Reports from the Economic Front

The U.S. economy continues to stagnate and our political leaders continue to embrace austerity.  One major reason for this policy stance is that stagnation has done nothing to dent the earnings of our top corporations and their owners.

The challenge for our political leaders is convincing the rest of us to accept this situation.  For sometime now their strategy has been to predict recovery right around the corner.  All we need, they say, is a bit more austerity to reassure financial markets and growth will naturally resume.

Their claims were initially buttressed by a few highly touted economic studies, but those studies have now been discredited.  See here and here.  Practice also makes clear that austerity is not the solution to our economic problems.

This strategy was tried first and most aggressively in Europe.  The chart below, taken from a blog post by the economist Ed Dolan, provides one indicator of the self-reinforcing consequences of austerity.  Half the countries in the euro zone are in recession, and several big ones are heading that way.  For example, Germany’s average annual growth fell from 0.7 percent in 2012 to 0.4 percent in the first quarter of 2013.

The European experience holds another lesson for people in this country.  It will take sustained popular organizing to get policy makers to change course.

This long post examines the causes of and offers a response to the dangerous escalation of tensions on the Korean peninsula.

While the details of U.S.-North Korean relations are complex, the story is relatively simple.  In brief, the U.S. government continues to reject possibilities for normalizing relations with North Korea and promoting peace on the Korean peninsula in favor of a dangerous policy of regime change.  Unfortunately, but not surprisingly, the U.S. media supports this policy choice with a deliberately one sided presentation of events designed to make North Korea appear to be an unwilling and untrustworthy negotiating partner.

As a corrective, in what follows I offer a more complete history of U.S -North Korean relations, focusing on the major events that frame current tensions over North Korea’s nuclear program.  This history makes clear that these tensions are largely the result of repeated and deliberate U.S. provocations and that our best hope for peace on the Korean Peninsula is an educated U.S. population ready and able to challenge and change U.S. foreign policy.

Historical Context

Perhaps the best starting point for understanding the logic of U.S.-North Korean relations is the end of Korean War fighting in 1953.  At U.S. insistence, the fighting ended with an armistice rather than a peace treaty.  A Geneva conference held the following year failed to secure the peace or the reunification of Korea, and U.S. demands were the main reason for the failure.

The United States rejected North Korean calls for Korea-wide elections, supervised by a commission of neutral nation representatives, to establish a new unified Korean government, a proposal that even many U.S. allies found reasonable.  Instead, the U.S. insisted, along with South Korea, that elections for a new government be held only in the North and under the supervision of the U.S. dominated United Nations.  Needless to say, the conference ended without any final declaration, Korea divided, and the United States and North Korea in a continuing state of war.

Up until the late 1980s/early 1990s, an interrelated, contentious but relatively stable set of relationships—between the United States and the Soviet Union and between North Korea and South Korea—kept North Korean-U.S. hostilities in check.  The end of the Soviet Union and transformation of Russia and other Central European countries into capitalist countries changed everything.

The loss of its major economic partners threw North Korea’s economy into chaos; conditions only worsened the following years as a result of alternating periods of flood and drought.  The North Korean government, now in a relatively weak position, responded by seeking new trade and investment partners, which above all required normalization of relations with the United States.  The U.S. government had a different response to the changed circumstances; seeking to take advantage of the North’s economic problems and political isolation, it rejected negotiations and pursued regime change.

It is the interplay of U.S. and North Korean efforts to achieve their respective aims that is largely responsible for the following oft repeated pattern of interaction: the North tries to force the United States into direct talks by demonstrating its ability to boost its military capacities and threaten U.S. interests while simultaneously offering to negotiate away those capacities in exchange for normalized relations.  The United States, in turn, seizes on such demonstrations to justify ever harsher economic sanctions, which then leads North Korea to up the ante.

There are occasional interruptions to the pattern.  At times, the United States, concerned with North Korean military advances, will enter into negotiations.  Agreements are even signed.  But, the U.S. rarely follows through on its commitments.  Then the pattern resumes.  The critical point here is that it is the North that wants to conclude a peace treaty ending the Korean War and normalize relations with the United States.  It is the U.S. that is the unwilling partner, preferring to risk war in the hopes of toppling the North Korean regime.

The Framework Agreement, 1994-2002

The U.S. government began to raise public concerns about a possible North Korean nuclear threat almost immediately after the dissolution of the Soviet Union.  These concerns were driven by many factors, in particular the U.S. need for a new enemy to justify continued high levels of military spending.  Colin Powell, then head of the Joint Chiefs of Staff, explained in testimony to Congress that with the Soviet Union gone, the United States was running out of enemies.  All that was left, he said, was Fidel Castro and Kim Il Sung.

The North had shut down its one operating reactor in 1989 for repairs.  In 1992, the CIA claimed that the North used the shutdown to reprocess plutonium and was now in possession of one or two nuclear weapons, a claim disputed at the time by the State Department.  The North also denied the claim but offered to settle U.S. nuclear concerns if the United States would enter into normalization talks.

The Clinton Administration rejected the invitation and began planning for war.  War was averted only because of Jimmy Carter’s intervention.  He traveled to North Korea and brokered an agreement with Kim Il Sung that Clinton reluctantly accepted.  The resulting 1994 Framework Agreement required the North to freeze its graphite-moderated reactor and halt construction of two bigger reactors.  It also required the North to store the spent fuel from its operating reactor under International Atomic Energy Association (IAEA) supervision.

In exchange, the U.S agreed to coordinate the building of two new light water reactors (which are considered less militarily dangerous) that were to be finished by 2003.  Once the reactors were completed, but before they were fully operational, the North would have to allow full IAEA inspections of all its nuclear facilities.  During the period of construction, the U.S. agreed to provide the North with shipments of heavy oil for heating and electricity production.

Perhaps most importantly, the agreement also called for the United States to “move toward full normalization of political and economic relations” with the North and “provide formal assurances to the DPRK against the threat or use of nuclear weapons by the United States.”

Tragically, although rarely mentioned in the U.S. media, the U.S. government did little to meet its commitments.  It was repeatedly late in delivering the promised oil and didn’t begin lifting sanctions until June 2000.  Even more telling, the concrete for the first light water reactor wasn’t poured until August 2002.  Years later, U.S. government documents revealed that the United States made no attempt to complete the reactors because officials were convinced that the North Korean regime would collapse.

The Bush administration had no use for the Framework Agreement and was more than happy to see it terminated, which it unilaterally did in late 2002, after charging the North with violating its terms by pursuing nuclear weapons through a secret uranium enrichment program.  Prior to that, in January 2002, President Bush branded North Korea a member of the “axis of evil.”  In March, the terms of a new military doctrine were leaked, revealing that the United States reserved the right to take preemptive military strikes and covert actions against nations possessing nuclear, biological, and chemical weapons as well as use nuclear weapons as an option in any conflict; North Korea was listed as one of the targeted nations.  In July, President Bush rejected a North Korean request for a meeting of foreign ministers, calling Kim Jong Il a “pygmy” and a “spoiled child at the dinner table”

It is certainly possible that North Korea did begin a uranium enrichment program in the late 1990s, although the Bush Administration never provided proof of the program’s existence.  However, what is clear is that the North did halt its plutonium program, allowing its facilities to deteriorate, with little to show for it.  The failure of the United States to live up to its side of the agreement is highlighted by the fact that North Korea’s current demands are no different from what it was promised in 1994.

The North Korean government responded to the Bush administration’s unilateral termination of the Framework Agreement by ordering IAEA inspectors out of the country, restarting its plutonium program, and pledging to build a nuclear arsenal for its defense.

Six Party Talks, 2003-7

Fearful of a new war on the Korean peninsula, the Chinese government organized talks aimed at deescalating tensions between the United States and North Korea.  The talks began in August 2003 and included six countries—the United States, North Korea, South Korea, Japan, China, and Russia.  Two years of talks failed to produce any progress in resolving U.S.-North Korea differences.  One reason: the U.S. representative was under orders not to speak directly to his North Korean counterpart except to demand that North Korea end its nuclear activities, scrap its missiles, reduce its conventional forces, and end human rights abuses.  The North, for its part, refused to discuss its nuclear program separate from its broader relations with the United States.

Finally, in mid-2005, the Chinese made it known that they were prepared to declare the talks a failure and would blame the United States for the outcome.  Not long after, the United States ended its opposition to an agreement.  In September 2005, the six countries issued a Joint Statement, which was largely a repackaged Framework Agreement.  While all the countries pledged to work towards the denuclearization of the Korean peninsula, most of the concrete steps were to be taken by the United States and North Korea “in a phased manner in line with the principle of ‘commitment for commitment, action for action’.”

Unfortunately, the day after the Joint Statement was issued, the United States sabotaged it.  The U.S. Treasury announced that it had “proof” that North Korea was counterfeiting $100 bills, so called super notes, an action it said amounted to war.  It singled out the Macao-based Banco Delta Asia, which was one of North Korea’s main financial connections to the west, for supporting the country’s illegal activities, froze its dollar accounts, and warned other banks not to conduct business with it or service any North Korean dollar transactions.  The aim was to isolate North Korea by denying it access to international credit markets.  The charge of counterfeiting was rejected by the North, most Western currency experts, and even China and Russia who were given a presentation of evidence by the U.S. Treasury.  However, fearful of possible U.S. retaliation, most banks complied with U.S. policy, greatly harming the North Korean economy.

The timing of the counterfeit charge was telling.  The U.S. Treasury had been concerned with counterfeit super notes since 1989 and had originally blamed Iran.  The sum total identified was only $50 million, and none of the notes had ever circulated in the United States.  This was clearly yet another effort to stop normalization and intensify economic pressure on North Korea.

The North announced that its participation in Six Party talks was contingent on the withdrawal of the counterfeit charge and the return of its Banco Delta Asia dollar deposits.  After months of inaction by the United States, the North took action.  On July 4, 2006, it test-fired six missiles over the Sea of Japan, including an intercontinental missile.  The U.S. and Japan condemned the missile firings and further tightened their sanctions against North Korea.  In response, on October 8, 2006, North Korea conducted its first nuclear test.  Finally, the U.S. agreed to reconsider its financial embargo and the North agreed that if its money was returned and it received energy supplies and economic assistance it was willing to once again shutdown its nuclear facilities, readmit international inspectors, and discuss nuclear disarmament in line with steps toward normalization of relations with the United States.

The Six Party talks began again in December 2006 but the process of securing implementation of the Joint Statement was anything but smooth.  The U.S. chief negotiator at the talks announced in February 2007 that all frozen North Korean deposits would be unfrozen and made available to the North within 30 days; the North was given 60 days to shut down its reactor.  However, the Treasury refused to withdraw its charges, and no bank was willing to handle the money for fear of being targeted as complicit with terrorism.  It took the State Department until June 25 to work out a back-door alternative arrangement, thereby finally allowing the Six Party agreement to go into effect.

The Six Party Agreement, 2007-9

As noted above, the Six Party agreement involved a phased process.  Phase 1, although behind schedule because of the U.S. delay in releasing North Korean funds, was completed with no problems.  In July 2007, North Korea shut down and sealed its Yongbyon nuclear complex which housed its reactor, reprocessing facility, and fuel rod fabrication plant.  It also shut down and sealed its two partially constructed nuclear reactors.  It also invited back IAEA inspectors who verified the North Korean actions.  In return, the U.S. provided a shipment of fuel oil.

Phase 2, which began in October, required the North to disable all its nuclear facilities by December 31, 2007 and “provide a complete and correct declaration of all its existing nuclear programs.”  In a separate agreement it also agreed to disclose the status of its uranium enrichment activities.  In exchange, the North was to receive, in stages, “economic, energy, and humanitarian assistance.” Once it fulfilled all Phase 2 requirements it would also be removed from the U.S. Trading with the Enemy Act and the State Sponsors of Terrorism list.

North Korean complaints over the slow delivery of fuel oil delayed the completion of this second phase.  However, in May 2008, North Korea completed the last stage of its required Phase 2 actions when it released extensive documentation of its plutonium program and in June a declaration of its nuclear inventory.  In response, the U.S. removed North Korea from its list of state sponsors of terrorism.

However, the U.S. government failed to release the remaining promised aid or end the remaining sanctions on North Korea.  It now demanded that North Korea accept a highly intrusive verification protocol, one that would open up all North Korean military installations to U.S. inspection, and made satisfaction of Phase 2 commitments dependent on its acceptance.  The U.S. was well aware that this demand was not part of the original agreement.  As Secretary of State Rice stated, “What we’ve done, in a sense, is move up issues that were to be taken up in phase three, like verification, like access to the reactors, into phase two.”

The North offered a compromise—a Six Party verification mechanism which would include visits to declared nuclear sites and interviews with technical personal.  It also offered to negotiate a further verification protocol in the final dismantlement phase.  The U.S. government rejected the compromise and ended all aid deliveries.

In February 2009, the North Korea began preparation to launch a satellite.  South Korea was preparing to launch a satellite of its own in July.  The North had signed the appropriate international protocols governing satellites and was now providing, as required, notification of its launch plan.  The Obama administration warned the North that doing so would violate sanctions placed on the country after its nuclear test.  In response, the North declared that it had every right to develop its satellite technology and if the U.S. responded with new sanctions it would withdraw from the Six Party talks, eject IAEA monitors, restart its reactors, and strengthen its nuclear deterrent.

The North launched its satellite in April.  In June, the U.S. won UN support for enhanced sanctions, and the North followed through on its threat.  In May the North conducted a second nuclear test, producing yet another round of sanctions.

Recent Events

In April and December 2012 the North again launched earth observation satellites.  Although before each of these launches the U.S. asserted that these were veiled attempts to test ballistic missiles designed to threaten the United States, after each launch almost all observers agreed that the characteristics of the launches—their flight pattern and the second stage low-thrust, long burntime–were what is required to put a satellite in space and not consistent with a missile test.

After the December launch, the only successful one, the U.S. again convinced the Security Council to apply a new round of sanctions.  And in response, the North carried out its third nuclear test in February 2013.  The North Korean Ministry of Foreign Affairs pointed out that there have been “more than 2,000 nuclear tests and 9,000 satellite launches” in the world, “but the UN Security Council has never passed a resolution prohibiting nuclear tests or satellite launches.”  The Security Council responded to the North’s nuclear test by approving stricter sanctions.

In addition to sanctions, the U.S. has also intensified its military provocations against the North in hopes of destabilizing the new North Korean regime led by Kim Jung Un.  For example, in 2012, U.S.-South Korean military analysts conducted the world’s largest computerized war simulation exercise, practicing the deployment of more than 100,000 South Korean troops into North Korea to “stabilize the country in case of regime collapse.”  As part of their yearly war games, U.S. and South Korean forces also carried out their largest amphibious landing operations in 20 years; 13 naval vessels, 52 amphibious armored vehicles, 40 fighter jets and helicopters, and 9,000 U.S. troops were involved.

As part of its March 2013 war games, the U.S. flew nuclear-capable B-2 Stealth bombers over South Korea; these are also the only planes capable of dropping the 30,000-pound Massive Ordnance Penetrator bomb, which was developed to destroy North Korean underground facilities.  Nuclear-capable B-52 bombers also flew over South Korea, dropping dummy munitions.  The United States also sent the nuclear-powered submarine USS Cheyenne, equipped with Tomahawk missiles, into Korea waters.

The North Korean government responded to these threats in three ways.  First, the content of their declarations changed.  In particular, they began to focus their own threats on the U.S. as well as South Korea.  For example, the government stated, “If the US imperialists brandish nuclear weapons, we — in complete contrast to former times — will by means of diversified, precision nuclear strike in our own style turn not just Seoul, but even Washington, into a sea of fire.”  It also asserted, for the first time, that its nuclear weapons were no longer negotiable.  At least, not “as long as the United States’ nuclear threats and hostile policy exist.”

Second, the government put North Korean forces on full alert, including all artillery, rockets, and missiles.  Kim Jong Un announced that the country would “answer the US imperialists’ nuclear blackmail with a merciless nuclear attack.”  Finally, it announced, in April, that it would restart its uranium enrichment program and its Yongbyon reactor.

What Lies Ahead

The Obama administration has adopted what it has called the doctrine of “strategic patience” in dealing with North Korea.  But as made clear from above, in reality the U.S. has continued to pursue an aggressive policy towards North Korea, motivated by the hope that the regime will collapse and Korean reunification will be achieved by the South’s absorption of the North, much like the German experience.

The consequence of this policy is ever worsening economic conditions in the North; continuing military buildup in the United States, Japan, China, and both North and South Korea; a strengthening of right-wing forces in South Korea and Japan; and the growing threat of a new war on the Korean peninsula.  There are powerful interests in Japan, South Korea, and the United States that are eager to further militarize their respective domestic and foreign policies, even at the risk of war.  Tragically, their pursuit of this goal comes at great cost to majorities in all the countries concerned, even if war is averted.

The North has made clear its willingness to enter direct talks with the United States.  It is only popular pressure in the United States that will cause the U.S. government to change its policy and accept the North Korean offer.  It is time for the U.S. government to sign a peace treaty finally ending the Korean War and take sincere steps towards normalization of relations with North Korea.

If you were one of those people who were not persuaded that the U.S. debt level was reaching growth-threatening levels, pat yourself on the back.

One of the major studies supporting the austerity position was a 2010 paper titled Growth in a Time of Debt by two well-known economists, Carmen Reinhardt and Kenneth Rogoff (R & R).  As Mike Konczal reports:

Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

This conclusion, that countries with debt-to-GDP ratios over 90 percent actually suffer negative growth, quickly became a staple in the arguments of those pushing for cuts in government spending.

Well, it turns out that R & R’s work was seriously flawed.  Once the flaws are corrected, the conclusion no longer holds; growth remains positive even at debt ratios over 90 percent and the difference in growth rates for countries below and above that level is not statistically significant.

R & R finally agreed to share their data with three professors from the University of Massachusetts at Amherst, Thomas Herndon, Michael Ash, and Robert Pollin (HAP).  HAP published their evaluation of R & R’s work in their recently published paper titled Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.”  As Konczal summarizes, HAP found  three serious problems with R & R’s work:

First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.

You can read Konczal or Michael Roberts for a fuller discussion of these points.  However, just to give you a flavor of how poor R & R’s methodology was, let me briefly summarize the second point.  R & R divided up each individual country’s data into several selected debt-to-GDP groupings, and then calculated an average real growth for all the years in the specific debt grouping.  Then they determined a global average rate of growth for a given debt-to-GDP level by averaging all the growth rates across countries at that specific debt level.

Konczal gives the following example to illustrate how sloppy this approach is:

The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.

Now maybe you don’t want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don’t discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.

As noted above, after HAP adjust for the errors they found, which include an Excel spread sheet error, R & R’s conclusion of negative growth at debt levels over 90 percent goes away.  More specifically, they found that “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [R & R claim].”

Now, have R & R backed off from their conclusion? Well, they admit the mistakes but still claim that the basic point is true.  But as Dean Baker notes: “If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.”

What we have here is politics in command.  R & R, as well as other advocates of austerity, continue to argue for cutting government spending despite having based their position largely on a study that is now shown to be wanting.  So, it goes.

The economist Ed Dolan sums up the current state of the U.S. economy in a recent blog post with the following headline: “Latest US GDP data show economy weak at year’s end but corporate profits near record high.”

The chart below, taken from that post, illustrates the steady rise in corporate profits.  As Dolan comments, “both before-tax and after-tax profits, stated as a percentage of GDP, reached their second highest level ever recorded, falling just short of their all-time highs of Q4 2011.”

One reason for this trend has been the ability of corporations to squeeze labor.  Fred Magdoff and John Bellamy Foster highlight this corporate success in their Monthly Review article “Class War and Labor’s Declining Share.”

The following four charts are taken from the article.  The first chart looks at total labor compensation as a percent of GDP.  The downward trend is visible but the extent of the attack on workers is somewhat masked since the data includes all workers and total benefits.  The second chart looks just at wages and salaries, again for all workers.

Chart 3 looks just at production and nonsupervisory workers.  These workers account for approximately 80 percent of all private sector workers.  We can see that while their share of total employment has remained relatively constant, their share of payroll has dramatically fallen.  Chart 4 compares wage and salary trends for production and nonsupervisory workers with trends for management, supervisory, and other nonproduction employees.

These last two charts make clear that the war on labor has been focused on production and nonsupervisory workers, and has been going on for decades.  And it doesn’t take much of a stretch of imagination to connect these trends with the growing suffering of most working people, the explosion in income inequality, and the rise in corporate profits.

But what are corporations doing with their profits?  As it turns out they are using their gains not to strengthen the economy but rather to reward their already wealthy stockholders (with dividends) and managers (with higher bonus boosting stock prices).

As the Wall Street Journal reports: “Firms Send Record Cash Back to Investors.” The article explains the headline as follows:

U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally.  Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year’s $282 billion. . . .

American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. Home Depot Inc., General Electric Co. and PepsiCo Inc. are among a number of large companies that announced plans last month to scoop up large amounts of their own shares. . . .

In returning money to shareholders, companies by and large are tapping into cash piles they have accumulated in the past few years by cutting costs or taking advantage of low interest rates to borrow funds. . . .

“Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing,” said Rob Leiphart, an analyst at Birinyi. “Companies have to do something with it.”

Clearly, all is well for those at the top.  And that is the problem for those of us opposing austerity.

So, what government believes that it has the right to kill anyone, regardless of where they are, if the head of state believes that the person is a threat to the country’s national security?  No, the answer is not the government of North Korea.  It is the government of the United States.

And how does the government of the United States justify its policy of targeted assassinations?  According to a recent New York Times article:

On Page 4 of the unclassified 16-page “white paper,” Justice Department lawyers tried to refute the argument that international law does not support extending armed conflict outside a battlefield. They cited as historical authority a speech given May 28, 1970, by John R. Stevenson, then the top lawyer for the State Department, following the United States’ invasion of Cambodia.

Since 1965, “the territory of Cambodia has been used by North Vietnam as a base of military operations,” he told the New York City Bar Association. “It long ago reached a level that would have justified us in taking appropriate measures of self-defense on the territory of Cambodia. However, except for scattered instances of returning fire across the border, we refrained until April from taking such action in Cambodia.”

In fact, Nixon had begun his secret bombing of Cambodia more than a year earlier. (It is not clear whether Mr. Stevenson knew this.) So the Obama administration’s lawyers have cited a statement that was patently false.

To be sure, the administration may have additional arguments in support of its use of drones in Yemen, Pakistan, Somalia and other countries. To secure the confirmation of John O. Brennan as the C.I.A. director, it recently showed members of the Congressional intelligence committees some of the highly classified legal memos that were the basis for the white paper. But Mr. Obama has asked us to trust him, and Cambodia offers us no reason to do so.

The following link illustrates the escalation of drone warfare under President Obama by highlighting every known drone attack in Pakistan since 2004 and the estimated casualties: http://drones.pitchinteractive.com/

After watching the graphic take a few moments to explore the site, especially the victims and news links.

Dylan Matthews, blogging in the Washington Post, discusses a very interesting paper that provides evidence showing that politicians seriously underestimate the progressivity of their constituents.

David Broockman and Christopher Skovron, the authors of the paper, “surveyed every candidate for state legislative office in the United States in 2012 [shortly before the November election] and probed candidates’ own positions and their perceptions of their constituents’ positions on universal health care, same-sex marriage, and federal welfare programs, three of the most publicly salient issues in both national-level and state-level American politics during the past several years.”  They then matched the results with estimates of the actual district- and issue-specific opinions of those residing in the candidates’ districts using a data set of almost 100,000 Americans.

Here is what they found:

Politicians consistently and substantially overestimate support for conservative positions among their constituents on these issues. The differences we discover in this regard are exceptionally large among conservative politicians: across both issues we examine, conservative politicians appear to overestimate support for conservative policy views among their constituents by over 20 percentage points on average. . . . Comparable figures for liberal politicians also show a slight conservative bias: in fact, about 70% of liberal office holders typically underestimate support for liberal positions on these issues among their constituents.

The following two charts illustrate this bias when it comes to universal health care and same sex marriage.

As Matthews explain:

The X axis is the district’s actual views, and the Y axis their legislators’ estimates of their views. The thin black line is perfect accuracy, the response you’d get from a legislator totally in tune with his constituents. Lines above it would signify the politicians think the district more liberal than it actually is; if they’re below it, that means the legislators are overestimating their constituents’ conservatism. Liberal legislators consistently overestimate opposition to same-sex marriage and universal health care, but only mildly. Conservative politicians are not even in the right ballpark.

The authors found a similar bias regarding support for welfare programs.  Perhaps even more unsettling, the authors found no correlation between the amount of time candidates spent meeting and talking to people in their districts while campaigning for office and the accuracy of their perceptions of the political positions of those living in their districts.

One consequence of this disconnect is that office holders, even those with progressive views, are reluctant to take progressive positions.  More generally, these results speak to a real breakdown in “the ability of constituencies to control the laws that their representatives make on their behalf.”

While newspapers give a lot of ink to arguments about whether reducing the budget deficit will boost or reduce growth, they seem to have little interest in the related issue of whether economic growth really benefits the great majority.

David Cay Johnston, the Pulitzer Prize winning financial journalist, recently addressed this issue drawing on the work of economists Emmanuel Saez and Thomas Piketty:

In 2011 entry into the top 10 percent . . . required an adjusted gross income of at least $110,651. The top 1 percent started at $366,623.

The top 1 percent enjoyed 81 percent of all the increased income since 2009. Just over half of the gains went to the top one-tenth of 1 percent, and 39 percent of the gains went to the top 1 percent of the top 1 percent.

Ponder that last fact for a moment — the top 1 percent of the top 1 percent, those making at least $7.97 million in 2011, enjoyed 39 percent of all the income gains in America.

So, 81 percent of all the new income generated from 2009 to 2011 was captured by the top 1 percent income earners, where income is defined as adjusted gross income, which refers to income minus deductions or taxable income.  In other words growth, even accelerated growth, is not going to do the majority much good if the economic structure remains the same.

Johnston highlights the problem with our existing economic model with perhaps an even more shocking example.  He compares the average income growth of the bottom 90 percent with the average income growth of the top 10 percent, 1 percent, and top 1 percent of the top 1 percent over the period 1966 to 2011.

It turns out that the average income of the bottom 90 percent rose by a miniscule $59 over the period (as measured in 2011 dollars).  By comparison, the average income of the top 10 percent rose by $116,071, the average income of the top 1 percent rose by $628,817, and the average income of the top 1 percent of the top 1 percent increased by a whopping $18,362,740.  In short, growth alone means little if the great majority of people are structurally excluded from the benefits.

In an effort to highlight this extreme disparity in adjusted income growth rates, Johnston suggests plotting the numbers on a chart, with $59, the amount gained by the bottom 90 percent, represented by a bar one inch high.  As the chart below shows, the bar representing average gains for the top 10 percent would be 163 feet high, that for the top 1 percent would be 884 feet high, and that for the top 1 percent of the top 1 percent would be 4.9 miles high.

In sum, the real challenge facing the great majority of Americans is not figuring out how to make the economy growth faster.  Rather, it is figuring out how to create space for a real debate about how to transform our economy so that growth will actually satisfy majority needs.

While some austerity advocates really fear (although incorrectly) the consequences of deficit spending, the strongest proponents are actually only concerned with slashing government programs or the use of public employees to provide them.  In other words their aim is to weaken public programs and/or convert them into opportunities for private profit.

One measure of their success has been the steady decline in public employment.  Floyd Norris, writing in the New York Times notes:

For jobs, the past four years have been a wash.

The December jobs figures out today indicate that there were 725,000 more jobs in the private sector than at the end of 2008 — and 697,000 fewer government jobs. That works into a private-sector gain of 0.6 percent, and a government sector decline of 3.1 percent.

In total, the number of people with jobs is up by 28,000, or 0.02 percent.

How does that compare? It is by far the largest four-year decline in government employment since the 1944-48 term. That decline was caused by the end of World War II; this one was caused largely by budget limitations.

The chart below, taken from the same post also reveals just how weak private sector job creation has been over the past 12 years.

What follows is a screen shot of a graphic in a New York Times Business Day post.  It highlights just how significant the decline in public employment has been in this business cycle compared with past ones.  Each line shows the percentage change in public sector employment for specified months after the start of a recession.  Our recent recession began December 2007 and ended June 2009.   As you can see, what is happening now is far from usual.

It is also worth noting that despite claims that most Americans want to see cuts in major federal government programs, the survey data show the opposite.  For example, see the following graphic from Catherine Rampell’s blog post.

As Rampell explains:

In every category except for “aid to world’s needy,” more than half of the respondents wanted either to keep spending levels the same or to increase them. In the “aid to world’s needy” category, less than half wanted to cut spending.

Not surprisingly, this assault on government spending and employment will have real consequences for the economy and job creation.  Binyamin Appelbaum writes in the New York Times:

The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war.

And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years. . . .

Over the last two years, federal consumption and investment declined by 6.9 percent. Including state and local consumption, a larger category that has declined more slowly, the inflation-adjusted reduction since 2011 was 4.9 percent.

But Alec Phillips, an economist at Goldman Sachs, estimated that federal consumption could fall by another 11 percent over the next two years. Mr. Phillips also noted that those earlier rounds of cuts in the 1970s and the 1990s came primarily from the military budget. The sequester is designed to be indiscriminate, cutting everything from air traffic control to nursery schools.

That could increase the resulting pain, because economic research suggests that military cuts are less painful than other kinds of spending reductions.

“It is cutting some of the best spending that government does,” Professor Cowen said of the cuts that would fall on the domestic side of the ledger.

All of this takes us back to the starting point–we are talking policy here.  Whose interests are served by these trends?

The so-called sequester appears likely to result in $85 billion in spending cuts this fiscal year.  The cuts are ostensibly the result of a political battle over the budget deficit, with Republicans arguing that spending cuts are absolutely necessary to save the economy and the Democrats agreeing that the budget deficit does need to be reduced, but preferring a combination of tax/revenue increases and spending cuts.

The austerity drive appears back in full swing regardless of how the debate turns out.  There was a brief period when the Occupy movement turned the spotlight on inequality and jobs, but powerful forces have succeeded in regaining control over the national debate on the economy.

Sadly those powerful forces tend to fly under the radar, with the media happy to portray concern about the deficit arising from the grassroots.  In fact, nothing could be further from the truth.  The sustained focus on the deficit and the need for spending cuts is to a considerable extent the result of huge spending by wealthy individuals and corporations on campaigns which give the appearance of public support.

Exhibit 1 is the Fix the Debt campaign.  A recent New York Times article provides an interesting look into the workings and supporters of this campaign:

When Jim McCrery, a former Louisiana congressman, urged lawmakers last month to pursue entitlement cuts and tax reform, he was introduced on television as a leader of Fix the Debt, a group of business executives and onetime legislators who have become Washington’s most visible and best-financed advocates for reining in the federal deficit.

Mr. McCrery did not mention his day job: a lobbyist with Capitol Counsel L.L.C. His clients have included the Alliance for Savings and Investment, a group of large companies pushing to maintain low tax rates on dividend income, and the Win America Campaign, a coalition of multinational corporations that lobbied for a one-time “repatriation holiday” allowing them to move offshore profits back home without paying taxes. . . .

In recent days, Fix the Debt has redoubled its efforts, starting a new national advertising campaign and calling on Mr. Obama and Congress to revise the tax code and reduce long-term spending on entitlement programs. . . .

While Fix the Debt criticized the recent fiscal deal between Mr. Obama and lawmakers, saying it did not do enough to cut spending or close tax loopholes, companies and industries linked to the organization emerged with significant victories on taxes and other policies. . . .

Sam Nunn, a former Democratic senator from Georgia who is a member of Fix the Debt’s steering committee, received more than $300,000 in compensation in 2011 as a board member of General Electric. The company is among the most aggressive in the country at minimizing its tax obligations. Mr. McCrery, the Louisiana Republican, is also among G.E.’s lobbyists, according to the most recent federal disclosures, monitoring federal budget negotiations for the company.

Other board members and steering committee members have deep ties to the financial industry, including private equity, whose executives have aggressively fought efforts to alter a tax provision, known as the carried interest exception, that significantly reduces their personal income taxes.

Erskine B. Bowles, a co-founder of Fix the Debt, was paid $345,000 in stock and cash in 2011 as a board member at Morgan Stanley, while Judd Gregg, a former Republican senator from New Hampshire and a co-chairman of Fix the Debt, is a paid adviser to Goldman Sachs. Both companies have engaged in lobbying on international tax rules.

Mr. Gregg also sits on the boards of Honeywell and Intercontinental Exchange, a company that has warned investors that a tax on financial transactions would lower trading volume and curtail its profits. The two companies paid Mr. Gregg almost $750,000 in cash and stock in 2011.

In all, close to half of the members of Fix the Debt’s board and steering committee have ties to companies that have engaged in lobbying on taxes and spending, often to preserve tax breaks and other special treatment. . . .

[S]o far, at least, the companies and industries most closely linked to Fix the Debt have been aggressive in defending their narrower legislative interests.

The fiscal deal preserved the carried interest loophole, eliminated most of a large prospective increase in dividends taxes and preserved a tax break, known as the active financing exception, that allows G.E. and other multinational companies to avoid paying United States taxes on overseas profits.

The deal also forestalled large automatic cuts in military spending, a boon to contractors like Honeywell. The company’s chief executive, David M. Cote, is a co-founder of Fix the Debt; the group’s “core principles,” which call for retrenchment in entitlement programs like Social Security, make no mention of military spending, which constitutes about a fifth of the federal budget.

A recent Democracy Now broadcast examined the link between this group and Pete Peterson.  Peterson has long worked behind the scenes in an effort to dismantle earned benefit programs like Social Security and Medicare and has personally given almost $500 million to his foundation which attempts to shape popular thinking accordingly.

As John Nichols explains on the broadcast:

And at the core of this is changing the way that we look at retirement in this country, definitely undermining Social Security, Medicare and Medicaid, changing those earned benefit programs into something very different than what they’ve been and something far less reliable, but also making an awfully lot of other cuts in programs that serve the great mass of Americans, while at the same time continuing and even advancing the tax breaks for billionaires and corporations that have helped to make Pete Peterson a very, very wealthy man.

He sold this idea to around 125 other CEOs and very wealthy people. They’ve all chipped in a whole bunch of money, millions and millions, perhaps as much as $60 million for the current campaign, to this “Fix the Debt” group. And this Fix the Debt group is the primary proponent in the United States today of austerity. They want to, quote-unquote, “cut our way to progress,” as President Obama suggested, but in reality, it’s cutting the way toward progress for them and cutting the way toward a real hard hit for the average working American and potentially a slowing of the economy that begins with the sequester but does not end there.

Peterson was also a key player behind the Simpson-Bowles Commission, which was established by President Obama.  It was, in fact, President Obama that chose Simpson and Bowles to head the commission.  In other words, it was President Obama that provided these people and their ideas with a platform and legitimacy that is undeserved.  Now we are reaping the consequences—a policy debate in which the wealthy are likely to win and the people are likely to lose regardless of outcome.

See here for more on the Fix the Debt Campaign.

See here for more on Pete Peterson.

See here for a discussion on what sequestration will mean for people’s lives.

There is general agreement that the economy is not growing fast enough to boost employment.  The question: What to do about it?

The response, at all levels of government, seems to be: increase corporate subsidies and lower corporate taxes in hopes that corporations will boost investment and, by extension, employment.  Those who promote this response no doubt reason that corporations must be struggling along with workers and need additional incentives and support to become successful “job-creators.”

The chart below, taken from a Paul Krugman blog post, certainly raises questions about this rationale and response.  It shows trends in corporate profits (in red) and business investment (in blue), both measured as shares of GDP.

As you can see, profits have clearly been trending upwards over time, especially during our current recovery.  At the same time, business investment, although improving, remains historically quite low.  It is hard to see a poor profit performance as the root cause of our slow growth and job creation.

Moreover, banks are sitting on record amounts of money.  The chart below, from the St. Louis Federal Reserve, shows that banks are holding approximately $1.5 trillion in excess reserves.  In the past, excess reserves averaged roughly $20 billion.  In other words, our banks just aren’t motivated to make loans.  And, instead of taxing these excess reserves to encourage loan activity, the Federal Reserve is actually paying the banks interest on their holdings.

Now, as noted above, it would not be fair to say that governments are not actively trying to create jobs.  It is just that they are going about it in the wrong way, the wrong way that is, if their aim is to actually create jobs.

Governments continue to shovel huge subsidies and tax breaks at our major corporations.  This, despite the fact that most studies find little evidence that they help promote investment or employment.  What they do, of course, is enhance corporate profits.  They also force cutbacks in public spending, which does have negative effects on the economy and social welfare.  Ironically, these negative effects then cause corporations to shy away from investing.

The New York Times recently ran a good series on state and local tax deals and subsidies written by Louise Story.  She wrote:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid. . . .

A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.

Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors.

These subsidies can dominate state budgets.  The Times reports that they were equal to approximately one-third the budgets of Oklahoma and West Virginia and almost one-fifth of the budget of Maine.

Here in Oregon, we continue to struggle with budget shortfalls.  And, fearful of losing corporate investment, the state legislature is doing what it can to keep corporate costs down.  In December 2012, Governor John Kitzhaber called the state legislature into special session to pass a bill specially designed to help Nike.

Nike had privately told the Governor that it planned to spend at least $150 million in an expansion which it claimed would create at least 500 jobs over a five year span.  If the state wanted that expansion and those jobs to be in Oregon, it had to reassure the company that its current favorable tax treatment would remain unchanged far into the future.

Although state legislators were not pleased to be presented with a major tax bill with little if any time to study its terms, they passed it.  The new bill guarantees Nike that the state of Oregon will not change how it calculates the company’s state taxes for the next 30 years, regardless of any future changes in the state’s tax policy.  More specifically, it gives the Governor power to offer such a deal to any major company that plans to invest at least $150 million and create at least 500 jobs over a five year span.  It just so happened that Nike is the only company, at least for the moment, receiving this benefit.

To appreciate what is at stake in this deal a little background on how Oregon taxes multi-state corporations like Nike is helpful.  Prior to 1991, Oregon taxed Nike using a formula that considered the state’s share of Nike’s total property, payroll, and sales, with each weighted equally.  In 1991, Oregon double weighted the sales component.  This greatly reduced Nike’s state tax bill, since while its property and payroll are concentrated in Oregon, only a small share of its sales are made in the state.

Then in 2001, Oregon began introducing a “single-sales factor” formula.  As Michael Leachman of the Oregon Center for Public Policy explains:

Under this formula, only in-state sales relative to all US sales matter in determining how much of a company’s profits are apportioned to and thus taxable by Oregon; it doesn’t matter how much of their property or payroll is based in Oregon. The Legislative Assembly in 2005 cut short the phase-in process and fully phased-in the “single-sales” formula for tax years starting on or after July 1, 2005.

The Oregon Department of Revenue estimates that using the single-sales factor formula instead of the double-weighted sales formula is costing Oregon $77.6 million in the current 2005-07 budget cycle, and will cost another $65.6 million in the upcoming 2007-09 budget cycle. The projected decline in the cost of “single-sales” in the upcoming budget cycle is temporary. It is due primarily to a corporate kicker that will slash corporate tax payments by two-thirds this year. In subsequent budget cycles, the revenue hit from “single-sales” will return to a higher level. . . .

Take Nike, for example. Nike lobbied for the switch to single-sales factor apportionment and it’s easy to see why. At the Oregon Center for Public Policy, we conservatively estimate that Nike’s 2006 tax cut from “single-sales” was over $16 million. Other prominent, profitable firms such as Intel also received a massive tax break from “single-sales.”

As Michael Munk points out:

The governor’s deal is also particularly cynical when at a time of declining public services desperate politicians are dragging out a regressive sales tax out of mothballs and The Oregonian’s “fact checker finds “mostly true” a finding that Oregon’s existing tax breaks (including almost $900B a year in corporate welfare) exceed tax collections.

Of course, this stance towards the needs of Oregonians is nothing new for Nike.  In 2010, Oregonians voted in favor of two measures (66 and 67) which temporarily raised taxes on the very wealthy and corporations.  Phil Knight, the Nike CEO, not only gave $100,000 to the anti-Measures campaign, he also wrote an article published in the Oregonian newspaper in which he said:

Measures 66 and 67 should be labeled Oregon’s Assisted Suicide Law II.

They will allow us to watch a state slowly killing itself.

They are anti-business, anti-success, anti-inspirational, anti-humanitarian, and most ironically, in the long run, they will deprive the state of tax revenue, not increase it.

The current state tax codes are all of those things as well. Measures 66 and 67 just take it up and over the top.

Knight even threatened to leave the state.  He didn’t, but I guess the last laugh is his, now that his company’s tax situation is secure for the next 30 years.

So—what lies ahead—more counterproductive state policies and head scratching about why things are going poorly for working people, or a change in strategy?