The Economy Is a Problem
So, now, at last we can discuss it.
Not just discuss it, in rapid order "Recession" became the word of the day, from White House, Congress, the Fed, and the media.
It's blamed, mostly, on the sub-prime crisis.
But that's not the problem. It's a symptom. It is the logical, and probably one of the necessary results, of Bushonomics.
Along with low, or no, job growth. Little or no business growth. Depressed wages. And the crashing dollar.
(The president has a different vision of the economy. In his vision it's booming! and the number of jobs is growing! Though there is this little blip.)
The idea under which Bushonomics was sold is this:
The rich are the investor class.
If the rich have more money, they will invest more.
Their investments will create more business.
Those businesses will create more wealth, thus improving everyone's lives and making the nation stronger. They will also create new and better jobs.
Whether or not the people who say such things truly believe them, I cannot say. But that's their pitch and the media certainly seems to buy it, as do most of the establishment economists.
A more realistic - and less idealistic - view of Bushonomics is that they came at the economy with the attitude of oil men.
They inherited a vastly wealth country.
They looked at it like the oil under the Alaskan wilderness. They craved to pump it out, turn it into cash, and grab as much of that cash as possible.
Wherever possible, they literally sold off the assets. This was called privatization. Our biggest asset - in terms of size - is, of course our defense establishment. With privatization, one dollar out of every three for direct military operations in Iraq and Afghanistan goes to private contractors like Halliburton and Blackwater. So when someone says "Support the Troops!" with budget appropriations, they should really yell, "Two thirds support to the Troops! One third support to Halliburton, et al!"
This is just an estimate. The degree of privatization is unknown. Presumably, that's deliberate. Nor does it count the amount of money the military spends with private purveyors to supply the troops and their operations. It is only the amount that goes directly to private contractors.
But for the most part, the assets of the United States, our collective wealth, could not be sold off in such a direct manner.
In order to turn them into cash, what the administration did was borrow against them.
That is, they cut taxes while continuing to spend lavishly, creating debt.
The debt is owed by all of us, the collective people of the United States.
The tax cuts hugely favored rich people. They also favored unearned income (dividends, capital gains, inherited money) as opposed to the kind of money people have to work for. The very richest got richer.
The spending was - to the degree possible - directed to themselves, their friends and their supporters: Big Pharma, the Medical Industry, Insurance, Banking and Financial, among others. And, of course, Big Oil, from whom they have spent close to a trillion dollars of our money, to conquer a big oil field for private exploitation.
Now let's take a look at some numbers.
The numbers will tell us if their idealistic tale about unleashing the capitalists to create a better world for us all is correct. Or if it's a fairy story that masks uncaring greed.
The big number is that the economy has grown.
As measured by the GDP it has. From 2001 - 2007 it went by 35%.
GDP stands for Gross Domestic Product. It could more accurately be called Gross Domestic Transactions, because it is the sum of all the financial transactions in the country.
Now let us look at Job Creation.
In the first six years of the Clinton Administration, 13.7 million jobs were created. In the same period, under Bush, only 3.7 million jobs were created. Barely keeping up with population growth, if that. (Source: Fox News)
Now let us look at Median Income. That's as opposed to average income (If Bill Gates walls into a bar with ten people, the average income of everyone in the room goes up by $17,5000,000. But the median income just moves up half a notch, from between the fifth and sixth person, to the sixth person's income). From 2001-2005, Median Income, for people under 65, went down $2,000.
That's worth restating. From 2001-2005, the income of the average working person declined by $2,000.
Now, let's look at the Value of America's Businesses.
A good rough measure of the market value of America's best businesses is the stock market. Under Clinton, the Dow Jones went up 324%. Wall-to-wall, after the dot.com bubble burst, it more than tripled in value.
Bush arrived in 2001. Since then the Dow Jones is up just 10%. Adjusted for inflation, that's absolutely flat. (It was briefly up 23%. It is now below the 10% mark, and tumbling down as this is written). Just pain, no gain.
If jobs have not increased, salaries have gone down, and the value of business has not risen, where is that 35% growth in the economy?
There is a number called the M3 Money Supply.
The M1 is basically cash, plus checking and 'current' accounts. The M2 adds savings accounts, money market accounts and CDs up to $100,000. The M3 adds in the big CDs, Eurodollar accounts and other large exotics.
Already rising very fast, the M3 took off like a rocket after 2001. The Fed stopped publishing the M3 in 2006 (conspiracy theorists please note.) But a quick look at the chart of its growth (en.wikipedia.org/wiki/Money_supply), and assuming its trajectory continued, it's very clear that the M3 grew by something in the range of 35%.
The entire growth of the economy under Bushonomics is accounted for by growth in the money supply.
The administration did not directly inflate the economy by 35%.
They pumped it by the size of the deficit. The rest happened this way.
When a government is 'printing money' (running big deficits), the big fear is inflation. Particularly in the financial community. Bankers make their money on interest, and inflation eats their profits, point for point.
The administration, very proudly, grew the economy (or at least the amount of money in circulation), without inflation. Which actually is a pretty good trick.
In part, they were able to so precisely because the policy was a failure.
If it had created business growth - actual business, not just financial business - that would have created jobs. Then there would have been inflationary pressure. Especially if they were good, high paying jobs. If the salaries for ordinary people go up, even a little, the total is a big sum because there are so many of us.
But due to free trade, out-sourcing, bad economic policy, policies aimed at keeping wages down, and relentless union busting, good jobs were lost, to be replaced with low wage jobs, when they were replaced at all. The proof is in that median income figure (down $2,000 per worker).
Due to free trade and outsourcing, consumer goods mostly went down also. The exception being in favored industries like pharmaceuticals, insurance and oil.
Finally, and this the key to the next step in the process, the Fed kept interest rates down.
Low interest rates mean that it's cheap to borrow.
The administration largely believes in supply-side economics (otherwise known as "trickle down," or "piss on the people."), if you increase the supply of something, consumers will appear to buy it.
The actual results are a perverse triumph of the idea.
The supply of money was increased. The price of money was kept artificially low.
Think of borrowing as buying money. It is.
People (and businesses and corporations) did rush forward to buy it. Once they had it, what was there to do with it? There was no new trend, no dot.coms, no high techs, no bio-techs, no nothing.
So they went out and sold money. That is, they made loans.
There are two big retail loan areas, credit cards and housing loans. Both were pushed very aggressively. With cheap, cheap money available to finance home buying, that market heated up. At the same time, commercial interests started aggressively buying up loans, packaging them together, and reselling them as financial instruments. That created more desire to make more loans (sell money). Financial institutions bought more money (borrowed), in order to sell it at a profit (make loans). Since the loans were quickly resold - and profit taken off the top - the quality of the loans didn't matter to the people who made them. The housing market - or rather the loans the fueled it -- grew into a bubble.
The sub-prime crisis, the housing bubble, whatever you want to call it, is not the problem.
It's a symptom of pumping in money with no place to go.
Other symptoms are no job growth, no business growth, no stock market growth, falling median incomes, disappearing pensions and health plans, and the fall of the dollar.
When Bush came into office, a Euro cost 95 cents. Now it costs a $1.50. The Canadian dollar (the Loony), was 70 cents. Now it costs a dollar. Most mainstream economists and pundits will opine that a low dollar is good for American industry, because it will help us sell our goods. That's only true if we're producing things that no one else is, or doing it better, or doing it cheaper, and we're not.
Also, many foreign exchange rate are being kept artificially low against ours. Some, like many of the oil countries, are pegged to the dollar. They're making it up for it by raising the price of oil (currently traded in dollars). Others, like the Asian manufacturing countries, are keeping their currency down to retain their edge in selling here, thereby canceling whatever advantage we're supposed to get from declining currency.
One way to think of what the administration has done, is as a leveraged buy-out. That's when someone buys a company, using the company itself as the collateral for the loan used to purchase it, usually at very high interest, then pays off the interest by cutting the work force and salaries, selling outsets and even breaking up the company.
It's good for the guy who makes the deal, skims the cream off the top and gets rich. (The company that Mitt Romney got rich working for, specialized in doing that.) It's good for the lenders, who get a good return (if the buyer is able to squeeze enough money out of his purchase), but it's bad for the work force, bad for the company, and, if no one comes along to replace it, bad for the business as a whole.
We've experienced a leveraged buyout of the national economy.
Our politicians, the media and economists are just now waking up to the fact that the economy is in trouble.
The current numbers make it clear that we are probably in, or probably headed for a recession.
Also, the polls show that people are concerned about the economy and it's an election year. The people are out ahead of our governing and media and professional economic classes on this, because they live in the real economy, the one that's been leveraged, and the professionals are either in, or work for, the investor class that has been doing well.
So there is, at last, talk about doing something about the economy.
The Feds will cut interest rates!
George Bush wants a stimulus package. Tax cuts, tax cuts and make my tax cuts permanent! After all, that policy has worked so well. He said the cuts must be at least 1% of the GDP. That will be $145 billion dollars.
Harry Reid and Nancy Policy (the King and Queen of Effective Politics) will offer a competing one (tax cuts, tax cuts!). Although they promised pay as you go economic policies from a Democratic legislature.
Pundits in the media talk about a crisis in consumer confidence. And how the fix is to restore it. So we will go out and buy. Presumably on credit.
How about, consumers think there's a problem because there is one. Not because they're weird emotionally. They reasonably see themselves so over-extended, with so little hope of being better earners, that they won't be able to pay things off. Not even with a one time government check of somewhere between $300 and $1,200.
In short, most of those solutions will go to making things worse.
The real solutions are pretty obvious and pretty simple.
First, we have to make a choice, do we want a sound economy for all of us and a strong America. Or do we want to have a few people of unlimited wealth who use that wealth, among other things, to control the government so that it helps them milk more money from the rest of us?
By the way, this is not a call for socialism! Or other ism! Except a call for sensible and effective capitalism. Based on what we've seen work and seen fail.
In the real world, there are no such things as free markets.
In the real world, business people manipulate and conspire to control markets, governments both control and collude with business, while tax policies and government spending have a major affect on the economy.
Let us accept that, and then the argument is only over how best to do it.
Simply giving money to rich people doesn't work.
Bob Novak, the conservative commentator who calls the investor class, "the most creative class," is flat out wrong. As we've seen, outside of their ability to buy influence in politics, the media and the law, the rich are like the rest of us, relatively passive and unimaginative, prone to putting their money in the easiest place that promises a return, in whatever bubble is in fashion at the moment, and wherever some salesman who gets their attention tells them.
Money has no mind of it's own. It has to be directed toward areas that will generate and support business and good jobs at good wages. As it happens, our economic goals are on the same road as the social good.
The number one target has to be alternative energy.
Energy that can be produced here, in the United States, renewable, non-polluting, and not, like corn based ethanol, requiring as much petroleum to produce it as it replaces. One third of our balance of trade deficit is oil, year in and year out. If the US can become the world leader in alternative energy and conservation technology, we will, at last, have something to export.
The number two target is infrastructure.
By it's nature, infrastructure has to be largely produced here with local labor and it stays here.
Hard infrastructure, like roads and bridges, cleaning up New Orleans and the Gulf Coast, protecting our coasts from future storms, internet and phone service as good as Europe's, Japan's and Singapore's.
Soft infrastructure, like education, youth services, parks and recreation programs, public safety, and a saner criminal justice system. The US has 5% of the world's population and 25% of the incarcerated population. That's expensive. And wasteful. Unsafe streets and high crime are expensive and wasteful.
Infrastructure makes doing business easier, quicker and cheaper. It becomes an invisible subsidy for all businesses. Try to imagine, for example, Fed Ex, that entrepreneurial triumph, without a national web of airports, flight controllers, and roads.
Please note: this has to be done with adult supervision and social goals in mind. Homeland Security gave Blackwater $73,000,000 to do security work in New Orleans. Mostly through no bid contracts. The result was the highest crime rate in the country. At the same time, Bush repealed the Davis-Bacon Act (a 1931 law that required contractors on government jobs to pay union wages) so that actual working people got as little as possible.
The number three target is health care.
Health care in the United States costs at least 50% more than the next highest spending country, and double what it does in most other modernized countries. All of them have better health than we do. They live longer and in better condition.
The difference is that they have national health plans. Mostly single payer, usually tax supported. Our plans are based on a hodge-podge of a thousand private insurers.
A single payer national health plan should cut the costs of our health care by at least 25%, possibly 50%. That's an astonishing number. That money could go to more productive things. Or, to even more health care.
American businesses who supply health care to their employees claim they are non-competitive with companies from countries that have national health. This will make them more competitive. This will make American labor more competitive.
The number four target is a balanced budget.
There are, in fact, times for deficit spending. Just as there are times in our personal lives to borrow and times for business to borrow.
This is probably not one of them.
There is an ocean of money sloshing all around the world, looking for a home. If there are real business opportunities in America (like taking the lead in alternative energy, bio tech, and whatever is next around the corner), it will come.
Especially if there is a sound business environment and dollar investments return to being the most reliable in the world. That means paying down our debt.
How can all this be done?
Raising taxes.
On the wealthy. And on corporations. That's not class warfare. That's simple practicality.
After your first twenty thousand dollars, how much of the next twenty do you need, to live, thrive and survive? Damn near all of it. After your first twenty million, now much of the next twenty million do you need? Not a nickel.
The rich will whine, writhe and scream, that they won't do business, they'll be driven out of business, that business will collapse. Bullshit. If they dislike keeping twenty or thirty or forty cents of each dollar of profit so much that they won't take the dollar, someone will come along who gladly will. That's how markets work.
The Iraq War is obviously part of the equation. The administration routinely leaves the financial cost of the war off the books (an accounting deception that Bush learned back when he was with Harken Energy). It should be made part of the budget and it should be made pay as you go. Then see how many people are willing to pay cash - through their taxes - to keep that failed enterprise going.
All of this is pretty straight-forward and common sense.
The illogic of Bushonomics is obvious. The results were foreseeable. After all, similar effects took place under Reagan and Bush the Elder, except insofar as they reversed courses, which they did.
Only this Bush is able to keep himself so far out of touch with reality that his prescription for disaster is more of what brought the disasters on.
The facts bear out the theory. Go back to Hoover and Roosevelt, then look at the down, up, down, of Bush the Elder, Bill Clinton, and Bush the Lesser.
(We do note that there are minor industries dedicated to proving that Franklin Roosevelt was, in the words of CNN's Glenn Beck, 'an evil son of a bitch,' that the New Deal really, really, really didn't work, and that Bush the Elder was really, really, really responsible for the boom of the Clinton years and that Clinton was responsible for the first recession during the reign of Bush the Lesser. But they are like people who see the image of the Virgin Mary in bread sticks and crullers.)
None of our politicians (with the exception of Dennis Kucinich and John Edwards), pundits or economists are addressing the fundamentals.
The last time we switched from the nonsense of worshipping unmitigated greed, disguised as Free Marketeering, it took a market crash and the Great Depression, to move us out of our public relations manufactured delusions and make us understand that when we all do well the rich get richer too, so let's start with the common good.
Based on the dialogue as it stands now, we will go with tinkering and twaddle, doing more of what doesn't work. And only if the whole things collapses will we address the real problems.
Larry Beinhart is the author of Wag the Dog, The Librarian, and Fog Facts: Searching for Truth in the Land of Spin. All available at nationbooks.org His new novel, Salvation Boulevard, (Nation Books) will be released in September, 2008. Responses can be sent to beinhart@earthlink.net.
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Mr. Beinhart has accurately detailed the problem for us yet again. He is far from the first. What is it going to take for voters to wake up and realize they have been scammed yet again? Yes, the Republicans are greedy and evil beyond all description, but the Dems are suckers for their own load of bullcrap. By all means, let us worship at the altar of diversity over every other issue possible! The Republicans figured out how they could win this election, no matter what the result, and they have carried out their plan with precision. They set the trap the moment Mr. Obama stood up and made his koombaya bullcrap speech at the '04 convention. When the **** are ya'll going to get it?! Put Hillary in office and the stinking MSM will cover up cable news with drivel every time Bill makes a move in The White House. Put Obama in and you will find out much he really does like Reagan. EDWARDS, EDWARDS, EDWARDS!!!
What an excellent article. The only thing I disagree with is that part of the conclusion, "when we all do well the rich get richer too". That may be true materially, but it's not true psychologically. Wealth - for those who have far more than they need - is about comparision - having lots more than other people. To say "we can all be better off" is, to those people, an obvious falsehood because they can only feel better off when there is more inequality. So the best thing to do is to take their interests into account in the same proportion that they take our interests into account - that is, not at all.
Larry:
You state: "Think of borrowing as buying money. It is."
When a bank makes a loan, it creates a deposit. A bank is a loan making, deposit creating entity!
The accounting mechanics for the much taught 'multiplier effect' is this: the loan goes on the books as a "debit" to the asset account Loans. The "credit" goes on the books to a bank liability account "deposits". And deposits are M-1, eminantly spendable money. Now of course, the esoterica of this comes in with liquidity.
The M-3 variety of trillions to fund subprime loans came from, amongst other places, the FHLB (fed home loan bank) in the form of "advances". The vaunted REPO variety of arrangement which is M-3 money. When Fed Funds were running at 1.0%(ergo the name "Easy Al") and Treasuries at 2+%, the FHLB could float Bonds in the market and avail itself of rates marginally above treasuries, say 3.0%. (Goodly sums of these bonds sold to PRC etc...the world). The FHLB takes this liquidity (ironically funded by our trade deficits..
I think the economy is a little bit like an engine. You know, suck, squeeze, bang, blow,
kind of a financial-
Yes indeedy, we play at a rigged table, if you do some things, you can stay in the game, but with every year, more sophistry and complexity is added to the tax code, and every year they keep coming up with more and more people who've made a career out of siphoning mad cash out of this entire system, payola-rola, bay-bee, and I think a lot of people are basically 'done'. But, it all kind of had to wind up sometime,
and now we're going to have another reality check, and hopefully, this one doesn't bounce.
Tax cuts - investment - new jobs (but overseas) - glut of products - low prices.
The problem with old supply side economic formulas is that it is no longer happening in a closed loop within the US. Thus the old canard, 'a rising tide lifts all boats' no longer even resembles what is happening because investments in manufacturing, production, and even service are taking place overseas; not here. Thus the loop does not create jobs here but overseas.
In the US the only jobs that are created are those minimum wage jobs in distribution centers trying to offload the glut of products to consumers. That tide is sinking all the boats.
We need a new economic approach to address a new reality in the 21st century. Reagan and Friedman economics belong to a different world. They no longer will bring wealth to most the people in this country.
Wow! Incredible writing! Usually when I read articles like this one I find a few holes in the logic or incorrect data. Not this time.
You hit almost all the key points. The one other thing I'd like to see you write about is how do we get a majority of Americans to finally see what a total con job Republican Reaganomic
Most Americans now realize we are in trouble, but they don't realize how serious it is and that the responsibility lies entirely with failed Republican policies.
The GOP believes, "The poor have too much money, and the rich don't have enough."
To solve this we must, "Socialize costs, privatize profits."
How to do this? Two examples.
Medical health care is to be, "The least care at the cheapest price."
How should employers treat their workers? "Pay them just enough so they will not quit." (and the corallary: "Employees work just hard enough so the boss won't fire them.")
One day the big wigs and MSM will figure out that when the American economy was healthy, it was healthy because the middle class had realtively large disposable incomes to increase the TOP LINE (that is, sales) of companies' balance sheets. The American economy did NOT grow because the companies cut costs to expand their bottom line. Cut wages, cut jobs, cut disposable income, and the top line will shrink and, eventually, the bottom line will shrink as well, and at that point there will be little we can do, in a macro-economic sense.
The 'trickle up' theory is alive and well. I worked for a medium-sized firm that was 'purchased' by an investor through a REIT. He proceeded to sell off all the assets and after a 300 to 1 reverse stock split, declared bankruptcy. Who was left holding the bag? Anyone who's 401K manager bought the bundle with that property, meaning an ex-middle class boomer trying to retire. The little guy always takes it in the ass.
Amazing isn't it. They pull somebody out and speak those hallowed but phony sayings and poof they get elected. The Clinton economy was fortunate. They essentially built the internet, which was infrastructure and a boon to business. These guys are just terrible. The worst ever. War, debt, and incompetence. That essentially sums up their whole gig.
this is probably the most comprehensive, straightforward and accessible analysis i have ever read in relation to the country we have become.
excellent writing, mr beinhart !
if edwards drops out of the race, we might as well start the chant now, '4 more years !!' cause that's what we'll get no matter which candidate, dem or rep is elected
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