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How to fix the American economy damn near overnight!

Posted on September 22nd, 2012 in Economy,Government,Politics by Robert Miller

From Hacker Pierson Winner Take All

After WW II,  Middle Class Americans came into prosperity through the power of labor unions and Federal policies that supported higher education, largely through the GI Bill, passed  in 1944. Twelve years later, when the Bill ended, 2.2 million GIs had taken advantage of the program and obtained a college education, while another 6.6 million had received some kind of job training benefit. A college benefit was also made available to Korean war veterans, though it was a bit less generous than that for WW II soldiers. These programs, coupled with New Deal policies favorable to the working class and labor unions,  helped generate the Middle Class out of the whole cloth of American workers, many of whom had struggled in poverty before the war during the Great Depression: it was an astonishing achievement the likes of which had never been seen before in American history: we created a new, wealthier Middle Class.  The birth of The New Deal under FDR seemed like a new era in political support for the American worker had arrived. The GI Bill was directly responsible for producing an educated American work force that was in the fire-when-ready-mode when the Russians launched Sputnik in 1957;  many of the children from this newly formed Middle Class, obtained doctorate degrees in a huge array of subjects and formed the foundation for the Golden Era of the American Research University, which lasted from 1958-1968. The Middle Class responded to this new challenge and proved that there was true genius among them, something we should never forget. It was during that period that science funding and Federal support for graduate programs, with fellowship and infrastructure support, emerged in a significant way for the first time in American history. This revolutionary period established the American Research University as among the premier research institutions in the world, until the neoliberals began to define a different agenda, characterized by disinvestment and the destruction of our education system, from K-12 to higher education and beyond. And let’s face it: they are winning this undeclared war.

Right now we are in a deep recession, one which has too many components to resolve itself quickly, but in essence, this recession has been building for the last 40 + years. The housing bubble merely represented the last log our economy could put on the fire before the long history of dismantling The New Deal came home to roost. Now, there is no quick fix for what ails us—we have to build a new economy from the ground up.  And we are not getting enough help to get the job done. Central to our economic problems is that the Middle Class has been deprived of wage increases that used to be strongly coupled to improvements in worker productivity. The accompanying graph (same as that in a previous posting) illustrates  income growth in 2008 dollars, from 1970 to 2008 for the bottom 90 percent of wage earners (light green line), compared to the top 1 percent (dark green line). Despite an increase in worker productivity (illustrated in the graph below) wages for the bottom 90 percent of Americans have seen no growth from 1970 through 2008 and as of 2006, wages and salaries for workers dropped to their lowest level as a percentage of the GDP since the government started keeping records in 1947.  The resulting stagnation in wage growth is a major reason why there is insufficient demand to pull our economy out of the serious recession we are in, particularly since we have become a far more of a consumer-based economy than we were immediately after WW II, when we had an economy based more on exports.  When worker productivity was not rewarded with parallel wage growth, Americans started borrowing, often using credit cards,  and Middle Class households discovered that a single wage-earner was no longer sufficient to maintain household expectations, one component of which was an affordable college education for their children. But, as Middle Class income stagnated and college costs skyrocketed,  it was necessary for their children to borrow in order to pay for college; today we have passed the $ 1 trillion mark for school loan debt. Excessive student debt was one of the major themes of the Occupy Wall Street (OWS) movement last year and this issue will be with us for a very long time. The jobs that are coming back now are low-paying jobs with no benefits—they are the jobs of the temp worker.

From NYT

Things changed beginning in the late 1970s and early 1980s, as the neoliberals gained momentum in turning back the wage increases that labor generated in the postwar period. The mortal enemy of capitalism is labor and the neoliberals set about to dramatically change the relationship between labor and business, to enhance short-term profits and improve the value of the company stock. The emphasis on the gold watch as a symbol of a quality CEO performance, was transformed into the golden parachute for the CEO and his select, executive companions. The failure of the public to denounce the leverage-buyout mania of the 1980s, helped accelerate inefficiencies in American manufacturing (because more focus and money was spent on acquisition than plant improvements) and gave birth to the private equity firms who make money from destroying the American manufacturing base.  Today, union membership in the private sector has fallen to about 7 percent, compared to the 35-40 percent during the peak period of union influence. These are levels that have not been seen since 1932. The decline in the unionized workforce was part of a deliberate strategy by the neoliberals to reduce the cost of labor and it worked, in part by creating a labor surplus, especially evident with today’s high unemployment levels but also generated by shipping jobs overseas as we sold manufacturing equipment and transferred jobs to India and China. We must also be aware of job loss through technological improvements and computerized functions which have displaced American workers. Just as one example, grocery stores used to have stock boys to make sure stock was ordered and displayed, but the computerized check-out and scanning system has eliminated their positions with more automated ordering. America is now the home of wealthy companies like Apple who design their products in America, but manufacture them in China or other Asian locations. How many jobs losses Mitt Romney presided over at Bain Capital has, to my knowledge, not been calculated, in part because the toxic version of capitalism that resides in America today doesn’t want anyone to know the answer. Perhaps during this election season we may see a number.

The figure to the right shows three different panels related to American wages and corporate profits. This article appeared in the New York Times in 2006, written by Stephen Greenhouse and David Leonhardt. The upper panel shows wage and salary growth, corrected for inflation from 1947 to 2006, at which point wages were at the lowest percentage of the GDP compared to any other time since the government started tracking this kind of data in 1947. The picture is slightly better when you look at overall compensation, adding benefits to the picture, but this is a bit misleading because it largely reflects the huge increase in health insurance costs, rather than something that went into the worker’s pockets. The lower graph of the upper panel shows that by 2006, corporate profits were at the highest level as a share of GDP since the 1960’s. The panel on the lower left shows wage and salary compensation for workers age 18 to 65 since 1974 expressed as a percent of income increase over the year before. This illustrates a very bumpy road of income growth with many negative periods, indicating a net loss of income. In contrast, the panel on the lower right shows productivity changes from previous years and illustrates only four years of negative change compared to 15 such years for wage growth. Clearly, the American worker has not experienced rewards for the increased productivity related to his/her work. According to economist Richard Wolff, the loss of compensation for increased productivity that began in the 1970’s was the first time in American history that wages did not track productivity.

Symbolically, the most prominent attack on labor was initiated under Ronald Reagan when he fired 13,000 air traffic controllers in 1981 and destroyed their union, the  Professional Air Traffic Controllers Organization (PATCO), which was eventually decertified. This cleared the way for business to fire employees who attempted to form unions with little or no protection from the weakened National Labor Board.  Everyone now recognizes that poor income levels among the Middle Class have served to push many of them into impoverished living conditions, forced them into foreclosure on their homes and worsening their debt load, which in turn has led to decreased demand in our consumer-based economy. We need to restore both the income level and confidence in the American worker to insure that his/her compensation includes a sensible plan for retirement (not a 401K, but a retirement fund contributed by employer and employee) that cannot be touched through corporate buyouts. Given the importance of labor unions and their historic role in generating improvements in wages and working conditions, it might seem plausible that we should wait around and do everything we can to give labor unions a chance to rebuild themselves and return to a more dominant role in wage negotiations, especially if we can rebuild the economy with a strong manufacturing base. But such a recovery is likely to take decades and we are so far down the road of financialization of our economy, that the prospects for achieving a short-term solution through this pathway seems very remote.

Yet, there’s a shorter, better way, one that we could implement almost overnight. The concept is referred to as Back to Full Employment. The idea of full employment came out of the Great Depression as a Keynesian concept. In those days, most economists thought that the purpose of macroeconomics was to steer economic policy and growth towards full employment. How times have changed: that concept of course was abandoned by the neoliberals who currently command our economic steering mechanisms. The first paper describing this strategy was by Polish economist Michal Kalecki, who wrote the article in the 1940s; The Monthly Review reprinted it a few years ago. In 1976 economist James Galbraith served on the staff of the House Banking Committee and worked to produce what, two years later became the Humphrey-Hawkins Full Employment and Balanced Growth Act. The bill had as its core, “full employment,” “balanced growth” and “reasonable price stability.” Included in the bill were amendments which instructed the Federal Reserve to report regularly to Congress about its progress on the full employment objective. Unfortunately, the Federal Reserve amendments are the only part of the bill that survived: every 6 months the head of the Federal Reserve sits before Congress and reports on the status of the economy; this is the only opportunity the Fed has to reveal its intentions in a public forum. The goal of the Humphrey-Hawkins Bill was to establish unemployment at 4 percent, with 3 percent inflation. Unfortunately, the Fed was run by Paul Volcker who followed a very strict policy of monetarism, driving the unemployment level to 11 percent in the early 1980s.

One of the most outspoken advocates of returning to the strategy of full employment is economist Robert Pollin who has just released a new book, Back to Full Employment. You can also see him interviewed on the subject with Laura Flanders on GRITtv.org. In addition, the Boston Review in their January/February 2011 issue featured this topic with Pollin and several others, including James Galbraith. According to Pollin, right now you can make a case that the unemployment level is close to 20 percent, when you include those that have stopped looking for jobs and the underemployed. This is an unsustainable rate for any country, but in the past, our country has been at full employment, with unemployment levels at 4 percent or below; that’s were we should aim and not be satisfied until we get there. Full employment is the unwritten part of America’s social contract with its labor force. Pollin’s argument is that once you get to an unemployment level of 4 percent or below, the labor market acquires a new dynamic and wages are bargained upwards: in 1998 the unemployment rate fell below 3.9 percent and wages started to rise rapidly, particularly for the lower income workers. According to Pollin, we can get to that level without new legislation through the authority of the Federal Reserve, a component of which was recently decided when Ben Bernanke announced that the Fed would buy mortgages and mortgage-backed securities. By the way, the full employment strategy is good for business because demand goes up and business income can flourish.

The neoliberals have given us one bubble after another as a method for stimulating our economy and the evidence is all around us how poorly this strategy has worked. No rational person can imagine that experiencing  bubble after bubble is a sensible way to build an economy, yet that is precisely what the neoliberals have in store for us. We have only to ask when the next one will be? We should recognize that the Federal Reserve can grow employment without the need for new legislation. But the success of that spending depends on where the money goes. According to Pollin, for a million dollars spent on education, public or private, twenty-seven jobs are created; if you spend the same amount on the military, about eleven jobs are created. So success at job creation depends a lot on where you spend the money. This simple fact tells us that Obama could significantly enhance the jobs picture by transferring money out of the military, into education, just for starters; imagine how much more our society would benefit by boosting education as opposed to putting more money in the military, where job creation gives us much less bang for the buck. A lot of these changes can be achieved without reducing our military preparedness, but let’s face it, we have nearly as large a military budget as the rest of the world combined. Do we really need to dominate the world, especially if doing so is costing us a robust domestic economy? The enemies we face are the enemies we created. But there is a lot more to the concept of “Back to Full Employment.” Right now we are laying off a lot of teachers, nurses and firefighters because local governments are under severe budgetary constraints. We have supposedly ended the war in Iraq and in the process of ending it in Afghanistan: the cost of those two wars was $ 88 billion this year; we should be able to take that chunk of money and feed it into local budgets to maintain important employment at the state and local level. The total budget deficit for all state and local governments is about $100 billion. Transferring the $ 88 billion could cover a big part of this deficit, which must be solved in order for a robust economic recovery to take place. A very large part of Obama’s stimulus package was tax cuts, so Obama did not hire lots of people as FDR did in the 1930s. It’s quite a different stimulus package when it’s loaded with tax cuts rather than a jobs program. But then too we have the banks, who, right now, are “hoarding” $ 1.6 trillion in cash at the central bank, not in some other country’s bonds. According to Pollin, this $1.6 trillion is 10 percent of the American economy and this is the money that banks get for free—zero interest rate. The reason banks are not investing in the American economy right now is that they rate it as too much of a risk. But we know that the current crisis is because of a lack of demand in a consumer-based economy. So why not use that $1.6 trillion to feed investments into our economy by rebuilding our infrastructure and shoring up things like education which will repay us in the form of good job creation with benefits. As Pollin says “there’s nothing unhealthy about running a big fiscal deficit in a recession.” We suffer from amnesia by not remembering how we recovered from the Great Depression—it was government spending, as we fused emerging from the Depression with ending the Second World War. If you are a young person just entering the work force with or without a college degree, the situation is hopeless, though it is not the same in every field or specialty. There is a minimum reserve requirement for the Fed’s $1.6 trillion, but if you say that $ 600 billion should be enough, it still leaves $1 trillion dollars available for spending on programs to enhance our work force and insist on full employment. A combination of massive spending to create jobs and extension and a loan guarantee for small business loans (right now small businesses are being denied loans because the banks do not want to take the risk. Federal intervention to provide small business loan guarantees would go a long way towards solving this dilemma). The third thing we must do is stop the austerity program—it is helping no one but the neoliberals who are out of touch to say the least with the American worker.

We know that the back to full employment movement will not resonate with Republicans. They were opposed to it when it was first brought up during the Great Depression.  One can almost visualize Paul Ryan’s facial contortions if someone presented this plan as a new election ploy for the Republicans. But if they came on board for this plan, they just might get elected. Pollin has also had contact with the Obama administration and when he suggested the idea, they too were opposed to it. Both parties are currently to the right of the American public and things will stay that way until we recognize that politics is not a game you can play by simply electing better officials–it’s become a contact sport! Besides the better public officials rarely run for office anymore and if they do, they will eventually need large sums of money to fund there campaign and we have only one funding source left for the kind of money required to run a vigorous campaign—everyone needs help from Wall Street. But, full employment should at the very least become a subject of public discussion. And if both political parties are against it, how can it enter into the public arena and acquire speech? The answer is through the Occupy Wall Street movement.

Think Progress Image

It has only been a year since that group first occupied Zucotti Park and already they have given us the “99 percent” as a symbolic way of characterizing income inequality in America and what they first pointed out is only getting worse. Most of the jobs coming back do not provide a liveable wage. Before the OWS movement, income inequality was not a subject of discussion and you didn’t see much of it in the newspapers. Now it is a major topic, though you don’t hear much about it during this Presidential election, perhaps because both political parties endorse the “steady as she goes” policies practiced by the Obama administration since their first attempt at stimulating the economy; these policies, where politicians seem to be trapped between the obvious need for a Federal stimulus and the Republican criticism about the debt. These factors add up to the state of paralysis we see in Washington about creating good jobs. If Romney is elected, his plan is to make things worse, but even if Obama stays on for a second term, he will not respond on this issue until public demands force him into action—that much is already clear.   When the OWS movement first started, it generated issues that deeply resonated with most Americans who felt a kinship to the concepts and the movement. The OWS movement identified a core problem and an element of great distortion if not disintegration within our economy and society. The 1 percent have been identified as the central cause of many of our problems, though they command great influence throughout our political institutions. But while the OWS movement properly identified a grave problem in America, they did not offer a clear pathway out of our dilemma, except they denounced both political parties and did not endorse any political movement. The full employment option is one way that the OWS movement can propose a solution to the problems they so effectively demonstrated about the 1 percent who flourish, while the rest of the country is faced with a long period of substandard living with little hope for the future of their children and grandchildren. A national discussion of Full Employment is one way to approach this issue and the OWS movement naturally comes to mind.


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Is Spain more democratic than the United States?

Posted on September 5th, 2012 in Economy,Politics by Robert Miller

July 20, 2012 Street Sign in Barcelona march; roughly translated “without science there is no future”

A few weeks ago, my wife and I went to Spain, where I attended a scientific meeting in Barcelona and afterwards, we went to Madrid. We took a bullet train to Madrid and noticed that Spain’s high-speed rail system was celebrating its 20th anniversary since the inauguration of the first. Spain has the largest fleet of bullet trains in Europe. The train reached 240 km/hr as we passed automobiles driving along the freeway, leaving them in the dust so to speak. You can ask why Spain is so far ahead of America in high speed rail service and the answer is always the same: neoliberal control of our economy, dominated by the oil and gas industry lobby to restrict Americans seeking transportation options to those modes that use fossil fuels: end of story. During our time in Spain, we witnessed a lot of civil unrest in the form of demonstrations and marches in both Barcelona and Madrid.  From this experience, I came away wondering if the United States is living up to the same ideals that I witnessed in Spain, specifically our constitutional right to assemble and petition the government with our grievances.  We are all aware that Spain, Europe’s fourth largest economy, is suffering from an overdose of austerity, with overall unemployment estimated at nearly 25 percent of the population, while more than 50 percent of those under age 25 are similarly disengaged from  participating in the Spanish economy.   This is intolerable and it doesn’t have to be that way. People in Spain, indeed Europe are mad about it, but we don’t hear that side of the Euro story in our newspapers because such events are filtered out: only the bond sales seem to get press play in America.  Given Spain’s past history of veering towards fascism when confronted with economic stress (Spanish Civil War, 1936-39), you might think that some concern would be evident to promote a more balanced approach to Spain’s economic plight.  But the neoliberals in Europe are still in control, especially in the banking and financial system of the Eurozone. German neoliberals largely control the monetary system of the Euro and they want to conform to the neoliberal manifesto—make a profit out of someone’s misery! That of course includes the IMF. In this iteration of our deepest international recession, we know that Spain did not cause the economic crash and though Spanish banks participated in the sub-prime housing scandal, the citizens of Spain are blameless, but they are being asked to foot the bill in ways that make no economic sense. The citizens of Spain are not all living a life of dignity and in that sense, the economic and financial system they live under has completely failed them. Indeed neoliberalism has failed all but a very few living at the top of the economic food chain. If we gain nothing more from this recession I hope we at last see the destructive forces of neoliberal financial policies—they are pursuing selfishly motivated strategies that are only good for the few and have absolutely no regard for the people most affected by this financial disaster. For Germany, the austerity strategy they have helped to impose defies logic, because their export economy will prosper more effectively if the Eurozone quickly recovers its economic vitality. Now is not too soon. So, you might guess that smart Germans would do everything in their power to have the European economies recover as quickly as possible and with little debt of the onerous variety—that is debt without high interest rates. After all,  Europeans like to buy German stuff, but only when they can afford it. The trouble is there are no smart Germans in control of the Euro. Like all neoliberals, their capacity to think beyond ultra-short-term planing vanished through the plasticity changes and synaptic reorganization of their brains, which left them with unparalleled skills for short-term thinking, but an empty frontal cortex when long-term thinking and planning is required, such as that mode of thought necessary to begin thinking about saving the planet. As a result of their policies, much of Europe is either in or headed for a double dip recession. So far, America avoided this trap through Obama’s stimulus package, but it wasn’t big enough and the plan was filled with too many tax breaks to have a more powerful, long lasting effect. We are thus continuously in danger of sliding back into a second recession: we are always on the margin. An additional component to this dilemma is that Obama jumped onto the austerity bandwagon, without checking with the American public and his austerity strategy was rescued by his own prior stimulus plan. Otherwise, we very likely would be in a second recession and may get there yet. So far, this “recovery” is too anemic and falls way short of what we really need to make our economy healthy and robust.

In my opinion, the Euro is not worth saving and if Spain went back to its own currency, they might already be experiencing a recovery. With  the austerity strategy and the “keep the Euro” mentality that dominates European neoliberal thinking at the moment, it will take many years for Europe to recover its economic vitality and, consequently, many years before the German economy is robust as well [there is now some hint that the bond rate for Spain’s borrowing is going down—if this turns out to be a new trend, it is a welcome one indeed, but it is much to late to bring sensible policy to such a grave economic condition and already too much economic hemorrhaging has taken place].  Besides, what Spain is asking for is a loan, not a bailout and when borrowing costs are practically free for the lender, why do you need to make  7 percent interest on loans to Spain or from any other European country? Except for the neoliberals, most people understand this.  Risk? No, it’s a far greater risk not helping Spain recover more quickly, by creating jobs, especially for the disenfranchised young people of Spain.  As an aside, economist Paul Krugman is something of a celebrity in Spain with his recently released book End This Depression Now. Last I checked the book was in it’s fourth printing in Spain. Clearly, the wrong people are in charge of international financial affairs. While we should be saying good-bye to the disastrous neoliberal economic policies, in fact, they remain firmly in control for who knows how long? It is way past time for them to go, but it hasn’t happened yet.

In Barcelona and later in Madrid, we saw many demonstrations, street marches, meetings in front of banks and labor leaders talking about the irresponsibility of the banking system that caused the problem in the first place. Television crews were among the crowds, interviewing labor leaders and citizens. One march in Barcelona stands out for the sheer scale  of the event. The march began in the North of the city, as we were following it quite by accident riding in a cab behind the early formation of the march. As the march grew in size, we noticed that police cars and motorcycles began to form a barricade, not to block the marchers, but to facilitate their objectives. All the side streets were blocked, as the march converged on the large street where our hotel was located. Our cab driver let us out blocks away from our hotel and we were told that he could get us no closer, so we had to walk back to our hotel and of course, came along the center of the march, where thousands of people were flowing down the four lane street in front of our hotel. No traffic was allowed to flow and all the side streets were blocked. It looked to me as though the police felt kinship with the marchers and were not there to arrest people but make sure the demonstration was carried out in safety. Barcelona and Madrid were cities filled with police, yet these were not the “I’m going to crack your head” types, but rather they seemed more professional than police in American cities.  As soon as the marchers gained a critical mass, the police obligingly cordoned off the side streets and followed from the rear to help protect the demonstrators. I was not prepared for this kind of police action, as we had just gone through the experience in America with the Occupy Wall Street movement in New York and other cities in which demonstrators were arrested by the hundreds on the Brooklyn bridge, pepper sprayed in Oakland, while Zucotti park  was ripped apart, heads bashed and things such as their library books were confiscated. The American Constitution prohibits any laws interfering with the right to peaceably assemble or prohibiting the petitioning for a governmental redress of grievances. But in America we see violations of our first amendment rights all the time; police in America tend to view public demonstrations as a threat to the neoliberal security and these events must never be allowed to get out of hand.We have seen police precipitate violence and then proceed with arrests and club bashing, claiming that the demonstration was not peaceful. Corruption is another label that can be applied to the American police force and the police have taken sides in the battle of red and blue America.

As we were watching the marchers in Barcelona (this peaceful demonstration lasted for hours), a group marched by where I was standing;  one person was handing out literature. His group was marching under a sign that said, more or less “without science a country has no future.” He told me that the budget cuts to science had been so severe at his university that they couldn’t buy surgical gloves to do animal surgery. We are fortunate in America that we don’t have the depths of the economic convulsion that Spain is going through, though having said that, we are in the process of destroying our scientific research base in ways that can never be recovered. God forbid that the sequestration budget adjustment take place on January 3, 2013, but if it does, we can all say goodbye to American science as we have known it. As just one example, the research into particle physics, which may be entering a new era now that the Higgs Boson has been discovered, has its epicenter in Europe at the new CERN Hadron Collider. Americans are not directly playing in this game as congress cancelled our supercollider project in the 1990s.  In America, we destroy the good things we establish that help to make us a pillar of strength and prosperity, such as science and our manufacturing base, but these things get systemically destroyed  through political machinations that rarely reach the pages of our newspapers. It is a silent process that even scientists don’t want to talk about. We also greatly under-report the seriousness of our own unemployment situation because massive numbers are not reported or people are working underemployed with wages that cannot sustain a decent lifestyle.  We only get the modified unemployment figures and hear nothing about the kinds of jobs that are being created. When are we going to realize that those who caused this deep recession are the ones that should pay for it? So far we are still operating under the policy of socializing financial risk, while privatizing profits through the financialization of the American economy. With the new securitized state given to us by GW Bush, combined with the hostility and confrontational nature of the right wing police, public demonstrations are viewed as a security risk and the Patriot Act provides the basis for treating demonstrators in America like criminals or terrorists. It was as least gratifying to see one country where public demonstrations are supported by the government with appropriate aid coming from the police. When was the last time you heard about something like that in America?


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