Archive for the ‘Housing’ Category
China is widely celebrated as an economic success story. And it is as far as GDP, investment, and export growth is concerned. However, as we know well from our experience in the United States, such economic indicators often reveal little about the reality of people’s lives. In China workers are subject to intense working conditions with a disproportionate share of the benefits of production going to a top few. For example, as Bloomberg News notes:
The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.
The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.
The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption.
“It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Liberthal, director of the John L. Thornton China Center at Washtington’s Brookings Institution. “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”
Growing numbers of Chinese workers and farmers have been engaged in workplace and community struggles in opposition to corporate and government policies, especially those designed to intensify the privatization, deregulation, and liberalization of the Chinese economy. The number and determination of participants in these struggles has forced business and government leaders on the defensive.
Recently, the People’s Daily ran an editorial calling for renewed commitment to “reform” in an attempt to shore up support for the government’s neoliberal policies. The editorial appears to have triggered growing discussions and debates on and off the internet among academics and activists about alternatives.
One concrete outcome from these discussions and debates is a 16 point proposal which was developed collectively and recently published on the Red China website; it has gained significant support. The following is an English translation of the proposal by the China Study Club at University of Massachusetts, Amherst. Reading it provides a window into political developments in China and also highlights the similarity of struggles in China and the United States.
A SIXTEEN-POINT PROPOSAL ON CHINA’S REFORM
1. That the personal and family wealth of all officials be publicized and their source clarified, and all “naked bureaucrats” be expelled from the Party and the government. (“Naked bureaucrats” refer to those officials whose family lives in developed countries and whose assets have been transferred abroad, leaving nothing but him/herself in China.)
2. That the National Congress concretely exercises its legislative and monitory function, comprehensively review the economic policies implemented by the state council, and defend our national economic security.
3. That the existing pension plans be consolidated and retirees be treated equally regardless of sector and rank.
4. That elementary and secondary education be provided free of charge throughout the country; compensation for rural teachers be substantially raised and educational resources be allocated on equal terms across urban and rural areas; and the state assume the responsibility of raising and educating vagrant youth.
5. That the charges of higher education be lowered, and public higher education gradually become fully public-funded and free of charge.
6. That the proportion of state expenditure on education be increased to and beyond international average level.
7. That the price and charge of basic and critical medicines and medical services be managed by the state in an open and planned manner; the price of all medical services and medicines should be determined and enforced by the state in view of social demand and actual cost of production.
8. That heavy progressive real estate taxes be levied on owners of two or more residential housings, so as to alleviate severe financial inequality and improve housing availability.
9. That a nation-wide anti-corruption online platform be established, where all PRC citizens may file report or grievance on corruption or abuse instances; the state should investigate in openly accountable manner and promptly publicized the result.
10. That the state of national resources and environmental security be comprehensively assessed, exports of rare, strategic minerals be immediately cut down and soon stopped, and reserve of various strategic materials be established.
11. That we pursue a self-reliant approach to economic development; any policy that serves foreign capitalists at the cost of the interest of Chinese working class should be abolished.
12. That labor laws be concretely implemented, sweatshops be thoroughly investigated; enterprises with arrears of wage, illegal use of labor, or detrimental working condition should be closed down if they fail to meet legal requirements even after lawfully limited term for self-correction.
13. That the coal industry be nationalized across the board, all coal mine workers receive the same level of compensation as state-owned enterprise mine workers do, and enjoy paid vacation and state-funded medical service.
14. That the personal and family wealth of managerial personnel in state-owned enterprises be publicized; the compensation of such personnel should be determined by the corresponding level of people’s congress.
15. That all governmental overhead expenses be restricted; purchase of automobile with state funds be restricted; all unnecessary traveling in the name of “research abroad” be suspended.
16. That the losses of public assets during the “reforms” be thoroughly traced, responsible personnel be investigated, and those guilty of stealing public properties be apprehended and openly tried.
Sadly, despite predictions of a housing recovery, housing prices are still heading downward, at least according to the well respected S&P Case-Shiller Index. The most recent data, which takes the index through November, shows price declines of 1.3 percent for both the 10- and 20-City Composites in November over October. The two Composites posted annual returns of -3.6% and -3.7% versus November 2010, respectively (see chart below).
The following chart looks at actual home values rather than their yearly price change. As of November 2011, average home prices across the United States were back to where they were in mid-2003. Measured from their June/July 2006 peaks through November 2011, the peak-to-current decline for both the 10-City Composite and 20-City Composite was -32.9%.
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 Federal Reserve Bank recently released 1,197 pages of transcripts of its 2006 closed door meetings. As the Wall Street Journal comments: “The transcripts paint the most detailed picture yet of how top officials at the central bank didn’t anticipate the storm about to hit the U.S. economy and the global financial system.”
Federal Reserve officials suspected that housing prices were peaking (see chart below). But since they didn’t believe that prices had been driven up by a well entrenched bubble, they were not very concerned that they were coming down.
The Financial Times described the general Federal Reserve stance as follows:
Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment but expected that to offset strength elsewhere in the economy, leading to continued growth overall.
“Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.” . . . .
Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy. “As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years — and doing so is unavoidable if we want to correct the sector,” said Thomas Hoenig, then president of the Kansas City Fed, at the September 2006 meeting of the FOMC.
The transcripts show that the Federal Reserve was so confident that the economy was on solid footing that many officials were, according to the Wall Street Journal:
offering praise for outgoing Fed Chairman Alan Greenspan, who attended his final Fed meeting in January 2006. Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.” . . . .
The transcripts also suggest that Fed officials misgauged the potential for housing problems to spill over into the broader economy.
“Our recent financial-market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward,” Mr. Geithner said at a meeting in December 2006.
So how did the best and the brightest get it so wrong. Perhaps the major reason is because it served their interests to pretend there was no housing bubble. The recovery from our 2001 recession was driven by consumption and that consumption was supported directly and indirectly by the housing bubble. In other words stopping the bubble would have revealed the weakness in our economy and the need for serious structural change. It was far easier and more lucrative for those at the top to just let the bubble go on expanding and pretend that it didn’t exist.
The following chart from the New York Times puts the movement in housing prices highlighted above into a longer term perspective, revealing just how strong speculative pressures were in the housing market.
As Dean Baker, one of the very few economists to warn about the dangers of the bubble, explains:
First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.
By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.
This was a huge problem – because this bubble was driving the economy. It drove the economy directly by creating a boom in residential housing construction. We were building housing at near record pace in the years 2002-2006. This was in spite of the fact that we had an ageing population and record levels of vacancies at the start of that period.
The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than US $8tn in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.
In reality, a lot of the consumer spending driving growth was financed by home refinancing, which helped many housholds compensate for stagnant wages and weak job creation at the cost of a sharp rise in debt. As a Wall Street Journal blog post pointed out, “From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.”
As we now know only too well, the collapse of the housing bubble reverberated through the economy, including the financial sector, triggering the Great Recession. Tragically, many of the “best and brightest” remain in leadership positions today, still arguing for the soundness of economic fundamentals.
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.
An April 2011 Gallup poll found that 29% of Americans thought that the U.S. economy was in a depression. Another 26% thought it was only a recession. This is scary since according to the National Bureau of Economic Research we have been in an economic expansion since June 2009.
Why would so many Americans feel this way you might ask. Here is one reason. According to recent Census Bureau data, during the recession, which lasted from December 2007 to June 2009, inflation-adjusted median household income fell by 3.2%. Between June 2009 and June 2011, a period of economic expansion, inflation-adjusted median household income fell by 6.7%. This decline is illustrated in the New York Times chart below.
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I recently appeared on the Alliance for Democracy’s “Populist Dialogue” TV show to talk about our economic crisis and possible responses to it. You can watch the show here or below.
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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.
Sadly our poverty rates understate the seriousness of our poverty problem, for children and adults. The history of how we developed and calculate our official poverty thresholds provides perhaps the clearest proof of the inadequacy of current statistics. In broad brush, the Johnson administration, having announced a war on poverty in January 1964, needed a measure of poverty. In response, its newly created Office of Economic Opportunity [OEO] introduced the first poverty thresholds in 1965.
These thresholds were largely based on previous work of the Department of Agriculture [DOA]. The DOA had developed four low-cost weekly food plans, the least generous called the “economy plan.” That plan was designed for “temporary or emergency use when funds are low.” It had no allowance for eating outside the home. The Department had also determined, based on surveys, that families of three or more persons spent approximately one-third of their after-tax income on food. The OEO took the cost of the economy food plan for families of different sizes and multiplied the total by 52 to get a series of yearly food budgets. Then, it multiplied those food budgets by three to generate a series of poverty thresholds.
From 1966 to 1969, these poverty thresholds were adjusted annually by the yearly change in the cost of the food items contained in the economy food plan. After 1969 the poverty thresholds were simply adjusted by the rise in the consumer price index.
This methodology has produced a poverty standard that is deficient in several ways. First, it does not acknowledge that our knowledge of nutrition has significantly changed since 1965. Second, it does not acknowledge that most families now spend approximately one-fifth of their after-tax income on food, not one-third. That correction alone would mean that the food budget should be multiplied by 5 rather than 3, thereby producing higher thresholds and poverty rates. Third, it does not acknowledge that poverty is best thought of as a relative condition.
The National Academy of Sciences Panel on Poverty and Family Assistance has played a leading role in developing one of the most promising alternative poverty measures. A 2008 Bureau of Labor Statistics Working Paper refine and extend the Panel’s experimental methodology and use it to calculate poverty thresholds and estimates for the period 1996 to 2005.
The authors of the Working Paper start with a reference family, two adults and two children, the most common family unit in the United States. Then, using Consumer Expenditure Surveys, they calculate the dollar amount of spending on food, clothing, shelter, utilities and medical care by all reference families in a given year.
The poverty threshold for the reference family is set, following the work of the Panel, at the midpoint between the 30th and 35th percentile of the spending distribution for all families with two adults and two children. Small multipliers are then used to add spending estimates for other needs, such as transportation and personal care, slightly raising the poverty threshold. This threshold is adjusted to generate thresholds for families of other sizes and compositions.
Poverty rates are determined by comparing family resources with these poverty thresholds. In contrast to current poverty calculations which rely on pre-tax incomes (even though official thresholds are based on the share of after-tax income spent on food), the authors of the Working Paper define family resources as the sum of after-tax money income from all sources plus the value of near-money benefits (such as food stamps) that help the family meet its spending needs.
The chart below shows national poverty rates for the years 1996 to 2005. We see that the rates produced by this experimental methodology are significantly higher than the official rates. Strikingly, while the official 2005 poverty rate is lower than the 1996 official poverty rate, the 2005 experimental poverty rate is the highest in the period.
Returning to the issue of child poverty, the table below highlights the difference between the two measures for specific demographic groups over the same period. Notice that the child poverty rate calculated using the experimental measure is always higher than the official rate. As previously stated, the official 2009 child poverty rate is 20 percent. The experimental rate would no doubt be several percentage points higher, closing in on 25 percent.
What can one say about a situation where between one-fifth and one-fourth of all children in the United States live in poverty? And all signs point to a higher rate for 2010. Words like outrageous, unacceptable, an indicator of a flawed economic system all come to mind. What also comes to mind is the fact these poverty statistics rarely get the attention they deserve. So does the question of why that is so.
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.
The United Kingdom faces many of the same problems we do. And the British government has decided to respond to these problems with many of the same policies promoted by our own conservative political leaders: slash public spending and cut public sector jobs and wages. In fact, the British plan calls for six consecutive years of spending cuts. As Paul Krugman explains:
Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.
Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.
The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.
But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.
Both the new British budget announced on Wednesday [October 20, 2010] and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.
The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.
Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative. . . .
What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.
Well, not surprisingly, the outcome of this austerity plan has been further economic decline. As the chart below shows, the UK economy actually fell back into recession the last three months of 2010, suffering a 0.5% contraction.
Despite that outcome, the government, according to the BBC, remains committed to its austerity policy:
The Chancellor, George Osborne, said the numbers were disappointing.
But he added the government would not be “blown off course” from its austerity program.
The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.
The BBC’s economics editor Stephanie Flanders said people were right to worry about where the UK’s growth would come from in 2011, especially as higher-than-expected inflation had dealt a further blow to household budgets.
Michael Roberts provides the following update and summary of economic trends:
The UK economy is struggling to recover from the Great Recession of 2008-9. While profitability has recovered, British big business is still refusing to invest. In Q1’11, UK gross fixed investment slumped by 4.4% compared with Q4’10, while household consumption fell 0.6%. Most significant, business investment excluding property fell 7.1% (manufacturing investment fell 1.1%). It prefers to heap up the cash, invest abroad or speculate in stock markets rather than invest in expanding production or employment in the UK. And while that continues British households on average will continue to suffer significant losses in living standards.
Household spending is set to experience the slowest pick-up of any post-recession period since 1830, according to a survey of economists. British consumers will spending barely more by 2015 than they were before the financial crisis in 2008. In the UK’s 18 major recessions since records began in 1830, Bank of England data show consumer spending on average recovered to 12% above its previous peak within seven years. But forecasts by the UK’s Office for Budget Responsibility put spending in 2015 at just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period. After recessions in the early 1980s and 1990s, spending was 20% and 15% higher respectively.
That household spending will be so laboured is not surprising as the average British household faces the biggest drop in income for 30 years. Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels. The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits. But IFS analysis suggests the long-term effects of the recession and higher inflation will soon squeeze incomes. Lower wage increases and the corrosive effect of rising inflation mean that it is “entirely possible” that income this year will return to levels of six years ago. Even the Bank of England warned that UK households faced a significant cut in their spending power as inflation heads towards a 5% annual rate.
So, one thing we can learn from studying the UK is not to adopt conservative budget policies. Another is that there are alternatives to the other established policy option, which is to just keep spending and hoping for a magical revival of economic fortunes.
To find solutions to the climate crisis and the recession, we need more public spending, the opposite of current government policy. We have people who need jobs and work that needs to be done. A million climate jobs in the UK will not solve all the economy’s problems. But it will take a million human beings off the dole and put them to work saving the future.
Their plan is careful to distinguish between climate jobs (which reduce greenhouse gases) and green jobs (which can mean almost anything). More specifically it calls for the creation of a million, new public sector jobs and a National Climate Service to employ them, highlights the kind of work that should be done, and presents a plan for financing it that does not rely on increasing the federal deficit.
In the words of the alliance:
We mean a million new jobs, not ones people are already doing. We don’t want to add up existing and new jobs and say that now we have a million climate jobs. We don’t mean jobs with a climate label, or a climate aspect. We don’t want old jobs with new names, or ones with ‘sustainable’ inserted into the job title. And we don’t mean ‘carbon finance’ jobs.
We mean new jobs now. We want the government to start employing 83,300 workers a month in climate jobs. Then, within twelve months, we will have created a million jobs.
We mean government jobs. This is a new idea. Up to now government policy under both Labour and Conservatives has been to use subsidies and tax breaks to encourage private industry to invest in renewable energy. The traditional approach is to encourage the market. That’s much too slow and inefficient. We want something more like the way the government used to run the National Health Service. In effect, the government sets up a National Climate Service (NCS) and employs staff to do the work that needs to be done. Government policy has also been to give people grants and loans to insulate and refit their houses. Instead, we want to send teams of construction workers to renovate everyone’s home, street by street. And we want the government to construct wind farms, build railways, and put buses on the streets.
Direct government employment means secure, flexible, permanent jobs. Workers with new climate jobs won’t always keep doing the same thing, but they will be retrained as new kinds of work are needed.
I strongly recommend reading their plan.
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.
What follows is the talk I gave:
The Challenges Ahead
I want to begin by summarizing my three main points—
First, our economic problems are serious and structural, and a long time in the making. They did not start with the 2007 collapse of the housing bubble, which means that we should not assume that so called “normal market forces” will eventually return us to an acceptable economic state. In other words, without major structural changes in the way our economy works we face a future of stagnation with ever worsening conditions for growing numbers of people.
Second, business and political leaders are not committed to making any serious changes in our economic structure. That is not because they are stupid. Rather it reflects a real class interest in maintaining the status quo. It is not that they are unaware of or unconcerned with our current social problems but rather that they view the cost of making necessary changes to our economy as too high.
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.
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.
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.
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.