Economic Weapons of Mass Exploitation

Sunday 8 May 2011

by: Ravi Batra, Truthout

(Photo: JMRosenfeld; Edited: Jared Rodriguez / t r u t h o u t)

About eight years ago, there was frenzied and furious talk about WMDs, or weapons of mass destruction. Both the frenzy and the fury came from President George W. Bush and his administration, prior to the US invasion of Iraq in March 2003 and soon thereafter. The president's poll ratings had soared in the aftermath of the quick American victory in Afghanistan, which was the base from which al-Qaeda had launched 9/11. In order to keep his poll numbers up, the president and his officials were in a hurry to invade Iraq and remove Saddam Hussein from power. There was a frenzy of claims that Saddam possessed WMDs including chemical arms and nuclear weapons. But when none were found, the officials were furious that Saddam, so to speak, had deceived them. They were also furious at their critics who wondered aloud if the entire WMD claim was actually a fabrication.

The Iraq invasion turned out to be a colossal mistake in terms of lost lives and heavy expenditures that sharply raised the federal budget deficit. However, few realize that the Bush administration made a far bigger mistake in using what may be called Weapons of Mass Exploitation or WMEs, which have all but decimated the US economy and continue to do so.

A WME is a short-term financial palliative that makes the rich richer but postpones economic troubles, while seeming to cure the problems of unemployment and dwindling family incomes. It tends to create debt in the economy, but most economists call it fiscal policy or monetary policy. Once the term "policy" is used, everybody shuts up and accepts the claims of WMEs' beneficence, believing that a genius must have devised it. However, all it does is to generate more debt in the economy, and let the problems pile up, only to return with greater force in the future. Most nations have deployed it in the past 30 years, but various American administrations have been exceptionally adept in its use.

Let us see how a WME only postpones economic ills and also enriches the rich. I am sure you've all heard of supply and demand, even if you never took a course in economics. Supply and demand are like the two wings of an airplane; both have to be equally strong and weighty, or else the plane will crash.

What is the main source of supply? Productivity. What is the main source of demand? Wages. If you become more productive - through education or the use of better technology - you produce or supply more goods. If your wages rise, then you consume or demand more goods. For the economy to stay healthy, supply must be equal to demand, or:

Supply = Demand

Please don't be alarmed by the use of a simple equation, because it will highlight the role of debt in a visual way and make it easily understandable. If supply is not equal to demand, then, like the airplane with unequal wings, the economy will crash some day. Here, supply refers to the value of goods produced in the entire economy, and demand means total spending or the value of goods consumed in the nation.

It so happens that, because of investment and new technology, productivity and, hence, supply rise year after year. This means that wages and, hence, demand must also rise year after, and in the same proportion. Otherwise, there is an imbalance, and unexpected problems arise. If wages trail productivity growth, supply exceeds demand, leading to overproduction. Businesses are unable to sell all that they produce and layoffs follow. Hence, the only cause of unemployment in an advanced economy is the rise in the gap between what you produce and what your employer pays you.

However, joblessness creates problems not only for the unemployed but also for elected officials, because the unemployed have the right to vote. Politicians seek to face a happy electorate and be re-elected. They don't like unemployment anymore than you or I, which means they have to create ways to raise national spending to the level of supply. They face two choices: either to follow policies to raise your salary proportionately to the level of your productivity - which is only fair and ethical - or to adopt measures to lure you into larger debt, so that you spend more not out of a pay raise, but from increased borrowing.

Luring the public into debt in order to get re-elected, I believe, is crass corruption. It is also corruption because the politician, ever in need of campaign donations, wouldn't dream of offending business interests that are all for low wages. With wages trailing productivity since 1981, elected officials have been following what is known as monetary policy, which tempts people into larger debts. This eliminates unemployment as spending rises to the level of supply, because now,

Supply = Demand + New Consumer Debt

With monetary policy, the Federal Reserve prints more money to bring down the rate of interest, and lower interest rates induce people to increase their borrowing or their debt. However, the wage-productivity gap has been rising so fast that the government also had to raise its own spending and debt constantly, so that total spending matched rising supply. In this case:

Supply = Demand + New Consumer Debt + New Government Debt

Raising government debt to postpone the problem of unemployment is called "fiscal policy." Now you see why our nation is awash in debt at both the consumer and the government level. Elected officials have frequently used debt-creation policies to get re-elected, while creating the impression that they are doing American workers a favor by preserving their jobs. Are they doing you a favor? Absolutely not. Instead, they are simply enriching the rich. Let us see how.

First, job creation occurs through the cooperative action of both producers and consumers. Producers only create supply and, indeed, hire workers, but if their goods remain unsold, they lose money and workers are laid off. Second, joblessness occurs only if your boss doesn't pay you enough to match your productivity. If you work hard and still get fired, then it is the employer's fault, not yours. You are doing your job of being productive on the one hand and creating demand out of your salary on the other. If your demand falls or does not rise enough, then it is because your boss has not given you a raise or has cut your wages. At the macro level, insufficient national demand only means that workers have produced so much for their companies that supply exceeds demand, so that some people have to be laid off. Where then is your fault in this entire process? It is your employer's greed that generates joblessness, not you.

Once the government has generated enough new debt to increase spending to the level of supply, the unemployed are called back to work, usually at lower wages. But the debt increase is large enough to eliminate overproduction even at puny wages. As overproduction vanishes, profits jump. You can see this clearly from the above equation. If your wages and, hence, your demand are constant, then the entire increase in debt goes into the pockets of suppliers. Without this debt growth, employers would have suffered losses due to overproduction; but with the creation of new debt, all their goods are sold, and profits soar, while your salary is either constant or grows very little; it may even fall, if you were laid off and had to find a new job. Thus, if the budget deficit is $1trillion, then corporate profits plus executive bonuses jump by $1 trillion. If the deficit is $2 trillion, then businessmen's incomes rocket by the same amount.

This is exactly what has occurred during the Great Recession that started at the end of 2007. Millions of people were fired because the likes of General Motors, IBM, Microsoft and Goldman Sachs could not sell all they had produced. Then President Bush sharply raised the budget deficit, and the Federal Reserve printed tons of new money to bail out failing businesses. As a result, the economy stabilized in 2009 and began to grow in 2010. However, real wages fell, while profits sky-rocketed. Why? Because, the entire increase in government debt went into the coffers of producers. This is how Goldman Sachs alone could give bonuses of over $20 billion to its executives in 2009, while millions were still being laid off. Consumer debt actually fell, but the government debt rose so much that executives received hefty extra compensation.

Eliminating the Budget Deficit

It should be clear by now that our so-called monetary and fiscal policies are enriching the rich while not doing much for the jobless. What should we do? For the solution, let us take a look at the American economy in the 1950s and the 1960s, the golden decades of high growth and growing prosperity for all. GDP growth averaged over 4 percent as compared to less than 3 percent since 1981, while real wages went up to match rising productivity. The top bracket income tax rate at the time averaged above 80 percent, and corporations paid 25 percent of the total tax revenue or about 5 percent of GDP. The middle class paid low taxes, and there was practically no budget deficit.

Why was GDP growth so high back then? The answer lies in high taxation of wealthy individuals and corporations. Thus, for the 1950s and the 1960s:

Supply = Demand + Near Zero New Debt

Since real wages grew as fast as productivity, new debt was practically zero. People met their needs mostly out of their rising salaries. Demand rose in a natural way to match increasing supply. It may be noted that supply comes primarily from the rich, but demand comes primarily from the poor and the middle class. Since taxes were low on low-income groups, consumer demand grew as fast as salaries; but from 1981 on, thanks to President Reagan and his advisers such as Alan Greenspan, the tax burden was transferred from the rich to everyone else. Income tax rates sank for wealthy individuals and corporations, while most, if not all, other federal taxes jumped. The self-employed small business person, for instance, saw a rise of 66 percent in their tax rate. Taxes also rose on gasoline and tires. The crippling tax burden on lower incomes naturally reduced the growth in demand, so GDP growth (growth in supply or output) fell sharply below that in the 1950s and the 1960s. Even the oil-shocked 1970s produced higher growth of 3.3 percent.

All this suggests that we should move toward the tax structure of the 1950s and 1960s. Today, the top-bracket income tax rate is 35 percent. Suppose we were to raise this rate to 45 percent for annual incomes above $250,000, and to 70 percent for incomes above one million, then the income tax yield would rise from $1 trillion to $1.5 trillion, or by $500 billion. Thus, any dollar earned above $250,000 will be taxed at the rate of 45 percent; similarly, any earned above a million will face a rate of 70 percent, so that average tax rates will be well below the top rates, which will still be below those in the 1960s. For corporations, we could go back to the old rate of 45 percent tax on corporate profits, while eliminating loopholes. We would then collect about 5 percent of GDP or some $750 billion, which would bring in extra revenue of $600 billion. Thus, higher taxes on affluent families and businesses will raise our revenue annually by $1.1 trillion. Slashing defense spending and oil and agricultural subsidies would reduce government spending. This way we can almost eliminate our budget deficit, which is currently running at an annual rate of $1.2 trillion.

Eliminating the Trade Deficit

Eliminating the budget deficit would quickly revive our comatose economy. The first benefit would be felt in the fall of our trade deficit, especially that with China, which has become our foremost lender. America would no longer have to borrow money from anyone, and China would not be able to use its surplus dollars to buy more US government bonds. Such a move would cause a major appreciation in the value of the Chinese yuan, which, in turn, would reduce, possibly eliminate, our trade shortfall with China. Our manufacturing would revive and thousands of new jobs would be created, raising the tax revenue further.

The next step would be to reduce the tax burden on lower incomes by cutting the self-employment tax to 12 percent from the current 15 percent; we could also eliminate the Social Security tax on the minimum wage. Our increased tax revenue would pay for these cuts, which would further raise consumer demand and, hence, GDP growth. Note that the trade deficit is also a WME, because it tends to lower wages, while stuffing the wallets of the CEOs of multinational corporations. Just look at the fat pay checks of such CEOs in the aftermath of our trade with China.

Another WME that our government has systematically used to reduce our living standard is outsourcing; we can impose a stiff tax on this practice and raise even more revenue. This would also enable us to trim the tax burden of low-income groups.

In short, the American economy can be easily fixed if our government would stop using its vast arsenal of WMEs against us. I believe that, in just 12 to 18 months, we can bring the nation back to an unemployment rate of 6 percent, which is close to full employment.

This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.

Weapons of Mass Exploitation

Sunday 8 May 2011

by: Ravi Batra, Truthout

(Photo: JMRosenfeld; Edited: Jared Rodriguez / t r u t h o u t)

About eight years ago, there was frenzied and furious talk about WMDs, or weapons of mass destruction. Both the frenzy and the fury came from President George W. Bush and his administration, prior to the US invasion of Iraq in March 2003 and soon thereafter. The president's poll ratings had soared in the aftermath of the quick American victory in Afghanistan, which was the base from which al-Qaeda had launched 9/11. In order to keep his poll numbers up, the president and his officials were in a hurry to invade Iraq and remove Saddam Hussein from power. There was a frenzy of claims that Saddam possessed WMDs including chemical arms and nuclear weapons. But when none were found, the officials were furious that Saddam, so to speak, had deceived them. They were also furious at their critics who wondered aloud if the entire WMD claim was actually a fabrication.

The Iraq invasion turned out to be a colossal mistake in terms of lost lives and heavy expenditures that sharply raised the federal budget deficit. However, few realize that the Bush administration made a far bigger mistake in using what may be called Weapons of Mass Exploitation or WMEs, which have all but decimated the US economy and continue to do so.

A WME is a short-term financial palliative that makes the rich richer but postpones economic troubles, while seeming to cure the problems of unemployment and dwindling family incomes. It tends to create debt in the economy, but most economists call it fiscal policy or monetary policy. Once the term "policy" is used, everybody shuts up and accepts the claims of WMEs' beneficence, believing that a genius must have devised it. However, all it does is to generate more debt in the economy, and let the problems pile up, only to return with greater force in the future. Most nations have deployed it in the past 30 years, but various American administrations have been exceptionally adept in its use.

Let us see how a WME only postpones economic ills and also enriches the rich. I am sure you've all heard of supply and demand, even if you never took a course in economics. Supply and demand are like the two wings of an airplane; both have to be equally strong and weighty, or else the plane will crash.

What is the main source of supply? Productivity. What is the main source of demand? Wages. If you become more productive - through education or the use of better technology - you produce or supply more goods. If your wages rise, then you consume or demand more goods. For the economy to stay healthy, supply must be equal to demand, or:

Supply = Demand

Please don't be alarmed by the use of a simple equation, because it will highlight the role of debt in a visual way and make it easily understandable. If supply is not equal to demand, then, like the airplane with unequal wings, the economy will crash some day. Here, supply refers to the value of goods produced in the entire economy, and demand means total spending or the value of goods consumed in the nation.

It so happens that, because of investment and new technology, productivity and, hence, supply rise year after year. This means that wages and, hence, demand must also rise year after, and in the same proportion. Otherwise, there is an imbalance, and unexpected problems arise. If wages trail productivity growth, supply exceeds demand, leading to overproduction. Businesses are unable to sell all that they produce and layoffs follow. Hence, the only cause of unemployment in an advanced economy is the rise in the gap between what you produce and what your employer pays you.

However, joblessness creates problems not only for the unemployed but also for elected officials, because the unemployed have the right to vote. Politicians seek to face a happy electorate and be re-elected. They don't like unemployment anymore than you or I, which means they have to create ways to raise national spending to the level of supply. They face two choices: either to follow policies to raise your salary proportionately to the level of your productivity - which is only fair and ethical - or to adopt measures to lure you into larger debt, so that you spend more not out of a pay raise, but from increased borrowing.

Luring the public into debt in order to get re-elected, I believe, is crass corruption. It is also corruption because the politician, ever in need of campaign donations, wouldn't dream of offending business interests that are all for low wages. With wages trailing productivity since 1981, elected officials have been following what is known as monetary policy, which tempts people into larger debts. This eliminates unemployment as spending rises to the level of supply, because now,

Supply = Demand + New Consumer Debt

With monetary policy, the Federal Reserve prints more money to bring down the rate of interest, and lower interest rates induce people to increase their borrowing or their debt. However, the wage-productivity gap has been rising so fast that the government also had to raise its own spending and debt constantly, so that total spending matched rising supply. In this case:

Supply = Demand + New Consumer Debt + New Government Debt

Raising government debt to postpone the problem of unemployment is called "fiscal policy." Now you see why our nation is awash in debt at both the consumer and the government level. Elected officials have frequently used debt-creation policies to get re-elected, while creating the impression that they are doing American workers a favor by preserving their jobs. Are they doing you a favor? Absolutely not. Instead, they are simply enriching the rich. Let us see how.

First, job creation occurs through the cooperative action of both producers and consumers. Producers only create supply and, indeed, hire workers, but if their goods remain unsold, they lose money and workers are laid off. Second, joblessness occurs only if your boss doesn't pay you enough to match your productivity. If you work hard and still get fired, then it is the employer's fault, not yours. You are doing your job of being productive on the one hand and creating demand out of your salary on the other. If your demand falls or does not rise enough, then it is because your boss has not given you a raise or has cut your wages. At the macro level, insufficient national demand only means that workers have produced so much for their companies that supply exceeds demand, so that some people have to be laid off. Where then is your fault in this entire process? It is your employer's greed that generates joblessness, not you.

Once the government has generated enough new debt to increase spending to the level of supply, the unemployed are called back to work, usually at lower wages. But the debt increase is large enough to eliminate overproduction even at puny wages. As overproduction vanishes, profits jump. You can see this clearly from the above equation. If your wages and, hence, your demand are constant, then the entire increase in debt goes into the pockets of suppliers. Without this debt growth, employers would have suffered losses due to overproduction; but with the creation of new debt, all their goods are sold, and profits soar, while your salary is either constant or grows very little; it may even fall, if you were laid off and had to find a new job. Thus, if the budget deficit is $1trillion, then corporate profits plus executive bonuses jump by $1 trillion. If the deficit is $2 trillion, then businessmen's incomes rocket by the same amount.

This is exactly what has occurred during the Great Recession that started at the end of 2007. Millions of people were fired because the likes of General Motors, IBM, Microsoft and Goldman Sachs could not sell all they had produced. Then President Bush sharply raised the budget deficit, and the Federal Reserve printed tons of new money to bail out failing businesses. As a result, the economy stabilized in 2009 and began to grow in 2010. However, real wages fell, while profits sky-rocketed. Why? Because, the entire increase in government debt went into the coffers of producers. This is how Goldman Sachs alone could give bonuses of over $20 billion to its executives in 2009, while millions were still being laid off. Consumer debt actually fell, but the government debt rose so much that executives received hefty extra compensation.

Eliminating the Budget Deficit

It should be clear by now that our so-called monetary and fiscal policies are enriching the rich while not doing much for the jobless. What should we do? For the solution, let us take a look at the American economy in the 1950s and the 1960s, the golden decades of high growth and growing prosperity for all. GDP growth averaged over 4 percent as compared to less than 3 percent since 1981, while real wages went up to match rising productivity. The top bracket income tax rate at the time averaged above 80 percent, and corporations paid 25 percent of the total tax revenue or about 5 percent of GDP. The middle class paid low taxes, and there was practically no budget deficit.

Why was GDP growth so high back then? The answer lies in high taxation of wealthy individuals and corporations. Thus, for the 1950s and the 1960s:

Supply = Demand + Near Zero New Debt

Since real wages grew as fast as productivity, new debt was practically zero. People met their needs mostly out of their rising salaries. Demand rose in a natural way to match increasing supply. It may be noted that supply comes primarily from the rich, but demand comes primarily from the poor and the middle class. Since taxes were low on low-income groups, consumer demand grew as fast as salaries; but from 1981 on, thanks to President Reagan and his advisers such as Alan Greenspan, the tax burden was transferred from the rich to everyone else. Income tax rates sank for wealthy individuals and corporations, while most, if not all, other federal taxes jumped. The self-employed small business person, for instance, saw a rise of 66 percent in their tax rate. Taxes also rose on gasoline and tires. The crippling tax burden on lower incomes naturally reduced the growth in demand, so GDP growth (growth in supply or output) fell sharply below that in the 1950s and the 1960s. Even the oil-shocked 1970s produced higher growth of 3.3 percent.

All this suggests that we should move toward the tax structure of the 1950s and 1960s. Today, the top-bracket income tax rate is 35 percent. Suppose we were to raise this rate to 45 percent for annual incomes above $250,000, and to 70 percent for incomes above one million, then the income tax yield would rise from $1 trillion to $1.5 trillion, or by $500 billion. Thus, any dollar earned above $250,000 will be taxed at the rate of 45 percent; similarly, any earned above a million will face a rate of 70 percent, so that average tax rates will be well below the top rates, which will still be below those in the 1960s. For corporations, we could go back to the old rate of 45 percent tax on corporate profits, while eliminating loopholes. We would then collect about 5 percent of GDP or some $750 billion, which would bring in extra revenue of $600 billion. Thus, higher taxes on affluent families and businesses will raise our revenue annually by $1.1 trillion. Slashing defense spending and oil and agricultural subsidies would reduce government spending. This way we can almost eliminate our budget deficit, which is currently running at an annual rate of $1.2 trillion.

Eliminating the Trade Deficit

Eliminating the budget deficit would quickly revive our comatose economy. The first benefit would be felt in the fall of our trade deficit, especially that with China, which has become our foremost lender. America would no longer have to borrow money from anyone, and China would not be able to use its surplus dollars to buy more US government bonds. Such a move would cause a major appreciation in the value of the Chinese yuan, which, in turn, would reduce, possibly eliminate, our trade shortfall with China. Our manufacturing would revive and thousands of new jobs would be created, raising the tax revenue further.

The next step would be to reduce the tax burden on lower incomes by cutting the self-employment tax to 12 percent from the current 15 percent; we could also eliminate the Social Security tax on the minimum wage. Our increased tax revenue would pay for these cuts, which would further raise consumer demand and, hence, GDP growth. Note that the trade deficit is also a WME, because it tends to lower wages, while stuffing the wallets of the CEOs of multinational corporations. Just look at the fat pay checks of such CEOs in the aftermath of our trade with China.

Another WME that our government has systematically used to reduce our living standard is outsourcing; we can impose a stiff tax on this practice and raise even more revenue. This would also enable us to trim the tax burden of low-income groups.

In short, the American economy can be easily fixed if our government would stop using its vast arsenal of WMEs against us. I believe that, in just 12 to 18 months, we can bring the nation back to an unemployment rate of 6 percent, which is close to full employment.

This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.v

Weapons of Mass Exploitation

Sunday 8 May 2011

by: Ravi Batra, Truthout

(Photo: JMRosenfeld; Edited: Jared Rodriguez / t r u t h o u t)

About eight years ago, there was frenzied and furious talk about WMDs, or weapons of mass destruction. Both the frenzy and the fury came from President George W. Bush and his administration, prior to the US invasion of Iraq in March 2003 and soon thereafter. The president's poll ratings had soared in the aftermath of the quick American victory in Afghanistan, which was the base from which al-Qaeda had launched 9/11. In order to keep his poll numbers up, the president and his officials were in a hurry to invade Iraq and remove Saddam Hussein from power. There was a frenzy of claims that Saddam possessed WMDs including chemical arms and nuclear weapons. But when none were found, the officials were furious that Saddam, so to speak, had deceived them. They were also furious at their critics who wondered aloud if the entire WMD claim was actually a fabrication.

The Iraq invasion turned out to be a colossal mistake in terms of lost lives and heavy expenditures that sharply raised the federal budget deficit. However, few realize that the Bush administration made a far bigger mistake in using what may be called Weapons of Mass Exploitation or WMEs, which have all but decimated the US economy and continue to do so.

A WME is a short-term financial palliative that makes the rich richer but postpones economic troubles, while seeming to cure the problems of unemployment and dwindling family incomes. It tends to create debt in the economy, but most economists call it fiscal policy or monetary policy. Once the term "policy" is used, everybody shuts up and accepts the claims of WMEs' beneficence, believing that a genius must have devised it. However, all it does is to generate more debt in the economy, and let the problems pile up, only to return with greater force in the future. Most nations have deployed it in the past 30 years, but various American administrations have been exceptionally adept in its use.

Let us see how a WME only postpones economic ills and also enriches the rich. I am sure you've all heard of supply and demand, even if you never took a course in economics. Supply and demand are like the two wings of an airplane; both have to be equally strong and weighty, or else the plane will crash.

What is the main source of supply? Productivity. What is the main source of demand? Wages. If you become more productive - through education or the use of better technology - you produce or supply more goods. If your wages rise, then you consume or demand more goods. For the economy to stay healthy, supply must be equal to demand, or:

Supply = Demand

Please don't be alarmed by the use of a simple equation, because it will highlight the role of debt in a visual way and make it easily understandable. If supply is not equal to demand, then, like the airplane with unequal wings, the economy will crash some day. Here, supply refers to the value of goods produced in the entire economy, and demand means total spending or the value of goods consumed in the nation.

It so happens that, because of investment and new technology, productivity and, hence, supply rise year after year. This means that wages and, hence, demand must also rise year after, and in the same proportion. Otherwise, there is an imbalance, and unexpected problems arise. If wages trail productivity growth, supply exceeds demand, leading to overproduction. Businesses are unable to sell all that they produce and layoffs follow. Hence, the only cause of unemployment in an advanced economy is the rise in the gap between what you produce and what your employer pays you.

However, joblessness creates problems not only for the unemployed but also for elected officials, because the unemployed have the right to vote. Politicians seek to face a happy electorate and be re-elected. They don't like unemployment anymore than you or I, which means they have to create ways to raise national spending to the level of supply. They face two choices: either to follow policies to raise your salary proportionately to the level of your productivity - which is only fair and ethical - or to adopt measures to lure you into larger debt, so that you spend more not out of a pay raise, but from increased borrowing.

Luring the public into debt in order to get re-elected, I believe, is crass corruption. It is also corruption because the politician, ever in need of campaign donations, wouldn't dream of offending business interests that are all for low wages. With wages trailing productivity since 1981, elected officials have been following what is known as monetary policy, which tempts people into larger debts. This eliminates unemployment as spending rises to the level of supply, because now,

Supply = Demand + New Consumer Debt

With monetary policy, the Federal Reserve prints more money to bring down the rate of interest, and lower interest rates induce people to increase their borrowing or their debt. However, the wage-productivity gap has been rising so fast that the government also had to raise its own spending and debt constantly, so that total spending matched rising supply. In this case:

Supply = Demand + New Consumer Debt + New Government Debt

Raising government debt to postpone the problem of unemployment is called "fiscal policy." Now you see why our nation is awash in debt at both the consumer and the government level. Elected officials have frequently used debt-creation policies to get re-elected, while creating the impression that they are doing American workers a favor by preserving their jobs. Are they doing you a favor? Absolutely not. Instead, they are simply enriching the rich. Let us see how.

First, job creation occurs through the cooperative action of both producers and consumers. Producers only create supply and, indeed, hire workers, but if their goods remain unsold, they lose money and workers are laid off. Second, joblessness occurs only if your boss doesn't pay you enough to match your productivity. If you work hard and still get fired, then it is the employer's fault, not yours. You are doing your job of being productive on the one hand and creating demand out of your salary on the other. If your demand falls or does not rise enough, then it is because your boss has not given you a raise or has cut your wages. At the macro level, insufficient national demand only means that workers have produced so much for their companies that supply exceeds demand, so that some people have to be laid off. Where then is your fault in this entire process? It is your employer's greed that generates joblessness, not you.

Once the government has generated enough new debt to increase spending to the level of supply, the unemployed are called back to work, usually at lower wages. But the debt increase is large enough to eliminate overproduction even at puny wages. As overproduction vanishes, profits jump. You can see this clearly from the above equation. If your wages and, hence, your demand are constant, then the entire increase in debt goes into the pockets of suppliers. Without this debt growth, employers would have suffered losses due to overproduction; but with the creation of new debt, all their goods are sold, and profits soar, while your salary is either constant or grows very little; it may even fall, if you were laid off and had to find a new job. Thus, if the budget deficit is $1trillion, then corporate profits plus executive bonuses jump by $1 trillion. If the deficit is $2 trillion, then businessmen's incomes rocket by the same amount.

This is exactly what has occurred during the Great Recession that started at the end of 2007. Millions of people were fired because the likes of General Motors, IBM, Microsoft and Goldman Sachs could not sell all they had produced. Then President Bush sharply raised the budget deficit, and the Federal Reserve printed tons of new money to bail out failing businesses. As a result, the economy stabilized in 2009 and began to grow in 2010. However, real wages fell, while profits sky-rocketed. Why? Because, the entire increase in government debt went into the coffers of producers. This is how Goldman Sachs alone could give bonuses of over $20 billion to its executives in 2009, while millions were still being laid off. Consumer debt actually fell, but the government debt rose so much that executives received hefty extra compensation.

Eliminating the Budget Deficit

It should be clear by now that our so-called monetary and fiscal policies are enriching the rich while not doing much for the jobless. What should we do? For the solution, let us take a look at the American economy in the 1950s and the 1960s, the golden decades of high growth and growing prosperity for all. GDP growth averaged over 4 percent as compared to less than 3 percent since 1981, while real wages went up to match rising productivity. The top bracket income tax rate at the time averaged above 80 percent, and corporations paid 25 percent of the total tax revenue or about 5 percent of GDP. The middle class paid low taxes, and there was practically no budget deficit.

Why was GDP growth so high back then? The answer lies in high taxation of wealthy individuals and corporations. Thus, for the 1950s and the 1960s:

Supply = Demand + Near Zero New Debt

Since real wages grew as fast as productivity, new debt was practically zero. People met their needs mostly out of their rising salaries. Demand rose in a natural way to match increasing supply. It may be noted that supply comes primarily from the rich, but demand comes primarily from the poor and the middle class. Since taxes were low on low-income groups, consumer demand grew as fast as salaries; but from 1981 on, thanks to President Reagan and his advisers such as Alan Greenspan, the tax burden was transferred from the rich to everyone else. Income tax rates sank for wealthy individuals and corporations, while most, if not all, other federal taxes jumped. The self-employed small business person, for instance, saw a rise of 66 percent in their tax rate. Taxes also rose on gasoline and tires. The crippling tax burden on lower incomes naturally reduced the growth in demand, so GDP growth (growth in supply or output) fell sharply below that in the 1950s and the 1960s. Even the oil-shocked 1970s produced higher growth of 3.3 percent.

All this suggests that we should move toward the tax structure of the 1950s and 1960s. Today, the top-bracket income tax rate is 35 percent. Suppose we were to raise this rate to 45 percent for annual incomes above $250,000, and to 70 percent for incomes above one million, then the income tax yield would rise from $1 trillion to $1.5 trillion, or by $500 billion. Thus, any dollar earned above $250,000 will be taxed at the rate of 45 percent; similarly, any earned above a million will face a rate of 70 percent, so that average tax rates will be well below the top rates, which will still be below those in the 1960s. For corporations, we could go back to the old rate of 45 percent tax on corporate profits, while eliminating loopholes. We would then collect about 5 percent of GDP or some $750 billion, which would bring in extra revenue of $600 billion. Thus, higher taxes on affluent families and businesses will raise our revenue annually by $1.1 trillion. Slashing defense spending and oil and agricultural subsidies would reduce government spending. This way we can almost eliminate our budget deficit, which is currently running at an annual rate of $1.2 trillion.

Eliminating the Trade Deficit

Eliminating the budget deficit would quickly revive our comatose economy. The first benefit would be felt in the fall of our trade deficit, especially that with China, which has become our foremost lender. America would no longer have to borrow money from anyone, and China would not be able to use its surplus dollars to buy more US government bonds. Such a move would cause a major appreciation in the value of the Chinese yuan, which, in turn, would reduce, possibly eliminate, our trade shortfall with China. Our manufacturing would revive and thousands of new jobs would be created, raising the tax revenue further.

The next step would be to reduce the tax burden on lower incomes by cutting the self-employment tax to 12 percent from the current 15 percent; we could also eliminate the Social Security tax on the minimum wage. Our increased tax revenue would pay for these cuts, which would further raise consumer demand and, hence, GDP growth. Note that the trade deficit is also a WME, because it tends to lower wages, while stuffing the wallets of the CEOs of multinational corporations. Just look at the fat pay checks of such CEOs in the aftermath of our trade with China.

Another WME that our government has systematically used to reduce our living standard is outsourcing; we can impose a stiff tax on this practice and raise even more revenue. This would also enable us to trim the tax burden of low-income groups.

In short, the American economy can be easily fixed if our government would stop using its vast arsenal of WMEs against us. I believe that, in just 12 to 18 months, we can bring the nation back to an unemployment rate of 6 percent, which is close to full employment.

This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.

Weapons of Mass Exploitation

Sunday 8 May 2011

by: Ravi Batra, Truthout

(Photo: JMRosenfeld; Edited: Jared Rodriguez / t r u t h o u t)

About eight years ago, there was fren­zied and furi­ous talk about WMDs, or weapons of mass de­struc­tion. Both the fren­zy and the fury came from Pre­sident Geor­ge W. Bush and his ad­ministra­tion, prior to the US in­vas­ion of Iraq in March 2003 and soon thereaft­er. The pre­sident's poll rat­ings had soared in the af­termath of the quick American vic­to­ry in Afghanis­tan, which was the base from which al-Qaeda had launched 9/11. In order to keep his poll numb­ers up, the pre­sident and his of­fici­als were in a hurry to in­vade Iraq and re­move Sad­dam Hus­sein from power. There was a fren­zy of claims that Sad­dam pos­sessed WMDs in­clud­ing chem­ical arms and nuc­lear weapons. But when none were found, the of­fici­als were furi­ous that Sad­dam, so to speak, had de­ceived them. They were also furi­ous at their critics who won­dered aloud if the en­tire WMD claim was ac­tual­ly a fab­rica­tion.

The Iraq in­vas­ion tur­ned out to be a col­oss­al mis­take in terms of lost lives and heavy ex­pen­di­tures that sharp­ly raised the feder­al bud­get de­ficit. Howev­er, few rea­l­ize that the Bush ad­ministra­tion made a far bi­gg­er mis­take in using what may be cal­led Weapons of Mass Ex­ploita­tion or WMEs, which have all but de­cimated the US economy and con­tinue to do so.

A WME is a short-term fin­an­ci­al pal­liative that makes the rich rich­er but post­pones economic troub­les, while seem­ing to cure the pro­blems of un­employ­ment and dwindl­ing fami­ly in­comes. It tends to create debt in the economy, but most econom­ists call it fisc­al poli­cy or moneta­ry poli­cy. Once the term "poli­cy" is used, every­body shuts up and ac­cepts the claims of WMEs' be­nefic­ence, be­liev­ing that a genius must have de­vised it. Howev­er, all it does is to generate more debt in the economy, and let the pro­blems pile up, only to re­turn with great­er force in the fu­ture. Most na­tions have de­ployed it in the past 30 years, but vari­ous American ad­ministra­tions have been ex­cep­tional­ly adept in its use.

Let us see how a WME only post­pones economic ills and also en­ric­hes the rich. I am sure you've all heard of sup­p­ly and de­mand, even if you never took a co­ur­se in economics. Sup­p­ly and de­mand are like the two wings of an airplane; both have to be equal­ly strong and weighty, or else the plane will crash.

What is the main sour­ce of sup­p­ly? Pro­duc­tiv­ity. What is the main sour­ce of de­mand? Wages. If you be­come more pro­duc­tive - through educa­tion or the use of bet­t­er tech­nology - you pro­duce or sup­p­ly more goods. If your wages rise, then you con­sume or de­mand more goods. For the economy to stay healthy, sup­p­ly must be equal to de­mand, or:

Sup­p­ly = De­mand

Please don't be al­ar­med by the use of a sim­ple equa­tion, be­cause it will highlight the role of debt in a visu­al way and make it eas­i­ly un­derstand­able. If sup­p­ly is not equal to de­mand, then, like the airplane with un­equ­al wings, the economy will crash some day. Here, sup­p­ly re­f­ers to the value of goods pro­duced in the en­tire economy, and de­mand means total spend­ing or the value of goods con­sumed in the na­tion.

It so hap­pens that, be­cause of in­vest­ment and new tech­nology, pro­duc­tiv­ity and, hence, sup­p­ly rise year after year. This means that wages and, hence, de­mand must also rise year after, and in the same pro­por­tion. Ot­herw­ise, there is an im­balan­ce, and un­ex­pected pro­blems arise. If wages trail pro­duc­tiv­ity growth, sup­p­ly ex­ceeds de­mand, lead­ing to over­produc­tion. Busines­ses are un­able to sell all that they pro­duce and layoffs fol­low. Hence, the only cause of un­employ­ment in an ad­vanced economy is the rise in the gap bet­ween what you pro­duce and what your em­ploy­er pays you.

Howev­er, job­less­ness creates pro­blems not only for the un­employed but also for elec­ted of­fici­als, be­cause the un­employed have the right to vote. Politicians seek to face a happy elec­torate and be re-elected. They don't like un­employ­ment an­ymore than you or I, which means they have to create ways to raise nation­al spend­ing to the level of sup­p­ly. They face two choices: eith­er to fol­low poli­cies to raise your sala­ry pro­por­tionate­ly to the level of your pro­duc­tiv­ity - which is only fair and eth­ical - or to adopt measures to lure you into larg­er debt, so that you spend more not out of a pay raise, but from in­creased bor­row­ing.

Lur­ing the pub­lic into debt in order to get re-elected, I be­lieve, is crass cor­rup­tion. It is also cor­rup­tion be­cause the politician, ever in need of cam­paign dona­tions, would­n't dream of of­fend­ing busi­ness in­terests that are all for low wages. With wages trail­ing pro­duc­tiv­ity since 1981, elec­ted of­fici­als have been fol­low­ing what is known as moneta­ry poli­cy, which tempts peo­ple into larg­er debts. This eliminates un­employ­ment as spend­ing rises to the level of sup­p­ly, be­cause now,

Sup­p­ly = De­mand + New Con­sum­er Debt

With moneta­ry poli­cy, the Feder­al Re­ser­ve prints more money to bring down the rate of in­terest, and lower in­terest rates in­duce peo­ple to in­crease their bor­row­ing or their debt. Howev­er, the wage-productivity gap has been ris­ing so fast that the govern­ment also had to raise its own spend­ing and debt con­stant­ly, so that total spend­ing matched ris­ing sup­p­ly. In this case:

Sup­p­ly = De­mand + New Con­sum­er Debt + New Govern­ment Debt

Rais­ing govern­ment debt to post­pone the pro­blem of un­employ­ment is cal­led "fisc­al poli­cy." Now you see why our na­tion is awash in debt at both the con­sum­er and the govern­ment level. Elec­ted of­fici­als have frequent­ly used debt-creation poli­cies to get re-elected, while creat­ing the im­press­ion that they are doing American work­ers a favor by pre­serv­ing their jobs. Are they doing you a favor? Ab­solute­ly not. In­stead, they are simp­ly en­rich­ing the rich. Let us see how.

First, job crea­tion oc­curs through the co­operative ac­tion of both pro­duc­ers and con­sum­ers. Pro­duc­ers only create sup­p­ly and, in­deed, hire work­ers, but if their goods re­main un­sold, they lose money and work­ers are laid off. Second, job­less­ness oc­curs only if your boss doesn't pay you en­ough to match your pro­duc­tiv­ity. If you work hard and still get fired, then it is the em­ployer's fault, not yours. You are doing your job of being pro­duc­tive on the one hand and creat­ing de­mand out of your sala­ry on the other. If your de­mand falls or does not rise en­ough, then it is be­cause your boss has not given you a raise or has cut your wages. At the macro level, in­suf­ficient nation­al de­mand only means that work­ers have pro­duced so much for their com­pan­ies that sup­p­ly ex­ceeds de­mand, so that some peo­ple have to be laid off. Where then is your fault in this en­tire pro­cess? It is your em­ployer's greed that generates job­less­ness, not you.

Once the govern­ment has generated en­ough new debt to in­crease spend­ing to the level of sup­p­ly, the un­employed are cal­led back to work, usual­ly at lower wages. But the debt in­crease is large en­ough to eliminate over­produc­tion even at puny wages. As over­produc­tion van­is­hes, pro­fits jump. You can see this clear­ly from the above equa­tion. If your wages and, hence, your de­mand are con­stant, then the en­tire in­crease in debt goes into the poc­kets of sup­pli­ers. With­out this debt growth, em­ploy­ers would have suf­fered los­ses due to over­produc­tion; but with the crea­tion of new debt, all their goods are sold, and pro­fits soar, while your sala­ry is eith­er con­stant or grows very lit­tle; it may even fall, if you were laid off and had to find a new job. Thus, if the bud­get de­ficit is $1trill­ion, then cor­porate pro­fits plus ex­ecutive bonuses jump by $1 tri­ll­ion. If the de­ficit is $2 tri­ll­ion, then businessmen's in­comes roc­ket by the same amount.

This is ex­act­ly what has oc­cur­red dur­ing the Great Re­cess­ion that star­ted at the end of 2007. Mill­ions of peo­ple were fired be­cause the likes of Gener­al Motors, IBM, Micro­soft and Goldman Sachs could not sell all they had pro­duced. Then Pre­sident Bush sharp­ly raised the bud­get de­ficit, and the Feder­al Re­ser­ve prin­ted tons of new money to bail out fail­ing busines­ses. As a re­sult, the economy stabilized in 2009 and began to grow in 2010. Howev­er, real wages fell, while pro­fits sky-rocketed. Why? Be­cause, the en­tire in­crease in govern­ment debt went into the co­ff­ers of pro­duc­ers. This is how Goldman Sachs alone could give bonuses of over $20 bi­ll­ion to its ex­ecutives in 2009, while mill­ions were still being laid off. Con­sum­er debt ac­tual­ly fell, but the govern­ment debt rose so much that ex­ecutives re­ceived hefty extra com­pen­sa­tion.

Eliminat­ing the Bud­get De­ficit

It should be clear by now that our so-called moneta­ry and fisc­al poli­cies are en­rich­ing the rich while not doing much for the job­less. What should we do? For the sol­u­tion, let us take a look at the American economy in the 1950s and the 1960s, the gold­en de­cades of high growth and grow­ing pro­sper­ity for all. GDP growth averaged over 4 per­cent as com­pared to less than 3 per­cent since 1981, while real wages went up to match ris­ing pro­duc­tiv­ity. The top brac­ket in­come tax rate at the time averaged above 80 per­cent, and cor­pora­tions paid 25 per­cent of the total tax re­venue or about 5 per­cent of GDP. The mid­dle class paid low taxes, and there was prac­tical­ly no bud­get de­ficit.

Why was GDP growth so high back then? The an­sw­er lies in high taxa­tion of wealthy in­dividu­als and cor­pora­tions. Thus, for the 1950s and the 1960s:

Sup­p­ly = De­mand + Near Zero New Debt

Since real wages grew as fast as pro­duc­tiv­ity, new debt was prac­tical­ly zero. Peo­ple met their needs most­ly out of their ris­ing sala­ries. De­mand rose in a natur­al way to match in­creas­ing sup­p­ly. It may be noted that sup­p­ly comes primari­ly from the rich, but de­mand comes primari­ly from the poor and the mid­dle class. Since taxes were low on low-income groups, con­sum­er de­mand grew as fast as sala­ries; but from 1981 on, thanks to Pre­sident Rea­gan and his ad­vis­ers such as Alan Greenspan, the tax burd­en was trans­fer­red from the rich to every­one else. In­come tax rates sank for wealthy in­dividu­als and cor­pora­tions, while most, if not all, other feder­al taxes jum­ped. The self-employed small busi­ness per­son, for in­stan­ce, saw a rise of 66 per­cent in their tax rate. Taxes also rose on gasoline and tires. The crippl­ing tax burd­en on lower in­comes natural­ly re­duced the growth in de­mand, so GDP growth (growth in sup­p­ly or out­put) fell sharp­ly below that in the 1950s and the 1960s. Even the oil-shocked 1970s pro­duced high­er growth of 3.3 per­cent.

All this sug­gests that we should move toward the tax struc­ture of the 1950s and 1960s. Today, the top-bracket in­come tax rate is 35 per­cent. Sup­pose we were to raise this rate to 45 per­cent for an­nu­al in­comes above $250,000, and to 70 per­cent for in­comes above one mill­ion, then the in­come tax yield would rise from $1 tri­ll­ion to $1.5 tri­ll­ion, or by $500 bi­ll­ion. Thus, any dol­lar ear­ned above $250,000 will be taxed at the rate of 45 per­cent; similar­ly, any ear­ned above a mill­ion will face a rate of 70 per­cent, so that average tax rates will be well below the top rates, which will still be below those in the 1960s. For cor­pora­tions, we could go back to the old rate of 45 per­cent tax on cor­porate pro­fits, while eliminat­ing loop­holes. We would then col­lect about 5 per­cent of GDP or some $750 bi­ll­ion, which would bring in extra re­venue of $600 bi­ll­ion. Thus, high­er taxes on affluent famil­ies and busines­ses will raise our re­venue an­nual­ly by $1.1 tri­ll­ion. Slash­ing de­fen­se spend­ing and oil and ag­ricul­tur­al sub­sid­ies would re­duce govern­ment spend­ing. This way we can al­most eliminate our bud­get de­ficit, which is cur­rent­ly runn­ing at an an­nu­al rate of $1.2 tri­ll­ion.

Eliminat­ing the Trade De­ficit

Eliminat­ing the bud­get de­ficit would quick­ly re­vive our com­atose economy. The first be­nefit would be felt in the fall of our trade de­ficit, es­pecial­ly that with China, which has be­come our foremost lend­er. America would no long­er have to bor­row money from an­yone, and China would not be able to use its sur­plus dol­lars to buy more US govern­ment bonds. Such a move would cause a major apprecia­tion in the value of the Chinese yuan, which, in turn, would re­duce, pos­sib­ly eliminate, our trade shortfall with China. Our manu­fac­tur­ing would re­vive and thousands of new jobs would be created, rais­ing the tax re­venue furth­er.

The next step would be to re­duce the tax burd­en on lower in­comes by cutt­ing the self-employment tax to 12 per­cent from the cur­rent 15 per­cent; we could also eliminate the Soci­al Secur­ity tax on the mini­mum wage. Our in­creased tax re­venue would pay for these cuts, which would furth­er raise con­sum­er de­mand and, hence, GDP growth. Note that the trade de­ficit is also a WME, be­cause it tends to lower wages, while stuff­ing the wal­lets of the CEOs of multi­nation­al cor­pora­tions. Just look at the fat pay checks of such CEOs in the af­termath of our trade with China.

An­oth­er WME that our govern­ment has sys­tematical­ly used to re­duce our li­v­ing stan­dard is out­sourc­ing; we can im­pose a stiff tax on this prac­tice and raise even more re­venue. This would also en­able us to trim the tax burd­en of low-income groups.

In short, the American economy can be eas­i­ly fixed if our govern­ment would stop using its vast ar­sen­al of WMEs against us. I be­lieve that, in just 12 to 18 months, we can bring the na­tion back to an un­employ­ment rate of 6 per­cent, which is close to full em­ploy­ment.

This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.