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Monday, August 29, 2011

Working Class Politics: Right, Left and Neutered

Dissident Voice: a radical newsletter in the struggle for peace and social justice

European and US Working Class Politics: Right, Left and Neutered

The deepening economic crises in Europe and the United States are provoking contrasting socio-political responses from the working and middle classes. In Europe, especially among the Mediterranean countries (Greece, Spain, Portugal and Italy) unemployed youth, workers and lower middle class public employees have organized a series of general strikes, occupations of public plazas and other forms of direct action. At the same time, the middle class, private-sector employees and small business people have turned to the “hard right” and elected, or are on the verge of electing, reactionary prime ministers in Portugal, Spain, Greece and perhaps even in Italy. In other words, the deepening crises has polarized Southern Europe: strengthening the institutional power of the hard right while increasing the strength of the extra-parliamentary left in mobilizing ‘street power’.

In contrast, in Northern and Central Europe the hard right and neo-fascist movements have made significant inroads among workers and the lower middle class at the expense of the traditional center-left and center-right parties. 1 The relative stability, affluence and stable employment of the Nordic working class has been accompanied by increasing support for racist, anti-immigrant, Islamophobic parties. 2

In the case of the United States, with a few notable exceptions, the working class has remained a passive spectator in the face of the right turn of the Democratic Party and the hard right’s capture of the Republican Party. There are no left wing street politics in the US, unlike Southern Europe, and only a passive rejection and repudiation of the hard right policies of Congress and the White House.

Rather than solidarity, the economic crisis highlights working class fragmentation, disunity and internal polarization.

The Right/Left Polarizations

One of the key reasons for the growth of right wing appeals to Northern European workers is the demise of working class-based ideology, parties and leaders. The Labor and Social Democratic Parties have initiated and administered neoliberal programs while promoting multi-national corporation-led export strategies. They have embraced regressive tax ‘breaks’ for big business; they have participated in imperialist wars of aggression (Afghanistan, Iraq and Libya); they have embraced the so-called “war on terror” mostly against Muslim countries while tolerating the growth of the neo-fascist, far-right Islamophobes who practice “direct action” to expel immigrants in Europe.

The European governing parties of the center-left (social democratic and labor) and the center-right (Sarkozy, Cameron and Merkle) have been outspoken in their assault on “multiculturalism” code-word for Muslim immigrant rights. Their tolerance and exploitation of Islamophobia serves as a cheap vote getter among their xenophobic electorate and as a justification for their involvement in US-Israeli wars of aggression in the Middle East and South Asia. As a result the “mainstream” regimes have weakened working class solidarity with immigrant workers and undermined any concerted effort by the state and civil society to actively counteract the neo-fascist racists who ply a more virulent version of Islamophobia embracing the Zionist ideologues’ vision of ethnic cleansing.

The trade unions have lost membership due especially to the growth of ‘contingent or temporary workers’ who are especially susceptible to far-right appeals. Equally important, trade unions no longer engage in political education aimed at strengthening class solidarity among all workers. While in Northern Europe wages may increase, the trade unions collaboration with the corporate elite has left workers vulnerable to anti-immigrant and Islamophobic propaganda. In this context a perverse “class struggle” pits the unorganized workers against those “below”, the immigrants. The neo-fascists gain by promoting and exploiting cultural and chauvinist beliefs which trade unions and social democratic parties no longer actively combat through worker education and class struggle. In other words, the neoliberal practice and ideology of the “center-left” parties and unions undermine class political identities and open the door for right wing penetration and influence. This is especially evident when center-left and trade union leaders no longer bother to consult or debate policies with their members: They impose policies from above, providing the ‘far right’ with a formidable weapon to attack the ‘elitist nature’ of the center-left political system.

In contrast, in Southern Europe the profound economic crisis, due in large part to the harsh conditions imposed by Northern and Western European bankers and their local center-left and right-wing politicians, has strengthened and sharpened class consciousness and politics. Right-wing appeals to anti-immigrant and anti-Muslim politics has little resonance among Southern European workers in the face of skyrocketing unemployment and brutal wage and pension cuts.

Northern European workers have allied with the right, and their own politicians and bankers, in demanding the imposition of greater austerity measures against Southern European countries, buying into the racist ideology that Mediterranean workers are lazy, irresponsible and on permanent vacation. In fact, Greek, Portuguese and Spanish workers work more days per year, enjoy less vacation time and much less secure pensions. The same racist sentiments pitting Northern workers against immigrants also promote chauvinist stereotypes against militant Southern European workers and fuel right-wing sympathies.

Creditor Northern European bankers and political leaders squeeze their own working and middle class taxpayers in order to bail-out their counterparts among the Southern European debtor elites, who, in turn, agree to squeeze their workers and public employees to meet the debt payment demands of the North. The Northern workers in the imperial countries have been convinced that their living standards are threatened by the irresponsible and indebted South, and not by the speculative activity and irresponsible lending of their own bankers. In the South, the workers have to shoulder the double exploitation of the Northern European creditors as well as their own local elites; hence, they have greater class awareness of the injustice of the imperial and local capitalist system.

To the degree that Northern workers make common cause with their own creditor ruling class and shift their resentments toward workers abroad and immigrants below, they become vulnerable to right wing appeals. They openly express resentment against striking Greek, Spanish or Portuguese workers’, whose militant struggles might disrupt their planned vacations to the Mediterranean islands and seashore resorts. The ideological battle which should pit the workers of Northern Europe against their own state creditors and speculator financial elite is transformed into hostility towards Southern European workers and immigrants. Overseas bailouts, imperial wars and cuts in social programs lead to greater competition over shrinking social expenditures and conflict between employed and unemployed, ‘native’ and ‘immigrant’ workers’.

International workers solidarity has been severely weakened and replaced, in some cases, by the proliferation of international far-right networks propagating virulent anti- immigrant (and anti-socialist) propaganda and, as in the case of the massacre of almost 70 left-wing youth, mostly teenage, activists of the Norwegian Labor Party, poses a direct murderous threat to progressive supporters of immigrant rights. The extreme-right began its assault on immigrants and Muslims and has now moved against the local left and progressive movements which support them. This has taken on an even more complex dimension with the marriage of rabid pro-Israel, Zionist ideologues (mostly based in the US) and the neo-fascist Islamophobes attacking supporters of Palestinian rights, an issue repeatedly stressed by the Norwegian fascist mass murderer, Anders Behring Breivik. The problem is that the ‘respectable’ liberal, social democratic and conservative parties, in their electioneering, have pandered to the anti-immigrant, anti-Muslim appeals of the far-right in order to attract workers rather than embarking on far-reaching class reforms which would lessen inequalities, financing them via increases in progressive taxes and greater public investments to unify all workers (local and immigrant) against capital.

Lacking working class solidarity, the sons and daughters of immigrants, especially the disproportionately unemployed young workers, engage in forms of direct action such as the pillage of local business, confrontations with the police and general mayhem, as was evident in the nationwide riots in England in the “hot August” of 2011. The demise of working class politics thus has produced violent right-wing extremism, racial-immigrant riots and pillage. The labor elite are spectators, confined to condemning extremism and violence, calling for investigations, but without any semblance of self-criticism or any programs for changing the socio-economic structures that produce the right turn and violence among workers and the unemployed.

The United States: The Rise of the Right

Unlike Europe, the extreme right is at home within the US established order. Brutal anti-immigration policies have led to the expulsion of nearly 1 million undocumented workers or family members in the first three years of the Obama regime (a three-fold increase over the George W. Bush years). The Tea Party has elected Congress members in the Republican Party who promote massive cuts in the social safety net with the collaboration of the White House. The mass media, Congress, the White House, mass-based Christian fundamentalist politicians and leading Zionist personalities and organizations actively promote Islamophobia and lead virulent campaigns against Muslims by fanning public insecurity. The US ‘establishment’ has pre-empted the racist agenda of the far-right in Europe. The far-right has turned its guns directly on the social programs of the poor, the working class and public employees (especially school teachers).

Moreover, their assault on debt financing and public expenditures has led to conflicts with sectors of the capitalist class, who are dependent on the State. In the course of the recent Congressional ‘debate’ over raising the debt ceiling, Wall Street joined in a selective struggle against the far-right: calling for “compromise” involving social cuts and tax reforms while supporting their anti-public union offensive.

Unlike in Europe, the mass of the US working class and poor are passive. They have been neutered: neither engaging in the street riots of England, nor taking the sharp right turn of their Northern European counterparts, nor participating in militant workers’ strikes of Southern Europe. The US trade unions, with the exception of the public employees union in Wisconsin, have been totally absent from any of the big confrontations. The American trade union bosses concentrate on lobbying the corporate Democratic Party and are incapable of mobilizing their shrinking membership.

The Tea Party, unlike its Northern European counterparts, does not attract many workers because of their virulent attacks on popular public programs, like Medicare, Medicaid, unemployment insurance and especially Social Security – all of the programs most likely to benefit American workers and their families. On the other hand, the economic crisis in the US has not led to Mediterranean-style mass action because American trade unions either don’t exist (93% of the private sector is not unionized) or are compromised to the point of paralysis.

So far the US working class is a spectator to the rise of the extreme right, because its organized leaders have tied their fortunes to the Democratic Party, which, in turn, has adopted significant parts of the far right’s agenda.


The US, in contrast to Europe, is experiencing a peaceful transition from neoliberalism to far-right politics, where the working and middle class are passive victims rather than active combatants for either the left or the right. In Europe, the current crisis reveals a deep polarization between the radical left turn of workers in the South and the growing shift to the far right among workers in Northern Europe. The ideal of international worker solidarity is being replaced, at best, by regional solidarity among the workers of Southern Europe and, at worst, by a network of rightist parties in the Northern European countries. With the decline of international solidarity, chauvinist and racist tendencies are rampant in the North, while in the South workers’ movements are joining with a broad range of social movements, including the unemployed, students, small business people and pensioners.

While the electoral right is capitalizing on the disenchantment with the center-left in Southern Europe, they still face formidable resistance from the extra-parliamentary workers and social movements. In contrast, in Northern Europe and the US, the far-right faces no such conscious opposition – in the streets or in the workplace. In these regions only the breakdown of the economic system or a prolonged severe economic recession, combined with devastating cuts of basic social programs and protections, may set in motion a revival of working class movements. and hopefully it will be from the class-conscious left and not from the far right.

  1. According to a study of workers support for far right wing parties in Western Europe, “workers have become their core clientele”. See Daniel Oesch, “Explaining Workers’ Support for Right-wing Populist Parties in Western Europe: Evidence from Austria, Belgium, France, Norway, and Switzerland”, International Political Science Review 2008: 29; pp. 350 -373 []
  2. While some of the motivations of the workers vary, the far-right wing parties are the beneficiaries []

James Petras, a former Professor of Sociology at Binghamton University, New York, owns a 50-year membership in the class struggle, is an adviser to the landless and jobless in Brazil and Argentina, and is co-author of Globalization Unmasked (Zed Books). Petras’ most recent book is The Arab Revolt and the Imperialist Counterattack. He can be reached at: jpetras@binghamton.edu. Read other articles by James, or visit James's website.

The Failure of Welfare Reform Is 'Exhibit A' That the Right's Punish-the-Poor Philosophy Doesn't Work



Our welfare reform experiment is little more than a confidence trick in which poor people get shuffled this way and that while their lives remain essentially unchanged.

Fifteen years ago, on August 22, 1996, President Bill Clinton perched at a podium in the White House Rose Garden and signed the bill that would become known as welfare reform. Flanked by three former welfare recipients and looking glazed and smooth as a donut, he swept aside six decades of social welfare policy with a single triangulating stroke of his pen, reversing a course that had been set by Franklin Delano Roosevelt during the New Deal. In the process, he handed the law's right-wing backers their first emboldening victory in a far bigger, dirtier, and still raging campaign to unravel the government safety net.

"Today we are ending welfare as we know it," Clinton declared, the words "A New Beginning" emblazoned on the podium beneath him in case anyone missed the point. From that moment on, needy families would face a strict five-year lifetime limit for welfare assistance. They would have to comply with stringent work requirements. Handouts would be replaced by a hand up, self-destruction would yield to self-sufficiency, and dependency would give way to the starchy respectability of personal responsibility.

Or, as Clinton promised, "Today we are taking a historic chance to make welfare what it was meant to be: a second chance, not a way of life."

Exactly 15 years later, a handful of welfare recipients gathered in Harlem, just a few blocks from Clinton's post-presidency redoubt, to describe exactly what Bubba's "second chance" has meant for them. They had been brought together by Community Voices Heard, a grassroots group of low-income people forged in the fires of welfare reform, and their stories crisscrossed the spectrum of welfare experiences. They were several women and one man, they were white, black and Latina, they were young and they were older -- and their verdict was as swift and final as a guillotine.

"It's a failure. It's a total failure," said Melissa McClure, a reedy-voiced 50-something with a Louise Brooks bob who successfully managed gift stores before falling on hard times and applying for welfare in early 2007.

"If I had a worst nightmare, this would be it," said Ketny Jean-Francois, a Haitian-born single mother who spent four years in the welfare meat-grinder before managing to land a spot in a nursing program -- against welfare reform rules -- and then a job.

The lone man of the group, Bill, a single 49-year-old with a host of physical and psychological ailments, struggled to find the words before spitting out, "It's definitely not achieving the goals of helping out," he said. "The official line is, 'If you're not working, we want to see you working. If you have children, we want to help you so you [don't] come back.' But if that's really the goal -- no."

Failure. Nightmare. Not achieving its goals. None of these descriptions are part of the official line peddled by welfare reform's sponsors and backers. If you hear anything these days, it's how dramatically welfare caseloads have dropped in the last 15 years -- 57 percent! -- and how salutary it's been for the country. "We renewed the American spirit by emphasizing personal responsibility in place of generational dependency on government," boasted E. Clay Shaw Jr., former Republican congressman and drafter of 1996's welfare reform law, in a recent Politico editorial.

Indeed, far from questioning the law's fundamental merits and efficacy, many Republicans (and a few Democrats) have taken to complaining that the law hasn't gone far enough, that its implementation has been too lax and its lessons not fully adequately exported. "The job is not finished," Dave Camp, Michigan Republican and Ways and Means Committee chairman, said in a statement. "[O]ther programs can and should be reformed to follow suit." And yet, to listen to the people who know welfare reform best, to the "Reformed," the reality of the 1996 law is not only a far cry from the compassionate conservative triumph it's trumpeted to be, it's a crucible for the failures of the stingy, starve-the-beast, punish-the-poor philosophy so in vogue among the Tea Bag brigades.

A hand up? More like a slap down, say those who've been through the system. The famously touted welfare-to-work programs are little more than exercises in make-work and are often exploitative to boot. Childcare remains persistently scarce. Job training is poor to non-existent. And on the increasingly rare occasions when people do find jobs, these jobs are often low-wage gigs that fail to hoist them out of poverty.

Meanwhile, life on welfare has become shorter and harsher. Cash grants have stagnated or even fallen in a number of states, with the median benefit for a family of three now clocking in at $429 a month, just 28 percent of the federal poverty level, according to the Center for Budget and Policy Priorities. Time limits have also gotten shorter. And while caseloads have certainly plummeted, it's fairly clear that a hefty portion of this drop can be attributed to steep new barriers to entry -- and time limits, of course. How else to explain the fact that at the height of the Great Recession only 28 percent of Americans living in poverty received welfare assistance while 75 percent got welfare help in 1995? In 13 states, welfare rolls actually declined during the recession, according to an Urban Institute report.

All of which suggests that for all the braying triumphalism, our nation's great welfare reform experiment is little more than an elaborate shell game, a confidence trick in which poor people get shuffled this way and that while their lives remain essentially unchanged. Or get harder.

Take the case of Bill, the lone man at the Community Voices Heard gathering, who wore a charm bracelet of Catholic saints around his wrist and asked to keep his last name on the down-low since most of his family doesn't know his situation. Bill is a college graduate who spent years working in and around the computer world until the recession hit (he made only $6,000 in 2008). Eviction was followed by homelessness. Eventually he landed on Public Assistance, which immediately put him to work in New York's notorious workfare program.

The city's workfare program is the twisted, and nationally celebrated, brainchild of former New York City mayor, Rudolph Giuliani, and a small cadre of conservative think-tank gurus. It requires public assistance recipients to spend 35 hours a week doing a mix of job search and work activities -- or face losing part or all of their benefits. These work activities, grouped under the condescending title of the Work Experience Program (WEP), include jobs like sweeping streets, cleaning parks, doing security, filing -- low-skilled, formerly union jobs for which the WEP workers are not paid, per se, because they are actually working off their benefits. Hence the comparisons to indentured servitude. Alternatives like education and training courses are generally forbidden, and exemptions for disabilities or disease are difficult to obtain. The reason: a "work-first" ethic so unrelenting that Giuliani's most notorious welfare commissioner, Jason Turner, famously explained, "It's work that sets you free." (Apparently he skipped the chapter in his high school history book about the Holocaust.)

"Work-first," however, has not set many welfare recipients free. It certainly didn't help Bill.

Bill is a man of many ailments, something that is apparent to the casual observer almost upon meeting him. Smart and sensitive, he is beset by the tics and torments of a man with serious depressive and anxiety disorders. He also underwent major surgery for a tear in his stomach in 2010. But within weeks of the operation, unable to bend, lift, or twist and suffering from pain and panic attacks, he was required to go back to his welfare-mandated job search and work activities. All so he could continue to receive $45 a month in cash assistance.

"It's like trying to trip a handicapped person," said Bill, who was recently judged disabled enough to qualify for Social Security Disability insurance and Supplemental Security Income- - though not before suffering a year in the workfare trenches. "But I have to stress that there are so many people that are in a much, much worse situation, and they're making them [work].... I saw guys nodding off in wheelchairs!"

Such stories reverberate throughout the archives of welfare reform, but even the stories that aren't so patently bad aren't so pretty either. Everyone has something to tell. For Ketny Jean-Francois, it was working a WEP assignment for the sanitation department in the Hunts Point section of the Bronx, a swath of asphalt and misery famous for its brisk drug and prostitution trades. Each day she would head to her assignment picking up condoms, needles and "doodoo" (as she delicately put it) in the protective company of one of her male co-workers, but that only seemed to encourage the johns, who would invariably stop her "guard" to ask her going rate.

As for Cheina Goncalec, a petite 27-year-old with two young kids who moved to New York in search of work, her story revolved around her stint as a security guard at a West Harlem community center, a WEP experience that consisted of fending off the occasional cursing, threatening gym-goer without any self-defense training whatsoever. But that was just icing. There was the constant abuse by welfare agency workers, and the arbitrary closing of her case. And the welfare agency's refusal to let her substitute education or training for WEP, even though "the only way to get out of welfare is getting a good job," she said. And there was the fact that after a year and a half spent doing "job search" and WEP, she was no closer to finding a permanent job -- or climbing out of poverty.

Given such snags in a program widely touted as one of the jewels of welfare reform -- so "successful" that it's been used as a model for the creation of workfare programs in places as far-flung as Israel and London -- it would seem like it might be long past time to re-evaluate. There are certainly plenty of smart ideas. And since the welfare program, Temporary Assistance for Needy Families, is set to be reauthorized in September, this would be the perfect time to debate, tweak, even radically reshape it.

Perhaps the most desperately needed change is a philosophical one, a shift in purpose and focus from welfare reform as an experiment in punitive behavior modification and deterrence to welfare as a genuine anti-poverty program. From this, everything else would follow: welfare caseworkers caring and experienced enough to help applicants get the services they need (beginning with access to welfare) rather than deterring them; higher cash grants which would allow recipients to live rather than simply subsist; access to quality child care; programs and alternatives for people with barriers to employment; training programs that are tiered to meet recipients where they're at -- and prepare them for quality jobs; and above all, subsidized employment programs that would train and then place recipients in bona fide, living-wage paying jobs.

"During the Great Depression, they put people to work doing what they knew to do," said Melissa McClure, offering an example of the kind of jobs program she'd like to see. "All that and you were paid, and it was promoting you into a better position."

And yet, what are the chances? The government couldn't -- or, more accurately, wouldn't -- even maintain the TANF Emergency Fund, which provided subsidized jobs to some 240,000 unemployed people and was one of the few effective jobs programs created during the Great Recession; instead, it let its funding expire last September. And with Congress divided between slack do-nothings and rabid ideologues, the fight over "reform" has moved from the fringes of a fraying society to the center, from the question of entitlements to the poor to entitlements more broadly.

Welfare reform, it turns out, was just the warmup. It was a test-case and a prophecy, "a new beginning" after all. And as the first hard yank on the threads holding together the country's safety net -- its social contract to provide for the needy -- it should have been a clarion warning. Welfare reform was an attack on all of us.

Lizzy Ratner is a journalist in New York City. From 1998 to 2000, she was a welfare rights advocate in New York City.

Sunday, August 28, 2011

Wrong About Right-to-Work

Dollars and Sense logo

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Wrong About Right-to-Work

Laffer throws another curve-ball.

By John Miller

issue 294 cover This article is from the July/August 2011 issue of Dollars & Sense magazine.

Boeing and the Union Berlin Wall

Two policies have consistently stood out as the most important in predicting where jobs will be created and incomes will rise. First, states with no income tax generally outperform high income tax states. Second, states that have right-to-work laws grow faster than states with forced unionism.

As of today there are 22 right-to-work states and 28 union-shop states. Over the past decade (2000–09) the right-to-work states grew faster in nearly every respect than their union-shop counterparts: 54.6% versus 41.1% in gross state product, 53.3% versus 40.6% in personal income, 11.9% versus 6.1% in population, and 4.1% versus -0.6% in payrolls.

The Boeing incident makes it clear that right-to-work states have a competitive advantage over forced-union states. So the question arises: Why doesn’t every state adopt right-to-work laws?

—Arthur B. Laffer and Stephen Moore, Wall Street Journal op-ed, May 13, 2011
What do you get when you mix a Wall Street Journal editorial writer with a supply-side economist?

That’s right: more of the same.

This time, however, it’s right-to-work laws, not taxes, that come in for the full Laffer treatment (although without the illustration on the back of a cocktail napkin).

In May of this year, the National Labor Relations Board (NLRB) issued an injunction to stop defense giant Boeing from moving a jet production line from its unionized factories in Washington state to right-to-work South Carolina. The International Association of Machinists & Aerospace Workers union had filed a complaint that the planned move was in retaliation against strikes the union conducted over the last decade, and thus illegal.

The NLRB decision amounts to “a regulatory wall with one express purpose: to prevent the direct competition of right-to-work states with union-shop states,” insist Arthur Laffer, the supply-side economist, and Stephen Moore, former head of the far-right economics think tank Club for Growth and now on the Wall Street Journal’s editorial board. Right-to-work laws enforced in 22 states, mostly in the southern and western United States, prohibit businesses and unions from agreeing to contracts that stipulate that an employer will hire only workers who join the union or pay union dues. In right-to-work states, unions confront a free-rider problem: they have to organize workers who can benefit from collective bargaining without joining (or staying in) the union or paying dues.
The disadvantages that right-to-work states impose on unions give those states a competitive advantage that will enrich them, according to Laffer and Moore. And their report, “Rich States, Poor States,” has the numbers to prove it, or so they claim. Right-to-work states grow faster, add more income, create more jobs, and attract more people than states hamstrung by pro-union labor laws.
But it turns out that the claim that right-to-work laws lead states to prosper is no more credible than Laffer”s earlier claim that cutting income taxes would spur such an explosion of economic growth that government revenues would actually rise despite the lower tax rates. Much like what Laffer had to say about tax cuts and economic growth, Laffer and Moore make the case for right-to-work laws as the key to economic prosperity through sleight of hand and half-truths.
Let”s take a look at exactly where their story goes wrong.

Something Up Their Sleeve

To begin with, Laffer’s and Moore’s report needs to be read carefully. Their claim is that the economies of states with right-to-work laws grow faster, not that their citizens are better off.

And they are not. For instance, while it is true that both output and income have grown faster in right-to-work states than in other states over the last decade, the growth is from a much lower starting point. In fact, output and income in those states still lag well behind the levels in non-right-to-work states. Personal income per capita averaged $37,134 (in 2010) and real GDP per capita averaged $39,365 (in 2009) in right-to-work states, but $41,312 and $42,513 respectively in the other 28 states.

The positive job creation numbers that Laffer and Moore report for right-to-work states over the last decade haven’t resulted in superior job prospects for those out of work. With their faster growing populations, right-to-work states had unemployment rates averaging 8.0% in April of this year, just below the 8.2% average in non-right-to-work states.

And in practice, right-to-work laws are very much “right-to-work-for-less” laws, as union critics call them. In a recent Economic Policy Institute briefing paper, economists Elise Gould and Heidi Shierholz looked closely at the differences in compensation between right-to-work and non-right-to-work states. Controlling for the demographic and job characteristics of workers as well as state-level economic conditions and cost-of-living differences across states, they found that in 2009:
  • Wages were 3.2% lower in right-to-work states vs. non-right-to-work states–about $1,500 less annually for a full-time, year-round worker.
  • The rate of employer-sponsored health insurance was 2.6 percentage points lower in right-to-work states compared with non-right-to-work states.
  • The rate of employer-sponsored pensions was 4.8 percentage points lower in right-to-work states. On top of that, in 2008 the rate of workplace deaths was 57% higher in right-to-work states than non-right-to-work states, while the 2009,poverty rate in right-to-work states averaged 15.0%, considerably above the 12.8% average for non-right-to-work states.

But here is the real kicker: once their effect is isolated from the effects of other factors, right-to-work laws seem to have little or no impact even on economic growth itself. For instance, a 2009 study conducted by economist Lonnie Stevans concludes that:

While…right-to-work states are likely to have more self-employment and less bankruptcies on average relative to non-right-to-work states, there is certainly no more business capital. …Moreover, from a state’s economic standpoint, being right-to-work yields little or no gain in employment and real economic growth. Wages and personal income are both lower in right-to-work states, yet proprietors’ income is higher. Those lower wages and lower personal incomes are especially detrimental in today’s fragile economic recovery, still plagued by a lack of consumer spending.

A Bad Move

The evidence above militates against the notion that right-to-work laws are the key to economic prosperity for state economies, and in favor of the notion that anti-union laws, much like deregulation and tax cuts targeted at the rich, are another mechanism for securing more and more for the well-to-do at the expense of most everyone else.

That is especially clear when it comes to Boeing’s planned move from Washington state to South Carolina. Ironically, union-heavy Washington tops right-to-work South Carolina in Laffer’s and Moore’s Economic Outlook Rankings for 2010 and in their Economic Performance Rankings for 1998–2008. Personal income, output, and employment all grew considerably faster in Washington state than in South Carolina from 1998 to 2008. And personal income per capita and GDP per capita in Washington state ($43,564 and $45,881 respectively) far exceed their levels in South Carolina ($33,163 and $30,845).

Beyond that, unemployment and poverty rates in Washington state are both well below those in South Carolina. By all those measures, Washington’s economy is far and away the more vibrant of the two.

Working conditions are a lot better in Washington state too, something not lost on Boeing. Wage workers in Washington state on average make $11,020 a year more than their counterparts in South Carolina. Production workers in Washington state earn $5,560 a year more. South Carolina workers are 69% more likely to die on the job than workers in Washington. And not surprisingly, just 6.2% of wage and salary workers in right-to-work South Carolina were union members in 2010, versus more than 20% in Washington.

So then why does Boeing want to leave the Evergreen State for the Palmetto State? To benefit from a more vibrant economy? Or to take advantage of workers whose ability to organize is hindered by right-to-work laws, whose bargaining power has been eroded by high unemployment and poverty, who have few alternatives than to endure working in far more dangerous conditions while getting paid less than workers in Washington? The numbers speak for themselves.

No wonder the NLRB filed an injunction against Boeing’s planned move. Labor board members saw it for what it is: not a mere relocation, but an exercise of raw power intended to bust a union.

JOHN MILLER, a member of the Dollars & Sense collective, is professor of economics at Wheaton College. 

SOURCES: Arthur B. Laffer and Stephen Moore, “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, 3rd edition,” Wall Street Journal, April 7, 2010; Lonnie K. Stevans, “The Effect of Endogenous Right-to-Work Laws on Business and Economic Conditions in the United States: A Multivariate Approach,” Review of Law & Economics, Vol. 5, Issue 1, 2009; Elise Gould and Heidi Shierholz, “The Compensation Penalty of ‘Right-to-Work’ Laws,” Economic Policy Institute Briefing Paper #299, February 17, 2011 (epi.org); Gordon Lafar, “‘Right-to-Work’: Wrong in New Hampshire,” Economic Policy Briefing Paper #302, April 5, 2011 (epi.org); Carl Horowitz, “NLRB Sues Boeing; Seeks End to Commercial Jet Production in South Carolina,” National Legal and Policy Center, May 4, 2011 (nlpc.org).

Jobs, Deficits, and the Misguided Squabble over the Debt Ceiling

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Jobs, Deficits, and the Misguided Squabble over the Debt Ceiling

By Tim Koechlin

 Budget cutting

These are obviously very grim economic times. One in six Americans who would like full-time work is unable to find a full-time job. Millions of Americans have lost their homes, and many millions more are “underwater”—they owe more than their homes are worth. The pain has been felt by nearly every household in the United States. Some have been hit harder than others. The unemployment rate for African Americans is double the rate for whites; since 2007, the median wealth of Black and Hispanic households has fallen by more than half. (Sabrina Tavernise, Recession Study Finds Hispanics are Hit the Hardest July 26th, 2011) The distributions of wealth and income in the United States—the most unequal among industrialized countries before the crash of 2008—have become more unequal.

In the midst of all of this suffering, U.S. corporate profits are at an all-time high. In 1980, the richest 1% of income earners in the United States claimed about 12% of all income; in 2008, they earned nearly one quarter of all income. The share of the top .1% has increased even faster. (See Huffington Post, Income Inequality is at an all-time high” (report on the work of UC-Berkeley Economist Emmanuel Saez). ; Paul Krugman, The Death of Horatio Alger, January 5th, 2004; Joseph Stiglitz Of the 1%, by the 1%, for the 1%, May, 2011; Emmanuel Saez Striking it Richer: The Evolution of Top Incomes in the US, July 10th, 2010) The U.S.
economy and the human beings it ought to serve are suffering, first and foremost, from a jobs deficit. Closing this gap—creating and facilitating the creation of good jobs—should be the very top priority of Congress and the White House. At this point, it is not. Indeed, Republicans (enabled by President Obama) are currently doing what they can to make things worse.

The absurd squabble over the debt ceiling and the national debt is distracting, destructive, and almost entirely beside the point. The budget deficit is not the most pressing economic problem facing the United States—not by a long stretch. Whatever comes of these negotiations, it will not address the jobs deficit, and it will not improve the lives of the overwhelming majority of U.S. families. Indeed, it is likely to make things worse.

Let’s be clear: the Republican approach to the economy and the budget is deeply misguided, wrong-headed, mean-spirited, and irresponsible. Their approach is as familiar as it is appalling: more tax cuts for the rich; more tax cuts for corporations; and cuts in social programs, including Medicare and Social Security. This tack is unconscionable. It is also bad economic policy, that is, it will not promote growth and it will not create jobs. Nobel Prize winner Paul Krugman is exactly correct when he concludes that “the G.O.P... has gone off the deep end.”
President Obama’s approach is less troubling for sure, and clearly preferable to the appalling Republican strategy. But this is a very low bar. President Obama has, unfortunately, embraced the faulty premise that deficit reduction should be a top priority. As a result, the President is prepared to make substantial spending cuts at precisely the wrong moment—when the economy needs demand, and people need help. And, alas, Mr. Obama has demonstrated a disturbing willingness to pursue cuts in Medicare and Social Security.

An intelligent response to this crisis has to reflect an understanding of its causes. Cutting spending during a recession is like blood-letting an anemic patient, or invading Iraq in an attempt to disempower Osama Bin Laden.

Our best hope on this issue is that the President and Congress will be forced to “kick the can down the road.” We can only hope that whenever we re-encounter the can, saner heads will prevail—or, more to the point, that the balance of political forces will have changed enough that we won’t have to endure a repeat performance.

Some good ideas and some bad ideas about the economic crisis, economic policy, and the federal budget

1. Cutting spending in the middle of a recession is a terrible idea. It will destroy jobs, and undermine the economy’s already feeble momentum. Intelligent spending—extending unemployment benefits, block grants to states and municipalities, spending on green infrastructure, and keeping college affordable, for example—will create jobs today, lighten the load of those who are in the most economic trouble, and facilitate growth and competitiveness in the long run. Serious, enforceable, well-funded efforts to liberate home owners from their enormous debt burden would help to re-ignite consumer spending and the housing market.

This is indeed the worst crisis since the Great Depression. How did and why did the Great Depression finally come to an end? After nearly a decade of mass unemployment (peaking at 25%), the U.S. government increased its debt financed spending massively to pay for the War; that is, it ran enormous budget deficits. War spending put people to work; these newly employed workers spent their income, and this spending created jobs for others. In fact, during the war, the U.S. economy suffered from labor shortages. The U.S. government and corporations actively recruited women into professions and trades that had previously been off limits—women in large numbers “manned” the factories and shipyards.

An implication of this argument and this history is that the primary problem facing the U.S. economy is not the budget deficit. Indeed, in the short run, substantial budget deficits are likely to accelerate the recovery.

The National Debt is often characterized as “a burden to future generations.” In fact, deficit spending—and the long run growth and opportunities that it can facilitate—can be a gift to our children and grandchildren. Debt financed investments today can leave them with a more prosperous, productive, sustainable economy, an economy that can provide them with educational, economic and personal opportunities that would not otherwise have been possible.

Notice, also, that, during a period of economic stagnation, budget deficits and government spending can be good for business. Rising demand means rising revenues, and this provides businesses with an incentive to hire workers. With adequate demand, it will be profitable for many businesses to increase hiring.

2. The current debt ceiling “crisis” is utterly unnecessary; it is an irresponsible political maneuver by the Republicans. Since 1962, the debt ceiling has been raised 74 times (including 18 times under President Reagan). With one exception—Newt Gingrich’s government shut down in 1995—this has been trivial and routine. If Congress simply voted to raise the debt ceiling—allowing the Treasury to pay its bills, as it is mandated to do by the Constitution—there would be no crisis. If the Republicans want to make changes in economic policy or shrink the federal government that is their prerogative. But this is not a reasonable or responsible way to make policy. It is an especially irresponsible way to make major decisions about the government’s long-standing commitment to provide health coverage and minimal economic security to elderly Americans.

3. The Republicans do not care about reducing the deficit. Their objective is to cut taxes—especially for the rich—and dismantle what’s left of the New Deal. Indeed, they have a long history of enthusiastically supporting enormous budget deficits and squandering surpluses (see the presidencies of Reagan and George W. Bush). Representative Paul Ryan’s proposed ten-year budget—which got unanimous support from House Republicans in April—proposes trillions in tax cuts (over ten years), cuts which will overwhelmingly benefit corporations and the rich. Note: tax cuts do not reduce deficits! Ryan’s plan also includes massive cuts to programs that benefit the poor and the middle class (most notably Medicare and Medicaid). According to the non-partisan Congressional Budget Office (CBO), Ryan’s plan would reduce the deficit by $155 billion over 10 years—a meager $15 billion per year. The Republican plan is rooted in politics, ideology, and mendacity. There is no evidence at all that it is rooted in a commitment to “fiscal responsibility.”

4. Taxes in the United States are extraordinarily low. Taxes in the United States are lower (as a share of GDP) than any other industrialized country. As a share of GDP, U.S. corporate taxes are lower than every industrialized country but Iceland. Tax rates for corporations and the wealthy have fallen substantially over the past 30 years. In the three decades following World War II—when taxes on the wealthy and corporate profits were considerably higher—the U.S. economy performed better: higher average growth rates, lower average rates of unemployment, and a much more equal distribution of income. Tax cuts for the rich are unfair, and trickle-down economics—the notion that giveaways to corporations and the rich will stimulate growth and employment—simply does not work. (For wonderfully illustrative charts about this, see Ten Charts that Prove the US is a Low-Tax Country, June 10th, 2011; US is one of the Least Taxed Countries June 30th, 2011 )

5. If political pressures compel us to focus on the deficit at this moment, our first step should be to tax the rich more heavily. Refusing to extend President Bush’s tax cuts (which will expire in 2013) for the top 5% income earners would raise government revenue by more than two trillion dollars over ten years. Spending cuts (if we must) should be back loaded—that is, they should occur disproportionately down the road, so that they do not undermine our efforts to get out of the current economic malaise.

6. The U.S. federal budget deficit (and the National Debt) is not analogous to overspending by a household. The U.S. government—despite a National Debt that is $14 trillion and growing—will not go bankrupt. Budget deficits can be problematic for sure; but at this moment, the benefits of debt financed government investment overwhelm the costs. (More on this below.)

7. Republicans have been working diligently to disempower the Government’s ability to regulate Wall Street’s excesses, and protect consumers. Their current target is the brand new Consumer Financial Protection Bureau. If they are successful, another financial crisis is inevitable.

8. This economic crisis is a devastating indictment of neoliberalism, the free market ideology that has framed economic policy debates since Ronald Reagan. The financial meltdown of 2008 revealed (yet again!) that financial markets do not regulate themselves. The deep and ongoing recession that followed reflects the fact that depressed economies do not have a reliable mechanism for restoring full employment, prosperity and growth. The “Invisible Hand” cannot do it alone. In early 2009, many of us imagined that this ideology was on its last legs. Even Alan Greenspan—the once legendary Federal Reserve Chairman, the “Maestro” of monetary policy, and a devoted protégé of the libertarian icon Ayn Rand—acknowledged before Congress that the model on which his worldview and policy recommendations had been premised—the view that unfettered markets (including financial markets) are efficient and stable—had failed. Of course it had! How could anyone continue to argue that laissez faire works? How indeed! But bad ideas can be resilient—especially when they are promoted by well-funded think tanks.

The Logic of a Recession: What happened to all of the jobs?

The catalyst to this current economic disaster was an unregulated financial system that ran amok—as unregulated financial systems inevitably do. Financial panics and crises are a chronic part of let-it-rip capitalism. If financial markets are not regulated adequately, this tendency will eventually manifest itself. The historical record is overwhelmingly clear about this.

The financial system crashed in October, 2008—although the strains had been mounting for years. Major financial institutions failed; housing prices collapsed and foreclosures spiked; the Dow Jones Industrial Average fell by nearly half, and banks stopped lending money. Investors panicked—with good reason. Consumers, spooked by shrinking retirement accounts, plummeting home prices, layoffs, a pervasive sense of economic chaos and, of course, declining incomes, cut their spending. The U.S. economy shed nearly two million jobs over the last third of 2008, and another four million in 2009.

The essential logic of a recession is not terribly complicated. When businesses experience declining demand, they shed workers (or decelerate hiring). These laid-off workers in turn cut their spending, because they must. In some cases, their increasingly nervous neighbors begin to reduce their spending also—they put off buying a new car, taking a trip, or re-modeling the kitchen. This thus the process accelerates—car dealerships, airlines, hotels, and contractors (etc.) are forced to lay workers off. These newly unemployed workers spend less, and so on. Tax revenues fall, forcing state and local governments to fire teachers, cops, and to cut social spending when it was needed most. At some point, apparently healthy businesses begin to worry that their demand projections are overly optimistic; many decide to put off investment in plant and equipment. Because of this “multiplier” process, “shocks” to the economy have the potential to accelerate. According to a recent Wall Street Journal article:

The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey (Phil Izzo, “Dearth of Demand Seen Behind Weak Hiring,” WSJ, July 18th, 2011)

Insufficient demand explains the Jobs Deficit, not “high” corporate taxes, not regulation, not immigration, not “uncertainty” about taxation and regulation, not President Obama’s health care plan, nor his allegedly flawed leadership. Spending by the private sector—consumers and businesses—is not, at this moment, up to the job of ensuring full employment. So the government needs to provide demand.

The Federal Reserve can facilitate private spending (demand) by keeping interest rates low. The federal government can generate demand by (a) spending (including grants to strapped state and municipal governments); (b) working to reduce the debt overhang constraining homeowners, and/or (c) lowering taxes on the middle class and extending unemployment benefits (the middle class and the poor spend a greater share of their income, and so tax cuts for the middle class are more effective than tax cuts for the rich).

Again, the U.S. economy emerged from the Great Depression because the Government spent like mad. “Future generations” (Baby Boomers, their kids, and their grandchildren) benefited enormously from this debt financed spending, because they inherited a more prosperous, productive economy, an economy that provided them with educational, economic and personal opportunities that would not otherwise have been possible. Deficit spending—and the long run growth that it can facilitate—can be a gift to our children and grandchildren.

Let me be completely explicit: an intelligent response to this crisis will lead to larger budget deficits in the short term. Budget deficits and government debt are potentially problematic but, at this moment—as in 1939—the benefits of deficit spending overwhelmingly exceed the costs.

Burdening Our Grandchildren? Why a Smart Deficit is a Gift to Future Generations

The commonplace assertion that budget deficits are a “burden to our grand-children” is both vague and deceptive, in large part because it fails to acknowledge that deficit spending today can—if done wisely—provide enormous benefits to us, our neighbors, our children and our grandchildren.

The U.S. government finances its deficits (the difference between revenue and spending) by borrowing. Generally speaking, it borrows by selling bonds—which are essentially IOUs (with interest) from the U.S. Treasury to bondholders (lenders). The Government borrows from many sources—individuals, pension funds, banks, foreign governments—and it pays these lenders back with interest.
There is a tendency to think that borrowing is inherently problematic, that it implies that we are “living beyond our means.“ But this is a dangerously narrow understanding of debt. Individuals borrow money all the time—to finance homes, cars, appliances, and college educations. Businesses borrow money to finance investment in equipment, technology, and research and development; many businesses have lines of credit with their suppliers, and this often works for both parties. Municipalities commonly undertake “bond issues” to finance school construction and other “capital’ projects.

Sometimes, of course, borrowing is a bad idea. But borrowing can also allow a family, a business, or a government to make useful and/or productive purchases that otherwise would not be possible. Is borrowing a problem? It depends on what the borrowing is for, and it depends on the capacity of the borrower to repay the debt. 

Government spending can improve the quality of our lives. Government spending pays for schools, environmental protection, parks and other public spaces, food and drug safety, public colleges and universities, fire and police protection, infrastructure, consumer protection, and health and income security in old age, to name just a few. Beyond the provision of these beneficial services, the government can create (and facilitate the creation of) jobs. When the economy is stagnant, an important benefit of borrowing is that it can lead to job creation.
So, we have a choice. We can limit the growth of the national debt by firing school teachers, cops, firefighters and mine inspectors; cutting health care coverage for the poor and elderly; ignoring our long run energy issues, defunding our public schools, and forcing states to raise tuition at our public universities ...and destroying millions of jobs. Or we can borrow money to support these services while, at the same time, preserving and creating jobs. The Republicans pretend that cutting the budget is a magic bullet—more jobs, and less debt. But this is utterly wrong.

In 1939, the U.S. National Debt was about $40 billion. By 1945, it had grown by a factor of six to $259 billion dollars. The benefits of this borrowing were enormous. First, it allowed the Allies to defeat the Nazis (something that would have been more complicated if Congress were constrained by a Balanced Budget Amendment). Second, this debt financed increase in government spending facilitated economic growth and employment. The U.S. economy was more productive by far in 1945 than it otherwise would have been. A rich country with a moderate debt burden is, by any reasonable measure, preferable to a moderately rich country with no debt. Deficit spending allowed the United States to avoid six more years of massive waste—that is, unemployment. This was undoubtedly a very wise investment.

This does not imply that budget deficits are always wise. Again, it depends on what the government does with the money. For example, budget deficits soared under President George W. Bush. This stunning increase in debt was a terrible mistake, in my view, because the borrowing was used to finance massive tax cuts for the rich, and two expensive, ill-advised wars. (President Bush’s policies, by the way, have had a much larger effect on the deficit than President Obama’s time-limited fiscal stimulus.) In contrast to Bush’s folly, borrowing for job creation and mortgage relief during an historic economic downturn is a good idea. (For a breakdown of deficits under Bush and Obama, see James Fallows, The Chart that Should Accompany all Discussions of the Debt Ceiling, July 25th, 2011)

Government debt can be problematic, for sure, but it is not analogous to household debt. The U.S. government will not go bankrupt—it has never missed a debt payment and, unless Congress impedes its ability to meet its obligations for political reasons, it never will. That is, the U.S. government’s “capacity to repay” is enormous. No one who understands the basics of government finance believes that bankruptcy is an issue for the U.S. government (although deficit hawks often suggest that it is, sometimes disingenuously, sometimes out of ignorance). The U.S. government has run budget deficits in all but five years since 1961 (four of them under President Clinton). Sometimes it made sense, other times it did not. (See also the short appendix to this essay, "The National Debt is not like your credit card debt")

Why are budget deficits problematic? Deficits can cause inflation. They can also put upward pressure on interest rates, and these higher interest rates, by making borrowing more expensive, can restrict the accessibility of capital to businesses and households, which can be a drag on investment and growth. Over the long term, this sort of chronic under-investment can be substantial, as can its effects on our living standards down the road. (For the wonks and/or economics majors among you, economists refer to this as “crowding out,” as in government borrowing may crowd out private borrowing and investment). It is worth worrying about, for sure.

The “good news” is that, in this depressed economy, interest rates are extraordinarily low. Inflation is also a minor concern; indeed “deflation” is arguably a greater threat.( For an excellent critical assessment of the “costs” of deficits, see Robert Pollin, Austerity is not a solution: why the deficit hawks are wrong, Nov/Dec, 2010.) At this moment in time, borrowing is especially easy and cheap because there are lots of potential investors sitting on big piles of cash and, further, in a depressed economy there are relatively few attractive alternatives—especially for risk averse investors.

All of this is to say that the potential benefits of deficit spending during a recession are great—it is by far the most effective way to address the jobs deficit; and borrowing can help us to deliver the goods and services on which many Americans depend, especially during a recession. (Paul Krugman No, We Can’t? Or Won’t?, July 11th, 2011)And at this moment in history, the “costs” of the deficit—its potential effects on inflation and interest rates are all but non-existent.
When the economy recovers sufficiently—when the Jobs Deficit has been resolved—relatively large budget deficits will probably no longer make sense. But until then, cutting spending is a terrible idea. I repeat: cutting spending during a recession is like blood-letting an anemic patient. The Republican “jobs program” starts with massive dismissals of teachers and other public sector employees.

That won’t work.

The content of this spending is important, of course. A detailed proposal is beyond the scope of this short paper. This said, it is clear that Congress should pass another economic stimulus package—several hundreds of billions of dollars at least. This package ought to include generous grants to state and municipal governments, investments in green infrastructure, urban jobs programs, extended unemployment benefits, and more generous financial aid for poor and middle class college students. (Readers who are interested in what this might look like should look at Robert Pollin’s excellent 18 million Jobs by 2012, February 18th, 2010)

The great John Maynard Keynes was (and is) right: unregulated, let-it-rip capitalism is prone to financial crises; capitalism has no reliable mechanism for resolving a jobs deficit, and the free market generates intolerable levels of inequality. In contrast, the Republican Party, the Neoliberals, the “Efficient Market” theorists and other fetishizers of “The Market” are wrong. Please spread the word!

Appendix: The National Debt is not like your credit card debt

A government that issues bonds (i.e. borrows money) denominated in a currency that (a) it has the power to create and (b) is recognized as a reliable currency, does not need to worry about default (as a household or business does).
The U.S. Treasury can borrow from a long line of willing lenders, who are happy to lend to the U.S. government because there is so little risk. Indeed, raising the debt ceiling is important because it might undermine investors’ confidence that U.S. government bonds are essentially risk free. At this moment in time, borrowing is especially easy and cheap because (a) there are lots of potential investors sitting on big piles of cash and (b) in a depressed economy, there are relatively few attractive alternatives—especially for risk averse investors.
Unlike households and businesses, the U.S. government has no problem finding lenders because (a) it has the authority to tax and (b) it has the authority to create money and thus (c) it has little trouble finding willing borrowers. When investors have lots of other alternatives, the Treasury will likely have to pay a higher interest rate on its debt. But, again, they can always find a borrower.
And further, about half of the U.S. debt is owed to the Federal Reserve, which buys government bonds (i.e. lends to the government) with money that it creates. The Fed does not literally “print” money, but it does create it—essentially out of thin air. If I had the authority to tax my neighbors and, in a pinch, to print dollars, my credit limit would be higher.

This story generally surprises and troubles my students, in part because they have a notion that “printing money” leads to “hyperinflation”. As noted above, deficits can indeed cause inflation, and overly exuberant money creation will surely make inflation more likely. Thankfully, the Board of Governors of the Fed understands this, and so the Fed uses its power to create money with caution; indeed, sometimes too much caution. The proof of the pudding is in the data: over the past 30 years—during which time large deficits been common, and the Fed has routinely used its power to “monetize” debt (by creating money)—inflation has been low and stable (in 2009 prices actually fell slightly; in 2010, the inflation rate was 1.6%).

I understand that this can be a little hard to accept—creating money to facilitate a government’s borrowing appears to be irresponsible and unsustainable. But in the U.S. case—and for most of the world’s rich countries—it has not been a problem. In fact, it has played a key role in facilitating prosperity and growth over the post-World War II era.

I also understand that “money creation by the Fed” feeds into a theme in the Conservative narrative. Governments spending without limit! Creating money out of thin air! Imperiling future generations (and the value of the dollar)! I accept this intellectual discomfort—but this does not change the fact that these concerns are essentially unfounded and wrong. And this understandable misunderstanding should certainly not be the basis of economic policy—any more than discomfort with Darwin should lead schools to teach our kids that the earth is six thousand years old. That is an essay for another day.

The U.S. national debt is also different from the “foreign debts” that have regularly thrown many countries into financial and economy crisis (forcing many of them to run to the IMF because they are unable to pay their debts). These debts, generally, are denominated in dollars and other hard currencies. Banks (and the IMF) require repayment in hard currencies. A government in hock to Western banks cannot raise the money it needs by taxing its citizens; nor does it have the power to create dollars. And these “limitations” make it harder to attract private lending on reasonable terms. In cases like these, default is a very real and dangerous possibility.

Sources: Center for American Progress, “Ten Charts that Prove the US is a Low Tax Country,” June 10th, 2011; Citizens for Tax Justice, “US is one of the least taxed countries,”June 30th, 2011; Emmanuel Saez, “Striking it Richer: The Evolution of Top Incomes in the US,” July 10th, 2010; Huffington Post, “Income Inequality is at an all-time high” (report on the work of UC-Berkeley Economist Emmanuel Saez);. James Crotty, “The Great Austerity War: What Caused the Deficit Crisis and Who Should Pay to Fix It?” Political Economy Research Institute (PERI), June, 2011; James Fallows, “The Chart that Should Accompany all Discussions of the Debt Ceiling,” June 25th, 2011; James R. Horney, “Ryan Budget Plan Produces far Less Deficit Cutting than Reported” Center for Budget & Policy Priorities, April 11th, 2011; Joseph Stiglitz, “Of the 1%, by the 1%, for the 1%,”, May, 2011; Paul Krugman, “No, We Can’t? Or Won’t?,” July 11th, 2011; Paul Krugman, “The Death of Horatio Alger,” January 5th, 2004; Robert Pollin, “18 Million Jobs by 2012,” Feburary 18th,2010; Robert Pollin, “Austerity is not a solution: why the deficit hawks are wrong,”, Nov/Dec, 2010.; Sabrina Tavernise, “Recession Study Finds Hispanics are Hit the Hardest,” July 26th, 2011

Saturday, August 27, 2011

The Trouble with Gold

August 26, 2011 at 09:12:14

The Trouble with Gold

By Jimmy Walter (about the author)

You can't eat it, drink it, drive it, or live in it. While you can wear some as jewelry, it won't keep you warm. It does not earn interest. It is not really good for anything that is necessary. Metal coins and paper money are merely tradable symbols for the efforts and possessions of humans. It is only people's attitudes and beliefs about these symbols that make them valuable. The only real basis for gold's value is the labor, machinery, and energy needed to find, extract, form and get it to market. That is difficult and therein lies it benefit and problem for economics.

Let's look at what happens in a pure gold currency economy. To make it simple, suppose that an economy has only 1,000 ounces of gold. Each person has a balanced budget, that is, each spends all of his income on what he needs and wants. The 1000 ounces of gold goes around and around: the shoemaker buys from the baker, the baker buys from the farmer, the farmer buys from the tailor, who buys from the shoemaker, etc.   If one of the society's members decides he wants to produce something new, there is no extra gold in the economy to invest in it. If one person has a new baby, there is no extra gold to buy anything for it. Since everyone is earning and buying what he or she needs and wants already, that person will have to give up something to invest or buy this new item or not do it all. If one of the members decides not to buy something, then this flows throughout the society and many of the other members cannot buy something since that gold no longer goes around (see Paradox of Thrift by Keynes). With an economy based on gold, you either have to conquer someone and take their gold, or go prospecting; not timely or likely and getting harder to do all the time. As a result, all ancient and most non-fiat money economies stagnated or collapsed when their source of new gold ran out, was horded, or saved. Gold is an unthinking and intractable economic master which has historically caused stagnation and war.

Humankind's ability to produce goods and services is limited only by our minds. With paper and electronic money (fiat money), a wise government expands the money supply in step with new production, services, and population growth so people can buy the newly produced items they want and need. Gold is limited by nature and technological innovation. The supply of gold cannot automatically, seamlessly expand when needed to fund new human ideas and production, to fund the needs of an expanding population. The world got lucky with the influx of the New World's gold and the California strike which stimulated stagnating economies.  

You often hear from people, particularly those who own lots of it (gold bugs), "Gold is the only "real' money." That is definitionally false. "Real" is anything that has actually occurred or existed. Sea shells, arrowheads, salt, animal hides, butter, cacao beans, tobacco leaves, barley, beads, the giant stone wheels of the south Pacific, many things, were "real" money since people actually used it to exchange goods, services, and property. What these gold salesmen are really saying is three things: 1) Gold does not deteriorate or waste away like barley, wood, iron, etc. 2) The government can print as much paper money as it wants, thereby enriching it while diluting the value of money already in the hands of others. 3) Gold is so rare that it is hard to increase the amount of it in circulation, so it is hard to dilute the value of it.   But gold, silver, diamonds, etc. are commodities subject to the laws of supply and demand. They have no immutable or innate value.

Gold inflation and bubbles have happened before. The discovery of the New World's gold flooded the market, resulting in crippling inflation for Spain. Spain also unwisely used its new found gold to buy what they needed from other countries rather than invest it increasing production in their own economy by their own citizens. They also used it to pay for wars and trade route protection as the US is doing today. Cortes wrote in the 1590's: "Although our kingdom could be the richest in the world for the abundance of gold and silver that have come into it and continue to come in from the Indies, it ends up as the poorest because it serves as a bridge across which gold and silver pass to other kingdoms that are our enemies." People quipped, ~"Wealth is born in the Indies, dies in Spain, and is buried in Genoa."

A second gold bubble happened again after the discovery of gold in California in 1848.  

NY Gold Price 1791 to 2010 by Jimmy Walter

The gold bugs ignore these bubbles and assert that it cannot happen again. However, the amount of gold mined has gone up geometrically with technology and price. These two factors make discovering and processing poorer and poorer ore worth the effort. Not withstanding that, the total amount of gold mined in all of history is still only 193,000 metric tons, enough to make a cube just 72 feet (22m) on a side or one acre, 9 feet deep, easily fitting into one large warehouse.   That is not enough to replace all the currency around the world. But what if suddenly there was much, much more recoverable gold? On average, seawater is around 13 ppt gold. Since there are 1.3 billion cubic kilometers of sea water on earth, there are 169,000,000 [1] metric tons of gold in seawater, 875 times more than has ever been mined. When someone invents a way to easily extract it, the price of gold will plummet. (It will happen -- remember people said man would never fly.) Moreover, the total gold on the surface of the earth and in its oceans is less than 1% of the gold in the earth, most of which has sunk far below the surface. Volcanoes brought most of it to the surface and who can say one won't bring up the mother load again?

I must give the gold bugs their due. History is replete with governments that inflated their currency and citizen's wealth into nothing by reducing the percentage of gold and silver in their coins or with printing presses. It was Greenspan [2] and the FED who blew up the bubble that got us into our current fix, just as the FED bubbled the economy in the 1920's and then kept deflating the economy over and over in the 1930's. I must give credit to Bernanke; he is not making the mistakes of the 1930's FED. He inherited the mess from Ayn Rand's faithful followers, Alan Greenspan, the Wall Street Journal, et. al. This time, it is Ayn Rand religiously fanatical disciples: the capitalists, Republicans, Libertarians, and Tea Partiers.

You could not use 100% gold backed certificates in place of fiat money since there is not enough gold in the world, even at its current price (which is falling as I write). What would you buy gold with since you are replacing fiat currency that nobody would want? Only the people with gold already would have any money. The gold salesmen/current holders are claiming we can go to a currency based on a percentage of gold. That is lipstick on a pig, fiat money tarted up. The-powers-that-be can just change the percentage of gold as the kings of old did in their coins.
What about supply and demand, the real basis for prices outside of speculators who have driven the price up temporarily as they did in previous bubbles? While investors accounted for 35% of gold consumption in the first half of this year, that was a decline of 23% from last year. 53% of gold production is going into jewelry and 12 - % into technological uses. Overall, second quarter 2011 demand was down 17%. That does not bode well for the bubble. There was "healthy" growth in jewelry for the first six months, but this may be suppliers buying now in anticipation of higher prices for their season, the end of the year when their demand spikes prices. There were "modest" gains in technology. Dental demand was down 12%, substitute materials pushing gold out like substitute materials pushed silver out of photography. This material switch can be anticipated to occur with gold for all technological uses; as the price rises, users will find alternatives. The surging economies of India and China account for 52% of global bar and coin investment, 55% of jewelry demand.   They are not rich people. They may sell to take some profits. If their economies sputter, so will their consumption. 69.4 tons were purchased by central banks, which can just as easily sell it to burst the bubble if it threatens their currency. [3]  

Gold Consumption 2009 to Present by Jimmy Walter

People have been proven to be bubble-headed by history. Americans seem to have the most bubbles. To name a few, there has been the 1920's and other stock market bubbles, the Florida land bubble, the new-issue stock bubble, the savings and loan real estate bubble, the dot com bubble, the mortgage bubble, 1980 gold and silver bubble, and now we have the current gold bubble. I'm not saying you should get completely out of gold now.   You may be able to ride this bubble to greater wealth until it starts to collapse (which may be happening now). But who knows when that will be exactly? The gold bugs were wrong on when this bubble would start. They have been predicting the end of fiat money for over half a century. They will be wrong on the end of this bubble just like they were wrong on the end of the one in 1980. My father taught me to sell half when you double your money (I did); then you are still in the game and all your gold is profit. He also taught me that you never go broke taking a profit. "The bulls get some, the bears get some, and the hogs get slaughtered." My advice is to sell half or at least a large part to cover your costs and pay off your mortgage. Paying off the mortgage on your home is always your best investment. Look what happened to all the home owners who squandered their equity in the mortgage/housing bubble. Sell more parts along the way and be ready to pull the rip cord and take far less than the top dollar for the remainder because when it collapses, it will be fast and furious, like it always is.

Finally, what is the end game? As I said before, you can't eat it, drink it, drive it, or live in it, nor does it pay interest. Gold is not legal tender. Governments will undoubtedly, legally prevent it from becoming legal tender. If fiat money is to become more and more worthless, how do you take your profit? What do you get in exchange for your gold? Gold is just a shiny stone that mesmerizes the naive natives.  

Please see my music video on the crisis, "Everything is workin' (So Why Aren't We?), a parody of Bob Dylan's, "Everything is Broken". It rocks! (Of course, I am prejudiced)

Gold a "bubble that could deflate," says analyst
Richard Russell - Expect Mass Entry Into Gold By Retail Public
Chart data source: http://www.measuringworth.com/datasets/gold/result.php


[1] 13 kilograms x 1.3 billion km3   / 1000
[2] A fanatic of the church of Ayn Rand
[3] Gold.org   is source for data and spreadsheet

Political Activist specializing in 911, economics (Socialist-Small/Medium Capitalism), and psychology (REBT/CBT - Dr Albert Ellis) Living in Vienna, Austria due to death threats, physical attacks, and personal property damage which the police and (more...)
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Who Fed Documents to the SEC Dog?

POGO Project On Government Oversight

Who Authorized Document Destruction at the SEC?

The watchdog ate our homework

Was the SEC's alleged document destruction debacle the result of nefarious behavior, or a simple case of incompetence?

DealBook columnist Peter J. Henning argued yesterday that the shredding of thousands of pages of documents "looks more like corner cutting to avoid cumbersome federal regulations." But in a letter sent last week to the National Archives and Records Administration (NARA) and the Securities and Exchange Commission (SEC) Office of Inspector General (OIG), whistleblower attorney Gary Aguirre suggests there may be more to it than that, and raises new questions about the SEC's alleged document destruction policy. One of those key questions, which so far seems to have eluded Henning and other close observers, is this: who at the SEC authorized the policy?

According to Aguirre, NARA and the SEC OIG may “not be getting an accurate picture” of the SEC’s alleged violations. Last week, NARA stated it is “concerned that the SEC has been slow in creating records schedules...that will ultimately determine how long these MUI records need to be retained.” In other words, the SEC simply failed to come to an agreement with NARA on how long the MUI files had to be preserved.

This in itself would be a serious problem, since the SEC did not have the authority to destroy the MUI records without approval from NARA, according to the Federal Records Act. But Aguirre’s letter makes the case that the SEC’s destruction of the MUI files was actually a violation of an existing arrangement with NARA. Aguirre argues that this is not an insignificant distinction:

Either violation is serious and could subject the violator to criminal sanctions. Further, the manner in which the statute was violated may point to the responsibility of specific officials within the SEC. It is therefore even more important that NARA carefully parse the facts to determine exactly how the SEC decided to destroy thousands of files containing federal records. Otherwise, there can be no accountability.

Aguirre points to an existing agreement approved by NARA in 1992 that requires SEC “Investigative Case Files...including case files relating to preliminary investigations” to be retained for 25 years (emphasis added). Which raises a critical question: are “case files relating to preliminary investigations” the same thing as the MUI files?

Aguirre argues that “preliminary investigations” and “MUIs” are just different terms used to describe the same initial investigative process. Indeed, the SEC itself uses different terms to describe this initial stage: for instance, while MUIs are referenced throughout the SEC’s Enforcement Manual, SEC regulations refer to the same stage only as a “preliminary investigation.”

“The real issue that NARA should be investigating,” Aguirre wrote, “is who at the SEC came up with the idea of attributing a new name to a preliminary investigation and then using that device to destroy thousands of files of preliminary investigations.”

Aguirre followed up with a letter sent yesterday to SEC Chairman Mary Schapiro, in which he raised concerns that “the truth may be a victim” of ongoing discussions between the SEC and NARA on the alleged shredding of the MUI records. He asked Schapiro to inform NARA that there is no meaningful distinction between “preliminary investigations” and the MUI files.

Michael Smallberg and Paul Thacker are POGO Investigators.

Thursday, August 25, 2011

Keynesian Stimulus Isn’t Enough: The Great Recession and the Trade Deficit

Dissent Magazine

Keynesian Stimulus Isn’t Enough: The Great Recession and the Trade Deficit

THE POLITICAL oxygen in the United States today is consumed by issues that have nothing to do with reducing the 9.1 percent unemployment rate. Everyone talks about the priority of creating jobs, and President Obama promises another speech on jobs after Labor Day. But through most of the year, Republicans fixated on cutting spending, while Obama and many Democrats accepted the notion that the deficit was the main issue facing the nation. Jobs are an afterthought, a political obligation, not a central ingredient of recovery. Well-meaning pundits offer work sharing (where companies, instead of laying off employees, reduce hours and pay, with government making up the difference), infrastructure banks, public works, and many other good ideas. Any one of these policies will become a lot more possible if attached to a larger narrative about what went wrong and what’s to be done. The chances of immediate action on jobs are remote, but analyzing the causes of the crisis, devising and promoting a program that can restore growth and jobs, and constructing a politics that can effect change is crucial because there will be future political openings.

We have high unemployment because growth has been anemic and jobless. Keynesians argue that the stimulus of nearly $800 billion was too small to make up for the huge loss of demand, at around $2 trillion. They are right. But even if the stimulus had been bigger, it aimed at boosting consumption, not the public investment that is needed to alter the composition of the American economy.

The composition of the stimulus reflected past norms. The largest portion was tax cuts (32 percent), much of which was saved. Other money went to the states, which ensured that public workers would not be fired, but barely compensated for the cuts in state and local government spending and probably added little to the economy. Unemployment benefits and food stamps were the best use of money because they were actually spent. Other sums went to research for green energy and similar items, but they were scattershot and did not add up to a plan to produce green jobs in the United States. The effect of this half-program was to stimulate the demand for Chinese solar panels, which helped Chinese workers but not Americans. The amount spent on infrastructure (12 percent) was minimal. Because the stimulus was too small and much of the money was either saved or used to stimulate demand abroad, it was not effective.

The burden of relieving the economy then fell on the Federal Reserve and its program of quantitative easing, which produced rising asset prices but few jobs. The buoyant stock market did enhance wealth, which led to more consumption among the upper classes. Moderate-income Americans, whose wealth consisted of their houses, did not experience such a boost. (There are still 4.6 million homes with delinquent mortgages.) Thus, the bailout of the banks, the stimulus, and Fed policy replicated the inequalities of the past thirty years, but this time with high unemployment.

It is not surprising that consumption still maintained its primacy, reaching an all-time high of 71 percent of GDP during 2010. And, just as before the credit crisis, Americans are consuming too many items that are imported. The trade deficit rose in July and will probably reduce GDP growth in the second quarter to under 1 percent. This trade deficit drag is not new. Since the Second World War, the United States has operated as the world’s engine of demand, the market of first and last resort. But over the past few decades, as more than 2 billion lower-wage workers from China, India, and the former Soviet Union entered the global economy, American corporations, encouraged by the government, found they could serve the U.S. market by producing abroad. Americans produced less and earned their livings in non-tradable activities like housing, finance, retail, medical care, and other personal services. Since we still used autos, computers, trains, clothing, furniture, and other items that we no longer produced, we bought them from other nations. Politicians, business leaders, and economists told us that importing so much did not matter. The United States would prosper by exporting high technology and financial and business services. But the nation ended up with deficits in high technology, and high-end services were never enough to balance our trade. Over time, the United States both sold off assets and accumulated debt.

At the same time, many Asian nations discovered that exporting, not increasing domestic demand, was the road to riches. China, especially, recycled its dollar trade surpluses into the U.S. financial system, fueling first the tech and then the credit and housing bubbles. In 2005, New York Times columnist Paul Krugman identified some of these problems when he concluded, “These days Americans make a living by selling each other houses, paid with money borrowed from China.” American politicians in both parties did not have such foresight. “When homes are doubling in price in every six years and incomes are increasing by a mere 1 percent a year,” said Senator Jack Reed (D-RI) in 2006, extending home ownership is critical to the nation.

After the crisis hit, commentators across the political spectrum urged global rebalancing—more investment and exports in countries with deficits like the United States and more consumption and imports in countries with surpluses. The problem is that there are vested interests—surplus countries like China, Japan, and Germany, and multinationals and banks—that like the system just as it is, and so the trade deficit remains a large barrier to reducing unemployment. U.S. growth needs to be driven more from abroad (increased exports) and from domestically produced consumption (decreased imports). To achieve either, the American economy would rely on more investment and less on consumption—and what consumption the United States does have would need to rest on rising wages and not debt creation, government transfers, or the wealth effect from assets.

Here, the robust Keynesians like Paul Krugman, Brad DeLong, and Mark Thoma are not so different from the ones who populated the Obama administration. The former, too, believed that the nation could return to the old economic structure, this time without its obvious flaw: the bloated housing market. However, their solution, a bigger stimulus, did not lead to a new path for the economy. Throughout the postwar period, the high priests of the American economic profession were macroeconomists. Aggregate changes in taxing and spending could produce prosperity, they believed. There are conservative and liberal versions, but all stress macroeconomic changes, advocate free trade, and argue that the microeconomy is immune to positive government intervention. Other countries placed more faith in government decisions about the composition of their economy and the management of their international trade. They relied less on the market to sort out which sectors would dominate their economies. China’s decision to accumulate dollars, for example, is not a market phenomenon, but a product of government decisions to keep the yuan low so that its exporters (foreign and domestic) can penetrate world markets.

SO, WHAT can we do? We have plenty of commentators who have wonderful ideas. But they lack a politics that can power policy, which is one reason they often place excessive faith in individuals, like they did in Obama. Economists especially have tended to see the labor movement simply as an interest group. Many writers argue that labor was effective in the past, but won’t be any longer. In 2004, John Judis and Ruy Teixeira predicted a new Democratic majority composed of nonwhite Americans, professionals, and others who worked in the post-industrial economy. The labor movement was noticeably absent, as was the recognition that most nonwhite Americans are also working class. The only organized group that represents the working class of whatever color is the labor movement. Any idea that does not attempt to enlist the unions will remain on paper or in cyberspace.

But unions are to blame, too. The “Andy Stern” wing of the labor movement, reflecting the growth of the non-industrial economy, argues that labor should forget about manufacturing, which can easily be outsourced, and concentrate on organizing jobs that must remain in the United States: education, health care, services, and so on. Stern, the former head of SEIU and Change to Win, a group of unions that left the AFL-CIO, has subsequently retired from the labor movement, but his ideas live on. Both union groups unwisely decided to pursue an “insider” strategy that allowed the Obama administration to bargain with Republicans without an active movement to its left. Simply attacking the GOP and the Tea Party did not put into play ideas that the Obama administration has summarily rejected.

But let us imagine for the moment that our politics have changed somewhat. What should we say and do?

During the past thirty years, politicians have argued that the promotion of capital will eventually benefit labor. We need to return to the ethic of the postwar era: that labor and capital will progress together. Every measure advocated should fit into this framework. And every proposal should have the potential to attract a majority of Americans. This is not a Left agenda—it is an American one.

Here are three ideas that fit under that rubric, on trade, infrastructure, and energy. They are not exhaustive, but they address areas crucial to growth and jobs, and they all can appeal to broad segments of the population.

1. Improving the U.S. trade balance could begin with creating a market for American-produced products. Government procurement requirements are employed by most countries. They do not violate the WTO because the products in question are not sent into the global economy, but used at home. It is outrageous that the steel used in the reconstruction of the San Francisco-Oakland Bay Bridge was made in China, and defective to boot. Of course, there would be those who would cry protectionism. Let them. I would love to go into an election against an opponent who defended Chinese steel. The Treasury could label currency manipulation an unfair trade practice. Congress threatens to do this all the time. The United States could then join with Europe, which also has an interest in seeing a larger realignment of global currencies, instead of competing with Europe for Chinese favor. The U.S. government could make common cause with southern Europe, whose slow growth is related to Asian mercantilism. When Portugal joined the EU, it lost its textile and shoe industry to Chinese imports.

2. An infrastructure bank that would leverage private investment by tapping private capital markets for public infrastructure investments would be a good beginning. The Europeans have done this. Such investment would employ people, including the many unemployed construction workers, and make the economy more efficient and productive over the longer term.

3. Oil imports are an important part of the trade deficit. President Obama has made clean energy an important goal, but because his policy mainly subsidizes research and usage, not production, it serves environmental more than job purposes. Evergreen Solar is the latest state-aided green energy company that has filed for bankruptcy. It and other U.S.-based manufacturers like Solyndra and SunPower cannot compete in the face of the large subsidies that the Chinese government provides. The United States should either match the aid or turn to other energy sources. It makes no sense to substitute imported wind turbines or solar panels for imported oil. In the short run, investing in domestically produced natural gas reserves in the United States is a better choice. It is cheaper, it will create jobs, and it could become a source of exports.

Judith Stein is a professor of history and the author of Pivotal Decade: How the United States Traded Factories for Finance in the Seventies (Yale University Press, 2010).

Image: San Francisco-Oakland Bay Bridge under construction (Roy Mesler, 2006, Flickr creative commons)