Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Nationalization

A Seat At The Table Of Power

A growing number of analysts are taking seriously the possibility that the U.S. economy is heading back into recession.   No wonder President Roosevelt’s 1933 first inaugural address is getting heavy internet circulation.  Here is a snippet:  

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources. . . .

Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.

These are the lines of attack.

Sadly our government appears to have no interest in directly “recruiting” people and putting them to work meeting the needs of our country.  In fact, most Republican and Democratic party leaders refuse to support a substantial fiscal stimulus even if it would be used to encourage private production.

Right now, the only governmental body committed to expansionary policy is the Federal Reserve, the body that determines our country’s monetary policy.   However, it appears that the banking sector opposes even that effort and it remains to be seen how successful they will be in getting their way. 

Our Federal Reserve System is an odd creation.  It was created in 1913 and consists of a seven member Board of Governors and twelve regional federal reserve banks located in different cities throughout the United States. 

As the Federal Reserve itself explains:

The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.

Sounds pretty straight forward.  The odd part is the system of regional federal reserve banks. 

Each regional bank has a president who serves a five year term and may be reappointed.  The president is chosen by the bank’s board of directors–and here is where the issue of who gets to sit at the table of power becomes important. 

Each regional bank’s board of directors consists of nine members selected from three “classes,” A, B, and C. The three Class A directors are chosen by the private banks operating in the region to represent the interests of the member banks.  The three Class B board members are also chosen by the private banks; they are supposed to represent “the public.”  The three Class C board members are chosen by the Board of Governors and are also supposed to represent the public.

In short, private bankers are structurally placed to dominate the selection of the presidents of the twelve regional federal reserve banks, and through them, influence the direction of the country’s monetary policy. 

Monetary policy is made by the Federal Reserve Open Market Committee (FOMC).  The voting members of the FOMC include the seven members of the Board of Governors and five of the twelve federal reserve presidents (on a rotating basis).  Thus, representatives of the banking sector are legally empowered to sit at the table where decisions about monetary policy and our economic future are made. 

If you are wondering if this is wise, you are not alone.  Barney Frank, Congressman from Massachusetts, has long worried about this.  As he said this September:

The Federal Reserve (Fed) regional presidents, 5 of whom vote at all times on the Federal Open Market Committee, are neither elected nor appointed by officials who are themselves elected.  Instead, they are part of a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the President and confirmed by the Senate.

For some time this has troubled me from a theoretical democratic standpoint.  But several years ago it became clear that their voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve.  In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate — specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.

In 2009, I asked staff of the Financial Services Committee to prepare an analysis of FOMC voting patterns.  It confirmed two points.  First, the great majority of dissents, 90 percent — from FOMC policy before 2010 — came from the regional presidents.  Second, the overwhelming majority of those dissents were in the direction of higher interest rates.  In fact, vote data confirmed that 97 percent of hawkish dissents came from the regional bank presidents and 80 percent of all dissenting votes in the FOMC over the past decade were from a hawkish stance.

One day before Frank issued his statement, the FOMC voted to modestly lower long term interest rates in an attempt to boost investment. The decision was supported by a 7-3 vote.  At present there are only five voting members of the Board of Governors; two seats remain open.  As Dean Baker explains:

What was striking about this vote was that all 5 governors voted for this measure obviously feeling that the potential benefits in the form of stronger growth and lower unemployment outweighed any risks of higher inflation.  However, 3 of the 5 voting bank presidents opposed the measure, apparently viewing the threat of inflation as being a greater concern than any possible growth and employment dividend.

This raises an obvious question about the interests being represented by the bank presidents.  Inflation is especially bad news for banks because it reduces the value of their assets.  On the other hand bankers may not be very concerned about unemployment. They have jobs, as is probably the case for most of their friends as well.

It is hard not to wonder whether the bank presidents voting against further steps to spur growth and reduce unemployment were acting in the best interest of the country as a whole or whether they were representing the banks in their districts.  If the latter is the case, then it is reasonable to ask why we are giving the banks a direct role in setting the country’s monetary policy.  There is no obvious reason that they should have any more voice in determining monetary policy than anyone else.

In April, Barney Frank introduced H.R. 1512, which would eliminate the voting power of the regional bank presidents.  This seems like a good step.  We might want to go further and restructure the way in which bank presidents are elected; we shouldn’t be relying on bankers to decide who represents the public interest.  

Market Outcomes And Political Power

The media likes to talk about markets as if they were just a force of nature.  In fact, markets and their outcomes are largely shaped by political power.  In a capitalist system like ours, that power is largely used to advance the interests of those who own and run our dominant corporations. 

Thanks to Bloomberg News we have yet another example of this reality.  In brief, as a result of Congressional and media pressure the Federal Reserve was recently forced to reveal its lending activity for the period August 2007 through April 2010.   Bloomberg News examined these Federal Reserve records and found that the Fed secretly provided selected banks, brokerage houses, and even non-financial firms (such as General Electric and Ford) with at least $1.2 trillion in loans, often with minimal collateral required and at below market interest rates.

This money was given through more than a dozen lending programs.  Many firms tapped multiple programs through multiple subsidiaries. Bloomberg arrived at its total by focusing on the seven largest programs, which included the Fed’s discount window and six temporary lending facilities (the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; the Commercial Paper Funding Facility; the Primary Dealer Credit Facility; the Term Auction Facility; the Term Securities Lending Facility; and so-called single- tranche open market operations.

If you like visuals, here is a 5 minute video that provides a good summary of what Bloomberg gleaned from its examination.

Bloomberg also has an interactive site that allows you to chart who got what and over what period.    

Some of the highlights are as follows:

The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion . . .

Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG, which got $77.2 billion. . . .

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

The Federal Reserve fiercely resisted making its records public, arguing that doing so would stigmatize those institutions that received loans.  A group of the largest commercial banks actually petitioned the Supreme Court in an unsuccessful effort to keep the loan information secret.  

Perhaps one reason that the Federal Reserve and the banks were reluctant to have these records made public is that they raise significant questions of conflict of interest.  According to a statement by Vermont Senator Bernie Sanders,

the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.

In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

Another reason may be that the Federal Reserve didn’t want it known that it was deviating from its past practice of requiring borrowers to provide secure collateral, which was normally either Treasuries or corporate bonds with the highest credit rating, and never stocks.  For example:

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.

Moreover, as Bloomberg News also reported, many Fed loans were made at below market interest.

On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.  

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

These loans were absolutely critical to the survival of our leading companies.  A case in point:

Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.

These loans are also a key reason that our post-Great Recession economy remains largely unchanged in structure.  In other words, it was the exercise of political power, rather than so-called market dynamics or efficiencies, that explains the financial industry’s continuing profitability and economic dominance.

Now imagine if we had a state that engaged in transparent planning and was committed to using our significant public resources to reshape our economy in the public interest.  As we have seen, state planning and intervention in economic activity already goes on.  Unfortunately, it happens behind closed doors and for the benefit of a small minority. It doesn’t have to be that way.

Learning From The UK

The U.S. economy isn’t the only one struggling.  That means there are things to learn from other countries.  Take the United Kingdom, for example. 

The United Kingdom faces many of the same problems we do.  And the British government has decided to respond to these problems with many of the same policies promoted by our own conservative political leaders: slash public spending and cut public sector jobs and wages.  In fact,  the British plan calls for six consecutive years of spending cuts.  As Paul Krugman explains:

Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday [October 20, 2010] and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative. . . .

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Well, not surprisingly, the outcome of this austerity plan has been further economic decline.   As the chart below shows, the UK economy actually fell back into recession the last three months of 2010, suffering a 0.5% contraction. 


Despite that outcome, the government, according to the BBC, remains committed to its austerity policy: 

The Chancellor, George Osborne, said the numbers were disappointing.

But he added the government would not be “blown off course” from its austerity program.

The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.

The BBC’s economics editor Stephanie Flanders said people were right to worry about where the UK’s growth would come from in 2011, especially as higher-than-expected inflation had dealt a further blow to household budgets.

Michael Roberts provides the following update and summary of economic trends:

The UK economy is struggling to recover from the Great Recession of 2008-9.  While profitability has recovered, British big business is still refusing to invest.  In Q1’11, UK gross fixed investment slumped by 4.4% compared with Q4’10, while household consumption fell 0.6%.  Most significant, business investment excluding property fell 7.1%  (manufacturing investment fell 1.1%).  It prefers to heap up the cash, invest abroad or speculate in stock markets rather than invest in expanding production or employment in the UK.   And while that continues British households on average will continue to suffer significant losses in living standards.

Household spending  is set to experience the slowest pick-up of any post-recession period since 1830, according to a survey of economists.  British consumers will spending barely more by 2015 than they were before the financial crisis in 2008.  In the UK’s 18 major recessions since records began in 1830, Bank of England data show consumer spending on average recovered to 12% above its previous peak within seven years.  But forecasts by the UK’s Office for Budget Responsibility put spending in 2015 at just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period.  After recessions in the early 1980s and 1990s, spending was 20% and 15% higher respectively.

That household spending will be so laboured is not surprising as the average British household faces the biggest drop in income for 30 years.   Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels.  The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits.  But IFS analysis suggests the long-term effects of the recession and higher inflation will soon squeeze incomes.  Lower wage increases and the corrosive effect of rising inflation mean that it is “entirely possible” that income this year will return to levels of six years ago.   Even the Bank of England warned that UK households faced a significant cut in their spending power as inflation heads towards a 5% annual rate.

So, one thing we can learn from studying the UK is not to adopt conservative budget policies.  Another is that there are alternatives to the other established policy option, which is to just keep spending and hoping for a magical revival of economic fortunes. 

For example, UK climate activists and several national trade unions are promoting a straightforward, effective campaign to create one million green climate jobs.  As the alliance says:

To find solutions to the climate crisis and the recession, we need more public spending, the opposite of current government policy. We have people who need jobs and work that needs to be done. A million climate jobs in the UK will not solve all the economy’s problems. But it will take a million human beings off the dole and put them to work saving the future.

Their plan is careful to distinguish between climate jobs (which reduce greenhouse gases) and green jobs (which can mean almost anything).  More specifically it calls for the creation of a million, new public sector jobs and a National Climate Service to employ them, highlights the kind of work that should be done, and presents a plan for financing it that does not rely on increasing the federal deficit.

In the words of the alliance:

We mean a million new jobs, not ones people are already doing. We don’t want to add up existing and new jobs and say that now we have a million climate jobs. We don’t mean jobs with a climate label, or a climate aspect. We don’t want old jobs with new names, or ones with ‘sustainable’ inserted into the job title. And we don’t mean ‘carbon finance’ jobs.

We mean new jobs now. We want the government to start employing 83,300 workers a month in climate jobs. Then, within twelve months, we will have created a million jobs.

We mean government jobs. This is a new idea. Up to now government policy under both Labour and Conservatives has been to use subsidies and tax breaks to encourage private industry to invest in renewable energy. The traditional approach is to encourage the market. That’s much too slow and inefficient. We want something more like the way the government used to run the National Health Service. In effect, the government sets up a National Climate Service (NCS) and employs staff to do the work that needs to be done. Government policy has also been to give people grants and loans to insulate and refit their houses. Instead, we want to send teams of construction workers to renovate everyone’s home, street by street. And we want the government to construct wind farms, build railways, and put buses on the streets.

Direct government employment means secure, flexible, permanent jobs. Workers with new climate jobs won’t always keep doing the same thing, but they will be retrained as new kinds of work are needed.

I strongly recommend reading their plan.

The Challenges Ahead

On May 6, 2011, I spoke at the First Unitarian Church in Portland along with Chuck Collins (from the Institute for Policy Studies) as part of a program sponsored by the church’s Real Wealth of Portland group.  We both addressed the following theme: “Economic Insecurity Continues…and Communities Respond.”   

Chuck talked about a very important initiative: Common Security Clubs.  The First Unitarian Church has sponsored similar clubs for approximately one year.  

What follows is the talk I gave:

The Challenges Ahead

I want to begin by summarizing my three main points—

First, our economic problems are serious and structural, and a long time in the making.  They did not start with the 2007 collapse of the housing bubble, which means that we should not assume that so called “normal market forces” will eventually return us to an acceptable economic state.  In other words, without major structural changes in the way our economy works we face a future of stagnation with ever worsening conditions for growing numbers of people.  

Second, business and political leaders are not committed to making any serious changes in our economic structure.  That is not because they are stupid.  Rather it reflects a real class interest in maintaining the status quo.  It is not that they are unaware of or unconcerned with our current social problems but rather that they view the cost of making necessary changes to our economy as too high.

Third, meaningful solutions will require building a movement that challenges our current reliance on profit driven market outcomes.  This movement has to be built by organizing strong social and community institutions, ones that give people the chance to develop in common a correct understanding of the causes of our problems and the organizational weight and confidence to promote the needed transformation of our economy.

Structural Crisis

The National Bureau of Economic Research, the official designator of recessions and expansions, declared that our economy went into recession in December 2007 and that this recession ended and an expansion began in June 2009.  In other words we have been in an expansion for almost two years.  Normally, the deeper the recession, the stronger the recovery.  However, as I am sure you are aware, the recession was very deep and to this point the recovery has been extremely weak.

The federal government has poured trillions of dollars into the economy to end the recession and boost the recovery.  The government’s great accomplishment has been a strong recovery of profits.  In fact, total domestic corporate profits are now about as high as they were in 2006 before the start of the crisis, and financial profits as a share of total profits are pushing 35%, which is close to the pre-crisis high of 40%.

But beyond this restoration of corporate profitability, and the recovery of finance as our leading economic sector, little has happened to generate sustained and beneficial growth for the great majority of us.  For example, total bank excess reserves averaged around $10 billion a year in the decades prior to the crisis.  Now they are pushing $1.4 trillion.  The banks are just holding this money.  One reason is that since October 2008 the Federal Reserve Board is paying them interest on those reserves.  Similarly non-financial corporations now have the highest ratio of cash to assets in post-war history; they are not using that money to invest in new plant and equipment.

What this means is that our leading financial and non-financial corporations have plenty of money, but see no privately profitable productive investment opportunities.  At the same time, they are in no hurry to pursue policy changes because despite the slow recovery they are doing quite well.  Thus, as things stand, there is little reason to believe that this government supported expansion will be long lasting or beneficial for working people. 

I cannot emphasize enough the fact that we are in an expansion; these are the good times—the period of recovery, when our income is supposed to go up, when unemployment is supposed to significantly decline, when we have money to rebuild our infrastructure, fund our health care and other social programs, and build a solid collective nest egg to cover the hard times which will of course come.  The fact that this is not happening—that we continue to struggle during this period of economic expansion—is indicative of the fact that our economic system as presently structured is not one we can count on; in other words it is a flawed system. 

With this perspective, you can see why the small increases in employment and production that are cheered by policy makers mean little—of course we are going to see some increases.  But for how long and with what effect?  Given the lack of corporate interest in investment or lending I think that there is little reason to be optimistic.  And now, there is even an increasingly strong movement to slash government spending.  Those who support that policy claim that we just have to put the collapse of the bubble economy behind us, tighten our fiscal belts, and let market forces return our economy to normal—but what is normal?

Let us consider the previous economic expansion.  That expansion lasted from 2001 to 2007.  If we compare it to the nine other post-war expansions, it ranks dead last in terms of the growth in GDP, investment, employment, wage and salary income, and compensation.  It ranks highly in only one category—and that was the growth in profits.  In fact, median household income actually fell over this period of economic expansion.  And it is important to recall that this expansion was long lasting only because it was supported by a debt-driven housing bubble.  We no longer have that bubble to support growth.  Therefore, the new normal appears to be ever weaker growth and deteriorating living and working conditions for the great majority of us.  I don’t find that to be acceptable. 

Class Struggle

Significantly, more and more people are arguing that our current problems are caused by government deficits that are too big, taxes that are too high, and unions that are too strong,.  They are therefore pushing for a major reduction and privatization of government social programs, tax cuts for the wealthy and corporations, and a weakening of unions, especially those in the public sector. 

This would be a recipe for disaster.  Where these policies have been implemented, in places like Ireland, Greece, and the UK, the result has been only more problems: lower growth, greater deficits, and of course worsening social conditions.  That is not a surprising outcome.  If you have an economy where there is weak domestic demand because banks will not lend and corporations will not invest, workers are deep in debt, unemployment is high, and exports are limited, and then you cut government spending—it should not surprise anyone that things go from bad to worse.

And, it is not like we haven’t tried similar policies here in the United States.  We have been cutting taxes, government programs, and union strength for more than two decades, and we can see the effects—ever weaker growth, greater inequality, and worsening living and working conditions for the great majority.

The fact is that government spending is one of the main reasons that we still have an economic expansion.  Debt fears are being hyped to scare us. 

So, why are there powerful social forces arguing for these policies?  I think there are two main reasons.  The first is to ensure that our anger is not directed at the corporate sector.  When this crisis broke in 2008 people were angry, and they were angry at our corporations.  There were demands for nationalization of the banks and auto industry and calls for greater government intervention in the economy to save homes, employ people, in short, chart a new economic course for the country. 

What happened was quite different.  The president immediately made clear that he was not going to interfere with market processes—in finance, in auto production, in the housing market, in health care, or in job creation.  Rather he did all he could to bail out those corporations that were in trouble because of their own reckless pursuit of profit.  And his efforts succeeded.  Profits are back up and finance continues to dominate.  Unfortunately for us, those efforts did little to address our needs. 

I think that the corporate sector is getting nervous.  They are fearful that their large profits in the face of our deteriorating social conditions might lead to a renewal of demands for social change.  And lets be clear—any significant social change is going to require a significant change in government policy.  For example, strengthening our economy will require an end to free trade agreements; rebuilding our infrastructure; a new green industrial policy directed at retrofitting our buildings, developing solar and wind power and mass transit; and a shrinking and redirection of finance.  Rebuilding our communities will require new labor laws to support unionization and higher minimum wages; support for education, health care, and transportation rather than military activity; and an increase in taxes on corporations and the wealthy to help pay for many of the needed initiatives. 

This is not what the corporate sector wants.  Therefore, they are trying to steer us in a different direction—to encourage us to believe that the reason our economy is not doing better is that our government deficits are too great and workers have too much power.  It is ironic.  We have government deficits not because of runaway social programs but because the government had to bail out the private sector.  It was this spending that kept us out of depression and enriched our corporations.  And now the leading lights of the private sector are trying to convince us that the main cause of our slow growth is this very same deficit spending.  So, the first reason for this anti-government offensive is to keep us from focusing on corporate behavior and the contradictions of market processes by encouraging us to blame the government and unions for our problems. 

The second reason is that the push for marginalizing government programs will likely open up new private profit making opportunities for our large corporations.  For example, the privatization of our military, our education system, our health care system, our retirement and social insurance systems all mean public dollars flowing into private coffers.  And as a bonus corporations would likely get new tax breaks.

To state the obvious: corporations are defending policies that help them make profits at majority expense.  I think the best way to grasp this reality is to focus on General Electric.  GE is not only one of our nation’s largest corporation, its head, Jeffrey Immelt, was picked by President Obama to head his President’s Council on Jobs and Competitiveness.  President Obama said he picked him because “He understands what it takes for America to compete in the global economy.”

That may be true, but what is GE’s competitiveness strategy? 

First, it is to avoid taxes. GE reported worldwide profits of $14.2 billion in 2010, including $5.1 billion from its operations in the United States.  Yet, it paid no US taxes; in fact it claimed a tax benefit of $3.2 billion.

It accomplished this through a very aggressive working of our tax policy. Here is what the New York Times said:

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

Second, it is to shift operations from production to finance.  According to the New York Times:

General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 percent of revenue, while lending accounts for more than 30 percent. . . . Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines.

Third, it is to move its operations and profits outside the US.  Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment.  Over that same period G.E.’s accumulated offshore profits have risen from $15 billion to $92 billion.

GE is far from unique in employing this strategy.  For example, the Wall Street Journal reports that U.S. MNCs cut their work forces in the United States by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.

So, we are in a battle over the nature and direction of our economy.  Successive governments, in response to corporate demands, have worked to promote more mobility for corporations, lower taxes for corporations, and the growing power of finance—all at our expense.  And despite our current economic problems, our government continues to push for more of the same.  In sum, while we might be experiencing a crisis caused by capitalism it is not a crisis for capitalism.

Movement Building 

So, what shall we do?  In fact, we are not short of ideas.  We have all sorts of progressive policy suggestions.  The problem is that those with power are not interested in our suggestions.  This means that we need to organize if we are to succeed in making a real change.  Here are a few of my suggestions about next steps.

First, we need to make sure that people understand the structural nature of the problems we face.  We have to make sure that unions, neighborhood associations, and places of worship become venues where people can talk, learn, develop their understandings and most importantly connections. 

Second, we need to build alliances around critical demands—changes in government priorities, for example, such as cutting military spending in favor of social programs, raising taxes on the wealthy and corporations, and defending Medicare and Social Security.  These alliances shouldn’t be hard to build.

Third, we need to be creative in who and how we organize.  We need organizations where people can produce themselves more fully as actors.  In the 1930s, for example, we had councils of the unemployed.  They fought for greater government spending, unemployment insurance, and in support of unionization for workers with jobs.  Now, we have large numbers of homeless and hungry.  We need to do more that take food to food banks—we need to help the hungry and homeless organize themselves into powerful social movements. 

We also need to help students, for example, see that their likely future of job insecurity, low wages, and lack of health care can be changed if they join with others, including unions, and health care advocates, and perhaps their parents, to demand a change in the direction of the economy.  And we need our unions to recognize that many of our young workers will be moving from job to job, and company to company, in temporary positions, which means that unions will have to develop new forms of organization.   

Fourth, we need to focus our attention on the public sector.  I think that one of our key challenges is to develop new coalitions between public sector unions and those who use public services.  While I believe that we need to fight against spending cuts for important programs I also know that our existing programs are far from perfect.  Moreover, just maintaining the same level of spending is not the same as transforming our economy.  We need more accountable and responsive public programs and I think the key to that, to the democratizing of the state, is a community-public sector worker alliance.

For example, imagine if those that cared about the environment; worker rights; an end to militarization; and gay, lesbian, transgender rights could engage public school teachers who were responsive to these views and collectively develop curriculum that advanced those views, thereby producing young people able and eager to contribute to making a better society.  And also imagine that in return, those in the community committed to working to ensure good funding for schools and political protection and decent salaries for our teachers.  We would not only help to improve the school system but also develop a new and positive understanding of the benefits of public services.  The same process can be encouraged around transportation by finding ways to bring bus riders and bus drivers together.  The same for social workers and their clients.  You get the idea.  Public sector workers could become our defenders—blowing the whistle if our money is not being property spent and helping us find ways to play a meaningful role in determining the actual nature and delivery of the services we want and pay for. 

We really have little choice but to help build resistance to current political tendencies and shape more positive visions.  There are very few of us that can avoid the consequences of failure.

The IMF and Hungary

Understandably, our media has focused its economic reporting on the US and secondarily other advanced capitalist countries, like Germany and France.  Developments in the rest of the world have largely been ignored.  As a consequence we are missing a lot.

Studying the third world means confronting the International Monetary Fund (IMF).  The IMF has long been criticized for its heavy handed attempts to promote neoliberal restructuring.  Starting in the early 2000s, third world countries, flush with foreign exchange from rising commodity prices, began paying off their debts to the IMF.  Faced with a loss of leverage and also interest income, the IMF had little choice but to start cutting its own staff.

The global economic crisis changed everything.  Many third world countries are again desperate for funds, and the IMF is happy to supply them—although as always with conditions.

The IMF claims to have learned its lessons.  Its own internal review of past practices highlighted a number of past loan conditions that the IMF now agrees were counterproductive.  Thus, it claims that it is now willing to support capital controls, at least for a limited period.  It also claims that it now supports counter-cyclical policies—which means that it will no longer force governments to implement austerity policies during a period of deepening economic crisis.

Unfortunately, despite its claims, the IMF appears back to its old tricks.  Most importantly, at the same time that it supports counter-cyclical policies in the developed world—for example, encouraging the US and EU to fight the Great Recession with deficit spending and low interest rates—it continues to oppose them in the third world.   A Center for Economic and Policy Research study of 41 countries that had agreements with the IMF in 2009 found that “31 of these agreements involved tightening either fiscal or monetary policy, or both, during a downturn.”

For example, according to Mark Weisbrot, one of the authors of the study:

The Fund is currently squeezing Ukraine . . . to reduce its spending, and suspended its disbursement of funds to the government in order to force budget tightening. This despite the fact that Ukraine’s economy shrank by about 15 percent last year [2009], and its public debt was only 10.6 percent of GDP. A country in this situation should be able to borrow as needed to stimulate the economy, and reduce its deficit after it has accomplished a robust recovery. In nearby Latvia, the IMF and European Commission are lending with conditions that have already resulted in the worst cyclical downturn on record, and it is not clear when or how fast the economy will eventually recover.

The case of Hungry is perhaps the clearest example of the class-bias underlying IMF policies, a bias shared by European elites.  As Jayati Ghosh reported:

In November 2008, Hungary signed a Stand-By Arrangement with the IMF for SDR 10.5 billion, as part of a joint rescue package worked out with the European Union. Various IMF reviews found that Hungary complied with all the very severely procyclical conditions imposed, including a massive reduction of the fiscal deficit from more than 9 per cent of GDP in the last quarter of 2008 to around 3.8 per cent thereafter. At least partly as a result of this, real GDP declined by 6.2 per cent in 2009.

The collapse of the Hungarian economy produced incredible social pain—and not surprisingly, the social democratic party that implemented the IMF mandated policies was defeated in June elections by a center-right party that had campaigned on a promise of less austerity.  However, once in power, the new government found that the economic collapse had made the budget deficit worse and that more severe fiscal measures were required to meet IMF budget deficit targets.

The government proposed new cuts in public sector wages and pensions as well as tax cuts for the wealthy, and asked the IMF for more support.  One might think that this would be enough for the IMF.  But it wasn’t.  The IMF asked for additional privatization of state owned enterprises and further reductions in state spending.  Perhaps most surprising, the IMF also demanded that the Hungarian government cancel an action that would have actually help to cut the deficit—a proposed tax on the banking sector expected to raise nearly $1 billion.  The IMF determined that this tax was too “high” and likely to “adversely affect lending and growth.”

Faced with a popular revolt, the Hungarian government rejected IMF demands for further cuts in spending and also refused to cancel its planned tax increase on the banks.  The IMF responded by breaking off talks.

The government is now seeking to reverse course and promote expansion.  Among other things, it is trying to force the (largely independent) central bank to lower interest rates; the bank (in tune with the IMF) had kept rates high despite the economic collapse.   As a first step, the government has cut the salary of the head of the central bank by 75 percent.

What does all of this mean?  Mark Weisbrot explains as follows:

As the New York Times reported on [August 2], the fight in Hungary “reflects a larger struggle that is expected to play out over the next year or so as most European politicians . . . seek to impose fiscal discipline on their increasingly unruly citizens.”

We can only hope that they get more unruly. The governments of Spain and Greece, for example, have a lot more bargaining power and a lot more alternatives than they have been willing to use. It is ironic that a center-right government in Hungary has taken the lead here; but if the socialist governments of Spain and Greece were to stand up to the European authorities and the IMF, they could also rally popular support. And then we would see a new playing field in Europe that would allow for a more rapid recovery, and possibly end the current assault on the living standards of the majority.

Cover Wars: Fortune Loses

The editors of Fortune magazine had hired the cartoonist Chris Ware to design the cover of the magazine’s May 2010 issue, which includes its annual listing of the country’s top 500 corporations as ranked by revenue.

They were no doubt hoping to get a cover that resonated with some of the magazine’s past cover glamor–You can see examples of past Fortune magazine covers here.

Well, Ware produced a stunner, but his inclusion of exploited Mexican factory workers, Guantanamo Bay prisoners, and a number of funny hits on corporate greed and federal bailouts was clearly not what the editors had hoped for.  So, they rejected it.

But you can still see it.  You will need to expand its size (by clicking on it to get a larger view and then clicking once again to get an even larger view) by going here.





Anger and Confusion

Everyone is angry about the big salaries CEOs have been drawing despite the Great Recession that has left almost everyone else struggling and scared.

The anger is understandable—check out the AFL-CIO’s executive paywatch site.  There you will see the following:

Bank of America Corp.
Thomas Montag
2009 Total Compensation: $29,930,431

JPMorgan Chase & Co.
James Dimon
2009 Total Compensation:

Citigroup Inc.
John Havens
2009 Total Compensation: $11,276,454

Morgan Stanley
Walid Chammah
2009 Total Compensation: $10,021,969

The Goldman Sachs Group Inc.
Lloyd Blankfein
2009 Total Compensation: $9,862,657

Wells Fargo
John Stumpf
2009 Total Compensation: $21,340,547

It helps to put these compensation numbers in a bit of perspective.  If you were to earn $100,000 a year, it would take you 90 years of work to make $9 million dollars, which is still less than what any of the above made in just one year.

But, to a large extent, our anger at these people and their earnings is all very acceptable to those who profit from the status quo.  That is one reason that the media is willing to give visibility to (or actually encourage) the public anger over the issue.  Lowering executive salaries will do little to change the dynamics of a system that resists labor law reform, promotes free trade agreements, champions war spending, seeks privatization, ignores income inequality, and welcomes cuts in public services, etc.

Yes, we should be mad, but we need to focus our anger at the structures that really shape our lives.  In this regard, it is depressing to read what Andrew Kohut, president of Pew Research Center, has to say about the results of a series of recent Pew surveys.

In short, the surveys show that people are increasingly blaming the government for our problems and viewing a smaller, less interventionist public sector as the answer to our problems.  While existing government programs and policies are far from perfect, this perspective is a recipe for far greater suffering.  Afterall, the smaller the government, the more powerful business becomes.

Here is a sample of what Pew found:

By almost every conceivable measure, Americans are less positive and more critical of their government these days. . . .

As in the past, poor performance is the most persistent criticism of the federal government. But increasingly Americans say that government has the wrong priorities and that has a negative effect on their day-to-day lives. Sixty-two percent say that government policies unfairly benefit some groups, while nearly as many (56%) say that government does not do enough to help average Americans.

There is also growing concern about the size and power of the federal government. The public is now evenly divided over whether federal government programs should be maintained to deal with important problems or cut back greatly to reduce the power of government.

A desire for smaller government is particularly evident since Barack Obama took office. In four surveys over the past year, about half have consistently said they would rather have a smaller government with fewer services, while about 40% have consistently preferred a bigger government providing more services. In October 2008, shortly before the presidential election, the public was evenly split on this question.

The public is now divided over whether it is a good idea for the government to exert more control over the economy than it has in recent years. Just 40% say this is a good idea, while a 51% majority says it is not. Last March, by 54% to 37%, more people said it was a good idea for the government to exert more control over the economy. The exception here is the undiminished support for the government to more strictly regulate the way major financial companies do business. This is favored by a 61% to 31% margin.

We have a lot of work to do.

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 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.

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.”