Last Friday, May 4, the U.S. labor department released its jobs numbers for April, confirming a prediction made by this writer this past winter that employment creation would once again slow this spring - for the third time in as many years. Jobs created in April declined to only 120,000, less than half the average monthly gains this past winter. Only days before the release of the April jobs numbers, GDP growth for the US economy as a whole were also released. The fourth quarter GDP growth rate of 3% declined to 2.2% in the first quarter, January-March 2012. The slowing of the US economy now underway is evident not only from the GDP and jobs data, but from a host of other indicators reported in recent weeks: business spending, durable goods orders, construction activity, services spending, slowing wage growth, to name but the most obvious.
The jobs numbers for April and other economic data thus suggest a continuing slowdown of the US economy has begun in the current second quarter of 2012. That decline will likely continue further in the months immediately ahead, to possibly as low as 1.5% the second quarter, April-June 2012.
The hot air trial balloon floated by the press and pundits this past winter - that the US economy was finally, after a third try in as many years, about to take off on a sustained growth path in 2012 - is thus once again about to deflate. The US economy remains mired in the stop-go trajectory that has characterized it since early 2009: short shallow rebounds punctuated by brief relapses and slowdowns - a condition and prediction this writer raised nearly three years ago with the publication of the work, Epic Recession, and reiterated last November with a latest work, Obama’s Economy: Recovery for the Few’, just published this April.
Obama’s Fundamental Strategic Error
The partial, stop-go recovery in the US, which has benefited stocks, bonds, corporate profits, CEO pay, and bankers’ bonuses, but virtually nothing else is the direct consequence of failure of fiscal-monetary policies of the Obama administration. Republican policies, from Reagan to Clinton to GW Bush, caused the economic crash of 2007-09. But Obama policies - policies that favored the banks and corporate America the first two years and then tail-ended teaparty radicals in Congress since 2010 - are clearly responsible for the failure to generate a sustained recovery ‘for all but the few’. Republicans and corporate America clearly created the mess; but Obama and corporate America have clearly failed to clean it up.
Obama policies since 2009 amounted to more than $1.5 trillion in tax cuts that mostly benefited business and investors plus another $1.5 trillion in spending that has been largely subsidies to states. Less than $100 billion was allocated for long term infrastructure spending, of which only $64 billion has been spent to date. Less than $50 billion was directed to rescuing homeowners and resurrecting the housing sector. Meanwhile, more than $9 trillion was provided in bank bailouts by the US Federal Reserve central bank.
The fundamental strategic error of the three Obama recovery programs since 2009 was to bailout the banks without ensuring that bailout directly result in lending to small and medium businesses; to provide massive tax cuts, mostly for businesses, without any guarantee it would result in immediate business investment and US jobs creation; and to provide subsidies to the states without proof and assurance of job creation.
The Obama strategy was to put a floor under the collapse of consumption for one year, to buy time for the tax cuts and bank lending to get going. After a year, the more than $400 billion in 2009 subsidies spending would be used up, and business (‘the market’) was supposed to take up the slack, to lend, to invest, and to create private sector jobs. The job creation would then reduce the rising foreclosures, restart the housing sector, raise local government tax revenues, and reduce the federal government’s deficit - the major cause of which has been the lack of recovery and tax revenue restoration. It all depended on corporations and banks taking the lead in recovery after a year.
But it didn’t happen that way. Although Obama provided the massive subsidy stimulus for a year, Big Corporations took the tax cuts and sat on them, accumulating a cash hoard of more than $2.5 trillion. Banks in turn took the $9 trillion in zero interest loans from the Federal Reserve, recovered profits, paid themselves bonuses, and either hoarded the remaining more than $1 trillion excess reserves, or lent it to speculators, and loaned it to emerging markets abroad - none of which did anything for small-medium business investing and recovery in 2010 and beyond. In short, Obama’s ‘market’ strategy broke down as banks and big businesses hoarded the bailout.
Obama compounded the problem in a second recovery program in late 2010 that provided another $802 billion in tax cuts only and a mere additional $55 billion more in subsidies. That didn’t work either. In mid 2010, he turned over his jobs creation program to big multinational corporations. That resulted in more corporate tax cuts, new free trade agreements, and more business deregulation that created a dribble of jobs. He then scuttled the States’ efforts to stop the 12 million and still growing foreclosures problem and guaranteed banks’ limited liability for the robo-signing foreclosure scandal. Meanwhile, local governments’ finances continued to deteriorate, as they laid off hundreds of thousands more workers, slashed benefits, cut services, and raised fees.
Instead of taking the ‘bailout to Main St.’ in mid-2010, before the midterm elections, he deferred to his new corporate advisers taken into the White House that summer. The result was a loss of Democrats’ control of Congress in the midterm elections, and a shift in policy in Washington from recovery to deficit cutting. Obama conveniently let the Teapublicans take control of the policy agenda thereafter in 2011, and attempted to compete with them as a still bigger deficit cutter than they by offering to cut social security, Medicare and Medicaid by more than $700 billion.
All past recoveries from recessions in the US were characterized by job creation of 300-400,000 a month for at least six consecutive months; by a robust recovery of the housing sector leading the way; and by local government hiring to offset private sector job loss during the downturns. None of this has happened since 2009. To the contrary, government has taken the lead in job destruction, laying off nearly half a million people; housing has lingered in depression conditions and local governments across the economy continue to layoff, cut services, and raise taxes.
It is not surprising, therefore, that US recovery has been an anemic ‘stop-go’ affair. Late in 2011 a still third feeble ‘rebound’ began to occur, as evidenced in GDP statistics for that quarter. But what lay behind those fourth quarter stats? What followed in the first quarter 2012? And what may we look forward to, especially after the November elections?
The Over-Estimated Fourth Quarter 2011 Data
The fourth quarter 2012 GDP number of 3.0% was hyped at the time as a predictor of future accelerating recovery, but a closer inspection of the 3% clearly showed it was built upon temporary factors that could not be sustained - as this writer pointed out in a previous article:
Briefly revisiting those factors showed the following limitation of that 3%. First, a full two thirds of the 3%, or 1.8% of it, was due to business inventory building. This inventory investment was a recouping of third quarter 2011 collapse in inventories. So two thirds of the activity represented delayed prior quarter growth. Second, non-inventory business spending growth in the fourth quarter was 5.2%, but it reflected end of year investment claims of tax cuts that were going to end. Consumption spending was also up. But it was driven by auto sales made possible by auto companies’ year-end deep discounting and nearly free credit to borrowers. In other words, by debt. Credit card debt spending also rose significantly, as banks began throwing cards at customers in a way reminiscent of pre-2007 practices. Not least, non-credit based consumer spending was driven by spending fueled by household dissavings.
A more fundamental, healthy consumer spending trend required real income gains for the bottom 80% households. But that was conspicuously missing. Throughout 2011, wages, the most critical source of household income for the bottom 80%, rose only 1.8% while prices rose 3.5% - continuing the trend of a 10% decline in household income over the decade.
Also on the negative side, government spending at all levels continued to decline in the fourth quarter: Federal spending fell by –6.9% and state and local government by –2.2%, serving as major drags on the economy in the quarter as they had all year long. It is not surprising that these factors - temporary in character - did not continue into the first quarter of 2012 at the same level.
1st Quarter GDP Data: Further Slowing To Continue
So how did each of these above elements behind the preceding quarter’s 3% growth perform, thus resulting in the decline to 2.2% for January-March 2012?
As predicted, inventories slowed significantly: from contributing two-thirds of the prior quarter’s growth to only 0.59% of the 2.2%, or about a fourth of the latest quarter’s growth. And that contribution will continue to decline in future quarters.
Business spending fell by –2.1% after the prior quarter’s rise of 5.2%. Commercial building plummeted by –12% and the important equipment and software segment fell to only 1.7%. The only improvement was residential housing. But that was mostly apartment building and driven by highly untypical warm weather conditions. As far as consumer spending was concerned, the conditions worsened as well. Nearly 50% of all consumer spending was paid for out of dissaving, as the savings rate fell from 4.5% to 3.9% in just one quarter. That kind of spending was, and remains, unsustainable. Auto sales, a major support of spending in the fourth quarter, began to fade by April 2012 as well. Meanwhile, both federal and state-local government continued their downward trajectory in the first quarter 2012, declining by another –5.6% and –1.2% respectively. Finally, a new negative element began to appear: manufacturing exports grew more slowly than imports, resulting in an additional decline in GDP that will likely continue into the second quarter as well.
What this overall six month scenario shows is that the US economy is not only NOT on an ascending growth path and recovery in the current election year, but is rather clearly on a descent in terms of economic growth. The factors that produced a very modest fourth quarter 3% GDP growth clearly weakened across the board in the first quarter 2012. They will mostly continue to weaken into the second.
Meanwhile, the Obama administration’s primary reliance on Manufacturing and exports to drive the US economy toward recovery are beginning to weaken. With the slowing global economy in Europe and even China and elsewhere, exports will not drive manufacturing any more than manufacturing is capable of driving the US economy. Manufacturing represents barely more than a tenth of the US economy and accounts for only 11.8 million out of 154 million jobs. Manufacturing jobs and manufacturing share of the economy, moreover, has not grown at all for the past decade. Since putting General Electric Corp’s CEO, Jeff Immelt, in charge of his manufacturing and jobs recovery programs two years ago, Obama has given Immelt and friends everything they’ve asked for: new free trade agreements, new tax cuts, backing off of foreign profits tax reform, patent protections, business deregulation, etc.. In return, manufacturing has added less than 15,000 jobs a month on average since mid-2010 and many of those jobs at half pay and no benefits.
During this past winter, press and pundits were not only arguing the US economy was on a sustained growth path, but that the US was about to lead the global economy to sustained recovery as well. Forget the obvious facts at the time of an emerging recession in Europe or a slowing of the Chinese, Brazilian and Indian economies. Europe, they predicted, would experience a historically mild downturn. And the Chinese, Brazilian and Indian economies would experience a ‘soft landing’. In recent weeks, however, it appears the Eurozone is headed from a deeper, more serious recession and the Chinese and other BRICS economies are headed for a ‘hard landing’ rather than soft.
Events and conditions unfolding the last nine months are showing China and the BRICS economies have proven unable to ‘decouple’ from the continuing global economic crisis that is still far from over. So too will the US economy prove unable to grow - i.e. ‘decouple’ - while the Eurozone descends into a serious contraction and the BRICS slow faster than anticipated. ‘Decoupling’ of any economy from the global, dominant trends is ultimately impossible. GDP stats in the US may go up and down for the remainder of the year over the short term, but the long term trend is toward a further ‘stop-go’ trajectory and a continued ‘bouncing along the bottom’ in terms of economic recovery.
As a consequence, Obama may be headed toward a repeat of the ‘Jimmy Carter Effect’. Carter failed to resolve another major economic crisis in the 1970s. He too turned toward corporate support and policies after 1978. Corporate America took his handouts, turned on him, and dumped him in 1980. Reagan did not ‘win’ the election; Carter lost it. Should GDP and economic recovery continue to falter in 2012, Obama may well end up repeating history. If so, however, he will have lost not in 2012, but in policies introduced (and not introduced) in 2010 - when he made a deeper turn toward corporate influence instead of turning to extend the bailout and recovery to Main St.
Jack Rasmus
Jack is the author of the April 2012 book, OBAMA’s ECONOMY: RECOVERY FOR THE FEW, Pluto Books and Palgrave-Macmillan, available now in bookstores, online, and from the writer’s website at discount at: www.kyklosproductions.com. His blog is jackrasmus.com
TABLE OF CONTENTS
OBAMA’S ECONOMY:
RECOVERY FOR THE FEW
Jack Rasmus
Copyright 2011
INTRODUCTION: A Systemic Crisis of Recovery
Subtitle: ‘The Wasted $12 Trillion’
Chapter 1: The Weakest, Most Lopsided Recovery
Subtitle: ‘Who Recovered, Who Didn’t, and Why?’
Chapter 2: From Tax Cuts to Tactical Populism
Subtitle: ‘Obama’s 2008 Campaign Promises’
Chapter 3: Obama’s Jobless-Homeless Stimulus
Subtitle: ‘The 1st Economic Recovery Program (2009)’
Chapter 4: A Record Short, Faltering Recovery
Subtitle: ‘The 1st Economic Relapse of 2010’
Chapter 5: How More Is Less of the Same
Subtitle: ‘The 2nd Economic Recovery Program (2010)’
Chapter 6: Historical Parallels and the Midterm Elections
Subtitle: ‘Obama as Franklin Roosevelt or Jimmy Carter?’
Chapter 7: Deficit Cutting on the Road to Double Dip
Subtitle: ‘Economic Recovery Policy in Reverse’
Chapter 8: Sliding Toward Global Depression?
Subtitle: ‘The 2nd Economic Relapse of 2011’
Chapter 9: From Failed Recovery to Austerity Recession
Subtitle: ‘The 3rd Economic Recovery Program (2011)’
Chapter 10: An Alternative Program for Economic Recovery
Subtitle: ‘Fundamentals of Economic Restructuring for the 21st Century’
INTRODUCTION
A Systemic Crisis of Recovery
“The Wasted $12 Trillion”
The defining feature of the U.S. Economy over the past three years since Obama took office has been its failure to achieve a sustained recovery. After three economic stimulus programs costing $3 trillion the past three years, 2009-2011, and after more than $9 trillion in bank rescues by the Federal Reserve, the faltering U.S. economic recovery of the past three years is sliding once again toward double dip recession.
The U.S. economy entered recession in December 2007. The decline accelerated in September-October 2008 with the onset of the banking crash. The collapse set in motion by the events of September-October 2008 continued through the first six months of 2009, at a pace virtually identical to 1929-1930. The economy only bottomed out by June 2009. But bottoming out does not constitute recovery. Nor does the weak and faltering economy that followed the June 2009 bottom.
Recovery means restoring the economy to levels and performance prior to the onset of recession, or at least to some ‘average’ historical level and performance preceding the collapse. The period from June 2009 to the present therefore cannot qualify as a recovery in either of these cases; nor can it in any otherwise normal sense of the term.
Except for financial asset prices—i.e. stocks, bonds, derivative trades, etc.—during the first year, from June 2009 to June 2010, nearly all real (non-financial) economic indicators recovered at best only part of the prior losses of 2008-2009. And critical sectors of the economy, like jobs and housing, recovered virtually nothing. Moreover, many economic indicators that did partially regain some lost ground in the first year after June 2009 thereafter experienced a further ‘relapse’ in the summer of 2010. Meanwhile, jobs and housing experienced a bona fide ‘double dip’. A second partial recovery followed in late 2010, even weaker than the first in 2009-2010. Now once again, in late 2011, the economy has begun to fade once more, as a second ‘relapse’ of the economy has once again emerged. This raises the first of three major themes of this book:
What explains this weak, repeatedly faltering economy and failure to achieve a self-sustaining recovery after trillions of fiscal and monetary stimulus?
By October 2011 an increasing number of economists, and even business sources, have been to predict the ‘relapse’ might soon turn into a ‘double dip recession’. A select few of those with the best forecasting track record to date have even begun to forewarn of a possible imminent global depression.
To the extent there has been any recovery these past three years under the Obama administration, that recovery has been limited to and has benefited a relatively small segment of the US economy and population. After June 2009 stock markets rose more than 100%. Bond markets did even better. Corporate profits exceeded levels even preceding December 2007. US large corporations accumulated more than $2 trillion in cash on hand, while U.S. multinational corporations were able to build a cash hoard of another $1.2-$1.4 trillion in their offshore subsidiaries. Both continue to hoard their more than $3 trillion in cash, not investing it in the U.S. to create jobs and contribute to sustained recovery. Not to be outdone, big banks accumulated—and then also sat on—about $1.5 trillion in excess cash reserves, mostly refusing to lend to smaller businesses to create jobs and assist recovery.
Measuring ‘recovery’ in terms of its human dimension—not just in terms of impersonal economic indicators—yields a similar grossly unbalanced picture: CEO and senior management compensation and bankers bonuses recovered in 2010 to pre-2008 levels. The top 25 hedge fund managers’ did even better. Their income more than doubled in 2009 to surpass previous 2007 peaks. The wealthiest 10% households returned to consuming luxury goods at pre-recession levels.
In contrast, more than three years after Obama took office there are still roughly 26 million unemployed. The numbers of part time and temp jobs have increased by more than 10 million, as full time permanent jobs are churned out and replaced by part time and temp jobs with lower pay and hardly any benefits. Thus, not only the number of jobs but the quality and level of pay and benefits associated with jobs has also not ‘recovered’. Real weekly incomes for more than 100 million non-supervisory workers are less today than two years ago due to wage cuts, fewer hours of work, and escalating inflation of basic items—like healthcare services, education, gasoline, and many basic food costs that have risen at double-digit rates throughout 2011.
In addition to jobs and wage income, home foreclosures have more than doubled in number since early 2009, to 11.4 million by late summer 2011. 17 million homes are ‘underwater’, with home values worth less than their mortgages. States and cities continue to layoff workers by the hundreds of thousands in 2010 and 2011, slash vital services and programs, and raise fees at an accelerating pace. Poverty rates in the US are now at their highest levels in half a century, impacting more than 15% of the population (45 million). That includes more than 15 million children—the latter distributed more or less evenly across white, latino, and black kids. More than 50 million officially—and more in fact—are without any kid of health care coverage. Food stamp usage has more than doubled the past two years, as has student loan debt in two years. Trillions of dollars of seniors’ retirement ‘nest eggs’ have disappeared forever, as Congress in late 2011 nonetheless prepares to reduce their medical and retirement benefits further. The litany of conditions that have worsened is endless. That is not recovery by any stretch of the imagination.
And it’s not just workers, homeowners, students, and the 100 million plus working and middle class households who have not ‘recovered’. Hundreds of thousands of small businesses have gone under since the bottom of the recession in June 2009, more failing than are being created, as banks continue to starve them (and households) of basic loans and credit as the banks continue hoarding more than a trillion in cash reserves on hand. Even banks themselves have been divided into ‘haves’ and ‘have-nots’. The ‘too big to fail’ largest 20 or so banks have in part recovered, propped up by $9 trillion in U.S. Federal Reserve liquidity injections, zero interest loans and direct subsidies, and hundreds of billions in direct grants from the U.S. Treasury and taxpayer. Meanwhile, more than five hundreds small community and regional banks have either failed outright or have been forced into mergers by government regulators to protect what little depositors’ assets remain on their books. In short, a small layer of wealthy households, professional speculators and investors, big banks and multinational corporations, CEOs and senior managers, have indeed ‘recovered’. But virtually no one else. The preceding undisputable facts lead to the second major theme of the book:
How to explain this historically unprecedented lopsided economic recovery—enjoyed so much by so few at the expense of so many?
The Obama team has introduced no fewer than three economic recovery programs over the past three years. One each year in 2009, 2010 and 2011. This does not include Obama’s election year proposals he offered in 2008 as a program for economic recovery. This book will look at each of the three recovery programs and his pre-election promises and analyze each in depth.
Each of Obama’s economic recovery programs share certain similarities, no doubt in large part explaining why all have similarly failed. They are all composed of a particular mix of tax cuts, spending stimulus, Federal Reserve monetary policies, and lesser efforts to expand manufacturing exports and trade. Each subsequent economic recovery program, however, has been less in magnitude and scope than the preceding. In turn, each recovery program’s impact on the economy has therefore been weaker and of shorter duration. Obama’s first economic recovery program (2009) produced a brief and weak recovery of barely 12 months. The second (2010) recovery program produced an even weaker and shorter 9 months recovery. And this writer predicts the third (2011) recovery program, in development since September 2011, will be weaker still than the preceding two.
The book is about the evolution of Obama economic recovery programs and policies from 2008 through 2011, why they were so ‘lopsided’ in favor of the wealthiest few and their corporations why they failed to generate sustained economic recovery. The book not only describes those programs and policies in some detail, but also provides a critique and an analysis of why they failed at recovery as well as benefited just a wealthy few. The book therefore constitutes an indictment and critique of traditional fiscal and monetary policies at the heart of the Obama programs and policies.
The book argues Obama economic programs and policies have been both ineffective and inefficient. Ineffective because they have failed to generate sustained recovery. Inefficient because a mountain of trillions of dollars in tax cuts, spending, and money injection into financial institutions has brought forth a molehill recovery—a recovery that appears faltering yet again.
The current economic crisis has always been global and never just a US centric event. As 2011 draws to a close, not only are signs growing the US economy is undergoing a second ‘relapse’—leading perhaps to an even a more serious double dip recession—but may have entered an evolutionary trajectory toward eventual global depression.
The global economy itself is clearly slowing and heading toward growing instability. While the US economy hovers somewhere between economic relapse and double dip, many economies elsewhere are already experiencing a double dip recession. The Eurozone periphery economies are already there. So is Japan. The main engines of the Euro economy, France and Germany, are near zero growth as of October 2011 and may well soon slip into recession by the fourth quarter should the Euro debt crisis not be resolved soon—which in all likelihood it appears it will not. The U.K. economy is slowing rapidly, to less than 1%, and approaching stagnant growth much like Germany and France. All are on the cusp of a double dip. Meanwhile, economic growth is rapidly slowing in China, India, Brazil and other key emerging economies that over past two years were able to grow robustly and temporarily to help dampen the global contraction of 2007-10 in part somewhat. But now they too are slowing rapidly. There are no remaining props to offset the worsening condition in the core capitalist economies of North America, Europe and Japan.
The eventual slipping into global double dip was predicted by this writer in late 2009 in a prior work, Epic Recession: Prelude to Global Depression, which was written at that time, as others were predicting recovery coming in only a few more months. As others predicted a ‘V-shape’ rapid recovery from the June 2009 recession bottom, this writer was warning that a long stagnation would follow the June 2009 recession bottom. That stagnation would take the form of a series of short, weak recoveries followed by short, mild downturns (relapses) or even double dips. The policies introduced in early 2009 by the Obama administration were rejected as inadequate for generating any sustained, true economic recovery. Not only were those policies, it was argued, insufficient in magnitude of stimulus, but the composition and timing of the stimulus were even more incorrect. And so far as Obama’s and the Federal Reserve’s monetary policy was concerned, it would prove ineffective in whatever form it assumed, given the massive debt that was allowed to remain on bank, general business, and household balance sheets. In other words, Epic Recession argued the ‘system was still fragile’ and would remain so since the Obama economic recovery program of 2009 did not address this key condition affecting banks, businesses, and household balance sheets.
Unlike Epic Recession, however, Obama’s Economy: Recovery for the Few, will not address such issues of economic theory. Readers nonetheless interested in theory are directed to the short Appendix I of this book, ‘A Note on Theory and History’. That Appendix explains in brief the relationship between Epic Recession and this more pragmatic policy critique book, Obama’s Economy. The former work is about how and why the current economic crisis occurred. Obama’s Economy is about how and why recovery from the crisis has failed these past three years and why similar policies will continue to fail to generate a sustained recovery. Appendix I, ‘A Brief Note on Theory and History’, links the two works and expands briefly on the topic of theory.
But Obama’s Economy goes further, beyond just describing, analyzing and critiquing the Obama economic recovery policies of the past three years. Describing and explaining today’s failed recovery is only half the task. If the Obama policies of the past three years have failed, what alternative policies may perhaps prove successful? The most important part of this book therefore is its final chapter—‘An Alternative Program for Economic Recovery’. For the most important question of the day is not answering ‘how did we get here’. It is not even explaining ‘why did recovery fail’. The most important question is: ‘How do we get out of the crisis; what will it take?’ Thus the third major theme of this book, in addition to Why has Recovery Failed and Why Did So Few Benefit So Much a the Expense of So Many is:
What Alternative Policies and Programs Are Necessary to Ensure a Full Recovery for All?
This book therefore concludes with recommendations of policies and programs needed to generate a sustained economic recovery. The proposals for recovery described in the final chapter of this book are of three kinds. The first are immediate policy proposals designed to check the tendency of the economy to continue on its current ‘stop-go’ The second type of proposals address more intermediate level demands. They are institutional in character and are designed to lead to sustained economic recovery. The third set of policy proposals are more long-term, deeply structural and even transformative of the economy, They are designed to make changes that would prevent a future recurrence of today’s continuing systemic crisis in the U.S. economy.
INTRODUCTORY CHAPTER
A Systemic Crisis of Recovery
“The Wasted $12 Trillion”
The defining feature of the U.S. Economy over the past three years since Obama took office has been its failure to achieve a sustained recovery. After three economic stimulus programs costing $3 trillion the past three years, 2009-2011, and after more than $9 trillion in bank rescues by the Federal Reserve, the faltering U.S. economic recovery of the past three years is sliding once again toward double dip recession.
The U.S. economy entered recession in December 2007. The decline accelerated in September-October 2008 with the onset of the banking crash. The collapse set in motion by the events of September-October 2008 continued through the first six months of 2009, at a pace virtually identical to 1929-1930. The economy only bottomed out by June 2009. But bottoming out does not constitute recovery. Nor does the weak and faltering economy that followed the June 2009 bottom.
Recovery means restoring the economy to levels and performance prior to the onset of recession, or at least to some ‘average’ historical level and performance preceding the collapse. The period from June 2009 to the present therefore cannot qualify as a recovery in either of these cases; nor can it in any otherwise normal sense of the term.
Except for financial asset prices—i.e. stocks, bonds, derivative trades, etc.—during the first year, from June 2009 to June 2010, nearly all real (non-financial) economic indicators recovered at best only part of the prior losses of 2008-2009. And critical sectors of the economy, like jobs and housing, recovered virtually nothing. Moreover, many economic indicators that did partially regain some lost ground in the first year after June 2009 thereafter experienced a further ‘relapse’ in the summer of 2010. Meanwhile, jobs and housing experienced a bona fide ‘double dip’. A second partial recovery followed in late 2010, even weaker than the first in 2009-2010. Now once again, in late 2011, the economy has begun to fade once more, as a second ‘relapse’ of the economy has once again emerged. This raises the first of three major themes of this book:
What explains this weak, repeatedly faltering economy and failure to achieve a self-sustaining recovery after trillions of fiscal and monetary stimulus?
By October 2011 an increasing number of economists, and even business sources, have been to predict the ‘relapse’ might soon turn into a ‘double dip recession’. A select few of those with the best forecasting track record to date have even begun to forewarn of a possible imminent global depression.
To the extent there has been any recovery these past three years under the Obama administration, that recovery has been limited to and has benefited a relatively small segment of the US economy and population. After June 2009 stock markets rose more than 100%. Bond markets did even better. Corporate profits exceeded levels even preceding December 2007. US large corporations accumulated more than $2 trillion in cash on hand, while U.S. multinational corporations were able to build a cash hoard of another $1.2-$1.4 trillion in their offshore subsidiaries. Both continue to hoard their more than $3 trillion in cash, not investing it in the U.S. to create jobs and contribute to sustained recovery. Not to be outdone, big banks accumulated—and then also sat on—about $1.5 trillion in excess cash reserves, mostly refusing to lend to smaller businesses to create jobs and assist recovery.
Measuring ‘recovery’ in terms of its human dimension—not just in terms of impersonal economic indicators—yields a similar grossly unbalanced picture: CEO and senior management compensation and bankers bonuses recovered in 2010 to pre-2008 levels. The top 25 hedge fund managers’ did even better. Their income more than doubled in 2009 to surpass previous 2007 peaks. The wealthiest 10% households returned to consuming luxury goods at pre-recession levels.
In contrast, more than three years after Obama took office there are still roughly 26 million unemployed. The numbers of part time and temp jobs have increased by more than 10 million, as full time permanent jobs are churned out and replaced by part time and temp jobs with lower pay and hardly any benefits. Thus, not only the number of jobs but the quality and level of pay and benefits associated with jobs has also not ‘recovered’. Real weekly incomes for more than 100 million non-supervisory workers are less today than two years ago due to wage cuts, fewer hours of work, and escalating inflation of basic items—like healthcare services, education, gasoline, and many basic food costs that have risen at double-digit rates throughout 2011.
In addition to jobs and wage income, home foreclosures have more than doubled in number since early 2009, to 11.4 million by late summer 2011. 17 million homes are ‘underwater’, with home values worth less than their mortgages. States and cities continue to layoff workers by the hundreds of thousands in 2010 and 2011, slash vital services and programs, and raise fees at an accelerating pace. Poverty rates in the US are now at their highest levels in half a century, impacting more than 15% of the population (45 million). That includes more than 15 million children—the latter distributed more or less evenly across white, latino, and black kids. More than 50 million officially—and more in fact—are without any kid of health care coverage. Food stamp usage has more than doubled the past two years, as has student loan debt in two years. Trillions of dollars of seniors’ retirement ‘nest eggs’ have disappeared forever, as Congress in late 2011 nonetheless prepares to reduce their medical and retirement benefits further. The litany of conditions that have worsened is endless. That is not recovery by any stretch of the imagination.
And it’s not just workers, homeowners, students, and the 100 million plus working and middle class households who have not ‘recovered’. Hundreds of thousands of small businesses have gone under since the bottom of the recession in June 2009, more failing than are being created, as banks continue to starve them (and households) of basic loans and credit as the banks continue hoarding more than a trillion in cash reserves on hand. Even banks themselves have been divided into ‘haves’ and ‘have-nots’. The ‘too big to fail’ largest 20 or so banks have in part recovered, propped up by $9 trillion in U.S. Federal Reserve liquidity injections, zero interest loans and direct subsidies, and hundreds of billions in direct grants from the U.S. Treasury and taxpayer. Meanwhile, more than five hundreds small community and regional banks have either failed outright or have been forced into mergers by government regulators to protect what little depositors’ assets remain on their books. In short, a small layer of wealthy households, professional speculators and investors, big banks and multinational corporations, CEOs and senior managers, have indeed ‘recovered’. But virtually no one else. The preceding undisputable facts lead to the second major theme of the book:
How to explain this historically unprecedented lopsided economic recovery—enjoyed so much by so few at the expense of so many?
The Obama team has introduced no fewer than three economic recovery programs over the past three years. One each year in 2009, 2010 and 2011. This does not include Obama’s election year proposals he offered in 2008 as a program for economic recovery. This book will look at each of the three recovery programs and his pre-election promises and analyze each in depth.
Each of Obama’s economic recovery programs share certain similarities, no doubt in large part explaining why all have similarly failed. They are all composed of a particular mix of tax cuts, spending stimulus, Federal Reserve monetary policies, and lesser efforts to expand manufacturing exports and trade. Each subsequent economic recovery program, however, has been less in magnitude and scope than the preceding. In turn, each recovery program’s impact on the economy has therefore been weaker and of shorter duration. Obama’s first economic recovery program (2009) produced a brief and weak recovery of barely 12 months. The second (2010) recovery program produced an even weaker and shorter 9 months recovery. And this writer predicts the third (2011) recovery program, in development since September 2011, will be weaker still than the preceding two.
The book is about the evolution of Obama economic recovery programs and policies from 2008 through 2011, why they were so ‘lopsided’ in favor of the wealthiest few and their corporations why they failed to generate sustained economic recovery. The book not only describes those programs and policies in some detail, but also provides a critique and an analysis of why they failed at recovery as well as benefited just a wealthy few. The book therefore constitutes an indictment and critique of traditional fiscal and monetary policies at the heart of the Obama programs and policies.
The book argues Obama economic programs and policies have been both ineffective and inefficient. Ineffective because they have failed to generate sustained recovery. Inefficient because a mountain of trillions of dollars in tax cuts, spending, and money injection into financial institutions has brought forth a molehill recovery—a recovery that appears faltering yet again.
The current economic crisis has always been global and never just a US centric event. As 2011 draws to a close, not only are signs growing the US economy is undergoing a second ‘relapse’—leading perhaps to an even a more serious double dip recession—but may have entered an evolutionary trajectory toward eventual global depression.
The global economy itself is clearly slowing and heading toward growing instability. While the US economy hovers somewhere between economic relapse and double dip, many economies elsewhere are already experiencing a double dip recession. The Eurozone periphery economies are already there. So is Japan. The main engines of the Euro economy, France and Germany, are near zero growth as of October 2011 and may well soon slip into recession by the fourth quarter should the Euro debt crisis not be resolved soon—which in all likelihood it appears it will not. The U.K. economy is slowing rapidly, to less than 1%, and approaching stagnant growth much like Germany and France. All are on the cusp of a double dip. Meanwhile, economic growth is rapidly slowing in China, India, Brazil and other key emerging economies that over past two years were able to grow robustly and temporarily to help dampen the global contraction of 2007-10 in part somewhat. But now they too are slowing rapidly. There are no remaining props to offset the worsening condition in the core capitalist economies of North America, Europe and Japan.
The eventual slipping into global double dip was predicted by this writer in late 2009 in a prior work, Epic Recession: Prelude to Global Depression, which was written at that time, as others were predicting recovery coming in only a few more months. As others predicted a ‘V-shape’ rapid recovery from the June 2009 recession bottom, this writer was warning that a long stagnation would follow the June 2009 recession bottom. That stagnation would take the form of a series of short, weak recoveries followed by short, mild downturns (relapses) or even double dips. The policies introduced in early 2009 by the Obama administration were rejected as inadequate for generating any sustained, true economic recovery. Not only were those policies, it was argued, insufficient in magnitude of stimulus, but the composition and timing of the stimulus were even more incorrect. And so far as Obama’s and the Federal Reserve’s monetary policy was concerned, it would prove ineffective in whatever form it assumed, given the massive debt that was allowed to remain on bank, general business, and household balance sheets. In other words, Epic Recession argued the ‘system was still fragile’ and would remain so since the Obama economic recovery program of 2009 did not address this key condition affecting banks, businesses, and household balance sheets.
Unlike Epic Recession, however, Obama’s Economy: Recovery for the Few, will not address such issues of economic theory. Readers nonetheless interested in theory are directed to the short Appendix I of this book, ‘A Note on Theory and History’. That Appendix explains in brief the relationship between Epic Recession and this more pragmatic policy critique book, Obama’s Economy. The former work is about how and why the current economic crisis occurred. Obama’s Economy is about how and why recovery from the crisis has failed these past three years and why similar policies will continue to fail to generate a sustained recovery. Appendix I, ‘A Brief Note on Theory and History’, links the two works and expands briefly on the topic of theory.
But Obama’s Economy goes further, beyond just describing, analyzing and critiquing the Obama economic recovery policies of the past three years. Describing and explaining today’s failed recovery is only half the task. If the Obama policies of the past three years have failed, what alternative policies may perhaps prove successful? The most important part of this book therefore is its final chapter—‘An Alternative Program for Economic Recovery’. For the most important question of the day is not answering ‘how did we get here’. It is not even explaining ‘why did recovery fail’. The most important question is: ‘How do we get out of the crisis; what will it take?’ Thus the third major theme of this book, in addition to Why has Recovery Failed and Why Did So Few Benefit So Much a the Expense of So Many is:
What Alternative Policies and Programs Are Necessary to Ensure a Full Recovery for All?
This book therefore concludes with recommendations of policies and programs needed to generate a sustained economic recovery. The proposals for recovery described in the final chapter of this book are of three kinds. The first are immediate policy proposals designed to check the tendency of the economy to continue on its current ‘stop-go’ The second type of proposals address more intermediate level demands. They are institutional in character and are designed to lead to sustained economic recovery. The third set of policy proposals are more long-term, deeply structural and even transformative of the economy, They are designed to make changes that would prevent a future recurrence of today’s continuing systemic crisis in the U.S. economy.
Forthcoming ‘Z’ Magazine, June 1, 2012
By Carl Finamore
Apparently, economics is one of the most popular electives in Ivy League schools. Admittedly, it can be a difficult and confusing subject. Particularly, it appears, for undergraduates from these very elite colleges.
According to a survey in the Wall Street Journal published a couple of years ago, most of them walk away from their brief classroom introduction with blind faith in an unfettered and unregulated market economy.
Perhaps this explains Harvard graduate Barack Obama’s June 2008 comment to cable business channel CNBC that “I’m a pro-growth, free market guy. I love the market.”
Maybe they’re all reading the same books. I have another recommendation.
It comes fresh off reading economic professor Dr. Jack Rasmus’ latest book published by Pluto Press – Obama’s Economy – Recovery for the Few. In refreshingly clear descriptive language, Rasmus presents a devastating indictment of the last four years of utterly failed government policies and their underlying false precepts.
No cheerleading for the private sector cabal of banks and corporations here. Why should there be? Outside of Ivy League classrooms, what exactly has blind faith in the market accomplished?
Look no further than the very apropos book title - recovery for the few.
Rasmus cites 2011 business journal reports that “corporations have a higher share of cash on their balance sheets than at any time in half a century…rather than invest[ing] in new plants or hiring.”
Banks are no different. The author explains that banks are sitting on “$1.7 trillion in excess cash” which they refuse to extend for mortgage relief or as credit for small businesses.”
The author breaks down how banks received low interest and, in some cases, zero interest bailout funds of nine trillion dollars, without any obligation or intention to help out millions of working people facing foreclosures.
It may also shock readers to learn that insurance policies reimburse bank mortgage losses at higher, pre-crash market rates. And, Rasmus reveals how quasi government mortgage agencies like Freddie Mac and Fannie Mae extend exactly the same favor to their banker friends.
This is a far better deal than renegotiating lower principle and interest payments with desperately “underwater” homeowners.
Free Market is Free Money for the Rich
And, just when you think it can’t get worse, other chapters disclose one of the most unscrupulous policy scandals of any recovery program. Banks were actually urged to park their zero interest or ridiculously low 0.25 per cent interest bailout funds with the Federal Reserve Bank (Fed) where they were paid more millions in interest for doing nothing.
Corporations are no better. Rasmus describes how they are sitting on a huge stash of $2 trillion, much of it resulting from government tax cuts.
This money is being invested in more profitable overseas markets or is being used to buy up their company stock, a move that inflates the stock value and, thus, increases dividend payments to fortunate shareholders.
Neither of these extremely profitable ventures produced jobs in this country.
Therefore, Rasmus concludes, rather than just simply arguing for more government spending as some liberal economists do, it’s far more important to challenge how the money is being spent, something economists call the composition of expenditures.
In other words, who receives bailout funds and what do they do with it.
I asked the author to further explain how he differs from other progressive economists. “My other difference with liberal economists,” Rasmus replied, “is that if corporations are hoarding their tax cuts and squeezing profits from labor the past four years, then government should and must tax them and create jobs directly itself.
“The market created the crisis and you cannot rely on the market to resolve it. Government must directly create jobs, and to do so without raising deficits there must be a radical restructuring of the U.S. tax system.”
To illustrate his point that Obama’s exclusive reliance on the private sector has been a complete disaster, Rasmus produces ample evidence that this is the most “lop-sided” recovery of the post WW II era.
For example, while the majority is suffering significant loss of spending power from the deep recession, he explains in the book how stock and bond investors have achieved extremely high returns and how corporate profits have snapped back “to record highs not seen in decades.”
Rasmus targets Obama’s policy for these cockeyed results and for producing other ruinous consequences - not increasing employment, not halting foreclosures and not ensuring sustained state and local government revenue. As only one example mentioned by Rasmus, upward revisions of the current low tax rates for the wealthy and for corporations could alone offset most government deficits.
Three Strikes and We are Out!
Other chapters thoroughly delve into Obama’s three-pronged recovery program of tax cuts, temporary subsidies to states and local governments and cash handouts to the private sector.
In fact, the author believes these government policies have generated another downturn in job losses and foreclosures.
As Rasmus points out, “there has never been a recovery of the economy from recession since 1947 without a sustained recovery of jobs, without the housing sector leading the recovery, and without state-local government increased spending on jobs and services.”
The government has completely failed to provide direct funding to solve these chronic problems – no funding to the 25 million unemployed for a massive, government-sponsored jobs program as was done during the Great Depression and no direct funding to some sixteen million “underwater” homeowners facing foreclosures now at around levels of 200,000 month.
Rasmus examines in depth how Obama and congress provided billions of dollars to banks without any obligation to renegotiate home loans and provided billions to corporations without any obligation to create new jobs.
This quick read of 177 pages is really a nice companion piece to Rasmus’ earlier 2010 work, Epic Recession, Prelude to Global Depression. But here Rasmus focuses his critical review less on theory and more on policy, examining decisions that have deepened the crisis and burdened further the overwhelming majority of people by favoring banks, corporations and the very wealthy.
As the author concisely summarizes: “So long as current economic recovery policies focus on more tax cuts for business and investors, on more subsidies for corporations, more free trade, more deregulation, and more deficit cutting for the rest of us—there will be no sustained recovery.”
What do we do Now?
Before becoming a trained economist, Rasmus served several stints as a union representative and organizer. He brings that knowledge and experience to his current profession. The last chapter in the book contains a full social and economic program that, in his view, will result in a dramatic reversal of the serious downward trends he predicts will only worsen, perhaps to the point of a global depression just a few years ahead of us.
His proposals are quite thoughtful. They include immediate relief to homeowners and the unemployed along with long-term structural reforms.
For example, it is quite interesting to review his detailed proposals fundamentally restructuring the tax system and a similar overhauling of the banking and retirement systems that in the longer run, Rasmus explained to me “ will shift income back to the middle and working classes and expunge their debt burden. Without these changes more ‘2008-like’ crashes are in our future, just as they are unfolding today in Europe.”
In every case, his initiatives contain revenue sources that, predictably, do indeed place the burden on banks, corporations and the wealthy. But, for example, he suggests increasing corporate tax rates that return to 1980 levels. These are still far lower than business tax rates of the 1950s.
In this sense, Rasmus frames his program as realistic appeals to the majority of people. That is, while they do indeed require struggle against the entrenched interests of the one percent, the suggested reforms are also capable of being considered both reasonable and necessary by millions who today believe the rich should be taxed more.
I strongly recommend this very readable primer for those interested in understanding more thoroughly how economic policy affects us, how it has been shaped by the upper crust and how new radical reforms can earnestly get the attention of the majority whose support and action are so desperately needed to shape a new reality.
Carl Finamore first met then-CWA Business Agent Jack Rasmus some thirty years ago when Rasmus was leading a militant strike in Oakland, California. Finamore is a delegate to the San Francisco Labor Council, AFL-CIO. He can be reached at local1781@yahoo.com and his writings viewed on http://carlfinamore.wordpress.com/
BOOK ABSTRACT
OBAMA’s ECONOMY: RECOVERY FOR THE FEW, by Jack Rasmus, Published by Pluto Press and Palgrave-Macmillan, April 2012, 190 pp., $24.95.
By Dr. Jack Rasmus
After a $9 trillion bailout of banks and financial institutions by the U.S. Federal Reserve, and more than $3 trillion in fiscal stimulus by Congress and the Obama administration, nearly four years after the onset of recession the U.S. economy is still mired in the weakest, and most lopsided, economic recovery since 1947. U.S. stock markets have risen more than 100%, corporate profits have exceeded 2007 levels, CEO pay and bankers’ bonuses have once again returned to pre-recession levels, the largest U.S. companies continue to hoard $2.5 trillion in cash, and banks dribble out loans to small businesses. In contrast, more than 23 million American workers remain jobless or underemployed, home foreclosures exceed 12 million, 15 million homeowners struggle with negative equity, income growth for 80% of households continues to stagnate at best, while state and local governments lay off workers and teachers by the hundreds of thousands, cut services, and raise taxes.
This book explains how the weakest and most lopsided economic recovery since 1947 has been the direct result of the failed economic policies of the Obama administration and the U.S. Federal Reserve. The book provides seven specific reasons—not just insufficient fiscal stimulus argued by liberals—that explain why recovery programs under Obama’s first term in office have failed to generate sustained economic growth. Tracing the evolution of Obama policies from his presidential election campaign in 2008 through the passage of his 2012 budget, the book explains how the US economy got where it is today and continues on a ‘stop-go’ trajectory of short, shallow relapses followed by weak and unsustained recoveries. A sequel to this writer’s previous 2010 book, Epic Recession: Prelude to Global Depression, this book, Obama’s Economy, argues and shows, based on extensive data, why the U.S. economy will once again suffer a ‘third relapse’, or a worse double dip recession, in 2013.
The book concludes by offering an ‘Alternative Program for Economic Recovery’ to the policies of the past four years, which focuses on jobs, housing, and local government immediately, and by introducing concurrent major structural economic reforms targeting the tax system, retirement system, and banking systems in the U.S. The ‘Alternative Program’ concludes with proposals for fundamental, longer term change necessary to reduce household, small business, and State-Local government debt and to restore historic rates of income growth for working and middle class households.
TABLE OF CONTENTS
OBAMA’S ECONOMY:
RECOVERY FOR THE FEW
Jack Rasmus
Copyright 2011
INTRODUCTION: A Systemic Crisis of Recovery
Subtitle: ‘The Wasted $12 Trillion’
Chapter 1: The Weakest, Most Lopsided Recovery
Subtitle: ‘Who Recovered, Who Didn’t, and Why?’
Chapter 2: From Tax Cuts to Tactical Populism
Subtitle: ‘Obama’s 2008 Campaign Promises’
Chapter 3: Obama’s Jobless-Homeless Stimulus
Subtitle: ‘The 1st Economic Recovery Program (2009)’
Chapter 4: A Record Short, Faltering Recovery
Subtitle: ‘The 1st Economic Relapse of 2010’
Chapter 5: How More Is Less of the Same
Subtitle: ‘The 2nd Economic Recovery Program (2010)’
Chapter 6: Historical Parallels and the Midterm Elections
Subtitle: ‘Obama as Franklin Roosevelt or Jimmy Carter?’
Chapter 7: Deficit Cutting on the Road to Double Dip
Subtitle: ‘Economic Recovery Policy in Reverse’
Chapter 8: Sliding Toward Global Depression?
Subtitle: ‘The 2nd Economic Relapse of 2011’
Chapter 9: From Failed Recovery to Austerity Recession
Subtitle: ‘The 3rd Economic Recovery Program (2011)’
Chapter 10: An Alternative Program for Economic Recovery
Subtitle: ‘Fundamentals of Economic Restructuring for the 21st Century’
Editorial Reviews:
Obama’s Economy: Recovery for the Few
By Jack Rasmus
Reviews
“Jack Rasmus has written in Obama’s Economy: Recovery for the Few a revealing exposé of Barack Obama’s economic policies since 2008. Explaining in detail why Obama’s programs have failed to generate an economic recovery for all but big bankers, corporations, speculations, and the 1% wealthiest households, Rasmus predicts more of the same economic stagnation, or perhaps worse, by 2013 if current economic policies continue. Rasmus concludes the book with his own detailed ‘Alternative Program for Economic Recovery.’ It is time to seriously begin public discussion and debate of economic alternatives to the past four years, which Rasmus’s book clearly has begun.”
- Nancy Wohlforth, Co-Convenor, U.S. Labor Against the War
“Obama was elected because he represented hope and the expectation of change. But as Jack Rasmus details in Obama’s Economy: Recovery for the Few, little changed for tens of millions of unemployed, homeowners, and those dependant on local government services for whom economic recovery has been anemic to non-existent the past four years. Rasmus describes in detail how Obama was the most conservative and business oriented of the Democratic candidates in 2008, and how his first term economic policies reflected that pro-business orientation.”
- Chuck Mack, Former International Vice-President, International Brotherhood of Teamsters Union
“Jack Rasmus in his new book, Obama’s Economy: Recovery for the Few, connects the dots and gives new meaning to common sense economics. While working people reel in the downward spiraling economy, Rasmus analyzes how we got where we are and makes recommendations for sustained economic growth and recovery. It’s the kind of reading that makes every leader stop and say ‘Wow! That makes perfect sense. Why didn’t I think of that?’ Then ask yourself, ‘Why wouldn’t our President think of that?’ When you’ve read the book I’m confident that you will conclude that Rasmus has done a brilliant job of defining the impact of the Obama policies and decisions to this continued economic crisis.”
- Donna DeWitt, President, South Carolina AFL-CIO
Since January 2009 the U.S. economy has been mired in the weakest, most lopsided recovery on record since 1947. It has limped along the past three years in an historic ‘stop-go’ trajectory, during which two brief, shallow recoveries were followed in the summer of 2010 and again in 2011 by two short economic ‘relapses’—the latter defined as a condition where momentum toward recovery fails and the economy falls back to near stagnant growth in key economic sectors.
After two weak recoveries and two subsequent relapses, since last November 2011 the economy has been undergoing yet a third brief, shallow rebound. Although hyped by the media and public officials, this current ‘third recovery’ is limited once again only to certain sectors of the economy and is being driven by forces that are temporary and cannot be sustained. The ‘stop-go’ trajectory—characteristic of the US economy since early 2009—has therefore not been fundamentally checked or reversed. The economy remains on a path that will experience yet another relapse, or possibly an even worse double dip, sometime no later than 2013—as this writer previously predicted last January.
Repeated economic relapses since 2009 indicate an inability of the economy to achieve a sustained recovery. This failure to achieve sustained recovery stands in stark contrast to the 11 previous recessions that have occurred in the U.S. since 1947, the worst of which took place in 1973-75 and 1981-82.
The ‘Weakest Recovery’ on Record
Forty-five months after the start of the current recession in December 2007, the U.S. economy as of October 2011 was no larger in terms of GDP than it was in late 2007. In other words, nearly four years after the recession began there has been no net additional growth. That is, the net growth of the economy over the past four years was 0%. After nearly four years the economy was merely back where it began.
This ‘no net growth’ compares to the 1973-75 recession where, according to U.S. Commerce Department data, 45 months after its start the economy had grown by 15.95%, or at a rate of 4.25% per year. And it further compares to the 1981-82 recession, where after 45 months from the start of the recession the economy had grown by 13.65%, or at a rate of 3.64% per year.
Another way to illustrate the historic weakness of the current recovery is to consider the rates of annual GDP growth for the two non-recession years following the end of each of the three recessions: 1976-77, 1983-84, and 2010-11. The following Table 1 provides the comparison:
TABLE 1
Percent Change in Gross Domestic Product After Recessions
Source: Bureau of Economic Analysis, Historical Table 1.1.1
1973-75 Recession 1981-82 Recession 2007-09 Recession
1976: 5.4% GDP 1983: 4.5% GDP 2010: 3.0% GDP
1977: 4.6% GDP 1984: 7.2% GDP 2011: 1.7% GDP
Once again the comparison is dramatic. The recovery the past two years has averaged barely 2% per year, after a fiscal stimulus of more than $3 trillion and monetary stimulus of more than $9 trillion. In contrast, prior recoveries from the two worst previous recessions averaged two and three times that.
The Weakness: Jobs, Housing, and State-Local Government
The Obama ‘recovery’ since 2009 has been the weakest of the 11 previous recessions on record not simply in terms of GDP growth, but the weakest in the three critical areas of jobs, housing, and state-local government. These three key areas have hardly participated at all in recovery since 2009. This fact in turn explains much of why the U.S. economy today still remains locked in a ‘stop-go’ trajectory and why another relapse is virtually guaranteed, or why an even more serious double dip recession in 2013 is increasingly possible.
For example, as of the official end of the recession in June 2009, there were a total approximately 25 million unemployed. After more than $3 trillion dollars in tax cuts and government spending by the Obama administration, today about 23 million are still jobless. That’s a cost of about $1.5 million per job. Since mid-2010 Obama has placed his bet on manufacturing, exports, and free trade to lead the jobs recovery. He put multinational corporation CEO, Jeff Immelt, in charge of his ‘Jobs Council’. Immelt delivered more free trade deals, more tax cuts for multinationals, and more deregulation of business as the latest ‘jobs program’. But manufacturing has not led a jobs recovery. There were 11,869,000 manufacturing jobs in the U.S. in June 2009; at year end 2011 there were 11,790,000 manufacturing jobs, for a net decline of nearly 80,000. So much for a manufacturing-driven jobs recovery.
The sad state of administration jobs creation program is illustrated by the recent misnamed JOBS (‘Jumpstart Our Business Start-Ups’) bill passed by Congress—a bill about jobs in name only and, in fact, a proposal for more business financial deregulation, more freedom for financial speculators, and more small business tax cuts.
In the housing sector, 3.6 million homes were foreclosed during the recession years of 2007 and 2008. Yet during the first three years of the Obama administration there were an additional 8 million homes foreclosed, with the number projected to rise by at least another million or more in 2012, according to the industry source, Realtytrac. While a couple dozen big banks got $9 trillion in bailouts from the Federal Reserve, 8 million homeowners facing foreclosure got nothing in mortgage principle reductions or else were given a pittance of less than $10 billion in temporary, partial interest rate reductions under the Obama HASP and HAMP housing programs introduced in 2009.
The Obama administration’s recent HARP 2.0 is another handout to the big 5 bank mortgage lenders. HARP is supposed to require mortgage lenders to refinance principle owed by homeowners with mortgages in ‘negative equity’, something the lenders have successfully blocked for three years now. In exchange for doing so, the Obama administration has forced States’ attorneys general to accept a $26 billion ‘cap’ on legal suits pending against the mortgage lenders arising out of the 2010 ‘robo-signing’ housing scandal where millions of homeowners were illegally foreclosed and thrown out of their homes by the banks. But HARP is already being gamed by the banks. As they put aside funds for refinancing negative equity mortgages, they are raising mortgage interest rates and fees on all non-negative equity mortgage applications to cover the cost of the negative equity refinancings. In other words, charging non-negative equity homeowners more to pay for the negative equity homeowners. Immediately upon announcement of HARP, mortgage rates began once again to rise, thereby dooming any nascent housing recovery.
In the previous worst recession in the 1970s and 1980s, the loss of jobs in the private sector were offset by hiring by state and local governments, thereby dampening the depth and duration of the recession and accelerating the recovery process. In contrast, since June 2009 state and local government has not only not increased hiring to offset private sector job loss, but has itself become the biggest contributor to job loss. From June 2009 through 2011 the number of state and local government workers declined by more than 640,000—most of them teachers.
The answer to the question previously posted—i.e. why has the Obama recovery been so short and shallow, so uncertain, and characterized by repeated relapses—can be explained in large part by the failure of Obama policies to address jobs, housing, and state-local governments. There have been three distinct economic recovery programs introduced by the Obama administration—in early 2009, late 2010, and late 2011. The fact that a third has been introduced in the past six months is testimony to the failure of the first two. But none of these three programs have resulted in a rapid recovery of jobs; none have resolved the foreclosure mess and continuing veritable depression in housing; and none have succeeded even remotely in stabilizing state and local government finances that would prevent layoffs, cuts in services, or rising local taxes and fees.
The importance of jobs, housing, and state-local government spending to recovery is evident by the fact there has never been a recovery from any recession since 1947 without increased spending and hiring by state and local government; without the housing sector recovery leading the way; or without job creation averaging at least 400,000 to 500,000 each month for at least six consecutive months.
The logical question of course is why has there not been a sustained recovery thus far—after more than $1.5 trillion in federal government spending since early 2009, after more than another $1.5 trillion in tax cuts, and after the Federal Reserve, the central bank of the U.S., has pumped in more than $9 trillion in virtually ‘free money’ into the banks (by purchasing at full price mortgage and other bonds worth pennies on the dollar and after lending banks all the money they can carry away at a mere 0.1% to 0.25% interest rates)?
The answer to the question is that a pittance of the cumulative $12 trillion of fiscal and monetary stimulus since 2009 has ‘trickled down’ to job creation, to stopping foreclosures or stimulating the housing sector, or to increase state-local government spending. What was once called the ‘trickled down’ economy in the U.S. in the past has basically changed since 2008. It has become, at best, a ‘drip-drip’, leaky faucet economy, with most of the $12 trillion spent by Congress and the Federal Reserve having been siphoned off by large multinational corporations and the big 19 banks, by speculative investors manipulating commodity, oil, and currency markets, by CEOs, hedge fund, and private equity managers ensuring huge personal income gains for themselves, and by the wealthiest 10% of households in the U.S., about 1 million of the approximate 130 million households in the U.S., reaping the harvest of record stock and bond market expansion set in motion by trillions of dollars of Federal Reserve free money.
The ‘Most Lopsided’ Recovery
The Obama recovery has not only been the weakest recovery on record, but also been the most ‘lopsided’ recovery of all the prior recessions since 1947. ‘Lopsided’ means large corporations, their CEOs, bankers, professional speculators, and the wealthiest 10% households that do most of the investing in stocks and bond have benefited nicely. For the wealthiest few and their institutions, the current recession was historically short, ‘V-shaped’, and their recovery fully complete after barely a year.
Stocks and Bonds
For example, in the first year of recovery alone the Dow-Jones index of US stocks rose between June 2009-June 2010 more than 90% from its prior lows. The bond markets have done even better. After a 30% increase in returns in 2009, high yield corporate bonds returned an additional 57% in 2010. Compounded that’s more than 100%. Stocks and bonds have surged a second time since October 2011 and currently approach their record highs of 2006-07.
Corporate Profits
Corporate profits have done still better. Having experienced the fastest recovery in 31 years, corporate profits today are higher than they were in December 2007 prior to the start of the recent recession. The average annual rate of increase of profits in the U.S. since 1948 has been around 10%. But pre-tax corporate profits nearly doubled in just a little more than two years, from their recession lows of $971 billion in December 2008 to $1,876 trillion by March 2011. By early 2012 they exceeded more than $2 trillion, well beyond their 2007 previous highs.
Yet another way to look at profits is profit margins. While profit levels rose to their highest levels in 31 years, profit margins reached levels not achieved in 80 years. Profit margins are defined as that percentage of revenue left over after expenses—i.e. profits as a percent of operating costs. Record profit margins during the recession meant profits recovery was due to cost cutting—labor cost cutting in particular. In other words, the record gains in profits have been largely achieved at the direct cost of workers’ wages, jobs, hours of work, benefits and the rapid productivity gains achieved after June 2009 that have not been shared by companies with their workers.
CEO and Executive Pay
After leveling off or slightly declining for one year during the worst of the 2008-09 economic collapse phase, top US executives’ paychecks rose significantly in 2010. Median pay for top execs at 200 big companies rose 23% to $10.8 million in 2010, and 36% according to most recent estimates for the S&P 500 largest companies by the corporate research company, GMI. CEO pay is estimated to rise another 36% in 2011, according to Forbes magazine, on the high end, and at minimum 10-20%, according to corporate consultants, the Hay Group.
Bankers’ Bonuses
Despite the near collapse of many of their banks, bankers did even better than non-bank CEOs and Executives during the recovery period. The average pay for the CEOs of the 15 largest banks also rose by 36% in 2010, according to a study done by the executive compensation research firm, Equilar. Those same 15 banks’ revenue rose by an average of only 2.9%. But that didn’t prevent the rapid recovery of bankers’ bonuses. Seven of the 15 banks actually reported a loss but their CEOs still got bonuses. The 36% is a low end estimate, moreover, as it doesn’t include contribution to CEOs’ retirement plans or stock accumulation.
Wealthiest 10% Households
The wealthiest 10% of households in the US own the vast majority of all common stock outstanding, about 80%. Among the top 10%, the wealthiest 1% own nearly half—38%–of that 80%. Their share of all the income generated each year in the US has risen from 8% in 1980 to 24% in 2007 of all income generated in the country. During the expansion years of 1993-2000 the income of the wealthiest 1% grew on average every year by 10.3%. During the expansion of 2002-2007 their incomes grew another 10.1% per year. In the 1993-2000 period they captured 45% of all the increase in national income. But by 2002-2007 they captured 65% of all the income gains during those years. Last year, in 2011, it has been estimated the wealthiest 1% received 93% of all total income gains in the country.
101 Million Workers’ Earnings
In contrast to the historic, lopsided recovery after June 2009 in favor of the wealthy and their corporations, the ‘bottom’ 80% American households had average income in 2008 of only $31,244 a year. During the expansion years of 2002-07 their income grew by less than 1.3%, and then collapsed in 2007-08 by more than -6.9% a year. In other words, their gains last decade were less than half their gains in the 1990s, but their losses in the recent recession were almost three times their losses in the 2001 recession. Since 2009 their real weekly earnings, adjusted for inflation, has fallen another –4.5%. Other indicators of their declining living standards include: More than 40 million U.S. workers today have no full time permanent job and earn on average 70% of full time pay as temp and part time workers. 47 million Americans live below the official poverty levels. And 45 million are now living on food stamps, including more than15 million children.
7 Reasons for Stop-Go Recovery
It logically follows to ask why has $12 trillion in fiscal and monetary stimulus has not resulted in a more robust, sustained economic recovery instead of the ‘stop-go’ economy of the past three years?
First, as even many mainstream economists have argued, the Obama recovery programs have all been insufficient in terms of magnitude. The government spending stimulus initiated in early 2009, for example, was insufficient—i.e. way too low—in terms of level of spending. It represented only around $400 billion in spending. The rest of the stimulus was tax cuts, mostly business tax cuts that would prove to have little impact on recovery given the nature and depth of the current ‘epic’ contraction. That $400 billion spending represented less than 3% of total output of the economy, the gross domestic product or GDP. In contrast to Obama’s weak fiscal response, other economies like China and Germany introduced far more fiscal stimulus when the 2008 downturn hit. China’s stimulus was approximately 17% of their GDP. Germany’s significantly more than the US as well. Both economies fared among the best in terms of recovery in 2009.
The Obama fiscal stimulus of 2009 quickly dissipated within a year, sending the economy into a slow decline by summer 2010. But there is a second reason for the failure of the Obama recovery: the stimulus was even more inadequate in terms of its composition. Spending was not focused on immediate job creation. It was composed largely of subsidies of various kinds. Most of the $400 billion spending was provided to State and Local governments, schools, the unemployed requiring unemployment insurance, subsidies to cover health insurance for the unemployed, more for food stamps as the use of the latter doubled, and other similar spending programs. At first Obama declared these subsidies would provide 3-4 million jobs. Then quickly re-framed this to proclaim millions of jobs would be ‘saved’ by the subsidies, once it was clear they would not create jobs.
But once subsidies are spent their economic impact is gone. And that’s exactly what happened a year later in 2010. In contrast, true net job creation results in a continued stream of spending by those now employed. But Obama never remotely considered direct job creation by the government. His program always counted on the private sector to create jobs, picking up about the time that the 2009 subsidies would run out a year later in mid-2010. However, in one of the greatest failures in US economic policy history, the corporate sector did not create jobs after the year of fiscal-subsidy stimulus. Corporations ended up hoarding record levels of cash—more than $2.5 trillion in fact—and not investing it in the U.S. to create jobs. To the extent they invested at all, it was offshore or in financial securities globally, neither of which produced jobs in the U.S.
Obama’s fundamental strategy then was to merely to try to provide a cushion, a floor, to the collapse of consumption—70% of the US economy—temporarily for a year. Once the stimulus ran out, the private sector was supposed to kick in. Banks were supposed to lend to small businesses too but didn’t. They also hoarded cash, more than $1 trillion in extra reserves obtained from the Federal Reserve at 0.1%-0.25% interest rates. Big corporations were, according to the Obama strategy, supposed to spend their now recovered profits in 2010 on jobs. Those getting the jobs would then be able to meet their mortgage payments and avoid a new wave of foreclosures. State and local government revenues would recover with the new business investment and jobs. It all turned on private sector corporate job creation—but that didn’t happen.
The third failure of Obama’s recovery program has been its over-emphasis and reliance on tax cuts for business and investors. Obama counted on tax cuts to boost corporate profits and margins. In turn, corporations flush with cash would spend on jobs. But they simply hoarded most of the tax cuts, or used the cuts to pay down debt, or else diverted it from the U.S. to invest abroad in emerging markets in Asia and elsewhere. Or, they held it for purposes of anticipated stock buybacks and dividend payouts to their stockholders. By mid-2011 the ‘cash hoard’, now more than $2, led to an explosion of stock buyback and dividend payouts.
Obama’s response to this third failure was to provide even more tax cuts to business in late 2010 to entice them to invest and create jobs. Small businesses got tens of billions of more tax cuts dollars, faster depreciation write-offs, and workers got a 2% payroll tax cut. And then there was the big event—the two year extension of the Bush tax cuts in December 2010. The Bush extensions added between $450-$500 billion to the US budget deficit for just the two years of extension, 2010-2011.
The fourth great failure of Obama’s recovery programs has been the President’s lack of an effective approach to the three ‘great mini-crises’ in the US economy: immediate job creation, foreclosures and spreading homeowner negative equity, and the chronic fiscal crisis of State and Local governments. Obama’s recovery programs never included a real jobs creation program, apart from tax cuts and nonsense about ‘saving’ jobs in the public sector by providing local government subsidies. He never had a foreclosures prevention program of any significance. And his stimulus aid to local government was essentially limited to one year. When the recovery did not occur after the first year, the states and local government were essentially ‘cut loose’ on their own to cut jobs in the hundreds of thousands, cut employees’ benefits, raise state taxes, and cut untold billions of dollars from services. The States then dumped the pain of spending cuts and fee hikes onto local governments, just as the Federal Government had turned the problem back to the States. The consequence is the widespread local government and teacher layoffs, the slashing of pension, health benefits, and wages at local government levels, the spreading cuts in social services, and desperate introduction of fee hikes by cities and counties now going on nationwide.
A fifth failure was Obama’s inability to understand where the economy was going by late summer 2010 and his failure to extend the bailout of big businesses, big banks and financial companies to ‘Main Street’. The summer-fall 2010 would prove a critical historical juncture. Obama’s failure to act aggressively and move to a higher stage of stimulus and recovery program mix doomed him and his party in the November 2010 midterm elections. Obama failed to seize the moment and opportunity to expand the recovery in the fall of 2010. Having lost the Congressional elections badly, he resorted to a weaker dose of monetary policy and still more business tax cuts. The economy would relapse once again in a few months. With the entry of Teaparty radicals in the House of Representatives, future stimulus in 2011 was effectively blocked and with it any possibility of seriously confronting the three mini-crises.
This raises the sixth program failure by Obama: his succumbing to policies of his opponents that now focused almost exclusively on austerity policies—i.e. on deficit and debt cutting. Instead of learning the lessons of the fall of 2010 and midterm elections, after the midterm 2010 elections Obama retreated further and embraced the policies of his opponents. Cutting deficits and debt—i.e. austerity solutions to the crisis—became Obama’s policy centerpiece by late 2011. But no economy ever recovered from a deep contraction by means of austerity programs. In fact, such programs all but ensure greater deficits and a more serious economic relapse.
A seventh reason is that the Obama bank bailout program has failed to eliminate banks’ financial fragility, thus laying the groundwork for sluggish bank lending and subsequent future credit and banking crises. Despite a $9 trillion injection of cash and liquid assets into the banks since 2008 crisis by the Federal Reserve, and hundreds of billions more by Congress and the U.S. Treasury, a good part of the banking system in the US remains ‘fragile’—in particular major institutions like Bank of America, Citigroup, and others.
The fundamental failure of the Obama policy with regard to banking was the policy never removed the trillions of ‘bad assets’ on the banks’ balance sheets. It only offset those bad assets with corresponding $ 9 trillion in cash injections from the Fed. In theory such massive offsetting liquidity injections into the banks were supposed to free up bank reserves to small and medium businesses dependent on bank loans. But just as the boosting of large business profits resulted only in cash hoarding and no investing or job creation, so too did banks simply ‘hoard’ the historic cash injection and refuse to loan to small businesses and consumers. Bank lending actually fell for 15 months during the post-June 2009 recovery period.
To summarize, Obama’s recovery strategy failed for the seven fundamental reasons:
§ Insufficient magnitude or level of fiscal stimulus
§ Government spending that was erroneously focused on subsidies instead ofjobs
§ Over-reliance on business tax cuts that were hoarded instead of invested
§ Failure to require bank lending as a condition of the $9+ trillion bank bailouts
§ Basic disregard of the three core ‘mini-crises’: jobs, housing, local government
§ Weak, traditional policy response to the first economic ‘relapse’ of summer 2010
§ Tail-ending opponents’ focus on deficit cutting and austerity solutions in the face
of the second economic ‘relapse’ in 2011
Is a ‘Third Recovery’ Underway?
Much has been said in recent months about indicators of a sound economic recovery finally underway. Proponents of the view that recovery is finally taking hold point to the jobs created the past five months, to rising consumer spending, to the manufacturing sector’s expansion, and even to select signs that housing is on the verge of recovery. They point to GDP in the fourth quarter of 2011 rising at a faster 3% annual clip.
The fourth quarter GDP 3% growth rate may seem significant relative to the 1.3% rate in the first 9 months of 2011, but it is a weak number for this stage in a recovery. Moreover, a closer look at its composition shows the 3% was the result of mostly two factors that are unsustainable: first, business inventory accumulation which accounted for almost two thirds of the 3%, an unprecedented share. Second, consumer household spending that was driven largely by credit and household dissaving. The credit-driven component is the consequence of banks showering credit cards once again on consumers and the result of auto sales and lending, as auto companies desperately tried to keep sales momentum going with discounting and attracting financing deals for new car purchases. The rest of retail sales in the quarter were actually quite below par for a holiday season quarter.
Sustainable consumer spending longer term depends primarily on increasing household real disposable income. And that has been, and continues to be, in decline—especially for the bottom 80% households. Real disposable income rose in 2010 by only 1.8%. In 2011 by an even smaller 1.3%. And projections are for even less real income growth in 2012, as yet another round of oil-gasoline driven price hikes in the first half of 2012 hit consumers’ wallets—the third such since 2008. As consumers are forced to pay more for gas due to price hikes, they will be forced to buy less of other items and thus slow down consumption (70% of GDP) in the first half of 2012. In fact, most estimates are that oil prices, a slowing of inventory build-up, and a slowing of manufacturing exports and sales will result in a GDP growth rate of 2% or less in the first half of 2012—significantly slower than the fourth quarter 2011’s 3%. The only sector consistently increasing consumption are the wealthiest 10% households, whose spending is strongly related to stock market gains which, since last October, have surged once again.
The causes of the oil price inflation has little to do with consumer demand, which has been falling for the past several years. It has everything to do with global speculators driving up the price of oil, and U.S. based gasoline refiners taking advantage of the situation as well by shutting down refineries, to drive the price of gas still hire. Should the Iranian crisis erupt before the November election and crude oil hit $150 per barrel, gas prices—now nearing $4.50 a gallon in many places—will certainly rise above $5 a gallon, which is the breaking point for consumption contracting in general. In other words, rising gas prices are a definite ‘wild card’ in terms of economic recovery in 2012 and could still throw a major wrench into Obama plans and hopes at seeing the recovery, even if tepid, continuing through the November elections.
Another indicator of imminent recovery favored by its proponents are the jobs market. Much is made of claims that job creation has averaged more than 200,000 each month for the past three months. However, much of these gains represent seasonal and other statistical adjustments to the raw numbers of jobs reported to the labor department over the winter months. Preliminary data for December 2011 through February 2012 show total private non-farm jobs actually declined by 1.7 million. That includes 300,000 construction jobs and 40,000 manufacturing jobs. But it also includes 1.4 million service job declines. While it is likely some job creation has occurred, it will require a shift in seasonality to determine how much of the job creation of recent months is real or just statistical smoothing.
Another area over-hyped is the housing-construction sector. With every blip in housing starts or home sales month to month, pundits declare the light is at the end of the housing depression tunnel—only to find the light has gone out in the next month’s data. Housing construction continues at less than 480,000 new units a year—about 1 million less than that of the pre-recession peak. Meanwhile, home prices are again falling in a second double dip, and home sales have again reversed in February. The only source of growth in the market is construction of apartment buildings, not surprising after 12 million foreclosures. Apart from that, construction spending recorded its largest drop in seven months in February that followed a nearly as large decline in January. In short, no convincing data here either, especially given the now rising home mortgage rates again.
Still another area hyped is manufacturing. But manufactured business goods fell in January by 3.7% and rose less than half that forecasted in February. But a longer term picture of the past several months indicates manufacturing, while not in decline, has been barely growing since last summer 2011.
Meanwhile, a second major ‘wild card’ continues to emerge with the chronic financial instability in the Eurozone. With the southern tier countries from Greece to Spain already deep in recession, and bordering on virtual Depression conditions, both the financial instability and the recession conditions are clearly spreading to the rest of Europe. France, Netherlands, the U.K. have all entered recession, and Germany is slowing as well. A full blown, deep recession in Europe can only impact the U.S. economy negatively as well via a number of channels. A Eurozone recession is a train that has left the station. How much and big an impact it has on the US only remains to be seen.
Concurrent with the Eurozone’s problems, it now appears China, India and Brazil are all also slowing rapidly, as global manufacturing and trade has been rapidly slowing. All had been growing at 8%-10% GDP rates. China and India are in the 6-7% range, and Brazil at less than 2%. The debate now is whether the landing will be ‘hard’ or ‘soft’. With Europe, Asia and much of the rest of the global economy slowing, it is impossible for the U.S. to avoid a further slowing as well. The only question is when and how fast will global economic developments negatively impact the U.S. There is no way the U.S. economy can continue to recover, as Europe and the rest of the world continue to slow. This is especially true if, as this writer predicts, yet another debt-banking crisis re-emerges in the Eurozone before year end 2012.
It should be noted that while this scenario is contrary to the general forecast of most mainstream economists today, it is not an isolated view. One need only read between the lines in the statements by Federal Reserve chairman, Ben Bernanke, to see even official U.S. government views on the still very weak and uncertain US recovery are not all that sanguine that the recovery can be sustained.
Another source, the highly respected Economic Cycle Research Institute, ECRI, insists that a double dip recession in the U.S. is on track and inevitable. ECRI has the distinction of having predicted nearly all the recessions in the past several decades in the U.S., including the 2007 advent of the current recession. Other notable forecasters with excellent prediction track records, such as New York University professor, Nouriel Roubini, financier George Soros, and others hold a view similar to this writer’s.
The U.S. economy still hovers on an economic knife edge. It may stumble to the November elections without major incident if it is lucky. But that luck will almost certainly run out once the election is over in November. Regardless who is elected, the ruling elite of both political parties will turn to additional massive deficit cutting immediately after November. Those new cuts in the trillions of dollars will be added to the already passed $2.2 trillion, which will start taking effect in January 2013. Combined with a Eurozone that can only get worse with time, and a rush toward a ‘hard’ landing in the economies of China, Brazil and others, plus the need to recycle record amounts of corporate junk bond debt in 2013—it is a scenario in which a ‘double dip’ recession is likely in 2013.
Jack Rasmus, April 2, 2012
For the third time in as many years, jobs growth over this past winter 2012 once again shows signs of a major ‘relapse’ this spring and summer. The Labor Department’s employment numbers released April 6, 2012 indicate a mere 120,000 new jobs were created in March, a number not even sufficient to absorb new entrants into the labor force for the month. This follows reports of more than 200,000 jobs created monthly since last December 2011.
If this latest, third major reversal in jobs creation were a one time occurrence, it could be attributed perhaps to real economic conditions simply shifting. But three years in a row every spring? That repetition means there is likely something more fundamental at work.
A year ago, during winter-spring 2010-11, this writer forewarned that the jobs recovery that was being reported during the winter 2010-11 would not be sustainable, and that job creation would collapse in the summer of 2011. And it did. (see this writer’s published articles: ‘The Truth Behind the December (2010) Jobless Numbers’, ‘Behind the February (2010) Jobs Numbers’, ‘March Jobs Numbers—A Contrarian View’, ‘Why March (2011) Jobs Gains Will Collapse This Summer’, and ‘The Predicted Job Collapse Now in Progress’, all of which are available on this writer’s blog, jackrasmus.com).
More recently over this most recent winter 2011-12, this writer once again warned that the real, raw jobs data reported by the Labor Department was showing a massive mismatch compared to the ‘statistically adjusted’ jobs data reported by the Department. While it is reasonable to expect some degree of divergence between the raw, ‘statistically unadjusted’ jobs data vs. the ‘statistically adjusted’ data—the latter of which are smoothed out based on assumptions of seasonality, new businesses formed, and other manipulations of the raw, actual jobs data—nevertheless the mismatch between the actual jobs numbers and the statistically adjusted numbers this past winter revealed a massive, extraordinary gap between the two. (see this writer’s more recent published pieces, ‘Those Peculiar January (2012) Jobs Numbers’ and ‘The US Jobs Crisis—The Bigger Picture’, also available at jackrasmus.com).
For example, this past winter, the ‘gap’ between the decline in raw, actual (statistically unadjusted) jobs and the statistically adjusted jobs numbers between November-December 2011 showed a ‘net swing’, or difference between adjusted and unadjusted, of about 430,000 jobs. That was not unreasonable. But over the period December 2011-January 2012, the U.S. labor department reported a statistically adjusted gain of 243,000 jobs in January 2012, whereas the raw actual jobs numbers showed an actual decline of –2.7 million jobs. That ‘net swing’ of nearly 3 million jobs, more than seven times greater than of the preceding November-December period, is unprecedented. That kind of massive gap between declining actual job creation and statistically adjusted, reported job increases requires an explanation. However, the media seemed simply to accept the 243,000 jobs created in January without question.
A corroborating further example is what also happened to the U-6 unemployment rate over this past winter 2011-12: The November to December 2011 U-6 jobless rate showed a ‘gap’ between raw data and adjusted data of only 112,000 jobs. That was reasonable. But the December-January the gap ballooned to a ‘gap’ or net swing of more than a million jobs difference between the actual vs. statistically adjusted jobless numbers. That’s a tenfold difference.
Something is going on, in other words, with the statistical adjustment methodology employed by the labor department to estimate jobs in the winter months and the first quarter of each year. The jobs creation numbers reported by the labor department between each winter the past three years are simply grossly overstated. That overstated thereafter appears to end come late spring-summer and the jobs numbers, even the statistically adjusted numbers, in turn collapse. This has happened now three years in a row. That means the gains of the past winter will likely again, for a third, time fade during the summer and third quarter of this year.
In this writer’s earlier articles, 2010-11, identifying this trend, it was suggested that at least two of the labor department’s statistical operations—the winter seasonality adjustments and the department’s additional, and grossly inaccurate, assumptions and methodology for estimating ‘new business formation’ (that raise the estimate of jobs created from new business formation)—are seriously deficient. Those methods and assumptions, in other words, may be based on conditions that pre-dated the current unique and qualitatively different and more severe ‘Epic’ recession conditions. These out of date methodologies may well be resulting in gross overestimation of adjusted job creation at certain times of the year (fourth and first quarters) and perhaps even underestimation at other times (second and third quarters). If so, what appears as volatility—gains in the winter and losses of jobs in the summer—may obscure what is essentially stagnant job growth throughout the year during the past three years.
It is also possible that the volatility in job creation may not be all statistical adjustments. It may be due as well to business cautiously hiring at the start of their fiscal years and then not continuing to hire further as the year progresses as it becomes clear, once again each year, that consumers do not have the income to sustain their consumption. Household real income growth for the ‘bottom 80%’ one hundred million or so households has declined steadily since 2009, and has been negatively impacted every spring by speculation-driven oil price hikes every spring the past three years. So too has spending by the wealthiest 10% households, whose buying is largely driven by the stock market. Stocks the last three years have surged in the Fall to Spring period, driven by free money pumped into the economy as a result of the Federal Reserve’s ‘Quantitative Easing’ programs. Those programs for three years ‘run out’ by the spring, the stock market stalls, and the wealthiest households pull back their spending as well. Like jobs, general economic recovery has also entered a ‘relapse’ in the summer-third quarter in 2010 and 2011. Thus both the economy and jobs are locked in a ‘stop-go’ scenario since 2009.
What all that also means is—notwithstanding a winter economic and jobs resurgence the past three years—there really isn’t, nor has there been, any sustainable job creation of any consequence for the past three years. Jobs aren’t declining in great numbers. Nor are they growing. We are ‘bouncing along the bottom’—both in terms of jobs and the economic recovery in general.
The three economic recovery programs of the Obama administration, introduced in early 2009, late 2010, and now in 2011-12, have not fundamentally resolved the jobs crisis. Nor have they been able to get the economy on a sustained growth path.
This fundamental stagnation in the jobs markets, and the general economy’s trajectory of short shallow recoveries followed by brief ‘relapses’, is all the more amazing given that more than $1.5 trillion in tax cuts introduced by the Obama administration over the course of its three economic recovery programs since 2009. More than another $1.5 trillion in stimulus has occurred in the form of spending (mostly on subsidies to the states, unemployed, and long term infrastructure projects that haven’t gotten off the ground) since 2009. In addition, more than $9 trillion pumped into the banks and stock and bond markets by the Federal Reserve.
This more than $12 trillion in total fiscal-monetary stimulus has resulted in large corporations accumulating a reported ‘cash hoard’ of more than $2.5 trillion. They have committed little of that to investment and job creation in the US. What was once termed ‘trickle down’ has become a ‘drip-drip’ investment-job creation process. More and more subsidies to corporate America (banks and non-banks) is producing less and less results in terms of US-based investment and job creation. Some job creation is occurring, but when that minimal job creation is contrasted to the massive, $12 trillion of stimulus of the past three years, it becomes clear that economic recovery programs, and related fiscal-monetary policies, are today essentially broken.
To the extent jobs are being created at all, it is heavily skewed toward lower paid temp, part time, and ‘two tier’ wage jobs. Both Obama and Corporations are making a big deal about jobs being brought back to the U.S. by the big Multinational Corporations, like General Electric and General Motors. But the relatively small flow of such jobs are at half pay and often with no benefits. Check out GE’s vaunted job creation at its Kentucky plant. And GM’s alleged new jobs in Detroit. New hires at both are paid $14 an hour, about half that of other workers, with less if any equivalent benefits.
And how many jobs in recent years have really been created in Manufacturing in general, and in Autos in particular? When the recession started in December 2007, there were 13.9 million jobs in manufacturing in the U.S, and 978,000 in autos, according to the Labor Department’s B-1 Table of Employment. In July 2009, at the official end of the recession, there were 11.9 million manufacturing jobs and 640,000 auto jobs. This past March 1, more than four years after the start of the recession and approaching three years since it was officially declared ‘ended’, there are 11.7 manufacturing and 751,000 auto jobs. In other words, more than a quarter million auto jobs were lost since the recession started and less than half, 110,000, have been recovered (paying half pay remember!). And more than two million manufacturing jobs were lost since the start of the recession and the number of manufacturing jobs today is still less by 100,000 today than when the recession officially ended three years ago!
To conclude, after three years and three repeated false job recoveries the outlook for a sustained jobs growth today is once again in decline. The fiscal-monetary policies of the past three years have not resurrected the jobs market in any sustained way, any more than they have succeeded in restoring the housing market or helping homeowners in foreclosure or have in any way stabilize state and local governments’ finances.
As this writer points out in his new book ‘Obama’s Economy: Recovery for the Few’, there has never been a recovery of the economy from recession since 1947 without a sustained recovery of jobs, without the housing sector leading the recovery, and without state-local government increased spending on jobs and services.
So long as current economic recovery policies focus on more tax cuts for business and investors, on more subsidies for corporations, more free trade, more deregulation, and more deficit cutting for the rest of us—there will be no sustained recovery. It will at best result in a continuation of the ‘stop-go’ economy of the past three years that is the defining characteristic of today’s on-going ‘epic’ recession.
Jack Rasmus
Growing sectors of Capital are becoming addicts—dependant on virtually free money from central banks, from Europe to the USA to Japan. That means, in particular, banks, financial intermediaries, stock market and commodities institutional speculators, and even a growing segment of non-bank corporations.
Since 2008 the US central bank, the Federal Reserve, has pumped more than $9 trillion into the banking and financial system to prevent it from collapsing. It has done this at great cost, however. The trillions of dollars of liquidity injections from the Fed have not eliminated the original problem that that liquidity was supposed to resolve: i.e. removal of the bad assets on financial balance sheets. Those bad assets still remain for most part, especially for institutions like Citigroup and Bank of America that - were it not for phony bank stress tests and suspension of normal accounting rules since 2009 - would be technically bankrupt today. The Fed has not ‘removed’ those bad assets, which have only in part been written off as losses; the Fed has merely mirrored them by adding them to its own balance sheet. In so doing, it has bought some time. But that is all. It has not resulted in sustained recovery of the US economy in any real sense.
For the past three years since February 2009, the Obama administration and supporters have argued that the Fed’s $9 trillion bailouts would generate recovery for the rest of the U.S. economy. But in this objective, it has clearly failed. Except for stock and bond markets, large company corporate profits, CEOs pay and bankers’ bonuses, and the wealthiest 10% households, nearly all economic indicators today still remain below their level when the recession began. And some indicators—especially jobs, housing, and local governments’ finances—are significantly below pre-recession levels.
The Fed’s virtually zero interest loans to banks, and its more than $2.7 trillion in direct purchases of bonds from the private financial sector using printed money (called ‘Quantitative Easing’ or QE), has not revived the economy. What that massive injection of liquidity to banks and investors has accomplished is a hand-stuffing of the capitalist goose with free money. That liquidity has financed stock and commodity market booms, that in turn have provoked inflation which reduces the real incomes of a 100 million US working and middle class households. That process, moreover, has occurred on three separate occasions in the US since 2008.
There have been three stock and commodity market booms since 2008. Remember gas prices hitting nearly $5 in the spring of 2008, then again in the spring of 2011, and now once more this spring 2012? Stock market and commodity price boomlets accompanied the massive liquidity injections during each of those same periods. Both stock market and commodities booms, and the resultant inflation, were immediately ‘fed’ by the Federal Reserve’s QE policies: The 2008 event was highly correlated with the Fed’s bailout of Bear Stearns and rescue auctions of the shadow banks in 2008. The 2010 stock-commodity boom was similarly set off by the Fed’s QE1 $1.75 trillion direct bond purchases and zero interest loans to banks in 2009. When the QE1 bond buying stopped in late spring 2010, the stock and commodity markets immediately collapsed. When the Fed announced another $600 billion QE2 in the fall 2010, the stock-commodity booms took off again in late 2010 and into the spring of 2011. When that QE2 buying binge finished in late spring 2011, the stock-commodity markets quickly fell back once again. Banks and investors once more demanded another round of Fed bond buying and free money. That led to the Fed’s ‘operation twist’ bond buying in late 2011, as well as demands for even more generous QE3 money injection since late last year. With that, the stock market surged again from late 2011 continuing today into 2012. Highly correlated with all the QE1, 2 and 3 and free money have been three corresponding bouts of stock and commodity - especially oil - price expansion and speculation. In other words, there’s an almost perfect correlation between Fed monetary bailouts, QE, and zero loan policies ‘coming and going’ and corresponding stock and commodity speculation ‘stop-go’ since 2008 to the present.
Here’s how it works: The Fed pumps no cost money into the banks. The banks then loan it at 5%-10% to speculators like hedge funds, private equity firms, ‘dark pool’ stock buying consortia, and other institutional and wealthy individual speculators. The latter then funnel the money into large block stock purchases, into commodity futures, speculate with credit default swaps on Euro sovereign bonds in Greece, Spain, etc., further exacerbating those crises, or into currency speculation (one favorite: the Brazilian currency, the Real), Hong Kong and Chinese property, etc. Where the Fed money doesn’t go, however, is into loans to small and medium businesses in the US for which it was originally purportedly intended or to aid the recovery of the collapsed housing and commercial property markets in the U.S.
After three years, 2009-12, it appears the U.S. financial system is becoming increasingly addicted to this Free Money from the Fed, increasingly (QE) money printed by the Fed instead of traditional Treasury bond open market operations.
But when the Fed stops, the stock and commodity markets flop.
The fundamental question therefore: if the Fed ever permanently ceases providing free money, can the stock, commodity, and even bond markets function on their own any more without that prop of multi-trillions of dollars? And there’s a converse to all this, of even greater importance: what happens when the Fed tries to retrieve those trillions of free money by cutting off the free money and raising interest rates? If it takes the recent massive liquidity injection just to keep the Capitalist financial system barely functioning, what happens should the Fed try to retrieve that liquidity? The Capitalist system may be ‘super sensitive’ to attempts to slow an economy, as well as ‘super insensitive’ to attempts to stimulate an economy. What that means is that it takes an ever-increasing massive liquidity injection to keep the system from collapsing in a recession phase, but that it will take very little Fed shift from free money and raising interest rates to choke off a nascent recovery of the economy in an early expansion phase. Stated differently in economists’ parlance, this means the financial system today may have now become ‘liquidity and interest rate inelastic’ in efforts to stimulate recovery, but conversely ‘liquidity and interest rate elastic’ given attempts to slow a recovery.
This addiction is not limited to the US financial system. It appears to be spreading as well to the non-banking sector. Large corporations increasingly do not appear eager today to invest their massive earnings and cash now on hand, estimated at more than $2.5 trillion, nor even to distribute most of it to their shareholders. They prefer to hoard it. The super-cheap Fed money means they either borrow it, through their financial subsidiary if they have one, directly from the Fed, or borrow from banks at today’s super low interest rates. Or they issue cheap corporate bonds, take on more debt, and use the borrowed funds to buy back their company stock and pay dividends to their shareholders. In other words, they borrow money at the super low rates and pay themselves the unearned capital gains ‘profits’. They don’t have to ‘make’ profits; they just transfer the free money from the Fed to their shareholders.
Among smaller and medium sized businesses, the main ‘play’ is to issue a mountain of high risk, ‘junk bond’ debt on their companies’ assets. Often, they issue new junk bonds to roll over and payoff old junk bonds, compounding the debt on their balance sheets. Junk bond issuance hit record levels in 2010 and now again in 2012. But the junk bond booms are made possible by the Fed’s free money. Much of this junk bond debt is set to come due in 2013-14. But should interest rates rise, small-medium business defaults will almost certainly escalate to record levels for those non-financial companies now addicted, it appears, to junk bond debt.
Another way to look at the addiction to free or super low cost money is that it is being made available because banks, speculators, and even non-bank companies are increasingly unable to generate profits from traditional normal business activities. So the central bank in a crisis must spoon-feed them the money to prevent their collapse. Capitalist companies are less interested today in making money by making things than in turning speculative profits, based on Fed free money availability and by borrowing in lieu of real profits creation. Of course, there are exceptions—in emerging markets infrastructure investment, making cars and iPads in China, and so forth. But I’m talking here about a growing trend and growing apparent dependency—that is, an addiction.
And the phenomenon increasingly is not limited to the US economy today. We now see this same development and trend occurring in the Eurozone with the European Central Bank, ECB.
Late last year, as the Eurozone economy and financial system began approaching a crisis stage with Greece, Spain, Portugal, Italy, etc. and, beneath the surface, the private banking systems throughout Europe. To prevent a run on the Euro private banking system, the European Central Bank, ECB, embarked upon a strategy almost exactly like the U.S. Federal Reserve’s. Last week alone, the ECB pumped 530 billion euros, or $777 billion, into the banks at 1% interest. That follows a previous 489 billion euros injected late last year, i.e. another $700 billion. (Which followed another $500 billion in 2010). That’s a total of more than $1.5 trillion in just six months of virtually free money pumped into the euro banking system, no doubt in anticipation of bank failures occurring in the wake of the Greek and other European bond crises. That massive recent ECB injection has temporarily stabilized the banking system in the Eurozone, much as this writer predicted last December would happen. However, ‘temporary’ is the operative term here. It is not likely another such liquidity injection will occur prior to a string of bank collapses taking place first, given growing opposition by the Germans to the ECB ‘printing money’ like the Federal Reserve. Meanwhile, the Greek debt crisis will almost certainly erupt once again before year end 2012. And Spain and Portugal and other Euro periphery economies are not far behind. The point is: massive liquidity injections by central banks may temporarily stabilize a banking crisis, but not permanently. Furthermore, they do not result in economic recovery—and in ways actually serve to constrain that same general economic recovery by precipitating inflation and reducing consumption. Here’s how massive liquidity injections, ‘free money’, restrain recovery:
The massive liquidity injections now commencing in Europe, just as they have been in the US since 2009, have not to date resulted in the European economies avoiding recession. Nor will the Fed’s ‘free money’ prevent the coming of another recession in the US by 2013. Today’s European recession train has left the station and Europe is now well on its way toward a generalized downturn. It’s only a question of how deep and how long. That rapid Euro slowdown has already begun impacting the rest of the global economy, as exports to Europe from China, India, and Japan are now falling, in turn slowing growth in China, India, and the rest of the global economy. The European recession will also mean fewer US exports and a further slowdown of the U.S. economy as U.S. manufacturing pulls back, which is already underway. Contrary to business pundits and the Obama administration, there is no way manufacturing can lead the US economy to a sustained recovery this year, next, or ever!
The joint Federal Reserve and ECB massive injection of free money into the global economy will continue to set off stock and commodity price inflation worldwide. For the rest of us non-professional investors that translates into more inflation, which is already happening, as commodity prices like gasoline and food escalate in both Europe and the U.S. In the U.S. gasoline prices alone in some places rose by 40 cents a gallon in a matter of just two weeks last month. And that’s well before the spring take-off in gasoline prices kicks in. That inflation means a further fall in household income, already declining for the past three years, less consumption in turn, more household credit card spending to try to make up for it, and especially severe stress on retiree fixed income households. It will also mean the recent passage of the extension of the payroll tax cuts will be largely absorbed by the oil companies—just as half of the same payroll tax cut in 2011 was absorbed by rising gas prices. The overall consequences for the US economy in turn later this year could prove negative.
To sum up, a real question remains whether the global capitalist system today, in particular in the northern tier of Europe, North America, and Japan—can function any longer as it once had. It may have become so addicted to, and so dependent upon, free central bank money, that it is questionable whether it can wean itself off that ‘fire hose’ injection of free money. Europe looks much like the US now in that regard, and both look very much like their predecessor capitalist invalid, Japan.
Like true addicts, attempts at some point to return to pre-crisis arrangements may result in such severe ‘withdrawal symptoms’ that the US and Euro economies may rapidly contract at the first attempt to shake the addiction. Going ‘cold turkey’ could result in a more severe economic contraction and recession than even that experienced during the 2007-09 initial downturn. Some form of ‘monetary methadone medical’ injection may have to continue. The patient may prove permanently in need of assistance—paid for by the rest of the economy. That means us. It also means more or less permanent ‘austerity’ blood transfusions. But blood transfusions cannot go on indefinitely. As some point the donors will shout, ‘I’m not going to die’ to save them and will tear off the hyperdermic needle.
However, before that occurs, in the interim the Eurozone’s current massive money injection by the ECB to the euro banks, and the U.S. Federal Reserve’s continuing liquidity injection to US banks, will no doubt continue. Continuing as well will be repeated stop-go cycles of stock market and commodity bubbles that stifle economic recovery, gasoline and food price inflation, further pressure on real incomes, hesitant consumption spending, and weak, unsustained economic recovery.
Jack Rasmus
Jack is the author of the forthcoming, April 2012 book, OBAMA’s ECONOMY: RECOVERY FOR THE FEW, Palgrave-Macmillan (US) and Pluto books, (UK). His blog is jackrasmus.com, accessible from the left sidebar of this website.
The crisis in Greece is not a ’sovereign (government) debt’ crisis. That’s the surface appearance of the problem. The below the surface struggle is about how bankers, bondholders and speculators–together with their politicians in government–can offload the cost of bad assets they created onto the shoulders of the Greek people. It’s all about ‘who’s going to pay for the bad assets created by bankers and speculators’.
The news now coming out of Greece, reported in the western press, is that the big banker, hedge fund, private equity finance boys of northern Europe, UK, and US are willing to ‘take a hair cut’ and lose 70% of the value of their existing bonds. But the real facts are that that 70% reduction includes only 30% of the bonds outstanding for Greece that have become ‘bad assets’. No mention is made in the press of the other 70% of bonds that are not required to take a loss. That are projected to be repaid at full value in the most recent Greek settlement—paid for by the jobs, wages, and social benefits of the Greek populace.
The reported Greek debt is somewhere between $300-$400 billion. The current ‘loan’ in question to Greece is about $170 billion. But the real Greek total debt is likely around $600-$650 billion. That’s just about the total on hand for the entire European bailout fund. (The total bailout that will be needed for all of the Eurozone is likely around $4 trillion, this writer estimates, to cover not only Greece but Portugal (next up for another $200 billion), Spain, Italy (more than a $trillion), as well as other ‘lesser economies’ also increasingly in trouble, such as Hungary, Austria, Belgium, and soon perhaps even economic stalwarts like Norway whose housing bubble is now about to burst).
In other words, the Greece and overall Eurozone debt crisis is far from over and has a long course yet to run. That means little Greece’s problems are also far from over as well. As they say, ‘you ain’t seen nothing yet’. The next firestorm is coming in April or sometime this late spring.
If you want to see what a bona fide economic depression in the 21st century looks like, look at Greece. One out of two youth unemployed. General unemployment in excess of 25% (the worst year level in the US in the 1930s). GDP collapsing. Wages falling by 20%-40%. Pensions shrinking. Jobs melting away at an increasing rate. And the bondholders-bankers behind the Germany-French and other Euro governments want the Greek people to pay for something they didn’t create. They want the people to cover the lion’s share burden of making up for their bad assets.
Greece is also a good example how an economy cannot ‘austerity its way to recovery’. Cutting incomes of those whose spending make up the overwhelming majority of the economy is not a path to recovery–as Obama and Congress will soon find out in 2013. Already the $2.2 trillion US deficit cuts mandated in 2011, which are scheduled to take effect AFTER the upcoming November 2012 national elections, will slow the US economy to a less than 1% GDP growth. Those aren’t my numbers; they’re the cautious Congressional Budget Office’s numbers. And that less than 1% growth is BEFORE Congress and the next president (doesn’t matter who) set to work cutting another $4 trillion immediately after the elections. That’s when the real US deficit cutting crunch will start–and the next double dip of the US economy.
Obama and Congress will discover what an ‘austerity recession’ is, come 2013. In that they will join Japan and most of western Europe, including the French and the British. Austerity, or deficit-budget cutting, only makes a debt crisis worse. Dont’ believe me, ask the Greeks!
There are only two ways to get out of deep debt-driven economic contraction that remains ’systemically fragile’ today across the board. I’m talking about both the US and the Eurozone, as well as Japan. One way is to reflate the economy by generating inflation. The other is to liquidate the bad assets. Policy makers are failing to achieve the former and will continue to refuse the latter, since liquidation of bondholders’ assets translates into massive bank defaults.
The Federal Reserve has done a horrible job at reflating the economy. The trillions it has spent on bailing out the banks, printing money, buying banks and mortgage lenders’ bad subprime loans at near full purchase price instead of the real 15 cents on the dollar they are worth, has led not to inflation in product prices (that would stimulate investment) but instead resulted in the Federal Reserve spoon-feeding speculators around the globe. The Fed has pumped up stock markets, real estate, currency speculation and volatility, oil and commodity prices, and financial securities in general. The money and credit from the Fed has not gotten to those parts of the economy that need it most. The Fed is not broke. It can always print money. It’s just that Fed policy is itself broken.
The other option is to ‘liquidate’ the bad assets. That too the Fed and the Obama administration have sadly failed at. The essence of the Fed-Obama bank bailout strategy since 2009 has been to ‘rescue’ the banks–not by removing the bad assets from their balance sheets but just by pumping liquidity into these zombie institutions (many of which have been technically insolvent and bankrupt now for years), to in effect ‘offset’ the bad assets on their balance sheets. The bad assets are still there. The Fed and Congress have not only just ‘offset’ the bad assets on the private balance sheet, but have in so doing mirrored those bad assets on the public balance sheet side. So it not only failed to remove (liquidate) the bad assets; it doubled them. Now the public sector has become as ‘fragile’ as the banking sector. But liquidation, you see, is abhorred by the bankers and bondholders. They don’t want their asset values ‘reduced’ or expunged. They want the people to pay for the losses. And that, once again, is Greece today–and the USA come 2013 and beyond.
Article 1: THOSE PECULIAR JANUARY JOBS NUMBERS: OR, WHEN 243,000 JOBS AREN’T
The January 2012 jobs report released by the US Labor Department on Friday, February 3 indicated that 243,000 new jobs were created in the nonfarm sector of the US economy last month. Additionally, the U-3 unemployment rate fell from 8.5 to 8.3%. How real are those numbers? Are they actual jobs created? What’s the true unemployment rate?
First, it is important to note that the 243,000 January jobs numbers are not the actual jobs created. They represent ‘seasonal adjustments’ made to the raw data for jobs, referred to as the ‘not seasonally adjusted’ jobs tally for the month. The January jobs report reflects an anomalous massive upward revision of the raw jobs data, due to assumptions about seasonality and new business formations.
Let’s look at trends from November 2011 through January 2012 for both the ‘seasonally adjusted’ and ‘not seasonally adjusted’ for purposes of comparison.
The actual (not seasonally adjusted) jobs numbers for November 2011 show there were 133.179 million nonfarm jobs in the US economy that month. The following month, December 2011, total nonfarm jobs had declined to 132.952 million, for a decline of –227,000 jobs. That makes sense, given that –203,000 jobs were lost in construction, which is typical for Decembers, while –74,000 jobs were reduced by states and another-72,000 by cities and schools that month. Offsetting the construction-public sector job losses were 142,000 jobs added in Retail, mostly department stores, which also makes sense given the holiday season. Manufacturing and other service sector jobs changed little, some up and some down slightly over the month. Again, these are the ‘not seasonally adjusted’ jobs for November.
What about the ‘seasonally adjusted jobs numbers’ for November? One would expect some differences in numbers here, of course. Let’s look. Total nonfarm jobs increased in November, by 203,000 instead of declined (per the not adjusted numbers) by –227,000. That represents a net difference and ‘swing’ of 430,000 jobs.
Now let’s make a similar comparison of ‘seasonally adjusted’ and ‘not seasonally adjusted’ for jobs between December 2011 and January 2012 that were reported on February 3, 2012 for last month. What appears is an incredible 7 to 10-fold increase in the difference between ‘seasonally adjusted’ and ‘not seasonally adjusted’.
The not seasonally adjusted, raw jobs numbers show a loss of jobs for January 2012, after the holiday season, of –2.7 million jobs. That includes about –300,000 construction jobs, which is not strange given the mid-winter slowdown typical of this sector. Plus another –600,000 jobs in retail, which makes sense after the typical holiday sales hiring surge typical in November-December. And another –400,000 in business professional services as most businesses trim their labor force at the start of the year to keep costs down and to watch when and where to add jobs back in the subsequent months. However, the adjusted, upward revised numbers for January showed a gain of 243,000 jobs instead of the unadjusted –2.7 million fewer jobs. That 243,000 gain in jobs includes adding construction jobs in mid-winter, and adding even more jobs—176,000—in Retail and Services after the holiday season hiring surge. This retail-services job gains for January occur, moreover, despite the dismal retail sales holiday season when, except for autos, retail sales actually declined by 0.1% compared to the previous year. Why would retail employers add jobs after that poor sales season? Why would they not reduce the huge numbers of part time and temp hires of November-December in January, as they typically do after the holidays—especially given the poor retail sales performance? And why would the construction sector add jobs in mid-winter? And why would business professional sector companies add 1.1 million jobs, according to the seasonal adjustment assumptions, instead of trimming jobs, as reflected in the unadjusted numbers? In other words, why would professional-business services not make their typical beginning-of-the-year labor force temporary reductions?
It is interesting to note that instead of a ‘net swing’ between the seasonally adjusted-not seasonally adjusted numbers of 430,000, as occurred during November-December, we get a ‘net swing’, or difference, between seasonally adjusted vs. not adjusted of nearly 3 million jobs for December-January? Does this make sense? One would expect major differences between seasonally adjusted-not seasonally adjusted numbers. But a seven-fold increase in the difference from month to month—from 430,000 to 3 million—is not credible.
Let’s look at this massive difference and ‘net swing’ anomaly from another perspective: the unemployment numbers. To start, forget about the ‘U-3’ unemployment number preferred by the press, with its reported reduction in unemployment rate from 8.5% in December to 8.3% in January that the administration and press have been hyping. The more accurate U-6 unemployment rate is a better indicator since it accommodates part time, discourage workers, and underemployed workers. It too underestimates true unemployment by about another 2%, per this writer’s calculations, but not nearly as dramatically as the U-3 number.
In December the U-6 unemployment rate for 15.2%, both for not seasonally adjusted and seasonally adjusted total employment. That means, for the unadjusted employment levels there were 20.208 million jobless in December 2011 and 20.096 million unemployment in December per the seasonally adjusted numbers. That’s a difference of only 112,000 unemployed.
But look at the December-January difference in unemployed between the two sets of numbers: The U-6 unemployment rate for seasonally adjusted fell to 15.1% in January (from 15.2%) in December, while the not seasonally adjusted number of unemployed rose from 15.2% in December to 16.2% in January. The U-6 indicates the number of unemployed rose, which makes sense for construction, retail, and other sectors per the preceding argument. But for the seasonally adjusted numbers, unemployment declined for the U-6 by 0.1% (and 0.2% for the U-3). The ‘net swing’ between the two sets of data for December-January was 1.108 million, compared to the ‘net swing’ for November-December of only 112,000. The difference represents a ten-fold jump for December-January.
How can the seasonally adjusted vs. not seasonally adjusted jobs numbers be so large for December-January compared to previous months? How can what appears to be a decline in jobs clearly in January end up reported, after seasonality and other statistical ‘adjustments’, as an upward revised 243,000 jobs?
Other economists have been focusing on the possible problem with the seasonality assumptions in the January jobs numbers this past week, but their commentary is not reaching the public press. The essential point is that the January jobs report is peculiar, and requires an explanation by Labor Department statisticians why there was a ‘swing’ of about 3 million jobs last month between the raw jobs numbers data and the ‘upward revisions’ in the seasonally adjusted numbers for the month.
ARTICLE 2: THE U.S. JOBS CRISIS–THE BIGGER PICTURE
Despite last Friday’s January 2012 Labor Department jobs report, more than three years after President Obama assumed office the crisis in jobs in the U.S. continues as the number one problem of the US economy. The ‘seasonally adjusted’ official numbers may have indicated 243,000 jobs created last month, but the actual, raw data on jobs was dramatically different, as will be explained in a follow up analysis to this item on jobs in the U.S. economy. In the interim, for those readers inclined to get excited about January’s very short term jobs picture, to start here’s some more sobering facts on the ‘bigger picture’.
Based on the U.S. Department of Labor’s ‘U-6’ unemployment rate, at the official end of the recession in June 2009 there were 25.4 million jobless; By January 2012 more than 30 months later, there still remained 23.4 million without work. That’s a total of only approximately 67,200 jobs created a month over two and a half years—a monthly number barely half of what is needed to even absorb new entrants into the labor force each month.
Most of the two million jobs created in the private sector since Obama assumed office three years ago have been lower paid service jobs, part time jobs, and temporary forms of employment—all providing lower wages and few benefits. Higher paying and benefit jobs in manufacturing and construction have, in contrast, continued to decline since the June 2009 recession low-point. Today there are still 79,000 fewer jobs in manufacturing and 680,000 fewer jobs in construction than there were at the recession low-point of June 2009. There were 21.1 million manufacturing and construction jobs when the recession began in 2008. There are only 17.3 million manufacturing-construction jobs today.
Unlike all previous 11 recessions in the U.S. since 1945, the government sector has not created jobs to offset private sector job loss during the recession. Government instead has become a major contributor to job destruction. Local governments have laid off 643,000 workers since June 2009, nearly a quarter million—247,000—of whom have been teachers. Public workers and teachers continue to be laid off at a rate of 20,000 a month or more. At that pace, by the end of his first term, President Obama may have presided over a loss of nearly a million public workers’jobs.
Other indicators of the continuing sad state of the jobs markets in the U.S. after three years further corroborate the continuing crisis of jobs in the U.S. For example, the duration of long-term unemployed—i.e. those out of work 27 or more weeks—has continued to rise steadily since June 2009 from 24% of all those unemployed to more than 40% today. Another indicator of the continuing severity of today’s jobs crisis, the ‘Employment to Population Ratio’ that measures how well the economy is creating jobs in relation to the growth of population, shows the U.S. economy is growing fewer and fewer jobs as the U.S. population rises. In other words, we are not even keeping up with the population growth. At the start of the current recession 63% of the US population was employed; today only 58.5% of the U.S. population has jobs. Not least, the ‘Job Opening to Labor Turnover’ (JOLT) ratio shows there are still today 4.2 workers looking for every job offered—i.e. well more than double the 1.8 to 1 ratio that existed before the recession began.
The Jobs Creation programs offered by the Obama administration and Congress over the past three years have proved dismally inadequate. In January 2009 the Obama administration promised to create 6 million jobs if its 1st stimulus program costing $787 billion were passed by Congress, 40% of which were tax cuts. In June 2009 there were approximately 25 million unemployed. By mid-summer 2010 there were still 25 million unemployed and job losses began to rise again that summer.
The Obama administration’s answer was to propose even more tax cuts for corporations and investors, another $802 billion in tax cuts including a two year extension of the Bush-era tax cuts costing $450 billion. The administration then added another new twist to its jobs strategy in late 2010: it brought in corporate CEOs like Jeff Immelt of the General Electric Corp., and Bill Daley, a big banker, to run the President’s new ‘jobs council’. Their corporate answer to a jobs program was more free trade agreements, an end to more business regulations, lowering corporate tax rates for offshore multinational companies hoarding their profits in foreign subsidiaries to avoid paying US taxes, patent law reform, and taking hundreds of billions in funds from social security to cut payroll taxes. That corporate-designed jobs program failed in turn as well.
Obama administration business tax cuts, its corporate friendly and job-destroying free trade deals, and its raiding social security to give workers with jobs a paltry tax cut at the expense of retired workers’ deferred wages have all failed to even dent the 23-24 million still unemployed. The stimulus and tax cut programs of the past three years have bailed out big business and big banks, but have not created jobs beyond a mere trickle. What was once a ‘trickle down’ approach to job creation has become today a ‘drip-drip’ policy.
While the Democrats have thus far failed to provide any effective programs to restore the millions of jobs lost since the recession began, Republicans continue to propose old ‘retread’ solutions that destroyed millions of jobs over the past decade. Republicans continue to propose more tax cuts for corporations and wealthy investors, still more job-destroying free trade agreements, more cuts in social security-medicare-medicaid and other social programs, and a further expansion of defense spending. These programs not only have failed to produce jobs, but actually have eliminated them by the millions over the past decade.
The historical record shows that $3.4 trillion in Bush tax cuts, given mostly to business and investors, were associated with no job creation at all during his term. The number of private sector jobs when Bush came into office in January 2001 was 111,634,000. The number of private sector jobs when he left office in January 2009 was 110,981,000. The U.S. economy and taxpayer paid $3.4 trillion to lose 653,000 jobs. By December 2011, three years later and after another year extension of the Bush tax cuts, there were 109,928,000 private sector jobs. The more the Bush tax cuts, the fewer the jobs. Yet Republicans continue to beat their broken drum that ‘tax cuts create jobs’, when in fact there are still 1.7 million fewer private jobs in the U.S. than there were a decade ago.
Republicans further continue to chant for more cuts in social programs, when countless studies show it will result in the loss of millions more jobs. And they continually call for more defense spending and wars as a way to create jobs. But the facts here again are the contrary. Increasingly, defense spending results in more high tech-high cost weapons systems that only boost still further the bloated profit margins of defense giants like Lockheed, Raytheon, Boeing and others, and actually result in more jobs outsourcing to these same companies’ foreign defense contractor partners in Japan, Germany, Israel, the United Kingdom and elsewhere.
The S&P-Fortune 500 largest corporations today sit on more than $2 trillion in cash and refuse to spend it to invest in America and create jobs here at home. The big tech-big bank-pharmaceutical companies sit on another cash hoard of more than another $1 trillion sheltered offshore and refuse to bring it home to create jobs. And the big 19 banks sit on still another $1 trillion and refuse to lend to small businesses to create jobs.
If big banks and big business refuse to use their bailed out $4 trillion cumulative cash hoard of the past three years to create jobs, then the government must tax it, must take it back from them and directly create jobs itself. The U.S. needs a 21st century version of the 1930s Depression-era ‘New Deal’ jobs programs, adapted from the past to present conditions. What the U.S. economy needs is the immediate creation of a Civilian Conservation Corp (CCC) program similar to that created in 1933. In just 90 days the CCC created the equivalent of 1.2 million jobs in today’s economy. Intermediate and longer term, what the economy now needs is a new 21st century ‘Works Progress Administration’ (WPA), that created between 1935-40 the equivalent today of 25 million jobs.
More specifically, the U.S. needs a new ‘Alternative Energy Public Investment Corporation’ (AEPIC), in which the government would invest directly in alternative energy infrastructure. It needs a modern version of the 1930s CCC, a ‘Civilian Reconstruction Corporation’ (CRC), to directly build, repair and maintain urban areas and urban renewal. It needs a ‘Community Health Services Administration’ (CHSA), to build medical clinics in communities and provide direct health services to the working poor, those on Medicaid, and the 50 million uninsured. And it needs a ‘21st Century Works Progress Administration’(21WPA), that targets job creation in non-infrastructure and non-health services employment across all other industries and occupations.
The $4 trillion to fund these direct job creation programs are there. There’s no need to raise the deficit or debt. If the super-wealthy and their big corporations and banks won’t spend the trillion dollar bailouts they were provided by the US taxpayer, to invest in America and create jobs, then the only alternative is for the government to reclaim those trillions and spend it on direct job creation programs itself.
Last Monday, January 24, 2012 President Obama delivered his latest ‘State of the Union’ (SOTU) speech to Congress. It heavily emphasized economic themes, among which were jobs, manufacturing, trade, the auto industry, teachers, taxes, medicare, financial regulation, and growing income inequality in the U.S. Claims were made and general proposals offered for creating more jobs and how to get a sluggish US economic recovery finally going after three years of tepid, stop-go results. But many of the President’s claims in his SOU speech were contrary to the facts, especially with regard to jobs. And the proposals he reaffirmed for generating a sustained economic recovery were more of the same ‘old wine in new bottles’ that haven’t had much impact to date. Here’s some facts concerning jobs to consider before feeling too optimistic over what was largely a campaign election year SOTU speech—a speech more reminiscent of Obama’s 2008 ‘talk the talk’ period than his 2009-11 ‘talk but no walk’ record.
Part 1: JOBS
Obama boasted that the US manufacturing sector had turned around and created millions of jobs on his watch. He subsequently raised the need to further boost manufacturing and the exports of US manufactured goods as one of his two primary recommendations for doing something about the 23 million jobless still without work in the U.S. (The other primary recommendation was more business tax cuts, further comment about which will follow in Part 2).
What are the facts concerning manufacturing sector jobs in the U.S. today?
According to the US Labor Department (table B-1 Employment Reports), there were 17.264 million jobs in manufacturing in December 2000. By the start of the recession in December 2007 there were 13.879 million. When Obama took office in 2009 there were 13.406 million. As of December 2011 there were 11.812 million.
Over the past year, from December 2010 through December 2011 there were 1.932 million total private sector jobs created. But only .218 million of those were manufacturing jobs. And virtually all of those manufacturing jobs were created in the first half of 2011, as global trade and exports accelerated. That same global trade began contracting in the second half of 2011. In response to that contraction, in the last three months of 2011, October-December, US manufacturing employment actually fell by 24,000 jobs. So tell me how this picture, and a further promotion of manufacturing sector is going to significantly reduce the 23-24 million currently still jobless in the US? Even at the early 2011 rate, it will take 100 years to create 20 million additional manufacturing jobs.
The above numbers represent total manufacturing jobs. How about jobs for non-supervisor/non-managers in manufacturing? Since the so-called official ‘end’ of the recession in June 2009, through December 2011—over a period of two and a half years—a mere 174,000 production manufacturing jobs were created. That’s a meager 5,800 a month.
The president in his speech was exceptionally laudatory of the US auto companies, praising all three for having fully recovered and now creating jobs. But let’s look at the record here as well. 315,000 auto jobs were lost from the start of the recession in December 2007 through the end of 2010. Over the past year the industry has hired back at the rate of only 4,000 a month, or 48,000, of those 315,000 jobs lost. And let’s not forget, the overwhelming number of those hired the past year have been temp status auto industry jobs paid at around $14 an hour, about half of the normal auto worker wage rate. Yes, the auto companies are hiring, but at half pay. Not surprisingly, their profits have recovered, but have done so by shifting money from auto workers to auto companies’ profits bottom line.
Ok, friends of the administration may argue, maybe the facts regarding manufacturing jobs were a bit overblown, and exaggerated by the president. What about the 1.9 million total private jobs created this past year. Isn’t that significant? Well, 600,000 of those jobs were created in the retail sector in the last two months of 2011, the holiday season. Most jobs in that sector are part time and temp jobs, many of which will soon disappear in early 2012. Another 82,000 jobs were messengers and couriers, hired by UPS, Fedex, etc. for the surge in mailing in the holiday season. They too will quickly disappear in early 2012. In addition, Banking and Finance sector companies have announced more than 150,000 layoffs scheduled for 2012, and that’s just a start. And the two biggest job creation sectors of the economy in the first half of 2011—Business and Professional Services and Leisure and Hospitality—both reduced jobs in the final two months of 2011 by 264,000 jobs.
Finally, let’s not forget the non-private, government sector of the economy. While the private side may have created 1.9 million jobs, 257,000 state, local government, and postal workers lost their jobs just in 2011 alone—106,000 of whom were teachers.
While on the topic of teachers, Obama praised the profession for its key role in the economy and development of society. He properly noted teachers should be honored and respected for their contribution to both. He then proclaimed the best teachers should be rewarded with more pay. Education managers should be given more flexibility, he advocated, to give more pay to the best teachers and get rid of the worst. This is his Education Secretary, Arne Duncan’s, old formula. In practice it means the introduction of merit pay, which would undermine teacher union contracts, and more manager freedom to fire teachers and/or layoff out of seniority based on administrator preferences and favoritism—the old ‘civil service’ approach. Together with the push toward charter schools, Obama’s policy for education amounts to a destruction of teacher union contracts. Charter schools plus merit pay plus end of seniority and more freedom to fire means the end of teacher unionism as we know it.
In the second half of 2010 Obama reshuffled his staff, re-populating his team with corporate advisers. Bill Daley became chief of staff. General Electric Corp. CEO, Jeff Immelt, headed his ‘jobs council’. Scores of corporate underlings were hired behind them. What we subsequently got in terms of jobs policy was a manufacturing sector-export trade centric set of proposals. Jobs were supposed to come from stimulating manufacturing, exports, pushing free trade, as well as cutting business regulations, promoting patent protection for the tech sector, and similar pro-business approaches. Daley-Immelt essentially took over the Obama jobs program.
More business and investor tax cuts followed, including $802 billion in further tax reductions in December 2010. Regulations were reduced, as Obama bragged in his SOTU that he cut more regulations than did George W. Bush in his first term. Contrary to his 2008 campaign promises to restructure job-killing free trade agreements, the Obama-Daley-Immelt team opened a new offensive to pass pending free trade agreements with Korea, Panama, Columbia and elsewhere. The former three were adopted in 2011. These were promoted as manufacturing job-creation measures. However, according to various studies since 1994 by the respected Economic Policy Institute, more than 10 million jobs have been LOST due to free trade. Nevertheless, in his SOTU speech Obama once again is promoting the corporate line and false claim that free trade creates jobs.
Manufacturing output has risen significantly since mid-2009, as has manufacturing corporations’ revenues and profits, especially the big multinational players like Immelt’s GE and the auto and high tech companies. But manufacturing jobs are still 1.6 million short of where they were in early 2009 and wages of new manufacturing jobs are far lower than existing wages. A few workers get low paying jobs, while manufacturing companies reap the big benefits of Obama’s manufacturing-export centric jobs policies. The ‘let’s boosts manufacturing-export companies’ approach to job creation has been a sham job creation program, taken straight out of the economic playbook of the Daleys and Immelts that have been driving the Obama team jobs program since late 2010. And by the comments of President Obama in his recent SOU address, corporations will continue to drive the Obama jobs program—while they simultaneously sit on their current $2.5 trillion cash hoard and refuse to invest in America. Sure, GE and GM may create some jobs in the US—but only if American workers are willing to work for Chinese wages!
On Friday, January 27, 2012 the first advanced reporting of fourth quarter 2011 GDP statistics were released. It showed a ‘first’ estimate of GDP growth of 2.8%. That follows a third quarter GDP number of 1.3%, and a first half 2011 of only 0.8%. At first glance it would appear economic growth is on the rise, supporting the claims of politicos and pundits that recovery is on the way (once again). But a closer look shows the US economy still remains mired in a stagnate, little to no growth condition.
A normal historical growth rate for the US economy is about 2.5%. But that’s a long run average pre-2007. That long run 2.5% average is well below what is normal for a recovery from a recession at our current stage two years after 2009. At our current stage in past recession recoveries, the GDP growth rate is ‘normally’ 4% to 5%. For the entire last year of 2011, actual GDP rose only 1.7%. That’s easily less than half the normal at this stage for a recession recovery.
But even that 1.7% average for all of 2011 assumes the official 2.8% last quarter was really 2.8%. It wasn’t. Last quarter’s 2.8% was really around the same 1.0% rate that marked the first nine months of last year, 2011. Here’s two reasons why:
To begin with, the fourth quarter 2.8% number will likely be revised downward to 2.7 or even 2.6% in the next two revisions that typically follow the reporting of ‘advance’ first estimates of GDP reported on January 27. But let’s not even count that reduction yet. Let’s start from the reported 2.8%.
The first problem with the fourth quarter estimate of 2.8% is that 1.9% of that total was due totally to business inventory buildup in the fourth quarter (which means it won’t last going into 2012). In the preceding third quarter 2011, inventory building by business collapsed to almost zero. The 1.9% therefore reflects recovery of the inventory buildup that didn’t occur in the third quarter 2011 but got put off to the fourth quarter. So the 1.9% for fourth quarter 2011 inventory buildup was really about half that, or only around 1%. That means 1% should be deducted from the total 2.8% GDP growth in the fourth quarter. And in turn that means GDP really grew only by 1.8% in the fourth quarter—not by 2.8%.
Here’s where the second problem comes in. The 2.8% is what is called ‘real’ GDP. That is, GDP that is adjusted for price inflation. The specific price index that is used to adjust for inflation for GDP is called the ‘GDP deflator’. If that deflator reports a very low inflation rate, the real GDP growth is higher. The GDP deflator claimed that inflation in the fourth quarter of 2011 was only a mere 0.4%. Does anyone believe that? The true inflation rate for the fourth quarter has to have been at minimum at least 1%. That’s 0.6% higher than the 0.4% that was officially reported by the GDP deflator. That 0.6% higher should therefore be subtracted from our adjusted 1.8% GDP growth rate in the fourth quarter. The real ‘real GDP’ should therefore be around 1.2%–that is, just about the 1% rate of GDP growth that occurred throughout all of last year.
In short, the US economy remained stuck in its stagnant, no-to-low growth condition in the fourth quarter that characterized the US economy throughout all of 2011.
There are a host of other problems with government statistics for the fourth quarter as well. Another area of problem is reporting on jobs. It’s important to know that the 200,000 job growth reported by the labor department was not the true, actual number of actual jobs created. The 200,000 is a statistic; that is, a manipulation of the actual raw, true jobs data that is then adjusted for seasonality assumptions by the labor department, new business formation assumptions, and other operations on the data. These adjustments typically tend to boost the real job numbers during the year end holiday season higher than the actual. The labor department’s seasonal and other adjustments were more accurate before 2007, but are now significantly less so in the current recession and stagnant recovery that makes the present economic downturn unique.
As just one example with regard to jobs: the seasonal adjustment for December 2011 reported 42,000 hires of ‘couriers and messengers’. These are workers hired by UPS, Fedex, etc. to accommodate temporary surges in parcel mailings. These are temp workers that then are typically laid off after the holidays. But the 42,000 reported was actually 86,000 messengers and couriers, most of whom will be laid off soon in 2012. Another related problem is the ‘seasonal adjustment’ of workers hired in retail, another temp-part time surge in the holiday season. The labor department gross underreported those numbers as well. Those workers too will be laid off in huge numbers come the first quarter of 2012.
Another deeper look at what really happened to retail sales in November-December is also revealing. Despite the hype around a ‘record’ holiday season, the facts now coming out in January show that retail sales, year over year, rose only 0.1% in December, and most of that due to car sales. Minus auto sales, retail sales declined in December 2011 compared to the year earlier, the first such fall since May 2010. And that despite record price discounting by retail sales companies. Even that poor retail sales performance was driven by rising use of credit cards once again by consumers, or by their dipping into savings for holiday spending. The latter was not surprising, given that wages and salaries rose only 1.8% (and most of that at the high end) while prices rose double that at 3.5%. In other words, real wages and income continued to fall, as they have since 2009. Over the past decade household income has declined has been about 10%.
No wonder holiday sales were so poor, given the continuing decline in real wages and household income for the ‘bottom 90%’.
To sum up, fourth quarter GDP was really much less than reported. The first quarter 2012 will be little different than 2011—and even possibly much worse should the Eurozone almost certainly experience a severe banking crisis this year. The real outlook for the US economy (not the politic-pundit version) and the real problems in the Eurozone and slowing global economy elsewhere is why the Federal Reserve a few days ago also indicated it planned to keep interest rates at zero for an additional two years, through 2014, instead of early 2013. It knew the public reporting on the economy for December and fourth quarter was really not all that rosey. The Fed knows the US economy will most likely get weaker, not stronger, in 2013 and perhaps even sooner. It knows that US banks will have to be bailed out again if European banks tank this summer. And if that happens it means a double dip recession this writer has been predicting for no later than early 2013.
For the past two years this writer has written on the status of the US and global economy in the January issue of ‘Z’ magazine, with predictions for the year to come and beyond. Past predictions since late 2009 have included: “the Euro financial system will be shaken in 2010 by one or more defaults on its periphery”…”should Democrats lose further seats in the House (in 2010), a highly likely event, federal spending will almost certainly be further reduced in 2011”…’The Eurozone debt crisis will spread beyond the current four economies (Ireland, Portugal, Spain, Greece) and engulf Italy, Belgium, and potentially France”…”Home prices will fall another 10% to 15% in the US… (and)…foreclosures will rise past 10 million”…”States, cities, and school districts will turn to massive layoffs”…”the job gains this spring (2011) will once again likely disappear in the coming summer-fall 2011”…”Both Japan and the Eurozone economies will weaken faster than the U.S.”…”a restructuring of the EU currency system will result in a kind of two-tier euro currency”…
Predicting the trajectory of the US and global economy in these volatile economic times is an uncertain endeavor. But that’s the very time predictions are of most value. Unfortunately, with a handful of exceptions, the mainstream economics profession habitually focuses on predicting the present rather than the future. That statement is not as contradictory as it seems. Translated, it means mainstream economics assiduously avoids predicting beyond the next few weeks or, at most, the next monthly release of data. Forecasting fundamental turning points of the economy, and the major events that provoke major crises, are avoided at all costs. It is far safer to find refuge in conservative consensus opinion than to risk stepping outside it. After all, if the consensus is wrong, one can’t be individually faulted by one’s professional peers if the vast majority of those peers are also in error! However, this conservative bias contributes little toward understanding the most likely trajectory of conditions and events as the economic crisis continues to evolve and unfold.
Mainstream Economics: A Bird Without Wings
Seeking refuge in conservative consensus partly explains why virtually all the 10,000 professional economists in the world failed to predict the onset of the current crisis in 2007. Or why the same crew, in lock-step, declared a sustained economic recovery after 2009 would occur but didn’t. It is also why the same group today are failing, for yet a third time now, to foresee the coming deeper economic crisis that will almost certainly emerge no later than early 2013—and potentially even earlier if the Eurozone financial system continues to unravel this spring 2012.
The repeated failure of the profession to predict the three great economic events of the past four years (two having occurred; one emerging) is not simply the consequence of economists’ myopic fixation on the latest data release or their consistent conservative bias, but more fundamentally is the result of their adherence to a conceptual apparatus that cannot explain the essential forces behind the current crisis. It is the result of theories based on pre-crisis conditions that no longer prevail; and of models that simply no longer work.
Deficient concepts, theories and models are why Obama’s own in-house professional economists—the Council of Economic Advisers—in early January 2009 erroneously assured the public that Obama’s $787 billion initial stimulus package would create 6 million jobs. But it didn’t. They are why the Federal Reserve’s economists insisted the $2.7 trillion Quantitative Easing (QE) 1, 2, and 2.5 (called ‘operation twist’) policies introduced between 2009-11 would resurrect the housing sector, but instead only fed stock, junk bond, and commodities futures speculators worldwide. And they are why Congressional Budget Office economists forecast that Obama’s $802 billion tax cuts introduced a year ago, in December 2010, would result in a significant increase in GDP growth rates and jobs, but instead produced GDP growth of less than 1% in the first half of 2011 and no net job creation the entire past year. Something clearly is wrong with the theories and models, as well as the conceptual apparatus underlying those theories and models.
The Broken Left Wing: Just Give Us More Stimulus
The liberal wing of the flightless bird of mainstream economics continues to maintain that the Obama programs since 2009 have not produced sustained economic recovery because the 2009 economic stimulus was of insufficient magnitude. At the forefront of this view have been noted economists like Paul Krugman and others. Even Larry Summers, former Treasury Secretary under Clinton and chief economic policy adviser for Obama in 2009-10, has recently joined the liberal chorus saying that the original stimulus of 2009 should have been $1 trillion or more—not the $787 billion.
Contrary to this view, however, the Obama stimulus programs introduced 2009-10, which amounting to more than $1.7 trillion in tax cuts and spending, failed not simply because they were of insufficient magnitude. They failed because their composition was also exceptionally bad and their timing poor.
With regard to composition: the Obama stimulus programs were composed 70% of tax cuts—and mostly business tax cuts at that. The tax cuts were then hoarded by corporations and not invested in the US to create jobs. Nearly another half trillion dollars in Obama spending programs were composed of subsidies to states, school districts, and unemployed. Those subsidies were designed to buy time, put a floor under the collapse of consumption that was occurring in 2008-09, until the tax cuts could pick up the slack, translate into real investment, and move the economy to a higher level of recovery. But that didn’t happen. The tax cuts weren’t invested. At least not in the U.S. Some went offshore to create jobs in Asia and elsewhere. Other amounts went into purchasing speculative securities—stocks, derivatives, foreign currencies, etc., that also created no jobs. The remainder was retained, and is still being hoarded today, in anticipation of being spent on corporate stock buybacks, dividend payouts, or eventual mergers and acquisitions that will result in fewer—not more—jobs. Despite a tax stimulus of trillions of dollars, corporate America continues to sit on a $2 to $2.5 trillion cash hoard as of year end 2011. Multinational corporations continue to hoard another $1.4 trillion in offshore subsidiaries instead of investing and creating jobs in the US. Not to be outdone in the hoarding game, after having been bailed out with $9 trillion in free loans by the Federal Reserve, big banks continue to sit on another $1.7 trillion in excess reserves, doling out loans in eye-drop fashion to small business, resulting in still further under-investment and minimal job creation.
Meanwhile, Obama’s $370 billion dollars of subsidies dissipated after 12-18 months. Like business tax cuts, subsidies do not create jobs. They may temporarily save some. But that’s not economic recovery. Recovery means significant net job creation, typically in the range of 300,000 to 500,000 jobs every month for a year. ‘Saving’ jobs is a policy of accepting continuing economic stagnation at best.
The remaining $126 billion dollars or so of Obama spending circa 2009-10 was earmarked for long term infrastructure—i.e. upgrading the national electrical grid, alternative energy projects, and so-called ‘shovel-ready’ construction projects that couldn’t find their shovels. But that spending did not create jobs or generate recovery in the short run since 2009 any more than tax cuts and subsidies created jobs. Composed mostly of capital-intensive projects, most infrastructure spending was structured very long term, taking effect over a ten year period. Like the tax cuts, the short term effect of this infrastructure spending thus also resulted in little if any job creation or economic recovery.
This bad composition of the Obama stimulus programs (i.e. tax cut heavy, subsidies, and capital intensive construction) and their poor timing (i.e. ultra-long term infrastructure projects and one-time short term grants to the states) are represented in the following Table 1.
TABLE 1
Economic Recovery Programs
Tax Cuts vs. Spending / Subsidy vs. Infrastructure
2009-2011
(billions, current $)
Subsidy Infrastructure
Program Total Cost Tax Spending Spending Spending (long)
Obama I $862 $417 $445 $319 $126
(2/09 +
supplements)
Obama II $857 $803 $54 $54
(12/10)
Obama III $447 $253 $194 $89 $105
(9/11) ______ _____ _____ ______ ______
TOTALS $2,166 $1,473 $693 $452 $231
Source: ‘Obama’s Economy: Recovery for the Few’, Pluto Press & Palgrave-Macmillan, March 2012.
Obama’s three recovery programs to date failed because they relied on the private market sector to generate a sustained recovery, instead of on the government directly taking the lead to create jobs, rescue homeowners and resurrect housing, and stabilize state-local government finances long run. Obama bailed out banks that didn’t lend, rescued corporations that didn’t create jobs, and subsidized state and local governments for a brief period and then cut them loose to fend fiscally for themselves.
The Stunted Right Wing: Just Give Business More Profits
Radical Republicans subsequently took charge of the U.S. House of Representatives following the November 2010 midterm elections—and with it took over the economic policy agenda as well. The takeover created an ideal environment for the re-ascendance of the ‘right’ wing of mainstream economics in the economic policy process. But if the ‘left’ wing was broken and unable to clearly understand the reasons why the Obama recovery policies have failed, the ‘right’ wing intellectually was a mere stub without feathers and thus even more incapable of flight.
The Obama programs failed to generate recovery, they argued, because they produced a ‘lack of business confidence’. That lack of confidence was due to business uncertainty about the future of tax cuts, to excessive business regulation, to stalled free trade agreements with South Korea, Panama, and Columbia, to excessive deficit pending and debt, to the excessive cost to business in the health care affordability act of 2010, and other such economic nonsense. Conservative economists argued that changing these policies would release more income for corporations and businesses to spend. More income would automatically translate into more investment and more jobs. The economy would then rapidly recover.
What’s conveniently ignored by this wing, however, are two major problems: First, massive government spending cuts and sharply reduced consumer incomes produces a steep decline in GDP and no recovery. Conservative economists argue this slack will be more than offset by a rise in business investment—which leads to the second problem: namely, with corporations already hoarding $2 trillion in cash and banks’ hoarding another $1.7 trillion in excess reserves today, why should giving corporations and banks even more cash and income result in investment and recovery? If corporations and the banks aren’t spending the $2 trillion or lending the $1.7 trillion they already have and insist on hoarding, why should giving them still more result in anything different? Exactly how many more trillions of dollars are needed to get them to invest, lend, and create jobs and ensure recovery?
This condition of mainstream economics today may be summarized with the following statement:
Just as the liberal wing of economics has no answer to exactly how much more magnitude of deficit spending is necessary to ensure a sustained economic recovery, the conservative wing cannot explain or answer how much more shifting of income to corporations and investors is needed to ensure a return to investment, jobs, and recovery.
Given such fundamental errors by both wings, it is not strange that both liberal or conservative economists today have had such great difficulty in recent years predicting the emergence and evolution of the current economic crisis. The bird simply cannot fly. It can only run around in circles, flightless, squawking as it turns first left and then right and back again.
With neither wing of the economics profession able to offer effective programs for economic recovery, what then are the likely scenario(s) for the U.S. and global economies in the year immediately ahead?
Economic Predictions 2012-13
The United States Economy
1. The US will experience a double dip recession in early 2013 or, in the event of another banking crisis in Europe, perhaps—though less likely—earlier in 2012.
Despite a continual hyping of economic reports by the media and business press in recent months, there is no recovery underway for jobs, housing, or state-local government finances. Job growth has been stuck throughout 2011 at around 80-100,000 a month per the Labor Department’s monthly data. The broader measure of unemployment, the U-6 rate, has been consistently in the 16% range, or about 25-26 million for the past year. State-Local governments continue to lay off workers in the 20,000 range every month. Little effective stimulus will be forthcoming from the Federal government in 2012 despite the election year, and further deficit cutting is even possible in 2012. The first quarter of 2012 will record a significant slowing of GDP growth once again. Should the Eurozone debt crisis escalate once more in the second quarter of 2012, the US economy will weaken further in the second quarter, 2012. It may even slip into recession if the Euro crisis is particularly severe. More likely, however, is the scenario of an emerging double dip recession in early 2013, when deficit cutting by Congress and the administration intensifies.
2. The Federal Reserve will introduce a third version of its ‘Quantitative Easing’ QE3 program in 2012.
QE is when the Fed prints money to directly purchase bonds from the private sector at above-market inflated prices, thus pumping up the money supply. As in the past two versions of QE in 2009 and 2010, the result will have little effect on the housing markets, jobs, or general recovery but will once again result in a boost to stock, bonds, and commodity speculation and related price inflation. The timing of QE3 will be driven by the events in Europe.
3. Real deficit-debt reduction will begin with great earnest immediately following the November 2012 general elections, or no later than February 2013.
The deficit cutting yet to come will dwarf the recent $2.2 trillion August 2011 deal. It will result in another $2-$4 trillion in cuts, mostly spending on social programs and entitlements like Medicare, Medicaid, and Social Security, as well as food stamps, unemployment insurance benefits, education and the 2010 Health Care Affordability Act. Tax hikes directly impacting the middle class will also occur, including heretofore untouchable measures like mortgage deductions.
4. Job growth will continue to stagnate and remain in the 24-25 million range throughout 2012, with a number of ‘false starts’ in jobs recovery determined by seasonal and other statistical factors.
There are no effective programs in place today to fundamentally increase net jobs in the U.S. Further tax cuts in 2011-12 will not stimulate investment of jobs. Corporations will continue to refuse to commit their massive $2 trillion cash hoard to investment or jobs as they await the outcome of the Bush tax extensions in late 2012 and maintain a large cash cushion in anticipation of events in Europe and the possibility of another global credit crunch. Bank lending to small-medium business will also change little, with consequent investment and job creation by small business remaining largely on hold in 2012 as well. Simultaneously, State-Cities-Schools will continue to layoff at the recent 20,000 a month rate—bringing the total of such public worker job loss to nearly 1 million during Obama’s first term. Post office employment will add to the layoff numbers, and federal government layoffs will commence in significant numbers in 2013.
5. Congress and the administration will pass two major tax bills in 2012
The first bill will bow to multinational corporations’ blackmail (and campaign contributions), and reduce the standard 35% corporate tax rate for offshore sheltered cash repatriation to the U.S. That tax rate will range between 5.25% and 10%, reduced from 35%. Multinational corporations will return about half of their current $1.4 trillion offshore profits hoard to take advantage of the lower rate—in a repeat of the same blackmail that occurred in 2004-05, when a similar bill reduced their rate to 5.25% from 35% to return about half of their then $700 billion offshore sheltered profits.
The second bill will be some kind of extension of the Bush tax cuts that will take place before the November 2012 elections; or, immediately after before year end. In the Bush tax extension deal, the top corporate and personal income tax rate of 35% will be permanently reduced to less than 30% in exchange for unverifiable tax loophole closings. The middle class will also pay higher taxes and the earned income credit for low pay workers will be reduced.
6. Home prices will continue to fall; foreclosures rise; and negative equity grow
Now at more than 11 million, foreclosures will continue to rise past 13 million. Home prices will continue to fall by 5-10% more in key markets (bringing the decline since 2006 to more than 40% on average). At least 17 million mortgaged homeowners (out of 54 million total) will experience negative equity. The Obama administration and Congress will force States’ attorneys general to accept the federal plan to let banks and lenders off the hook for ‘robo-signing’ and illegal foreclosures, in exchange for a token fine. Housing and commercial property construction will continue to stagnate in 2012 at around current levels.
7. U.S. Exports and thus US manufacturing will slow in 2012
US exports will not outperform the global trade market and will slow, as will exports in general globally and including China and the Eurozone. As US exports soften, so in turn will their positive effect on US manufacturing production.
8. Should Eurozone banking implode, one or more major US banks will require further rescue by the Federal Reserve and US Treasury
In the event of a default by one or more sovereign economies in the Eurozone, major banks in France, Austria, Belgium and even Germany will become technically insolvent. In such case, the contagion will spread to US banks. Most vulnerable and requiring rescue are: Bank of America, Citigroup, Morgan Stanley.
The Global Economy
9. The Eurozone Sovereign Debt Crisis Will Stabilize then Worsen Again
The Euro sovereign debt crisis will temporarily stabilize in early 2012 as the European Central Bank follows the US Federal Reserve and introduces quantitative easing while negotiations among the Euro states on a fiscal union begins. However, the sovereign crisis will erupt again in late spring 2012 as Italy and Greece encounter severe debt refinancing problems. Three to four times the currently available $1.5 trillion Euro bailout fund—more than $5 trillion—will be eventually needed to resolve the Euro debt crisis.
10. Two or More Euro Banks will ‘Fail’
Several Euro banks will become technically insolvent and will be nationalized by their governments and bailed out. Major candidates include: the French banks, Societe General and BNP Paribas; the German ‘Commerzbank; the Italian ‘Unicredit’, and possibly one or more Austrian and Finnish banks.
11. Both Germany and France will experience modest recession in 2012; the United Kingdom will experience a more severe double dip.
Germany and France economies slowed to virtually no growth at year end 2011 and both will slip into recession in 2012. A second round of severe austerity programs in the UK, introduced at year end by the conservative Cameron government, will produce a further economic contraction in the UK.
12. China’s Economic Growth Rate Will Slow
Havig grown consistently in the 9%-10% range in recent years, China’s GDP will slow dramatically in 2012, potentially to half the rate of previous years. Chinese manufacturing exports will contract. India and Brazilian economies will slow significantly as well.
13. Global Trade Will Slow and Begin to Contract in 2012
Already heading in the direction of contraction, given China’s slowing economy, continuing Eurozone instability, and slowing growth in the U.S. economy, the pace of declining world trade will quicken and global trade in general contract. Global manufacturing will follow in turn.
The foregoing ‘bakers dozen’ of predictions about the US and global economy in the coming year are based upon a non-mainstream economic analysis this writer has developed in his 2010 book, Epic Recession: Prelude to Global Depression, and its forthcoming sequel this March 2012, Obama’s Economy: Recovery for the Few, both published and distributed by Pluto Books and Palgrave-Macmillan. Both works represent a new theoretical framework for analysis of the continuing economic crisis. This framework is the consequence of the recognition that the restructuring of the US and global economy that occurred in the 1980s in response to the earlier economic crisis of the 1970s has now collapsed with the events of 2007-08. Sometimes called ‘neoliberalism’ this earlier 1980s restructuring has today run its course as capitalist economies are once again in the process of attempting to restructure the global capitalist economy anew once again. However, they have yet to do so. The result is continuing economic instability and volatility. The economy, U.S. and global, therefore continues in turn to reflect a degree of severe systemic fragility. To date this uncertain condition has been called by this writer a ‘type I’ Epic Recession. But Epic Recessions have the internal tendency to transition from ‘Type I’ to ‘Type II’, the latter a condition that is immediately preliminary to a global depression. In the book, Epic Recession: Prelude to Global Depression, written in late 2009, it was predicted the US and global economies would reach a juncture point to a potential transition circa 2012-14, during which time it would be settled whether today’s Type I epic recession would indeed transition to a Type II and a possible depression. The coming year, 2012, will reveal whether this process has begun, as the US and other economies weaken and the ‘wild card’ of Euro banking instability runs its course. Should a bona fide banking crisis erupt in the Eurozone, it is all but certain that transition to a ‘Type II’ epic recession will occur. The odds of a true global depression in turn will rise significantly.
Jack Rasmus, copyright November 2011
Jack is the author of the forthcoming, Obama’s Economy: Recovery for the Few, by Pluto Press and Palgrave-Macmillan, March 2012, as well as the pamphlet produced for the Teamsters Union, ‘An Alternative Program for Economic Recovery’. The latter is available for purchase on the front webpage of this website for $5 plus $2 s/h.
For the past year ruling circles in the U.S. are in agreement that a minimum of $4 trillion must be cut from the federal debt. Their main differences are over how to distribute that $4+ trillion in cuts—i.e. between taxes and spending; between tax hikes for the middle class and tax cuts for corporations and wealthiest households, and between defense spending vs. social security, Medicare, and Medicaid.
The $4 trillion minimum target was initially established as the primary target amount by President Obama’s deficit commission, co-chaired by the two conservatives, Alan Simpson and Erskine Bowles, more than a year ago, November 2010. That’s when the Deficit Commission released its report that has served ever since as a template for all deficit cutting proposals from that point, up to the recent Supercommittee. Simpson is the ex-arch conservative senator from Wyoming, who called social security “a milk-tit for 300 million” and Erskine Bowles is a political retread staff advisor from the Clinton administration who is now a senior manager at Citigroup. That should provide some idea where that committee was coming from at the outset.
Their $4 trillion recommendation a year ago was quickly adopted and pushed by just about every political wing of the ruling class in Congress and the federal government over the past year: it was the number proposed by President Obama last February 2011 in his budget; it was the number proposed by Teapublican radical, Paul Ryan, in April; the number suggested by Vice President, Joe Biden, in his secret negotiations with House speaker, John Boehner, last June before their discussions imploded; it was again the number suggested by the ‘gang of six’ senators last July 2011; and it was the number suggested again by Obama as a ‘grand deal’ to the Teapublicans and Boehner again last July just before the infamous debt ceiling deal between Obama and the Republicans on August 2, 2011.
The August 2 deal required an immediate $1 trillion cut—all in social spending programs. The deal also provided for another $1.2 trillion in spending cuts, at minimum, scheduled to go into effect by this year’s end if Congress’s so-called ‘Supercommittee’ of 12—also established by the August 2 deal—cannot come up with cuts exceeding the $1.2 trillion. By the time this article appears in print, we will know if the cuts are the $1.2 trillion minimum, or much more. This writer predicts the latter. Why? Because the political pressure from various wings of Capital in the U.S. has been intensifying in the weeks preceding the Supercommittee release of its recommendations, so far scheduled for November 23.
If the Supercommittee recommends more than $1.2 trillion, the amount of cuts will likely be more, in fact much more than the automatic $1.2 trillion. The Supercommittee consensus will probably range between $2 and $3 trillion more. There’s that ‘magic number’ of $4 trillion again that the different wings of the ruling class have always been advocating. Once the recommendations are made, per the August 2 debt deal, Congress will have only until December 23 to vote on them. And the voting can only take place as a ‘vote up or vote down’ of the recommendations. No discussion or further debate by the remaining 523 members of Congress. So much for democracy, even among the elite. When the really big issues come to a head—and $4 trillion is a really big issue—it’s time to put democracy on the back burner and even suspend it in part or even in total at some point.
The August 2 deal was drafted in such a manner as to make it unlikely the Supercommittee will fail to come to a recommendation of cuts in excess of $1.2 trillion. The August 2 deal required that the $1.2 trillion be divided between roughly equal cuts in defense spending and social program spending. As a result, the defense corporations and their political friends have been lobbying frantically since October to push the Supercommittee to come up with more cuts than $1.2 trillion. That way they can lobby for less cuts in defense spending at the expense of a greater reduction in entitlements and other social programs, especially Medicare and Medicaid. If the Supercommittee does recommend more than $1.2 trillion, it’s almost certain that the cuts in Medicare-Medicaid and other elements of the social safety net left will be greater than the $600 billion mandated in the $1.2 trillion deal of August 2.
Medicare and Medicaid are thus the real targets of the Supercommittee this time around. Proposals to cut social security retirement benefits will likely come next round. Moreover, this writer predicts, the cuts will be ‘backloaded’, as they say, taking effect mostly after the November 2012 elections to minimize the immediate effects of the draconian cuts forthcoming in social programs on voters before the 2012 elections.
That Medicare and Medicaid are the prime targets for cuts in this particular round of deficit cutting has been evident for some months now. Last June, in his secret negotiations with Boehner, Vice-President Joe Biden proposed between $400-$500 billion in Medicare-Medicaid cuts—without any concessions from Boehner or the Republicans in return. Biden proposed a $3-$4 trillion total deficit cut package to Boehner, with 87% in spending cuts and only 13% in tax hikes. Boehner refused even that and walked out. Obama then offered the same, including a 75%-25% spending cut-tax hike mix in his ‘grand deal’ last July. Again no deal. Obama then followed up with a proposal last September to cut $320 billion in just Medicare-Medicaid, once more an offer without any concession in return. Clearly the Democrats’ ‘number’ is the $500 billion they’ve been offering for a year now. The Republicans responded in October, calling for $780 billion in Medicare-Medicaid cuts as part of a $2.2 trillion total deal with no defense spending cuts and no tax increases on the wealthy or corporations. In fact, they want to cut the top bracket for the wealthiest 1% from the current 35% to 23%-28%, and similarly for corporations from 35% to 23%-28%. Readers can expect cuts in Medicare-Medicaid alone in the area of $600 billion or so in a total package of around $3 trillion, and maybe even more.
Even if the Supercommittee does not come to an agreement to recommend more cuts than the automatic $1.2 trillion, the politicians of both parties will accept the mandated automatic $1.2 trillion cuts only temporarily. Defense corporations will then force politicians to reopen the $1.2 trillion to reduce their $600 billion share and add, delete and change the spending-tax mix once again after the new year. Congress will no doubt oblige that request. In other words, the Supercommittee is not the end of the spending cut process; they are only the beginning of the severe austerity program focus agreed to by both Democrats and Republicans in Congress and the administration. Regardless of whether the Supercommittee does come out with recommendations or not, the process of further cuts will continue to go forward. Only the form will change. The $4 trillion target or larger will remain.
An early indication that the deficit cutting frenzy will not stop with either the Supercommittee or the mandated $1.2 trillion, whichever is the case, is evident in a recent statement by the Teapublicans’ number one hatchet man going after Medicare: Congressman Paul Ryan. It was Ryan last April 2011 who’s budget proposed to totally privatize Medicare, turning it into a voucher program. That program would allow health prices to continue to rise while adjusting the voucher amount slowly. The result within a few y ears would mean seniors on Medicare would only have half their medical expenses covered, forcing them to buy private health insurance or go bankrupt. Ryan’s attack on Medicare-Social Security makes George W. Bush’s effort to privatize social security in 2005 appear amateurish.
As Ryan replied to an interview with the Financial Times daily earlier in November about his plans to dramatically change Medicare by privatizing it, “I am looking forward to doing it next year”. That means the attacks on Medicare, Social Security and Medicaid will keep coming and likely intensify next year, regardless of the Supercommittee outcome this November 2011.
How do politicians of both parties, Republican and Democrat, justify such massive cuts in the social safety net—specifically in Medicare, Medicaid, and Social Security—one might reasonably ask?
Their arguments are basically twofold: first, that Social Security-Medicare and Medicaid are the cause of the exploding annual budget deficits and the federal debt. But that argument is a gross lie, for reasons explained shortly. Their second, fall back argument is that social security and Medicare must be cut because they are going broke and won’t be around by the end of the decade unless their benefits are radically reduced. That too is of course another lie. Here’s the explanation and refutation to both those false arguments.
Are Social Security-Medicare-Medicaid the Cause of Deficits and Debt?
To begin to answer this question it is necessary to identify the major causes of the US federal debt. Let’s start with some actual numbers.
The total US federal government debt rose between 2000 and 2010 by approximately $9.2 trillion, from $5.6 trillion in 2000 to $14.8 trillion today, according to the Federal Reserve’s ‘Flow of Funds’ reports.
There are basically eight causes of the $9.2 trillion rise in the US federal debt over the past decade: excess inflationary defense-war spending; the Bush tax cuts from 2001-2011; the direct Congressional funded bailouts of banks and corporations following the banking crash of 2008; Bush and Obama’s successive fiscal (tax cuts and spending) stimulus packages of 2008-11; price gouging by health insurance companies and health services providers; and simple interest on the debt for all the above. The amounts and calculations for each are summarized in Table 1 as follows:
TABLE 1
Seven Major Causes of $9 Trillion U.S. Debt Increase
Debt Contributing Factor Addition to Debt Percent of $9 Trillion Debt
1. Defense-War Spending $2,100 billion 22.9%
2. Bush Tax Cuts 2001-12 $3,150 billion 34.2 %
& Extensions
3. Direct Bank & Other $900 billion 9.8%
Bailouts(TARP, GSEs)
4. Bush-Obama Stimulus $1,896 billion 20.6%
Packages, 2008-2011
(Spending & Tax cuts)
5. Nonfunding of Part ‘D’ $450 billion 4.8%
Prescription Drugs Plan
6. Excess Inflation Costs for
Medicare-Medicare $180 billion 1.9%
7. Lost Tax Revenue from $255 billion 2.7%
18 million unemployed
8. Interest on the $9 Trillion $270 billion 2.9%
____________
$9,201 billion ($9.2 trillion)
Sources: (1)Office of Management & Budget historical tables & BLS for CPI change; (2) Center for Budget and Policy Priorities, June 28, 2010, based on Congressional Budget Office and Joint Tax Committee of Congress data; (3) U.S. Treasury, TARP Report; (4) (5), Medicare Trustees Report for 2011, (6) Wall St. Journal, New York Times, Economic Policy Institute, Center for Budget and Policy Priorities articles and analyses; (7) Federal Reserve Bank, ‘Flow of Funds’ Report, July 2011 and author’s calculations.
Considering each of these eight causes in turn:
The $2.1 trillion in Pentagon and War spending as a contributing factor to the $9 trillion debt run-up over the decade represents just the excessive inflation in Defense and ‘Contingency Operations’ (‘CO’=direct spending on Iraq and Afghanistan) above the normal average consumer price index (CPI) rise of about 2%. War and Defense spending rose annually on average by 8.2% over the decade. The $2.1 trillion thus represents just that increase in War and Defense spending in excess of the 2% average CPI. The $2.1 figure is actually very conservative, since it does not include additional long-term indirect war costs associated with military construction, department of energy, veterans benefits, and the like. It also excludes arguable defense costs in the military and counterinsurgency elements of spending by the CIA, FBI, NASA, State Department, Foreign Aid, and Homeland Security. Also excluded are ‘black’ or ‘off budget’ secret project military weapons development spending that doesn’t show up in public budget data. The latter are estimated at around $50 billion a year. Homeland Security another $40 billion a year. In total, the US spending around $900 billion to $1 trillion a year on Defense and War. The inflation in these costs over the decade would easily increase the $2.1 trillion allocated to the $9 trillion debt run-up by another $300 billion or so.
The Bush Tax cuts contribution to the total debt includes a basic $1.7 trillion estimate for the Bush era 2001-2003 tax cuts from 2001 to 2008, and the Center for Budget and Policy Priorities’ estimate of another more than $1 trillion for 2009-10, plus the two year extensions of the Bush tax cuts agreed to by Congress for 2011 and 2012 costing about $450 billion more. These are also conservative estimates, since they don’t include major oil and energy industry corporate tax cuts enacted in 2004-05 by the Bush administration. Nor do they account for the $1.2 to $1.4 trillion that multinational corporations are hoarding in cash in their offshore subsidiaries today to avoid paying the normal 35% tax rate in the U.S. If the latter were included, the total tax cuts for corporations and investors would add another $400 billion or so to the Bush tax cuts of $2.9 trillion.
The $900 billion in bank and corporate bailouts refers only to the $700 billion TARP (Troubled Asset Relief Program) passed by Congress in October. It also includes the roughly $200 billion separately passed by Congress to bailout the government mortgage agencies, Fannie Mae and Freddie Mac. They too ‘went broke’ as a result of the financial collapse of the housing sector in 2007-08 and were bailed out in July 2008. It is important to note that this $900 billion ‘direct’ bailout does not include the roughly $9 trillions of dollars injected into the banks by the Federal Reserve, which was the true source of the bailout of the banks since 2008. The Federal Reserve has a separate set of books that do not add to the US deficit and total debt of the federal government.
Then there is the three main Bush and Obama fiscal stimulus packages in 2008, 2009 and 2010, which together amount to $1.89 trillion in tax cuts and spending that have failed to date to bring about economic recovery. They include the Bush April 2008 stimulus of $168 billion; Obama’s February 2009 stimulus of $787 billion and subsequent $84 billion in supplement spending and tax cuts in 2009-10; and Obama’s December 2010 package worth another $857 billion, of which a massive $802 was tax cuts.
The escalating health care cost—consisting mainly of unfunded Part D of Medicare and the excessive inflation in health care services well above the average national inflation rate—contributed approximately $630 billion to that $9 trillion US debt run-up from 2000 to 2011. Most of that $630 billion was the $450 billion in Congress’s failure to fund the Part D prescription drug program, requiring the program be paid totally out of deficit spending. The remainder cost is attributable to the excess inflation for health insurance and services directly impacting Medicare and Medicaid costs.
Another $255 billion is from lost tax revenue due to chronic unemployment for the past three years. Before the recession began in December 2007, there were 7.1 million unemployed. For the past three years that number has been 25-26 million without change, or about 18 million. Assuming a median annual earnings of $47,000 for the 18 million, an unemployment period of 6 months on average, and an average income tax rate for the group of 20%, the total lost for the past three years in federal income tax revenue is $255 billion. And that does not count lost payroll tax or corporate income tax revenue associated with the layoffs.
The final item, interest on the debt is calculated based on a simple assumption of non-compounded interest over the decade, which comes to $270 billion for the $9.2 trillion.
In summary, notice these numbers do not include costs of social security, nor even costs of Medicare and Medicaid except with excess inflationary costs. It was not because of significant benefit increases that health care costs rose exceptionally over the decade, contributing to the deficit. It was price gouging. The only exception to this conclusion is the Part D prescription drug program which does represent a benefit improvement.
In other words, the argument for targeting Medicare-Medicaid-Social Security as the causes of the debt escalation the past decade is just outright false. In fact, social security retirement and other non-medical funds have run a surplus over the past decade that has been ‘counted’ by politicians to offset the actual annual deficits and therefore debt. The reported deficits every year would have been even higher, were it not for the social security surpluses every year (except the most recent due to payroll tax cuts).
The clear causes of the deficits and therefore debt are wars and runaway Pentagon equipment spending, the Bush tax cuts, the bailouts of banks and corporations, the fiscal stimulus packages of Bush-Obama that didn’t result in economic recovery, the chronic three year long 25 million jobless situation, and price gouging by health insurance and health services providers.
And what about the second argument for justifying cutting social security-medicare-medicaid? The argument that they are going broke, and if major cuts are not made now in benefit levels the programs will collapse before the end of the next decade? That too is blatantly false, for the following reasons:
Are Social Security-Medicare Going Broke?
Concerning Social Security retirement benefits, that particular trust fund has produced a surplus over the past quarter century, since 1986, in the amount of more than $2.4 trillion. That surplus was generated as a result of a major hike in the payroll tax at that time and its indexing to inflation. The payroll tax as a share of total federal tax revenues thereafter leaped from less than 30% to about 44% on average for the next several decades. (At the same time the corporation income tax’s share of total federal tax revenues fell by half, to less than 10% today). The huge and growing social security retirement trust surplus enabled presidents from Clinton to Bush Jr. to borrow hundreds of billions every year, spent on wars, pentagon and tax cuts for the rich. So social security has subsidized the federal budget and the deficits for a quarter century.
That surplus in the social security trust fund will continue for another decade producing another $1 trillion in extra funds—unless of course we continue to have 25 million jobless and Obama and Congress continue to give away the surplus in payroll tax cuts. Last year $112 billion was drained from the trust fund. This year Obama proposed to double it or more, allowing small businesses to discontinue paying from half to all their share of the payroll tax.
Those like Ryan intent on privatizing social security learned a lesson from George W. Bush’s failure in 2005. They learned that if the trust fund has a surplus it is hard to convince voters social security must be radically changed. So the new strategy is to go after the weaker link in the social security program—i.e. Medicare—and especially the weakest point in Medicare which is the Part D prescription drugs program. That program was created also in 2005, pushed by Bush. But Bush made is certain that it would not be funded by a payroll tax, like the Part A hospital fund of Medicare. That meant that every penny of the drug program would have to be financed out of deficit spending. Bush also made it certain that drug companies, and all health service insurers and providers, were allowed to continue to raise prices at double digit levels over the decade. That too would put pressure on the hospital and doctors’ trust funds, Part A and B, in Medicare. Make Medicare appear as if it was experiencing big losses. That was the new strategy. Then go after and privatize Medicare first, as Paul Ryan has proposed.
While Medicare was being privatized, prepare the groundwork for attacking social security retirement in the future. That too, like Medicare, would require creating a condition of deficits in social security trust funds. Cutting payroll taxes is a good start in causing a deficit shortfall in social security. The strategy for privatizing Medicare and Social Security is the same: create a funding crisis and deficit however possible, then claim they are broke or about to go broke, then use that excuse to privatize them. ‘Privatize’ in this case means turn it over to insurance companies and Wall St. to suck profits out of the 48 million seniors in the social security-Medicare system.
As shown in the preceding, Social Security retirement is not a cause of the current deficit and debt even remotely; in fact, it has paid for much of the deficit and debt. But that’s not the only argument employed by the Ryans to justify cutting it. The other, more subtle argument is that social security is destined to go broke in another decade or less.
But that’s not even remotely true if the federal government simply returns the $2.4 trillion it borrowed from 1986 to 2011. And there are other simple fixes even if the government refuses to return the $2.4 trillion that will mean social security retirement, disability and survivor trust funds will continue more than solvent for 75 more years.
For example, by simply raising the ‘annual cap’ of $108,600 on which the payroll tax is levied today to $180,000 any conceivable shortfalls in social security over the next 75 years disappear. Social security was intended to cover all earned incomes (wages, salaries), but over the past thirty years the top 15% of wage earners have been getting a free break. Raising the cap to $180,000 returns to the original intent of social security to have all wage earners pay.
A limitation of the original social security law however was its failure to levy a comparable tax on all ‘capital incomes’ (capital gains, interest, dividends, rents, etc.). Requiring earners of capital incomes, like earners of wages, to pay an equivalent 6.2% into the funds not only wipes out any shortfall imaginable in social security for the rest of the century but also leaves an excess of hundreds of billions a year for other uses. That could be used to cover any shortfalls in Part A and B Medicare and fully fund Part D prescription drugs as well.
And if those two approaches are not acceptable, simply raising the payroll tax for social security from its current 6.2% for both employees and employers by only 0.5% also eliminates any conceivable shortfall in social security for the next century.
In other words, even after the federal government dragging $2.4 trillion from the fund for the past quarter century, even with the current attack on social security in the form of payroll tax cuts under Obama, the ‘fixes’ for social security long term are quite simple and doable. There is no crisis in social security in the longer run. It is not necessary to implement draconian cuts in social security benefits in order to ensure its continuation. All it simply needs is to restore the funds taken from it, stop draining it to enable tax cuts, and start making the wealthy and super-wealthy pay into it by raising the cap and/or making the super-wealthy millionaires pay into it.
And what about Medicare and its three trust funds, Part A, B and D? It was previously explained that only Part D has contributed significantly to the deficit and debt and Parts A and B only due to health insurers and providers health price gouging. Therefore the first argument, that Medicare is a major cause of the current deficits and debt is mostly nonsense. But what about the argument that both are going to be broke in another decade?
Here’s some facts regarding ‘they’re going broke ‘ by Teapublican radicals like Ryan in Congress:
The Part A hospital fund in Medicare today has a surplus of $270 billion. It will still have a surplus in 2020 of $108 billion, despite tens of millions more boomer generation seniors accessing the program over the next decade. Does that sound like it’s going broke?. And those aren’t this writer’s estimations. They come directly from the Medicare trustees report of 2011.
The same applies to Medicare’s Part B doctors trust fund, which has a surplus today of $71 billion. That surplus will actually rise to $110 billion in 2020. Is that a crisis justifying slashing Medicare benefits for seniors? Or, as Ryan proposes, gutting Medicare and turning it into a privatized voucher program requiring seniors to pay up to half of all their medical costs?
As for Part C, the prescription drug fund, it is true it is in deficit. But it has been since it was legislated that way in 2005. So what’s so different today, six years later? However it too, like the hospital and doctors trust funds, can be easily addressed, according to the Medicare trustees. Simply introduce a 0.25% increase in the Medicare payroll tax today and another 0.25% a decade from now. That would raise the Medicare payroll tax from today’s 1.45% to a mere 1.7%, hardly perceptible in one’s weekly paycheck. That will cover the annual shortfall. After another decade the pressure on all the Medicare funds will ease, as a result of the surge in the baby boomers tapering off. Medicare will actually need less funding per capita by 2030, providing of course the real problem underlying it—providing the price gouging by health industry servicers is contained along the way.
Another way to address the matter of the financing of all the funds—i.e. the social security retirement, disability, survivors funds and the three Medicare funds—and ensure they all have sufficient surpluses for the next two decades is to do something about getting jobs for today’s 25 million unemployed. The U.S. has had 25 million jobless for three consecutive years now. Twenty more million with jobs means more payments into all the trust funds and even higher surpluses in all of them. Put people back to work and a major source of additional funding for social security and Medicare reappears.
Raising wages in the U.S. would have a similar effect. Raise the average weekly earnings of America’s 110 million non-supervisory production and service workers by stop sending jobs overseas, by stop destroying unions and collective bargaining, by stop shifting tens of millions of jobs from full time to part time and temporary, by raising the minimum wage, by ending free trade lowering wages, and by controlling escalating health care costs. Raising wages also translates into more payroll tax payments into the social security and Medicare funds, providing an ever greater surplus.
For the past three decades an attack on workers nominal wages has been underway on many fronts. The consequence has been a stagnation and now decline of wages and incomes for the 110 million in particular—the core of the US working class. Now that corporate America has successfully driven down their current (nominal) wages, they are intent, through their politicians in Congress and state houses, to attack workers’ deferred wages—i.e. those wages that workers agreed to forego and have paid into social security, medicare, and their pensions over the past quarter century. It’s their past wages that Teapublican radicals like Ryan are intent on taking back. Social Security and Medicare is not an ‘entitlement’. They are simply wages workers agreed to forego and collect when they retire. Not satisfied with driving down current wages, Ryan and his colleagues in the direct service of corporate interests and the interests of the wealthiest 1% are now intent on taking back the deferred wages of the working and middle class in America now as well.
Jack Rasmus
Jack is the author of the current pamphlet, ‘An Alternative Program for Economic Recovery’ which may be ordered from his website, www.kyklosproductions.com, and the author of the forthcoming book, Obama’s Economy: Recovery for the Few, Pluto Press and Palgrave, February 2012; and Epic Recession: Prelude to Global Depression, same
The collapse of the Supercommittee’s effort to produce a joint package of recommendations for deficit reduction proves conclusively that for Republicans and their corporate allies that deficit reduction is, and always has been, a secondary objective. The primary objective is to protect and expand the Bush tax cuts.
From reports now leaking out it is apparent that Democrats on the Supercommittee had offered massive cuts to Medicare and Medicaid amounting to a minimum of $500 billion over the coming decade. Those cuts were in addition to the automatic $1.2 trillion automatic additional deficit cuts negotiated as part of last August’s Debt Ceiling Deal. That deal already had authorized $1 trillion in spending-only cuts. So the Democrats’ offer was the $1.2 trillion automatic deficit cuts—all spending about equally divided between defense and non-defense cuts—plus another $500 billion in Medicare-Medicaid matched by another roughly equal $500 billion in tax revenue increases.
The Republicans on the Supercommittee offered a different ‘mix’ of tax revenue and spending cuts. Their counter was $760 billion in Medicare-Medicaid cuts plus approximately $300 billion in tax revenue recovery. However, that tax revenue recovery was largely raised from increasing taxes on the middle class, by reducing the mortgage interest deduction and other middle class tax breaks. In addition, the Republicans required a further major tax break for the top personal income tax bracket and for the corporate income tax. Both currently are set at a 35% tax rate. Republicans proposed to reduce both to between 25%-28%. In other words, raise taxes on the middle class and give it to the rich and their corporations. And make seniors, retirees and the poor pay $760 billion in Medicare-Medicaid benefit cuts.
What these maneuvers by both parties shows is the following:
First, Republican’s top priority is shielding the Bush tax cuts. Those cuts cost the U.S. budget a minimum of $2.9 trillion last decade. Another $450 billion in extensions 2010-12. And a projected $2.2 to $2.7 trillion if extended for another decade. By proposing further tax cuts for the top income brackets and corporations, it is clear Republicans aren’t all that concerned about the deficit and debt in fact. They are focused on protecting and further cutting taxes for the rich and their corporations. What’s new in their position, revealed by the Supercommittee’s machinations, is that they now propose that not only seniors and the poor pay more for continuing (and expanding) those tax cuts, but that now the middle class will also have to pay for them with more tax hikes.
Second, it is clear the Democrats continue to be more than willing to put Medicare-Medicaid on the chopping block. They proposed $500 billion cuts last June, in the secret negotiations between Vice-President, Joe Biden, that broke down. They repeated that offer in July as President Obama offered the same as part of a ‘grand deal’ that also imploded. Obama subsequently offered up front $320 billion in Medicare-Medicaid cuts last September 19 as an enticement to get Republicans to agree to his $447 billion third recovery plan. And just a few weeks ago, the Democrats again proposed $500 billion. In other words, the Democrats have repeatedly offered massive cuts in Medicare-Medicaid. They will likely continue to do so in the coming months.
Third, the sticking point between the two is not whether Medicare-Medicaid will eventually be cut, but only when. Nor is the amount of these cuts really in question. It will be between $500 billion and $1 trillion when it happens—and it eventually will happen.
Fourth, the real bottleneck is the Bush tax cuts and Republican efforts to not only protect those cuts but extend them as well, even if now at the expense of the middle class.
What the breakdown of the Supercommittee’s efforts shows is that the Republicans calculated they would have a better chance at extending the $2.2 trillion Bush tax cuts for another decade by deferring the vote on their extension until next fall, 2012, in the midst of the final months of the 2012 election campaign.
Republicans no doubt looked beyond November 23 and see several legislative ‘choke points’ that will enable them to extract more spending cut concessions from the Democrats without having to give up on the Bush tax cuts. The first of such ‘choke points’ will come next month, in December 2011.
There are four major legislative bills that Democrats and Obama desperately want that will have to be decided by Congress before the end of 2011. The first has already been raised by Obama: continue the 2% payroll tax deduction for workers another year. That will cost another $112 billion to the budget and deficit this coming year. A second is an extension of unemployment benefits for millions of more workers, whose benefits run out at year end. That’s another $55 billion cost. The third is yet another year ‘fix’ to the Alternative Minimum Tax, AMT, which impacts the upper middle class who earn more than $150,000 a year. That’s another $70 billion cost. The fourth is also another delay in the 29% cut in doctors’ fees for serving medicare patients. That’s tens of billions more cost to part B medicare spending. We’re talking here about at least another $250 billion. If these bills are not passed, it will mean a major hit to GDP and the economy in the first quarter 2012, for an economy already extremely fragile and susceptible to a double dip early next year. In fact, the Federal Reserve now predicts the likelihood of a double dip occurring in the US economy early next year is now greater than 50%.
The Republicans will especially drive a hard bargain, and extract more than a ‘pound of legislative flesh’, in exchange for agreeing to pass the extension of unemployment benefits and the payroll tax cuts for another year. They will demand more spending-only cuts, likely to include Medicare-Medicaid, and also likely demand that the $450 billion in defense spending cuts mandated in the $1.2 trillion automatic deficit reduction are removed from the $1.2 trillion. Obama will be hard pressed not to agree to remove the defense spending cuts if he wants his payroll tax cut and unemployment benefits extensions passed before year end 2011. Obama and the Democrats will be desperate in an election year to have the unemployment benefits and payroll tax extended, as well as the AMT ‘fix’ which otherwise would impact the independent voters that he is courting heavily in the coming election. The Republicans know all this, and will push to extract cuts in spending at least equal to the $250 billion cost for these various measures coming up in December 2011.
Republicans may also get another opportunity in early 2012 to extract spending cuts without having to touch their Bush tax cuts. According to last August’s debt ceiling deal, that reduced spending by $1 trillion immediately and the $1.2 trillion additional automatic cuts that will now go into effect, there would be no further need to raise the debt ceiling until after the November 2012 elections. That was the trade-off for the $2.2 trillion in spending cuts that the Obama administration and Democrats in Congress agreed to: i.e. no more debt ceiling crises in exchange for the $2.2 trillion in spending-only cuts. But the debt ceiling issue may still re-emerge before the elections, and maybe even as early as this spring 2012.
As part of the August 2011 deal the U.S. Treasury is authorized to raise another $400 billion or so this spring and increase the debt ceiling by that amount. But if the economy retreats in early 2012, as many now increasingly predict, that will mean less federal tax revenues than originally projected and a larger budget deficit in 2012 than originally forecast. That might potentially reintroduce the need to raise the debt ceiling again in mid-2012 even more than projected last August. If this scenario unfolds, the Republicans will have yet another ‘bite at the apple’ of deficit cutting. That’s in addition to the four bills coming up next month costing $250 billion, for which Republicans will demand at least an equivalent spending cuts elsewhere to fund.
So look for the issue of cutting Medicare-Medicaid to continue to be on the negotiating table despite the Supercommittee’s recent breakdown. The Supercommittee may fade away, but not the fundamental issues behind it. Those issues are the continuing weak US economy and its impact on deficits, the intense commitment by the Republicans, corporations, and the wealthiest 1% to protect their Bush tax cuts ‘at all costs’, and the repeated willingness of Obama and the Democrats to offer up Medicare-Medicaid as a bargaining chip.
The Republicans are in the preferred bargaining position going forward. They will try to cash in on some of Democrats’ repeated offers to cut Medicare-Medicaid by $500 billion—first in exchange for agreeing to pass the $250 billion in bills in December and thereafter potentially in the spring should the debt ceiling issue raise its ugly head again.
As the November 2012 election grows nearer, Democrats’ resolve not to extend the Bush tax cuts another decade will also undoubtedly weaken. Republicans count on chipping away at Medicare-Medicaid and other spending over the coming year, while bidding their time for the best timing to extend the Bush tax cuts for another decade.
It’s no wonder, therefore, that the Republicans on the Supercommittee were more than willing to allow the Supercommittee to implode. They can protect their tax cuts better, and extract spending cuts more effectively, by going at it piecemeal over the coming year.
Jack Rasmus
November 22, 2011
The ‘Occupy Wall St.’ movement across the USA has raised the slogan of ‘We Are the 99%’ and the related ‘99% vs. the 1%’. Thus far the idea of taxing the rich has remained stated in general terms. For greater impact it must be further clarified, or else it will be misinterpreted and co-opted by politicians pushing false ideas while claiming to tax the rich but not really doing so—such as the recent proposals by Republican presidential candidate Cain’s phony 9-9-9 or even Obama’s ‘millionaires tax’. The following is an effort to suggest various measures to ‘tax the wealthiest 1%’ that represent true, progressive tax the rich proposals.
Tax Program #4.1: Professional Investors’ Tax Haven Repatriation Tax.
About $4 trillion today is held in offshore tax havens by US investors, individuals and institutions, in island nations like Cayman islands, Vanuatu, Seyschelles, Isle of Man, Cyprus, etc., and in more traditional havens like Switzerland, Lichtenstein, and so forth. The IRS has identified 27 of these, which it calls ‘special jurisdictions’. If just $2 trillion of that $4 trillion was required to be re-deposited in US banks, those investors would have to pay the 35% top tax bracket personal income tax on the $2 trillion in the first year, raising about $700 billion. Future earnings on the remainder would also be taxed in the second to fifth years, yielding another $200 billion a year. Refusal to repatriate could result in a 10% penalty after 90 days, followed by similar penalties. Countries that refused to cooperate should have their US based assets frozen and then taxed until compliance.
Tax Program #4.2: Multinational Corporations’ Offshore Profits Recovery Tax.
Multinational corporations today are hoarding between $1 and $1.4 trillion in their offshore subsidiaries, refusing to pay the required 35% corporate tax rate. If they were required to repatriate that lower amount of $1 trillion, it would raise in the first year a sum of $350 billion and another $140 billion a year in each of the next four years. Refusal to repatriate could result in a 50% tariff on the re-importing of their offshore products to the U.S. until they repatriated.
Tax Program #4.3: One Year 15% Surtax on $2 Trillion Corporate Cash Hoard
U.S. large corporations today are hoarding between $2 and $2.5 trillion in cash and refusing to invest it in the U.S., instead preparing to buyback stock, increase dividends, or acquire other companies. Companies refusing to invest at least one third of their current $2 trillion cash hoard within 6 months in the US, and create jobs in the U.S. as a consequence of such investment, would be taxed at a 15% surtax rate for the remaining six months of the first fiscal year. That raises another $300 billion in tax revenue for the first year. The tax would repeat for those not investing the cash hoard in the subsequent second year at the same rate.
Tax Program #4.4: Financial Transactions Tax on Stocks, Bonds and Derivatives
Another $150-$200 billion a year, at minimum, is raised by implementing a financial transactions tax as follows: $1.00 per every common stock trade for stock value traded $10,000 or less. Add $100.00 for stock trades valued $10,000 to $100,000. 1% on all trades worth more than $100,000. $1.00 per each $1000 value for all forms of corporate bond sales, both investment and junk grade bonds. Similar charge for commercial paper transactions. And $1 per $100 notional value for all interest rate, currency and other derivatives trades, levied on each of the counter-parties. 1% tax of notional value for all credit default swaps derivatives trades.
Tax Program #4.5: Capital Gains, Dividends & Estate Tax Restorations.
This proposal raises taxes on capital gains and dividends from current 15% to the 35% rate that is currently levied on all top bracket personal incomes. It would also tax carrying interest at the same rate and require all hedge fund managers to pay 35% instead of their current 15%. Estate Tax rates and thresholds are restored to 1980 levels. These measures raise at minimum $125 billion in the first year, and potentially more, as well as an additional $125 billion per year for the next four years.
Tax Program #4.6: Immediate Expiration of the Bush Tax Cuts
Bush tax cuts passed in 2001-04 cost over the last decade approximately $2.9 trillion. Extended the Bush tax cuts for another decade will cost between $2.2 to $2.7 trillion more. Their extensions alone in 2010-11 cost the U.S. budget about $270 billion a year. Immediately suspending the Bush tax cuts for 2012, the second year, will save $270 billion.
Tax Program #4.7: Restore Top Personal & Corporate Tax Rates to 1980 Levels
Tax proposal 4.5 above addresses only capital gains, dividends, and estate tax rates within the broader personal income tax. Tax proposal 4.6 addresses revenue savings for only one more year, 2012. Proposal #4.6 include revenue potentially raised from raising the top marginal income tax rate or the top marginal corporate income tax rate back to 1980 levels of 50%. Nor does it include numerous tax credits, exemptions, subsidies and other tax loopholes for the wealthy and corporations. Restoring the top marginal rates for the personal income tax in general and the corporate income tax to the 50% level in 1980, as well as raising capital gains and dividends to the 50% level, together raises more than $100 billion more in tax revenue per year.
Tax Program #4.8. Business-to-Business 2% Value Added Tax (VAT)
Consumers and households pay a significant sales tax to provide state government revenues. Businesses buying from other businesses should also pay an appropriate ‘business to business’ sales tax on intermediate goods they buy from each other, just as households pay on final goods sales. The initial tax should be levied at a half the consumer sales tax rate in the first year, and subsequently scaled to an equal rate over a five year period. This business sales tax, a ‘value added tax’ only on intermediate goods sales, would in most cases fully stabilize state revenues.
Tax Program #4.9: State-to-State Business Relocation Equalization Tax
This tax prevents states’ from competing with each other in a ‘race to the bottom’ to lure companies from each other, which has been increasingly undermining state revenues for more than a decade. A federal level tax, it is designed to offset any tax advantage to a company from moving from its current state to another state. Should the company relocate nonetheless, the revenue from the tax is earmarked for spending on job creation and job retraining for workers negatively affected by the relocation.
Tax Program #4.10: Increase 12.4 % Social Security Payroll Tax on Wages & Salaries (Earned Incomes)—i.e.‘Scrap the Cap’
Currently less than 85% of all wage earners pay up to the current top annual limit of $106,800 because wage income at the top wage levels above $106,800 has risen faster than the social security base increase. This proposal raises the limit to $250,000 a year and indexes it thereafter to inflation, to recover the remaining 15% of earned incomes (wages) not paying the social security tax above $106,800. This is sometimes called ‘scrap the cap’. This proposal, however, also calls for requiring an equivalent 6.7% tax on all capital incomes (dividends, interest, capital gains, rents) as well up to the $250,000. It is called ‘pay the same’. It would enable not only the stabilization of current social security payments for the rest of the century, but would enable raising monthly social security benefit payments by at minimum another 20% above current levels.
Tax Program #4.11: Levy 6.7% Payroll Tax Equivalent on all Capital Incomes up to $250,000 annually—i.e.‘Pay the Same’
An even larger social security surplus would result if a 6.7% tax were levied on all incomes (capital gains, dividends, interest, business rents, etc.) up to $250,000 annually and also indexed. It is called a ‘pay the same’ payroll equivalent tax. This would transform social security from a ‘payroll tax’ to a true social insurance tax. The tax revenue raise would amount to additional hundreds of billions of dollars a year, stabilize the social security trust funds for the rest of the 21st century, while simultaneously providing a 20% raise in monthly social security benefit payments for the 48 million current and future retirees.
Tax Program #4.12: Increase Medicare’s 1.45% Payroll Tax by 0.25%.
An initial 0.25% in the payroll tax for the next ten years provides all necessary funding to stabilize the Medicare system for ten years. That’s a combined 0.5% for employee and employer. Starting the eleventh year, 2022, another 0.25% each tax increase is necessary. Thereafter, the 77 million baby-boomers begin to decline as a cost factor, the costs of Medicare level off, and then decline. So a total tax increase of 0.5% over 20 years for both worker and employer totally covers the Medicare cost shortfalls. Those who consider this mere 1.7% tax for the next ten years unacceptable, should consider that the typical employer insured health care plan costs the equivalent of 30-35% of a worker’s take home pay today.
Tax Program #4.13: Excess Profits Tax on the ‘Big 4 Parasite’ Industries
There are four industries that are sucking the economic life blood from the U.S. economy, at the expense not only of their workers, the bottom 80% households, but also at the expense of millions of smaller businesses. These industries ‘suck’ super-profits out of the economy—away from wages and other businesses income. They are the most powerful in terms of both economic and political influence. They are the banks, the oil companies, the health insurance companies, and the big pharmaceutical companies. They charge excess prices, rising at double digits now for decades, and thus reap super-profits at the expense of everyone else. An excess profits tax equivalent to a minimum 10% of the gross profits or net income of the companies in these industries should be levied on the biggest companies in these industries. Those excess profits should be returned to consumers and small businesses as offsets for health care costs and gas and electric utility costs and mortgage interest in the form of credits on annual federal tax returns.
The preceding proposals to ‘Tax the Rich’ are excerpted from the recent pamphlet by Jack Rasmus, ‘An Alternative Program for Economic Recovery’, recently produced for various Teamsters Unions in the San Francisco bay area and New York. The longer pamphlet also includes proposals to restructure the banking and retirement systems in the U.S., create 17 million jobs, save 11 million homeowners, and stabilize state and local government finances. For more information re. the pamphlet, contact the author, Jack Rasmus at: rasmus@kyklos.com or call 925-209-3933. The pamphlet may also be ordered from the website, http://www.kyklosproductions.com.
This past Monday, September 19, President Obama revealed his proposals for how to pay for his $447 billion tax cut-jobs bill announced last week. In the same speech he announced a goal of cutting the deficits and debt by $4.4 trillion. But what he didn’t tell us is that the $4 trillion plus in deficit and debt reduction is almost exactly the amount of tax cuts that have been enacted over the past decade, 2001-2011, roughly three-fourths of which have gone to corporations, banks, investors and the wealthiest 10% households.
$4 Trillion Budget Cuts to Pay for $4 Trillion Tax Cuts
Here’s how the $4 trillion tax cuts stack up:
* Bush tax cuts, 2001-2010 $2,900 billion
* Bush 2008 Stimulus tax cuts $90 billion
* Obama 2009 Stimulus tax cuts $313 billion
* AMT Tax ‘Fix’ for high income households $70 billion
* Supplemental tax cuts June 2009-October 2010 $50 billion
* Obama December 2010 tax cuts $802 billion
* Obama September 2011 ‘jobs’ bill tax cuts $270 billion
___________
Total tax cuts $4,495 billion ($4.49 Trillion)
Approximately 75% of the $4.482 Trillion in tax cuts accrued to corporations, bankers, investors, and the wealthiest 10% households. Today the consensus of policy makers from Obama to the Deficit Commission to the ‘Supercommittee’ is that the ‘appropriate mix’ of budget cuts should be 75% spending reductions and 25% tax hikes. Most of the spending cuts will be social programs benefiting seniors, retirees (medicare, social security), the working poor and children (Medicaid, CHIP), students (loans, assistance to schools), and just about every other social program aiding the least fortunate.
In his September 19 speech Obama “threatened Monday to veto any bill that cuts Medicare benefits without increasing taxes on corporations or the wealthy”, according to the front page story in the September 20 Wall St. Journal. Among those experienced in bargaining, that statement means’ I am signaling I will cut Medicare if you, Republicans, agree to raise taxes’, but not until you do. In other words, folks, bigger Medicare cuts are not ‘off the table’ by any means. In fact, as a ‘sweetener’, Obama has already agreed to start with $320 billion in Medicare and Medicaid cuts out the gate, which he already announced. Once again, a ‘freebie’ concession up front for nothing in return which is the President’s negotiating ‘style’, it appears. Republicans get an initial pass from agreeing to any tax increase, in exchange for Obama’s first ‘down-payment’ of $320 billion in Medicare cuts as a prelude to a later final deal in December.
The $4 Trillion Dollar Consensus
For some time now there’s been a clear consensus among Democrats and Republicans alike, Obama and Boehner, Deficit Commission, ‘Gang of Six’, ‘Supercommittee of 12, and all the rest. That consensus is to cut $4 trillion minimum from the budget.
The original Simpson-Bowles deficit commission report issued last December 2010 called for about $4 trillion in deficit reduction over the coming decade. Then last spring, Republicans demanded that same amount. Even Teaparty Congressman Paul Ryan’s budget last spring proposed $4 trillion in cuts. It’s just that he wanted the lion’s share taken out of the hides of seniors and Medicare. After that, in June, Vice-President Joe Biden held his then secret backroom negotiations with Republican leaders on behalf of the Obama administration. When news of the negotiations leaked out, it was reported Biden had agreed to a $3 trillion deficit reduction, with 87% composed of spending cuts, including Social Security and Medicare, and 13% in tax loophole closings. The Democrat Party base choked when it found out what was going on. The negotiations blew up and Republican House leader, John Boehner, walked out. In July, the magic number of $4 trillion was once again quickly re-introduced by the ‘gang of six’ senators. President Obama then directly jumped into the public negotiations in July and proposed his ‘grand deal’ of $4 trillion of deficit cuts, composed of 75% spending reduction and 25% tax loophole closing. And now, most recently, the ‘magic number of $4 trillion in budget cuts is offered up again by Obama.
$1 trillion is already in the bag, as they say. This past August’s ‘debt ceiling deal’ between Obama and Republicans amounted to roughly $1 trillion in immediate cuts, and required a further minimum $1.2 to $1.5 trillion guaranteed cuts by end of this year from the ‘Supercommittee’ in Congress that will make its proposals public on November 19. so that adds up to a guaranteed minimum $2.5 trillion. But wait! Obama’s recent proposed $447 billion ‘jobs’ bill will raise that $2.5 to $2.95 trillion, since Obama has publicly said the Congressional Supercommittee should add that amount to $1.5 trillion additional cuts mandated by year end. That same Supercommittee is already talking about cutting more than the $1.5 trillion, however. So to the $1 trillion cuts this past August will be increased, at minimum, by another $2 trillion and possibly more. This writer predicts the eventual final deficit cutting package by year end will add at least another $1 trillion. That adds up to the consensus $4 trillion number.
$4 Trillion Tax Cuts & 25 Million Jobless
The $4 trillion in 2008-2011 tax cuts were supposed to create jobs but they didn’t. Nor will Obama’s $447 billion ‘jobs’ bill—composed 60% of tax cuts—create jobs. We had 25 million jobless when Obama came in office. After $420 billion in tax cuts in 2009 and another $802 billion in tax cuts in 2010, we still have 25 million jobless today. By what logic does anyone think another $270 billion in tax cuts will create jobs when more than $1.2 trillion did not? Whether another $270 billion in Obama’s ‘jobs’ bill or more (which is likely after Republicans take a whack at it), six months from now there will still be 25 million jobless—as the US and global economies continue to drift inexorably toward a double dip recession.
$4 Trillion Tax Cuts & $4 Trillion Corporate Cash Hoard
But wait, there’s still more. That $4 trillion in deficit cuts for tax cuts is also just about the amount that big business, multinational corporations and banks have been hoarding in cash since they were bailed out during 2009-10.
According to various sources and estimates, large US corporations—not small businesses—are sitting on a cash hoard of $2 trillion and refusing to invest it and create jobs in the U.S. Multinational corporations are reportedly hoarding another $1.2 to $1.4 trillion in their offshore subsidiaries, refusing to return it to the U.S. and pay the normal 35% corporate income tax rate. And U.S. big banks are sitting on an excess cash reserves hoard of at least another $1 trillion. That’s all just about…guess what? $4 trillion.
$4 Trillion Tax Cuts and $9 Trillion U.S. Debt
In 2001 the total federal debt as George W. Bush entered office was approximately $5.5 trillion. That total debt accelerated to $14.5 trillion today. So the run-up in the total federal debt over the last decade was about $9 trillion. As already noted, about $4 trillion attributable to tax cuts. Another $1 trillion in lost revenue due to chronic joblessness. That leaves…$4 trillion of the $9 trillion debt run-up due to excess spending over the decade. So where does this $4 trillion in excess spending derive from?
$2.1 trillion was from escalating defense spending and wars. Defense spending rose at an annual rate of 8.2% over the decade. If it had just risen at the normal consumer price rate over the decade of roughly 2%, instead of the 8.2%, it would have lowered the deficits over the past decade by $2.1 trillion. Add at least another $400-$500 billion in the Medicare Part D prescription drug program introduced by Bush that was not funded but paid for by borrowing; add another $200 billion in excess inflationary health care cost increases that have pushed government Medicare and Medicaid payments through the roof; add the $700 billion cost of the TARP bailouts of banks in 2008 plus $140 billion in bailout costs for the government housing agencies, Fannie Mae & Freddie Mac; and then add $589 billion in non-tax spending provisions in Obama’s 2009-10 stimulus packages. The total in spending contributing to the $9 trillion debt now comes to roughly… $4.179 trillion. And that’s before any interest charges on the debt from the $4.179 trillion.
Summing it all up, about $4.495 trillion of the $9 trillion debt added since 2000 has been due to tax cuts that didn’t create jobs. And another $4.179 trillion of the $9 trillion is the product of inflationary defense spending, inflationary health care costs, unfunded prescription drug plan, bank bailouts, and stimulus spending that didn’t create a sustained economic recovery. (The remaining $500 billion to $1 trillion is a consequence of three years of 25 million unemployed and lost income tax revenue and interest on the $9 trillion debt).
Some Simple Alternatives to $4 Trillion Budget Cuts
If the consensus budget cut target is $4 trillion, why not just reverse the $4 trillion tax cuts? Or address the four major causes of deficit spending: wars, healthcare cost inflation, bank bailouts, and poorly targeted stimulus spending? Or why not tax the $4 trillion cash hoard big corporations, multinational companies, and banks are sitting on and refusing to spend to create jobs after we bailed them out? Or, while we’re at it, how about taxing the $4 trillion that U.S. wealthy investors have squirreled away in offshore tax havens from the Cayman islands to Cyprus to Vanuatu to Seychelles…and of course Switzerland?
So why are politicians, Republican and Democrat alike, Obama and Teapartyers, liberals and libertarians, all so focused on cutting $4 trillion at the expense of seniors and retirees, students, and middle-working class households when they had nothing whatsoever to do with the deficits and $9 trillion debt run-up? They didn’t cause the economic crisis and weren’t bailed out even to this day. They are the 25 million unemployed. They are the 11 million foreclosed homeowners. They are the 20 million with homes ‘under water’. They are the 44 million seniors who will soon have to pay twice as much for their Medicare and receive no cost of living increases in their social security checks. They are the tens of millions of children of the poor who will soon be denied Medicaid. They are the millions of students now facing decades of financial indenture due to accelerating college debt.
Who will speak for them, as the politicians this coming December 23, 2011 cut another $3 trillion from social programs and as we are offered yet another tax-cut bloated jobs bill from the President that won’t create jobs and only add to corporations’ cash hoarding? Don’t count on the politicians in Washington, whatever their party affiliation or ideological stripe. It’s time to take to the streets and be heard.
Jack Rasmus, September 21, 2011
Last night President Obama proposed a $447 billion ‘Jobs Act’. What we got from Obama was a 2009 ‘Stimulus Light’ proposal, with all the problems of the prior 2009 stimulus package in the form of inadequate magnitude of spending, wrong composition and targets, and bad timing.
First, on the matter of the magnitude of spending in the proposal. Some think it was bold. But put it in context. $447 billion just won’t achieve the job creation it claims. It’s once again too little for an economy the size of the US, for an economy in as deep an economic hole as it is, and in an economy facing growing downward momentum at home in the context of a global economy also rapidly slipping.
In February 2009 President Obama proposed $787 billion in economic stimulus. Unemployment was about 25 million. More than two years later, after the $787 billion has been spent, unemployment (measured by the Labor Department’s U-6 rate) is still around 25 million. Why therefore should Obama’s latest proposals to create jobs, consisting about half the size of the 2009 stimulus, expect to create jobs when the larger stimulus did not?
Even more important than Obama’s jobs act’s insufficient magnitude, the composition is also seriously deficient—just as was the 2009 stimulus. Like the stimulus in 2009, it is once again overloaded in tax cuts. In fact, a greater percentage (60%) of the total Jobs Act is composed of tax cuts than was the 2009 stimulus (38%). Then, and now, tax cuts simply cannot and will not create jobs, given the kind of ‘epic’ recession in which the US economy now finds itself entrapped.
The 38% tax cut mix in 2009 amounted to about $300 billion in total tax reduction. That $300 billion followed a $90 billion tax cut less than mine months before in spring 2008. Another $50 billion in tax cuts was further added later in 2009-10 in various bills and administrative actions. That’s a total of $440 billion in tax cuts. There’s more. Add to that $440 billion another $270 billion in Bush tax cut extensions in late 2010 for 2011, plus another $100 billion in this year’s payroll tax cut. Now add the ‘Job Act’s tax-heavy $270 additional billion. Now we’re well over a $1 trillion in tax cuts in just the past two years. And what’s been the result in jobs? Still 25 million unemployed today as in June 2009.
If someone needs still further evidence that tax cuts don’t create jobs in today’s environment, just step back a decade. In 2001-04 George W. Bush passed another $3 trillion in tax cuts, overwhelmingly biased again toward the rich and their corporations in the form of capital gains, dividends, inheritance, business depreciation, and other corporate largesse. Over 80% of the $3 trillion went to the wealthiest 20% households and most of that to the wealthiest 5% and 1%. And what kind of job creation resulted? We had the longest jobless recession in US history up to that point. It took 46 months just to recover to the level of jobs we had before the first Bush recession in 2001.
Furthermore, most of the jobs that were created under Bush were in the Finance and Housing sectors of the economy at the time, which were both undergoing a boom due to speculative excesses before an eventual bust. The jobs mostly created in Finance and Housing had little to do with Bush’s tax cuts of 2001-04, however. Instead, millions of jobs were being lost in manufacturing while the tax cuts were taking effect last decade.
In 2004 Bush also pushed through a bill to allow multinational corporations to repatriate their then $700 billion hoard of cash they were keeping offshore in their subsidiaries in order to avoid paying the US 35% corporate tax rate. The multinationals blackmailed Congress to let them pay only 5.25% instead of 35%. In exchange, they said they’d bring back the money (saving 29.75% for themselves) and use it to create jobs. Did they? No. They money brought back was used to buy back their stock, payout more dividends, and to use for mergers and acquisitions that in fact resulted in fewer jobs. Now the same ‘game’ is being proposed in Congress, except this time their offshore cash hoard is $1.2 trillion.
The historical record of the past decade is clear: tax cuts simply don’t create jobs, especially tax cuts for the rich and corporations. So why has Obama given them $1 trillion in tax cuts the past two years and is now proposing more?
Neither Bush nor Obama policies of tax cuts have created jobs. Big corporations today are sitting on a cash hoard of $2 trillion—a result in large part of the nearly $1 trillion in tax cuts of the past two years—and they aren’t using it to create jobs. How much more will Corporate America have to be given in tax cuts to finally create jobs? Will another $1 trillion do it? $500 billion? Will the roughly additional $270 billion proposed by Obama yesterday suffice? What’s the magic number in more tax cuts that will finally result in job creation?
But the tax-heavy proposal once again by Obama is not the only problem with his ‘Jobs Act’. The Jobs Act shares another similar deficiency with the President’s prior 2009 stimulus. It’s too heavily weighted as well in favor of subsidies to the states. The 2009 stimulus provided $263 billion in subsidies to the states. It was supposed to create jobs. It didn’t. Local government laid off hundreds of thousands of workers since June 2009 despite the $263 billion. What guarantees are there that won’t be repeated this when they’re given the added subsidies? Will they get the subsidy only if they first prove they’ve added the jobs? Don’t count on it.
Another problem with the ‘composition’ of yesterday’s Jobs Act announcement by the President is it once again repeats the promise of the 2009 stimulus that infrastructure spending will quickly create jobs. In 2009 about $100 billion was allocated to infrastructure related spending that was supposed to create 4 million jobs. That didn’t happen. There were 6.4 million construction workers employed in June 2009. There are 5.5 million today. Nearly a million fewer construction jobs was the result. There just weren’t as many ‘shovel-ready’ jobs as was claimed. Construction and infrastructure jobs are long term. What is needed today is immediate job creation. Infrastructure programs just won’t cut it. Especially when of the minimal magnitude in Obama’s recent proposal.
Obama yesterday promised his proposals would focus on small business by subsidizing their hiring of workers for each job they create. But for small business to create jobs it needs more than a partial hiring subsidy. It needs funds in addition to cover all the other costs of production. For that small business needs bank loans. And for two years now they just can’t get the loans from the big banks. Bank lending to small business declined for 15 consecutive months after June 2009 and it’s not much better today. Obama and the Federal Reserve bailed out the big banks to the tune of $9 trillion in recent years, in the expectation they would start lending. They didn’t. They still aren’t. Like the big corporations hoarding their $2 trillion and not creating jobs, the big banks are hoarding their cash reserves as well and lending to small business that might create jobs if they could get the loans. Obama would have done better to propose the Federal government bypass the banks and directly loan to small business at 0.25%. After all, that’s the interest rate at which the Fed today ‘loans’ to the big banks? No, I take that back. Actually it’s only 0.1%, and then the Fed pays the banks 3% to temporarily park the free money with the Fed in the interim. What a deal: the Fed pays the big banks to take its free money.
In summary, what we got from Obama’s ‘Jobs Act’ last night was more of the same in terms of poor composition (i.e. excessively tax cut heavy), poor timing (long term infrastructure projects), and too little magnitude spending in any event.
There’s no reason to believe that the Obama jobs package that repeats the problems of poor composition and bad timing of the 2009 stimulus—which didn’t create jobs—is going to do any better when it’s also half the size of the stimulus.
Of course, the proposed Jobs Act won’t pass anyway because the Teapublicans will oppose it. At best, they might try to cherry-pick out the business tax cuts proposed by Obama, and then add even more tax cuts to the ‘Jobs Act’—a proposal which anyway should be appropriate renamed ‘The Business Tax Expansion Act of 2011’.
Just a day before the president’s address, the Teapublican candidates gathered to hold their latest debate. They stumbled all over each other to see who could promise Corporate America even greater tax cuts. Rick Perry even promised to end all corporate taxes. Rick Santorum promised to lower capital gains and dividends taxes to zero. Others proposed no income taxes whatsoever for earners of $200,000 income a year. Grovel for those campaign contributions, fellas. These same candidates, after proposing cutting hundreds of billions a year in tax cuts for the rich and corporations, will turn around and cry about the budget deficits and demand equivalent cuts in social security, medicare and Medicaid to make up for their ever-generous handouts to the wealthy.
But this kind of mercenary, Robin-hood in reverse, policy of ‘No taxes whatsoever’ for the rich and their corporations is expected from the radical right. Yet it seems Obama is being drawn into their tax cut for the rich frenzy with his proposal last night for yet another $270 billion in cuts. He just agreed, less than nine months ago, to give them $270 billion by extending the Bush tax cuts last December. Now hundreds of billions of dollars more. This past year witnessed the President’s adopting their central agenda demand to cut deficits. Could he now be tailing the Teapublicans once again down the ‘Cut more taxes for Corporate America’ road as well?
A real job program today would be proposals and programs to re-create, in 21st century form, of a Works Progress Administration—paid for not by giving the rich and their corporations still more tax cuts but by taxing their $2 trillion cash hoard, their $1 trillion in excess free Fed money bank reserves, their $1.2 trillion held in offshore subsidiaries, and by taxing the more than $6 trillion they’ve all stashed away in their tax havens around the globe from the Cayman islands to the Seychelles to Vanuatu and, of course, Switzerland.
Politics in America today sadly is not about what will ensure true economic recovery and give the 25 million Americans a job. It’s about how to extend tax cuts for Corporate America and its shareholder beneficiaries; it’s about how to ensure the Great American Tax Shift of recent decades is never rescinded and instead further extended; and it’s about how to make everyone else in American pay for their bailouts so that the corporations and wealthiest themselves do not have to.
Jack Rasmus, September 9, 2011
This coming week, September 6-10, may prove one of the most volatile economically and financially since the global banking panic of September 2008—both in the US and worldwide.
At the end of last week, stock markets in the US and around the world staggered on the news of the US August jobs report. That report showed zero jobs created last month, according to one of the Labor Department’s jobs survey. The same Labor Department’s second job survey—the one that didn’t gain much attention in the press—was even worse. It showed more than 212,500 jobs lost. Stocks plummeted.
What was overlooked with the big stock market drop-off at the close of last week was a growing instability in the bond markets, both government and corporate, that has also been emerging. Bond markets are far more important economically than stock markets. They dwarf the size of all world stock markets combined by several magnitudes of trillions of dollars.
Not just government bonds but corporate bonds as well. And not just bond markets in the US but in Europe, where it appears that the most recent ‘bail out’ of Greece once again is about to collapse—just a few weeks after it was announced. This is the third Greek bailout. Or is it the fourth? Depends on your definition. However defined, the Greek default crises are now coming faster and more furious. There is no way the Eurozone can save Greece now from default and they are just beginning to realize that fact. The key question is, as the French say, ‘apres le deluge, quoi’—after the fall what/who?
The bankers and their politicians in Europe, UK and the USA would no doubt prefer to allow Greece simply to leave the Eurozone. But they can’t. They are uncertain of its impact on the Euro currency, which would likely collapse below parity with the US dollar. That would wipe out trillions of Euro-denominated securities overnight—a terrifying thought for bondholders and other Euro and global investors. So they stumble along with bailout to bailout for Greece. And the bond markets begin to quiver.
Then there’s Italy and maybe Spain—and maybe even thereafter Belgium and France. If either of the four candidates enter a sovereign-bank crisis, then almost certainly another ‘Lehman-event’ reminiscent of the crash of the Lehman Brothers investment bank back in 2008 will likely occur.
This was all foreseen by this writer back in late 2009, when the book, Epic Recession: Prelude to Global Depression (Pluto Press and Palgrave May 2010) was completed by this writer. To quote some of my predictions of two years ago:
“ The Obama 2009 recovery program will, at best, result in a drawn-out economic stagnation, a period of weak and short recoveries followed by short and shallow declines; i.e. a ‘W’ shaped or ‘double dip’ recovery scenario. Or, at worst, will result in an eventual further collapse of the economy following a renewed financial crisis event.”
(Epic Recession: Prelude to Global Depression, p. 314)
Or, the following prediction in January 2010 of a second banking crisis sometime 2011-14:
“The Euro financial system will be shaken in 2010 by one or more defaults on its periphery…The possibility of a second banking crisis and panic in 2011-14 is high” (Z magazine, January 1, 2010).
A year later, in 2011, this same theme was taken up once again, where this writer predicted further:
“The Eurozone sovereign debt crisis will spread beyond the current four economies (Ireland, Portugal, Spain, Greece) and engulf Italy, Belgium, and potentially (though less likely France”…”A restructuring of the EU currency system will result in a kind of two-tier euro currency.” (Z Magazine, January 1, 2011)
And then this past spring,
“The US and other major global economies are once again on the cusp of a significant slowdown.” (Truthout Blog, June 5, 2011)
And two weeks ago,
“The big economic engines of Europe (France, Germany, UK) are all about to tip into recession themselves in the coming quarter”…”If Italy, or even Spain, are among the two (Euro sovereign defaults), it is almost certain one or more French or Swiss Banks will become the ‘next Lehman’.” (Znet blog, August 29, 2011)
The coming week of September 5-10 may prove to be the most economically volatile in some time. In the Eurozone, unions are finally stirring in Italy. The reason: Prime Minister Berlusconi’s ‘austerity package’ was abruptly changed after promises made to labor to include austerity for all, including the wealthy. Their taxes were to be raised. Then he reneged. No tax increases for the rich, but austerity for workers and the rest. Understandably the Italian workers felt betrayed. Promises of sharing of equal sacrifices were shown to be a sham. Berlusconi was no doubt told by his rich supporters he had to change the terms over the weekend.
This backtracking by Berlusconi reveals the central fundamental issue in all the ‘austerity programs’ being launched across the globe—in the US (called deficit cutting here) and Europe. These programs are fundamentally about two things:
First, imposing austerity is so that bondholders and their banks don’t have to take any losses. Make the people pay for the bailouts of those same banks and investors who, by the way, caused the crisis in the first place. Banks and bondholders refuse to take any losses.
Second, austerity means cutting social programs, wages, benefits only—without any tax hikes. In other words, once again, make everyone else pay but don’t touch the tax cuts of the rich. That was clear in Berlusconi’s reversal over the weekend. It’s also abundantly obvious in US Republican and Teaparty politicians refusal to accept any form of tax hike for the rich and corporations. Austerity is for the bottom 95% households; not for the top 5%.
So watch Italy this week, the Italian unions, and the rest of the Eurozone bondholders and banks. Watch Greece. Watch what happens in the capitols of Paris, Berlin, and London in response to coming events this week. As that crisis deepens in Europe this week and next, the financial instability will deepen further in Europe. It will have repercussions for US stock and bond markets, without a doubt. Stock market swings of 300-500 points a day will occur in response, in part, to the Eurozone crisis.
The Eurozone crisis comes at an inopportune time, as instability in the US also ratchets up this week for domestic reasons. All ears are on what Obama will announce on Thursday, September 8. But don’t hold your breathe. It will prove under-whelming. And the markets will react accordingly.
The President will rummage into his policy bag of two years ago, dust off what he didn’t offer then, and announce it later this week—just about when the crisis in Europe intensifies. What we’re likely to see are: an infrastructure bank financed by private interests, more tax cuts for business, more deregulation of business, more payroll tax cuts, call to conclude new free trade agreements. In short, the stuff his corporate advisers have been recommending to him.
How the stock and bond markets will react this week to the deepening Euro crisis and to the Obama jobs proposals will prove interesting. How bank stocks respond will be especially interesting. Already Bank of America and Citigroup, two of the biggest, are experiencing a freefall in their stock price. Both banks have been technically insolvent for the past two years. The upheaval in Europe and US domestic events may push their stock prices down further, to low single digit levels. That collapse in their capitalization means eventually the need for more bailouts.
If stocks tank at this coming Friday after Obama’s jobs announcement, or earlier due to the Euro-Italy-Greece crisis, all eyes will then turn to the Federal Reserve once again in the mistaken hope it can prevent the economy from sinking further. Investors will expect another ‘Quantitative Easing’ (QE) program. But this time they may not get the money injection they expect. The Fed has an internal revolt of its own now underway. At best it may provide a QE 2.5, which will boost stocks a little for a short while. But that will soon fade as well, as the stock markets realize there is no further injection of hundreds of billions of dollars coming from the Fed this time around. The last short-lived stock boomlet of earlier this year was driven largely by the Fed’s preceding QE2, initiated last October 2010 and concluded this past June 2011. It pumped up stocks and commodities speculation in oil, metals, cotton, food grains, which has translated into rising gasoline and food prices for the general consumer and falling real wages in turn. But QE2 did nothing for housing or jobs recovery. The same results can be expected from any new version of QE 2.5 as well.
Capitalist policymakers from Washington to Berlin to Paris to Rome are fast running out of policy bullets to contain a crisis that is once again beginning to show early signs of spinning out of control. The bullets to date have aimed only at social programs, wages, benefits, and John Q. Taxpayer. None have been intended for bondholders, investors, bankers, or big multinational corporations. All austerity programs to day everywhere—US, Europe, etc.—have targeted everyone but the bond holdings of the rich, their tax rates, loopholes, and tax havens, or their record accumulated cash on hand. That may soon prove impossible to continue.
How soon their privileged exclusion from paying for the crisis depends on how much those targeted—workers, consumers, unions—resist and how hard they push back. Perhaps what happens in Italy and Italian unions this coming week will be an early sign.
There are only three ways to resolve the global financial crisis with its mountain of bank, corporate, and government debt. One is to grow out of the crisis. But economic growth is not on the horizon. In fact, quite the opposite. The second is to squeeze the taxpayer, the worker, the consumer, the retiree and make them pay. But that just may radicalize folks and push them out of the electoral orbit of the dominant political parties and into the arms of the new parties that challenge their old control. The third is to make the bond and debt holders take their losses, expunge their debt, pay them the pennies on the dollar their bad assets are worth, or none at all, and move on. The latter, third option is the quickest and most certain. But investors, wealthy, bondholders, and corporations will fight to the finish to prevent it.
It’s all about ‘who pays’. Austerity solutions mean the rich get to keep their tax cuts and the rest have to pay the bill for their excesses that caused the crisis. Austerity never resolved a financial or economic crisis, however. It only makes it worse. Don’t believe me? Look at Greece today. Italy and Eurozone tomorrow. And USA thereafter.
In the meantime, get ready for an economic volatility roller-coaster this coming week and the weeks and months immediately ahead.
Jack Rasmus
September 5, 2011
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