Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: August 2009

Know Your Enemy

The following comes from Peter Coy at Business Week.  It describes the upcoming Chamber of Commerce public relations offensive aimed at getting you to defend capitalism and the rights of capitalists to freely make profits.  The problem for the Chamber (and the firms it represents) is that people now view “capitalism” critically.  So,  it is on to new words.

Capitalism, No. Free Enterprise, Yes

To combat what it views as rapid government growth and attacks on business, the U.S. Chamber of Commerce is launching a multiyear campaign to remind Americans of the virtues of a free market and free trade. But don’t expect the campaign, which could cost as much as $100 million, to praise “capitalism” or “risk taking.” Or to criticize “protectionism.”

It’s not that the Chamber, which represents 3 million organizations, has gone squishy on its core values. The group just wants its message to resonate with the public. And reactions to these terms by focus groups in Jacksonville, Fla., and Philadelphia suggest it would be best to omit them. ” ‘Capitalism’ was universally problematic,” says Chamber spokeswoman Tita Freeman. Adds Rich Thau, president of New York-based Presentation Testing, which ran the focus groups: “There were those who associated ‘capitalism’ with greed and with the powerful dominating the vulnerable.” But those negatives, he says, didn’t apply at all to “free enterprise.” (For now, the Chamber’s multimedia offensive, which starts officially in October, is called the Campaign for Free Enterprise.)

As for “risk-taking,” which has been promoted in the Chamber’s press materials, “it was at the bottom of the pile,” says Freeman. “We found the average American doesn’t like the idea of businesses taking risks. They think of a casino and someone throwing the dice.” And “protectionism,” which the Chamber opposes? In an earlier round of tests, people approvingly linked the word with a general sense of being “protected,” says Thomas Donohue, the Chamber’s president and CEO. (The campaign may instead inveigh against “isolationism.”)

To test the various terms, Thau convened separate focus groups of Obama voters, McCain voters, and small business owners. The responses were quite similar across all three categories, he says. What surprised him most? “The number of people who associated ‘capitalism’ with increased government involvement in business. I’m still puzzling over that one.”

Making Sense of the Economy

It is easy to be confused about the state of the economy.  However, if we stop trying to figure out turning points, when a recession ends and an expansion begins, and start thinking about longer terms trends, things become a bit clearer.

Consumption accounts for about two-thirds of U.S. Gross Domestic Product (GDP).  What kept GDP growing over the last expansion (2001-2007) was rising consumption, and what kept consumption growing was debt.  The result was an ever shakier foundation that has now collapsed.   The reason the expansion was built on debt was that despite the growth in GDP, real wages and household income trended downward.  If we are going to have a healthy economic future we must ensure that structures are in place to reverse that trend.

The following chart, taken from the blog Mish’s Global Economic Trend Analysis shows just how critical consumption gains have been to economic recovery.

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So, where are we today?  The answer is not very promising.  According to Bloomberg News:

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.  Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed.

Without higher wages and income there won’t be any sustained increase in consumption, which means business investment will remain weak, and . . . well, you probably get the picture, no meaningful economic recovery.

Of course employment is also important (individual wages might not go up significantly but an increase in total employment could still generate an increase in total spending), but the news is no better on this front.  In a previous post I highlighted (check out the chart) the fact that the private sector has almost stopped creating jobs.   I quoted the business analyst Michael Mandel 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.

And of course this doesn’t even speak to the quality of the jobs; for example, involuntary part-time employment has soared.

Sadly, there is very little reason to expect any significant near term decline in unemployment.  In fact, as a recent post at Mish’s Global Economic Trend Analysis noted: “If [past business cycle patterns] hold, unemployment will rise until 2011 or beyond. . . . Odds of a double dip recession similar to 1980-1982 are high after whatever inventory rebuilding and bottom fishing in housing ends.” [Check out the chart below from the same source–it shows how the past two expansions, unlike the previous seven, are marked by continuing increases in the unemployment rate.]

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So—don’t confuse stabilization with recovery, and keep your eye on real fundamentals—majority living and working conditions.

Class Power At Work: Social Security

There is a new attack on social security.  As you may remember, before the recent collapse of the economy, conservative forces claimed that the social security system was headed for crisis and offered privatization as the solution.

The truth was that there was never a real crisis; it was manufactured.  The health of social security is determined using models to predict economic trends over the next 75 years.  The social security crisis was the result of the assumptions used in the modeling—these assumptions assumed rates of growth that were lower than during the 1930s.  If one made growth assumptions that were more in keeping with historical trends, there was no crisis.  The aim of the conservatives was to push money into the stock market where private interests could make millions managing it.  Thank goodness this privatization push was resisted.

But the same forces are hard at work again.  The Associated Press recently ran a story calling social security a “giant federal Ponzi scheme” that will soon collapse because of a lack of money.  The Washington Post recently warned us that social security is one of “the primary drivers . . . of the nation’s financial problems.

This is all silly.  Social Security is still running surpluses.  Moreover, even using its conservative assumptions, the social security administration is forced to admit that the current system will have plenty of money to meet all its obligations through 2037.  The Congressional Budget Office puts the date at 2043.

Would you give up a program working as intended because of predictions that SOME 30 YEARS FROM NOW it might not have sufficient money to cover all its promises?

Actually, even if the social security administration’s prediction is accurate, we still don’t face a crisis.   Right now social security taxes are paid on all labor income up to $106,800.  Earnings above that ceiling are not taxed.   Why is this important?  As the Wall Street Journal explained in a recent article titled “Pay of Top Earners Erodes Social Security”:

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year. . . .

Lifting the earnings ceiling could result in higher Social Security benefits payments to higher-income individuals, since benefits are based on a worker’s highest 35 years of earnings. But the additional tax revenue would have decades to earn a return, thus offsetting the cost of the additional payments.

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

You are reading that right—even using the most conservative estimates about future economic trends, the social security system would remain fully operational if we just removed the earnings ceiling on the wealthy.

So, what is class power?  One measure of class power is the ability to shape public discussions in such a way that attention is focused on what you want to talk about and away from what you don’t want to talk about.  The rich want social security privatized, not saved.  So the media obligingly give us story after story about the crisis in social security and the need to drastically change the system.

The rich don’t want to talk about the growth in inequality and its negative social consequences.  Thus, simple reforms that would strengthen the system are never discussed (except by publications like the Wall Street Journal which are largely read by an audience that fully understands its class interests).

When will we recognize and promote our own class interest?

Unemployed Councils: Lessons For Today

Economic conditions are bad; what should we do?  In many ways the problem is not a lack of ideas—if we had power we could strengthen labor laws making it easier for workers to defend their rights; implement a single payer health system; nationalize the banks and re-direct funds to priority areas like mass transit and green technology; raise taxes on corporations and the wealthy to fund vital social services and programs; change trade laws to undercut corporate power.  The list goes on.

No, the problem is more a lack of political power and will.  People feel isolated and discouraged.  How do we overcome that problem?  History offers some important examples that deserve serious study.  One is the experience of the 1930s Unemployed Councils.

By the end of 1931, Unemployed Councils in Portland had more than 3000 registered members.  When individual efforts to work within the system failed, the Councils often took direction action in defense of their member’s interests. For example, after some 400 unemployed stormed City Hall, the city agreed to provide housing and shelter for over 1000 unemployed working people.  [The picture below illustrates the work of the unemployed councils in Portland “reversing” an eviction]

If unemployed workers could come together in the midst of the depression and form a powerful national organization to fight for meaningful social changes for themselves and others,  why can’t we help today’s hungry, homeless, and unemployed (modern day victims of social forces beyond their control) organize and work with other movements to demand change?

Here are some places to learn more about the Unemployed Councils:

The Pacific Northwest Labor History Project

KBOO’s Labor Radio

“Organize among Yourselves”: Mary Gale on Unemployed Organizing in the Great Depression

“I’m Going to Fight Like Hell”: Anna Taffler and the Unemployed Councils of the 1930s

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Labor Radio Interview

On Monday (August 10), Labor Radio–a weekly program that airs on KBOO radio (90.7 FM)–played an interview of me by hosts Deborah Schwartz and Al Bradbury.  We discussed a variety of topics, including the effectiveness of the stimulus, the outlook for the economy, the alleged social security crisis, and the need for structural change in our economy.

You can hear the interview (followed by another that was done by the hosts with Henry Huerta, Campaign Director of the CLEAN Car Wash Campaign, about the unionization efforts of more than ten thousand Los Angeles car washers) at:  http://kboo.fm/node/15826

You can hear an extended (and unaired) version of my interview at: http://kboo.fm/node/15788

What Lies Ahead For The US Economy?

The newspapers are full of reports suggesting that the worse may be over—perhaps they are right, but I put little store in reports that rely on economic projections made by the same people that denied we had a bubble economy right up to the moment it popped, and then have been busy ever since telling us that things aren’t too bad.

There is no doubt that the US economy came very close to a complete melt down and that government action has helped break and cushion the fall.  But here is the key point—our economy was not working well for the great majority even during the debt-driven speculative years before the collapse.  With speculative forces now spent and the economic structure unchanged the odds are great that conditions will continue to deteriorate even after our economy does stabilize.

What we have seen so far in terms of economic trends is a slowing of the decline, not a recovery.   We need a new round of stimulus spending to hurry along the recovery.  But even more we need real structural changes—we need changes that will promote livable wages, workplace democracy, full employment, well funded and accountable social programs, and a sustainable and responsive use of our productive resources to satisfy domestic needs not profits.

To appreciate how important the need for structural change is, consider the quality of our last expansion.   The Economic Policy Institute provides some good data for doing this in a very useful report,  “A Feeble Recovery, The Fundamental Economic Weaknesses of the 2001-07 Expansion.”  As the chart below (taken from the report) shows, the last expansion (and full business cycle) ranks among the weakest on almost all counts (the lower the number the better) except one: profits.  And that is why business is not eager to make any real changes.  But remember, our next expansion will not have the “benefit” of the stock and housing bubbles that underpinned our last expansion.   Is a future of worsening economic outcomes really the best we can do?

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New Summer Camp Curriculum: Down With the Bosses

U.S.: Das Camp-ital – Kids Overthrow Bosses on ‘Capitalism Day’
By Ben Case

LIBERTY, New York, Jul 28 (IPS) – Workers at a munitions factory in Almosnino walked out last Wednesday, joining an anti-war protest nearby. The combined strikers and protesters later stormed the factory after a scuffle with police who were trying to arrest a crowd that was blocking a truck from leaving the factory.

Workers immediately held a meeting inside their occupied factory and unanimously voted to suspend production of weapons and switch to the production of solar panels.

Later that day, the people of Almosnino, reeling from economic woes and unable to pay for food, convinced the chief of police to cede power and allow a population without money to eat for free.

This was the culmination of a daylong social experiment, practiced once a year by Shomria summer camp.

Shomria, located outside the small town of Liberty, New York and open to children aged eight to 15, is run by Hashomer Hatzair, a Socialist Zionist youth movement in Israel, the U.S., and Canada.

Once per summer, the camp runs a ‘Yom Capitalism’ (Hebrew for ‘Capitalism Day’) in which the entire camp simulates a town with a free market economy. The remarkably realistic exercise comes complete with a bank, government offices, and printed money in a make-believe town named Almosnino.

“It might seem weird to think about a ‘capitalism day’ in a capitalist society. But what we normally do here at camp is live in a kibbutz-style socialist village,” explained Yotam Marom, head of continuing education for Hashomer Hatzair, and facilitator for the oldest age groups at Shomria.

“This day has meaning in contrast with the way we run things on a day-to-day basis. It gives us the ability to reflect on capitalism in a way that you don’t get just living in a capitalist society,” Marom told IPS.

Shomria is run according to egalitarian philosophies. Work is shared evenly, issues are discussed collectively, and everything is decided by consensus.

“We do all of our own work,” Marom told IPS. “Aside from a few support staff, the camp is run exclusively by youth.”

Central to the camp’s ideology is the concept of youth leading youth. The youngest camper is eight years old and the oldest counselor is 23. “Everyone is connected to each other, everyone is an educator and everyone learns,” Marom added.

When campers wake up on Capitalism Day, they are handed an envelope containing their starting financial situation. Most will start with both some money and some debt, a few will start with a lot of money, and even fewer will start with land and a business.

Throughout the day, kids are able to get jobs, acquire loans from the bank, and start businesses. Everything that goes on in the day, including eating, requires money, which is printed up the night before and available through the bank or through their labour.

Some counselors were also workers and business owners, but many were pre-set ‘characters’ such as the mayor, the factory owner, chamber of commerce and bank officials, and police officers.

Early in the day, a multitude of businesses opened, ranging from lemonade stands to massage parlors and salons to a sign shop, selling advertising materials to other businesses.

Most campers found jobs working in the factory, making ‘bombs’ out of plastic bottles, water, and food coloring. A truck picked up the finished products and delivered them to an imaginary military buyer.

“We used a munitions factory this year because we wanted to connect labour issues to the war,” said Adam Bresgi, a 20-year-old counselor who played the part of the mayor.

The day also included politics. An election pitted Bresgi, a socially liberal, fiscally conservative, pro-war incumbent, against a green, pro-worker’s rights, anti-war challenger, played by a 23-year-old counselor.

Throughout the day, two ‘TV anchors’ put on periodic live news shows to inform everyone about what was happening all over the camp, even holding a debate between mayoral candidates.

By the afternoon, when the bank began calling back loans, nearly all businesses defaulted and closed, leading to an economic crisis in Almosnino. The mayor proceeded to simulate a bailout, giving government money to the factory and several other businesses deemed ‘too big to fail’.

This, along with divisions that had been forming throughout the day, sparked protests and a strike that led to the eventual ‘revolution’.

As interesting as the outcome, though, was the social dynamics throughout the experiment. “The most educational part of Capitalism Day is watching relationships transform,” Marom told IPS.

“Normally everything is collective: They pool their candy and share. Their counselors care about their feelings. They work to understand each other and really try to provide for each other,” he said.

“But on Capitalism Day the relationships get flipped on their heads in a moment,” he continued. “Kids wake up and have money or don’t, and that creates class divisions on the spot that in turn create divisions between the kids in reality not in the game.” Indeed, many campers reported having serious feelings about what happened on Capitalism Day.

“It was much harder than I thought to get money,” Gal Gelbard, age 10, told IPS. “When you don’t have money today, you don’t have fun. You can work hard all day and still not have enough money.”

Nine-year-old Idan Cohen told IPS he enjoyed the experience even though it wasn’t easy. “Today taught you how to take care of yourself with no parents and just your own money,” he said. “It taught you how to be responsible.”

“If you have no money now you know how it feels, how it can be for our parents,” Cohen went on. “You are sometimes being a little spoiled to your mom, but now we get it and we know.”

Tamar Golan, at age 23 one of the oldest people at Shomria, said she distinctly remembered her first experience with Capitalism Day as a camper.

“I just remember walking around and having all of my interactions with other people be through money,” she told IPS. “That’s when it clicked for me what the social influence of capitalism is – isolating.”

Golan played the part of the opposition mayoral candidate, who beat the pro-business incumbent mayor by a landslide in a late afternoon election as the economy crumbled.

Despite not knowing Capitalism Day was happening until the morning of it, campers were astonishingly clever and resourceful. Prime examples were workers organising a class action lawsuit against the factory owner and police putting undercover agents in spontaneously forming organised crime gangs.

“People acted just like their roles, it was amazing,” Marom told IPS. “Cops acted like cops. Bosses acted like bosses. Workers acted like workers,” he said.

Perhaps the most important question raised by Yom Capitalism was: Why do people in society behave the ways that they do – are there certain roles because people are just different from one another or do power relationships inherently create such dynamics?

Shomria was founded in 1946, then serving as a training farm for people to learn how to live on kibbutzim before they would move to Israel, and later developed into a summer camp.

Military Spending Keeps Growing

The US military empire continues to grow, and at an ever greater price tag.  At the same time the conventional wisdom is that there is not sufficient money available for accessible, affordable, inclusive national health care.

The Pentagon claims to have 865 bases, but if new bases in Iraq and Afghanistan are included the number likely tops 1000!.  “These thousand bases constitute 95 percent of all the military bases any country in the world maintains on any other country’s territory. . . . These bases do not come cheap. Excluding U.S. bases in Afghanistan and Iraq, the United States spends about $102 billion a year to run its overseas bases, according to Miriam Pemberton of the Institute for Policy Studies.”

It is worth restating this last point: we are spending more than $100 billion a year just for bases and those don’t include newly created bases in Afghanistan and Iraq.  Oh, and there is also the recently approved, with little or no debate, decision to construct “a new ’embassy’ in Islamabad, Pakistan, which at $736 million will be the second priciest ever constructed, only $4 million less, if cost overruns don’t occur, than the Vatican-City-sized one the Bush administration put up in Baghdad.”  While officially outside the base budget, embassies like these have clear military purposes.

Our overall military spending is also far larger than we realize.   John Bellamy Foster, Hannah Holleman, and Robert W. McChesney highlight this by developing their own estimate of military spending for the year 2007 (illustrated in the table below). Their starting point for this exercise is the National Income and Product Accounts.  This shows 2007 military spending at $662 billion for 2007, over $100 billion more than the military total claimed by the Office of Management and Budget in the official budget.

As Foster, Holleman and McChesney explain:

Much of the difference is explained by the fact that the NIPA numbers for national defense, as opposed to the U.S. budget figures, take account of the following: government consumption of fixed capital, cash payments to amortize the underfunded liability for military and civilian retirement benefits (which in the budget accounting are included elsewhere as “intergovernmental transactions”), and expenditures recorded on a delivery (accrual) rather than cash basis (as in the budget).

While using “full cost accounting” NIPA figures is the best starting point, more needs to be added to get an accurate assessment of actual U.S. military spending.  For example, we need to add: “military grants to foreign governments; space; medical payments to military retirees and dependents at non-military facilities; veterans’ benefits; and the net interest payments on the national debt attributable to military spending.”

As the table below shows, making the above corrections almost doubles the amount that we are officially told we spend on our military.  And although the Obama administration is calling for a slower rate of increase in military spending, actual spending on the military continues to climb.  And this is despite the fact that we already account for at least 45% of total world military spending.

We constantly debate and scrutinize spending on social programs and are told by the experts that there just isnt enough money to meet our needs.   There is no debate over and no scrutiny of our military spending, and always enough money for new interventions/occupations, bases, and weapons systems.  This is no accident but a matter of differing priorities, ones that will not be easily changed without real political struggle.

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a) Grants to foreign governments are conservatively considered here to be eighty percent military. For instance, under the International Affairs portion of the budget $8 billion was spent in 2007 on International Security Assistance, $16 billion on International Development and Humanity Assistance, most of which were imperial expenditures.

b) Includes one-third of “Other” government social benefits category (National Income and Product Accounts, Table 3.12), defined by BEA as consisting “largely of payments to nonprofit institutions, aid to students, and payments for medical services for retired military personnel and their dependents at nonmilitary facilities.”

c) Assumes 80 percent of net interest payments attributable to military. This is less than other estimates by major analysts.