03/24/2010 05:12 am ET Updated May 25, 2011

Bloomberg to NYC: "Tighten Your Belts"

Don't you just love it when a multi-billionaire tells the rest of us that we have to make do with less, and then, to help us forget our troubles, leads a rally for a local football team? While Bloomberg has been mayor, it is estimated his personal wealth jumped from four billion dollars to 16 billion dollars. Meanwhile, the latest official unemployment rate for the city is over ten percent, which is above the national rate. Nothing like a "Man of the People." One good thing, at least from my perspective, is the mayor wants to lock up fewer young people for victimless crimes. It seems the city does not have the money to keep them in jail.

Unfortunately, the proposed New York City budget is not the only place that we are being cut. In the state of the state address Governor David Paterson proposed $5.2 billion worth of cuts over the next year and a half with Medicaid and education cut the deepest. There would be mid-year reductions in school aid for the first time since the early 1990s. He wants to cut $585 million this fiscal year and another $844 million next year. At the same time everyone is talking about higher standards for teachers, Paterson is planning to do away with teacher mentoring programs.

According to the Center on Budget and Policy Priorities, 27 other states and Washington, DC are making similar cuts specifically targeting K-12 education. Hawaii plans to furlough teachers for 17 days this year.

The cuts in higher education financing are even worse. At least 36 states have cut assistance to public colleges and universities, resulting in reductions in faculty and staff in addition to tuition increases. The University of California is increasing tuition by 32 percent. At SUNY, resident undergraduate tuition increased by 14 percent (over $600 per year) for the spring 2009 semester.

While states and municipalities are pressed to balance their budgets, there is little discussion taking place on the impact of these budget cuts on school children and the people who depend on social service program, a number which is increasing because of rising unemployment. You mostly hear people complaining that taxes are too high and that teachers and government workers are overpaid.

There is also little discussion of the way our economy works and what happens when government lays off workers and cuts back on spending. Every state and municipal cutback undermines the federal economic stimulus plan. When you lay people off, or just don't hire people to replace retirees, people don't patronize local businesses, hire local contractors, purchase homes, or buy new cars. When states and municipal governments lay people off or freeze hiring, the entire economy collapses in on itself and the economic situation, instead of improving, grows more bleak.

I prepared an economic explanation for social studies education students and teachers to help them prepare for classroom discussions with their students. It is based on my understanding of the work of three economists, Eric Wolff of UMass-Amherst, Paul Krugman of Princeton, and Joseph Stiglitz of Columbia. The last two are Nobel Prize winners in Economics. Because of its length, I will be presenting it in my Huffington Posts in two parts.

NYS and the Global Economic Crisis Deepens, Part 1

The joke about left-wing economists is that they have successfully predicted ten of the last three recessions. They don't like capitalism, so they are all gloom and doom. I am not an economist, but I am a left-wing historian. In my professional opinion as a historian, the global economy is in deep trouble and I fear it is going to get worse, unfortunately a lot worse, not better.

I wish this were not the case. I would like my children and grandchildren to have a good life. I would like to finish out mine with health insurance and without being impoverished. But I am very skeptical and I am battening down the storm doors.

Who would have thought that we need to worry about the financial solvency of Dubai, an artificial country on an artificial island. It sounds like someone's avatar. Dubai is the most populous state of the United Arab Emirates (UAE). It is located on the Arabian Peninsula along the southern coast of the Arabian Gulf. In the summer the average daily temperature is well over 100 degrees Fahrenheit.

This fictitious country is really a corporation governed by a board of directors with its monarch as CEO. Its population is 1.4 million people, but only 300,000 are women. These are not citizens but guest workers that have been building a capitalist theme park for the super rich. Corporate Dubai accumulated $59 billion in debt borrowing to build extravagant construction projects like a giant island shaped like a palm tree. But no one needs it, and now, with the economic downturn, Dubai is on the verge of bankruptcy. Foreign banks have $130 billion in capital tied up in the United Arab Emirates; British banks have the largest exposure, $51 billion. If the Dubai Ponzi scheme collapses, it could bring down many western banks with it.
According to a recent Bank of America report, "One cannot rule out ... a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets." I would say this is a conservative reaction.

According to the New York Times, "just as Bear Stearns was a harbinger of a string of failures of overly leveraged investment banks, the concern is that Dubai could be the canary in the coal mine for heavily indebted countries," the worst are Greece and Russia, but they include Japan and the United States. In other words, if Dubai or an other small but deeply indebted country goes, it could set off a series of escalating financial collapses by banks, corporations, and countries around the world and no one will be immune. And you were worried about swine flu.

If you are not depressed enough, the U.S. economy is being kept afloat by record-breaking borrowing. In 1960, the ratio of debt-to-personal-disposable income was 55%. In 2007 it was over 130%. Total debt surged from 143% of the Gross Domestic Product in 1951, which was right after World War II, to 350% of G.D.P. in 2008. In 2007, the federal deficit was 1.2% of G.D.P. In 2009, only two years later, it was 13%.

The country produces nothing and purchases goods from China on credit. In September 2009, U.S. federal, state, and local governments and corporations owed China about $2 trillion. Meanwhile China is vastly overproducing and facing its own economic crisis. More and more of its companies are stockpiling goods and are at the risk of failing. Approximately 100 million Chinese migrated from the countryside to the city to work in these factories. What happens to all of these people when the Chinese economic bubble bursts? What if a bankrupt or recession ridden China stops lending the US money? What if it starts calling for repayment of what is already owed?

This is not just left-wing towel-wringing. James S. Chanos, who built one of the largest fortunes on Wall Street by anticipating the collapse of Enron and other high-flying companies whose stories were too good to be true, is now betting against China. He believes the China miracle blinded investors to the risks in that economy. He warns that China's hyper-stimulated economy is headed for a crash, rather than the sustained boom that most economists predict. According to Chanos, China's surging real estate sector, buoyed by a flood of speculative capital, looks like "Dubai times 1,000 -- or worse." He also suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.