Archive for December, 2011
What follows are three charts from the Economic Policy Institute. This one highlights the ratio of unemployed persons to job openings. Although the ratio has fallen since the “end” of the recession, it remains considerably higher than a decade ago. It currently stands at 4 unemployed per job opening.
This one breaks down the data by industry. It reveals that there are problems across the board.
This final one shows that the job crisis is hitting everyone. As the Economic Policy Institute explains: “Those with higher levels of education are leaving (or never entering) the workforce at the same rate as those with just a high school degree.” Only those with less than a high school diploma seem to be experiencing improved employment opportunities.
And the response of many political and business leaders to this dismal situation? Primarily calls for austerity–or better said cuts in social spending. Some economists have even developed a theory of austerity-led growth, arguing that slashing government spending will unleash private investment and job creation.
We have been witnessing a test of this theory in Europe and not surprisingly it hasn’t produced positive results. As the economist Kevin O’Rourke explains: “One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary.”
I am willing to bet that this outcome wasn’t a surprise to most workers.
Here is a short (less than 4 minute) video that illustrates the fact that 53% of our tax dollars, conservatively estimated, go to finance our military.
[youtube] http://www.youtube.com/watch?v=kFeduoDWKj4 [/youtube]
And here is a link to a recent study by Robert Pollin and Heidi Garrett-Peltier on the employment effects of military spending versus alternative domestic spending priorities, in particular investments in clean energy, health care, and education.
The authors first examine the employment effects of spending $1 billion on the military versus spending the same amount on clean energy, health care, education or tax cuts. The chart below shows their results.
Moreover, even though jobs in the military provide the highest levels of compensation, the authors still find that “investments in clean energy, health care and education create a much larger number of jobs across all pay ranges, including mid-range jobs (paying between $32,000 and $64,000) and high paying jobs (paying over $64,000).”
Let’s see if these facts come up in the next Congressional budget debate.
Growing numbers of European countries are running large national budget deficits which their governments are finding increasingly difficult to cover through borrowing. According to the New York Times, “Euro zone governments have to repay more than 1.1 trillion euros, nearly $1.5 trillion, of long- and short-term debt in 2012, with about 519 billion euros, or $695 billion, of Italian, French and German debt maturing in the first half alone.” The Wall Street Journal provides the following national breakdown:
The danger is that some European governments will be unable to secure the funds required to pay their debts. Such defaults would threaten the financial stability of a number of large European banks, which are major holders of government bonds, and eventually the U.S. financial system because of the close ties between many large European and U.S. financial institutions.
At the Brussels meeting, government leaders agreed to raise some $270 billion and give it to the IMF which is supposed to use it provide loans to those governments in need, with its usual austerity conditions attached, of course. The leaders also agreed to speed up the introduction of a new European rescue fund that would do much the same. This determination to impose austerity on European workers stands in sharp contrast to another agreement. According to the New York Times, “The leaders sent an important signal to the bond markets by scrapping a pledge to make private investors absorb losses in any future bailout for a euro nation.”
The leaders rejected what would have been the most useful action—empowering the European Central Bank to directly buy government bonds, much like the Federal Reserve does for the U.S. government.
The leaders did approve two major long term policy initiatives. As the Wall Street Journal explains:
After a marathon session of negotiating that started Thursday and ran until early Friday morning, the leaders emerged with two principal achievements: Euro-zone members who run outsize government deficits will face automatic penalties, and all governments will put balanced-budget procedures of some form in their national laws.
Germany had wanted this limit on government borrowing made part of the EU constitution, thereby giving EU institutions the authority to enforce it. It was unsuccessful in achieving its goal only because of UK opposition; such major changes require unanimous approval on the part of all 27 member countries. As a result, the other 26 leaders have agreed to implement this “fiscal stability compact” by winning approval for it in each of their respective national parliaments.
This fiscal stability compact reflects the continuing belief of European political leaders that the current crisis was caused by runaway government debts and can only be contained through adoption of a balanced budget amendment. This is precisely the argument being made by conservatives in the United States. And it is just as wrong headed in Europe as it is in the United States.
Paul Mason, the economic editor of Newsday put it well, saying:
I can only add at this stage that, by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy. . . .
It has done what the US Republicans would like to do – and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal.
The result, if it works will be stability. It is hard to see how it promotes long-term growth.
Mason is probably overoptimistic that such a policy will even prove able to ensure stability. As for the claim that the current crisis is the result of out-of-control deficits, take a look at the chart below:
As you can see, Spain and Ireland, two of the countries with the biggest debt problems, were actually running strong surpluses before the crisis. On the other hand, Germany was in violation of the Euro zone agreement to keep yearly budget deficits below 3% of GDP from 2001 to 2005. Not surprisingly, once the crisis hit, almost every country was forced into running large deficits. Said differently, in almost all cases, large budget deficits are the result of the crisis not the cause.
In short, pushing austerity will produce a deeper economic downturn, resulting in bigger government deficits and a worsening debt problem. As the economist Kevin O’Rourke explains:
One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.comis predicting declines in eurozone GDP for late 2011 and early 2012. . . .
What is needed to save the eurozone in the medium term is a central bank mandated to target more than just inflation – for example, unemployment, financial stability, and the survival of the single currency. . . . This will require a minimal fiscal union; a full-scale fiscal union would be better still. Yet none of this was on the summit’s agenda.
Europe’s current approach to its crisis is crazy, and one can only hope that few if any national parliaments will endorse it. I suppose there is some reason to be optimistic. As the Wall Street Journal reports:
One particular complication is the bid to make sanctions automatic. It recycles an idea that the euro zone rejected in October 2010. At that time, the European Commission, the bloc’s executive arm, proposed that penalties for violating the fiscal rules be automatically imposed; unless the countries voted affirmatively to block them, they’d stand.
The longstanding rules work the other way around. Penalties are imposed only if countries vote for them. That led to the ignominious spectacle, in 2003, of France and Germany each breaking the deficit ceiling and each voting against condemning the other, killing enforcement efforts.
In the meantime, governments in Europe, much like in the United States, continue to defend the very economic structures and patterns of economic activity that led to the current economic mess while demanding that working people pay the costs. What a nightmare.
Good old Ireland—according to the leaders of France and Germany, things would be a lot better in Europe if all the countries were like Ireland. Their reason: the Irish have generally accepted their austerity “medicine” quietly while workers in other countries (like Greece and Spain) have been in the streets protesting.
The problem with being the “good” country is that while austerity helps ensure that the Irish government is able to make payments to the country’s international investors (especially French and German banks), the Irish people are suffering and their economy is close to sinking back into a new recession. Some deal.
Not so long ago Ireland was known as the Celtic Tiger. Ireland’s recent economic rise, which began in the 1990s, was fueled by multinational corporate investment, much of it from US high-tech firms. As Andy Storey explains:
Ireland, accounting for a mere 1% of Europe’s population, managed to attract 25% of all US greenfield investment into the EU in the early 1990s. US investment in Ireland, at $165 billion, is greater than US investment in Brazil, Russia, India and China combined. Multinationals, the majority of them from the US, account for 70% of Irish exports.
The attraction: Ireland’s extremely low tax rates and tariff-free access to the EU.
Unfortunately for Ireland, the 2001 collapse of the US high-tech bubble meant the end of US investment in the country. Ireland was “saved,” however, by a debt-driven housing boom. Sound familiar?
Irish banks were able to borrow cheaply thanks to the country’s 1999 adoption of the Euro. And with manufacturing in a slump, they aggressively and profitably pushed loans to Irish home buyers and builders. Storey highlights the importance of real estate activity to the Irish economy as follows:
Investment in buildings accounted for 5% of output in 1995 but for over 14% in 2008. By 2006/07, the construction industry was contributing 24% to Irish income (compared to the Western European average of 12%), accounting (directly and indirectly) for 19% of employment (including high levels of migrant labor) and for 18% of tax revenues (property transaction taxes have now collapsed as construction activity has nosedived).
Just like in the United States, this housing boom temporarily masked the fact that the country’s industrial base and public infrastructure was decaying, overall job growth was slowing, and household debt was soaring. When the global crisis hit in 2008, triggered by the collapse of the US housing market, it was the end for Irish growth as well. Irish banks lost access to foreign credit at the same time as their own real estate loans went bad. The Irish financial sector was on the ropes and unable to repay its creditors.
So, what did the Irish government do? In September 2008 it announced that it would guarantee all deposits and payments to foreign creditors. Thus, the people of Ireland found themselves taking on all the debts of the Irish financial sector. Not surprisingly, government debt as a share of GDP greatly increased.
The main beneficiaries of this policy were the country’s foreign lenders, including French and German banks. No wonder the French and German governments view Ireland as a good nation and role model for Europe. This history challenges the notion, widely pushed by the leaders of France and Germany, that the region’s crisis was caused by out-of-control government spending.
Of course, with low tax rates and an economy in recession the Irish government was in no position to pay the private debts it had taken over. The answer, supported by European elites, was austerity. The Irish government slashed spending on public sector projects and workers as well as social programs to free up funds. But even that was not enough. The Irish government had to borrow as well, an action that further increased the country’s national debt.
The foreign creditors got paid, all right. But the austerity only made things worse for Ireland. The cuts drove the economy deeper into recession, again driving down revenue, and forcing the government to seek new loans. However, foreign lenders could see the handwriting on the wall and were unwilling to substantially increase their lending to Ireland. Instead of renouncing or renegotiating the debts, the Irish government went to the IMF and EU for help. It was “rewarded” with a major loan of approximately $90 billion in December 2010, at the cost of yet more austerity involving higher sales taxes and sharply reduced spending on social programs.
And the consequences of this strategy for the Irish people? As the New York Times reports:
“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”
Ireland’s GDP fell by 3.5 percent in 2008, another 7 percent in 2009, and a further 0.4 percent in 2010. The economy grew 1.2 percent the first half of this year but even this weak expansion will likely be short-lived. According to the New York Times:
The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to under 1 percent. It cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.
In fact, the Irish government announced in November that it will be forced to raise taxes and cut spending again in 2012. The reason: despite all its efforts the size of the national debt continues to growth. The budget deficit is projected to hit 10 percent of GDP this year, still sizeable even though down from 32 percent of GDP in 2010. The government fears that without drastic action it will be unable to continue paying its debts.
Perhaps not surprisingly, the Irish people are beginning to say “enough is enough.” The New York Times highlights one indicator of the change:
On a recent frosty night in Dublin, David Johnson, 38, an I.T. consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank. “This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”
The December 3rd Spectacle of Defiance and Hope in Dublin, captured in the video below from Trade Union TV, is another.
The following charts published in the New York Times highlight some of the trends discussed above.
Ireland’s road to debt and austerity is illustrative of the general situation in Europe. Working people are being squeezed to protect profits and ensure the stability of existing economic relations. Significantly, the leaders of France and Germany have just announced their long term plan for ending Europe’s crisis: adoption of tough new limits on government borrowing. Clearly this is a desperate attempt to head off any meaningful challenge to the existing system. At some point, and one hopes sooner rather than later, working people throughout Europe will see through this game, recognize their common interests, and take up the difficult but necessary job of economic restructuring.
Some things just have to be shared.
Chris Moody, writing for Yahoo News, reports that a major theme at the recent Republican Governors Association meeting in Florida was: “How can Republicans do a better job of talking about Occupy Wall Street?”
Apparently Republicans are really worried. Moody quotes Frank Luntz, an influential Republican strategist, as saying:
I’m so scared of this anti-Wall Street effort. I’m frightened to death. They’re having an impact on what the American people think of capitalism.
Not surprisingly, Luntz had advice for those present. The following are his “10 do’s and don’ts” for Republicans:
1. Don’t say ‘capitalism.’
“I’m trying to get that word removed and we’re replacing it with either ‘economic freedom’ or ‘free market,’ ” Luntz said. “The public . . . still prefers capitalism to socialism, but they think capitalism is immoral. And if we’re seen as defenders of quote, Wall Street, end quote, we’ve got a problem.”
2. Don’t say that the government ‘taxes the rich.’ Instead, tell them that the government ‘takes from the rich.’
“If you talk about raising taxes on the rich,” the public responds favorably, Luntz cautioned. But “if you talk about government taking the money from hardworking Americans, the public says no. Taxing, the public will say yes.”
3. Republicans should forget about winning the battle over the ‘middle class.’ Call them ‘hardworking taxpayers.’
“They cannot win if the fight is on hardworking taxpayers. We can say we defend the ‘middle class’ and the public will say, I’m not sure about that. But defending ‘hardworking taxpayers’ and Republicans have the advantage.”
4. Don’t talk about ‘jobs.’ Talk about ‘careers.’
“Everyone in this room talks about ‘jobs,'” Luntz said. “Watch this.”He then asked everyone to raise their hand if they want a “job.” Few hands went up. Then he asked who wants a “career.” Almost every hand was raised.“So why are we talking about jobs?”
5. Don’t say ‘government spending.’ Call it ‘waste.’
“It’s not about ‘government spending.’ It’s about ‘waste.’ That’s what makes people angry.”
6. Don’t ever say you’re willing to ‘compromise.’
“If you talk about ‘compromise,’ they’ll say you’re selling out. Your side doesn’t want you to ‘compromise.’ What you use in that to replace it with is ‘cooperation.’ It means the same thing. But cooperation means you stick to your principles but still get the job done. Compromise says that you’re selling out those principles.”
7. The three most important words you can say to an Occupier: ‘I get it.’
“First off, here are three words for you all: ‘I get it.’ . . . ‘I get that you’re angry. I get that you’ve seen inequality. I get that you want to fix the system.”Then, he instructed, offer Republican solutions to the problem.
8. Out: ‘Entrepreneur.’ In: ‘Job creator.’
Use the phrases “small business owners” and “job creators” instead of “entrepreneurs” and “innovators.”
9. Don’t ever ask anyone to ‘sacrifice.’
“There isn’t an American today in November of 2011 who doesn’t think they’ve already sacrificed. If you tell them you want them to ‘sacrifice,’ they’re going to be be pretty angry at you. You talk about how ‘we’re all in this together.’ We either succeed together or we fail together.”
10. Always blame Washington.
Tell them, “You shouldn’t be occupying Wall Street, you should be occupying Washington. You should occupy the White House because it’s the policies over the past few years that have created this problem.”
BONUS: Don’t say ‘bonus!’
Luntz advised that if they give their employees an income boost during the holiday season, they should never refer to it as a “bonus.” “If you give out a bonus at a time of financial hardship, you’re going to make people angry. It’s ‘pay for performance.'”
CLEARLY GOOD THINGS ARE HAPPENING
[youtube] http://www.youtube.com/watch?v=n2-T6ox_tgM [/youtube]