Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: March 2009

Venezuela

We are dealing with a serious, structural crisis—but until now our responses have been overwhelmingly directed at reform of our system.  We want to increase taxes on the wealthy, put limits on corporate bonuses, tighten regulations on the finance sector, expand the reach of our health care system, rebuild our infrastructure, support unionization.  All important aims (which continue to be resisted by powerful interests), but all pursued as separate initiatives that bring us only marginally closer to confronting our longer term structural challenges.

What about reconceptualizing work, including reducing work hours and developing new forms of workplace democracy?

What about creating new forms of community governance that are capable of incorporating publicly or cooperatively owned enterprises in planning processes designed to ensure production aimed at meeting community needs?

What about creating new forms of planned trade and investment with other countries that encourage solidaristic rather than competitive relationships?

No easy answers – but there are countries struggling with these very same questions, even if imperfectly, and it is well worth our time to study and learn from their efforts.  One is Venezuela.  Venezuelanalysis.com is one of the best sources for information.

The mainstream media tends to paint the Venezuelan economy as a disaster.  But the data tell a different story.  To learn more about economic trends check out Luigino Bracci, “The Minimum Wage in Venezuela Will Double That in the Rest of South America,” and Mark Weisbrot,  Rebecca Ray and Luis Sandoval, “The Chavez Administration at 10 Years: The Economy and Social Indicators.”

To learn how the Venezuelan government is dealing with the global crisis you might want to read James Suggest, “President Chavez and Venezuela’s Socialist Elected Officials Meet to Discuss Political Strategy,” and a PSUV document, “Crack in the Accumulation of World Capitalism.”

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Keeping Score

Dont let short term movements in the stock market fool you–this recession is far from over.  And when it does end it will have set some records.

Want to do your own scoring on the current recession (which started December 2007)?

Well the Federal Reserve Bank of Minneapolis makes it pretty easy.  (Thanks to Cliff Bekar for the heads up on the site.)  It has nice color charts that let you “compare output and employment changes during the present recession with the same data for the 10 previous recessions that have occurred since 1946.”  And they keep updating it.

Check it out here.

Ideological Struggle-Part III

People are mad—the economy is tanking and understandably we want to know who to blame.  Of course, AIG (and its bonus payments) is an easy target.  So is the failed bank bailout.  And the media is happy to oblige us with lots of stories.

The problem is that we are dealing with something bigger—a structural crisis.  That is something that the media refuses to address.

In an earlier post I described how most mainstream economists believe that capitalism is a stable system that produces and maintains full employment.  For these economists, serious problems must be caused by developments that are, at root, external to the workings of the system.  Examples include technology shocks or overly aggressive or misdirected government policy.

In reality capitalism is a system that generates contradictions—and crises.

Imagine you are a capitalist.  You hire workers and other inputs needed for production.  Your goal is to maximize profits.   So, what do you do?  If you are a “good” capitalist you find ways to get your workers to produce the very most they can for the lowest possible wage.

But if every capitalist does this we end up in a situation where production soars way beyond the purchasing power of the population.   What then?  Well, we are likely to end up in recession.  Unable to sell all their goods, capitalists will cut production and lay off workers, who will then have even less money, leading to a downward spiral.

It is true that capitalists themselves might demand enough (investment) goods and services to fill the gap—but that is a risky thing to count on.  There has to be some great new invention or access to some big new market to encourage such new spending in the face of declining household demand.

Of course we are not always in recession.  The reason is that capitalists and the government are resourceful.  They can try and promote exports and sell goods elsewhere.  Thus sometimes a potential crisis in one country can be forced onto another—think third world.  Or the government can engage in serious spending (directly by buying goods and services from companies or indirectly by transferring money to workers so that they can buy things from companies) to provide the necessary extra demand.  Or capitalists can develop (with government support) a sophisticated credit system that can lend money to workers to allow them to pump up their spending beyond what their income might allow.

These solutions can work for a time, sometimes for a long time—but they also generate their own problems.  For example, credit markets could end up triggering stock market or housing bubbles, leading to unsustainable debt-based growth.  Sound familiar?  And of course these solutions also have their class dimension—we are not all equal when it comes to enjoying the profits or sharing the pressured working conditions and employment insecurity.  AIG executives are able to defend their bonuses while GM workers are forced to renegotiate their contracts because of the structural inequalities of our system.

We got into our current mess because of structural problems.  In broad brush: growing international competition beginning in the late 1960s led to a decline in profits in manufacturing.  By the 1980s, capitalists had worked out their response.  Led by the government they restored profit margins by breaking unions and pushing down wages.  And they also gradually shifted away from manufacturing to finance.  By the late 1990s, things were in high gear.  Average earnings were generally stagnating but huge gains were being made by those at the top thanks to all sorts of financial developments, including the stock market and housing bubbles.  Workers relied on rising home prices to borrow enough money to keep consumption strong and the economy growing–at least until the housing bubble popped.

Yes, we need to block the bonuses and deal with the banking system—nationalization being the best answer to both.  But we need more than that—we have to recognize that capitalism was not working well for the great majority of us for decades and that growth was bound to end because of growing imbalances that were becoming unmanageable.  We have to start openly discussing how best to restructure our economy.  I wonder when the media will start encouraging that discussion.

Ideological Struggle-Part II

The Obama administration is working hard to restore our economy to health.  But what does “restore to health” mean when the pre-crisis period of growth produced declining median household income, increasing job insecurity, declining health care coverage, decaying infrastructure—need I go on?

Right now there is a big fight brewing in Congress over the Employee Free Choice Act.  The fight poses the question of what kind of economy we want—will it be one supportive of the rights of working people or of business as usual?

Where does the administration stand on this question?  Larry Summers, who is the Director of President Obama’s National Economic Council, recently addressed it in a talk at the Brookings Institution.  Here is what the Washington Post says he said:

If we want to propel this economy forward [and] have a sound expansion, it has to be an expansion whose benefits are more broadly shared,” he said. That involves tax policy and education, he said, but also “goes to the question of having a healthy and well-functioning trade union movement. . . . It is hard to avoid the conclusion that the way in which our labor laws have functioned, and have been enforced and been acted on over many years, have not been constructive from the point of view of having a healthy trade union movement. And an attempt to redress that balance seems to me something that is appropriate at such a time.

Doesn’t sound too bad.  But here is the same Larry Summers writing on “unemployment” for the Library of Economics and Liberty:

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions. To put this in perspective, 1.2 percentage points is about 60 percent of the increase in normal unemployment between 1970 and 1985.  There is no question that some long-term unemployment is caused by government intervention and unions that interfere with the supply of labor.

The Brookings talk came after the posting on unemployment—so perhaps he has changed his mind.  But who knows?  Can we really count on people like this to fight our fights.

I think if we want a structurally different economy, then we are going to have to organize and fight for it ourselves.

Ideological Struggle–Part I

We are in the midst of very hard economic times—everyone agrees.  But there is not agreement on causes or responses.

Most mainstream economists believe that capitalism is a stable system.  For them, the private pursuit of profits keeps things in balance.  Recessions and high levels of unemployment are caused by unexpected exogenous shocks—definitely not by the workings of the capitalist system itself.  Many actually believe that the main cause of economic instability is the government; they believe that its spending generates imbalances which markets can only slowly overcome.

The biggest worry for these economists today is that we might demand regulations or restrictions on private profit-making activity (or even worse—public ownership, planning or production).  As they see it—if we would only be patient and allow market forces to work, things will return to normal—although how they understand normal is itself an important issue that needs further discussion.

This seriously flawed understanding of capitalist dynamics guides the thinking of most if not all Obama’s main economic advisors.  For example, here is how Christina D. Romer, Chairwoman of Obama’s Council of Economic Advisor, explains the business cycle:

Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy could stay forever. . . . If nothing disturbs the economy, the full-employment level of output, which naturally tends to grow as the population increases and new technologies are discovered, can be maintained forever. There is no reason why a time of full employment has to give way to either an inflationary boom or a recession.  Business cycles do occur, however, because disturbances to the economy of one sort or another push the economy above or below full employment.

What causes those disturbances?  For Romer and most of her associates the culprit more often than not is an overly aggressive use of monetary or fiscal policy by the government.  No contradictions or class tensions exist in this world.

Such a perspective has encouraged most mainstream economists to celebrate whatever “market forces” produce.  They dismissed concerns of income stagnation for the majority and celebrated the concentration of wealth in the hands of a small minority.  They dismissed concerns of deindustrialization and celebrated financialization.  They dismissed concerns of stock market and housing bubbles and celebrated the economy’s debt-driven growth.

Not surprisingly, the severity of the current crisis has taken them by surprise.  Forced by circumstances to respond, most suggest policies that are carefully designed to avoid any direct challenge to existing structures of power and wealth (think financial bailouts).  But this limitation means that their policies are incapable of addressing our immediate or long term needs.

We need better–a real debate on alternatives for a start–but we wont get it unless we organize and push for it.

To be continued.

Support the Employee Free Choice Act

Most workers were having a tough time even during the so-called pre-crisis good times.  Even while the economy was growing, average wages and household income was stagnating if not actually falling.  So, what were workers doing?

Many of them were trying to defend their interests by pursuing unionization—but corporate responses made that very difficult.  In fact, according to a recent study by the Center for Economic and Policy Research [CEPR], “pro-union workers were fired in 26 percent of union election campaigns over the period 2001-2007 (most recent available data). The 26 percent rate is up from about 16 percent in the last half of the 1990s.  The share of elections in 2001-2007 with an illegal firing was almost as high as the historical peak for such activity –31 percent during the period 1981-1985.”  By contrast, the rate was only 4-5 percent in the 1950s and 8 percent for most of the 1970.

This corporate response was part of a broader effort to boost profit margins at worker expense.  And as John Schmitt, CEPR senior economist and lead author of the study noted: “The financial penalties for illegal actions, including firing pro-union workers, are minimal, so it makes perfect sense for employers to break the law to derail union-organizing efforts.”

To change this situation, workers and their unions are pushing for adoption of the Employee Free Choice Act.  This act does three things to improve things:

* It strengthens penalties against companies that illegally coerce or intimidate employees in an effort to prevent them from forming a union;
* It brings in a neutral third party to settle a contract when a company and a newly certified union cannot agree on a contract after three months;
* It lets employees decide how to express their choice to organize, either by balloting or by majority sign-up, meaning that if a majority of the employees sign union-authorization cards, validated by the National Labor Relations Board (NLRB), a company must recognize the union.

Corporations are doing what they can to keep Congress from voting on this act.  Despite pre-election support for changes in labor law, the Obama administration has yet to take a strong stand on behalf of this act.  Let’s hope that strong public pressure will encourage it to do the right thing.

If you want to learn more about this and other labor related struggles visit Jobs with Justice.

Media Integrity and Predictions

Are you one of those people who watch business news programs on TV and believe that the “experts” know what they are talking about? If so you need to watch this 8 minute segment from the March 4 Daily Show with Jon Stewart.

It starts with the now famous on-air comments of Rick Santelli (a CNBC analyst), who blasts the Obama administration for trying to directly help homeowners avoid foreclosure while somehow forgetting the huge bailouts that have already gone to the banks and investment houses.  This leads Jon Stewart to examine CNBC investment advice and economic predictions in the period leading up to the current crisis.  For the results (and laughs) check out:

The daily show: cnbc-gives-financial-advice

Unemployment

The unemployment rate is soaring—the official February rate hit 8.1 percent.  That is the highest level in 25 years.  We have lost more than 4.4 million jobs since the recession started in December 2007.

Even this high rate understates the degree of unemployment. When the media cites the unemployment rate they typically use what the Bureau of Labor Statistics calls U-3. This measures counts people involuntarily working part time as fully employed and does not count people that want to work but have given up looking for work. The Bureau does have an alternative measure of unemployment that corrects for these shortcomings; it is called U-6. The official U-6 unemployment rate was a much higher 14.8 percent.

As Dean Baker reports in his useful March 6, 2009 Jobs Byte: “The economy is in a free fall with no obvious brakes in place. The recent forecasts, used in analyzing the stimulus and the budget, which projected 8.5 percent unemployment for the 4th quarter, now look impossibly optimistic. The unemployment rate is likely to hit 8.5 percent by March and will almost certainly cross 9.0 percent by the early summer. Without substantial additional stimulus, it could cross 10.0 percent by year-end.”

As I noted in a previous post, the predicted unemployment rates in the baseline scenario that the Treasury plans to use in its upcoming “stress test” of the banks are 8.4% in 2009 and 8.8% in 2010. Clearly this is not enough stress!

This situation also points out the need to fix our broken unemployment system. The New York Times recently highlighted a report by the Center for American Progress and the National Employment Law Project which found that “tighter rules mean that just 37 percent of unemployed Americans are receiving jobless benefits today, down from 42 percent during the 1981-82 recession and 50 percent during the 1974-75 downturn. Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s. The average weekly benefit is $293.”

The Stress Test

A problem banking system is one of the main factors driving our economy deeper into recession.

Most analysts believe that several of our major money center banks are technically bankrupt. Treasury Secretary Geithner believes otherwise and wants to convince investors that the banking system is fundamentally sound–there might be a few problems, but these can be addressed through some government stock purchases or loans.

He has ordered the Treasury to conduct “stress tests” on the biggest 19 U.S. banks to see how they would fare assuming a continuing deterioration in the economy. Though the tests have not yet begun, Geithner has publicly ruled out any nationalization, claiming that any problems that might emerge can and will be handled through some form of public subsidy.

This position has not reassured many investors or economists. They also don’t find the standards to be used in the test reassuring either. The tests are supposed to determine each banks likely financial health under two different economic scenarios — “baseline” and “more adverse” — covering this year and next.

The “baseline” scenario assumes that GDP growth will be -2% in 2009 and +2.1% in 2010, the unemployment rate will be 8.4% in 2009 and 8.8% in 2010, housing prices will fall 14% in 2009 and 4% more in 2010.

The “more adverse” scenario assumes that GDP will be -3.3% in 2009 and +0.5% in 2010, the unemployment rate will be 8.9% in 2009 and 10.3% in 2010, and housing prices will fall 22% in 2009 and a further 7% in 2010.

This sounds pretty bad—except for the fact that most people think it will be far worse.  Speaking about the baseline scenario, Simon Johnson (former chief economist of the IMF and now professor of economics at MIT) asks:

How exactly do we get growth over 2 percent in 2010 (and after)? The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different). There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year. Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system.

Dean Baker, one of the sharpest analysts around, has the following to say about the assumptions underlying the scenarios:

Okay, unemployment will almost certainly reach 8.0 percent and possibly 8.1 percent in February. It might cross 8.5 percent in March. The worst case scenario is that it hits 8.9 percent by the rest of the year?

Remember, this is the same crew that told us that there was no housing bubble. When it became clear that there were serious problems, they assured us that they would be contained in the subprime market. After Bears Stearn collapsed they told us that they didn’t see another Bear Stearns out there.These stress tests indicate that our economic policy makers are still in a serious state of denial. Why isn’t the media ridiculing them and telling the public that the folks making economic policy still don’t understand the economy.

And if you have any doubts—Doug Henwood, author of the always insightful Left Business Observer, shared the following on his blog:

It was predicted in this space just two weeks ago: “Obama to coddle bankers.” Now we’ve got official confirmation of this from one of the prime coddle-ees: Citigroup. An analysis of the Treasury’s plan produced by two Citi analysts, Ryan O’Connell and Jerry Dorost, begins with this headline: “New Treasury Stress Test Guidelines Do Not Appear Onerous” and continues in this vein.

Even the conservative London-based Economist magazine appears to have thrown in the towel—after grudgingly accepting the need for nationalization, it ended one of its recent editorials as follows: “[Nationalization] is hard to swallow in a country that likes its capitalism red in tooth and claw. But better a temporary ward of the state than a permanent zombie.”