State Budget Woes

The recession has cost jobs and income, and thus tax revenue.  Facing huge shortfalls, state governments are preparing to slash social programs and jobs, a response that will only deepen the downturn.

How bad is the problem?  According to a study by the Nelson A. Rockefeller Institute of Government (highlighted in Mish’s Global Economic Trend Analysis):

Total personal income tax collections in January-April 2009 were 26 percent, or about $28.8 billion below the level of a year ago in states for which we have data. In April 2009 alone (April being the month when many states receive the bulk of their balance due or final payments), personal income tax receipts fell by 36.5 percent, or $18.2 billion.

Oregon relies more heavily on personal income taxes (PIT) for revenue then any other state.  Here are some comparison numbers to put Oregon’s problem in perspective:

• 68.5% of Oregon’s Tax Revenue comes from PIT.  First quarter collections were off 27.0%
• 57.2% of Massachusetts’ Tax Revenue comes from PIT. Collections were off 28.5%

• 55.9% of New York’s Tax Revenue comes from PIT. Collections were off 31.8%

• 52.7% of Colorado’s Tax Revenue comes from PIT. Collections were off 25.4%

• 52.4% of Connecticut’s Tax Revenue comes from PIT. Collections were off 25.9%

• 47.5% of California’s’ Tax Revenue comes from PIT. Collections were off 33.8%

The Oregon legislature should be applauded for its recent approval of two bills, one increasing the minimum corporate tax and the other establishing a higher tax rate for individuals making over $125,000 a year or households reporting income over $250,000 a year.  The combination is expected to generate more than $730 million in new revenue, a small but meaningful step in the defense of public services and jobs–and a fairer tax structure.

Job Creation Blues

Leave it to the market used to be the cry.  Economists never tired of singing the praises of our capitalist system for its flexibility and job creating magic.   So, let take a look at the job creation magic–and here we ignore other relevant considerations like pay, insecurity, working conditions, and even the value of what is being produced. As the chart below (taken from Michael Mandel’s blog) shows, private sector job creation pretty much slowed to a crawl over the last decade–and that was before the crisis.   Mandel comments as follows:

Between May 1999 and May 2009, employment in the private sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.

This is another good indication that our economy is in desperate need of real structural transformation.

Pushing War on the Korean Peninsula

War tensions are building again on the Korean peninsula.  Even if actual military conflict is avoided, the tensions themselves have serious consequences–encouraging militarism in Japan; strengthening right-wing, anti-democratic forces in South Korea; intensifying hunger and repression in North Korea; and legitimizing greater military spending in the US.  In short, the growing confrontation between the US and North Korean governments is a serious issue and we need to understand what is driving it.

The general consensus as reported in the press is that North Korea is hell-bent on having a nuclear weapons program and using it to terrorize other countries.  The US has tried repeatedly to get the North to give up its nuclear weapons program, but to no avail.  The North never sticks to its word and cannot be trusted.  Therefore, the time has come for “tougher” action.

This may be the consensus but it is not accurate.  The truth is that negotiations between the US and North Korea have always been about more than the North’s nuclear program; they have also been about normalization of relations between the two countries.  And, the latter is something that the US has never taken seriously despite promises to do so.  That is the main reason that previous negotiations have failed.   The sad fact is that it has been the US government that has been the most unreliable negotiating partner: repeated administrations have failed to keep their promises and unilaterally changed the terms of previous agreements.

This is quite a different story—but the facts supporting it are not hard to find.  A case in point: the current round of tensions dates back to December 2008 when the US government announced that the North Korean government had failed to comply with the terms of an October 2007 agreement, which required it to declare the extent of its nuclear program.  Therefore, the US government no longer felt obligated to take the steps towards normalization of relations that it committed to as part of the agreement.

But did the North really fail to comply? In June 2008, the North Korean government gave the Chinese government, as required by the October 2007 agreement, a package of materials detailing its nuclear activities, including its plutonium holdings.  The US response was to demand that the North allow the US to verify this declaration by, among other things, giving the US full access to all North Korean military sites.  The problem with this demand was that no verification measures had been agreed to as part of the October agreement.  Verification measures were to be negotiated as part of the next stage of negotiations.

In short, the US simply decided to change the terms of the October 2007 agreement.  It even rejected North Korean offers of a compromise verification plan.  Thus it was US actions that brought the denuclearization-normalization process to a halt and set the stage for North Korea’s recent nuclear test.

Here is how Leon Sigal describes what happened:

The day Pyongyang turned over its declaration, the White House announced its intention to relax sanctions under the Trading with the Enemy Act and to delist North Korea as a “state sponsor of terrorism”–but with an important proviso. As Secretary of State Condoleezza Rice told the Heritage Foundation on June 18, “[B]efore those actions go into effect, we would continue to assess the level of North Korean cooperation in helping to verify the accuracy and completeness of its declaration. And if that cooperation is insufficient, we will respond accordingly.” She acknowledged Washington was moving the goal posts: “What we’ve done, in a sense, is move up issues that were to be taken up in phase three, like verification, like access to the reactor, into phase two.”

Many other examples could be given, all reflecting the same pattern.  If we want peace on the Korean peninsula, we desperately need a new US foreign policy towards North Korea—and the sooner the better.

For more on this history and related issues, I recommend the following articles:

•  These two provide an overview of the current situation:  Leon V. Sigal, “Why Punishing North Korea Won’t Work: Toward Resolution of the US-North Korea Conflict,” The Asia-Pacific Journal, June 8, 2009; Gavan McCormack, “Security Council Condemnation of North Korean “UFO” Deepens Korean Crisis,”  The Asia-Pacific Journal, April 15, 2009.

• This one provides a bit more historical background:  Martin Hart-Landsberg and John Feffer, “Sanctions and War on the Korean Peninsula,” Foreign Policy in Focus, January 17, 2007.

• This one addresses human rights issues in the North:  Christine Ahn and Thomas P. Kim, “The Untold Story Behind Human Rights Violations in North Korea,” Korea Policy Institute, June 16, 2009.

Union Busting

In a recent study of worker interest in unions, Harvard University professor Richard B. Freeman found that “The proportion of workers who want unions has risen substantially over the last 10 years.”  In fact, “if workers were provided the union representation they desired in 2005, then the overall unionization rate would have been about 58%.”

So how come the unionization rate is only about 12%?  One reason is that union busting efforts by employers have grown ever more intense and effective.  Cornell University professor Kate Bronfenbrenner recently examined employer responses to union organizing drives over the period 1999-2003.  Among other things, she found that:

* 63 percent interrogate workers in one-on-one meetings with their supervisors about support for the union.
* 54 percent threaten workers in such meetings.
* 57 percent threaten to close the worksite.
* 47 percent threaten to cut wages and benefits.
* 34 percent fire workers.

Moreover, worker problems are far from over even if they successfully form a union; more than half of new unions remain without a contract one year after winning election.

The Employee Free Choice Act was designed to address some of these issues—unfortunately, but not surprisingly, Congress and the President have largely walked away from their past commitments to support it.

The Chinese Economic Experience–Part II

The Chinese economic experience has drawn considerable attention; few if any countries have matched China’s record of sustained and rapid export-led growth.  China’s economic performance appears exemplary even during this global recession.

However, as noted in Part I of this series on China, working people have paid a heavy price for their country’s growth.  And, they have responded with ever growing resistance.

In this post, I focus on China’s current economic performance.  According to official Chinese data, the country’s GDP increased at a rate of 6.1% in the first quarter of this year (down from over 8% last year).  Although a 20 year low, this is still an impressive achievement.  In fact, it is so impressive that many analysts don’t believe it.

• China is an export driven economy, yet its exports have fallen for seven straight months (from November to May).

• As a result of massive excess industrial capacity, China is now facing disinflation; May marked the fourth consecutive month of falling consumer prices.

• Profits at large Chinese firms actually fell by 37.3% in the first two months of this year. Moreover, there are no signs of any revival in private investment.

• Foreign direct investment (excluding the financial sector) has been declining for eight straight months; it fell by 20.4% between January and May. The number of newly approved foreign enterprises fell by an even greater 33.8% over the same period.

• Unemployment is on the rise; wages are falling.

One would need a powerful stimulus to overcome these trends, and those who accept official GDP figures argue that this is exactly the situation in China: a massive government stimulus program has successfully sustained Chinese industrial production and retail sales.

The Chinese government has indeed greatly boosted its spending and expanded state lending.  And government figures show continued positive growth in both industrial production and retail sales. But, there are good reasons to doubt that the stimulus program has been so successful.

For example: Chinese industrial production has long been correlated with energy use.  Yet, while government figures show steady growth in industrial production over the first quarter of this year, China’s industrial use of electricity actually fell by more than 8%  over the same period and the rate of decline appears to be accelerating.

Moreover, as the Asia Times reports, there are major discrepancies between reporting agencies concerning sales of key products such as cars.  “Sales by China’s top 10 automakers as provided by their industry body are on average 10% higher than those indicated by licenses being issued.”  Similar problems are found with housing data.  Dongguan is a major industrial city hard hit by the fall in exports.  Its housing administration bureau reported declines of almost 40% in apartment sales last year while the National Bureau of Statistics recorded declines of only 10%.  This pattern is repeated in major cities across the country.

There are signs that even the central government is becoming suspicious of the underlying data that is fed into GDP calculations.  It implemented new regulations (which took effect May 1) under which state officials can be demoted, dismissed, or criminally punished for making false reports or compiling fake data.

In Part III, I look more closely at the Chinese government stimulus package and the hopes of many analysts that this spending signals greater attention to the domestic economy, thereby also providing a needed boost to the global economy.

The Chinese Economic Experience–Part I

A lot of attention is being paid to China during this crisis.  One reason is that it appears to be one of the few countries able to maintain a relatively high rate of growth.  Some analysts take this as more evidence for the superiority of the Chinese economic model.  Some US workers even view Chinese workers as benefiting at their expense.  These conclusions are largely based on a misreading of the Chinese experience.

Despite claims by the Chinese government, China is not a socialist country.  While the government remains a powerful force, its actions have created an economy that is dominated by markets and privately owned enterprises, and driven by foreign produced exports which are largely sold to the US, European Union, and Japan.  Exports now account for some 40% of Chinese GDP.  Approximately 55% of all exports and 88% of all high-tech exports are produced by multinational corporations operating in China, a growing number of which are 100% foreign owned.  In other words, China has become a capitalist country with “Chinese characteristics.”

While China’s growth strategy generated rapid growth and industrial transformation, these gains have come at high cost for Chinese workers.  One indicator: Chinese wages as a share of GDP fell from approximately 53% of Gross Domestic Product in 1992 to less than 40% in 2006. Private consumption as a percent of GDP also declined, falling from approximately 47% to 36% over the same period.

According to the Economist magazine, “the decline in the ratio of consumption to GDP . . . is largely explained by a sharp drop in the share of national income going to households (in the form of wages, government transfers and investment income), while the shares of profits and government revenues have risen. . . . Many countries have seen a fall in the share of labor income in recent years, but nowhere has the drop been as huge as in China.”

Despite strong state repression, workers have been anything but passive in the face of deteriorating living and working conditions.  According to official Chinese government statistics, the number of large scale “public order disturbances” grew from 58,000 in 2003, to 74,000 in 2004, 87,000 in 2005, and 94,000 in 2006.

Things have only intensified since the global crisis began.  The number of disturbances reached 120,000 in 2008 and 58,000 in just the first quarter of 2009 (which would produce a record 230,000 for the year if the current trend is maintained).

Concerned by growing popular resistance to its growth strategy, the Chinese government introduced a new labor law in January 2008 which was designed to force employers to sign contracts specifying  hours and wages and pay required overtime and health and retirement benefits.  However, more concerned about maintaining corporate profits in the face of the current world crisis, the government recently told employers that the law will not be enforced.

Chinese migrant workers account for approximately 70% of all manufacturing employment and these workers have been hard hit by the decline in Chinese exports.  Up to 30 million have lost their jobs over the last year, and millions more have been forced to accept lower wages.  Urban unemployment has also spiked for non-migrant workers—rising to double digit levels according to conservative estimates.

In short, even when China’s economy was booming it was far from a model for workers.  Wealth was created, but most of it went to multinational corporate owners (including those from the US) and their Chinese allies inside and outside of the Communist Party.  Now that China confronts a global crisis, living and working conditions for the majority have sharply deteriorated.

The significance of the above is that we need to think more globally and less nationally.  Business and government elites in both countries tend to share a common interest in maintaining a system that benefits them at majority expense.

This brings us to China’s still strong GDP growth rates.  In Part II, I discuss reasons to doubt these figures and thus the soundness of the Chinese economy.

Talking Strategy

We have become a highly atomized society—as a result it is difficult to know just how our fellow workers are doing during this recession.

The media reinforces this isolation by promoting the notion that individual actions represent our best survival strategy.  Collective actions to transform choices are never discussed, much less encouraged.

So—how are we doing?  We hear lots about unemployment, but what is the situation like for those with jobs?

A USA Today report provides some perspective: “People who still have jobs are faring worse than at any time since the Great Depression . . . . Furloughs, pay cuts and reduced hours are taking a toll on workers who so far have escaped job cuts.”

According to the Bureau of Labor Statistics, the average work week fell to 33.1 hours in May, the lowest total since the Bureau began counting in 1964.  One reason is that involuntary part-time work is at an all-time high; a record 9 million people want full time but can find only part-time work.

Of course, with fewer people working, and for fewer hours, total wage earnings are also falling fast.  Private business spending on wages fell at a 6.2% annual rate in the first quarter of this year.  Federal, state and local governments offset this somewhat, increasing their total wage spending by 6.1%.  But this won’t last long; state and local governments are under tremendous pressure to slash their spending, which will translate into cuts in employment and wages.

Significantly, similar pressures are also building on the federal government, directed against the few collective programs we do have.  As the World Socialist Web Site reports:

Testifying Wednesday [June 3] before the Budget Committee of the House of Representatives, Federal Reserve Board Chairman Ben Bernanke demanded that Congress and the Obama administration map out a program of austerity measures to bring down record budget deficits. Bernanke made clear that the heart of this program should be sharp cuts in social spending, including basic entitlement programs such as Social Security and Medicare.

Without collective action there is no saying how bad things might get.

Following The Depression Path

In April, Barry Eichengreen and Kevin H. O’Rourke, two well-known economists, published a study which compared economic trends today with those during the Great Depression.  They found that world industrial production, trade, and stock markets were collapsing faster during this global crisis then during the Great Depression.

They have now updated their work.  Their major findings include the following:

* World industrial production continues to track 1930s trends, with no clear signs of ‘green shoots’.

* World stock markets have rebounded a bit since March, and world trade has stabilized, but they are still following paths far below the ones followed in the Great Depression.

* German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.

* US and Canadian industrial output continues to fall approximately in line with what happened in the Great Depression, with no clear signs of a turn around.

* Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

In short–a quick look at their easy to follow graphs makes it clear that we are dealing with a serious structural crisis.

One would be hard pressed to know all of this from reading the mainstream media.  As Dean Baker notes: “The media have obviously abandoned economic reporting and instead have adopted the role of cheerleader, touting whatever good news it can find and inventing good news when none can be found. This leaves the responsibility of reporting on the economy to others.”

The (Un)employment Report

The May unemployment figures are now out.  The U-3 unemployment rate rose from 8.9 in April to 9.4 percent.  The U-6 unemployment rate (which includes discouraged and involuntary part-time workers) rose from 15.8 to 16.4 percent.  Moreover, the average length of unemployment now stands at a record 21.4 weeks.

The US economy has lost some 6 million jobs since the recession began in December 2007.  Is the worst behind us?  Not likely.

The main areas of employment growth in May were in education and health services.  These can be expected to take a big hit when state governments are forced to balance their budgets through massive cuts in social spending.  Oh yes, and then there is GM which will soon be slashing its payroll by tens of thousands.

The US and the Euro area are locked in fierce competition for unemployment leader, with workers in both regions the big losers.   The seasonally adjusted unemployment rate for the 16 Euro using countries was 9.2 percent in April, having risen from 8.9 percent in March.  The US and the Euro area use slightly different definitions for calculating unemployment.  Internationally comparable data will be published later in June and it is likely that the US rate will remain higher.

US problems also extend to earnings.  The employment cost index, which includes both wages and benefits, was basically flat in the first quarter of 2009, after having grown by almost 3 percent in 2008.

It is hard to imagine a real recovery ahead with unemployment still growing and earnings flat.

The GM bailout

The GM bankruptcy is indeed big news—unfortunately it is also another example of problematic reporting.

We are encouraged most of all to worry about the “huge” government bailout to the company—some $30 billion dollars on top of a previous $17 billion.  The slogan seems to be: Forget the crisis! Worry about the deficit!

Missing is perspective.  For example, the US government has been spending $12 billion a month to fight the war in Iraq.  Thus we have the equivalent of some three bailouts a year but we never hear a critical voice about this spending and its deficit producing consequences.  And there is every reason to believe that the US government is determined to continue spending huge sums of money in Iraq and Afghanistan, again with little media attention.

We are told that the president plans to withdraw our forces from Iraq in stages.  The first stage is withdrawal from Iraqi cities by June 30.  However, as the Christian Science Monitor reports, not much is likely to happen:

On a map of Baghdad, the US Army’s Forward Operating Base Falcon is clearly within city limits. Except that Iraqi and American military officials have decided it’s not. As the June 30 deadline for US soldiers to be out of Iraqi cities approaches, there are no plans to relocate the roughly 3,000 American troops who help maintain security in south Baghdad along what were the fault lines in the sectarian war. “We and the Iraqis decided it wasn’t in the city,” says a US military official. The base on the southern outskirts of Baghdad’s Rasheed district is an example of the fluidity of the Status of Forces Agreement (SOFA) agreed to late last year, which orders all US combat forces out of Iraqi cities, towns, and villages by June 30.

Equally troubling is the fact that while the government may eventually reduce the number of troops fighting in Iraq and Afghanistan, it is rapidly increasing the number of private contractors.  As Democracy Now reports:

Newly released Pentagon statistics show the number of armed contractors in both Iraq and Afghanistan is rapidly rising. The number of military contractors in Afghanistan increased by 29 percent in the second quarter of 2009. The number in Iraq jumped by 23 percent. Independent journalist Jeremy Scahill reports there are now over 240,000 private contractors working in Iraq and Afghanistan.

Problems with the GM reporting go far beyond spending.  The media uncritically reports the president saying that the government is “acting as a reluctant shareholder.” By this he means that there is no justification for the government to take any decision-making role in the company despite becoming its majority shareholder.

Lets see–private profit-making led to crisis for the company and industry, requiring public bailout, but it would be irresponsible for the public to play a major role in shaping or directing (in partnership with the workers) a new plan for the company and industry.

Sounds a lot like the banking sector–and after giving private financial interests trillions of dollars to do with as they want we still don’t have a finance sector that is responsive to public needs.  We appear to be making the same mistake with the auto industry and for the same reason–those in charge oppose real change.   They seem clear on their interests–what about us?