Losing the Economy By Saving the Rich

socialism for the rich
Originally published on OpEdNews

Economic policy in the United States and Europe has failed, and people are suffering.

Economic policy failed for three reasons:

  1. Policymakers focused on enabling off-shoring corporations to move middle class jobs, and the consumer demand, tax base, GDP, and careers associated with the jobs, to foreign countries, such as China and India, where labor is inexpensive.
  2. Policymakers permitted financial deregulation that unleashed fraud and debt leverage on a scale previously unimaginable.
  3. Policymakers responded to the resulting financial crisis by imposing austerity on the population and running the printing press in order to bail out banks and prevent nny losses to the banks regardless of the cost to national economies and innocent parties.

Jobs off-shoring was made possible because the collapse of the Soviet Union resulted in China and India opening their vast excess supplies of labor to Western exploitation. Pressed by Wall Street for higher profits, US corporations relocated their factories abroad. Foreign labor working with Western capital, technology, and business know-how is just as productive as US labor. However, the excess supplies of labor (and lower living standards) mean that Indian and Chinese labor can be hired for less than labor's contribution to the value of output. The difference flows into profits, resulting in capital gains for shareholders and performance bonuses for executives.

As reported by Manufacturing and Technology News, (September 20, 2011), the Quarterly Census of Employment and Wages reports that in the last 10 years, the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent.

These losses are net of new start-ups. Not all the losses are due to off-shoring. Some are the result of business failures.

US politicians, such as Buddy Roemer, blame the collapse of US manufacturing on Chinese competition and "unfair trade practices." However, it is US corporations that move their factories abroad, thus replacing domestic production with imports. Half of US imports from China consist of the off-shored production of US corporations.

The wage differential is substantial. According to the Bureau of Labor Statistics, as of 2009, average hourly take-home pay for US workers was $23.03. Social insurance expenditures add $7.90 to hourly compensation and benefits paid by employers add $2.60 per hour for a total labor compensation cost of $33.53.  

In China as of 2008, total hourly labor cost was $1.36, and India's is within a few cents of this amount. Thus, a corporation that moves 1,000 jobs to China saves $32,000 every hour in labor cost. These savings translate into higher stock prices and executive compensation, not in lower prices for consumers who are left unemployed by the labor arbitrage.

Republican economists blame "high" US wages for for the current high rate of unemployment. However, US wages are about the lowest in the developed world. They are far below hourly labor cost in Norway ($53.89), Denmark ($49.56), Belgium ($49.40), Austria ($48.04), and Germany ($46.52). The US might have the world's largest economy, but its hourly workers rank 14th on the list of the best paid.

Americans also have a higher unemployment rate. The "headline" rate that the media hypes is 9.1 percent, but this rate does not include any discouraged workers or workers forced into part-time jobs because no full-time jobs are available.  

The US government has another unemployment rate (U6) that includes workers who have been too discouraged to seek a job for six months or less. This unemployment rate is over 16 percent. Statistician John Williams (Shadowstats.com) estimates the unemployment rate when long-term discouraged workers (more than six months) are included. This rate is over 22 percent.

Most emphasis is on the lost manufacturing jobs. However, the high speed Internet has made it possible to offshore many professional service jobs, such as software engineering, Information Technology, research and design. Jobs that comprised ladders of upward mobility for US college graduates have been moved off shore, thus reducing the value to Americans of many university degrees. Unlike former times, today an increasing number of graduates return home to live with their parents as there are insufficient jobs to support their independent existence.

All the while, the US government allows in each year one million legal immigrants, an unknown number of illegal immigrants, and a large number of foreign workers on H-1B and L-1 work visas. In other words, the policies of the US government maximize the unemployment rate of American citizens.

Republican economists and politicians pretend that this is not the case and that unemployed Americans consist of people too lazy to work who game the welfare system. Republicans pretend that cutting unemployment benefits and social assistance will force "lazy people who are living off the taxpayers" to go to work.

To deal with the adverse impact on the economy from the loss of jobs and consumer demand from offshoring, Federal Reserve chairman Alan Greenspan lowered interest rates in order to create a real estate boom. Lower interest rates pushed up real estate prices. People refinanced their houses and spent the equity. Construction, furniture and appliance sales boomed.  But unlike previous expansions based on rising real income, this one was based on an increase in consumer indebtedness. 

There is a limit to how much debt can increase in relation to income, and when this limit was reached, the bubble popped. 

When consumer debt could rise no further, the large fraudulent component in mortgage-backed derivatives and the unreserved swaps (AIG, for example) threatened financial institutions with insolvency and froze the banking system. Banks no longer trusted one another. Cash was hoarded.

Treasury Secretary Paulson browbeat Congress into massive taxpayer loans to financial institutions that functioned as casinos. The Paulson Bailout (TARP) was large but insignificant compared to the $16.1 trillion (a sum larger than US GDP or national debt) that the Federal Reserve lent to private financial institutions in the US and Europe.

In making these loans, the Federal Reserve violated its own rules. At this point, capitalism ceased to function. The financial institutions were "too big to fail," and thus taxpayer subsidies took the place of bankruptcy and reorganization.  In a word, the US financial system was socialized as the losses of the American financial institutions were transferred to taxpayers.

European banks were swept up into the financial crisis by their unwitting purchase of the junk financial instruments marketed by Wall Street. The financial junk had been given investment grade rating by the same incompetent agency that recently downgraded US Treasury bonds.

The Europeans had their own bailouts, often with American money (Federal Reserve loans). All the while Europe was brewing an additional crisis of its own. By joining the European Union and (except for the UK) accepting a common European currency, the individual member countries lost the services of their own central banks as creditors. In the US and UK, the two countries' central banks can print money with which to purchase US and UK debt. This is not possible for member countries in the EU.

When financial crisis from excessive debt hit the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) their central banks could not print euros in order to buy up their bonds, as the Federal Reserve did with "quantitative easing." Only the European Central Bank (ECB) can create euros, and it is prevented by charter and treaty from printing euros in order to bail out sovereign debt.

In Europe, as in the US, the driver of economic policy quickly became saving the private banks from losses on their portfolios. A deal was struck with the socialist government of Greece, which represented the banks and not the Greek people. The ECB would violate its charter and together with the IMF, which would also violate its charter, would lend enough money to the Greek government to avoid default on its sovereign bonds to the private banks that had purchased the bonds. In return for the ECB and IMF loans, and in order to raise the money to repay them, the Greek government had to agree to sell to private investors the national lottery, Greece's ports and municipal water systems, a string of islands that are a national preserve, and in addition to impose a brutal austerity on the Greek people by lowering wages, cutting social benefits and pensions, raising taxes, and laying off or firing government workers. 

In other words, the Greek population is to be sacrificed to a small handful of foreign banks in Germany, France and the Netherlands. 

The Greek people, unlike "their" socialist government, did not regard this as a good deal. They have been in the streets ever since.

Jean-Claude Trichet, head of the ECB, said that the austerity imposed on Greece was a first step. If Greece did not deliver on the deal, the next step was for the EU to take over Greece's political sovereignty, make its budget, decide its taxation, decide its expenditures and, from this process, squeeze out enough from Greeks to repay the ECB and IMF for lending Greece the money to pay the private banks. 

In other words, Europe under the EU and Jean-Claude Trichet is a return to the most extreme form of feudalism in which a handful of rich are pampered at the expense of everyone else.

This is what economic policy in the West has become -- a tool of the wealthy used to enrich themselves by spreading poverty among the rest of the population.

On September 21, the Federal Reserve announced a modified QE 3. The Federal Reserve announced that the bank would purchase $400 billion of long-term Treasury bonds over the next nine months in an effort to drive long-term US interest rates even further below the rate of inflation, thus maximizing the negative rate of return on the purchase of long-term Treasury bonds. The Federal Reserve officials say that this will lower mortgage rates by a few basis points and renew the housing market.

The officials say that QE 3, unlike its predecessors, will not result in the Federal Reserve printing more dollars in order to monetize US debt. Instead, the central bank will raise money for the bond purchases by selling holdings of short-term debt. Apparently, the Federal Reserve believes it can do this without raising short-term interest rates, because back during the recent debt-ceiling-government-shutdown-crisis, the Federal Reserve promised banks that it would keep the short-term interest rate (essentially zero) constant for two years. 

The Fed's new policy will do far more harm than good. Interest rates are already negative. To make them more so will have no positive effect. People aren't buying houses because interest rates are too high, but because they are either unemployed or worried about their jobs and do not see a recovering economy.

Already insurance companies can make no money on their investments. Consequently, they are unable to build their reserves against claims. Their only alternative is to raise their premiums. The cost of a homeowner's policy will go up by more than the cost of a mortgage will decline. The cost of health insurance will go up. The cost of car insurance will rise. The Federal Reserve's newly announced policy will impose more costs on the economy than it will reduce.

In addition, in America today savings earn nothing. Indeed, they produce an ongoing loss as the interest rate is below the inflation rate. The Federal Reserve has interest rates so low that only professionals who are playing arbitrage with algorithm programmed computer models can make money. The typical saver and investor can get nothing on bank CDs, money market funds, municipal and government bonds. Only high-risk debt, such as Greek and Spanish bonds, pay an interest rate that is higher than inflation.

For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising. Considering the extraordinary political incompetence of the Democratic Party, the right-wing of the Republican Party, which is committed to eliminating income support programs, could find itself in power. If the right-wing Republicans implement their program, the US will be beset with political and social instability.

As Gerald Celente says, "when people have nothing left to lose, they lose it."

Meta: 

Comments

Spot ON

@Paul Craig Roberts

Mr. Roberts, you have taken the most complicated economic disaster this nation and the world have ever seen and drilled down to the core of the matter and presented it here for everyone to read in a couple of minutes. Thank you. Maybe some of the conservatives who worship at the altar of the Holy Reagan will wake up and smell the failure of their ideas when the co-founder of Reaganomics puts these words to pen.

From an economists perspective I cannot agree with everything you have supported in the past thirty years but you are very correct in identifying the underlying factors and actors that allowed this economic mess to build into the ticking time bomb that it has become. Now it is time that you pen the solution to this mess even as right wing ideologically charged economists demonize you for your candor.

Capitalism may not be the problem, but deregulated business that demands no government intervention or regulation is the result of a capitalism that has not been restrained and shaped by the government of the people so that it serves the good of the people at least as much as it serves its own good. Some regulations probably need to be overhauled and I am certain that the tax code needs to be revised so that companies do not benefit from their trans-nationalism at the expense of society and differing political climates. In moving to China and India, big business has shown that it prefers a government that has little interest in performing its only real duty which is to protect its people from threats. Sadly, many of these economic powerhouses have become threats to the national security of every nation they exist in. This must change or the end result will be full blown class welfare on the streets in not only America, but around the world.

The Occupy Wall Street has become the protest heard around the world much the same as that infamous shot heard around the world 400 years became. Right now people who are protesting are still hopeful that change will occur but the longer our political leaders ignore and scorn them the more restless they will become and then things will turn nasty. A significant number of people will side with the establishment and call them terrorists at that point however an almost as large and equally significant number will see the establishment as the root cause of the beginning of hostilities and growing sentiment will put even more pressure on leaders to enact meaningful legislation to meet the demands of we the people. By not doing so the establishment could face a situation similar to what happened in the Civil War of America which was as much about about welfare inequality much as the growing protests of today are.

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'US corporations' and 'economic powerhouses'

"Sadly, many of these economic powerhouses [MNCs] have become threats to the national security of every nation they exist in." -- Heilager

I am an admirer of Paul Craig Roberts, but there is one point that should be clarified, concerning his use of the term 'US corporations'.

"US politicians, such as Buddy Roemer, blame the collapse of US manufacturing on Chinese competition and 'unfair trade practices.' However, it is US corporations that move their factories abroad, thus replacing domestic production with imports. Half of US imports from China consist of the off-shored production of US corporations." -- Paul Craig Roberts

The question is "What is meant by a US corporation?" I think that "US corporations" have seen that they could maximize their profits and avoid stagnation by shifting resource exploitation, production, sales, R&D and even management out of the USA. Shifts such as out-sourcing to increase profits have been a trend for a very long time -- at least since World War II. But is a corporation that has made such shifts still a "US corporation"?

One example is California-Arabian Standard Oil Company, which evolved half a century ago into the Arabian American Oil Company (Aramco or Saudi Aramco). Other examples are Halliburton, General Electric and Apple. Halliburton notoriously moved even its HQ to the Persian Gulf just a few years ago. GE, which was operating in Germany (as A.E.G., a major financial backer of Hitler's rise to power) since shortly after World War I and into the Nazi era, appears to maintain its stance as a US corporation today only for the sake of the negative income tax that it receives from Congress. (GE or AEG is still a major corporation operating in Germany.) As for Apple, it develops products for a global market and it manufactures those products through suppliers in China. (There is currently a scandal about factories in China where Apple suppliers -- Chinese companies that build Apple products -- have been identified as polluters adversely affecting public health in the vicinity of their operations.)

I do not mean to criticize or condemn any of these companies. I am just pointing out that at some point they are no longer what we used to think of as "US Corporations," and we are silly to think of them in that way. It may be that we have been silly ever to think in terms of "US corporations" except during World War II, when the entire country was organized for the war effort. Certainly, in the current WTO world system, the concept of "US corporations" is fuzzy, at best.

Having said that, it is counter-productive to blame China rather than to focus on what the USA can do for ourselves, that is, on the necessity for some form of national economic protectionism.

In short, we need national borders, we need national integrity, for the sake of world peace. It's like supertankers -- they must be constructed with chambers and baffles, or they are unstable and likely to capsize.

A return to nationalism won't, in and of itself, solve all our problems. However, there is no solution to our global problems without restoring nationalism. Because of the history of the USA, we are not a country that can restore our nation without restoring our democracy.

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The Bank's Class War against The World

Goldman Sachs is an exceptionally well capitalized Bank by Basel II Standards. GS primary ration is 18.8% and total capital ratio is 23.9%. The ECB today is hoping to get the Euro sector up to 9% primary capital. But look closer at GS.

Total Revenue is almost $40Bn and Expense is $19Bn on 12/31/2010. All compensation is $9Bn. Executive Comp is the lion's share. Of 585Million Common Shares authorized, the restricted stock plans hold 60 million shares, and 231 Million shares are held in treasury. So over the last 4 years, GS has issued 11% of its common shares to executive comp plans or $8.4 Billion.

This number is set against total assets of $911 Million  and Equity of $77 Million. So paying out sums like this is a big deal. GS turnover is 40 times its assets. All the action these days is in its derivative portfolio of of $20Billion. Now according the NYTimes on Friday, GS is heading for a loss. This time who is the Uncle Warren to buy some more preferred shares?

Most important, how would GS or any bank more poorly capitalized, issue more common equity when it's executives have taken such a huge share already? The Euro sector banks have similar compensation but much poorer capital ratios. Dodd-Frank has restricted use of bailouts.

All things economic are about choice. You can't do it all at one time. The banks cannot do profligate executive compensation and also recapitalize with more equity. The failure to bring up capital ratios effects macro economies and executive compensation is in the way of better capital rations. 

 

 

http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?docKey=136-000095012311020067-4KJPN489V5P2LPN44QIT0PG9JV&docFormat=HTM&formType=10-K

 

 

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