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

by Roberts, Paul Craig

  As economic forecasting was locked into the “Phillips curve”—the belief that inflation was the price of full employment and that unemployment was the price of lower inflation—the Reagan administration’s budget forecast was restrained by the “Phillips curve.” Orthodoxy would not permit us to forecast the extent to which a supply-side policy would bring down inflation as the economy grew. Even if we had been able to disregard forecasting orthodoxy, our forecast would have been off as Volcker brought money growth in below target.

  The “Reagan deficits” thus resulted from the unanticipated collapse of inflation. As inflation came in below forecast, nominal GNP came in below forecast. Thus, tax revenues were less. But appropriation bills are in nominal dollars, which meant that real spending was greater than intended because inflation was less than forecast.

  Wall Street believed that the “Reagan deficits” would cause inflation, but, of course, they did not cause inflation as they were the consequences of the collapse in inflation.

  This shows how totally wrong conventional opinion can be even when it tries to think. Today no policy-maker or establishment economist is thinking at all.

  The “Reagan deficits” were not financed by printing money or dependent on recycling of surplus dollars by trading partners. The deficits were no threat to the dollar, which was thought to be too strong. The increased after-tax return on investment reduced the flow of U.S. capital abroad, and we financed our own deficit.

  This brings us back to the original question: How is the Obama deficit going to be financed?

  February 13, 2009

  Chapter 32: Is It Time to Bail Out of America?

  California State Controller John Chiang announced on January 26, 2009, that California’s bills exceed its tax revenues and credit line and that the state is going to print its own money known as IOUs. The template is already designed.

  Instead of receiving their state tax refunds in dollars, California residents will receive IOUs. Student aid and payments to disabled and needy will also come in the form of IOUs. California is negotiating with banks to get them to accept the IOUs as deposits.

  California is often identified as the world’s eighth largest economy, and it is broke.

  A person might think that California’s plight would introduce some realism into Washington, D.C., but it has not. President Obama is taking steps to intensify the war in Afghanistan and to expand it to Pakistan.

  Obama has retained the Republican warmongers in the Pentagon, and the U.S. continues to illegally bomb Pakistan and to murder its civilians. At the World Economic Forum at Davos this week, Pakistan’s prime minister, Y. R. Gilani, said that the American attacks on Pakistan are counterproductive and done without Pakistan’s permission. In an interview with CNN, Gilani said: “I want to put on record that we do not have any agreement between the government of the United States and the government of Pakistan.”

  How long before Washington will be printing money?

  On January 28, Obama announced his $825 billion economic stimulus plan. This comes on top of President Bush’s $700 billion bank bailout of just a few months ago.

  Obama says his plan will be more transparent than Bush’s and will do more good for the economy.

  As large as the bailouts are—a total of $1.5 trillion in four months—the amount is small in relation to the reported size of troubled assets that are in the tens of trillions of dollars. How do we know that there won’t be another bailout, say $950 billion?

  Where will the money come from?

  Obama’s bailout plan, added to the FY 2009 budget deficit he has inherited from Bush, opens a gaping expenditure hole. Who is going to fill the gap with their savings?

  Not the U.S. consumer. The consumer is out of work and out of money. Private sector credit market debt is 174 percent of GDP. The personal savings rate is 2 percent. Ten percent of households are in foreclosure or arrears. Household debt-service ratio is at an all-time high. Household net worth has declined at a record rate. Housing inventories are at record highs.

  Not America’s foreign creditors. At best, the Chinese, Japanese, and Saudis can recycle their trade surpluses with the U.S. into Treasury bonds, but the combined surplus does not approach the size of the U.S. budget deficit.

  Perhaps another drop in the stock market will drive Americans’ remaining wealth into “safe” U.S. Treasury bonds.

  If not, there’s only the printing press.

  The printing press would turn a deflationary depression into an inflationary depression. Unemployment combined with rising prices would be a killer.

  Inflation would kill the dollar as well, leaving the U.S. unable to pay for its imports.

  All the Obama regime sees is a “credit problem.” But the crisis goes far beyond banks’ bad investments. The United States is busted. Many of the state governments are busted. Homeowners are busted. Consumers are busted. Jobs are busted. Companies are busted.

  And Obama thinks he has the money to fight wars in Afghanistan and Pakistan.

  Except for the super-rich and those banksters and CEOs who stole wealth from investors and shareholders, Americans have suffered enormous losses in wealth and income.

  The stock market decline has destroyed about 45 percent of their IRAs, 401Ks, and other equity investments. On top of this comes the decline in home prices, lost jobs and health care, lost customers. The realized gains in mutual funds and investment partnerships, on which Americans paid taxes, have been wiped out.

  The government should give those taxes back.

  Americans who have seen their retirement savings devastated by complicity of government regulators and lawmakers with financial gangsters should not have to pay any income tax when they draw on their pensions.

  The financial damage inflicted on Americans by their own government is as great as would be expected from foreign conquest. While Washington “protected” us from terrorists by fighting pointless wars abroad, the U.S. economy collapsed.

  How can President Obama even think about fighting wars half way around the world while California cannot pay its bills, while Americans are being turned out of their homes, while, as Business Week reports, retirees will work throughout their retirement (which assumes that there will be jobs), while careers are being destroyed and stores and factories shuttered?

  Americans are facing tremendous unemployment and hardship. Obama doesn’t have another dollar to spend on Bush’s wars.

  Taxpayers are busted. They cannot stand another day of being milked by the military-security complex. The U.S. government is paying private mercenaries more by the day than the monthly checks it is providing to Social Security retirees.

  This is insanity.

  The banksters robbed us twice. First it was our home and stock values. Then the government rewarded the banksters for their misdeeds by bailing out the banksters, not their victims, and putting the cost on the taxpayers’ books.

  The government has also robbed the taxpayers of $3 trillion to fight its wars.

  When foreign creditors look at the debt piled on the taxpayers’ books, they don’t see a good credit risk.

  Washington is so accustomed to ripping off the taxpayers for the benefit of special interests that the practice is now in the DNA. While bailouts are being piled upon bailouts, wars are being piled upon wars.

  Before Obama gets in any deeper, he must ask his economic team where the money is coming from. When he finds out, he needs to tell the rest of us.

  January 29, 2009

  Chapter 33: Was the Bailout a Scam?

  Professor Michael Hudson (CounterPunch, March 18, 2009) is correct that the orchestrated outrage over the $165 million AIG bonuses is a diversion from the thousand times greater theft from taxpayers of the approximately $185 billion “bailout” of AIG. Nevertheless, it is a diversion that serves an important purpose. It has taught an inatt
entive American public that the elites run the government in their own private interests.

  Americans are angry that AIG executives are paying themselves millions of dollars in bonuses after having cost the taxpayers an exorbitant sum. Senator Charles Grassley put a proper face on the anger when he suggested that the AIG executives “follow the Japanese example and resign or go commit suicide.”

  Yet, Obama’s White House economist, Larry Summers, on whose watch as Treasury Secretary in the Clinton administration financial deregulation got out of control, invoked the “sanctity of contracts” in defense of the AIG bonuses.

  But the Obama administration does not regard other contracts as sacred. Specifically: labor unions had to agree to give-backs in order for the auto companies to obtain federal help; CNN reports that “Veterans Affairs Secretary Eric Shinseki confirmed Tuesday [March 10] that the Obama administration is considering a controversial plan to make veterans pay for treatment of service-related injuries with private insurance;” the Washington Post reports that the Obama team has set its sights on downsizing Social Security and Medicare.

  According to the Post, Obama said that “it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.”

  After Washington’s trillion dollar bank bailouts and trillion dollar gratuitous wars for the sake of the military industry’s profits and Israeli territorial expansion, there is no money for Social Security and Medicare. It is the payroll tax-supported programs on which ordinary Americans depend that are blamed for bankrupting the government, not the trillions of dollars squandered in pointless wars and bailouts of banksters.

  The U.S. government breaks its contracts with U.S. citizens on a daily basis, but AIG’s bonus contracts are sacrosanct. The Social Security contract was broken when the government decided to tax 85 percent of the benefits. It was broken again when the Clinton administration rigged the inflation measure in order to beat retirees out of their cost-of-living adjustments. To have any real Medicare coverage, a person has to give up part of his Social Security check to pay Medicare Part B premium and then take out a private supplemental policy. The true cost of full coverage to Medicare beneficiaries is about $6,000 annually in premiums, plus deductibles and the Medicare tax if the person is still earning.

  Treasury Secretary Timothy Geithner, the fox in charge of the hen house, has resolved the problem for us. He is going to withhold $165 million (the amount of the AIG bonuses) from the next taxpayer payment to AIG of $30 billion. If someone handed you $30,000 dollars, would you mind if they held back $165?

  PR flaks have rechristened the bonus payments “retention payments” necessary if AIG is to retain crucial employees. This lie was shot down by New York Attorney General Andrew Cuomo, who informed the House Committee on Financial Services that the payments went to members of AIG’s Financial Products subsidiary, “the unit of AIG that was principally responsible for the firm’s meltdown.” As for retention, Cuomo pointed out that “numerous individuals who received large ‘retention’ bonuses are no longer at the firm.”

  Eliot Spitzer, the former New York governor who was setup in a sex scandal to prevent him investigating Wall Street’s financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG’s financial deals. These payments, Spitzer writes, are “a way to hide an enormous second round of cash to the same group that had received TARP money already.”

  Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.

  Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary. They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.

  Spitzer identifies a conflict of interest that could possibly be criminal self-dealing. According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.

  The Bush/Obama bailouts require serious investigation. Were these bailouts necessary, or were they a scam, like “weapons of mass destruction,” used to advance a private agenda behind a wall of fear? Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the U.S. has far too many banks. Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks. Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?

  March 19, 2009

  Chapter 34: President of Special Interests

  The Bush/Obama bailout/stimulus plans are not going to work. Both are schemes hatched by a clique of financial insiders. The schemes will redistribute income and wealth from American taxpayers to the shyster banksters, who have destroyed American jobs, ruined the retirement plans of tens of millions of Americans, and worsened the situation of millions of people worldwide who naively trusted American financial institutions. The ongoing theft has simply been recast. Instead of using fraudulent financial instruments, the banksters are using government policy.

  Michael Hudson captures the nature of the heist in CounterPunch, February 12, 2009:

  When it comes to cleaning up the Greenspan Bubble legacy by writing down homeowner mortgage debt, the Treasury proposal offers homeowners $50 billion—just [half of one percent] of the $10 trillion Wall Street bailout to date, and less than half the amount given to AIG to pay its hedge fund speculators on their derivative gambles. The Treasury has handed out $25 billion to each and every big bank, so just two of these banks alone got as much as the reported one-quarter of all homeowners in America suffering from Negative Equity on their homes and in need of mortgage renegotiation. Yet today’s economic shrinkage cannot be reversed without a recovery in consumer demand. The economy has lost the ‘virtual wealth’ in higher-priced homes and the stock market, and must rely on after-tax earnings. But I see little concern for wage earners in the Treasury plan. Without debt relief, consumer spending and business investment will not recover.

  The big money men cannot conceive of anyone’s suffering except the mega-rich. If billions are not at stake, what is the problem? How can families losing their homes bring down the economy?

  There was a time in America when the interests of elites were connected to those of ordinary Americans. Henry Ford said that he paid his workers good wages so they could buy his cars.

  Today American corporations pay foreign workers low wages so CEOs can pay themselves multi-million dollar “performance” bonuses.

  Congress has had a parade of CEOs, ranging from Bill Gates of Microsoft and IBM brass on down the line, to testify that they desperately need more H-1B work visas for foreign employees as they cannot find enough American software engineers and IT workers to grow their businesses. Yet, all the companies who sing this song have established records of replacing American employees with H-1B workers who are paid less.

  Just the other day Microsoft, IBM, Texas Instruments, Sprint-Nextel, Intel, Motorola, and scores of other corporations announced thousands of layoffs of the qualified American engineers who “are in short supply.”

  IBM has offered to help to relocate its “redundant” but “scarce” American engineers to its operations in India, China, Brazil, Mexico, the Czech Republic, Russia, South Africa, Nigeria, and the United Arab Emirates at the salaries prevailing in those countries.

  On Janu
ary 28, USA Today reported: “In 2007, the last full year for which detailed employment numbers are available, 121,000 of IBM’s 387,000 workers [31 percent] were in the U.S. Meanwhile, staffing in India has jumped from just 9,000 workers in 2003 to 74,000 workers in 2007.”

  In order to penetrate and to serve foreign markets, U.S. corporations need overseas operations. There is nothing unusual or unpatriotic about this. However, many U.S. companies use foreign labor to manufacture abroad the products that they sell in American markets. If Henry Ford had used Indian, Chinese, or Mexican workers to manufacture his cars, Indians, Chinese, and Mexicans could possibly have purchased Fords, but not Americans.

  Senators Charles Grassley and Bernie Sanders offered an amendment to the Troubled Asset Relief Program (TARP) bill that would prevent companies receiving bailout money from discharging American employees and replacing them with foreigners on H-1B visas.

  The U.S. Chamber of Commerce, no longer an American institution, and immigration advocates, such as the American Immigration Lawyers Association, immediately went to work to defeat or to water down the amendments. Senator Grassley’s attempt to prevent American corporations from replacing American workers with foreigners on H-1B work visas in the midst of the most serious economic crisis since the Great Depression was met with outrage from the U.S. Chamber of Commerce, an organization concerned solely with the multi-million dollar bonuses paid to American CEOs for reducing labor costs by offshoring American jobs or by replacing American employees with foreign guest workers.

  On January 23, Senator Grassley wrote to Microsoft CEO Steve Ballmer:

  I am concerned that Microsoft will be retaining foreign guest workers rather than similarly qualified American employees when it implements its layoff plan. As you know, I want to make sure employers recruit qualified American workers first before hiring foreign guest workers. For example, I cosponsored legislation to overhaul the H-1B and L-1 visa programs to give priority to American workers and to crack down on unscrupulous employers who deprive qualified Americans of high-skilled jobs. Fraud and abuse is rampant in these programs, and we need more transparency to protect the integrity of our immigration system. Last year, Microsoft was here on Capitol Hill advocating for more H-1B visas. The purpose of the H-1B visa program is to assist companies in their employment needs where there is not a sufficient American workforce to meet their technology expertise requirements. However, H-1B and other work visa programs were never intended to replace qualified American workers. Certainly, these work visa programs were never intended to allow a company to retain foreign guest workers rather than similarly qualified American workers, when that company cuts jobs during an economic downturn. It is imperative that in implementing its layoff plan, Microsoft ensures that American workers have priority in keeping their jobs over foreign workers on visa programs.My point is that during a layoff, companies should not be retaining H-1B or other work visa program employees over qualified American workers. Our immigration policy is not intended to harm the American workforce. I encourage Microsoft to ensure that Americans are given priority in job retention. Microsoft has a moral obligation to protect these American workers by putting them first during these difficult economic times.