Observations on “Saving the Rich, Losing the Economy” by Ronald Reagan’s Assistant Treasury Secretary, Paul Craig Roberts

“Saving the Rich, Losing the Economy” is pasted below.

First… two inconvenient truths.

Following a century of American global dominance, nations previously excluded from “The Money/Power Club” are now “taking their  place at the table.”

http://en.wikipedia.org/wiki/War_Is_a_Racket

“The Economic Pie,” which, for a hundred years, has been apportioned to vouchsafe 40% of the world’s wealth for 5% of the world’s people, is undergoing permanent re-calibration. (See paragraph 5 at

http://homepages.nildram.co.uk/~gw/georgekennanpps23.htm)

For decades to come, the feeding frenzy previously “reserved” for 300 million Americans will be accessed, increasingly, by 1.3 billion Chinese, 1.2 billion Indians, half a billion Latin Americans, hundreds of millions of diverse East Asian nationalities and, sooner or later, a billion Africans.

Although the production of wealth is not a zero sum game, irrepressible circumstances are now enfranchising “the perennially disenfranchised” so that America’s standard of living will decline – at least insofar as that standard is defined by most material measures. http://www.amazon.com/All-That-Share-Environment-Communities/dp/1595584994

2.) Computer-based automation and ever more capable robots — coupled with the globalized availability of dirt-cheap foreign labor — will permanently eliminate a huge number of traditional jobs as diverse as automobile assembly, surgery, nursing and bar-tending. (See “Will Robots Steal Your Job” at Slate.com)

Increasingly, global production is attributable to a Machine requiring ever fewer people to “turn the crank.”

Although no one is eager to confront the fact, American conservatives are particularly flummoxed by the prospect that “personal responsibility for earning a living” is becoming structurally “obsolete.”

Broadly speaking, we have four choices.

a.) The Fabulously Wealthy who are increasingly the beneficiaries of “automated production,” will continue to sequester more and more resource for themselves. The end result will be a traditionally bifurcated plutocratic society with massive numbers of abjectly poor people, punctuated by gated communities protected by private forces – http://www.youtube.com/watch?v=SE9lPiZ16e8

b.) We can recognize that capital and labor have collaborated in building the Machine of Automatic Production, so that — get this! — everyone is entitled to the fruits of The Machine’s labor. This assumption characterized The Greatest Generation which was the generation chiefly responsible for “building the machine.”

http://www.dailykos.com/story/2011/10/02/1022118/-What-Abraham-Lincoln-(R,-IN)-had-to-say-about-OccupyWallStreet?via=sidebar

Such re-allocation of wealth could be accomplished by “jobs projects” devised by the government, or, by “corporate America” as an alternative to corporations paying the same amount of tax that might otherwise go to the “creation” of jobs. These jobs may – or may not – be profitable. In any event, such a “tax” or “jobs” scheme would oblige the hiring of Americans who find themselves deprived of work by automation and roboticization. The following Ben Franklin quotation on the propriety of taxation impresses me as the most remarkable statement ever made by a American politician:

Benjamin Franklin to Robert Morris – 25 Dec. 1783

“The Remissness of our People in Paying Taxes is highly blameable; the Unwillingness to pay them is still more so. I see, in some Resolutions of Town Meetings, a Remonstrance against giving Congress a Power to take, as they call it, the People’s Money out of their Pockets, tho’ only to pay the Interest and Principal of Debts duly contracted. They seem to mistake the Point. Money, justly due from the People, is their Creditors’ Money, and no longer the Money of the People, who, if they withold it, should be compell’d to pay by some Law. All Property, indeed, except the Savage’s temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it. All the Property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other Laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.” – http://press-pubs.uchicago.edu/founders/documents/v1ch16s12.html

c.) It is also possible to forcibly sterilize the economically disenfranchised, an increasing number of whom are structurally disabled from finding work that enables “dignified living.” As recently as the 1970s, the federal government defined “full employment” as a maximum unemployment rate of 3%. Then, in the 1980s, “full employment” was defined as a maximum unemployment rate of 5%. And now, the “normalized” upper limit of unemployment is perhaps 7% with 8% just around the corner. (Please keep in mind that these “published numbers” obscure an additional percentage of people – a percentage that is also on the rise – who are no longer “counted” as “unemployed” because they fail to measure up to standard criteria of unemployment.)

d.) And finally, widespread “structural unemployment” can be eliminated by a “final solution.” America’s Armageddon Cheerleaders — “good Christians” and “real Patriots” all — are exploring this option.

***

September 26, 2011

When There’s Nothing Left to Lose

Saving the Rich, Losing the Economy

by Paul Craig Roberts

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 offshoring 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 any losses to the banks regardless of the cost to national economies and innocent parties.

Jobs offshoring 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. http://www.manufacturingnews.com/

These losses are net of new start-ups. Not all the losses are due to offshoring. 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 offshored 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. (A.A. Yes! We can bring “American” jobs “back home.” Just pay American workers $1.50 an hour.)

Republican economists blame “high” US wages 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 offshore, 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. (A.A. I would bet “long odds” that the lion’s share of America’s one million legal immigrants are highly productive people who make outsized contributions to the economy – contributions that are net-positive for America and Americans generally. As for America’s illegal immigrants, I agree with my judge friend who insists that “when America’s economy recovers, we will beg Mexicans to come back.” At the moment, illegals – once highly sought after by captains of industry – serve the purpose that “minority scapegoats” have always served… “escape valves” for the angst and anger that always accompany “hard times.”)

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. (A.A. I do not understand economic details well enough to know if this “bill of particulars” is accurate. Intuitively, I think it impossible to say whether insurance costs will go up more than the cost of a mortgage will decline. For example, I have recently learned that a federal program entitled HARP is doing remarkable work lowering the principle of “underwater loans,” and then re-financing them at more favorable rates – https://www.efanniemae.com/sf/mha/index.jsp )

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. (A.A. Although Roberts accurately describes interest rates as lower than the inflation rate, it is also true that AT&T, Verizon, Vodaphone, Telefonica and a wide range of other stocks, pay over 5% dividend on common stock.)

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.” (A.A. Roberts accurately describes Democratic Party incompetence. Even more importantly, he describes the foundational instability – both political and social – which will come to pass ‘if the Republican right-wing implements its program’ – a program whose catastrophic effects don’t even rise to the level of minimal incompetence. Rather, the Republican program is beyond incompetent – a categorically different beast. In the words of conservative historian Niall Ferguson, the core belief of contemporary Republicans is “A Dogma to Wreck the Country: It beggars belief that the GOP is willing to risk national default for the sake of antitax purity.”

http://www.thedailybeast.com/newsweek/2011/07/24/gop-antitax-dogma-endangers-the-country.html    Ronald Reagan — apparently a “Republican in Name Only” — raised taxes three times. “What Would Reagan Really Do?” –

http://www.thedailybeast.com/newsweek/2010/07/09/what-would-reagan-really-do.html)

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and Associate Editor of the Wall Street Journal. His latest book is How the Economy Was Lost (CounterPunch / AK Press).


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