The US economy died when
middle class jobs were offshored and when the financial system was deregulated.
Jobs offshoring benefitted
Wall Street, corporate executives, and shareholders, because lower labor and
compliance costs resulted in higher profits. These profits flowed through to
shareholders in the form of capital gains and to executives in the form of
“performance bonuses.” Wall Street benefitted from the bull market generated by
higher profits.
However, jobs offshoring also
offshored US GDP and consumer purchasing power. Despite promises of a “New
Economy” and better jobs, the replacement jobs have been increasingly
part-time, lowly-paid jobs in domestic services, such as retail clerks,
waitresses and bartenders.
The offshoring of US
manufacturing and professional service jobs to Asia stopped the growth of
consumer demand in the US, decimated the middle class, and left insufficient
employment for college graduates to be able to service their student loans. The
ladders of upward mobility that had made the United States an “opportunity
society” were taken down in the interest of higher short-term profits.
Without growth in consumer
incomes to drive the economy, the Federal Reserve under Alan Greenspan
substituted the growth in consumer debt to take the place of the missing growth
in consumer income. Under the Greenspan regime, Americans’ stagnant and
declining incomes were augmented with the ability to spend on credit. One
source of this credit was the rise in housing prices that the Federal Reserves
low interest rate policy made possible. Consumers could refinance their
now higher-valued home at lower interest rates and take out the “equity” and
spend it.
The debt expansion, tied
heavily to housing mortgages, came to a halt when the fraud perpetrated by a
deregulated financial system crashed the real estate and stock markets. The
bailout of the guilty imposed further costs on the very people that the guilty
had victimized.
Under Fed chairman Bernanke
the economy was kept going with Quantitative Easing, a massive increase in the
money supply in order to bail out the “banks too big to fail.” Liquidity
supplied by the Federal Reserve found its way into stock and bond prices and
made those invested in these financial instruments richer. Corporate executives
helped to boost the stock market by using the companies’ profits and by taking
out loans in order to buy back the companies’ stocks, thus further expanding
debt.
Those few benefitting from
inflated financial asset prices produced by Quantitative Easing and buy-backs
are a much smaller percentage of the population than was affected by the
Greenspan consumer credit expansion. A relatively few rich people are an
insufficient number to drive the economy.
The Federal Reserve’s zero
interest rate policy was designed to support the balance sheets of the
mega-banks and denied Americans interest income on their savings. This
policy decreased the incomes of retirees and forced the elderly to reduce their
consumption and/or draw down their savings more rapidly, leaving no safety net
for heirs.
Using the smoke and mirrors of
under-reported inflation and unemployment, the US government kept alive the
appearance of economic recovery. Foreigners fooled by the deception
continue to support the US dollar by holding US financial instruments.
The official inflation
measures were “reformed” during the Clinton era in order to dramatically
understate inflation. The measures do this in two ways. One way is
to discard from the weighted basket of goods that comprises the inflation index
those goods whose price rises. In their place, inferior lower-priced
goods are substituted.
For example, if the price of
New York strip steak rises, round steak is substituted in its place. The
former official inflation index measured the cost of a constant standard of
living. The “reformed” index measures the cost of a falling standard of
living.
The other way the “reformed”
measure of inflation understates the cost of living is to discard price rises
as “quality improvements.” It is true that quality improvements can
result in higher prices. However, it is still a price rise for the
consumer as the former product is no longer available. Moreover, not all
price rises are quality improvements; yet many prices rises that are not can be
misinterpreted as “quality improvements.”
These two “reforms” resulted
in no reported inflation and a halt to cost-of-living adjustments for Social
Security recipients. The fall in Social Security real incomes also
negatively impacted aggregate consumer demand.
The rigged understatement of
inflation deceived people into believing that the US economy was in recovery.
The lower the measure of inflation, the higher is real GDP when nominal GDP is
deflated by the inflation measure. By understating inflation, the US
government has overstated GDP growth.
What I have written is easily
ascertained and proven; yet the financial press does not question the
propaganda that sustains the psychology that the US economy is sound.
This carefully cultivated psychology keeps the rest of the world invested in
dollars, thus sustaining the House of Cards.
John Maynard Keynes understood
that the Great Depression was the product of an insufficiency of consumer
demand to take off the shelves the goods produced by industry. The
post-WW II macroeconomic policy focused on maintaining the adequacy of
aggregate demand in order to avoid high unemployment. The supply-side
policy of President Reagan successfully corrected a defect in Keynesian
macroeconomic policy and kept the US economy functioning without the
“stagflation” from worsening “Philips Curve” trade-offs between inflation and
employent. In the 21st century, jobs offshoring has depleted consumer
demand’s ability to maintain US full employment.
The unemployment measure that
the presstitute press reports is meaningless as it counts no discouraged
workers, and discouraged workers are a huge part of American
unemployment. The reported unemployment rate is about 5%, which is the
U-3 measure that does not count as unemployed workers who are too discouraged
to continue searching for jobs.
The US government has a second
official unemployment measure, U-6, that counts workers discouraged for less
than one-year. This official rate of unemployment is 10%.
When long term (more than one
year) discouraged workers are included in the measure of unemployment, as once
was done, the US unemployment rate is 23%. (See John Williams, shadowstats.com)
Fiscal and monetary stimulus
can pull the unemployed back to work if jobs for them still exist
domestically. But if the jobs have been sent offshore, monetary and
fiscal policy cannot work.
What jobs offshoring does is
to give away US GDP to the countries to which US corporations move the
jobs. In other words, with the jobs go American careers, consumer
purchasing power and the tax base of state, local, and federal
governments. There are only a few American winners, and they are the
shareholders of the companies that offshored the jobs and the executives of the
companies who receive multi-million dollar “performance bonuses” for raising profits
by lowering labor costs. And, of course, the economists, who get grants,
speaking engagements, and corporate board memberships for shilling for the
offshoring policy that worsens the distribution of income and wealth. An
economy run for a few only benefits the few, and the few, no matter how large
their incomes, cannot consume enough to keep the economy growing.
In the 21st century US
economic policy has destroyed the ability of real aggregate demand in the US to
increase. Economists will deny this, because they are shills for
globalism and jobs offshoring. They misrepresent jobs offshoring as free trade
and, as in their ideology free trade benefits everyone, claim that America is
benefitting from jobs offshoring. Yet, they cannot show any evidence
whatsoever of these alleged benefits. (See my book, The
Failure of Laissez Faire Capitalism and Economic Dissolution of the West.)
As an economist, it is a
mystery to me how any economist can think that a population that does not
produce the larger part of the goods that it consumes can afford to purchase
the goods that it consumes. Where does the income come from to pay for imports
when imports are swollen by the products of offshored production?
We were told that the income
would come from better-paid replacement jobs provided by the “New Economy,” but
neither the payroll jobs reports nor the US Labor Departments’s projections of
future jobs show any sign of this mythical “New Economy.”
There is no “New
Economy.” The “New Economy” is like the neoconservatives promise that the
Iraq war would be a six-week “cake walk” paid for by Iraqi oil revenues, not a
$3 trillion dollar expense to American taxpayers (according to Joseph Stiglitz
and Linda Bilmes) and a war that has lasted the entirely of the 21st century to
date, and is getting more dangerous.
The American “New Economy” is
the American Third World economy in which the only jobs created are low
productivity, low paid nontradable domestic service jobs incapable of producing
export earnings with which to pay for the goods and services produced offshore
for US consumption.
The massive debt arising from
Washington’s endless wars for neoconservative hegemony now threaten Social
Security and the entirety of the social safety net. The presstitute media are
blaming not the policy that has devasted Americans, but, instead, the Americans
who have been devasted by the policy.
Earlier this month I posted
readers’ reports on the dismal job situation in Ohio, Southern Illinois, and
Texas. In the March issue of Chronicles, Wayne Allensworth describes America’s
declining rural towns and once great industrial cities as consequences of
“globalizing capitalism.” A thin layer of very rich people rule over
those “who have been left behind”—a shrinking middle class and a growing
underclass. According to a poll last autumn, 53 percent of Americans say
that they feel like a stranger in their own country.
Most certainly these Americans
have no political representation. As Republicans and Democrats work to raise
the retirement age in order to reduce Social Security outlays, Princeton
University experts report that the mortality rates for the white working class
are rising. The US government will not be happy until no one lives long
enough to collect Social Security.
The United States government
has abandoned everyone except the rich.
In the opening sentence of
this article, I said that the two murderers of the American economy were jobs
offshoring and financial deregulation. Deregulation greatly enhanced the
ability of the large banks to financialize the economy. Financialization is the
diversion of income streams into debt service. When debt service absorbs a
large amount of the available income, the economy experiences debt
deflation. The service of debt leaves too little income for purchases of
goods and services and prices fall.
Michael Hudson, who I recently
wrote about, is the expert on finanialization. His book, Killing
the Host, which I recommended to you, tells the complete story.
Briefly, financialization is the process by which creditors capitalize an
economy’s economic surplus into interest payments to themselves. Perhaps an
example would be a corporation that goes into debt in order to buy back its
shares. The corporation achieves a temporary boost in its share prices at the
cost of years of interest payments that drain the corporation of profits and
deflate its share price.
Michael Hudson stresses the
conversion of the rental value of real estate into mortgage payments. He
emphasizes that classical economists wanted to base taxation not on production,
but on economic rent. Economic rent is value due to location or to a
monopoly position. For example, beachfront property has a higher price because
of location. The difference in value between beachfront and nonbeachfront
property is economic rent, not a produced value. An unregulated monopoly
can charge a price for a service that is higher than the price that would bring
that service unto the market.
The proposal to tax economic
rent does not mean taxing you on the rent that you pay your landlord or taxing
your landlord on the rent that you pay him such that he ceases to provide the
housing. By economic rent Hudson means, for example, the rise in land
values due to public infrastructure projects such as roads and subway
systems. The rise in the value of land opened by a new road and in
housing and commercial space along a new subway line is not due to any action
of the property owners. This rise in value could be taxed in order to pay
for the project instead of taxing the income of the population in
general. Instead, the rise in land values raises appraisals and the
amount that creditors are willing to lend on the property. New purchasers
and existing owners can borrow more on the property, and the larger mortgages
divert the increased land valuation into interest payments to creditors.
Lenders end up as the major beneficiaries of public projects that raise real
estate prices.
Similarly, unless the economy
is financialized to such an extent that mortgage debt can no longer be
serviced, when central banks lower interest rates property values rise, and
this rise can be capitalized into a larger mortgage.
Another example would be
property tax reductions and legislation such as California’s Proposition 13
that freeze in whole or part the property tax base. The rise in real
estate values that escape taxation are capitalized into larger mortgages.
New buyers do not benefit. The beneficiaries are the lenders who capture the
rise in real estate prices in interest payments.
Taxing economic rent would
prevent the financial system from capitalizing the rent into debt instruments
that pay interest to the financial sector. Considering the amount of
rents available to be taxed, taxing rents would free production from income and
sales taxation, thus lowering consumer prices and freeing labor and productive
capital from taxation.
With so much of land rent
already capitalized into debt instruments shifting the tax burden to economic
rent would be challenging. Nevertheless, Hudson’s analysis shows that
financialization, not wage suppression, is the main instrument of exploitation
and takes place via the financial system’s conversion of income streams into
interest payments on debt.
I remember when mortgage
service was restricted to one-quarter of household income. Today mortgage
service can eat up half of household income. This extraordinary growth
crowds out the production of goods and services as less of household income is
available for other purchases.
Michael Hudson and I bring a
total indictment of the neoliberal economics profession, “junk economists” as
Hudson calls them.
Paul Craig Roberts is a
former Assistant Secretary of the US Treasury and Associate Editor of the Wall
Street Journal. Roberts’ How
the Economy Was Lost is now available from CounterPunch in electronic
format. His latest book is The
Neoconservative Threat to World Order.
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