government had grown and grown but there wasn't much sense of accountability in terms of how it was operating. I think people, he just tapped into what people were already feeling, which was we want clarity we want optimism, we want a return to that sense of dynamism and entrepreneurship that had been missing." Does Obama model his super smooth style after Reagan's slick salesman act?
Reagan was a mediocre movie actor when he became the host of the General Electric Theater on NBC. General Electric launched his political career by sponsoring a national speaking tour for their handsome, look-um-in-the-eye, all-American guy, who promoted their conservative philosophy. He was the ideal political huckster for corporate America's unbridled greed. Reagan put a nice face on the mean-spirited politics of fear and greed, blaming welfare mothers, social programs, government regulations and the "evil empire of the Soviet Union" as causes for America's troubles. Scapegoating poor people and criticizing government programs enabled him to deliver a giant tax break for the rich, roll back health and safety regulations, and push through a gigantic military buildup for corporate defense contractors like General Electric. His racially charged attacks on affirmative action hurt racial minorities and women.
Obama's smooth rhetoric can't conceal his role in bailing out Wall Street, cutting deals with corporate interests to dilute the healthcare reform bill, and developing financial regulations in closed-door meetings with bankers.
Rather than praising Reagan, Obama should make Lyndon Johnson and Franklin Roosevelt his role models and work to establish social programs which provide jobs for poor and working class people. LBJ can also teach Obama that endless wars won't work. We should end tax cuts for the rich and transfer funds from war and Wall Street to social programs that put people to work and reduce poverty.
Military spending is causing huge deficits and wasting money needed for education, housing, healthcare, infrastructure, and developing clean, renewable energy. 14.9 million Americans are unemployed. 50.7 million Americans did not have health insurance and 43.6 million or 14.3% lived beneath the poverty level in 2009, according to the Census Bureau and the numbers are even higher now. Expenditures for our bloated war complex are about 55% of all discretionary spending. We have spent more than a trillion dollars on the wars in Iraq and Afghanistan since 2001 and much more in bribes to government officials, and tribal chiefs and payments to corrupt private contractors. According to the Democratic Leadership Council, US military spending accounted for 44% of all money spent globally on war, weapons and the military in 2009. Our military spending is as much as all of the next 15 countries combined. The number of people killed in the Iraq and Afghanistan wars is anywhere from 100,000 to a million or more depending on who does the estimates. Statistics on the number of civilians and military personnel killed are often distorted by military propaganda.
Glorification of the mass terrorism of war by media, politicians, weapons makers and other violence peddling war profiteers is depressing. Killing people by war and willful violence is the most demented activity of our species. War is intrinsically evil. Peacemakers like Jesus, Mother Theresa, Gandhi and Martin Luther King are real heroes rather than the war complex hyped "warriors" who "fight for our freedom" by killing people in Iraq and Afghanistan so the US can control their governments and natural resources. Metaphors like the war on poverty seem inappropriate in describing anti-poverty programs, which are diminished by the diversion of resources to make war. Lyndon Johnson took on the pervasive poverty of the 1960 by promoting broad anti-poverty social programs like civil rights, education, Medicare and Medicaid as part of his Great Society.
Rather than advocate more social programs that provide jobs, Obama wants to tinker with middle class tax cuts and a roll back on tax breaks for the fat cats, but how much will trickle down to poor and unemployed people? When a reporter asked Obama to discuss his views on the poverty agendas of LBJ and Dr. King, he answered, "I think the history of anti-poverty efforts is that the most important anti-poverty effort is growing the economy. It's more important than any program we could set up. It's more important than any transfer payment we could have." Economic growth and tax cuts that increase corporate profits will not eliminate poverty. Such praise of Reagan's supply side economics isn't new for Obama.
During the presidential campaign in 2008, Obama said, "I think Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way that Bill Clinton did not. He put us on a fundamentally different path because the country was ready for it. I think they felt like with all the excesses of the 1960s and 1970s and government had grown and grown but there wasn't much sense of accountability in terms of how it was operating. I think people, he just tapped into what people were already feeling, which was we want clarity we want optimism, we want a return to that sense of dynamism and entrepreneurship that had been missing." Does Obama model his super smooth style after Reagan's slick salesman act?
Reagan was a mediocre movie actor when he became the host of the General Electric Theater on NBC. General Electric launched his political career by sponsoring a national speaking tour for their handsome, look-um-in-the-eye, all-American guy, who promoted their conservative philosophy. He was the ideal political huckster for corporate America's unbridled greed. Reagan put a nice face on the mean-spirited politics of fear and greed, blaming welfare mothers, social programs, government regulations and the "evil empire of the Soviet Union" as causes for America's troubles. Scapegoating poor people and criticizing government programs enabled him to deliver a giant tax break for the rich, roll back health and safety regulations, and push through a gigantic military buildup for corporate defense contractors like General Electric. His racially charged attacks on affirmative action hurt racial minorities and women.
Obama's smooth rhetoric can't conceal his role in bailing out Wall Street, cutting deals with corporate interests to dilute the healthcare reform bill, and developing financial regulations in closed-door meetings with bankers.
Rather than praising Reagan, Obama should make Lyndon Johnson and Franklin Roosevelt his role models and work to establish social programs which provide jobs for poor and working class people. LBJ can also teach Obama that endless wars won't work. We should end tax cuts for the rich and transfer funds from war and Wall Street to social programs that put people to work and reduce poverty.
Economics as if People Mattered
by Grace Lee Boggs - Sunday, September 19, 2010 by CommonDreams.org
As I‘ve been following President Obama's desperate efforts to devise a popular Jobs programs in order to avoid his party's defeat in the November election, I've also been re-reading (and urging others to read) Buddhist Economics by E.F. Schumacher.
I first read this amazingly timely article in 1969 when my friend, Henry Geiger, featured it in Manas, his little 8-page weekly with only 2500 subscribers. Robert M. Hutchins, the internationally renowned University of Chicago President, called them "the 2,500 most interesting people in the world."
Schumacher (1911-1977) was a British economist who served as Chief Economic Advisor to the UK National Coal Board. In 1973 he explained Buddhist Economics and advocated small, appropriate technologies in a little book titled Small Is Beautiful: Economics as if People Mattered. The Times Literary Supplement ranked it among the "100 most influential books published since World War II. "
I only met Schumacher once (in Ann Arbor in 1976), but I have long believed that one day his profoundly human approach to economics would be recognized as the alternative to our dehumanizing and increasingly unsustainable economic system.
That day has come!
In Buddhist Economics Schumacher explains why mass joblessness is inevitable as long as Work is viewed as Labor, because both employers and employees, each for their own reasons, are constantly seeking to reduce or eliminate it.
As I‘ve been following President Obama's desperate efforts to devise a popular Jobs programs in order to avoid his party's defeat in the November election, I've also been re-reading (and urging others to read) Buddhist Economics by E.F. Schumacher.
I first read this amazingly timely article in 1969 when my friend, Henry Geiger, featured it in Manas, his little 8-page weekly with only 2500 subscribers. Robert M. Hutchins, the internationally renowned University of Chicago President, called them "the 2,500 most interesting people in the world."
Schumacher (1911-1977) was a British economist who served as Chief Economic Advisor to the UK National Coal Board. In 1973 he explained Buddhist Economics and advocated small, appropriate technologies in a little book titled Small Is Beautiful: Economics as if People Mattered. The Times Literary Supplement ranked it among the "100 most influential books published since World War II. "
I only met Schumacher once (in Ann Arbor in 1976), but I have long believed that one day his profoundly human approach to economics would be recognized as the alternative to our dehumanizing and increasingly unsustainable economic system.
That day has come!
In Buddhist Economics Schumacher explains why mass joblessness is inevitable as long as Work is viewed as Labor, because both employers and employees, each for their own reasons, are constantly seeking to reduce or eliminate it.
"The modern economist," he writes, " has been brought up to consider ‘labour' or work as little more than a necessary evil. From the point of view of the employer, it is in any case simply an item of cost, to be reduced to a minimum if it cannot be eliminated altogether, say, by automation. From the point of view of the workman, it is a ‘disutility'; to work is to make a sacrifice of one's leisure and comfort, and wages are a kind of compensation for the sacrifice.
"Hence the ideal from the point of view of the employer is to have output without employees, and the ideal from the point of view of the employee is to have income without employment. The consequences of these attitudes both in theory and in practice are, of course, extremely far-reaching. If the ideal with regard to work is to get rid of it, every method that "reduces the work load" is a good thing. The most potent method, short of automation, is the so-called "division of labour" and the classical example is the pin factory eulogized in Adam Smith's Wealth of Nations....dividing up every complete process of production into minute parts, so that the final product can be produced at great speed without anyone having had to contribute more than a totally insignificant and, in most cases, unskilled movement of his limbs."By contrast, Buddhist Economics is based on recognizing the role that Work plays in human development: "to give man (sic) a chance to utilize and develop his faculties; to enable him to overcome his ego-centeredness by joining with other people in a common task; and to bring forth the goods and services needed for a becoming existence."
Therefore, "to organize work in such a manner that it becomes meaningless, boring, stultifying, or nerve-racking for the worker would be little short of criminal; it would indicate a greater concern with goods than with people, an evil lack of compassion and a soul-destroying degree of attachment to the most primitive side of this worldly existence. Equally, to strive for leisure as an alternative to work would be considered a complete misunderstanding of one of the basic truths of human existence, namely, that work and leisure are complementary parts of the same living process and cannot be separated without destroying the joy of work and the bliss of leisure."You can find Buddhist Economics on the web. Reading it will open up both your heart and your mind. See also my June 20-26 column, Maybe Jobs aren't what we need by Frank Joyce. It's on the Boggs Center website www.boggscenter.org/
U.S. Exits (?) Longest Recession Since World War II
(Sorry, I don't buy it. The fact that a 7 member "panel" determines when we are IN a recession, and when we emerge from one is ludicrous! This article is crap! You can't have a real recovery with 1/5 of the workforce, under- or unemployed.--jef)
***
WASHINGTON - The U.S. economy exited recession in June 2009, the National Bureau of Economic Research said Monday, making it official that the downturn was the longest in more than half a century.
More than eight million jobs were lost in the slump that was triggered by dodgy Wall Street mortgage investments.
President Barack Obama said the end of the "Great Recession" would come as little solace to the millions of people who are still out of work
"Even though economists may say that the recession officially ended last year, obviously for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay the bills day to day, it's still very real for them."
The NBER underscored that slow pace of recovery as it issued a statement that confirmed: "The recession lasted 18 months, which makes it the longest of any recession since World War II.
"The committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity," it noted, pointedly.
At the same time it warned "economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion."
Earlier on Monday the Organization for Economic Co-operation and Development warned that the U.S. economy would grow at a slower-than-expected rate of 1.5 per cent this year.
The Paris-based OECD said U.S. growth would be far less than the 3.2 per cent predicted in May, and would increase to only 2.3 per cent next year raising the specter of a painfully slow recovery.
"The United States is slowly recovering from a severe recession and, with economic growth projected to remain low for some time," the OECD said.
The body added that "unemployment is likely to stay elevated for a relatively long period."
"Continuation of targeted support for the labor market may also be necessary until private sector employment picks up more strongly."
But there was some good news.
Despite economists' warnings of a double-dip recession, the NBER said the economy had already recovered enough that any new slide would be an entirely new recession.
"The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007."
"The basis for this decision was the length and strength of the recovery to date."
Unlike many countries where a recession is defined as two consecutive quarters of shrinking growth domestic product, in the United States it is determined by a seven-member NBER panel. (A panel?!?! So, it's bullshit, then, this so called recovery--jef)
Although the depth of the crisis had already been clear, the NBER confirmed it was longer than those which began in 1973 and 1981 and which both lasted 16 months.
***
WASHINGTON - The U.S. economy exited recession in June 2009, the National Bureau of Economic Research said Monday, making it official that the downturn was the longest in more than half a century.
More than eight million jobs were lost in the slump that was triggered by dodgy Wall Street mortgage investments.
President Barack Obama said the end of the "Great Recession" would come as little solace to the millions of people who are still out of work
"Even though economists may say that the recession officially ended last year, obviously for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay the bills day to day, it's still very real for them."
The NBER underscored that slow pace of recovery as it issued a statement that confirmed: "The recession lasted 18 months, which makes it the longest of any recession since World War II.
"The committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity," it noted, pointedly.
At the same time it warned "economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion."
Earlier on Monday the Organization for Economic Co-operation and Development warned that the U.S. economy would grow at a slower-than-expected rate of 1.5 per cent this year.
The Paris-based OECD said U.S. growth would be far less than the 3.2 per cent predicted in May, and would increase to only 2.3 per cent next year raising the specter of a painfully slow recovery.
"The United States is slowly recovering from a severe recession and, with economic growth projected to remain low for some time," the OECD said.
The body added that "unemployment is likely to stay elevated for a relatively long period."
"Continuation of targeted support for the labor market may also be necessary until private sector employment picks up more strongly."
But there was some good news.
Despite economists' warnings of a double-dip recession, the NBER said the economy had already recovered enough that any new slide would be an entirely new recession.
"The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007."
"The basis for this decision was the length and strength of the recovery to date."
Unlike many countries where a recession is defined as two consecutive quarters of shrinking growth domestic product, in the United States it is determined by a seven-member NBER panel. (A panel?!?! So, it's bullshit, then, this so called recovery--jef)
Although the depth of the crisis had already been clear, the NBER confirmed it was longer than those which began in 1973 and 1981 and which both lasted 16 months.
Economic Mess of the Century-How Right-Wing Billionaires and Business Propaganda Got Us into It
Holland's new book shows how the corporate Right obscured how they've rigged the "free market" so they always come out on top.
By Joshua Holland, AlterNet
Posted on September 15, 2010
The Great Recession that began in 2008 wiped out $13 trillion in Americans' household wealth —in home values and stocks and bonds—stoking the kind of anger we’ve seen from pissed off progressives and from the Tea Partiers who dominated the news in the summer of 2009.
But although a lot of people threw around some angry rhetoric—and even invoked the specter of armed revolution—the reality is that when the economy nosedived, we basically took it. We didn’t riot; we took the bailouts, tolerated our stagnant wages, and accepted that Washington wasn’t about to give struggling families any real relief.
Yet the meltdown was global in nature, and it’s worth noting that citizens of other wealthy countries weren’t so complacent. As the Telegraph, a British tabloid, reported, “A depression triggered in America is being played out in Europe with increasing violence, and other forms of social unrest are spreading. In Iceland, a government has fallen. Workers have marched in Zaragoza, as Spanish unemployment heads toward 20 percent. There have been riots and bloodshed in Greece, protests in Latvia, Lithuania, Hungary and Bulgaria. The police have suppressed public discontent in Russia.” Another British paper, the Guardian, reported scenes of “Burned-out cars, masked youths, smashed shop windows and more than a million striking workers” in France. French officials went so far as to delay the release of unemployment data, “apparently for fear of inflaming the protests.”
You might wonder why Americans are so docile compared to others in the face of such a brutal economic onslaught by a small and entitled elite. Any number of theories have been offered to explain the apparent disconnect. Thomas Frank argued eloquently in his book What’s the Matter with Kansas? that wedge social issues—“God, guns and gays”—that the American Right nurtures with such care, obscure the fundamental differences between rich and poor, the powerful and the disenfranchised. Class consciousness, common to other liberal democracies, has been trumped by social anxieties,* according to Frank.
I would offer two additional explanations. First, the 90 percent of Americans who haven’t seen a raise in 35 years compensated for their stagnant incomes and kept on consuming, buying televisions and going out to dinner. How did they do it? First, by bringing women into the workforce in huge numbers, transforming the “typical” single-breadwinner family into a two-earner household. Between 1955 and 2002, the percentage of married women who had jobs outside the home almost doubled. Workers’ salaries stayed pretty much the same, but the average family now had two paychecks instead of one.
After that, we started to finance our lifestyles through debt—mounds of it. Consumer debt blossomed; trade deficits (which are ultimately financed by debt) exploded, and the government started to run big budget deficits, year in and year out. In the period after World War II, while wages were still rising along with the overall economy, Americans socked away 7 to 12 percent of the nation’s income in savings annually (the data only go back as far as 1959). But in the 1980s, that began to decline—the savings rate fell from around 10 percent in the 1960s and the 1970s to about 7 percent in the 1980s, and by 2005, it stood at less than 1 percent (it’s rebounded somewhat since the crash—to 3.3 percent at the beginning of 2010).
The second reason Americans seem complacent in the face of this tectonic shift in their economic fortunes is more controversial: the “New Conservative Movement” built a highly influential message machine that’s helped obscure not only the economic history of the last four decades, but the very notion of class itself.
The Lies That Corporate America Tells Us
Let’s return to the early 1970s, when a rattled economic elite became determined to regain control of the U.S. economy. How do you go about achieving that in a democracy?
One way, of course, is to depose the government and replace it with one that’s more to your liking. In the 1930s, a group of businessmen contemplated just that—a military takeover of Washington, D.C., to stop Franklin Delano Roosevelt’s dreaded New Deal from being enacted. The plot fell apart when the decorated general the group had tapped to lead the coup turned in the conspirators.
A more subtle approach is to convince a majority of voters that your interests are, in fact, their own. Yet there’s a big problem with this: if you belong to a rarified group, then the notion of aligned interests doesn’t reflect objective reality. And in the early 1970s, the media and academia provided a neutral arbiter of that reality (of sorts).
We’ve all grown accustomed to conservatives’ conspiracy theories about the corporate media having a far-left bias and college professors indoctrinating American youths into Maoism. In the early 1970s, a group of very wealthy conservatives started to invest in what you might call “intellectual infrastructure” ostensibly designed to counter the liberal bias they saw all around them. They funded dozens of corporate-backed think tanks, endowed academic chairs, and created their own dedicated and distinctly conservative media outlets.
Families with names such as Olin, Coors, Scaife, Bradley, and Koch may not be familiar to most Americans, but their efforts have had a profound impact on our economic discourse. Having amassed huge fortunes in business, these families used their foundations to fund the movement that would culminate in the election of Ronald Reagan in 1980 and eventually bring about the coronation of George W. Bush in 2000.
In 1973, brewer Joseph Coors kicked in $250,000 for seed money to start the now highly influential Heritage Foundation (with the help of the Olin, Scaife, Bradley, and DeVos foundations). In 1977, Charles Koch, an oil billionaire, started the libertarian CATO Institute. Richard Mellon Scaife, a wealthy right-wing philanthropist who would later fund the shady “Arkansas Project” that almost brought down Bill Clinton’s presidency, bought the Pittsburgh Tribune-Review in 1970. The American Enterprise Institute, which was founded as the American Enterprise Association in the 1930s and remained relatively obscure through the 1960s, was transformed into an ideological powerhouse when it added a research faculty in 1972. The Hoover Institution, founded by Herbert himself in 1928, saw a huge increase in funding in the 1960s and would be transformed during the 1980s into the Washington advocacy organization that it is today.
In 1982, billionaire and right-wing messianic leader Sun Myung Moon started the Washington Times as an antidote to the “liberal” Washington Post. The paper, which promoted competition in the free market over all other human virtues, would be subsidized by the "Moonies” to a tune of $1.7 billion during the next 20 years. In 2000, United Press International, a venerable but declining newswire, was bought up by Moon’s media conglomerate, World News Communications.
With generous financing from that same group of conservative foundations, the Federalist Society was founded in 1982 by former attorney general Ed Meese, controversial Supreme Court nominee Robert Bork, and Ted Olsen—who years later would win the infamous Bush v. Gore case before the Supreme Court in 2000 and then go on to serve as Bush’s solicitor general. The Federalist Society continues to have a major impact on our legal community.
In 2005, one of the most influential right-wing funders, the John M. Olin Foundation, actually declared its “mission accomplished” and closed up shop. The New York Times reported that after “three decades financing the intellectual rise of the right,” the foundation’s services were no longer needed. The Times reported that the loss of Olin wasn’t terribly troubling for the movement, because whereas “a generation ago just three or four major foundations operated on the Right, today’s conservatism has no shortage of institutions, donors or brio.” And that’s not even mentioning Rupert Murdoch’s vast, and vastly dishonest, media empire.
The rise of the conservative “noise machine” has been discussed at length in a number of other works, and conservatives dismiss it as a conspiracy theory of sorts. In truth, it’s anything but—it’s simply a matter of people with ample resources engaging in some savvy politics in an age of highly effective mass communication. There’s nothing new about that; what’s changed is that the world of advertising and marketing has become increasingly sophisticated, and the Right has played the instrument of modern public relations like a maestro.
Taken as a whole, it’s difficult to overstate how profound an impact these ideological armies have had on our economic debates. Writing in the Washington Post, Kathleen Hall and Joseph Capella, two scholars with the Annenberg School of Communication, discussed the findings of a study in which they coded and analyzed the content broadcast across conservative media networks. They found a tendency to “enwrap [their audience] in a world in which facts supportive of Democratic claims are discredited and those consistent with conservative ones championed.” The scholars warned, “When one systematically misperceives the positions of those of a supposedly different ideology, one may decide to oppose legislation or vote against a candidate with whom, on some issues of importance, one actually agrees.”
A larger issue is that the corporate Right’s messaging doesn’t remain confined to the conservative media. The end of the Cold War brought about a sense of economic triumphalism, which infected the conventional wisdom that ultimately shapes the news stories we read—U.S.-style capitalism had slain the socialist beast, proving to many that in the words of Tom Paine, “government is best when it governs least.”
A wave of mergers also concentrated our media in the hands of a few highly influential corporations. In 2009, there was a rare (public) example of one such corporation nakedly exerting editorial control over the decisions of one of its news “assets.” During a meeting between the top management of General Electric, which owned NBC-Universal with its various news networks, and Rupert Murdoch’s News Corporation, GE executives agreed to force MSNBC’s firebrand host Keith Olbermann to cease fire in his long-standing feud with Fox News’s Bill O’Reilly.
As journalist Glenn Greenwald noted at the time, “The most striking aspect of this episode is that GE isn’t even bothering any longer to deny the fact that they exert control over MSNBC’s journalism.”
A week after that, Scarborough invited Nancy Snyderman, a regular medical correspondent for NBC’s networks, onto the show to discuss the health care reform bill then moving through Congress. Snyderman, who was presented to the audience as an impartial medical expert, had lost the ABC News job she’d previously held for 17 years due to a conflict of interest. The Nashville Examiner reported that “she was briefly suspended for being paid to promote J & J’s product Tylenol. She later spent four years with Johnson & Johnson as Vice President of Consumer Education.”
In another ABC segment, Snyderman weighed in on congressional hearings about autism without disclosing that a Johnson & Johnson subsidiary was the target of litigation alleging that one of its vaccines may help cause the condition. It was a “blatant conflict of interest,” in the words of National Autism Association vice president Ann Brasher.
Snyderman is hardly unique. A months-long investigation in 2010 by the Nation’s Sebastian Jones revealed what he called a far-reaching “media-lobbying complex”—dozens of corporate hired guns who appear on network broadcasts without disclosing their ties to the firms they work for. Jones wrote of “the covert corporate influence peddling on cable news,” citing such appearances as former Homeland Security chief Tom Ridge, who went on MSNBC—which conservatives insist is the liberal antidote to Fox News—to urge the Obama administration to launch an ambitious energy program.
There’s a final piece of this puzzle that’s less insidious than what Jones unearthed but probably has a bigger impact on our discourse: the standard-issue “he-said/she-said” reporting that’s so instinctive to neutral, “unbiased” journalists. Reporters are expected to get “both sides” of every story, even if one of those sides is making factually dishonest arguments. And there are an untold number of consultants, corporate flacks, lobbyists, and right-wing think-tankers who are always good for a quick quote for a reporter working on deadline.
The economic perception that emerges from all of this simply doesn’t depict the economy in which most Americans live and work. Before the crash of 2008, most Americans saw news of a relatively robust economy, with solid growth and rising stock prices. But their own incomes had essentially stagnated for a generation. I’ve long thought that the disconnect may help explain why Americans suffer from depression at higher rates than do the citizens of most other advanced countries—if you think the economy’s solid, everyone else is prospering, and yet you still just can’t get ahead, isn’t it natural to conclude it must be the result of some fundamental flaw in yourself?
Maybe you do have flaws—sure, you do—but it’s important to understand how the economy helps shape one’s fortunes. In The 15 Biggest Lies, we’ll look at some of the Right’s most cherished rhetoric and try to burn off some of the fog that shrouds our economic discourse.
(*I totally agree.--jef)
By Joshua Holland, AlterNet
Posted on September 15, 2010
Editor's note: AlterNet is proud to present this excerpt from senior writer Joshua Holland's new book, The Fifteen Biggest Lies about the Economy (And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America). Holland's research-rich but entertainingly written book slices and dices the latest talking points, explaining the issues with depth and nuance. The book tells an important story about the American economy that you won't read in the Washington Post or the Wall Street Journal. It's one that is vitally important to understand as we grapple with some new economic realities. It's a story about how the corporate Right has obscured the ways in which they've rigged the “free market” so they always come out on top. Ultimately, it goes a long way toward explaining how so few Americans noticed as a new Gilded Age emerged under a haze of lies, half-truths and distortions.
*****
But although a lot of people threw around some angry rhetoric—and even invoked the specter of armed revolution—the reality is that when the economy nosedived, we basically took it. We didn’t riot; we took the bailouts, tolerated our stagnant wages, and accepted that Washington wasn’t about to give struggling families any real relief.
Yet the meltdown was global in nature, and it’s worth noting that citizens of other wealthy countries weren’t so complacent. As the Telegraph, a British tabloid, reported, “A depression triggered in America is being played out in Europe with increasing violence, and other forms of social unrest are spreading. In Iceland, a government has fallen. Workers have marched in Zaragoza, as Spanish unemployment heads toward 20 percent. There have been riots and bloodshed in Greece, protests in Latvia, Lithuania, Hungary and Bulgaria. The police have suppressed public discontent in Russia.” Another British paper, the Guardian, reported scenes of “Burned-out cars, masked youths, smashed shop windows and more than a million striking workers” in France. French officials went so far as to delay the release of unemployment data, “apparently for fear of inflaming the protests.”
You might wonder why Americans are so docile compared to others in the face of such a brutal economic onslaught by a small and entitled elite. Any number of theories have been offered to explain the apparent disconnect. Thomas Frank argued eloquently in his book What’s the Matter with Kansas? that wedge social issues—“God, guns and gays”—that the American Right nurtures with such care, obscure the fundamental differences between rich and poor, the powerful and the disenfranchised. Class consciousness, common to other liberal democracies, has been trumped by social anxieties,* according to Frank.
I would offer two additional explanations. First, the 90 percent of Americans who haven’t seen a raise in 35 years compensated for their stagnant incomes and kept on consuming, buying televisions and going out to dinner. How did they do it? First, by bringing women into the workforce in huge numbers, transforming the “typical” single-breadwinner family into a two-earner household. Between 1955 and 2002, the percentage of married women who had jobs outside the home almost doubled. Workers’ salaries stayed pretty much the same, but the average family now had two paychecks instead of one.
After that, we started to finance our lifestyles through debt—mounds of it. Consumer debt blossomed; trade deficits (which are ultimately financed by debt) exploded, and the government started to run big budget deficits, year in and year out. In the period after World War II, while wages were still rising along with the overall economy, Americans socked away 7 to 12 percent of the nation’s income in savings annually (the data only go back as far as 1959). But in the 1980s, that began to decline—the savings rate fell from around 10 percent in the 1960s and the 1970s to about 7 percent in the 1980s, and by 2005, it stood at less than 1 percent (it’s rebounded somewhat since the crash—to 3.3 percent at the beginning of 2010).
The second reason Americans seem complacent in the face of this tectonic shift in their economic fortunes is more controversial: the “New Conservative Movement” built a highly influential message machine that’s helped obscure not only the economic history of the last four decades, but the very notion of class itself.
The Lies That Corporate America Tells Us
Let’s return to the early 1970s, when a rattled economic elite became determined to regain control of the U.S. economy. How do you go about achieving that in a democracy?
One way, of course, is to depose the government and replace it with one that’s more to your liking. In the 1930s, a group of businessmen contemplated just that—a military takeover of Washington, D.C., to stop Franklin Delano Roosevelt’s dreaded New Deal from being enacted. The plot fell apart when the decorated general the group had tapped to lead the coup turned in the conspirators.
A more subtle approach is to convince a majority of voters that your interests are, in fact, their own. Yet there’s a big problem with this: if you belong to a rarified group, then the notion of aligned interests doesn’t reflect objective reality. And in the early 1970s, the media and academia provided a neutral arbiter of that reality (of sorts).
We’ve all grown accustomed to conservatives’ conspiracy theories about the corporate media having a far-left bias and college professors indoctrinating American youths into Maoism. In the early 1970s, a group of very wealthy conservatives started to invest in what you might call “intellectual infrastructure” ostensibly designed to counter the liberal bias they saw all around them. They funded dozens of corporate-backed think tanks, endowed academic chairs, and created their own dedicated and distinctly conservative media outlets.
Families with names such as Olin, Coors, Scaife, Bradley, and Koch may not be familiar to most Americans, but their efforts have had a profound impact on our economic discourse. Having amassed huge fortunes in business, these families used their foundations to fund the movement that would culminate in the election of Ronald Reagan in 1980 and eventually bring about the coronation of George W. Bush in 2000.
In 1973, brewer Joseph Coors kicked in $250,000 for seed money to start the now highly influential Heritage Foundation (with the help of the Olin, Scaife, Bradley, and DeVos foundations). In 1977, Charles Koch, an oil billionaire, started the libertarian CATO Institute. Richard Mellon Scaife, a wealthy right-wing philanthropist who would later fund the shady “Arkansas Project” that almost brought down Bill Clinton’s presidency, bought the Pittsburgh Tribune-Review in 1970. The American Enterprise Institute, which was founded as the American Enterprise Association in the 1930s and remained relatively obscure through the 1960s, was transformed into an ideological powerhouse when it added a research faculty in 1972. The Hoover Institution, founded by Herbert himself in 1928, saw a huge increase in funding in the 1960s and would be transformed during the 1980s into the Washington advocacy organization that it is today.
In 1982, billionaire and right-wing messianic leader Sun Myung Moon started the Washington Times as an antidote to the “liberal” Washington Post. The paper, which promoted competition in the free market over all other human virtues, would be subsidized by the "Moonies” to a tune of $1.7 billion during the next 20 years. In 2000, United Press International, a venerable but declining newswire, was bought up by Moon’s media conglomerate, World News Communications.
With generous financing from that same group of conservative foundations, the Federalist Society was founded in 1982 by former attorney general Ed Meese, controversial Supreme Court nominee Robert Bork, and Ted Olsen—who years later would win the infamous Bush v. Gore case before the Supreme Court in 2000 and then go on to serve as Bush’s solicitor general. The Federalist Society continues to have a major impact on our legal community.
In 2005, one of the most influential right-wing funders, the John M. Olin Foundation, actually declared its “mission accomplished” and closed up shop. The New York Times reported that after “three decades financing the intellectual rise of the right,” the foundation’s services were no longer needed. The Times reported that the loss of Olin wasn’t terribly troubling for the movement, because whereas “a generation ago just three or four major foundations operated on the Right, today’s conservatism has no shortage of institutions, donors or brio.” And that’s not even mentioning Rupert Murdoch’s vast, and vastly dishonest, media empire.
The rise of the conservative “noise machine” has been discussed at length in a number of other works, and conservatives dismiss it as a conspiracy theory of sorts. In truth, it’s anything but—it’s simply a matter of people with ample resources engaging in some savvy politics in an age of highly effective mass communication. There’s nothing new about that; what’s changed is that the world of advertising and marketing has become increasingly sophisticated, and the Right has played the instrument of modern public relations like a maestro.
Taken as a whole, it’s difficult to overstate how profound an impact these ideological armies have had on our economic debates. Writing in the Washington Post, Kathleen Hall and Joseph Capella, two scholars with the Annenberg School of Communication, discussed the findings of a study in which they coded and analyzed the content broadcast across conservative media networks. They found a tendency to “enwrap [their audience] in a world in which facts supportive of Democratic claims are discredited and those consistent with conservative ones championed.” The scholars warned, “When one systematically misperceives the positions of those of a supposedly different ideology, one may decide to oppose legislation or vote against a candidate with whom, on some issues of importance, one actually agrees.”
A larger issue is that the corporate Right’s messaging doesn’t remain confined to the conservative media. The end of the Cold War brought about a sense of economic triumphalism, which infected the conventional wisdom that ultimately shapes the news stories we read—U.S.-style capitalism had slain the socialist beast, proving to many that in the words of Tom Paine, “government is best when it governs least.”
A wave of mergers also concentrated our media in the hands of a few highly influential corporations. In 2009, there was a rare (public) example of one such corporation nakedly exerting editorial control over the decisions of one of its news “assets.” During a meeting between the top management of General Electric, which owned NBC-Universal with its various news networks, and Rupert Murdoch’s News Corporation, GE executives agreed to force MSNBC’s firebrand host Keith Olbermann to cease fire in his long-standing feud with Fox News’s Bill O’Reilly.
As journalist Glenn Greenwald noted at the time, “The most striking aspect of this episode is that GE isn’t even bothering any longer to deny the fact that they exert control over MSNBC’s journalism.”
Most notably, the deal wasn’t engineered because of a perception that it was hurting either Olbermann or O’Reilly’s show, or even that it was hurting MSNBC. To the contrary, as Olbermann himself has acknowledged, his battles with O’Reilly have substantially boosted his ratings. The agreement of the corporate CEOs to cease criticizing each other was motivated by the belief that such criticism was hurting the unrelated corporate interests of GE and News Corp.Five months previously, MSNBC host Joe Scarborough had been criticized for touting GE’s stock on his show, "Morning Joe," without disclosing that the company owned the network that employed him. “I never invest in the stock market because I think—I’ve always thought—that it’s just—it’s a crap shoot,” he said. “[But] GE goes down to five, six, or seven, and I’m thinking, ‘My god. I’m gonna invest for the first time, and I’m gonna send my kids to college through this.’“
A week after that, Scarborough invited Nancy Snyderman, a regular medical correspondent for NBC’s networks, onto the show to discuss the health care reform bill then moving through Congress. Snyderman, who was presented to the audience as an impartial medical expert, had lost the ABC News job she’d previously held for 17 years due to a conflict of interest. The Nashville Examiner reported that “she was briefly suspended for being paid to promote J & J’s product Tylenol. She later spent four years with Johnson & Johnson as Vice President of Consumer Education.”
In another ABC segment, Snyderman weighed in on congressional hearings about autism without disclosing that a Johnson & Johnson subsidiary was the target of litigation alleging that one of its vaccines may help cause the condition. It was a “blatant conflict of interest,” in the words of National Autism Association vice president Ann Brasher.
Snyderman is hardly unique. A months-long investigation in 2010 by the Nation’s Sebastian Jones revealed what he called a far-reaching “media-lobbying complex”—dozens of corporate hired guns who appear on network broadcasts without disclosing their ties to the firms they work for. Jones wrote of “the covert corporate influence peddling on cable news,” citing such appearances as former Homeland Security chief Tom Ridge, who went on MSNBC—which conservatives insist is the liberal antidote to Fox News—to urge the Obama administration to launch an ambitious energy program.
The first step [toward a green economy], Ridge explained, was to “create nuclear power plants.” Combined with some waste coal and natural gas extraction, you would have an “innovation setter” that would “create jobs, create exports.”
As Ridge counseled the administration to “put that package together,” he sure seemed like an objective commentator. But what viewers weren’t told was that since 2005, Ridge has pocketed $530,659 in executive compensation for serving on the board of Exelon, the nation’s largest nuclear power company. As of March 2009, he also held an estimated $248,299 in Exelon stock, according to SEC filings.Jones found that during just the previous three years, “at least seventy-five registered lobbyists, public relations representatives and corporate officials—people paid by companies and trade groups to manage their public image and promote their financial and political interests”—had appeared on the major news channels. “Many have been regulars on more than one of the cable networks, turning in dozens—and in some cases hundreds—of appearances,” he wrote.
There’s a final piece of this puzzle that’s less insidious than what Jones unearthed but probably has a bigger impact on our discourse: the standard-issue “he-said/she-said” reporting that’s so instinctive to neutral, “unbiased” journalists. Reporters are expected to get “both sides” of every story, even if one of those sides is making factually dishonest arguments. And there are an untold number of consultants, corporate flacks, lobbyists, and right-wing think-tankers who are always good for a quick quote for a reporter working on deadline.
The economic perception that emerges from all of this simply doesn’t depict the economy in which most Americans live and work. Before the crash of 2008, most Americans saw news of a relatively robust economy, with solid growth and rising stock prices. But their own incomes had essentially stagnated for a generation. I’ve long thought that the disconnect may help explain why Americans suffer from depression at higher rates than do the citizens of most other advanced countries—if you think the economy’s solid, everyone else is prospering, and yet you still just can’t get ahead, isn’t it natural to conclude it must be the result of some fundamental flaw in yourself?
Maybe you do have flaws—sure, you do—but it’s important to understand how the economy helps shape one’s fortunes. In The 15 Biggest Lies, we’ll look at some of the Right’s most cherished rhetoric and try to burn off some of the fog that shrouds our economic discourse.
***
Where is the World Economy Headed?
Challenging the Model of the North
By MICHAEL HUDSON
Toward what goal is the world economy steering?
That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.
Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily. But the aim is the same: to make subject populations pay – as debtors and as dependent junior trade partners. Indebted “host economies” are in a similar position to that of defeated countries. Their economic surplus is transferred abroad financially, while locally, debtors lose sovereignty over their own financial, economic and tax policy. Public infrastructure is sold off to foreign buyers, on credit and therefore paying interest and fees that are expensed as tax-deductible and paid to foreigners.
The Washington Consensus applauds this pro-rentier policy. Its neoliberal ideology holds that the most efficient path to wealth is to shift economic planning out of the hands of government into those of bankers and money managers in charge of privatizing and financializing the economy. Almost without anyone noticing, this view is replacing the classical law of nations based on the idea of sovereignty over debt and financial policy, tariff and tax policy. Ideology itself has become an economic weapon. Indebted governments have been told since 1980 to sell off their public infrastructure to foreign investors. Extractive “tollbooth” charges (economic rent) replace moderate or subsidized public user fees, making economies less competitive and painting them even more into a debt corner as the surplus is transferred abroad, largely tax-free.
What the world is experiencing in the face of today’s globalism is a crisis in the character of nationhood and economic sovereignty. Bankers in the North look upon any economic surplus – real estate rent, corporate cash flow or even the government’s taxing power or ability to sell off public enterprises – as a source of revenue to pay interest on debts. The result is a more debt-leveraged economy – in all countries. Foreign investment, bank lending, the privatization of public infrastructure and currency speculation is now viewed from this bankers’-eye perspective.
There is one great exception to relinquishing national policy to foreign control: the United States itself is by far the world’s largest debtor economy. While mobilizing creditor power to force other debtors to privatize their public sectors and acquiesce in a one-sided U.S. trade protectionism, the United States is the only nation able to issue its own currency (Treasury debt) and international bank credit without limit, at a lower interest rate than any other country, and even without any foreseeable means to pay.
This double standard has transformed the character of international finance and the meaning of capital inflows. Money no longer is an asset in the form of gold or silver bullion reflecting what has been produced by labor. Money is credit, and hence finds its counterpart in debt on the liabilities side of the balance sheet. Since the United States suspended gold convertibility of the dollar in 1971, international money – the savings of central banks – has taken the form mainly of U.S. Treasury debt, that is, loans to the United States to finance its twin balance-of-payments and budget deficits (both of which are largely military in character). Meanwhile, domestic commercial bank credit takes the form of private debt – mortgage debt, corporate debt (increasingly for debt leveraged takeovers), and even loans for speculation on financial derivatives and currency gambles.
Little bank credit has gone to finance tangible capital investment. Most such investment has been paid for out of retained business earnings, not bank loans. And as banks and brokerage houses have financed corporate takeovers, the new buyers or raiders have had to divert corporate cash flow to paying back their creditors rather than expanding production. This is how the U.S. and other economies have become financialized and post-industrialized. Their experience should serve as an object lesson for what Brazil and other countries need to avoid.
U.S. bank lending has been the major dynamic fueling a global inflation of real estate, stock and bond prices, bolstered over the past decade by European bank lending. Dollar credit (like yen credit after 1990) is created “freely” without the constraint that used to occur when capital outflows forced central banks either to raise national interest rates or lose their gold stocks. In fact, any economy today can create its own domestic credit on its own computer keyboards – those of its central bank and commercial banks. Under today’s conditions, foreign loans do not provide resources that host countries cannot create for themselves. The effect of foreign credit converted into domestic currency is merely to siphon off interest and economic rent.
It is not widely recognized that most commercial bank loans merely attach debt to existing assets (above all, real estate and infrastructure) rather than being invested in creating new means of production, or to employ labor, or even to earn a profit. Banks prefer to lend against assets already in place – real estate, or entire companies. So most bank loans are used to bid up of prices for assets, especially those whose prices are expected to rise by enough to pay the interest on the loan.
The fact that bankers can create interest-bearing debt on computer keyboards with little cost of production poses the question of whether to leave this free lunch (economic rent) in private hands or treat money creation as a public “institutional” good. Classical economists urged that such rent-yielding privileges be regulated to keep prices and incomes in line with necessary costs of production. The surest way to do this was to keep monopolies in the public domain to provide basic services at minimum cost or for free while land taxes and user fees could serve as the main source of public revenue. This principle has been flagrantly violated by the practice of erecting privatized “tollbooths” that extract rent revenue without a corresponding cost of production. This has been done in a way that benefits only a select few.
The unchecked explosion of global credit and debt – and hence, pressure to sell off natural monopolies in the public domain – is largely a result of the credit explosion unleashed after gold convertibility ended in 1971. The ensuing U.S. Treasury-bill standard left foreign central banks with no vehicle in which to hold their international reserves except loans to the U.S. Treasury. This gives the U.S. balance-of-payments deficit a free ride, which translates into a military free ride. After the Korean War forced the dollar into deficit status in 1951, overseas military spending throughout the 1950s and ‘60s equaled the entire U.S. payments deficit. The private sector was almost exactly in balance during these decades, while U.S. “foreign aid” actually generated a balance-of-payments surplus, as a result of aid tied to U.S. exports rather than to the needs of aid-recipient countries.
While other countries running trade and payments deficits must increase their interest rates to stabilize their currencies, the United States has lowered its interest rates. This has increased the “capitalization rate” of its real estate rents and corporate earnings, enabling banks to lend more against higher-priced collateral. Property is worth whatever banks will lend against it, so the U.S. economy has been able to use the dollar standard’s free ride to load itself down with an unprecedented debt overhead – an overhead that traditionally has been suffered only by countries fighting wars abroad or burdened with reparations payments. This is the Treasury-bill standard’s self-destructive blowback.
It is an object lesson for Brazil to avoid. Your nation today is receiving balance-of-payments inflows as foreign banks and investors create credit to lend against your real estate, natural resources and industry. Their aim is to obtain your economic surplus in the form of interest payments and remitted earnings, turning you into a rentier tollbooth economy.
Why would you need these “capital inflows” that extract interest, rents and profits as a return for electronic “keyboard credit” that you can create yourself? In today’s world, no nation needs credit from abroad for domestic-currency spending at home. Brazil should avoid letting foreign creditors capitalize its economic surplus into debt service and other payments.
The way to avoid this fate was outlined from the French Physiocrats and Adam Smith through John Stuart Mill and Progressive Era reformers: by ending the special privileges bequeathed by Europe’s military conquests (privatization of land rent), and by collecting “free lunch” rentier income as the tax base to save it from being privatized and capitalized into bank loans. Taxing land and resource rent lowers the cost of living and doing business not only by removing the tax burden on labor and industry, but by holding down housing and real estate prices, because whatever the tax collector relinquishes is available to be pledged to carry bank loans to bid up property prices.
In the 19th century the American System of political economy was based on the perception that highly paid labor is more productive labor, such that well-educated, well-fed and well-clothed labor undersells “pauper” labor. The key to international competitiveness is thus to raise wages and living standards, not lower them. This is especially the case for Brazil, given its need to raise labor productivity by better education, health and social support systems if it is to thrive in the 21st century. And if it is to raise capital investment and living standards free of debt service and higher housing prices, it needs to prevent the economy’s surplus from being turned into a “free lunch” in the form of land rent, resource rent and monopoly rent – and to save this economic surplus from bankers seeking to capitalize it into debt payments. This is best achieved by taxing away the potential rentier charges that turn the surplus into unnecessary overhead.
But because the wealth of nations is now calculated from the banker’s perspective, surplus income is viewed as potentially available to capitalize into debt service. Rather than using the surplus to invest in capital formation and public infrastructure, the distinguishing characteristic of our time is financialization – the capitalization of the economic surplus (corporate cash flow, real estate rent and other economic rent, and personal income over and above basic living costs) into interest payments for bank loans.
This is the business plan of bank marketing departments and is a far cry from what Adam Smith wrote about in The Wealth of Nations. Loan officers see any net flow of income as potentially available to be pledged as interest payment. Their dream is to see the entire surplus capitalized into debt service to carry loans. Net real estate rent, corporate cash flow (ebitda: earnings before interest, taxes, depreciation and amortization), personal income above basic spending needs, and net government tax revenues can be capitalized into as much as banks will lend. And the more credit they lend, the higher prices are bid up for real estate, stocks and bonds.
So bank lending is applauded for making economies richer, even as families and businesses are loaded down with more and more debt. And the easier debt leveraging becomes, the more asset prices rise. Lower interest rates, lower down payments, more stretched-out amortization periods, and even fraudulent “devil may care” lending thus increase the “capitalization rate” of real estate and business revenue. This is applauded as “wealth creation” – which turns out to be debt-leveraged asset-price inflation and can infect an entire economy.
The limit of this policy is reached when the entire surplus is turned into debt service. At this point the economy is fully financialized. Income spent to pay debts is not available for new investment or consumption spending, so the “real” economy is debt-shackled and must shrink.
The financial takeoff thus ends in a crash. That is what the world is seeing today, at least outside of Brazil and its fellow BRIC countries. For these economies, the question is whether they will follow the same financialization path.
The World Bank and IMF are Not Reformable
A document put out by the Council of Economic Advisors to the President (CDES) speaks of “reforming” the IMF, World Bank and even the United Nations. I don’t believe that this hope is realistic. As I analyzed in Super Imperialism (1972 and 2002), the World Bank and IMF are committed to a basically destructive economic philosophy.
In the case of agricultural development, the World Bank is authorized only to make foreign-currency loans aimed at increasing exports. Its lending accordingly has been for roads and export infrastructure, not to develop the local economy. The effect has been to shift agricultural patterns away from feeding domestic populations with domestic grain crops, to exporting plantation crops. The latter’s global oversupply has lowered Third World terms of trade while enabling the United States and Europe to become major grain exporters.
This trade pattern benefits the industrial grain-exporting core while driving the periphery into food and debt dependency – for which “interdependence” has become a bureaucratic euphemism. I note that this happy-face word – interdependence – appears in the first sentence of this meeting’s brochure. It implies acquiescence in globalization, as if it is desirable in itself as mutually beneficial to all parties. But in today’s world, interdependence implies three modes of dependency: (1) food dependency, (2) military dependency, and (3) debt dependency. The Washington Consensus promoted by the International Monetary Fund (IMF), World Bank and U.S. bilateral aid reinforces these three modes of dependency, bolstering U.S. financial and military hegemony.
The drain of payments to creditors and absentee investors forces countries to balance their budgets by selling off their public domain. Credit rating agencies threaten to downgrade counties that do not “play ball” by giving up their commanding heights on the cheap. Lower bond ratings would make these countries pay much higher interest. This system traps them into letting privatizers extract economic rent.
From about 1950 to 1980, World Bank and commercial bank consortia lent governments money to put these assets in place. Now that these loans are paid off, banks are lending all over again to private buyers of these assets. The new owners erect tollbooths on this hitherto public infrastructure – and “expense” their revenue in the form of tax-deductible interest, underwriting charges, high management fees and other largely fictitious “costs of production.” Globalized accounting orthodoxy enables foreign investors to transfer their receipt of user fees and other economic rent out of the country, tax-free. This drives the host economies further into balance-of-payments deficit, leading to even more sell-offs at even steeper distress-price discounts.
In times past, population provided a military advantage, as well as supplying labor for production. But finance wields dominant control today. The lead nations are willing to see Brazil and other BRIC countries grow and export enough labor-intensive goods and raw materials to pay their growing debts. What rentier interests want is the economic surplus, in the form of debt service (interest, amortization and fees) and monopoly rents in the form of tollbooth charges for the roads and other public infrastructure that is being privatized. They add insult to injury by also demanding that governments refrain from taxing these takings, by permitting interest and other technologically unnecessary charges such as depreciation to be tax-deductible. An illusion of non-profit (and hence, non-taxable) business also is given by going along with the accounting pretense of fictitiously low transfer prices for exports.
Corporate accountants quantify these stratagems with an eye to leaving little net income to be reported and taxed. Under this false map of economic reality, seemingly empirical statistics serve mainly to preserve the deceptive neoliberal economic theory behind them.
To keep their monopoly of money creation, creditor nations demand that governments not use their central banks to do what central banks all over the world originally were founded to do: finance public budget deficits by monetizing them to become the national credit base. The pretense is that it would be inflationary for central banks to finance their government’s budget deficits. But it is no more inflationary than permitting central banks to create credit on their own keyboards!
The European Central Bank insists that governments borrow only from commercial banks and other private-sector creditors – and even that foreign bank branches in host countries can denominate loans in the currency used by the head office or other foreign currencies. Swedish branch banks in Latvia and Austrian bank branches in Hungary thus make loans denominated in Euros. Creditor-nation banks thus can invade and conquer by creating their own local electronic credit, violating the prime directive of wise financial management: never denominate debts in hard foreign currency, when your income is in soft domestic currency.
The demand that countries “balance their budgets” is a euphemism for selling off the public domain and slashing pensions and public spending on education, medical care and other basic preconditions for raising labor productivity. Such austerity demands the opposite of the Keynesian policies followed by the United States itself. Economies subjected to the Washington Consensus fall further and further behind, making the global economy more polarized and unstable. The collapse of the “Baltic Tigers” and other post-Soviet economies where neoliberal planners had a free hand stands as an object lesson for how self-destructive these policies are for nations that submit to them.
What turns out to be ironic is that the tax philosophy favoring debt leveraging rather than equity investment is destroying the creditor core economies as well as the financialized periphery. That is the blowback that Europe and North America are now experiencing. They have let free credit creation subject their own economies to debt deflation – the same dysfunctional policies that impaired Third World development from the 1960s onward!
It is to prevent the resulting shrinkage of the “real” economy – and indeed, debt peonage – that European labor unions are mounting a general strike on September 28, 2010, against austerity plans that would roll back living standards. The move by the BRIC countries to create an alternative financial system and trade and development philosophy for themselves is a kindred reaction against the neo-rentier counter-Enlightenment that is determined to undermine classical economic reform.
The Importance of Economic Ideology to Make a New Beginning
The most important factor in the economic strength of Brazil and its fellow BRIC countries is that you are not yet as debt-ridden as North America and Europe. Your advantages do indeed include your population and natural resources, but you have had these all along. What makes you so attractive to the North is that you are the remnant of the global economy that has not yet buckled under their debt burden. Your economic surplus is not yet pledged to pay debt service, so bankers eye you as not yet “loaned up.”
Your main economic problem is how to protect yourself from the proliferation of credit and debt that has dragged down the North like an invading army, along with the privatization of natural monopolies and financial privileges. Your solution must be to follow an alternative to the regressive financial and tax ideology promoted by today’s international institutions.
What is needed today is not just a “global governance revision” but an outright break from the past. Revision tends to be merely marginal, not the structural change that is called for.
When building a new foundation, it is easier to replace old institutions and start afresh than to try to modify bad institutions and retrain personnel who are committed to entrenched, dysfunctional past policies. An outstanding example of this is U.S. policy after its Civil War. To develop the logic for their economic program, the Republican Party at that time (not today’s neoliberal Republicans!) founded land-grant state colleges and endowed business schools to teach the protectionist and technology-based alternative to the British free trade doctrine being taught at the most prestigious colleges such as Harvard, Yale and Princeton. The result was the doctrine that would propel the United States to world leadership by means of protective tariffs, a national bank and public infrastructure investment.
We have before us four objectives for discussion:
This accounting format rejects the classical definition of economic rent as the excess of market price extracted over and above the necessary costs of production. The result is merely a map of the economy as seen by a predatory bankers’-eye view of the world – a view of how they play only a productive role, as if all credit and debt leveraging were productive rather than extractive.
Obviously, this view fails to reflect today’s economic problem or how industrial economies are being post-industrialized and financialized. “The devil wins at the point where he convinces the world that he does not really exist,” quipped Charles Baudelaire. Providing privatized services, including bank credit, health insurance and other “tollbooth”-type fees at a price in excess of these necessary costs should be treated as transfer payments, not as output.
The GDP accounting format and national balance sheet analysis are asymmetrical in undervaluing land and other natural resources relative to capital and rent imputations. The pretense is that buildings grow in value even while being depreciated. Meanwhile, free market ideology deters governments from calculating the economic cost of recovering the exhaustion of mineral and subsoil wealth and forests from private exploitation. A depletion allowance is given to private investors for making holes in the ground and cutting down forests. It would be more economically fair for them to make payments to reimburse the national economy that is losing this patrimony or suffering environmental cleanup charges.
Free traders have opposed including such calculations for national depletion, cleanup or other restoration charges in national accounts. Taking them into account would reduce the gains-from-trade calculations with which neoliberal trade theory indoctrinates students and public officials. This ideological prejudice makes current practice doctrinaire, not empirical science.
The international economy needs an accounting format to calculate the national ability to pay foreign debts. In 1929 the Young Plan averted global financial breakdown by finally limiting Germany’s reparations payments for World War I in the context of calculating how much foreign exchange Germany could earn (and pay) in the normal course of trade, as distinct from simply borrowing new money or selling off assets. Trying to pay by taking on more debt or selling assets is not to be viewed as a normal ability to carry debt in equilibrium.
In such circumstances the debts should be deemed to have gone bad and be written down. The alternative is the kind of asset stripping that Iceland and Latvia are now suffering, and that Third World countries suffered in the late 1970s and ‘80s. This is the road to debt peonage, shrinking the economy and spurring emigration of the labor force as well as capital flight, benefiting the few at home and abroad.
These shortcomings prevent the GDP format from being a good guide for public policy-making. The two above problems – austerity policy and the current pro-rentier map of the economy – have promoted a bankers’-eye view of the world advocating
In terms of international balance, the cost of labor is inflated by payments owed to the FIRE sector. By contrast, when trade theory was elaborated by British free traders, American protectionists and other economists in the 19th century, it was spending on food and other consumer goods that provided the basis for labor cost comparisons among nations. Today’s U.S. trade deficit, for example stems largely from the fact that homeowners typically pay up to 40 per cent of their income for mortgage debt service and other carrying charges, 15 per cent for other debt (credit card interest and fees, auto loans, student loans, etc.), 11 per cent for FICA wage withholding for Social Security and Medicare, and about 10 to 15 per cent in other taxes (income and excise taxes). So debt-leveraged real estate and consumption are aggravated by forced saving set-asides in the form of “pension fund capitalism” run by money managers. And this brings us to the topic of
Summary
It seems obvious that financial reform is needed – and this requires fiscal reform as well. The fact that whatever the tax collector relinquishes is available (“free”) to be pledged to creditors as interest makes the fiscal problem part and parcel of this financial problem. The economic rent that governments relinquish is “free” to be captured by the banks, which capitalize untaxed revenue into bank loans. This is how economies load themselves down with debt. Lower taxes on rent leave more revenue available to pay interest on loans made to enable borrowers to bid up prices. Meanwhile, cutting taxes on unearned income obliges the government to make up the gap by taxing labor and tangible industrial investment more, raising their supply price, or borrowing from the banks at interest.
Today’s budget deficits thus have gone hand in hand with over-indebted economies, and with a regressive tax shift that burdens productive labor and industry. The tax systems of nearly all countries today favor debt financing – and hence, asset-price inflation – by permitting interest and financial fees to be tax-deductible, while dividends and earnings must be paid after taxes. This un-taxing of land and rent-extracting monopolies goes against the logic of Saint-Simon and other 19th-century reformers who sought to free markets from debt overhead, not to free bankers and financiers from regulation and taxation.
Today’s financialized world is paying a steep price for its rentier-sponsored reaction against classical economics. This reaction distracted attention from the fact that economies suffer a rising “free lunch” of what J. S. Mill called unearned income and unearned increments in the form of higher land rent and land prices. Rent extraction is the business plan of privatizers of public infrastructure and natural monopolies – and of their financial backers seeking to provide buyout loans. The tragedy of our epoch is that most credit is extended to buy rent-extracting opportunities, not for productive capital formation. Banks prefer to lend against property already in place – real estate or companies – than to finance tangible new capital formation. This poses the threat of globalization taking a corrosive form, ending in debt deflation, privatization and a rentier tollbooth economy rather than becoming a system of mutual gain.
The neoliberal motto of Margaret Thatcher, “There is No Alternative” (TINA), ignores the alternative advocated by two hundred years of classical economists. The original liberals – from Adam Smith and the Physiocrats through John Stuart Mill and even Winston Churchill – urged that the tax system be based on the economic rent of land so as to keep down the price of housing (and hence labor’s cost of living). The Progressive Era followed this principle by aiming to keep natural monopolies such as transportation, communication and even banks (or at least, free credit creation) in the public domain. But the post-1980 world has encouraged private owners to buy them on credit and extract economic rent, thereby shifting the tax burden onto labor, industry and agriculture – while concentrating wealth, first on credit and then via the enormous recent public bailouts of this failed financial debt pyramiding and deregulation.
This is what is shrinking the Northern economies today as they suffer from economic polarization between creditors and debtors, property owners and an increasingly insecure labor force – insecure because it is so deeply in debt that losing a job or being fired threatens loss of one’s home and solvency.
Austerity and economic shrinkage are not necessary. There is an alternative. Given the bankers’-eye view of the world promoted by the IMF, World Bank and most mainstream economists, your task must be to stay free of globalization in today’s financialized form. Your counter is simple enough: Do not permit outsiders to buy your assets and drive up your currency’s exchange rate with “computer keyboard” credit that you do not need. Commercial banking requires careful public regulation, with the government itself controlling money-creation, leaving banks to act as intermediaries. The aim of financial regulatory policy should be to make sure that Brazil’s economic surplus is invested in production to raise living standards rather than relinquishing money creation to foreign and domestic financial interests aiming mainly at currency speculation, interest and rent extraction.
You face a danger from mounting global pressure backing policies to slash your living standards, capital investment and infrastructure spending in order to pay exponentially growing private and public debts. Unless debts are written off, or at least reduced to the reasonable ability to pay, economies throughout the world will suffer waves of foreclosure, financial polarization between creditors and debtors, and ultimately social collapse.
At issue is the concept of free markets. Are they to be free from monopoly and special privilege, or free for the occupying financial invaders and speculators? The reform of classical political economy in the 18th and 19th centuries was to keep “free lunch” rent from rising land and raw materials prices, financial credit creation and related monopolies in the public domain.
Looking back on history, we can see how the economies created by the conquerors of Europe and its subsequent colonies were based on war making and looting, seizure of the land, taxation, royal war debts – and, by the 17th century, the creation of Crown monopolies to sell off to raise the money to pay off these debts. (The South Sea and Mississippi Companies in the 1710s are the culminating examples of this practice.) This led to high-cost, debt-ridden economies in Britain and France. It was against such wasteful – and technologically unnecessary – overhead that classical economics was developed as a reform program. The main aim was to make these nations more competitive by freeing their markets from rent and monopolies, and from taxes levied mainly on labor and industry for unproductive spending on wars and empire building. A kindred aim was to reform the financial system to replace debt financing with equity investment. And increasing reform pressure grew for public subsidy of basic infrastructure, especially outside of Britain.
Neoliberals advocate the opposite policy. They define a free market as one that is free for rentiers to extract economic rent and interest. The effect is to turn the public domain into a field of tollbooths for roads and other basic infrastructure charging entry prices and user fees that are loaded with built-in financial charges, exorbitant salaries and rake-offs that raise the economy’s cost of living and doing business.
So we are brought back to how privatizing the public domain and financializing the economy is akin to military defeat. To defend themselves, the BRIC countries need to isolate themselves from global debt creation. The “dialogue” your conference calls for with regard to rules for “new global governance” is unlikely to reach a consensus under today’s conditions where the United States and EU, the World Bank and IMF are urging austerity. They are calling for a sacrifice of labor’s Social Security and pension savings in order to extract payment for the debt overhang that has been allowed to develop.
Debt leveraging and asset-price inflation have been encouraged by the past generation’s fiscal ideology giving tax favoritism for interest and capital gains. This pro-rentier tax favoritism was the opposite of classical free-market reforms and was bound to fail. Yet its sponsors have the audacity to claim Adam Smith, J. S. Mill and their followers as the patron saints of neoliberalism. Classical political economy endorsed a broadening array of public services and social support outside of the market. The United States subsidized its industrial takeoff by realizing that roads, public health and other basic services should be provided freely rather than burdened with intrusive toll charges. Neoliberal ideology asserts that such public investment and regulation is the “road to serfdom” and proposes in its place what may best be thought of as the real road to debt peonage – tax favoritism for debt leverage followed by debt deflation and austerity.
A century ago, even fifty years ago, most of the world was embarking on a program of public infrastructure investment, including central bank or treasury credit for government spending. This was the classical policy program to free economies from the rentier overhead that now is proliferating in much of the world. It is this financial, real estate and monopoly overhead that is pricing Northern Hemisphere labor and industry out of world markets – and leading its investors to look south for more to plunder.
Fortunately, Brazil and its fellow BRIC members have an opportunity to create the classical 19th-century version of free markets, checks and balances that has failed in the North.
By MICHAEL HUDSON
Last Thursday Michael Hudson addressed the Council of Economic Advisors to the President of Brazil (CDES) . He offered an unsparing description of how the global economy is being shaped and exploited by Northern bankers. Then he outlined the ways in which Brazil and other major “BRIC” economies – Russia, Chinas, India – can steer an independent path and thus preserve and improve their nations’ condition . CounterPunch is delighted to feature here Dr Hudson’s very striking address. AC/JSC
Brasilia
Toward what goal is the world economy steering?
That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.
Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily. But the aim is the same: to make subject populations pay – as debtors and as dependent junior trade partners. Indebted “host economies” are in a similar position to that of defeated countries. Their economic surplus is transferred abroad financially, while locally, debtors lose sovereignty over their own financial, economic and tax policy. Public infrastructure is sold off to foreign buyers, on credit and therefore paying interest and fees that are expensed as tax-deductible and paid to foreigners.
The Washington Consensus applauds this pro-rentier policy. Its neoliberal ideology holds that the most efficient path to wealth is to shift economic planning out of the hands of government into those of bankers and money managers in charge of privatizing and financializing the economy. Almost without anyone noticing, this view is replacing the classical law of nations based on the idea of sovereignty over debt and financial policy, tariff and tax policy. Ideology itself has become an economic weapon. Indebted governments have been told since 1980 to sell off their public infrastructure to foreign investors. Extractive “tollbooth” charges (economic rent) replace moderate or subsidized public user fees, making economies less competitive and painting them even more into a debt corner as the surplus is transferred abroad, largely tax-free.
What the world is experiencing in the face of today’s globalism is a crisis in the character of nationhood and economic sovereignty. Bankers in the North look upon any economic surplus – real estate rent, corporate cash flow or even the government’s taxing power or ability to sell off public enterprises – as a source of revenue to pay interest on debts. The result is a more debt-leveraged economy – in all countries. Foreign investment, bank lending, the privatization of public infrastructure and currency speculation is now viewed from this bankers’-eye perspective.
There is one great exception to relinquishing national policy to foreign control: the United States itself is by far the world’s largest debtor economy. While mobilizing creditor power to force other debtors to privatize their public sectors and acquiesce in a one-sided U.S. trade protectionism, the United States is the only nation able to issue its own currency (Treasury debt) and international bank credit without limit, at a lower interest rate than any other country, and even without any foreseeable means to pay.
This double standard has transformed the character of international finance and the meaning of capital inflows. Money no longer is an asset in the form of gold or silver bullion reflecting what has been produced by labor. Money is credit, and hence finds its counterpart in debt on the liabilities side of the balance sheet. Since the United States suspended gold convertibility of the dollar in 1971, international money – the savings of central banks – has taken the form mainly of U.S. Treasury debt, that is, loans to the United States to finance its twin balance-of-payments and budget deficits (both of which are largely military in character). Meanwhile, domestic commercial bank credit takes the form of private debt – mortgage debt, corporate debt (increasingly for debt leveraged takeovers), and even loans for speculation on financial derivatives and currency gambles.
Little bank credit has gone to finance tangible capital investment. Most such investment has been paid for out of retained business earnings, not bank loans. And as banks and brokerage houses have financed corporate takeovers, the new buyers or raiders have had to divert corporate cash flow to paying back their creditors rather than expanding production. This is how the U.S. and other economies have become financialized and post-industrialized. Their experience should serve as an object lesson for what Brazil and other countries need to avoid.
U.S. bank lending has been the major dynamic fueling a global inflation of real estate, stock and bond prices, bolstered over the past decade by European bank lending. Dollar credit (like yen credit after 1990) is created “freely” without the constraint that used to occur when capital outflows forced central banks either to raise national interest rates or lose their gold stocks. In fact, any economy today can create its own domestic credit on its own computer keyboards – those of its central bank and commercial banks. Under today’s conditions, foreign loans do not provide resources that host countries cannot create for themselves. The effect of foreign credit converted into domestic currency is merely to siphon off interest and economic rent.
It is not widely recognized that most commercial bank loans merely attach debt to existing assets (above all, real estate and infrastructure) rather than being invested in creating new means of production, or to employ labor, or even to earn a profit. Banks prefer to lend against assets already in place – real estate, or entire companies. So most bank loans are used to bid up of prices for assets, especially those whose prices are expected to rise by enough to pay the interest on the loan.
The fact that bankers can create interest-bearing debt on computer keyboards with little cost of production poses the question of whether to leave this free lunch (economic rent) in private hands or treat money creation as a public “institutional” good. Classical economists urged that such rent-yielding privileges be regulated to keep prices and incomes in line with necessary costs of production. The surest way to do this was to keep monopolies in the public domain to provide basic services at minimum cost or for free while land taxes and user fees could serve as the main source of public revenue. This principle has been flagrantly violated by the practice of erecting privatized “tollbooths” that extract rent revenue without a corresponding cost of production. This has been done in a way that benefits only a select few.
The unchecked explosion of global credit and debt – and hence, pressure to sell off natural monopolies in the public domain – is largely a result of the credit explosion unleashed after gold convertibility ended in 1971. The ensuing U.S. Treasury-bill standard left foreign central banks with no vehicle in which to hold their international reserves except loans to the U.S. Treasury. This gives the U.S. balance-of-payments deficit a free ride, which translates into a military free ride. After the Korean War forced the dollar into deficit status in 1951, overseas military spending throughout the 1950s and ‘60s equaled the entire U.S. payments deficit. The private sector was almost exactly in balance during these decades, while U.S. “foreign aid” actually generated a balance-of-payments surplus, as a result of aid tied to U.S. exports rather than to the needs of aid-recipient countries.
While other countries running trade and payments deficits must increase their interest rates to stabilize their currencies, the United States has lowered its interest rates. This has increased the “capitalization rate” of its real estate rents and corporate earnings, enabling banks to lend more against higher-priced collateral. Property is worth whatever banks will lend against it, so the U.S. economy has been able to use the dollar standard’s free ride to load itself down with an unprecedented debt overhead – an overhead that traditionally has been suffered only by countries fighting wars abroad or burdened with reparations payments. This is the Treasury-bill standard’s self-destructive blowback.
It is an object lesson for Brazil to avoid. Your nation today is receiving balance-of-payments inflows as foreign banks and investors create credit to lend against your real estate, natural resources and industry. Their aim is to obtain your economic surplus in the form of interest payments and remitted earnings, turning you into a rentier tollbooth economy.
Why would you need these “capital inflows” that extract interest, rents and profits as a return for electronic “keyboard credit” that you can create yourself? In today’s world, no nation needs credit from abroad for domestic-currency spending at home. Brazil should avoid letting foreign creditors capitalize its economic surplus into debt service and other payments.
The way to avoid this fate was outlined from the French Physiocrats and Adam Smith through John Stuart Mill and Progressive Era reformers: by ending the special privileges bequeathed by Europe’s military conquests (privatization of land rent), and by collecting “free lunch” rentier income as the tax base to save it from being privatized and capitalized into bank loans. Taxing land and resource rent lowers the cost of living and doing business not only by removing the tax burden on labor and industry, but by holding down housing and real estate prices, because whatever the tax collector relinquishes is available to be pledged to carry bank loans to bid up property prices.
In the 19th century the American System of political economy was based on the perception that highly paid labor is more productive labor, such that well-educated, well-fed and well-clothed labor undersells “pauper” labor. The key to international competitiveness is thus to raise wages and living standards, not lower them. This is especially the case for Brazil, given its need to raise labor productivity by better education, health and social support systems if it is to thrive in the 21st century. And if it is to raise capital investment and living standards free of debt service and higher housing prices, it needs to prevent the economy’s surplus from being turned into a “free lunch” in the form of land rent, resource rent and monopoly rent – and to save this economic surplus from bankers seeking to capitalize it into debt payments. This is best achieved by taxing away the potential rentier charges that turn the surplus into unnecessary overhead.
But because the wealth of nations is now calculated from the banker’s perspective, surplus income is viewed as potentially available to capitalize into debt service. Rather than using the surplus to invest in capital formation and public infrastructure, the distinguishing characteristic of our time is financialization – the capitalization of the economic surplus (corporate cash flow, real estate rent and other economic rent, and personal income over and above basic living costs) into interest payments for bank loans.
This is the business plan of bank marketing departments and is a far cry from what Adam Smith wrote about in The Wealth of Nations. Loan officers see any net flow of income as potentially available to be pledged as interest payment. Their dream is to see the entire surplus capitalized into debt service to carry loans. Net real estate rent, corporate cash flow (ebitda: earnings before interest, taxes, depreciation and amortization), personal income above basic spending needs, and net government tax revenues can be capitalized into as much as banks will lend. And the more credit they lend, the higher prices are bid up for real estate, stocks and bonds.
So bank lending is applauded for making economies richer, even as families and businesses are loaded down with more and more debt. And the easier debt leveraging becomes, the more asset prices rise. Lower interest rates, lower down payments, more stretched-out amortization periods, and even fraudulent “devil may care” lending thus increase the “capitalization rate” of real estate and business revenue. This is applauded as “wealth creation” – which turns out to be debt-leveraged asset-price inflation and can infect an entire economy.
The limit of this policy is reached when the entire surplus is turned into debt service. At this point the economy is fully financialized. Income spent to pay debts is not available for new investment or consumption spending, so the “real” economy is debt-shackled and must shrink.
The financial takeoff thus ends in a crash. That is what the world is seeing today, at least outside of Brazil and its fellow BRIC countries. For these economies, the question is whether they will follow the same financialization path.
The World Bank and IMF are Not Reformable
A document put out by the Council of Economic Advisors to the President (CDES) speaks of “reforming” the IMF, World Bank and even the United Nations. I don’t believe that this hope is realistic. As I analyzed in Super Imperialism (1972 and 2002), the World Bank and IMF are committed to a basically destructive economic philosophy.
In the case of agricultural development, the World Bank is authorized only to make foreign-currency loans aimed at increasing exports. Its lending accordingly has been for roads and export infrastructure, not to develop the local economy. The effect has been to shift agricultural patterns away from feeding domestic populations with domestic grain crops, to exporting plantation crops. The latter’s global oversupply has lowered Third World terms of trade while enabling the United States and Europe to become major grain exporters.
This trade pattern benefits the industrial grain-exporting core while driving the periphery into food and debt dependency – for which “interdependence” has become a bureaucratic euphemism. I note that this happy-face word – interdependence – appears in the first sentence of this meeting’s brochure. It implies acquiescence in globalization, as if it is desirable in itself as mutually beneficial to all parties. But in today’s world, interdependence implies three modes of dependency: (1) food dependency, (2) military dependency, and (3) debt dependency. The Washington Consensus promoted by the International Monetary Fund (IMF), World Bank and U.S. bilateral aid reinforces these three modes of dependency, bolstering U.S. financial and military hegemony.
The drain of payments to creditors and absentee investors forces countries to balance their budgets by selling off their public domain. Credit rating agencies threaten to downgrade counties that do not “play ball” by giving up their commanding heights on the cheap. Lower bond ratings would make these countries pay much higher interest. This system traps them into letting privatizers extract economic rent.
From about 1950 to 1980, World Bank and commercial bank consortia lent governments money to put these assets in place. Now that these loans are paid off, banks are lending all over again to private buyers of these assets. The new owners erect tollbooths on this hitherto public infrastructure – and “expense” their revenue in the form of tax-deductible interest, underwriting charges, high management fees and other largely fictitious “costs of production.” Globalized accounting orthodoxy enables foreign investors to transfer their receipt of user fees and other economic rent out of the country, tax-free. This drives the host economies further into balance-of-payments deficit, leading to even more sell-offs at even steeper distress-price discounts.
In times past, population provided a military advantage, as well as supplying labor for production. But finance wields dominant control today. The lead nations are willing to see Brazil and other BRIC countries grow and export enough labor-intensive goods and raw materials to pay their growing debts. What rentier interests want is the economic surplus, in the form of debt service (interest, amortization and fees) and monopoly rents in the form of tollbooth charges for the roads and other public infrastructure that is being privatized. They add insult to injury by also demanding that governments refrain from taxing these takings, by permitting interest and other technologically unnecessary charges such as depreciation to be tax-deductible. An illusion of non-profit (and hence, non-taxable) business also is given by going along with the accounting pretense of fictitiously low transfer prices for exports.
Corporate accountants quantify these stratagems with an eye to leaving little net income to be reported and taxed. Under this false map of economic reality, seemingly empirical statistics serve mainly to preserve the deceptive neoliberal economic theory behind them.
To keep their monopoly of money creation, creditor nations demand that governments not use their central banks to do what central banks all over the world originally were founded to do: finance public budget deficits by monetizing them to become the national credit base. The pretense is that it would be inflationary for central banks to finance their government’s budget deficits. But it is no more inflationary than permitting central banks to create credit on their own keyboards!
The European Central Bank insists that governments borrow only from commercial banks and other private-sector creditors – and even that foreign bank branches in host countries can denominate loans in the currency used by the head office or other foreign currencies. Swedish branch banks in Latvia and Austrian bank branches in Hungary thus make loans denominated in Euros. Creditor-nation banks thus can invade and conquer by creating their own local electronic credit, violating the prime directive of wise financial management: never denominate debts in hard foreign currency, when your income is in soft domestic currency.
The demand that countries “balance their budgets” is a euphemism for selling off the public domain and slashing pensions and public spending on education, medical care and other basic preconditions for raising labor productivity. Such austerity demands the opposite of the Keynesian policies followed by the United States itself. Economies subjected to the Washington Consensus fall further and further behind, making the global economy more polarized and unstable. The collapse of the “Baltic Tigers” and other post-Soviet economies where neoliberal planners had a free hand stands as an object lesson for how self-destructive these policies are for nations that submit to them.
What turns out to be ironic is that the tax philosophy favoring debt leveraging rather than equity investment is destroying the creditor core economies as well as the financialized periphery. That is the blowback that Europe and North America are now experiencing. They have let free credit creation subject their own economies to debt deflation – the same dysfunctional policies that impaired Third World development from the 1960s onward!
It is to prevent the resulting shrinkage of the “real” economy – and indeed, debt peonage – that European labor unions are mounting a general strike on September 28, 2010, against austerity plans that would roll back living standards. The move by the BRIC countries to create an alternative financial system and trade and development philosophy for themselves is a kindred reaction against the neo-rentier counter-Enlightenment that is determined to undermine classical economic reform.
The Importance of Economic Ideology to Make a New Beginning
The most important factor in the economic strength of Brazil and its fellow BRIC countries is that you are not yet as debt-ridden as North America and Europe. Your advantages do indeed include your population and natural resources, but you have had these all along. What makes you so attractive to the North is that you are the remnant of the global economy that has not yet buckled under their debt burden. Your economic surplus is not yet pledged to pay debt service, so bankers eye you as not yet “loaned up.”
Your main economic problem is how to protect yourself from the proliferation of credit and debt that has dragged down the North like an invading army, along with the privatization of natural monopolies and financial privileges. Your solution must be to follow an alternative to the regressive financial and tax ideology promoted by today’s international institutions.
What is needed today is not just a “global governance revision” but an outright break from the past. Revision tends to be merely marginal, not the structural change that is called for.
When building a new foundation, it is easier to replace old institutions and start afresh than to try to modify bad institutions and retrain personnel who are committed to entrenched, dysfunctional past policies. An outstanding example of this is U.S. policy after its Civil War. To develop the logic for their economic program, the Republican Party at that time (not today’s neoliberal Republicans!) founded land-grant state colleges and endowed business schools to teach the protectionist and technology-based alternative to the British free trade doctrine being taught at the most prestigious colleges such as Harvard, Yale and Princeton. The result was the doctrine that would propel the United States to world leadership by means of protective tariffs, a national bank and public infrastructure investment.
We have before us four objectives for discussion:
(1) Globalization and labor markets under today’s push for austerity. Under the euphemism of “balanced budgets,” fiscal austerity aims to prevent countries from using their economic surplus to raise living standards. This policy is self-destructive. Austerity prevents productivity from being raised, stifling domestic markets by “freeing” government revenue for paying debt service, bailouts and other transfer payments or subsidies to the finance, insurance and real estate (FIRE) sector at home and abroad.
(2) New development indicators are indeed needed to replace the GDP accounting format with a better map of the economy. Accounting categories reflect economic theory. Classical doctrine divided economies into two parts: (A) the production-and-consumption sector that textbooks usually refer to as the “real” economy, and (B) the extractive FIRE sector (finance, insurance and real estate), which today’s mainstream analysis and GDP accounts define as producing “output” equal in value to what FIRE rentiers charge. So what used to be viewed as overhead is now treated as output, as if it were a necessary part of economic activity.
This accounting format rejects the classical definition of economic rent as the excess of market price extracted over and above the necessary costs of production. The result is merely a map of the economy as seen by a predatory bankers’-eye view of the world – a view of how they play only a productive role, as if all credit and debt leveraging were productive rather than extractive.
Obviously, this view fails to reflect today’s economic problem or how industrial economies are being post-industrialized and financialized. “The devil wins at the point where he convinces the world that he does not really exist,” quipped Charles Baudelaire. Providing privatized services, including bank credit, health insurance and other “tollbooth”-type fees at a price in excess of these necessary costs should be treated as transfer payments, not as output.
The GDP accounting format and national balance sheet analysis are asymmetrical in undervaluing land and other natural resources relative to capital and rent imputations. The pretense is that buildings grow in value even while being depreciated. Meanwhile, free market ideology deters governments from calculating the economic cost of recovering the exhaustion of mineral and subsoil wealth and forests from private exploitation. A depletion allowance is given to private investors for making holes in the ground and cutting down forests. It would be more economically fair for them to make payments to reimburse the national economy that is losing this patrimony or suffering environmental cleanup charges.
Free traders have opposed including such calculations for national depletion, cleanup or other restoration charges in national accounts. Taking them into account would reduce the gains-from-trade calculations with which neoliberal trade theory indoctrinates students and public officials. This ideological prejudice makes current practice doctrinaire, not empirical science.
The international economy needs an accounting format to calculate the national ability to pay foreign debts. In 1929 the Young Plan averted global financial breakdown by finally limiting Germany’s reparations payments for World War I in the context of calculating how much foreign exchange Germany could earn (and pay) in the normal course of trade, as distinct from simply borrowing new money or selling off assets. Trying to pay by taking on more debt or selling assets is not to be viewed as a normal ability to carry debt in equilibrium.
In such circumstances the debts should be deemed to have gone bad and be written down. The alternative is the kind of asset stripping that Iceland and Latvia are now suffering, and that Third World countries suffered in the late 1970s and ‘80s. This is the road to debt peonage, shrinking the economy and spurring emigration of the labor force as well as capital flight, benefiting the few at home and abroad.
These shortcomings prevent the GDP format from being a good guide for public policy-making. The two above problems – austerity policy and the current pro-rentier map of the economy – have promoted a bankers’-eye view of the world advocating
(3) An unsustainable development policy. Debts growing at exponential rates (“the magic of compound interest”) are not sustainable. Trying to pay them makes economies less competitive and impoverishes populations, leading to defaults both in domestic and foreign currency, and hence to social unrest.
In terms of international balance, the cost of labor is inflated by payments owed to the FIRE sector. By contrast, when trade theory was elaborated by British free traders, American protectionists and other economists in the 19th century, it was spending on food and other consumer goods that provided the basis for labor cost comparisons among nations. Today’s U.S. trade deficit, for example stems largely from the fact that homeowners typically pay up to 40 per cent of their income for mortgage debt service and other carrying charges, 15 per cent for other debt (credit card interest and fees, auto loans, student loans, etc.), 11 per cent for FICA wage withholding for Social Security and Medicare, and about 10 to 15 per cent in other taxes (income and excise taxes). So debt-leveraged real estate and consumption are aggravated by forced saving set-asides in the form of “pension fund capitalism” run by money managers. And this brings us to the topic of
(4) Global governance. Who shall set the rules? And in whose interest are they to be set? When discussing austerity in (1) above, we need to ask, “austerity for whom?” Will mortgages and other debts be written down to the ability to pay? If they are, banks and the wealthiest 10 per cent of the population will have to lose some of the financial advantage that enable them to reduce the bottom 90 per cent to a state of debt peonage. But if debts are not written down, the result will be debt deflation that can destroy entire economies. Homeowners and businesses have to use their income to pay their bankers, not spend on goods and services. So employment and national output will continue to shrink. The corrosive role of debt is the major choice facing countries today, and hence the focus of rival plans for global governance.
Summary
It seems obvious that financial reform is needed – and this requires fiscal reform as well. The fact that whatever the tax collector relinquishes is available (“free”) to be pledged to creditors as interest makes the fiscal problem part and parcel of this financial problem. The economic rent that governments relinquish is “free” to be captured by the banks, which capitalize untaxed revenue into bank loans. This is how economies load themselves down with debt. Lower taxes on rent leave more revenue available to pay interest on loans made to enable borrowers to bid up prices. Meanwhile, cutting taxes on unearned income obliges the government to make up the gap by taxing labor and tangible industrial investment more, raising their supply price, or borrowing from the banks at interest.
Today’s budget deficits thus have gone hand in hand with over-indebted economies, and with a regressive tax shift that burdens productive labor and industry. The tax systems of nearly all countries today favor debt financing – and hence, asset-price inflation – by permitting interest and financial fees to be tax-deductible, while dividends and earnings must be paid after taxes. This un-taxing of land and rent-extracting monopolies goes against the logic of Saint-Simon and other 19th-century reformers who sought to free markets from debt overhead, not to free bankers and financiers from regulation and taxation.
Today’s financialized world is paying a steep price for its rentier-sponsored reaction against classical economics. This reaction distracted attention from the fact that economies suffer a rising “free lunch” of what J. S. Mill called unearned income and unearned increments in the form of higher land rent and land prices. Rent extraction is the business plan of privatizers of public infrastructure and natural monopolies – and of their financial backers seeking to provide buyout loans. The tragedy of our epoch is that most credit is extended to buy rent-extracting opportunities, not for productive capital formation. Banks prefer to lend against property already in place – real estate or companies – than to finance tangible new capital formation. This poses the threat of globalization taking a corrosive form, ending in debt deflation, privatization and a rentier tollbooth economy rather than becoming a system of mutual gain.
The neoliberal motto of Margaret Thatcher, “There is No Alternative” (TINA), ignores the alternative advocated by two hundred years of classical economists. The original liberals – from Adam Smith and the Physiocrats through John Stuart Mill and even Winston Churchill – urged that the tax system be based on the economic rent of land so as to keep down the price of housing (and hence labor’s cost of living). The Progressive Era followed this principle by aiming to keep natural monopolies such as transportation, communication and even banks (or at least, free credit creation) in the public domain. But the post-1980 world has encouraged private owners to buy them on credit and extract economic rent, thereby shifting the tax burden onto labor, industry and agriculture – while concentrating wealth, first on credit and then via the enormous recent public bailouts of this failed financial debt pyramiding and deregulation.
This is what is shrinking the Northern economies today as they suffer from economic polarization between creditors and debtors, property owners and an increasingly insecure labor force – insecure because it is so deeply in debt that losing a job or being fired threatens loss of one’s home and solvency.
Austerity and economic shrinkage are not necessary. There is an alternative. Given the bankers’-eye view of the world promoted by the IMF, World Bank and most mainstream economists, your task must be to stay free of globalization in today’s financialized form. Your counter is simple enough: Do not permit outsiders to buy your assets and drive up your currency’s exchange rate with “computer keyboard” credit that you do not need. Commercial banking requires careful public regulation, with the government itself controlling money-creation, leaving banks to act as intermediaries. The aim of financial regulatory policy should be to make sure that Brazil’s economic surplus is invested in production to raise living standards rather than relinquishing money creation to foreign and domestic financial interests aiming mainly at currency speculation, interest and rent extraction.
You face a danger from mounting global pressure backing policies to slash your living standards, capital investment and infrastructure spending in order to pay exponentially growing private and public debts. Unless debts are written off, or at least reduced to the reasonable ability to pay, economies throughout the world will suffer waves of foreclosure, financial polarization between creditors and debtors, and ultimately social collapse.
At issue is the concept of free markets. Are they to be free from monopoly and special privilege, or free for the occupying financial invaders and speculators? The reform of classical political economy in the 18th and 19th centuries was to keep “free lunch” rent from rising land and raw materials prices, financial credit creation and related monopolies in the public domain.
Looking back on history, we can see how the economies created by the conquerors of Europe and its subsequent colonies were based on war making and looting, seizure of the land, taxation, royal war debts – and, by the 17th century, the creation of Crown monopolies to sell off to raise the money to pay off these debts. (The South Sea and Mississippi Companies in the 1710s are the culminating examples of this practice.) This led to high-cost, debt-ridden economies in Britain and France. It was against such wasteful – and technologically unnecessary – overhead that classical economics was developed as a reform program. The main aim was to make these nations more competitive by freeing their markets from rent and monopolies, and from taxes levied mainly on labor and industry for unproductive spending on wars and empire building. A kindred aim was to reform the financial system to replace debt financing with equity investment. And increasing reform pressure grew for public subsidy of basic infrastructure, especially outside of Britain.
Neoliberals advocate the opposite policy. They define a free market as one that is free for rentiers to extract economic rent and interest. The effect is to turn the public domain into a field of tollbooths for roads and other basic infrastructure charging entry prices and user fees that are loaded with built-in financial charges, exorbitant salaries and rake-offs that raise the economy’s cost of living and doing business.
So we are brought back to how privatizing the public domain and financializing the economy is akin to military defeat. To defend themselves, the BRIC countries need to isolate themselves from global debt creation. The “dialogue” your conference calls for with regard to rules for “new global governance” is unlikely to reach a consensus under today’s conditions where the United States and EU, the World Bank and IMF are urging austerity. They are calling for a sacrifice of labor’s Social Security and pension savings in order to extract payment for the debt overhang that has been allowed to develop.
Debt leveraging and asset-price inflation have been encouraged by the past generation’s fiscal ideology giving tax favoritism for interest and capital gains. This pro-rentier tax favoritism was the opposite of classical free-market reforms and was bound to fail. Yet its sponsors have the audacity to claim Adam Smith, J. S. Mill and their followers as the patron saints of neoliberalism. Classical political economy endorsed a broadening array of public services and social support outside of the market. The United States subsidized its industrial takeoff by realizing that roads, public health and other basic services should be provided freely rather than burdened with intrusive toll charges. Neoliberal ideology asserts that such public investment and regulation is the “road to serfdom” and proposes in its place what may best be thought of as the real road to debt peonage – tax favoritism for debt leverage followed by debt deflation and austerity.
A century ago, even fifty years ago, most of the world was embarking on a program of public infrastructure investment, including central bank or treasury credit for government spending. This was the classical policy program to free economies from the rentier overhead that now is proliferating in much of the world. It is this financial, real estate and monopoly overhead that is pricing Northern Hemisphere labor and industry out of world markets – and leading its investors to look south for more to plunder.
Fortunately, Brazil and its fellow BRIC members have an opportunity to create the classical 19th-century version of free markets, checks and balances that has failed in the North.
A Better Way to Measure Poverty
The Material Hardship Indicator
By STEPHEN CRAWFORD and SHAWN FREMSTAD
The newly released poverty statistics paint a grim picture. Last year 43.6 million Americans — more than 14 percent — had income below the federal poverty line. But those numbers only give a partial picture of the problem.
That’s because real poverty is not just about income, but also consists of assets and liabilities. The official poverty numbers look only at income and use an unrealistically low estimate for what it takes to make ends meet.
It’s time to take assets into account when measuring poverty.
As Nobel laureates Joseph Stiglitz and Amartya Sen, along with economist Jean-Paul Fitoussi, write in their new book Mis-measuring Our Lives, “Income and consumption are crucial for assessing living standards, but in the end they can only be gauged in conjunction with information on wealth.” This point is just as relevant to poverty measurement as it is to other measures of living standards.
To understand why this is the case, consider two families: one had an income that puts them a few thousand dollars below the poverty line, which was $22,050 for a family of four in 2009; the other has an income a few thousand dollars above the line. Looking only at income, the first family is worse off than the second.
Now add what the family owns and owes into the mix. Let’s say the first family has substantial net equity in its home and moderate liquid savings for a “rainy day,” while the latter has no liquid savings or, as is becoming too common these days, has liabilities that dwarf their assets such as an “underwater” mortgage. Using this more comprehensive method, the latter family, despite a modestly higher income, is actually the poorer one.
Recent Urban Institute research looks at the role liquid assets play in reducing material hardship. Among both low- and middle-income families the research showed that those with low levels of liquid assets experience considerably more economic hardship — including food insecurity, trouble paying bills, and other kinds of deprivation.
Other research by scholars at Washington University, the University of Kansas, and elsewhere, suggest that liquid assets can facilitate economic opportunity by raising expectations for a better future, increasing access to education, and, if used prudently, enabling families to obtain other assets that may appreciate in value over time.
In this year’s budget, the Obama administration included a request for funding that would allow the Census Bureau to produce a Supplemental Poverty Measure (SPM) to complement the current measure. If Congress appropriates the modest funding requested, Census will release the first SPM in 2011, which will improve the current measure in several respects. Most importantly, it would take into account important benefits, including the Earned Income Tax Credit and nutrition assistance, and significant non-discretionary expenses, including for health care and child care.
But, the proposed SPM, like the official measure, is still an income-only measure of poverty, and thus fails to capture the vital role that assets play in economic security. Moreover, since assets and income don’t exist in separate “silos” in the real world, the Census Bureau should integrate assets and savings directly into the SPM.
A new approach to measuring poverty adopted this year in the United Kingdom — with support from conservatives and liberals — is worth looking at as a model. Britain’s approach uses two distinct measures of poverty: an income poverty measure and a measure of material hardship.
Unlike the current U.S. measure or the proposed SPM, both of Britain’s poverty indicators take some important asset- and savings-related factors into account. In the income-poverty measure, both savings to retirement accounts and student loan repayments are subtracted from the income that is compared with the poverty threshold to determine whether someone is living below the poverty line.
Britain’s material-hardship indicator of poverty measures economic deprivation similar to how the Urban Institute does as well. A family is considered poor if it experienced two or more forms of material hardship. The items included on the index are ones that the majority of British believe are contemporary living necessities such as the ability to regularly save at least £10 (about $15) a month for rainy days or retirement, which roughly two-thirds of the British view is necessary. This approach better captures the overall effect that both income and assets have on poverty.
In effect, the new British poverty measures treat basic savings as a necessity rather than a luxury. To get a better picture of poverty, the United States should do the same.
By STEPHEN CRAWFORD and SHAWN FREMSTAD
The newly released poverty statistics paint a grim picture. Last year 43.6 million Americans — more than 14 percent — had income below the federal poverty line. But those numbers only give a partial picture of the problem.
That’s because real poverty is not just about income, but also consists of assets and liabilities. The official poverty numbers look only at income and use an unrealistically low estimate for what it takes to make ends meet.
It’s time to take assets into account when measuring poverty.
As Nobel laureates Joseph Stiglitz and Amartya Sen, along with economist Jean-Paul Fitoussi, write in their new book Mis-measuring Our Lives, “Income and consumption are crucial for assessing living standards, but in the end they can only be gauged in conjunction with information on wealth.” This point is just as relevant to poverty measurement as it is to other measures of living standards.
To understand why this is the case, consider two families: one had an income that puts them a few thousand dollars below the poverty line, which was $22,050 for a family of four in 2009; the other has an income a few thousand dollars above the line. Looking only at income, the first family is worse off than the second.
Now add what the family owns and owes into the mix. Let’s say the first family has substantial net equity in its home and moderate liquid savings for a “rainy day,” while the latter has no liquid savings or, as is becoming too common these days, has liabilities that dwarf their assets such as an “underwater” mortgage. Using this more comprehensive method, the latter family, despite a modestly higher income, is actually the poorer one.
Recent Urban Institute research looks at the role liquid assets play in reducing material hardship. Among both low- and middle-income families the research showed that those with low levels of liquid assets experience considerably more economic hardship — including food insecurity, trouble paying bills, and other kinds of deprivation.
Other research by scholars at Washington University, the University of Kansas, and elsewhere, suggest that liquid assets can facilitate economic opportunity by raising expectations for a better future, increasing access to education, and, if used prudently, enabling families to obtain other assets that may appreciate in value over time.
In this year’s budget, the Obama administration included a request for funding that would allow the Census Bureau to produce a Supplemental Poverty Measure (SPM) to complement the current measure. If Congress appropriates the modest funding requested, Census will release the first SPM in 2011, which will improve the current measure in several respects. Most importantly, it would take into account important benefits, including the Earned Income Tax Credit and nutrition assistance, and significant non-discretionary expenses, including for health care and child care.
But, the proposed SPM, like the official measure, is still an income-only measure of poverty, and thus fails to capture the vital role that assets play in economic security. Moreover, since assets and income don’t exist in separate “silos” in the real world, the Census Bureau should integrate assets and savings directly into the SPM.
A new approach to measuring poverty adopted this year in the United Kingdom — with support from conservatives and liberals — is worth looking at as a model. Britain’s approach uses two distinct measures of poverty: an income poverty measure and a measure of material hardship.
Unlike the current U.S. measure or the proposed SPM, both of Britain’s poverty indicators take some important asset- and savings-related factors into account. In the income-poverty measure, both savings to retirement accounts and student loan repayments are subtracted from the income that is compared with the poverty threshold to determine whether someone is living below the poverty line.
Britain’s material-hardship indicator of poverty measures economic deprivation similar to how the Urban Institute does as well. A family is considered poor if it experienced two or more forms of material hardship. The items included on the index are ones that the majority of British believe are contemporary living necessities such as the ability to regularly save at least £10 (about $15) a month for rainy days or retirement, which roughly two-thirds of the British view is necessary. This approach better captures the overall effect that both income and assets have on poverty.
In effect, the new British poverty measures treat basic savings as a necessity rather than a luxury. To get a better picture of poverty, the United States should do the same.
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