How the Economy Was Lost: The War of the Worlds (Counterpunch)

by Roberts, Paul Craig

  Other forms of deception are widely practiced. For example, Matthew Spiegleman, a Conference Board economist, claims that manufacturing jobs are only slightly higher paid than domestic service jobs, so there is no meaningful loss in income to Americans from offshoring. He reaches this conclusion by comparing only hourly pay and leaving out the longer manufacturing workweek and the associated benefits, such as health care and pensions.

  Occasionally, however, real information escapes the spin machine. In February 2006 the National Association of Manufacturers, one of offshoring’s greatest boosters, released a report, “U.S. Manufacturing Innovation at Risk,” by economists Joel Popkin and Kathryn Kobe. The economists find that U.S. industry’s investment in research and development is not languishing after all. It just appears to be languishing, because it is rapidly being shifted overseas: “Funds provided for foreign-performed R&D have grown by almost 73 percent between 1999 and 2003, with a 36 percent increase in the number of firms funding foreign R&D.”

  U.S. industry is still investing in R&D after all; it is just not hiring Americans to do the research and development. U.S. manufacturers still make things, only less and less in America with American labor. U.S. manufacturers still hire engineers, only they are foreign ones, not American ones.

  In other words, everything is fine for U.S. manufacturers. It is just their former American work force that is in the doldrums. As these Americans happen to be customers for U.S. manufacturers, U.S. brand names will gradually lose their U.S. market. U.S. household median income has fallen for the past five years. Consumer demand has been kept alive by consumers’ spending their savings and home equity and going deeper into debt. It is not possible for debt to forever rise faster than income.

  The United States is the first country in history to destroy the prospects and living standards of its labor force. It is amazing to watch freedom-loving libertarians and free-market economists serve as apologists for the dismantling of the ladders of upward mobility that made the America of old an opportunity society.

  America is seeing a widening polarization into rich and poor. The resulting political instability and social strife will be terrible.

  September 30, 2006

  Chapter 5: Empire on the Brink - Zealots Bring Disaster to America

  March 12, 2008. Crude oil for April delivery hit $110 per barrel. The U.S. dollar fell to a new low against the euro. It now takes $1.55 to purchase one euro.

  These new highs against the dollar are the ongoing story of the collapse of the U.S. dollar as world reserve currency and corresponding collapse of American power.

  Each new decision from the insane Bush regime pushes the dollar a little further along to oblivion. The same Fed announcement that boosted the stock market on March 11 sent the dollar reeling and the price of oil up. The Fed’s announcement that it and other central banks are going to deal with the derivative crisis by monetizing $200 billion of the troubled instruments signaled more dollar inflation.

  Of course, something needed to be done to forestall an implosion of the financial system, but a less costly alternative was at hand. The mark-to-market rule could have been suspended in order to halt the forced sale and write down of assets and to provide time in which to sort out derivative values, which are higher than the fire sale prices.

  More pressure on the dollar resulted from the decision to award the European company, Airbus, a $40 billion contract that could reach $100 billion to build U.S. Air Force tankers. In simple terms, that means another $40 to $100 billion added to the U.S. trade deficit, and a loss of $40 to $100 billion in U.S. Gross Domestic Product and associated jobs.

  Of course, the Bush regime had to award the contract to Europe as a payoff for Europe’s support of the Bush regime’s wars of aggression in the Middle East. Europe is not going to provide Bush with diplomatic cover for his wars and NATO troops for his war in Afghanistan without a payoff.

  Here is the picture: The U.S. economy, which has been kept alive by enormous debt expansion that has over-reached its limit, is falling into recession. The traditional way out by expanding the supply of money and credit is blocked by the impaired banking system, the levels of consumer debt, and the collapsing value of the U.S. dollar.

  The Bush regime is attempting to bypass the stalled credit expansion by sending Americans $600 checks, money that will mainly be used to reduce existing credit card debt and not to fund new consumption.

  The U.S. is dependent on foreigners not only for energy but also for manufactured goods and advanced technology products. The U.S. is dependent on foreigners to finance our consumption of $800 billion annually more than the U.S. produces. The U.S. is dependent on foreigners to finance its red ink wars, and the U.S. government’s budget deficit is now expanding as tax revenues decline with the declining economy.

  The bottom line: U.S. power is enfeebled. U.S. power depends on the willingness of foreigners to finance our wars and on the willingness of foreigners to continue to accumulate depreciating dollar assets. The U.S. cannot close its trade deficit. Oil prices are rising, and offshore production of goods and services for U.S. markets results in a dollar-for-dollar increase in imports, while reducing the supply of domestic goods available for export.

  The U.S. cannot close its budget deficit while it is squandering vast sums on wars that serve no U.S. purpose, handing out $150 billion in red ink rebates, and falling into recession.

  U.S. living standards, which have been stagnant for years, will plummet once dollar decline forces China off the dollar peg. So far prices of the Chinese-made goods on Wal-Mart shelves have not risen, because the Chinese currency, pegged to the dollar, falls in value with the dollar. In a word, tottering U.S. living standards are being supported by China’s willingness to subsidize U.S. consumption by keeping its currency undervalued.

  The U.S. is overextended economically and militarily, just as was Great Britain with the fall of France in the opening days of World War II. The British had the Americans to bail them out. After the chewing gum and bailing wire patch-ups are exhausted, who is going to bail us out?

  March 13, 2008

  Chapter 6: The Bitter Fruits of Deregulation

  Remember the good old days when the economic threat was mere recession? The Federal Reserve would encourage the economy with low interest rates until the economy overheated. Prices would rise, and unions would strike for higher benefits. Then the Fed would put on the brakes by raising interest rates. Money supply growth would fall. Inventories would grow, and layoffs would result. When the economy cooled down, the cycle would start over.

  The nice thing about 20th century recessions was that the jobs returned when the Federal Reserve lowered interest rates and consumer demand increased. In the 21st century, the jobs that have been moved offshore do not come back. More than 3 million U.S. manufacturing jobs have been lost while Bush was in the White House. Those jobs represent consumer income and career opportunities that America will never see again.

  In the 21st century the U.S. economy has produced net new jobs only in low paid domestic services, such as waitresses, bartenders, hospital orderlies, and retail clerks. The kind of jobs that provided ladders of upward mobility into the middle class are being exported abroad or filled by foreigners brought in on work visas. Today when you purchase an American name brand, you are supporting economic growth and consumer incomes in China and Indonesia, not in Detroit and Cincinnati.

  In the 20th century, economic growth resulted from improved technologies, new investment, and increases in labor productivity, which raised consumers’ incomes and purchasing power. In contrast, in the 21st century, economic growth has resulted from debt expansion.

  Most Americans have experienced little, if any, income growth in the 21st century. Instead, consumers have kept the economy going by maxing out their credit cards and refinancing their mortgages in order to consume the equity in their homes.

&
nbsp; The income gains of the 21st century have gone to corporate chief executives, shareholders of offshoring corporations, and financial corporations.

  By replacing $20 an hour U.S. labor with $1 an hour Chinese labor, the profits of U.S. offshoring corporations have boomed, thus driving up share prices and “performance” bonuses for corporate CEOs. With Bush/Cheney, the Republicans have resurrected their policy of favoring the rich over the poor. John McCain captured today’s high income class with his quip that you are middle class if you have an annual income less than $5 million.

  Financial companies have made enormous profits by securitizing income flows from unknown risks and selling asset-backed securities to pension funds and investors at home and abroad.

  Today recession is only a small part of the threat that we face. Financial deregulation, Alan Greenspan’s low interest rates, and the belief that the market is the best regulator of risks, have created a highly leveraged pyramid of risk without adequate capital or collateral to back the risk. Consequently, a wide variety of financial institutions are threatened with insolvency, threatening a collapse comparable to the bank failures that shrank the supply of money and credit and produced the Great Depression.

  Washington has been slow to recognize the current problem. A millstone around the neck of every financial institution is the mark-to-market rule, an ill-advised “reform” from a previous crisis that was blamed on fraudulent accounting that over-valued assets on the books. As a result, today institutions have to value their assets at current market value.

  In the current crisis the rule has turned out to be a curse. Asset-backed securities, such as collateralized mortgage obligations, faced their first market pricing in panicked circumstances. The owner of a bond backed by 1,000 mortgages doesn’t know how many of the mortgages are good and how many are bad. The uncertainty erodes the value of the bond.

  If significant amounts of such untested securities are on the balance sheet, insolvency rears its ugly head. The bonds get dumped in order to realize some part of their value. Merrill Lynch sold its asset-backed securities for twenty cents on the dollar, although it is unlikely that 80 percent of the instruments were worthless.

  The mark-to-market rule, together with the suspect values of the asset backed securities and collateral debt obligations and swaps, allowed short sellers to make fortunes by driving down the share prices of the investment banks, thus worsening the crisis. With their capitalization shrinking, the investment banks could no longer borrow. The authorities took their time in halting short-selling, and short-selling is set to resume soon.

  If the mark-to-market rule had been suspended and short-selling prohibited, the crisis would have been mitigated. Instead, the crisis intensified, provoking the U.S. Treasury to propose to take responsibility for $700 billion more in troubled financial instruments in addition to the Fannie Mae, Freddie Mac, and AIG bailouts. Treasury guarantees are also being extended to money market funds.

  All of this makes sense at a certain level. But what if the $700 billion doesn’t stem the tide and another $700 billion is needed? At what point does the Treasury’s assumption of liabilities erode its own credit standing?

  This crisis comes at the worst possible time. Gratuitous wars and military spending in pursuit of U.S. world hegemony have inflated the federal budget deficit, which recession is further enlarging. Massive trade deficits, magnified by the offshoring of goods and services, cannot be eliminated by U.S. export capability.

  These large deficits are financed by foreigners, and foreign unease has resulted in a decline in the U.S. dollar’s value compared to other tradable currencies, precious metals, and oil.

  The U.S. Treasury does not have $700 billion on hand with which to buy the troubled assets from the troubled institutions. The Treasury will have to borrow the $700 billion from abroad.

  The dependency of Treasury Secretary Henry Paulson’s bailout scheme on foreign willingness to absorb more Treasury paper in order that the Treasury has the money to bail out the troubled institutions is heavy proof that the U.S. is in a financially dependent position that is inconsistent with that of America’s “superpower” status.

  The U.S. is not a superpower. The U.S. is a financially dependent country that foreign lenders can close down at will.

  Washington still hasn’t learned this. American hubris can lead the administration and Congress into a bailout solution that the rest of the world, which has to finance it, might not accept.

  Currently, the fight between the administration and Congress over the bailout is whether the bailout will include the Democrats’ poor constituencies as well as the Republicans’ rich ones. The Republicans, for the most part, and their media shills are doing their best to exclude the ordinary American from the rescue plan.

  A less appreciated feature of Paulson’s bailout plan is his demand for freedom from accountability. Congress balked at Paulson’s demand that the executive branch’s conduct of the bailout be non-reviewable by Congress or the courts: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion.” However, Congress substituted for its own authority a “board” that possibly will consist of the bailed-out parties, by which I mean Republican and Democratic constituencies. The control over the financial system that the bailout would give to the executive branch could mean, in effect, state capitalism or fascism.

  If we add state capitalism to the Bush administration’s success in eroding both the U.S. Constitution and the power of Congress, we may be witnessing the death of accountable constitutional government.

  The U.S. might also be on the verge of a decision by foreign lenders to cease financing a country that claims to be a hegemonic power with the right and the virtue to impose its will on the rest of the world. The U.S. is able to be at war in Iraq and Afghanistan and is able to pick fights with Iran, Pakistan, and Russia, because the Chinese, the Japanese and the sovereign wealth funds of the oil kingdoms finance America’s wars and military budgets. Aside from nuclear weapons, which are also in the hands of other countries, the U.S. has no assets of its own with which to pursue its control over the world.

  The U.S. cannot be a hegemonic power without foreign financing. All indications are that the rest of the world is tiring of U.S. arrogance.

  If the U.S. Treasury’s assumption of bailout responsibilities becomes excessive, the U.S. dollar will lose its reserve currency role. The minute that occurs, foreign financing of America’s twin deficits will cease, as will the bailout. The U.S. government would have to turn to the printing of paper money.

  For now this pending problem is hidden from view, because in times of panic, the tradition is to flee into “safety,” that is, into U.S. Treasury debt obligations. The safety of Treasuries will be revealed by the extent of the bailout.

  September 24, 2008

  Chapter 7: Economic Treason

  The June 2005 payroll jobs report did not receive much attention due to the July 4 holiday, but the depressing 21st century job performance of the U.S. economy continues unabated.

  •Only 144,000 private sector jobs were created, each one of which was in domestic services.

  •56,000 jobs were created in professional and business services, about half of which are in administrative and waste services.

  •38,000 jobs were created in education and health services, almost all of which are in health care and social assistance.

  •19,000 jobs were created in leisure and hospitality, almost all of which are waitresses and bartenders.

  •Membership associations and organizations created 10,000 jobs and repair and maintenance created 4,000 jobs.

  •Financial activities created 16,000 jobs.

  This most certainly is not the labor market profile of a First World country, much less a superpower.

  Where are the jobs for this year’s crop of engineering and
science graduates?

  U.S. manufacturing lost another 24,000 jobs in June.

  A country that doesn’t manufacture doesn’t need many engineers. And the few engineering jobs available go to foreigners.

  Readers have sent me employment listings from U.S. software development firms. The listings are discriminatory against American citizens. One ad from a company in New Jersey that is a developer for many companies, including Oracle, specifies that the applicant must have a TN visa.

  A TN or Trade NAFTA visa is what is given to Mexicans and Canadians who are willing to work in the U.S. at below prevailing wages.

  Another ad from a software consulting company based in Omaha, Nebraska specifies it wants software engineers who are H-1B transferees. What this means is that the firm is advertising for foreigners already in the U.S. who have H-1B work visas.

  The reason the U.S. firms specify that they have employment opportunities only for foreigners who hold work visas is because the foreigners will work for less than the prevailing U.S. salary.

  Gentle reader, when you read allegations that there is a shortage of engineers in America, necessitating the importation of foreigners to do the work, you are reading a bald-faced lie. If there were a shortage of American engineers, employers would not word their job listings to read that no American need apply and that they are offering jobs only to foreigners holding work visas.

  What kind of country gives preference to foreigners over its own engineering graduates?

  What kind of country destroys the job market for its own citizens?

  How much longer will parents shell out $100,000 for a college education for a son or daughter who ends up employed as a bartender, waitress, or temp?