Archive for April, 2012
Paul Krugman, a leading proponent of the deficit spending side, puts it like this:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. . . .
The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
There is no doubt that the European experience has put those supporting austerity on the defensive. As the New York Times explains:
Britain has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far. Britain is now in its second recession in three years. . . .
In a packed British Parliament, Prime Minister David Cameron had to defend his austerity drive against critics like Ed Miliband, head of the opposition Labour Party, who called the economic numbers “catastrophic.”
The raucous scene was the latest manifestation of growing popular frustration with the strict fiscal diet that has been prescribed by the European Central Bank and German leaders in response to the euro zone’s sovereign debt crisis. While Britain is not a member of the euro zone, its economic fortunes are closely linked with those of the currency union.
The discontent was on view in French elections last weekend and played a role in the collapse of the Dutch government on Monday. Greece, Spain and Italy have been the scene of mass demonstrations for months, but the turmoil now seems to be spreading to countries that were not seen as being at the heart of the crisis. Britain joined Belgium, the Czech Republic, Greece, Italy, the Netherlands and Spain in recession.
Of course, as Krugman notes, that doesn’t mean that the austerity defenders have given up. Here is the solution to the crisis put forward by Mr. Draghi, head of the European Central Bank, as reported by the New York Times:
He urged national leaders to take steps to promote long-term growth even when it is politically difficult. Some leaders have raised taxes or cut infrastructure projects, when instead they should be reducing government operating expenses, Mr. Draghi said.
Tragically, those in Mr. Draghi’s camp continue to blame Europe’s crisis on too much government spending when its roots lie far more in the collapse of speculative bubbles driven by private financial interests and German austerity policies. Of course, this understanding would require taking a critical stance against dominant capitalist interests; far easier to make the working class pay.
However, we should also be careful about assuming that the bankruptcy of the austerity strategy proves the wisdom of relying on deficit spending to solve our economic problems. The fact of the matter is that spending to stimulate growth will not solve our problems. The reason is that existing economic structures operate to generate what the United Nations Development Program has called “savage growth.” Savage growth refers to a growth process that enriches the few at the expense of the many. In other words, a process that is neither desirable nor sustainable. Therefore, unless we change the nature of our economy, deficit spending will just temporarily postpone the start of a new crisis.
Here are two charts from an Economic Policy Institute report that highlight the workings of savage growth in the United States. The first shows a sharp divergence, beginning in the mid-1970s, between productivity and hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). In other words, the owners of the means of production have basically stopped sharing gains in output with their workers. This wedge between productivity and compensation helps explain both the growth in inequality and the need for debt to sustain consumption.
The second provides a closer look at post-1973 trends. A key point: median hourly compensation basically stopped growing starting early in the 2000s, even though the economy continued to expand for several more years, and it continues to fall despite the end of the recession.
In sum, if we are serious about improving economic conditions we need to move past the austerity-deficit financing debate and begin pressing for adoption of trade, finance, production, and labor policies that strengthen the position of workers relative to those who own the means of production. Anything short of that just won’t do.
Too big to fail—that was the common explanation voiced at the start of the Great Recession for why the Federal Reserve had no choice but to channel trillions of dollars into the coffers of our leading banks. But, the government also pledged that once the crisis was over it would take steps to make sure we would never face such a situation again.
The chart below shows the growing concentration of bank assets in the hands of the top 3 U.S. banks. The process really took off starting in the late 1990s and never slowed down right up to the crisis. It was the reality of the top three banks controlling over 40 percent of total bank assets that gave meaning to the “too big to fail” fears.
But what has happened since the crisis? According to Bloomberg Businessweek, the largest banks have only gotten bigger:
Five banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs—held more than $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve. That’s up from 43 percent five years earlier.
The Big Five today are about twice as large as they were a decade ago relative to the economy, meaning trouble at a major bank would leave the government with the same Hobson’s choice it faced in 2008: let a big bank collapse and perhaps wreck the entire economy or inflame public ire with a costly bailout. “Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” says Gary Stern, former president of the Federal Reserve Bank of Minneapolis.
Not surprisingly, this kind of economic dominance translates into political power. For example, the U.S. financial sector is leading the charge for new free trade agreements that promote the deregulation and liberalization of financial sectors throughout the world. Such agreements will increase their profits but at the cost of economic stability; a trade-off that they apparently find acceptable.
The recently concluded U.S.-Korea Free Trade Agreement is a case in point. Leading financial firms helped shape the negotiating process. As a consequence, Citigroup’s Laura Lane, corporate co-chair of the U.S.-Korea FTA Business Coalition, was able to declare that the agreement had “the best financial services chapter negotiated in a free trade agreement to date.” Among other things, the chapter restricts the ability of governments to limit the size of foreign financial service firms or covered financial activities. This means that governments would be unable to ensure that financial institutions do not grow “too big to fail” or place limits on speculative activities such as derivative trading. The chapter also outlaws the use of capital controls.
These same firms are now hard at work shaping the Transpacific Partnership FTA, a new agreement with a similar financial service chapter that includes eight other countries. Significantly, although the U.S. Trade Representative has refused to share any details on the various chapters being negotiated with either the public or members of Congress, over 600 representatives from U.S. multinational corporations do have access to the texts, allowing them to steer the negotiations in their favor.
The economy may be failing to create jobs but leading financial firms certainly don’t seem to have any reason to complain.
Whenever people propose increasing taxes on the wealthy to maintain our needed public programs and services it doesn’t take long for someone to raise the following objection: if we do that, the rich will flee, thereby weakening rather than strengthening our (fill in the blank: city, state, or national) economy.
How seriously should we take this threat? Opponents of Oregon Measures 66 and 67, which raised taxes on the wealthy and corporations and were approved by voters in 2010, cited just this danger in campaigning against them. Among those business leaders most upset with the outcome were some of Oregon’s most well known corporate leaders, for example Phil Knight (Nike) and Tim Boyle (Columbia Sportswear). Knight gave some $100,000 to the anti-Measures campaign, Boyle approximately $75,000.
Here is what Knight had to say about Measures 66 and 67 in an article he wrote for the Oregonian newspaper:
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. . . .
Reputable economists forecast 66 and 67 will cost the state thousands — maybe tens of thousands — of jobs, and that thousands of our most successful residents will leave the state.
Well, despite the threats, there is no evidence that the wealthy or jobs fled the state to escape the tax increases. Rather the state got some desperately needed revenue.
Here is another data point, courtesy of the Wall Street Journal, that also suggests we should take this threat of flight with a grain of salt:
According to a new study from Lloyds TSB, nearly one in five affluent Britons plan to leave the country in the next two years. That’s up from 14% a year ago. The study measured those with around $400,000 in investible assets.
Conservatives point out this sudden flight comes on the back of the 50% tax rate that was imposed on top earners during the recession. That hike was widely blamed for U.K. wealth flight and for not raising nearly as much revenue as expected.
But a closer look at the study provides a different picture. The top reason that the study group (it’s a stretch to call them “wealthy”) gave for leaving were crime and “anti-social behavior.” About the same number, however, cited the British weather as the top reason for leaving.
The study really gets interesting when you look at where these affluent folks want to go to. The top destination is high-tax France, where the leading Presidential contender is pushing a 75% tax rate on the wealthy. The second choice is Spain, followed by the U.S., Australia and New Zealand.
When asked what would make the U.K. a better place to live, most cited infrastructure spending. That was followed by “cutting red tape for business.” Cutting taxes got about the same number of votes as “improving public services like healthcare, education and the police.”
In other words, the affluent want more government services not less. And taxes were a relatively minor concern in their decision to move.
Returning to the U.S., it is important to remember that the rich have not only succeeded in capturing an ever greater share of national income, they have also enjoyed steady and disproportionately large cuts in their tax rates (see below). This trend was the result of deliberate policy, which was defended by claims that lower tax rates on the wealthy would deliver robust investment and job creation. It clearly has not worked out that way; in fact quite the opposite has taken place. This seems a very opportune time to reverse the trend.
While the press cheers on every sign of private sector job creation, little attention is being paid to public sector job destruction. As the Economic Policy Institute reports, while there has been an increase of some 2.8 million private sector jobs since June 2009, public sector employment (federal, state, and local governments combined) has actually fallen by approximately 600,000. This is a very unusual development as the figure below reveals.
According to the Economic Policy Institute, if the percentage growth of public sector employment in this recovery had followed past recovery trends, we would have an additional 1.2 million public sector jobs and some 500,000 additional private sector jobs. A separate reason for concern about this trend is that lost public sector jobs generally means a decline in the services that we need to sustain our communities. The withering away of our public sector during a period of expansion should worry us all.