Reports from the Economic Front

A January 22, 2012 New York Times story, The iEconomy: How U.S. Lost Out on iPhone Work, has been getting a lot of coverage.   The article makes clear that Apple and other major multinational corporations have moved production to China not only to take advantage of low wages but also to exploit a labor environment that gives them maximum flexibility. The following quote gives a flavor for what attracts Apple to China: 

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

The article highlights these conditions to make the point that manufacturing is not coming back to the United States because these conditions cannot be replicated in the United States. 

One aspect not stressed in the article is that many of the labor policies described are actually against the law in China and contrary to Apple’s own claims about its labor standards.  See William K. Black’s analysis here.

If you are interested in a more detailed picture of just what goes into making Apple products so profitable you should listen to or read the transcript of a This American Life radio segment which aired in January.  The segment is based on a Mike Daisey performance in front of a small audience.  Mike is a self proclaimed technology geek who just adores Apple products.  At least that was before he visited the Foxconn (Taiwanese multinational corporation owned) factory located in China in which many Apple products are assembled.  The program discusses the labor conditions at Foxconn and other similar multinational corporations operating in China.

These multinational corporations have helped make China the world’s top exporter of manufacturers, both overall and of high technology goods more specifically.  China’s share of world exports of information and communication technology products (such as computers and office machines; and telecom, audio and video equipment) has grown from 3 percent in 1992 to 24 percent 2006, and its share of electrical goods (such as semiconductors) from 4 percent to 21 percent over the same period.  Of course, while these exports are officially recorded as Chinese exports, approximately 60 percent of all Chinese exports and 85 percent of all Chinese high technology exports are produced by foreign companies operating in China.

The issue here isn’t one of China stealing manufacturing jobs from the United States or other developed countries.  According to the U.S. Bureau of Labor Statistics, total manufacturing employment in China actually fell by over 9 million over the period 1994-2006, from 120.8 million to 111.61 million.  Total urban manufacturing employment, which would include most foreign operations, declined sharply from 54.92 million to 33.52 million. 

In fact, China’s growth has generated few decent employment opportunities for urban workers, regardless of their employment sector.  The International Labor Organization did an extensive study of urban employment over the period 1990 to 2002.  Although total urban employment increased slightly, almost all the growth was in irregular employment, meaning casual-wage or self-employment—typically in construction, cleaning and maintenance of premises, retail trade, street vending, repair services, or domestic services.  More specifically, while total urban employment over this thirteen-year period grew by 81.7 million, 80 million of that growth was in irregular employment.  As a result, irregular workers in China now comprise the largest single urban employment category. 

The issue here isn’t even one of China versus the United States.  It also isn’t one of dictatorship versus democracy.  Rather it is one of capitalism’s logic.  Said simply, large multinational corporations and their allies in both the United States and China have successfully created a global system of production and consumption that gives them maximum freedom of operation.  It is this logic that keeps pushing more free trade agreements, attempts to create more flexible labor markets, and more attractive conditions for business investment, both here and in China.   And it is this logic that needs to be challenged on both sides of the Pacific. 

The deficit commission failed to produce a plan to cut deficit spending by $1.2 trillion over the next ten years.  According to the ground rules of the agreement that created the commission, its failure is supposed to trigger approximately $1 trillion in “automatic” spending cuts that will go into effect beginning January 2013. 

The agreement included the following stipulations for guiding the automatic cuts:

• Approximately 50% of the required reduction is to come from the so-called security budget (national security operations and military costs).  
  

•  Approximately 32% is to come from non-defense discretionary programs (health, education, drug enforcement, national parks and other agencies and programs).  

• About 12% is come from Medicare (reduced payments to Medicare providers and plans).   

• The rest is to come mostly from agricultural programs.  

To be clear, these are reductions to be made in projected budget lines.  In other words, the cuts to the security budget will not produce an actual decline in security spending, only a slowdown in the projected increase previously agreed to by Congress. 

As previously discussed the failure of the commission is a good thing.  The commission was actively considering structural changes to a number of key social programs.  One was to change the formula for calculating social security payments so as to reduce them.  Another was to raise the age at which people could access Medicare. The automatic cuts, if enacted, will reduce spending on important programs, but at least they do not include steps towards their dismantling.  In fact, Social Security and Medicaid are exempt.

The next stage of the budget battle has been joined.  Political forces are maneuvering to change the formula for the automatic cuts mandated by the budget agreement.  In fact, this maneuvering began weeks before the commission formally announced its failure to agree on a deficit cutting plan.  According to a November 5, 2011 New York Times report:  

Several members of Congress, especially Republicans on the House and Senate Armed Services Committees, are readying legislation that would undo the automatic across-the-board cuts totaling nearly $500 billion for military programs, or exchange them for cuts in other areas of the federal budget.

We need to enter this budget battle with our own plan.  That plan must include blocking further cuts to non-defense discretionary programs and Medicare.  It is worth recalling that the agreement that established the deficit commission already included approximately $1 trillion in cuts to non-defense discretionary programs.

It is the security budget that we need to focus on.  And we need to be clear that our aim in demanding cuts to that budget, as well as tax increases on the wealthy and corporations, is to help generate funds to support an aggressive federal program of economic restructuring not deficit reduction.

The table below makes clear just how important it is to target the security budget.  It shows the pattern of  federal spending on discretionary programs, defense and non-defense, over the years 2001 to 2010.  The big winner was the Department of Defense, which captured 64.6% of the total increase in discretionary spending over those years.  It was still the big winner, at 36.9%, even if one subtracts out war costs.   

While the defense gains are staggering, they do not include spending increases enjoyed by other key budget areas dedicated to the military.  For example, many costs associated with our nuclear weapons program are contained in the Energy Department budget.  Many military activities are financed out of the NASA budget.  And then there is Homeland Security, Veteran Affairs, and International Assistance Programs.  It would not be a stretch to conclude that more than 75% of the increase in spending on discretionary programs over the period 2001 to 2010 went to support militarism and repression.  No wonder our social programs and public infrastructure has been starved for funds.

There is no way we can hope to reshape our economy without taking on our government’s militaristic foreign and domestic policy aims and the budget priorities that underpin them.  

The Congressional deficit commission (also known as the super-committee), which is charged which recommending ways to reduce the national deficit by some $1.2 trillion over the next ten years, appears headed for failure.  And that is a good thing.  

The commission has until Monday, November 21, to submit a plan to the Congressional Budget Office for evaluation.  The plan must then go to the full Congress for an up-or-down vote no later than Wednesday November 23.  Anything can happen but the reports suggest that the six Republicans and six Democrats remain deeply divided, with the Republicans demanding that deficit reduction be achieved only through spending cuts and the Democrats demanding that tax increases be a part of the plan.

The History of the Deficit Commission

The deficit commission was established in August as part of the deal that secured an increase in the national debt ceiling, giving the Treasury authority to borrow enough money to cover approved expenditures through fiscal 2012.  Republicans and Democrats both agreed that projected future deficits had to be reduced but then, as now, the Republicans wanted to achieve that goal only through spending cuts while the Democrats wanted some tax increases in addition to the spending cuts.  

In order to win Republican support for an increase in the debt ceiling and avert a federal default a compromise was struck.  The two parties agreed to reduce spending by some $1 trillion, with 35% of the spending reduction coming from security related budgets (military and homeland security) and the rest coming from non-security discretionary budgets (infrastructure, clean energy, research, education, as well as programs that help low income people with child care, housing, community service, etc.).  The compromise also included the creation of the deficit commission, which was given the charge of recommending ways to reduce future deficits by an additional $1.2-1.5 trillion.  

What made the commission especially dangerous is that both Republicans and Democrats agreed that the committee would be free to consider a full range of options, including permanent changes to Social Security, Medicare and Medicaid programs.  In fact, Democrats made clear that they would support cuts in those programs if Republicans would only accept some tax increases on the wealthy and corporations. 

If the commission failed to agree on a plan, which required only majority support, Congress would have until January 15 to approve its own plan.  And if they failed, automatic spending cuts would be triggered, with approximately half of the reduction coming from security budgets and the other half from non-security discretionary budgets.  Significantly, the automatic budget cuts would not take effect until fiscal 2013, meaning not until after the next presidential election.

A False Crisis

The premise underlying the creation of the super-committee is that federal spending is out of control, especially on social programs, and that if real deficit reduction is not achieved we face economic chaos.  More recently some supporters of deficit reduction point to European government debt problems as an omen of what awaits us if we don’t act quickly and decisively. 

The fact of the matter is that social spending is not driving our deficit and debt problems.  The primary drivers are our military spending, including our wars in Iraq and Afghanistan; the Bush-era tax cuts; and our economic crisis.  If we truly want to stabilize our national finances we need to halt our wars, raise taxes on the wealthy and corporations, and engage in serious public spending to generate equitable and sustainable economic growth.

 Moreover, there is no reason to believe that we are facing a debt crisis.  The ratio of public debt to GDP is predicted to remain comfortably below the 100% level for at least a decade, the level that some experts claim marks the danger zone.  The U.S. government has no trouble borrowing money to fund its operations.  Actually, investors throughout the world want U.S. Treasures because of their safety.  Moreover, as Paul Krugman points out, even high debt ratios are not automatically dangerous if countries are able to borrow in their own currency, which is the situation for the U.S. government:  

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

Why “Failure” Is A Good Thing

Our biggest danger is not runaway debt but austerity.  And that brings us back to the deficit commission.   

Nothing good can possibly come out of the work of the deficit commission.  If an agreement is reached it will include proposals to reduce the deficit through significant spending cuts and as a consequence we can expect two bad outcomes.  First, the cuts will weaken our economic recovery, and a weaker economic recovery will worsen the budget deficit, triggering demands for further spending reductions.  Second, the cuts will include damaging changes to our social programs, including Social Security and Medicare, which will be hard to undue.  And there is no need to weaken either program.  In fact, there are many reasons for increasing Social Security payments and expanding Medicare.

If the deficit commission fails to agree on a plan, we can be reasonably sure that Congress will do no better, and the automatic cuts will be triggered.  But, these automatic cuts will have only limited effect on our social programs.  For example, Social Security cannot be touched.  Most importantly they will not take place for over a year, giving us time to demand new policies. 

In short, we must resist the media’s attempt to panic us into rooting for a bad deal.  We don’t face any budgetary crisis.  The collapse of the deficit commission is our best possible outcome given the current political environment.  The occupy movement is beginning to influence our national dialogue and that means growing power to change our choices. 

Our demands must remain focused on economic transformation.  We need more and better directed government spending, spending that doesn’t just support our existing economic structure but is designed to reshape existing patterns of employment, production, and investment.  And that spending needs to be financed by slashing our military budget, changing our foreign policy, and boosting taxes on the wealthy and corporations.  Someday maybe we can have a super-committee that will be charged with recommending the best way to accomplish those goals. 

Agreement on Technical Barriers to Trade (TBT)—what could that be you ask?  It is one of the many agreements enforced by the World Trade Organization (WTO).    

The WTO is said to be concerned only with the promotion of free trade for our collective benefit.  And, according to the WTO, the TBT was negotiated to achieve that very aim. In the words of the WTO:

Technical regulations and product standards may vary from country to country. Having many different regulations and standards makes life difficult for producers and exporters. If regulations are set arbitrarily, they could be used as an excuse for protectionism. The Agreement on Technical Barriers to Trade tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles, while also providing members with the right to implement measures to achieve legitimate policy objectives, such as the protection of human health and safety, or the environment.

Sounds reasonable—well, the United States just lost two cases this past September in which foreign governments charged the United States with violating that agreement.

First case: a WTO panel ruled in Mexico’s favor against U.S. measures designed to protect dolphins.  The United States allows tuna fishers that use dolphin-safe nets to label their tuna sold in the U.S with a dolphin-safe label.  According to Mexico, this unfairly discriminates against those fishers that want to use different methods of production.  The WTO agreed—the U.S. was being an unfair trader.  No more labels.  

Second case: a WTO panel ruled against U.S. measures designed to reduce teenage smoking.  Among other things, the U.S. measures banned the sale of many flavored cigarettes–in particular clove cigarettes–which were seen as likely to hook young smokers.  Indonesia is a major producer and exporter to the United States of clove cigarettes and it argued that the U.S. ban discriminated against its products.  The WTO agreed—the U.S. was being an unfair trader.   

It also looks likely that a WTO panel will find against U.S. consumer labeling laws that allow country of origin labeling for beef.  If consumers knew where their beef came from it might influence their purchasing decisions.  That could have a negative effect on sales of imported beef.  

Free trade in the eyes of the WTO means maximum freedom for corporations to produce and sell products as they want.  Said differently, it means a world in which governments are forbidden to take steps to protect the environment or the health of its citizens if doing so interferes with private profit making. 

This is just one agreement.  The WTO presides over many more that are equally, if not more, scandalous.  You will be hard pressed to read about these decisions in the press.  The reason: it might encourage people to question the free trade agreements with Korea, Colombia, and Panama that the U.S. government is promoting, since they also include TBTs.  My recently published analysis of the U.S.-Korea Free Trade Agreement can be read here.

Children are our most important resource.  Everyone says it, but we don’t really mean it.  Exhibit one: the percentage of children under the age of 18 that live in poverty. In 2007, at the peak of our previous economic expansion, the child poverty rate was 18 percent.  In 2009, it hit 20 percent.  The figure below provides a look at child poverty rates in each state.  New Hampshire has the lowest rate–11 percent.  Mississippi has the highest rate–31 percent.

Children under the age of 18 are counted as poor if they live in families with income below U.S. poverty thresholds.  There are a range of poverty thresholds which are based on family size and number of children.  The thresholds are adjusted yearly using the change in the average annual Consumer Price Index for All Urban Consumers (CPI-U).  These poverty thresholds are far from generous.  The 2009 poverty threshold for a family of two adults and two children was $21,756.  Poverty thresholds for 2010 have not yet been published.   

Congress has finally agreed on a deficit reduction plan that President Obama supports.  As a result, the debt ceiling is being lifted, which means that the Treasury can once again borrow to meet its financial obligations. 

Avoiding a debt default is a good thing.  However, the agreement is bad and even more importantly the debate itself has reinforced understandings of our economy that are destructive of majority interests.

The media presented the deficit reduction negotiations as a battle between two opposing sides.  President Obama, who wanted to achieve deficit reduction through a combination of public spending cuts and tax increases, anchored one side.  The House Republicans, who would only accept spending cuts, anchored the other.  We were encouraged to cheer for the side that we thought best represented our interests. 

Unfortunately, there was actually little difference between the two sides in terms of the way they engaged and debated the relevant issues. Both sides agreed that we face a major debt crisis.  Both sides agreed that out-of-control social programs are the main driver of our deficit and debt problems.  And both sides agreed that the less government involvement in the economy the better.

The unanimity is especially striking since all three positions are wrong.  We do not face a major debt crisis, social spending is not driving our deficits and debt, and we need more active government intervention in the economy not less to solve our economic problems.

Before discussing these issues it is important to highlight the broad terms of the deficit reduction agreement. The first step is limited to spending cuts. More specifically, discretionary spending is to be reduced by $900 billion over the next ten years.  Approximately 35% of the reduction will come from security related budgets (military and homeland security), with the rest coming from non-security discretionary budgets (infrastructure, clean energy, research, education, as well as programs that help low income people with child care, housing, community service etc.).  In exchange for these budget cuts the Congress has agreed to raise the debt ceiling by $1 trillion. 

The agreement also established a 12 person committee (with 6 Democrats and 6 Republicans) to recommend ways to reduce future deficits by another $1.2-1.5 trillion.  Its recommendations must be made by November 23, 2011 and they can include cuts to every social program (including Social Security, Medicare and Medicaid), as well as tax increases.    

Congress has to vote on the committee’s package of recommendations by December 23, 2011, up or down.  If Congress approves them they will be implemented.  If Congress does not approve them, automatic cuts of $1.2 trillion will be made; 50% of the cuts must come from security budgets and the other 50% must come from non-security discretionary budgets and Medicare.  Regardless of how Congress votes on the recommendations, it must also vote on whether to approve a Balanced Budget Amendment to the Constitution.  Once this vote is taken, the debt ceiling will be raised again by an amount slightly smaller than the deficit reduction.  

Check out the following flowchart from the New York Times if you want a more complete picture of the process.  If you are content with the above summary skip to the text below the flowchart for some analysis.

Many commentators, trying to explain why President Obama embraced an agreement so heavily weighted towards spending cuts (potentially including cuts in Social Security benefits), claim that he was outmaneuvered by Republicans.  In reality, President Obama has long supported deficit reduction along the lines of this agreement. 

As early as March 2009, his staff told David Brooks, a columnist for the New York Times, that the President was “extremely committed to entitlement reform and is plotting politically feasible ways to reduce Social Security as well as health spending.”  In fact, according to Brooks:  

The White House has produced a chart showing nondefense discretionary spending as a share of GDP.  That’s spending for education, welfare, and all the stuff that Democrats love.  Since 1985, this spending as hovered around 3.7% of GDP. . . . The White House claims that it is going to reduce this spending to 3.1%, lower than at any time in any recent Republican administration.  I was invited to hang this chart on my wall and judge them by how well they meet these targets.

The White House Fact Sheet issued to explain why the President supports the recently negotiated deficit reduction agreement reveals the consistency in Obama’s position.  It notes favorably that this agreement “puts us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.”

Those who favor reducing spending on government programs generally argue that we have no choice because our public spending and national debt are out of control, threatening our economic future.  But, the data says otherwise.   

The chart below, from the economist Menzie Chinn at Econbrowser, shows the movement in the ratio of publically held debt to GDP over the period 1970 to 2011; the area in yellow marks the Obama administration. While this ratio has indeed grown rapidly, it remains well below the 100% level that most economists take to be the warning level.  In fact, according to Congressional Budget Office predictions, we are unlikely to reach such a level for decades even if we maintain our current spending and revenue patterns.

The sharp growth in the ratio over the last few years strongly suggests that our current high deficits are largely due to recent developments, in particular the 2001 and 2003 Bush tax cuts, the wars in Iraq and Afghanistan, and the Great Recession. Their contribution can be seen in the chart below from the New York Times.

The effects of the tax cuts and economic crisis on our deficits (and by extension debt) are especially visible in the following chart (again from Menzie Chinn), which plots yearly changes in federal spending and federal revenue as a percentage of GDP (the shaded areas mark periods of recession).   As we can see, the recent deficit explosion was initially driven more by declining revenues than out of control spending.  Attempts to close the budget gap solely or even primarily through spending cuts, especially of social programs, is bound to fail.

Tragically, the debate over how best to reduce the deficit has encouraged people to blame social spending for our large deficits and those large deficits for our current economic problems.  As a result, demands for real structural change in the way our economy operates are largely dismissed as irrelevant.

Recent economic data should be focusing our attention on the dangers of a new recession.  According to the Commerce Department our economy grew at an annual rate of just 1.3% in second quarter of this year, following a first quarter in which the economy grew by only 0.3%.  These are incredibly slow rates of growth for an economy recovering from a major recession.  To put these numbers in perspective, Dean Baker notes that we need growth of over 2.5% to keep our already high unemployment rate from growing.

Cutting spending during a period of economic stagnation, especially on infrastructure, research, and social programs, is a recipe for greater hardship.  In fact, such a policy will likely further weaken our economy, leading to greater deficits.  This is what happened in the UK, Ireland, and Greece—countries with weak economies that tried to solve their deficit problems by slashing public spending.

We need more active government intervention, which means more spending to redirect and restructure the economy; a new, more progressive tax structure; and a major change in our foreign policy, if we are going to solve our economic problems.  Unfortunately for now we don’t have a movement powerful enough to ensure our side has a player in the struggles that set our political agenda. 

On May 6, 2011, I spoke at the First Unitarian Church in Portland along with Chuck Collins (from the Institute for Policy Studies) as part of a program sponsored by the church’s Real Wealth of Portland group.  We both addressed the following theme: “Economic Insecurity Continues…and Communities Respond.”   

Chuck talked about a very important initiative: Common Security Clubs.  The First Unitarian Church has sponsored similar clubs for approximately one year.  

The Challenges Ahead

Third, meaningful solutions will require building a movement that challenges our current reliance on profit driven market outcomes.  This movement has to be built by organizing strong social and community institutions, ones that give people the chance to develop in common a correct understanding of the causes of our problems and the organizational weight and confidence to promote the needed transformation of our economy.

Structural Crisis

The National Bureau of Economic Research, the official designator of recessions and expansions, declared that our economy went into recession in December 2007 and that this recession ended and an expansion began in June 2009.  In other words we have been in an expansion for almost two years.  Normally, the deeper the recession, the stronger the recovery.  However, as I am sure you are aware, the recession was very deep and to this point the recovery has been extremely weak.

The federal government has poured trillions of dollars into the economy to end the recession and boost the recovery.  The government’s great accomplishment has been a strong recovery of profits.  In fact, total domestic corporate profits are now about as high as they were in 2006 before the start of the crisis, and financial profits as a share of total profits are pushing 35%, which is close to the pre-crisis high of 40%.

But beyond this restoration of corporate profitability, and the recovery of finance as our leading economic sector, little has happened to generate sustained and beneficial growth for the great majority of us.  For example, total bank excess reserves averaged around $10 billion a year in the decades prior to the crisis.  Now they are pushing $1.4 trillion.  The banks are just holding this money.  One reason is that since October 2008 the Federal Reserve Board is paying them interest on those reserves.  Similarly non-financial corporations now have the highest ratio of cash to assets in post-war history; they are not using that money to invest in new plant and equipment.

What this means is that our leading financial and non-financial corporations have plenty of money, but see no privately profitable productive investment opportunities.  At the same time, they are in no hurry to pursue policy changes because despite the slow recovery they are doing quite well.  Thus, as things stand, there is little reason to believe that this government supported expansion will be long lasting or beneficial for working people. 

I cannot emphasize enough the fact that we are in an expansion; these are the good times—the period of recovery, when our income is supposed to go up, when unemployment is supposed to significantly decline, when we have money to rebuild our infrastructure, fund our health care and other social programs, and build a solid collective nest egg to cover the hard times which will of course come.  The fact that this is not happening—that we continue to struggle during this period of economic expansion—is indicative of the fact that our economic system as presently structured is not one we can count on; in other words it is a flawed system. 

With this perspective, you can see why the small increases in employment and production that are cheered by policy makers mean little—of course we are going to see some increases.  But for how long and with what effect?  Given the lack of corporate interest in investment or lending I think that there is little reason to be optimistic.  And now, there is even an increasingly strong movement to slash government spending.  Those who support that policy claim that we just have to put the collapse of the bubble economy behind us, tighten our fiscal belts, and let market forces return our economy to normal—but what is normal?

Let us consider the previous economic expansion.  That expansion lasted from 2001 to 2007.  If we compare it to the nine other post-war expansions, it ranks dead last in terms of the growth in GDP, investment, employment, wage and salary income, and compensation.  It ranks highly in only one category—and that was the growth in profits.  In fact, median household income actually fell over this period of economic expansion.  And it is important to recall that this expansion was long lasting only because it was supported by a debt-driven housing bubble.  We no longer have that bubble to support growth.  Therefore, the new normal appears to be ever weaker growth and deteriorating living and working conditions for the great majority of us.  I don’t find that to be acceptable. 

Class Struggle

Significantly, more and more people are arguing that our current problems are caused by government deficits that are too big, taxes that are too high, and unions that are too strong,.  They are therefore pushing for a major reduction and privatization of government social programs, tax cuts for the wealthy and corporations, and a weakening of unions, especially those in the public sector. 

This would be a recipe for disaster.  Where these policies have been implemented, in places like Ireland, Greece, and the UK, the result has been only more problems: lower growth, greater deficits, and of course worsening social conditions.  That is not a surprising outcome.  If you have an economy where there is weak domestic demand because banks will not lend and corporations will not invest, workers are deep in debt, unemployment is high, and exports are limited, and then you cut government spending—it should not surprise anyone that things go from bad to worse.

And, it is not like we haven’t tried similar policies here in the United States.  We have been cutting taxes, government programs, and union strength for more than two decades, and we can see the effects—ever weaker growth, greater inequality, and worsening living and working conditions for the great majority.

The fact is that government spending is one of the main reasons that we still have an economic expansion.  Debt fears are being hyped to scare us. 

So, why are there powerful social forces arguing for these policies?  I think there are two main reasons.  The first is to ensure that our anger is not directed at the corporate sector.  When this crisis broke in 2008 people were angry, and they were angry at our corporations.  There were demands for nationalization of the banks and auto industry and calls for greater government intervention in the economy to save homes, employ people, in short, chart a new economic course for the country. 

What happened was quite different.  The president immediately made clear that he was not going to interfere with market processes—in finance, in auto production, in the housing market, in health care, or in job creation.  Rather he did all he could to bail out those corporations that were in trouble because of their own reckless pursuit of profit.  And his efforts succeeded.  Profits are back up and finance continues to dominate.  Unfortunately for us, those efforts did little to address our needs. 

I think that the corporate sector is getting nervous.  They are fearful that their large profits in the face of our deteriorating social conditions might lead to a renewal of demands for social change.  And lets be clear—any significant social change is going to require a significant change in government policy.  For example, strengthening our economy will require an end to free trade agreements; rebuilding our infrastructure; a new green industrial policy directed at retrofitting our buildings, developing solar and wind power and mass transit; and a shrinking and redirection of finance.  Rebuilding our communities will require new labor laws to support unionization and higher minimum wages; support for education, health care, and transportation rather than military activity; and an increase in taxes on corporations and the wealthy to help pay for many of the needed initiatives. 

This is not what the corporate sector wants.  Therefore, they are trying to steer us in a different direction—to encourage us to believe that the reason our economy is not doing better is that our government deficits are too great and workers have too much power.  It is ironic.  We have government deficits not because of runaway social programs but because the government had to bail out the private sector.  It was this spending that kept us out of depression and enriched our corporations.  And now the leading lights of the private sector are trying to convince us that the main cause of our slow growth is this very same deficit spending.  So, the first reason for this anti-government offensive is to keep us from focusing on corporate behavior and the contradictions of market processes by encouraging us to blame the government and unions for our problems. 

The second reason is that the push for marginalizing government programs will likely open up new private profit making opportunities for our large corporations.  For example, the privatization of our military, our education system, our health care system, our retirement and social insurance systems all mean public dollars flowing into private coffers.  And as a bonus corporations would likely get new tax breaks.

To state the obvious: corporations are defending policies that help them make profits at majority expense.  I think the best way to grasp this reality is to focus on General Electric.  GE is not only one of our nation’s largest corporation, its head, Jeffrey Immelt, was picked by President Obama to head his President’s Council on Jobs and Competitiveness.  President Obama said he picked him because “He understands what it takes for America to compete in the global economy.”

That may be true, but what is GE’s competitiveness strategy? 

First, it is to avoid taxes. GE reported worldwide profits of $14.2 billion in 2010, including $5.1 billion from its operations in the United States.  Yet, it paid no US taxes; in fact it claimed a tax benefit of $3.2 billion.

It accomplished this through a very aggressive working of our tax policy. Here is what the New York Times said:

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

Second, it is to shift operations from production to finance.  According to the New York Times:

General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 percent of revenue, while lending accounts for more than 30 percent. . . . Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines.

Third, it is to move its operations and profits outside the US.  Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment.  Over that same period G.E.’s accumulated offshore profits have risen from $15 billion to $92 billion.

GE is far from unique in employing this strategy.  For example, the Wall Street Journal reports that U.S. MNCs cut their work forces in the United States by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.

So, we are in a battle over the nature and direction of our economy.  Successive governments, in response to corporate demands, have worked to promote more mobility for corporations, lower taxes for corporations, and the growing power of finance—all at our expense.  And despite our current economic problems, our government continues to push for more of the same.  In sum, while we might be experiencing a crisis caused by capitalism it is not a crisis for capitalism.

Movement Building 

So, what shall we do?  In fact, we are not short of ideas.  We have all sorts of progressive policy suggestions.  The problem is that those with power are not interested in our suggestions.  This means that we need to organize if we are to succeed in making a real change.  Here are a few of my suggestions about next steps.

First, we need to make sure that people understand the structural nature of the problems we face.  We have to make sure that unions, neighborhood associations, and places of worship become venues where people can talk, learn, develop their understandings and most importantly connections. 

Second, we need to build alliances around critical demands—changes in government priorities, for example, such as cutting military spending in favor of social programs, raising taxes on the wealthy and corporations, and defending Medicare and Social Security.  These alliances shouldn’t be hard to build.

Third, we need to be creative in who and how we organize.  We need organizations where people can produce themselves more fully as actors.  In the 1930s, for example, we had councils of the unemployed.  They fought for greater government spending, unemployment insurance, and in support of unionization for workers with jobs.  Now, we have large numbers of homeless and hungry.  We need to do more that take food to food banks—we need to help the hungry and homeless organize themselves into powerful social movements. 

We also need to help students, for example, see that their likely future of job insecurity, low wages, and lack of health care can be changed if they join with others, including unions, and health care advocates, and perhaps their parents, to demand a change in the direction of the economy.  And we need our unions to recognize that many of our young workers will be moving from job to job, and company to company, in temporary positions, which means that unions will have to develop new forms of organization.   

Fourth, we need to focus our attention on the public sector.  I think that one of our key challenges is to develop new coalitions between public sector unions and those who use public services.  While I believe that we need to fight against spending cuts for important programs I also know that our existing programs are far from perfect.  Moreover, just maintaining the same level of spending is not the same as transforming our economy.  We need more accountable and responsive public programs and I think the key to that, to the democratizing of the state, is a community-public sector worker alliance.

For example, imagine if those that cared about the environment; worker rights; an end to militarization; and gay, lesbian, transgender rights could engage public school teachers who were responsive to these views and collectively develop curriculum that advanced those views, thereby producing young people able and eager to contribute to making a better society.  And also imagine that in return, those in the community committed to working to ensure good funding for schools and political protection and decent salaries for our teachers.  We would not only help to improve the school system but also develop a new and positive understanding of the benefits of public services.  The same process can be encouraged around transportation by finding ways to bring bus riders and bus drivers together.  The same for social workers and their clients.  You get the idea.  Public sector workers could become our defenders—blowing the whistle if our money is not being property spent and helping us find ways to play a meaningful role in determining the actual nature and delivery of the services we want and pay for. 

We really have little choice but to help build resistance to current political tendencies and shape more positive visions.  There are very few of us that can avoid the consequences of failure.

Understandably, jobs, or the lack of them, is a big topic of conversation.  But, times are hard even for those with jobs.  Simply put, more and more working people are finding it increasingly difficult to make ends meet.

Thanks to a study commissioned by the non-profit group Wider Opportunities for Women, we now have a new set of income standards that are far more useful than the poverty line or minimum wage for gauging how well working people are faring.  The authors of the study created “thresholds for economic stability.”  In other words they actually estimated how much different households needed to secure a minimum but meaningful standard of living, one that included some savings for retirement and emergencies.   A summary of their work is highlighted in the table below.

As the New York Times explains:

According to the report, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour.

A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.

That compares with the national poverty level of $22,050 for a family of four. The most recent data from the Census Bureau found that 14.3 percent of Americans were living below the poverty line in 2009. 

To develop its thresholds, the authors of the study used a variety of public data.  For example:

For housing, which along with utilities is usually a family’s largest expense, the authors came up with “a decent standard of shelter which is accessible to those with limited income” by averaging data from the Department of Housing and Urban Developmentthat identified a monthly cost equivalent for rent at the fortieth percentile among all rents paid in each metropolitan area across the country.

They chose a “low cost” food plan from the nutritional guidelines of the Department of Agriculture, and calculated commuting costs “assuming the ownership of a small sedan.” For health care, they calculated expenses for workers both with and without employer-based benefits.

Given that the poverty lines fall far short of the thresholds established by the report, and these thresholds are themselves bare-bones, there can be little doubt that the actual U.S. poverty rate far exceeds the official estimate of 14.3 percent.     

Faced with this reality, the current moves to cut social programs and break unions seems down right criminal. 

The struggles in Madison have understandably focused attention on the wages and working conditions of public sector workers.  Thankfully, it appears that these struggles have helped to promote greater solidarity between public and private sector workers.  Now, we must build on this new solidarity to focus our collective energies on the bigger challenge: transforming a system that demands that workers (in both the public and private sector) accept ever worsening living and working conditions.

As many involved in the Wisconsin struggles have pointed out, there is plenty of wealth being produced—the problem is that those who are doing the producing are being increasingly denied access to it, both collectively and individually.  For example, as the Economic Policy Institute points out:

U.S. productivity grew by 62.5% from 1989 to 2010, far more than real hourly wages for both private-sector and state/local government workers, which grew 12% in the same period. Real hourly compensation grew a bit more (20.5% for state/local workers and 17.9% for private-sector workers) but still lagged far behind productivity growth.

The chart below highlights this development.  As one can see, the real issue isnt whether public sector workers make more or less than private sector workers (and the chart covers compensation which includes pay and benefits).  Rather it is that workers together have been increasingly productive but receving an increasingly smaller share of the fruits of their labor.    Those who are well place to benefit, those at the very top of the income scale, have of course done quite well.  For example, the richest 1% received 56% of all the income growth between 1989 and 2007 (before the start of the recession).  By contrast the bottom 90% got only 16%.

If we want to change this we are going to have to build a powerful political movement, one that is prepared to take on the powerful interests that are determined to keep spending on the military; privatizing our educational, health, and retirement systems; promoting corporate mobility; weakening labor laws; and confusing us all about the causes of existing trends.  

The times are definitely getting interesting and increasingly hopeful.  Many people are even starting to make comparisons between the struggles in Egypt and those in Wisconsin, Ohio, and Indiana. 

Egyptian workers are offering their support to U.S. workers.   Some Egyptians are even sending pizza’s to those demonstrating in Madison.    By the way, if you want to do the same, you can call Ian’s Pizza at 608-257-9248. It has shut down its regular operations and is only doing protest deliveries.  It reports orders from 45 states and 12 countries. 

Representative Paul Ryan, in a revealing comment on Wisconsin events, said “It’s like Cairo has moved to Madison.”  Gives you a good sense how those on the right view popular movements for democracy.

The events in Wisconsin were triggered by Republican Governor Scott Walker, who hoped his bill to strip all Wisconsin public sector workers of their union rights would launch a broader rightwing offensive against public sector unions everywhere, much as Ronald Reagan’s 1981 attack on PATCO (the air-traffic controllers union) was the opening salvo in a major (and successful) offensive against unions in general.

Walker sought to hide the true meaning of his effort by arguing that he was only working to balance the budget.  The Wisconsin state budget is in fact out of balance; the state faces a deficit of some $3.6 billion over the next two years.  But Walker is not only proposing that public sector workers greatly increase their contributions for health care and pensions, he is also proposing changes that would end the ability of the unions to collect dues and engage in collective bargaining over non-wage issues.  Moreover, the amount the State would collect from his proposed budgetary changes amount to no more than $300 million over the next two years, nowhere near what is needed to close the deficit.  Significantly, Wisconsin public sector workers have even communicated their willingness to accept the higher health care and pension costs if the Governor would drop his attempt to destroy their unions—and the Governor has refused.

Missing from the discussion of the budget deficit are the following points made by Joshua Holland in his article, “12 Things You Need to Know About the Uprising in Wisconsin“: 

At the beginning of this year, the state was on course to end 2011 with a budget surplus of $120 million. As Ezra Klein explained, newly elected GOP Governor Scott Walker then ” signed two business tax breaks and a conservative health-care policy experiment that lowers overall tax revenues (among other things). The new legislation was not offset, and it turned a surplus into a deficit.” Walker then used the deficit he’d created as the justification for assaulting his state’s public employees.

Wisconsin’s public workers have already “made sacrifices to help balance the budget, through 16 unpaid furlough days and no pay increases the past two years,” according to the Associated Press.

There are already 13 states that restrict public workers’ bargaining rights and it hasn’t helped their bottom lines.  As Ed Kilgore notes, “eight non-collective-bargaining states face larger budget shortfalls than either Wisconsin or Ohio,” and ” three of the 13 non-collective bargaining states are among the eleven states facing budget shortfalls at or above 20%.”
 
Health-care costs, rather than workers’ greed, are what has driven up the price of employees’ benefits. But generally speaking, those public sector health-care costs have grown at a slower clip than in the private sector.
 
Last year, more working people belonged to a union in the public sector (7.9 million) than in the private (7.4 million), despite the fact that corporate America employs five times the number of wage-earners.  37 percent of government workers belong to a union, compared with just 7 percent of private-sector employees.
 
Whether in the public or private sector, union workers earn, on average, 20 percent more than their non-unionized counterparts. They also have richer retirement and health benefits — the “union compensation premium” rises to almost 30 percent when you include those bennies. That workers can still negotiate from a position of strength somewhere in the U.S. is simply unacceptable to the right, and that’s what this is about.

Public sector workers have, on average, more experience and higher levels of education than their counterparts in the private sector (they are twice as likely to have a college degree). When you adjust for those factors, they make, on average, 4 percent less than their private-sector counterparts. Like any group of workers with a high union density, they have better benefits, on average. But even including those benefits, state and local employees still make less in total compensation than they would doing the same work in the private sector.

Of course, the main cause of state budget deficits is the economic crisis, which drove down tax revenues at the same time it caused an increase in the demand for services.   But it is precisely the causes of the economic crisis—the policies of deregulation, liberalization, and privatization—that those in power don’t want to discuss.  

In reality, the anti-union policy proposals of governments in Wisconsin and the other states have very little to do with budget issues–they are driven by the quest for power—the power to promote a vision of the economy.  Right now corporate forces have power and they are eagerly using it to pursue changes that will further strengthen their ability to generate profits at the public expense.  Weakening unions, especially public sector unions, is clearly a key part of their strategy.  That is why shortly after Walker proposed his legislation, governors and legislatures in other states quickly followed with similar bills. 

The New York Times captures the moment this way:

To gaze upon the world of American corporations is to see a sunny place of terrific profits and princely bonuses. American businesses reported that third-quarter profits in 2010 rose at an annual rate of $1.659 trillion, the steepest annual surge since officials began tracking such matters 60 years ago. It was the seventh consecutive quarter in which corporate profits climbed.

Staring at such balance sheets, you might almost forget that much of the nation lives under slate-gray fiscal skies, a place of 9.4 percent unemployment and record levels of foreclosures and indebtedness.

And as John Stewart correctly notes—the corporations want to permanently remake the American economy and they are pressing their advantage to force U.S. workers into doing the work for them. 

One can only hope that what is happening in Wisconsin is the start of a new American labor movement.  We desperately need one, and better now than latter.