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

Introduction

I
n the first decade of the 21st century Americans have experienced the worst economy since the Great Depression of the 1930s. Today’s policy-makers are just as bereft of solutions as policy-makers 80 years ago. More Americans have lost their homes in the current crisis than during the Great Depression. In some states the unemployment rate is already at Great Depression levels even as the current crisis continues to develop. Tent cities are again appearing.

The Great Depression lasted for a decade, because its cause was not understood. As policy-makers did not understand the cause of the problem, they could not formulate a solution, and the suffering was prolonged.

As an economist and a columnist watching the current crisis develop and unfold, I have endeavored to explain what is occurring in order that course corrections can be made and the worst avoided. The first part of this book is a collection of columns published by
CounterPunch
over the past five years that explain what is happening to us and why.

The columns deal with a range of issues that are vital to understanding our situation: how jobs offshoring erodes Americans’ employment prospects, dismantles the ladders of upward mobility, and worsens the income distribution; how offshoring increases the trade and budget deficits and creates financing problems for the U.S. government that threaten the dollar’s role as world reserve currency, the main basis of U.S. power; how necessary changes in economic policy are blocked by organized special interests who spin explanations designed to further their own agendas; how deregulation permitted debt leverage to exceed any measure of prudence.

Being the reserve currency country allows the U.S. government to escape trade and budget discipline, because the U.S. can pay for its imports in its own currency. There is no discipline to match imports with exports in order to earn the foreign currencies with which to pay the import bill. Thus, the trade deficit tends to grow continuously.

Indeed, there is a tendency for government to see the trade deficit in a positive light as it provides foreigners with dollars that they recycle by purchasing U.S. Treasury debt, thus financing the U.S. government’s budget deficits.

The U.S. government’s policy of benign neglect of the trade deficit has permitted the trade deficit to reach unsustainable levels. This has occurred simultaneously with the federal budget deficit reaching unsustainable levels. Enlarged by the bank bailout, the stimulus package, expensive wars, and the loss of tax revenues to the deteriorating economy, the federal budget deficits for fiscal years 2009 and 2010 will each be four times larger than the 2008 deficit. Financing needs for 2009 and 2010 come to $3 trillion according to current estimates.

The unanswered question is: who has $3 trillion to lend to Washington? The sum is far larger than the trade surpluses of our trading partners, so the traditional recycling will not cover the red ink. Americans are deep in debt and lack the means to purchase the government’s debt. The danger is that the government will resort to printing money in order to pay its bills.

This would add inflation, perhaps hyperinflation, to high unemployment and present government with a crisis for which economic policy has no solution. It would place the political stability of the United States in doubt.

So far into the crisis, the Obama administration and most economists regard the problem as a credit problem. Banks, impaired by questionable investments in derivatives, can’t lend. Economists believe that the solution is to restart the credit cycle by using taxpayers’ money, or money borrowed abroad, to take the bad investments off the banks’ hands. This solution overlooks the fact that consumers are so overloaded with debt that they cannot afford to borrow more in order to finance more consumption.

The essays in Part One explain why piling debt upon debt is not a solution to problems caused by moving American middle class jobs abroad. The real incomes of Americans ceased to grow in the 21st century, because many of the jobs that produce real income gains have been moved offshore. An increase in consumer indebtedness substituted for growth in real incomes and sustained the growth of the economy until mortgage and credit card debts reached their limits.

The essays in Part One explain why fiscal stimulus—a larger budget deficit—is part of the problem, not part of the solution.

Obama’s policy, like Bush’s before him, is on the wrong track. If the course is not changed, the crash will be hard indeed.

There is repetition in the chapters, because the government’s statistics over the years consistently support the point that the US economy is ceasing to create middle class jobs. The mounting evidence, reported in my columns, is important. We have spent a decade losing middle class jobs while economists sing the praise of the “New Economy.” Likewise, the dollar has continued to lose value in relation to other hard currencies.

Part Two offers in ordinary language a short course in economics keyed to the unrecognized problems of our time. A widespread misunderstanding of free trade by policy-makers and economists has resulted in free trade becoming an excuse for the erosion of the productive capability of the American economy. Free trade has a hallowed status among most economists. Consequently, it is an unexamined article of faith. Economists even believe that jobs offshoring is a manifestation of free trade and, thus, a benefit to the U.S. economy.

In Chapters 49 and 50 I explain the unacknowledged problems in free trade doctrine and why jobs offshoring is not free trade.

In Chapter 51, I explain the fundamental error in economists’ assumption that natural resources are inexhaustible. This uninformed assumption permits nature’s capital to be exhausted with no thought to the consequences. On this point, the failure of economic thinking is so great as to call into question the designation of economics as a science.

The final two chapters explain how businesses maximize profits by imposing costs on others and how we might mitigate these costs. Economists term these imposed costs “external costs.” In a “full world” (see Chapter 51), external costs might be the greatest part of costs. Have we reached a stage in capitalist development in which a large, and perhaps the major, cost of capitalist profits are imposed on third parties who do not share in the profits? In the U.S. today, corporate profits are no longer related to the welfare of the general population as corporations maximize their profits by replacing American labor with foreign labor.

In the presence of powerful organized special interests, does representative government have sufficient independence and integrity to represent the public interest?

This is the unanswered question.

If the American people wish to continue as a viable society, they must inform themselves of their plight and demand change. If they acquiesce in propaganda and disinformation from the special interests who are enriched by America’s decline—the same special interests that control their government—the bulk of the American population is headed for Third World status.

This book is my contribution to my fellow citizens’ welfare. Wake up! Be aware that the interest groups that control “your” government are destroying you.

Paul Craig Roberts November 8, 2009

Part One: The Lost Economy

Chapter 1: The Return of the Robber Barons

T
he U.S. economy continues its 21st century decline, even as
the Bush Regime outfits B-2 stealth bombers with 30,000 pound monster “bunker buster” bombs for a possible attack on Iran. While profits soar for the armaments industry, the American people continue to take it on the chin.

The latest report from the Bureau of Labor Statistics shows that the real wages and salaries of U.S. civilian workers are below those of five years ago. It could not be otherwise with U.S. corporations offshoring good jobs in order to reduce labor costs and, thereby, to convert wages once paid to Americans into multi-million dollar bonuses paid to CEOs and other top management.

Good jobs that still remain in the U.S. are increasingly filled with foreign workers brought in on work visas. Corporate public relations departments have successfully spread the lie that there is a shortage of qualified U.S. workers, necessitating the importation into the U.S. of foreigners. The truth is that the U.S. corporations force their American employees to train the lower paid foreigners who take their jobs. Otherwise, the discharged American gets no severance pay.

Law firms, such as Cohen & Grigsby, compete in marketing their services to U.S. corporations on how to evade the law and to replace their American employees with lower paid foreigners. As Lawrence Lebowitz, vice president at Cohen & Grisby, explained in the law firm’s marketing video, “our goal is, clearly, not to find a qualified and interested U.S. worker.”

Meanwhile, U.S. colleges and universities continue to graduate hundreds of thousands of qualified engineers, IT professionals, and other professionals who will never have the opportunity to work in the professions for which they have been trained. America today is like India of yesteryear, with engineers working as bartenders, taxi cab drivers, waitresses, and employed in menial work in dog kennels as the offshoring of U.S. jobs dismantles the ladders of upward mobility for U.S. citizens.

Over the last year (from June 2006 through June 2007) the U.S. economy created 1.6 million net private sector jobs. Essentially all of the new jobs are in low-paid domestic services that do not require a college education.

The category, “leisure and hospitality,” accounts for 30 percent of the new jobs, of which 387,000 are bartenders and waitresses, 38,000 are workers in motels and hotels, and 50,000 are employed in entertainment and recreation.

The category, “education and health services,” accounts for 35 percent of the gain in employment, of which 100,000 are in educational services and 456,000 are in health care and social assistance, principally ambulatory health care services and hospitals. There is much evidence that many teaching and nursing jobs are being filled by foreigners brought in on work visas.

“Professional and technical services” accounts for 268,000 of the new jobs. “Finance and insurance” added 93,000 new jobs, of which about one quarter are in real estate and about one half are in insurance. “Transportation and warehousing” added 65,000 jobs, and wholesale and retail trade added 185,000.

Over the entire year, the U.S. economy created merely 51,000 jobs in architectural and engineering services, less than the 76,000 jobs created in management and technical consulting (essentially laid-off white collar professionals). Except for a well-connected few graduates, who find their way into Wall Street investment banks, top law firms, and private medical practice, American universities today consist of detention centers to delay for four or five years the entry of American youth into unskilled domestic services.

Meanwhile the rich are getting much richer and luxuriating in the most fantastic conspicuous consumption since the Gilded Age. Robert Frank has dubbed the new American world of the super-rich “Richistan.”

In Richistan there is a two-year waiting list for $50 million 200-foot yachts. In Richistan Rolex watches are considered Wal-Mart junk. Richistanians sport $736,000 Franck Muller timepieces, sign their names with $700,000 Mont Blanc jewel-encrusted pens. Their valets, butlers (with $100,000 salaries), and bodyguards carry the $42,000 Louis Vuitton handbags of wives and mistresses.

Richistanians join clubs open only to those with $100 million, pay $650,000 for golf club memberships, eat $50 hamburgers and $1,000 omelettes, drink $90 a bottle Bling mineral water and down $10,000 “martinis on a rock” (gin or vodka poured over a diamond) at New York’s Algonquin Hotel.

Who are the Richistanians? They are CEOs who have moved their companies abroad and converted the wages they formerly paid Americans into $100 million compensation packages for themselves. They are investment bankers and hedge fund managers, who created the subprime mortgage derivatives that threaten to collapse the economy. One of them was paid $1.7 billion last year. The $575 million that each of the 25 other top earners were paid is paltry by comparison, but unimaginable wealth to everyone else.

Some of the super rich, such as Warren Buffet and Bill Gates, have benefitted society along with themselves. Both Buffet and Gates are concerned about the rapidly rising income inequality in the U.S. They are aware that America is becoming a feudal society in which the super-rich compete in conspicuous consumption, while the serfs struggle merely to survive.

With the real wages and salaries of American civilian workers lower than five years ago, with their debts at all time highs, with the prices of their main asset—their homes—under pressure from overbuilding and fraudulent finance, and with scant opportunities to rise for the children they struggled to educate, Americans face a dim future.
Indeed, their plight is worse than the official statistics indicate. During the Clinton administration, the Boskin Commission rigged the inflation measures in order to hold down indexed Social Security payments to retirees.

Another deceit is the measure called “core inflation.” This measure of inflation excludes food and energy, two large components of the average family’s budget. Wall Street and corporations and, therefore, the media emphasize core inflation, because it holds down cost of living increases and interest rates. In the second quarter of this year, the Consumer Price Index (CPI), a more complete measure of inflation, increased at an annual rate of 5.2 percent compared to 2.3 percent for core inflation.

An examination of how inflation is measured quickly reveals the games played to deceive the American people. Housing prices are not in the index. Instead, the rental rate of housing is used as a proxy for housing prices.

More games are played with the goods and services whose prices comprise the weighted market basket used to estimate inflation. If beef prices rise, for example, the index shifts toward lower priced cuts. Inflation is thus held down by substituting lower priced products for those whose prices are rising more. As the weights of the goods in the basket change, the inflation measure does not reflect a constant pattern of expenditures. Some economists compare the substitution used to minimize the measured rate of inflation to substituting sweaters for fuel oil.

Other deceptions, not all intentional, abound in official U.S. statistics.
Business Wee
k
’s June 18, 2007 cover story used the recent important work by Susan N. Houseman to explain that much of the hyped gains in U.S. productivity and GDP are “phantom gains” that are not really there.

Other phantom productivity gains are produced by corporations that shift business costs to consumers by, for example, having callers listen to advertisements while they wait for a customer service representative, and by the government pricing items in the inflation basket according to the low prices of stores that offer customers no service. The longer callers can be made to wait, the fewer the customer representatives the company needs to employ. The loss of service is not considered in the inflation measure. It shows up instead as a gain in productivity.

In America today the greatest rewards go to investment bankers, who collect fees for creating financing packages for debt. These packages include the tottering subprime mortgage derivatives. Recently, a top official of the Bank of France acknowledged that the real values of repackaged debt instruments are unknown to both buyers and sellers. Many of the derivatives have never been priced by the market.

Think of derivatives as a mutual fund of debt, a combination of good mortgages, subprime mortgages, credit card debt, auto loans, and who knows what. Not even institutional buyers know what they are buying or how to evaluate it. Arcane pricing models are used to produce values, and pay incentives bias the assigned values upward.

Richistan wealth may prove artificial and crash, bringing an end to the new Gilded Age. But the plight of the rich in distress will never compare to the decimation of America’s middle class. The offshoring of American jobs has destroyed opportunities for generations of Americans.

Never before in our history has the elite had such control over the government. To run for national office requires many millions of dollars, the raising of which puts “our” elected representatives and “our” president himself at the beck and call of the few moneyed interests that financed the campaigns.

America as the land of opportunity has passed away into history.

August 2, 2007