Archive for the ‘Progressive Strategies’ Category
Paul Krugman, a leading proponent of the deficit spending side, puts it like this:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. . . .
The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
There is no doubt that the European experience has put those supporting austerity on the defensive. As the New York Times explains:
Britain has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far. Britain is now in its second recession in three years. . . .
In a packed British Parliament, Prime Minister David Cameron had to defend his austerity drive against critics like Ed Miliband, head of the opposition Labour Party, who called the economic numbers “catastrophic.”
The raucous scene was the latest manifestation of growing popular frustration with the strict fiscal diet that has been prescribed by the European Central Bank and German leaders in response to the euro zone’s sovereign debt crisis. While Britain is not a member of the euro zone, its economic fortunes are closely linked with those of the currency union.
The discontent was on view in French elections last weekend and played a role in the collapse of the Dutch government on Monday. Greece, Spain and Italy have been the scene of mass demonstrations for months, but the turmoil now seems to be spreading to countries that were not seen as being at the heart of the crisis. Britain joined Belgium, the Czech Republic, Greece, Italy, the Netherlands and Spain in recession.
Of course, as Krugman notes, that doesn’t mean that the austerity defenders have given up. Here is the solution to the crisis put forward by Mr. Draghi, head of the European Central Bank, as reported by the New York Times:
He urged national leaders to take steps to promote long-term growth even when it is politically difficult. Some leaders have raised taxes or cut infrastructure projects, when instead they should be reducing government operating expenses, Mr. Draghi said.
Tragically, those in Mr. Draghi’s camp continue to blame Europe’s crisis on too much government spending when its roots lie far more in the collapse of speculative bubbles driven by private financial interests and German austerity policies. Of course, this understanding would require taking a critical stance against dominant capitalist interests; far easier to make the working class pay.
However, we should also be careful about assuming that the bankruptcy of the austerity strategy proves the wisdom of relying on deficit spending to solve our economic problems. The fact of the matter is that spending to stimulate growth will not solve our problems. The reason is that existing economic structures operate to generate what the United Nations Development Program has called “savage growth.” Savage growth refers to a growth process that enriches the few at the expense of the many. In other words, a process that is neither desirable nor sustainable. Therefore, unless we change the nature of our economy, deficit spending will just temporarily postpone the start of a new crisis.
Here are two charts from an Economic Policy Institute report that highlight the workings of savage growth in the United States. The first shows a sharp divergence, beginning in the mid-1970s, between productivity and hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). In other words, the owners of the means of production have basically stopped sharing gains in output with their workers. This wedge between productivity and compensation helps explain both the growth in inequality and the need for debt to sustain consumption.
The second provides a closer look at post-1973 trends. A key point: median hourly compensation basically stopped growing starting early in the 2000s, even though the economy continued to expand for several more years, and it continues to fall despite the end of the recession.
In sum, if we are serious about improving economic conditions we need to move past the austerity-deficit financing debate and begin pressing for adoption of trade, finance, production, and labor policies that strengthen the position of workers relative to those who own the means of production. Anything short of that just won’t do.
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.
The economy has officially been in recovery since June 2009, but it is only wealthy individuals and corporations that are celebrating. For example, real wages fell by almost 2 percent in 2011. At the same time corporate profits hit a record high in the third quarter of 2011. Businessweek explains how corporations continue to enjoy profits in the face of declining wages as follows:
Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services. The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.
“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.” While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.
“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”
In other words, as far as business is concerned, things are pretty good. Economic conditions enable them to suppress wages while tax cuts and social spending ensure sufficient demand. So goes “the recovery.”
Working people increasingly understand that the system is not working for them; their sacrifices are translating into corporate gains, gains sufficiently satisfying to those at the top that business and political leaders have no interest in pursuing change. Here and there successful resistance has taken place. But to this point, popular pressure has not been great enough to really shake business or government leaders out of their complacency.
What will it take? We can learn an important lesson from the recent WikiLeaks publication of over 5 million emails taken from the servers of Stratfor, a so-called intelligence/information company, by Anonymous. As explained by a Yes Men blog post:
The emails, which reveal everything from sinister spy tactics to an insider trading scheme with Goldman Sachs (see below), also include several discussions of the Yes Men and Bhopal activists. (Bhopal activists seek redress for the 1984 Dow Chemical/Union Carbide gas disaster in Bhopal, India, that led to thousands of deaths, injuries in more than half a million people, and lasting environmental damage.)
Many of the Bhopal-related emails, addressed from Stratfor to Dow and Union Carbide public relations directors, reveal concern that, in the lead-up to the 25th anniversary of the Bhopal disaster, the Bhopal issue might be expanded into an effective systemic critique of corporate rule, and speculate at length about why this hasn’t yet happened—providing a fascinating window onto what at least some corporate types fear most from activists.“
[Bhopal activists] have made a slight nod toward expanded activity, but never followed through on it—the idea of ‘other Bhopals’ that were the fault of Dow or others,” mused Joseph de Feo, who is listed in one online source as a “Briefer” for Stratfor.
“Maybe the Yes Men were the pinnacle. They made an argument in their way on their terms—that this is a corporate problem and a part of the a [sic] larger whole,” wrote Kathleen Morson, Stratfor’s Director of Policy Analysis.
“With less than a month to go [until the 25th anniversary], you’d think that the major players—especially Amnesty—would have branched out from Bhopal to make a broader set of issues. I don’t see any evidence of it,” wrote Bart Mongoven, Stratfor’s Vice President, in November 2004. “If they can’t manage to use the 25th anniversary to broaden the issue, they probably won’t be able to.”
Mongoven even speculates on coordination between various activist campaigns that had nothing to do with each other. “The Chevron campaign [in Ecuador] is remarkably similar [to the Dow campaign] in its unrealistic demand. Is it a follow up or an admission that the first thrust failed? Am I missing a node of activity or a major campaign that is to come? Has the Dow campaign been more successful than I think?” It’s almost as if Mongoven assumes the two campaigns were directed from the same central activist headquarters. Just as Wall Street has at times let slip their fear of the Occupy Wall Street movement, these leaks seem to show that corporate power is most afraid of whatever reveals “the larger whole” and “broader issues,” i.e. whatever brings systemic criminal behavior to light. “Systemic critique could lead to policy changes that would challenge corporate power and profits in a really major way,” noted Joseph Huff-Hannon, recently-promoted Director of Policy Analysis for the Yes Lab.
Thus, what those with power really fear is not popular outrage at a particular injustice, or even financial penalties in response to that injustice, but rather that somehow people will come to see an overall pattern of behavior that ties together these injustices, revealing an underlying exploitative class system. Said more plainly, those with power fear that an aware populace will come to understand the need to challenge and transform capitalism. No doubt that is why they fear the Occupy movement. And that is why we need to ensure that our organizing and resistance efforts are conducted in ways that help promote this understanding.
On January 1st, the minimum wage increased in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. These eight states all have laws which require them to automatically increase their respective minimum wages by the rate of inflation. Nevada also indexes its minimum wage but its increase takes place in July.
The state of Washington has the highest state minimum hourly wage at $9.04. Oregon has the second highest at $8.80.
Eighteen states plus the District of Columbia have minimum wages above the federal minimum wage which remains at $7.25 per hour. A full-time worker making the federal minimum wage earns just $15,000 a year.
There are those who argue against state laws requiring an inflation adjustment to the minimum wage. Their most common argument is that such government mandated increases are a threat to business profitability and the health of our capitalist, free-market economy. This is an interesting argument. At one time, the conventional wisdom was that capitalism was a means to an end, the end being a better standard of living. Now it appears that capitalism has become the end itself, and to sustain a healthy capitalism workers will have to make sacrifices.
Actually, those arguing against increasing the minimum wage are really arguing for the necessity of a declining real wage. The minimum wage has not kept up with inflation. This is true even in states that currently index their minimum wage. The reason is that indexing began after years of real wage decline. For example, Oregon’s January 2012 increase to $8.80 from $8.50 still leaves the real inflation-adjusted Oregon minimum wage below what it was in 1976. In 2011 dollars, Oregon’s 1976 minimum wage was $9.09.
The federal government does not automatically index the federal minimum wage and the chart below highlights the extent of the decline in its real value. The blue line shows the actual or nominal dollar value of the federal minimum wage; increases are the result of a vote by Congress. The red line shows the real value of the minimum wage in 2010 dollars. In real terms the federal minimum wage remains considerably below its value in the 1970s.
A second common argument against inflation adjusted increases in the minimum wage is that it is just a training wage for young teens and therefore not important to family survival. This argument misses the mark for several reasons, the most important being that, as the chart below shows, 80% of minimum wage workers in the eight states with mandated increases are over the age of 20, and more than 75% work more than 20 hours per week (just over half work full-time). In fact, according to an Economic Policy Institute study of national data, families with a minimum-wage worker rely on their earnings for nearly half the family income.
Some things just have to be shared.
Chris Moody, writing for Yahoo News, reports that a major theme at the recent Republican Governors Association meeting in Florida was: “How can Republicans do a better job of talking about Occupy Wall Street?”
Apparently Republicans are really worried. Moody quotes Frank Luntz, an influential Republican strategist, as saying:
I’m so scared of this anti-Wall Street effort. I’m frightened to death. They’re having an impact on what the American people think of capitalism.
Not surprisingly, Luntz had advice for those present. The following are his “10 do’s and don’ts” for Republicans:
1. Don’t say ‘capitalism.’
“I’m trying to get that word removed and we’re replacing it with either ‘economic freedom’ or ‘free market,’ ” Luntz said. “The public . . . still prefers capitalism to socialism, but they think capitalism is immoral. And if we’re seen as defenders of quote, Wall Street, end quote, we’ve got a problem.”
2. Don’t say that the government ‘taxes the rich.’ Instead, tell them that the government ‘takes from the rich.’
“If you talk about raising taxes on the rich,” the public responds favorably, Luntz cautioned. But ”if you talk about government taking the money from hardworking Americans, the public says no. Taxing, the public will say yes.”
3. Republicans should forget about winning the battle over the ‘middle class.’ Call them ‘hardworking taxpayers.’
“They cannot win if the fight is on hardworking taxpayers. We can say we defend the ‘middle class’ and the public will say, I’m not sure about that. But defending ‘hardworking taxpayers’ and Republicans have the advantage.”
4. Don’t talk about ‘jobs.’ Talk about ‘careers.’
“Everyone in this room talks about ‘jobs,’” Luntz said. “Watch this.”He then asked everyone to raise their hand if they want a “job.” Few hands went up. Then he asked who wants a “career.” Almost every hand was raised.“So why are we talking about jobs?”
5. Don’t say ‘government spending.’ Call it ‘waste.’
“It’s not about ‘government spending.’ It’s about ‘waste.’ That’s what makes people angry.”
6. Don’t ever say you’re willing to ‘compromise.’
“If you talk about ‘compromise,’ they’ll say you’re selling out. Your side doesn’t want you to ‘compromise.’ What you use in that to replace it with is ‘cooperation.’ It means the same thing. But cooperation means you stick to your principles but still get the job done. Compromise says that you’re selling out those principles.”
7. The three most important words you can say to an Occupier: ‘I get it.’
“First off, here are three words for you all: ‘I get it.’ . . . ‘I get that you’re angry. I get that you’ve seen inequality. I get that you want to fix the system.”Then, he instructed, offer Republican solutions to the problem.
8. Out: ‘Entrepreneur.’ In: ‘Job creator.’
Use the phrases “small business owners” and “job creators” instead of “entrepreneurs” and “innovators.”
9. Don’t ever ask anyone to ‘sacrifice.’
“There isn’t an American today in November of 2011 who doesn’t think they’ve already sacrificed. If you tell them you want them to ‘sacrifice,’ they’re going to be be pretty angry at you. You talk about how ‘we’re all in this together.’ We either succeed together or we fail together.”
10. Always blame Washington.
Tell them, “You shouldn’t be occupying Wall Street, you should be occupying Washington. You should occupy the White House because it’s the policies over the past few years that have created this problem.”
BONUS: Don’t say ‘bonus!’
Luntz advised that if they give their employees an income boost during the holiday season, they should never refer to it as a “bonus.” “If you give out a bonus at a time of financial hardship, you’re going to make people angry. It’s ‘pay for performance.’”
CLEARLY GOOD THINGS ARE HAPPENING
[youtube] http://www.youtube.com/watch?v=n2-T6ox_tgM [/youtube]
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.
. . .
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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A growing number of analysts are taking seriously the possibility that the U.S. economy is heading back into recession. No wonder President Roosevelt’s 1933 first inaugural address is getting heavy internet circulation. Here is a snippet:
Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources. . . .
Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.
These are the lines of attack.
Sadly our government appears to have no interest in directly “recruiting” people and putting them to work meeting the needs of our country. In fact, most Republican and Democratic party leaders refuse to support a substantial fiscal stimulus even if it would be used to encourage private production.
Right now, the only governmental body committed to expansionary policy is the Federal Reserve, the body that determines our country’s monetary policy. However, it appears that the banking sector opposes even that effort and it remains to be seen how successful they will be in getting their way.
Our Federal Reserve System is an odd creation. It was created in 1913 and consists of a seven member Board of Governors and twelve regional federal reserve banks located in different cities throughout the United States.
As the Federal Reserve itself explains:
The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.
Sounds pretty straight forward. The odd part is the system of regional federal reserve banks.
Each regional bank has a president who serves a five year term and may be reappointed. The president is chosen by the bank’s board of directors–and here is where the issue of who gets to sit at the table of power becomes important.
Each regional bank’s board of directors consists of nine members selected from three “classes,” A, B, and C. The three Class A directors are chosen by the private banks operating in the region to represent the interests of the member banks. The three Class B board members are also chosen by the private banks; they are supposed to represent ”the public.” The three Class C board members are chosen by the Board of Governors and are also supposed to represent the public.
In short, private bankers are structurally placed to dominate the selection of the presidents of the twelve regional federal reserve banks, and through them, influence the direction of the country’s monetary policy.
Monetary policy is made by the Federal Reserve Open Market Committee (FOMC). The voting members of the FOMC include the seven members of the Board of Governors and five of the twelve federal reserve presidents (on a rotating basis). Thus, representatives of the banking sector are legally empowered to sit at the table where decisions about monetary policy and our economic future are made.
If you are wondering if this is wise, you are not alone. Barney Frank, Congressman from Massachusetts, has long worried about this. As he said this September:
The Federal Reserve (Fed) regional presidents, 5 of whom vote at all times on the Federal Open Market Committee, are neither elected nor appointed by officials who are themselves elected. Instead, they are part of a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the President and confirmed by the Senate.
For some time this has troubled me from a theoretical democratic standpoint. But several years ago it became clear that their voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve. In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate — specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.
In 2009, I asked staff of the Financial Services Committee to prepare an analysis of FOMC voting patterns. It confirmed two points. First, the great majority of dissents, 90 percent — from FOMC policy before 2010 — came from the regional presidents. Second, the overwhelming majority of those dissents were in the direction of higher interest rates. In fact, vote data confirmed that 97 percent of hawkish dissents came from the regional bank presidents and 80 percent of all dissenting votes in the FOMC over the past decade were from a hawkish stance.
One day before Frank issued his statement, the FOMC voted to modestly lower long term interest rates in an attempt to boost investment. The decision was supported by a 7-3 vote. At present there are only five voting members of the Board of Governors; two seats remain open. As Dean Baker explains:
What was striking about this vote was that all 5 governors voted for this measure obviously feeling that the potential benefits in the form of stronger growth and lower unemployment outweighed any risks of higher inflation. However, 3 of the 5 voting bank presidents opposed the measure, apparently viewing the threat of inflation as being a greater concern than any possible growth and employment dividend.
This raises an obvious question about the interests being represented by the bank presidents. Inflation is especially bad news for banks because it reduces the value of their assets. On the other hand bankers may not be very concerned about unemployment. They have jobs, as is probably the case for most of their friends as well.
It is hard not to wonder whether the bank presidents voting against further steps to spur growth and reduce unemployment were acting in the best interest of the country as a whole or whether they were representing the banks in their districts. If the latter is the case, then it is reasonable to ask why we are giving the banks a direct role in setting the country’s monetary policy. There is no obvious reason that they should have any more voice in determining monetary policy than anyone else.
In April, Barney Frank introduced H.R. 1512, which would eliminate the voting power of the regional bank presidents. This seems like a good step. We might want to go further and restructure the way in which bank presidents are elected; we shouldn’t be relying on bankers to decide who represents the public interest.
The media likes to talk about markets as if they were just a force of nature. In fact, markets and their outcomes are largely shaped by political power. In a capitalist system like ours, that power is largely used to advance the interests of those who own and run our dominant corporations.
Thanks to Bloomberg News we have yet another example of this reality. In brief, as a result of Congressional and media pressure the Federal Reserve was recently forced to reveal its lending activity for the period August 2007 through April 2010. Bloomberg News examined these Federal Reserve records and found that the Fed secretly provided selected banks, brokerage houses, and even non-financial firms (such as General Electric and Ford) with at least $1.2 trillion in loans, often with minimal collateral required and at below market interest rates.
This money was given through more than a dozen lending programs. Many firms tapped multiple programs through multiple subsidiaries. Bloomberg arrived at its total by focusing on the seven largest programs, which included the Fed’s discount window and six temporary lending facilities (the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; the Commercial Paper Funding Facility; the Primary Dealer Credit Facility; the Term Auction Facility; the Term Securities Lending Facility; and so-called single- tranche open market operations.
If you like visuals, here is a 5 minute video that provides a good summary of what Bloomberg gleaned from its examination.
Some of the highlights are as follows:
The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion . . .
Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG, which got $77.2 billion. . . .
The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.
The Federal Reserve fiercely resisted making its records public, arguing that doing so would stigmatize those institutions that received loans. A group of the largest commercial banks actually petitioned the Supreme Court in an unsuccessful effort to keep the loan information secret.
Perhaps one reason that the Federal Reserve and the banks were reluctant to have these records made public is that they raise significant questions of conflict of interest. According to a statement by Vermont Senator Bernie Sanders,
the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.
For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.
In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds. One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.
Another reason may be that the Federal Reserve didn’t want it known that it was deviating from its past practice of requiring borrowers to provide secure collateral, which was normally either Treasuries or corporate bonds with the highest credit rating, and never stocks. For example:
Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.
Moreover, as Bloomberg News also reported, many Fed loans were made at below market interest.
On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.
The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.
These loans were absolutely critical to the survival of our leading companies. A case in point:
Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.
These loans are also a key reason that our post-Great Recession economy remains largely unchanged in structure. In other words, it was the exercise of political power, rather than so-called market dynamics or efficiencies, that explains the financial industry’s continuing profitability and economic dominance.
Now imagine if we had a state that engaged in transparent planning and was committed to using our significant public resources to reshape our economy in the public interest. As we have seen, state planning and intervention in economic activity already goes on. Unfortunately, it happens behind closed doors and for the benefit of a small minority. It doesn’t have to be that way.
The mainstream media works hard to convince us that Republicans and Democrats are locked in heated battle, with each side advocating dramatically different economic policies. Although there are differences between the two sides, members of both parties generally share common ground in opposing any fundamental changes to the workings of our economy.
A recent International Monetary Fund report on the U.S. economy sheds light on why this is so. The report includes the following four color-coded charts which compare economic recoveries (including our current one) according to various criteria.
As you can see from the red boxes in the first chart (the one titled “Real GDP and components”), our last two recoveries have been quite weak compared with previous recoveries in terms of growth in GDP, personal consumption, and investment in nonresidential structures. This indicates a growing problem with our economic fundamentals.
The red boxes in the second chart (“Households and employment”) indicate that our last two recoveries have also not been kind to working people as measured by the growth in nonfarm payrolls, unemployment, and disposable income.
However, things look quite different in the last two charts. The green boxes in the third chart (“Business sector”) make clear that the last two expansions have generally been good for nonfinancial corporations. And the dark green boxes in the fourth chart (“Financial”) highlight the enormous gains made by financial corporations in the last two expansions, and especially the current one.
The take-away from these charts is that business leaders experience our recent recoveries very differently than do the great majority of people. Despite the fact that growing numbers of workers find it hard to distinguish our expansions from our recessions, business profits keep climbing. And that is what matters to business. Not surprisingly, then, our corporate leaders are lobbying our political leaders hard not to change existing economic arrangements. If some austerity is needed to maintain stability–so be it. And, this lobbying has proven successful.
The connection between deteriorating economic and social conditions and high corporate profitability deserves careful study as does the question of whether this is a stable relationship. Regardless, these charts provide important insight into our national policy-making nexus. As long as our large corporations are prospering we should not expect our political process to produce meaningful change. The problem isnt a lack of good ideas for how to strengthen our economy and generate jobs, it is the lack of interest on the part of our elected leaders to seriously consider them. It appears that meaningful economic change will have to await either a further unraveling of our economic and social infrastructure or the rise of a powerful social movement with a new economic vision.
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.