Jack Rasmus

COMMENTARY: THE FOLLOWING ENTRY REPRESENTS A FORAY INTO COMMENTARY ON THE CURRENT GREEK DEBT CRISIS AND THE RISING DIRECT OPPOSITION IN THE STREETS OF GREECE TO EFFORTS BY BANKERS AND POLITICIANS TO MAKE THE GREEK PEOPLE PAY FOR THE CRISIS. PARALLELS BETWEEN GREECE TODAY, AND THE US AUSTERITY PROGRAM TO COME IN 2013 IMMEDIATELY AFTER THE NOVEMBER US ELECTIONS, ARE MADE

The crisis in Greece is not a ‘sovereign, or government, debt’ crisis. That’s the surface appearance of the problem. The below the surface struggle is about how bankers, bondholders and speculators–together with their politicians in government–can offload the cost of bad assets they created onto the shoulders of the Greek people. It’s about ‘who’s going to pay for the bad assets’.

The news coming out of Greece, reported in the western press, is that the big boys of northern Europe, US, and their hedge fund-banker buddies, are willing to ‘take a hair cut’ and lose 70% of the value of their existing bonds. But the real facts are that 70% reduction includes only 30% of the current bonds that have become ‘bad assets’. No mention is made in the press of the other 70% of bonds that are not required to take a loss.

The reported Greek debt is somewhere between $300-$400 billion. The current ‘loan’ in question is about $170 billion. But the real Greek total debt is likely around $600-$650 billion. That’s just about the total on hand for the European bailout fund. (Total bailout that will be needed for all of the Eurozone is likely around $4 trillion, this writer estimates, to cover not only Greece but Portugal (next up for another $200 billion), Spain, Italy (more than a $trillion), as well as other ‘lesser economies’ also increasingly in trouble, such as Hungary, Austria, Belgium, and soon perhaps even economic stalwarts like Norway, whose housing bubble is now about to burst.

In other words, the Greece and overall Eurozone debt crisis is far from over and has a long course yet to run. That means little Greece’s problems are also far from over as well. As they say, ‘you ain’t seen nothing yet’.

If you want to see what a bona fide economic depression in the 21st century looks like, look at Greece. One out of two youth unemployed. General unemployment in excess of 25% (the worst year level in the US in the 1930s). GDP collapsing. Pensions shrinking. Jobs melting away at an increasing rate. And the bondholders-bankers behind the Germany-French and other Euro governments want the Greek people to pay for something they didn’t create. They want the people to cover the lion’s share burden of making up for their bad assets.

Greece is also a good example how an economy cannot ‘austerity its way to recovery’. Cutting incomes of those whose spending make up the overwhelming majority of the economy is not a path to recovery–as Obama and Congress will soon find out in 2013. Already the $2.2 trillion US deficit cuts mandated in 2011, which are scheduled to take effect AFTER the upcoming November 2012 national elections, will slow the US economy to a less than 1% GDP growth. Those aren’t my numbers; they’re the cautious Congressional Budget Office’s numbers. And that less than 1% growth is BEFORE Congress and the next president (doesn’t matter who) set to work cutting another $4 trillion immediately after the elections. That’s when the real US deficit cutting crunch will start–and the next double dip of the US economy.

Obama and Congress will discover what an ‘austerity recession’ is, come 2013. In that they will join Japan and most of western Europe, including the French and the British. Austerity, or deficit-budget cutting, only makes a debt crisis worse. Dont’ believe me, ask the Greeks!

There are only two ways to get out of deep debt-driven economic contraction that remains ‘systemically fragile’ today across the board. I’m talking about both the US and the Eurozone, as well as Japan. One way is to reflate the economy by generating inflation. The other is to liquidate the bad assets.

The Federal Reserve has done a horrible job at reflating the economy. The trillions it has spent on bailing out the banks, printing money, buying banks and mortgage lenders’ bad subprime loans at near full purchase price instead of the real 15 cents on the dollar they are worth, has led not to inflation in product prices (that would stimulate investment) but instead resulted in the Federal Reserve spoon-feeding speculators around the globe. The Fed has pumped up stock markets, real estate, currency speculation and volatility, oil and commodity prices, and financial securities in general. The money and credit from the Fed has not gotten to those parts of the economy that need it most. The Fed is not broke. It can always print money. It’s just that Fed policy is itself broken.

The other option is to ‘liquidate’ the bad assets. That too the Fed and the Obama administration have sadly failed at. The essence of the Fed-Obama bank bailout strategy since 2009 has been to ‘rescue’ the banks–not by removing the bad assets from their balance sheets but just by pumping liquidity into these zombie institutions (many of which have been technically insolvent and bankrupt now for years), to in effect ‘offset’ the bad assets on their balance sheets. The bad assets are still there. The Fed and Congress have not only just ‘offset’ the bad assets on the private balance sheet, but have in so doing mirrored those bad assets on the public balance sheet side. So it not only failed to remove (liquidate) the bad assets; it doubled them. Now the public sector has become as ‘fragile’ as the banking sector. But liquidation, you see, is abhorred by the bankers and bondholders. They don’t want their asset values ‘reduced’ or expunged. They want the people to pay for the losses. And that, once again, is Greece today–and the USA come 2013 and beyond.

Jack Rasmus
For an ‘Alternative Program for Economic Recovery’ that makes bankers and bondholder-speculators pay for the losses on their bad assets, see Jack’s program by the same title on his website, www.kyklosproductions.com, accessible from the right side of this blog page.

COMMENTARY: LAST WEEK’S JANUARY JOBS REPORT FROM THE LABOR DEPARTMENT HAD SOME VERY PECULIAR AND STRANGE NUMBERS, INCLUDING A MASSIVE UPWARD REVISION OF 3 MILLION JOBS DUE TO SEASONALITY ASSUMPTIONS. WAS THERE REALLY 243,000 ACTUAL (REAL) JOBS CREATED LAST MONTH, OR WAS IT LARGELY STATISTICAL LEGERDEMAIN? HERE’S SOME QUESTIONS RAISED ABOUT THE NUMBERS. (What follows is somewhat ‘wonkish’ but for those interested, do read on).

‘Those Peculiar January Jobs Numbers; Or, When 243,000 Jobs Aren’t’ by Jack Rasmus, copyright 2012

The January 2012 jobs report released by the US Labor Department on Friday, February 3 indicated that 243,000 new jobs were created in the nonfarm sector of the US economy last month. Additionally, the U-3 unemployment rate fell from 8.5 to 8.3%. How real are those numbers? Are they actual jobs created? Whats the true unemployment rate?

First, it is important to note that the 243,000 January jobs numbers are not the actual jobs created. They represent seasonal adjustments made to the raw data for jobs, referred to as the not seasonally adjusted jobs tally for the month. The January jobs report reflects an anomalous massive upward revision of the raw jobs data, due to assumptions about seasonality and new business formations.

Lets look at trends from November 2011 through January 2012 for both the seasonally adjusted and not seasonally adjusted for purposes of comparison.

The actual (not seasonally adjusted) jobs numbers for November 2011 show there were 133.179 million nonfarm jobs in the US economy that month. The following month, December 2011, total nonfarm jobs had declined to 132.952 million, for a decline of 227,000 jobs. That makes sense, given that 203,000 jobs were lost in construction, which is typical for Decembers, while 74,000 jobs were reduced by states and another-72,000 by cities and schools that month. Offsetting the construction-public sector job losses were 142,000 jobs added in Retail, mostly department stores, which also makes sense given the holiday season. Manufacturing and other service sector jobs changed little, some up and some down slightly over the month. Again, these are the not seasonally adjusted jobs for November.

What about the seasonally adjusted jobs numbers for November? One would expect some differences in numbers here, of course. Lets look. Total nonfarm jobs increased in November, by 203,000 instead of declined (per the not adjusted numbers) by 227,000. That represents a net difference and swing of 430,000 jobs.

Now lets make a similar comparison of seasonally adjusted and not seasonally adjusted for jobs between December 2011 and January 2012 that were reported on February 3, 2012 for last month. What appears is an incredible 7 to 10-fold increase in the difference between seasonally adjusted and not seasonally adjusted.

The not seasonally adjusted, raw jobs numbers show a loss of jobs for January 2012, after the holiday season, of 2.7 million jobs. That includes about 300,000 construction jobs, which is not strange given the mid-winter slowdown typical of this sector. Plus another 600,000 jobs in retail, which makes sense after the typical holiday sales hiring surge typical in November-December. And another 400,000 in business professional services as most businesses trim their labor force at the start of the year to keep costs down and to watch when and where to add jobs back in the subsequent months. However, the adjusted, upward revised numbers for January showed a gain of 243,000 jobs instead of the unadjusted 2.7 million fewer jobs. That 243,000 gain in jobs includes adding construction jobs in mid-winter, and adding even more jobs176,000in Retail and Services after the holiday season hiring surge. This retail-services job gains for January occur, moreover, despite the dismal retail sales holiday season when, except for autos, retail sales actually declined by 0.1% compared to the previous year. Why would retail employers add jobs after that poor sales season? Why would they not reduce the huge numbers of part time and temp hires of November-December in January, as they typically do after the holidaysespecially given the poor retail sales performance? And why would the construction sector add jobs in mid-winter? And why would business professional sector companies add 1.1 million jobs, according to the seasonal adjustment assumptions, instead of trimming jobs, as reflected in the unadjusted numbers? In other words, why would professional-business services not make their typical beginning-of-the-year labor force temporary reductions?

It is interesting to note that instead of a net swing between the seasonally adjusted-not seasonally adjusted numbers of 430,000, as occurred during November-December, we get a net swing, or difference, between seasonally adjusted vs. not adjusted of nearly 3 million jobs for December-January? Does this make sense? One would expect major differences between seasonally adjusted-not seasonally adjusted numbers. But a seven-fold increase in the difference from month to month–from 430,000 to 3 million–is not credible.

Lets look at this massive difference and net swing anomaly from another perspective: the unemployment numbers. To start, forget about the U-3 unemployment number preferred by the press, with its reported reduction in unemployment rate from 8.5% in December to 8.3% in January that the administration and press have been hyping. The more accurate U-6 unemployment rate is a better indicator since it accommodates part time, discourage workers, and underemployed workers. It too underestimates true unemployment by about another 2%, per this writers calculations, but not nearly as dramatically as the U-3 number.

In December the U-6 unemployment rate for 15.2%, both for not seasonally adjusted and seasonally adjusted total employment. That means, for the unadjusted employment levels there were 20.208 million jobless in December 2011 and 20.096 million unemployment in December per the seasonally adjusted numbers. Thats a difference of only 112,000 unemployed.

But look at the December-January difference in unemployed between the two sets of numbers: The U-6 unemployment rate for seasonally adjusted fell to 15.1% in January (from 15.2%) in December, while the not seasonally adjusted number of unemployed rose from 15.2% in December to 16.2% in January. The U-6 indicates the number of unemployed rose, which makes sense for construction, retail, and other sectors per the preceding argument. But for the seasonally adjusted numbers, unemployment declined for the U-6 by 0.1% (and 0.2% for the U-3). The net swing between the two sets of data for December-January was 1.108 million, compared to the net swing for November-December of only 112,000. The difference represent a ten-fold jump for December-January.

How can the seasonally adjusted vs. not seasonally adjusted jobs numbers be so large for December-January compared to previous months? How can what appears to be a decline in jobs clearly in January end up reported, after seasonality and other statistical adjustments, as an upward revised 243,000 jobs?

Other economists have been focusing on the possible problem with the seasonality assumptions in the January jobs numbers this past week, but their commentary is not reaching the public press. The essential point is that the January jobs report is peculiar, and requires an explanation by Labor Department statisticians why there was a swing of about 3 million jobs last month between the raw jobs numbers data and the upward revisions in the seasonally adjusted numbers for the month.

Jack Rasmus

Jack is the author of An Alternative Program for Economic Recovery, available at his website, www.kyklosproductions.com, and the forthcoming April book, Obamas Economy: Recovery for the Few, by Pluto Press-Palgrave.

COMMENTARY: THE HYPE IS ON AGAIN IN THE PRESS THAT RECOVERY IS AROUND THE CORNER. LAST MONTH’S JOBS NUMBERS ARE CITED AS THE LATEST PROOF OF RECOVERY. THE ECONOMIC DATA PUFFERY WILL NO DOUBT PROVE INTENSE IN THE COMING MONTHS, IN THIS ELECTION YEAR. BUT A CLOSER LOOK AT THE FACTS SHOULD TEMPER THE FALSE CONFIDENCE. LAST WEEK’S JOBS NUMBERS WILL BE ADDRESSED IN AN ANALYSIS TO SHORTLY FOLLOW. IN THE MEANTIME, A BROADER LOOK AT THE STILL ONGOING JOBS CRISIS IN THE U.S. IS ANALYZED IN THE FOLLOWING

“THE U.S. JOBS CRISIS–THE BIGGER PICTURE” by Jack Rasmus, copyright 2012

Despite last Fridays January 2012 Labor Department jobs report, more than three years after President Obama assumed office the crisis in jobs in the U.S. continues as the number one problem of the US economy. The seasonally adjusted official numbers may have indicated 243,000 jobs created last month, but the actual, raw data on jobs was dramatically different, as will be explained in a follow up analysis to this item on jobs in the U.S. economy. In the interim, for those readers inclined to get excited about January’s very short term jobs picture, to start here’s some more sobering facts on the bigger picture.

Based on the U.S. Department of Labors U-6 unemployment rate, at the official end of the recession in June 2009 there were 25.4 million jobless; By January 2012 more than 30 months later, there still remained 23.4 million without work. That’s a total of only approximately 67,200 jobs created a month over two and a half years–a monthly number barely half of what is needed to even absorb new entrants into the labor force each month.

Most of the two million jobs created in the private sector since Obama assumed office three years ago have been lower paid service jobs, part time jobs, and temporary forms of employment–all providing lower wages and few benefits. Higher paying and benefit jobs in manufacturing and construction have, in contrast, continued to decline since the June 2009 recession low-point. Today there are still 79,000 fewer jobs in manufacturing and 680,000 fewer jobs in construction than there were at the recession low-point of June 2009. There were 21.1 million manufacturing and construction jobs when the recession began in 2008. There are only 17.3 million manufacturing-construction jobs today.

Unlike all previous 11 recessions in the U.S. since 1945, the government sector has not created jobs to offset private sector job loss during the recession. Government instead has become a major contributor to job destruction. Local governments have laid off 643,000 workers since June 2009, nearly a quarter million247,000of whom have been teachers. Public workers and teachers continue to be laid off at a rate of 20,000 a month or more. At that pace, by the end of his first term, President Obama may have presided over a loss of nearly a million public workers’ jobs.

Other indicators of the continuing sad state of the jobs markets in the U.S. after three years further corroborate the continuing crisis of jobs in the U.S. For example, the duration of long-term unemployed–i.e. those out of work 27 or more weeks–has continued to rise steadily since June 2009 from 24% of all those unemployed to more than 40% today. Another indicator of the continuing severity of today’s jobs crisis, the Employment to Population Ratio that measures how well the economy is creating jobs in relation to the growth of population, shows the U.S. economy is growing fewer and fewer jobs as the U.S. population rises. In other words, we are not even keeping up with the population growth. At the start of the current recession 63% of the US population was employed; today only 58.5% of the U.S. population has jobs. Not least, the Job Opening to Labor Turnover (JOLT) ratio shows there are still today 4.2 workers looking for every job offered, i.e. well more than double the 1.8 to 1 ratio that existed before the recession began.

The Jobs Creation programs offered by the Obama administration and Congress over the past three years have proved dismally inadequate. In January 2009 the Obama administration promised to create 6 million jobs if its 1st stimulus program costing $787 billion were passed by Congress, 40% of which were tax cuts. In June 2009 there were approximately 25 million unemployed. By mid-summer 2010 there were still 25 million unemployed and job losses began to rise again that summer.

The Obama administrations answer was to propose even more tax cuts for corporations and investors, another $802 billion in tax cuts including a two year extension of the Bush-era tax cuts costing $450 billion. The administration then added another new twist to its jobs strategy in late 2010: it brought in corporate CEOs like Jeff Immelt of the General Electric Corp., and Bill Daley, a big banker, to run the Presidents new jobs council. Their corporate answer to a jobs program was more free trade agreements, an end to more business regulations, lowering corporate tax rates for offshore multinational companies hoarding their profits in foreign subsidiaries to avoid paying US taxes, patent law reform, and taking hundreds of billions in funds from social security to cut payroll taxes. That corporate-designed jobs program failed in turn as well.

Obama administration business tax cuts, its corporate friendly and job-destroying free trade deals, and its raiding social security to give workers with jobs a paltry tax cut at the expense of retired workers deferred wages have all failed to even dent the 23-24 million still unemployed. The stimulus and tax cut programs of the past three years have bailed out big business and big banks, but have not created jobs beyond a mere trickle. What was once a trickle down approach to job creation has become today a drip-drip policy.

While the Democrats have thus far failed to provide any effective programs to restore the millions of jobs lost since the recession began, Republicans continue to propose old retread solutions that destroyed millions of jobs over the past decade. Republicans continue to propose more tax cuts for corporations and wealthy investors, still more job-destroying free trade agreements, more cuts in social security-medicare-medicaid and other social programs, and a further expansion of defense spending. These programs not only have failed to produce jobs, but actually have eliminated them by the millions over the past decade.

The historical record shows that $3.4 trillion in Bush tax cuts, given mostly to business and investors, were associated with no job creation at all during his term. The number of private sector jobs when Bush came into office in January 2001 was 111,634,000. The number of private sector jobs when he left office in January 2009 was 110,981,000. The U.S. economy and taxpayer paid $3.4 trillion to lose 653,000 jobs. By December 2011, three years later and after another year extension of the Bush tax cuts, there were 109,928,000 private sector jobs. The more the Bush tax cuts, the fewer the jobs. Yet Republicans continue to beat their broken drum that tax cuts create jobs, when in fact there are still 1.7 million fewer private jobs in the U.S. than there were a decade ago.
Republicans further continue to chant for more cuts in social programs, when countless studies show it will result in the loss of millions more jobs. And they continually call for more defense spending and wars as a way to create jobs. But the facts here again are the contrary. Increasingly, defense spending results in more high tech-high cost weapons systems that only boost still further the bloated profit margins of defense giants like Lockheed, Raytheon, Boeing and others, and actually result in more jobs outsourcing to these same companies foreign defense contractor partners in Japan, Germany, Israel, the United Kingdom and elsewhere.

The S&P-Fortune 500 largest corporations today sit on more than $2 trillion in cash and refuse to spend it to invest in America and create jobs here at home. The big tech-big bank-pharmaceutical companies sit on another cash hoard of more than another $1 trillion sheltered offshore and refuse to bring it home to create jobs. And the big 19 banks sit on still another $1 trillion and refuse to lend to small businesses to create jobs.

If big banks and big business refuse to use their bailed out $4 trillion cumulative cash hoard of the past three years to create jobs, then the government must tax it, must take it back from them and directly create jobs itself. The U.S. needs a 21st century version of the 1930s Depression-era New Deal jobs programs, adapted from the past to present conditions. What the U.S. economy needs is the immediate creation of a Civilian Conservation Corp (CCC) program similar to that created in 1933. In just 90 days the CCC created the equivalent of 1.2 million jobs in today’s economy. Intermediate and longer term, what the economy now needs is a new 21st century Works Progress Administration (WPA), that created between 1935-40 the equivalent today of 25 million jobs.

More specifically, the U.S. needs a new Alternative Energy Public Investment Corporation (AEPIC), in which the government would invest directly in alternative energy infrastructure. It needs a modern version of the 1930s CCC, a Civilian Reconstruction Corporation (CRC), to directly build, repair and maintain urban areas and urban renewal. It needs a Community Health Services Administration (CHSA), to build medical clinics in communities and provide direct health services to the working poor, those on Medicaid, and the 50 million uninsured. And it needs a 21st Century Works Progress Administration(21WPA), that targets job creation in non-infrastructure and non-health services employment across all other industries and occupations.

The $4 trillion to fund these direct job creation programs are there. There s no need to raise the deficit or debt. If the super-wealthy and their big corporations and banks wont spend the trillion dollar bailouts they were provided by the US taxpayer, to invest in America and create jobs, then the only alternative is for the government to reclaim those trillions and spend it on direct job creation programs itself.

Jack is the author of An Alternative Program for Economic Recovery, available at his website, www.kyklosproductions.com, and the forthcoming March 2012 book, Obamas Economy: Recovery for the Few, by Pluto Press and Palgrave-Macmillan.

COMMENTARY: On FRIDAY, JANUARY 27, 2012 THE US GOVERNMENT REPORTED RESULTS FOR THE GROWTH OF THE ECONOMY FOR THE FOURTH QUARTER OF 2011 AND ALL OF 2011. THE GROSS DOMESTIC PRODUCT STATISTIC, OR GDP, SHOWED THE ECONOMY GROWING AT A 2.8% ANNUAL RATE FOR OCTOBER-DECEMBER 2011. THAT REPRESENTED A RISE FROM THE AVERAGE OF ONLY 1.7% FOR THE ENTIRE PRECEDING NINE MONTHS OF 2011. THE PRESS HAS BEGUN HYPING THE 2.8% NUMBER AS INDICATING AN ACCELERATING GROWTH OF THE US ECONOMY AND THUS A RECOVERY UNDERWAY. BUT A CLOSER LOOK AT THE FOURTH QUARTER GDP STATISTICS SHOW THE GROWTH WAS REALLY ONLY AROUND 1-1.2%, THAT IS ABOUT WHAT IT HAD BEEN FOR THE PRECEDING NINE MONTHS. HERE’S WHY.

‘A Comment on GDP and Other Year-End Statistics’ by Jack Rasmus, copyright 2012

On Friday, January 27, 2012 the first advanced reporting of fourth quarter 2011 GDP statistics were released. It showed a first estimate of GDP growth of 2.8%. That follows a third quarter GDP number of 1.3%, and a first half 2011 of only 0.8%. At first glance it would appear economic growth is on the rise, supporting the claims of politicos and pundits that recovery is on the way (once again). But a closer look shows the US economy still remains mired in a stagnate, little to no growth condition.

A normal historical growth rate for the US economy is about 2.5%. But that’s a long run average pre-2007. That long run 2.5% average is well below what is normal for a recovery from a recession at our current stage two years after 2009. At our current stage in past recession recoveries, the GDP growth rate is normally 4% to 5%. For the entire last year of 2011, actual GDP rose only 1.7%. That’s easily less than half the normal at this stage for a recession recovery.

But even that 1.7% average for all of 2011 assumes the official 2.8% last quarter was really 2.8%. It wasn’t. Last quarters 2.8% was really around the same 1.0% rate that marked the first nine months of last year, 2011. Heres two reasons why:

To begin with, the fourth quarter 2.8% number will likely be revised downward to 2.7 or even 2.6% in the next two revisions that typically follow the reporting of advance first estimates of GDP reported on January 27. But lets not even count that reduction yet. Lets start from the reported 2.8%.

The first problem with the fourth quarter estimate of 2.8% is that 1.9% of that total was due totally to business inventory buildup in the fourth quarter (which means it wont last going into 2012). In the preceding third quarter 2011, inventory building by business collapsed to almost zero. The 1.9% therefore reflects recovery of the inventory buildup that didn’t occur in the third quarter 2011 but got put off to the fourth quarter. So the 1.9% for fourth quarter 2011 inventory buildup was really about half that, or only around 1%. That means 1% should be deducted from the total 2.8% GDP growth in the fourth quarter. And in turn that means GDP really grew only by 1.8% in the fourth quarter, not by 2.8%.

Here’s where the second problem comes in. The 2.8% is what is called real GDP. That is, GDP that is adjusted for price inflation. The specific price index that is used to adjust for inflation for GDP is called the GDP deflator. If that deflator reports a very low inflation rate, the real GDP growth is higher. The GDP deflator claimed that inflation in the fourth quarter of 2011 was only a mere 0.4%. Does anyone believe that? The true inflation rate for the fourth quarter has to have been at minimum at least 1%. That’s 0.6% higher than the 0.4% that was officially reported by the GDP deflator. That 0.6% higher should therefore be subtracted from our adjusted 1.8% GDP growth rate in the fourth quarter. The real real GDP should therefore be around 1.2%–that is, just about the 1% rate of GDP growth that occurred throughout all of last year.

In short, the US economy remained stuck in its stagnant, no-to-low growth condition in the fourth quarter that characterized the US economy throughout all of 2011.

There are a host of other problems with government statistics for the fourth quarter as well. Another area of problem is reporting on jobs. Its important to know that the 200,000 job growth reported by the labor department was not the true, actual number of actual jobs created. The 200,000 is a statistic; that is, a manipulation of the actual raw, true jobs data that is then adjusted for seasonality assumptions by the labor department, new business formation assumptions, and other operations on the data. These adjustments typically tend to boost the real job numbers during the year end holiday season higher than the actual. The labor departments seasonal and other adjustments were more accurate before 2007, but are now significantly less so in the current recession and stagnant recovery that makes the present economic downturn unique.
As just one example with regard to jobs: the seasonal adjustment for December 2011 reported 42,000 hires of couriers and messengers. These are workers hired by UPS, Fedex, etc. to accommodate temporary surges in parcel mailings. These are temp workers that then are typically laid off after the holidays. But the 42,000 reported was actually 86,000 messengers and couriers, most of whom will be laid off soon in 2012. Another related problem is the seasonal adjustment of workers hired in retail, another temp-part time surge in the holiday season. The labor department gross under-reported those numbers as well. Those workers too will be laid off in huge numbers come the first quarter of 2012.

Another deeper look at what really happened to retail sales in November-December is also revealing. Despite the hype around a record holiday season, the facts now coming out in January show that retail sales, year over year, rose only 0.1% in December, and most of that due to car sales. Minus auto sales, retail sales declined in December 2011 compared to the year earlier, the first such fall since May 2010. And that despite record price discounting by retail sales companies. Even that poor retail sales performance was driven by rising use of credit cards once again by consumers, or by their dipping into savings for holiday spending. The latter was not surprising, given that wages and salaries rose only 1.8% (and most of that at the high end) while prices rose double that at 3.5%. In other words, real wages and income continued to fall, as they have since 2009. Over the past decade household income has declined has been about 10%. No wonder holiday sales were so poor, given the continuing decline in real wages and household income for the bottom 90%.

To sum up, fourth quarter GDP was really much less than reported. The first quarter 2012 will be little different than 2011and even possibly much worse should the Eurozone almost certainly experience a severe banking crisis this year. The real outlook for the US economy (not the politic-pundit version) and the real problems in the Eurozone and slowing global economy elsewhere is why the Federal Reserve a few days ago also indicated it planned to keep interest rates at zero for an additional two years, through 2014, instead of early 2013. It knew the public reporting on the economy for December and fourth quarter was really not all that rosy. The Fed knows the US economy will most likely get weaker, not stronger, in 2013 and perhaps even sooner. It knows that US banks will have to be bailed out again if European banks tank this summer. And if that happens it means a double dip recession this writer has been predicting for no later than early 2013.

Jack Rasmus

Jack is the author of An Alternative Program for Economic Recovery, October 2011, available on his website, www.kyklosproductions.com; and the forthcoming March 2012 book, Obamas Economy: Recovery for the Few, Pluto press and Palgrave-Macmillan.

COMMENTARY: Earlier this past week President Obama gave his State of the Union (SOTU)address to Congress. He sounded more like someone in 2008 wanting to be president rather than someone the past three years who in fact was president. You know, ‘talk the talk’ and sound progressive before election, and thereafter forget about ‘walk the talk’. As part of his speech he emphasized the need for finally creating jobs. But he clearly focused on manufacturing as the main engine of job creation going forward. What follows is some deep fact-checking on what the record of manufacturing and job creation has been and why his call for ‘let’s boost manufacturing and exports’ as the key to jobs recovery is just a sham job creation program, taken straight out of the economic playbooks of the president’s corporate advisers, the Bill Daleys and Jeff Immelts. Subsequent commentaries on the Obama SOTU 2012 speech–on taxes, medicare, education, and housing–will follow this first entry on jobs.

“Fact Checking Obama’s State of the Union Speech, Part 1 (Jobs)” by Jack Rasmus, copyright January 2012

Last Monday, January 24, 2012 President Obama delivered his latest State of the Union (SOU) speech to Congress. It heavily emphasized economic themes, among which were jobs, manufacturing, trade, the auto industry, teachers, taxes, medicare, financial regulation, and growing income inequality in the U.S. Claims were made and general proposals offered for creating more jobs and how to get a sluggish US economic recovery finally going after three years of tepid, stop-go results. But many of the Presidents claims in his SOTU speech were contrary to the facts, especially with regard to jobs. And the proposals he reaffirmed for generating a sustained economic recovery were more of the same old wine in new bottles that haven’t had much impact to date. Here’s some facts concerning jobs to consider before feeling too optimistic over what was largely a campaign election year SOTU speech–a speech more reminiscent of Obamas 2008 talk the talk period than his 2009-11 talk but no walk record.

Part 1: JOBS

Obama boasted that the US manufacturing sector had turned around and created millions of jobs on his watch. He subsequently raised the need to further boost manufacturing and the exports of US manufactured goods as one of his two primary recommendations for doing something about the 23 million jobless still without work in the U.S. (The other primary recommendation was more business tax cuts, about which will follow in Part 2).

What are the facts concerning manufacturing sector jobs in the U.S. today?

According to the US Labor Department (table B-1 Employment Reports), there were 17.264 million jobs in manufacturing in December 2000. By the start of the recession in December 2007 there were 13.879 million. When Obama took office in 2009 there were 13.406 million. As of December 2011 there were 11.812 million.

Over the past year, from December 2010 through December 2011 there were 1.932 million total private sector jobs created. But only .218 million of those were manufacturing jobs. And virtually all of those manufacturing jobs were created in the first half of 2011, as global trade and exports accelerated. That same global trade began contracting in the second half of 2011. In response to that contraction, in the last three months of 2011, October-December, US manufacturing employment actually fell by 24,000 jobs. So tell me how this picture, and a further promotion of manufacturing sector is going to significantly reduce the 23-24 million currently still jobless in the US? Even at the early 2011 rate, it will take 100 years to create 20 million additional manufacturing jobs.

The above numbers represent total manufacturing jobs. How about jobs for non-supervisor/non-managers in manufacturing? Since the so-called official end of the recession in June 2009, through December 2011over a period of two and a half years–a mere 174,000 production manufacturing jobs were created. That’s a meager 5,800 a month.

The president in his speech was exceptionally laudatory of the US auto companies, praising all three for having fully recovered and now creating jobs. But lets look at the record here as well. 315,000 auto jobs were lost from the start of the recession in December 2007 through the end of 2010. Over the past year the industry has hired back at the rate of only 4,000 a month, or 48,000, of those 315,000 jobs lost. And lets not forget, the overwhelming number of those hired the past year have been temp status auto industry jobs paid at around $14 an hour, about half of the normal auto worker wage rate. Yes, the auto companies are hiring, but at half pay. Not surprisingly, their profits have recovered, but have done so by shifting money from auto workers to auto companies profits bottom line.

Ok, friends of the administration may argue, maybe the facts regarding manufacturing jobs were a bit overblown, and exaggerated by the president. What about the 1.9 million total private jobs created this past year. Isn’t that significant? Well, 600,000 of those jobs were created in the retail sector in the last two months of 2011, the holiday season. Most jobs in that sector are part time and temp jobs, many of which will soon disappear in early 2012. Another 82,000 jobs were messengers and couriers, hired by UPS, Fedex, etc. for the surge in mailing in the holiday season. They too will quickly disappear in early 2012. In addition, Banking and Finance sector companies have announced more than 150,000 layoffs scheduled for 2012, and that’s just a start. And the two biggest job creation sectors of the economy in the first half of 2011–Business and Professional Services and Leisure and Hospitality–both reduced jobs in the final two months of 2011 by 264,000 jobs.

Finally, lets not forget the non-private, government sector of the economy. While the private side may have created 1.9 million jobs, 257,000 state, local government, and postal workers lost their jobs just in 2011 alone, 106,000 of whom were teachers.

While on the topic of teachers, Obama praised the profession for its key role in the economy and development of society. He properly noted teachers should be honored and respected for their contribution to both. He then proclaimed the best teachers should be rewarded with more pay. Education managers should be given more flexibility, he advocated, to give more pay to the best teachers and get rid of the worst. This is his Education Secretary, Arne Duncan’s, old formula. In practice it means the introduction of merit pay, which would undermine teacher union contracts, and more manager freedom to fire teachers and/or layoff out of seniority based on administrator preferences and favoritism–the old civil service approach. Together with the push toward charter schools, Obama’s policy for education amounts to a destruction of teacher union contracts. Charter schools plus merit pay plus end of seniority and more freedom to fire means the end of teacher unionism as we know it.

In the second half of 2010 Obama reshuffled his staff, re-populating his team with corporate advisers. Bill Daley became chief of staff. General Electric Corp. CEO, Jeff Immelt, headed his jobs council. Scores of corporate underlings were hired behind them. What we subsequently got in terms of jobs policy was a manufacturing sector-export trade centric set of proposals. Jobs were supposed to come from stimulating manufacturing, exports, pushing free trade, as well as cutting business regulations, promoting patent protection for the tech sector, and similar pro-business approaches. Daley-Immelt essentially took over the Obama jobs program.

More business and investor tax cuts followed, including $802 billion in further tax reductions in December 2010. Regulations were reduced, as Obama bragged in his SOU that he cut more regulations than did George W. Bush in his first term. Contrary to his 2008 campaign promises to restructure job-killing free trade agreements, the Obama-Daley-Immelt team opened a new offensive to pass pending free trade agreements with Korea, Panama, Columbia and elsewhere. The former three were adopted in 2011. These were promoted as manufacturing job-creation measures. However, according to various studies since 1994 by the respected Economic Policy Institute, more than 10 million jobs have been LOST due to free trade. Nevertheless, in his SOU speech Obama once again is promoting the corporate line and false claim that free trade creates jobs.

Manufacturing output has risen significantly since mid-2009, as has manufacturing corporations’ revenues and profits, especially the big multinational players like Immelt’s GE and the auto and high tech companies. But manufacturing jobs are still 1.6 million short of where they were in early 2009 and wages of new manufacturing jobs are far lower than existing wages. A few workers get low paying jobs, while manufacturing companies reap the big benefits of Obama’s manufacturing-export centric jobs policies. The ‘lets boost manufacturing-export companies’ approach to job creation has been a sham job creation program, taken straight out of the economic playbook of the Daleys and Immelts that have been driving the Obama team jobs program since late 2010. And by the comments of President Obama in his recent SOTU address, corporations will continue to drive the Obama jobs program, while they simultaneously sit on their current $2.5 trillion cash hoard and refuse to invest in America. Sure, GE and GM will create some jobs in America, so long as workers are willing to work for Chinese wages!

Jack Rasmus

Jack is the author of EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION, 2010, by Palgrave-Pluto press and the pamphlet, Alternative Program for Economic Recovery, Kyklos Productions, October 2011, which may be purchased from his website, www.kyklosproductions.com.

COMMENTARY: MY PRECEDING BLOG POST, ‘ECONOMIC PREDICTIONS 2012-13′, SUMMARIZED THIS WRITER’S ANNUAL PREDICTIONS FOR THE U.S. AND GLOBAL ECONOMIES FOR THE YEAR AHEAD. THE 13 PREDICTIONS ARE PUBLISHED IN THE JANUARY 2012 ISSUE OF ‘Z’ MAGAZINE. THE ‘Z’ PUBLICATION ALSO INCLUDES ADDITIONAL MATERIAL EXPLAINING WHY MAINSTREAM ECONOMISTS HAVE HABITUALLY MISSED THE MAJOR TURNING POINTS OF THE US-GLOBAL ECONOMY IN RECENT YEARS–INCLUDING THEIR FAILURE TO PREDICT THE EPIC RECESSION OF 2008, THEIR ERRONEOUS PREDICTION OF A RAPID, ‘V’-SHAPE RECOVERY IN 2009-10, AND NOW THEIR FAILURE TO FORESEE WHAT’S COMING IN THE EUROZONE, CHINA, AND EMERGING MARKETS. THAT ADDITIONAL MATERIAL IN THE ‘Z’ ARTICLE IS NOW ALSO OFFERED HERE, AS A ‘PREFIX’ TO THE 13 PREDICTIONS PREVIOUSLY POSTED. THE MATERIAL THAT FOLLOWS ALSO INCLUDES A DATA TABLE NOT PUBLISHED IN THE ‘Z’ ARTICLE, SUMMARIZING THE OBAMA ADMINISTRATION’S TOTAL SPENDING AND TAX CUTS SINCE FEBRUARY 2009 THROUGH PROPOSALS OF LATE 2011.

‘Why Mainstream Economists Fail to Predict the Decisive Economic Turning Points’ by Jack Rasmus, copyright 2011

For the past two years this writer has written on the status of the US and global economy in the January issue of Z magazine, with predictions for the year to come and beyond. Past predictions since late 2009 have included: the Euro financial system will be shaken in 2010 by one or more defaults on its periphery; should Democrats lose further seats in the House (in 2010), a highly likely event, federal spending will almost certainly be further reduced in 2011; the Eurozone debt crisis will spread beyond the current four economies (Ireland, Portugal, Spain, Greece) and engulf Italy, Belgium, and potentially France; home prices will fall another 10% to 15% in the US (and)foreclosures will rise past 10 million; states, cities, and school districts will turn to massive layoffs; the job gains this spring (2011) will once again likely disappear in the coming summer-fall 2011; both Japan and the Eurozone economies will weaken faster than the U.S.a restructuring of the EU currency system will result in a kind of two-tier euro currency

Predicting the trajectory of the US and global economy in these volatile economic times is an uncertain endeavor. But that’s the very time predictions are of most value. Unfortunately, with a handful of exceptions, the mainstream economics profession habitually focuses on predicting the present rather than the future. That statement is not as contradictory as it seems. Translated, it means mainstream economics assiduously avoids predicting beyond the next few weeks or, at most, the next monthly release of data. Forecasting fundamental turning points of the economy, and the major events that provoke major crises, are avoided at all costs. It is far safer to find refuge in conservative consensus opinion than to risk stepping outside it. After all, if the consensus is wrong, one cant be individually faulted by ones professional peers if the vast majority of those peers are also in error! However, this conservative bias contributes little toward understanding the most likely trajectory of conditions and events as the economic crisis continues to evolve and unfold.

Mainstream Economics: A Bird Without Wings

Seeking refuge in conservative consensus partly explains why virtually all the 10,000 professional economists in the world failed to predict the onset of the current crisis in 2007. Or why the same crew, in lock-step, declared a sustained economic recovery after 2009 would occur but didn’t. It is also why the same group today are failing, for yet a third time now, to foresee the coming deeper economic crisis that will almost certainly emerge no later than early 2013and potentially even earlier if the Eurozone financial system continues to unravel this spring 2012.

The repeated failure of the profession to predict the three great economic events of the past four years (two having occurred; one emerging) is not simply the consequence of economists myopic fixation on the latest data release or their consistent conservative bias, but more fundamentally is the result of their adherence to a conceptual apparatus that cannot explain the essential forces behind the current crisis. It is the result of theories based on pre-crisis conditions that no longer prevail; and of models that simply no longer work.

Deficient concepts, theories and models are why Obama’s own in-house professional economists–the Council of Economic Advisers–in early January 2009 erroneously assured the public that Obama’s $787 billion initial stimulus package would create 6 million jobs. But it didn’t. They are why the Federal Reserves economists insisted the $2.7 trillion Quantitative Easing (QE) 1, 2, and 2.5 (called operation twist) policies introduced between 2009-11 would resurrect the housing sector, but instead only fed stock, junk bond, and commodities futures speculators worldwide. And they are why Congressional Budget Office economists forecast that Obama’s $802 billion tax cuts introduced a year ago, in December 2010, would result in a significant increase in GDP growth rates and jobs, but instead produced GDP growth of less than 1% in the first half of 2011 and no net job creation the entire past year. Something clearly is wrong with the theories and models, as well as the conceptual apparatus underlying those theories and models.

The Broken Left Wing: Just Give Us More Stimulus

The liberal wing of the flightless bird of mainstream economics continues to maintain that the Obama programs since 2009 have not produced sustained economic recovery because the 2009 economic stimulus was of insufficient magnitude. At the forefront of this view have been noted economists like Paul Krugman and others. Even Larry Summers, former Treasury Secretary under Clinton and chief economic policy adviser for Obama in 2009-10, has recently joined the liberal chorus saying that the original stimulus of 2009 should have been $1 trillion or more–not the $787 billion.

Contrary to this view, however, the Obama stimulus programs introduced 2009-10, which amounting to more than $1.7 trillion in tax cuts and spending, failed not simply because they were of insufficient magnitude. They failed because their composition was also exceptionally bad and their timing poor.

With regard to composition: the Obama stimulus programs were composed 70% of tax cuts–and mostly business tax cuts at that. The tax cuts were then hoarded by corporations and not invested in the US to create jobs. Nearly another half trillion dollars in Obama spending programs were composed of subsidies to states, school districts, and unemployed. Those subsidies were designed to buy time, put a floor under the collapse of consumption that was occurring in 2008-09, until the tax cuts could pick up the slack, translate into real investment, and move the economy to a higher level of recovery. But that didn’t happen. The tax cuts weren’t invested. At least not in the U.S. Some went offshore to create jobs in Asia and elsewhere. Other amounts went into purchasing speculative securities–stocks, derivatives, foreign currencies, etc., that also created no jobs. The remainder was retained, and is still being hoarded today, in anticipation of being spent on corporate stock buybacks, dividend payouts, or eventual mergers and acquisitions that will result in fewernot morejobs. Despite a tax stimulus of trillions of dollars, corporate America continues to sit on a $2 to $2.5 trillion cash hoard as of year end 2011. Multinational corporations continue to hoard another $1.4 trillion in offshore subsidiaries instead of investing and creating jobs in the US. Not to be outdone in the hoarding game, after having been bailed out with $9 trillion in free loans by the Federal Reserve, big banks continue to sit on another $1.7 trillion in excess reserves, doling out loans in eye-drop fashion to small business, resulting in still further under-investment and minimal job creation.

Meanwhile, Obama’s $370 billion dollars of subsidies dissipated after 12-18 months. Like business tax cuts, subsidies do not create jobs. They may temporarily save some. But that’s not economic recovery. Recovery means significant net job creation, typically in the range of 300,000 to 500,000 jobs every month for a year. Saving jobs is a policy of accepting continuing economic stagnation at best.

The remaining $126 billion dollars or so of Obama spending circa 2009-10 was earmarked for long term infrastructure–i.e. upgrading the national electrical grid, alternative energy projects, and so-called shovel-ready construction projects that couldn’t find their shovels. But that spending did not create jobs or generate recovery in the short run since 2009 any more than tax cuts and subsidies created jobs. Composed mostly of capital-intensive projects, most infrastructure spending was structured very long term, taking effect over a ten year period. Like the tax cuts, the short term effect of this infrastructure spending thus also resulted in little if any job creation or economic recovery.

This bad composition of the Obama stimulus programs (i.e. tax cut heavy, subsidies, and capital intensive construction) and their poor timing (i.e. ultra-long term infrastructure projects and one-time short term grants to the states) are represented in the following Table 1.

TABLE 1
Economic Recovery Programs
Tax Cuts vs. Spending / Subsidy vs. Infrastructure
2009-2011
(billions, current $)
Subsidy Infrastructure
Program Total Cost Tax Spending Spending Spending (long)

Obama I $862 $417 $445 $319 $126
(2/09 +
supplements)

Obama II $857 $803 $54 $54
(12/10)

Obama III $447 $253 $194 $89 $105
(9/11) ______ _____ _____ ______ ______

TOTALS $2,166 $1,473 $693 $452 $231

Source: Obamas Economy: Recovery for the Few, Pluto Press & Palgrave-Macmillan, March 2012.

Obamas three recovery programs to date failed because they relied on the private market sector to generate a sustained recovery, instead of on the government directly taking the lead to create jobs, rescue homeowners and resurrect housing, and stabilize state-local government finances long run. Obama bailed out banks that didnt lend, rescued corporations that didnt create jobs, and subsidized state and local governments for a brief period and then cut them loose to fend fiscally for themselves.

The Stunted Right Wing: Just Give Business More Profits

Radical Republicans subsequently took charge of the U.S. House of Representatives following the November 2010 midterm elections–and with it took over the economic policy agenda as well. The takeover created an ideal environment for the re-ascendance of the right wing of mainstream economics in the economic policy process. But if the left wing was broken and unable to clearly understand the reasons why the Obama recovery policies have failed, the right wing intellectually was a mere stub without feathers and thus even more incapable of flight.

The Obama programs failed to generate recovery, they argued, because they produced a lack of business confidence. That lack of confidence was due to business uncertainty about the future of tax cuts, to excessive business regulation, to stalled free trade agreements with South Korea, Panama, and Columbia, to excessive deficit pending and debt, to the excessive cost to business in the health care affordability act of 2010, and other such economic nonsense. Conservative economists argued that changing these policies would release more income for corporations and businesses to spend. More income would automatically translate into more investment and more jobs. The economy would then rapidly recover.

Whats conveniently ignored by this wing, however, are two major problems: First, massive government spending cuts and sharply reduced consumer incomes produces a steep decline in GDP and no recovery. Conservative economists argue this slack will be more than offset by a rise in business investment, which leads to the second problem: namely, with corporations already hoarding $2 trillion in cash and banks hoarding another $1.7 trillion in excess reserves today, why should giving corporations and banks even more cash and income result in investment and recovery? If corporations and the banks aren’t spending the $2 trillion or lending the $1.7 trillion they already have and insist on hoarding, why should giving them still more result in anything different? Exactly how many more trillions of dollars are needed to get them to invest, lend, and create jobs and ensure recovery?

This condition of mainstream economics today may be summarized with the following statement:

Just as the liberal wing of economics has no answer to exactly how much more magnitude of deficit spending is necessary to ensure a sustained economic recovery, the conservative wing cannot explain or answer how much more shifting of income to corporations and investors is needed to ensure a return to investment, jobs, and recovery.

Given such fundamental errors by both wings, it is not strange that both liberal or conservative economists today have had such great difficulty in recent years predicting the emergence and evolution of the current economic crisis. The bird simply cannot fly. It can only run around in circles, flightless, squawking as it turns first left and then right and back again.

With neither wing of the economics profession able to offer effective programs for economic recovery, what then are the likely scenario(s) for the U.S. and global economies in the year immediately ahead?

COMMENTARY: THIS PAST MONTH SEVERAL ECONOMIC INDICATORS HAVE FLASHED AN UPTURN OF THE US ECONOMY. MEDIA PUNDITS AND GOVERNMENT SOURCES HAVE JUMPED ON THESE NUMBERS TO HYPE A COMING RECOVERY–A SONG THEY’VE BEEN SINGING FOR THREE YEARS NOW. NOVEMBER JOBS, RETAIL SALES, AND TODAY’S HOUSING NUMBERS ARE REFERRED TO AS INDICATING THE RECOVERY (ONCE AGAIN) IS UNDERWAY. THIS VIEW IS VERY SHORT TERM AND MYOPIC, HOWEVER. FOR ONE THING, THE NUMBERS ARE HIGHLY QUESTIONABLE FOR NOVEMBER JOBS, DEBATABLE FOR RETAIL SALES, AND NOT ALL THAT SIGNIFICANT FOR HOUSING. ONE RECENT CRITIC OF MY LONGER TERM VIEW–FORECASTING A DOUBLE DIP IN LATE 2012-EARLY 2013 AT LATEST AND POSSIBLY EARLIER SHOULD THE EUROZONE CRISIS TURN FOR THE WORST IN 2012–HAS CHALLENGED MY LONGER TERM VIEW AND MY COROLLARY VIEW THAT WEEK TO WEEK AND MONTHLY DATA ARE NOT THE PROPER FOCUS FOR A FORECAST OF THE US ECONOMY 2012-13. HOWEVER, HE HAS RAISED AN IMPORTANT POINT WORTH DISCUSSING: IS THERE A RECOVERY NOW UNDERWAY BASED ON ONE MONTH’s QUESTIONABLE DATA? I STILL SAY NO. HERE’s WHY: THE PROBLEM WITH MAINSTREAM ECONOMISTS AND THEIR HYPING OF RECOVERY UNDERWAY YET AGAIN BASED ON LAST MONTH’S NUMBERS IS THAT THEY ARE MESMERIZED BY THE IMMEDIATE DATA AND CANNOT SEE THE BIGGER TURNING POINTS IN THE US AND GLOBAL ECONOMY THAT HAVE BEEN THE PRIMARY DRIVERS SINCE 2007. BASED ALMOST EXCLUSIVELY ON SHORT TERM DATA THAT IS OFTEN VOLATILE, THEIR MODELS FOR PREDICTING THE US AND GLOBAL ECONOMIES DIRECTION ARE DEFICIENT. THAT SHORT TERM FOCUS ON OFTEN QUESTIONABLE, AND CERTAINLY INTERPRETABLE, DATA IS WHY THEY HAVE FAILED TO FORECAST THE 2007-08 CRASH, WHY THEY THEN ERRONEOUSLY FORECAST RAPID RECOVERY OF THE US AND GLOBAL ECONOMY AFTER 2009, AND WHY TODAY THEY CANNOT SEE WHAT IS COMING IN 2012-13. THE FOLLOWING IS MY BRIEF REPLY TO ONE OF THEIR DEFENDERS OF THE OFFICIAL SHORT TERM ECONOMICS VIEW, WHO HAS POSTED HIS OPINION TO THIS BLOG AND OPENED AN IMPORTANT POINT OF DISCUSSION. I RESPECTFULLY DISAGREE WITH HIS DEFENSE OF WHAT HE CALLS THE “DEAN BAKER” VIEW–i.e. THE VIEW THAT ECONOMIC RECOVERY IS UNDERWAY AND MY FORECAST OF DOUBLE DIP IN 2012-13 IS INCORRECT. (NOTE: IN EARLY JANUARY I WILL BE POSTING TO THIS BLOG A MORE IN DEPTH ANALYSIS WHY THE US ECONOMY WILL SLOW ONCE AGAIN IN THE FIRST HALF OF 2012).

A REPLY TO A CRITIQUE OF MY FORECAST, by Jack Rasmus

Once again you, and Baker, are looking at short term economic indicators. You are forecasting the present, and not the future. You are no doubt referring to the questionable data on employment last month and today’s hyped housing numbers. Job numbers for the past six months are averaging less than 100,000. Last month’s 120,000 were 40,000 retail Xmas jobs–virtually all part time and temp that will disappear next January. The housing numbers are apartments building and are in response to what looks increasingly like a QE3 coming next spring, that will drop mortgage rates closer to 3%, that builders are now planning to take advantage of. They will build while it is cheap and wait to sell the inventory. Retail sales numbers recently are driven by banks issuance of credit cards once again and a drop in the household savings rate. These cannot and will not continue. Look at the longer picture: first, the Eurozone is headed into a deep recession. Most of it is already there. China is contracting sharply, heading for a hard landing; so is India, Brazil and other sectors of the global economy. That means global manufacturing is in for a contraction, which may be already underway, and that sector of the US economy will perform poorly next year. As for consumption, household real income declined by nearly 4% last year and more of the same is coming this year. The government sector will continue to contract in 2012, especially state and local. The problem with guys like you and Baker is that you cannot see beyond 2-4 weeks and you are mesmerized by the immediate data. You cannot forecast the turning points in the US and global economy with your limited models. The big picture your data does not factor in is a rapidly slowing global economy, Eurozone crisis and global contraction of bank lending, continual downward pressure on US household income (which ultimately determines consumption), and continuing deficit cutting and government spending contraction. When I predict a double dip, it has always been in the time-frame of late 2012-early 2013, or earlier if the Eurozone and or China contractions emerge significantly more severe by mid-year 2012.  So, address those arguments if you wish, and not the day’s latest (often questionable) numbers. It’s that kind of short-term view that makes guys like you miss the 2007-08 crash, erroneously predict rapid recovery after 2009, and now fail to see what is coming further down the road.

COMMENTARY: A striking fact of the past four years is that the world’s 10,000 or so economists have overwhelmingly failed to predict the three major economic developments of this period, 2007-2011. First, only a handful predicted the financial crash of 2007-08 and subsequent deep global contraction that I have called an ‘Epic’ recession, to distinguish it qualitatively and quantitatively from normal recessions (and also from depressions). Secondly, the 10,000 have failed to predict the current protracted economic stagnation that has occurred since 2008 as well; instead nearly all mainstream economists in recent years forecast a sharp ‘V’-shaped sustained economic recovery since 2008-09 that has yet to take place. Third, today at year end 2011, they once again fail to see the sharp and even deeper retrenchment of the US and global economies that is coming, no later than 2013–and possibly even earlier should the Eurozone currency and banking system crash in 2012 which appears increasingly likely. In contrast to mainstream economists, the methodology applied to the US and global economy used by this writer to predict the US and global economies the past four years (as outlined in my book, EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION) has relatively accurately forecast the course of economic events. Based on that same methodology, this writer has recently predicted a double dip recession in the US no later than early 2013, and a major financial crisis in the Eurozone and a slowing of the global economy once again. This double-dip in the US and global slowdown in 2012-13 is treated in more detail in this writer’s forthcoming book that will by available February 2012, entitled OBAMA’S ECONOMY: RECOVERY FOR THE FEW). In future blog postings in the next few weeks this writer will also summarize why double dip in the US in 2013 and a Eurozone banking crisis in 2012 are increasingly likely. In the meantime, offered here are this writer’s select published predictions, both past and present. In ‘Part 1′ that immediately follows are predictions for 2012-13 for the US, Euro and global economy which will shortly appear in a forthcoming January 2012 article for ‘Z’ magazine. A ‘Part 2′ that immediately follows summarizes this writer’s prior published predictions for the preceding period 2008-2011. (A fuller analysis of Part 1 is included in the forthcoming January 2012 Z magazine article, soon available as well on my website, www.kyklosproductions.com.

“ECONOMIC PREDICTIONS: PRESENT (2012-13) AND PAST (2008-11)” by Jack Rasmus, copyright 2011

PART 1: FUTURE PREDICTIONS 2012-13

1. The US will experience a double dip recession in early 2013 or, in the event of another banking crisis in Europe, perhaps–though less likely–earlier in 2012.

Despite a continual hyping of economic reports by the media and business press in recent months, there is no recovery underway for jobs, housing, or state-local government finances. Job growth has been stuck throughout 2011 at around 80-100,000 a month per the Labor Departments monthly data. The broader measure of unemployment, the U-6 rate, has been consistently in the 16% range, or about 25-26 million for the past year. State-Local governments continue to lay off workers in the 20,000 range every month. Little effective stimulus will be forthcoming from the Federal government in 2012 despite the election year, and further deficit cutting is even possible in 2012. The first quarter of 2012 will record a significant slowing of GDP growth once again. Should the Eurozone debt crisis escalate once more in the second quarter of 2012, the US economy will weaken further in the second quarter, 2012. It may even slip into recession if the Euro crisis is particularly severe. More likely, however, is the scenario of an emerging double dip recession in early 2013, when deficit cutting by Congress and the administration intensifies.

2. The Federal Reserve will introduce a third version of its Quantitative Easing QE3 program in 2012.

QE is when the Fed prints money to directly purchase bonds from the private sector at above-market inflated prices, thus pumping up the money supply. As in the past two versions of QE in 2009 and 2010, the result will have little effect on the housing markets, jobs, or general recovery but will once again result in a boost to stock, bonds, and commodity speculation and related price inflation. The timing of QE3 will be driven by the events in Europe.

3. Real deficit-debt reduction will begin with great earnest immediately following the November 2012 general elections, or no later than February 2013.

The deficit cutting yet to come will dwarf the recent $2.2 trillion August 2011 deal. It will result in another $2-$4 trillion in cuts, mostly spending on social programs and entitlements like Medicare, Medicaid, and Social Security, as well as food stamps, unemployment insurance benefits, education and the 2010 Health Care Affordability Act. Tax hikes directly impacting the middle class will also occur, including heretofore untouchable measures like mortgage deductions.

4. Job growth will continue to stagnate and remain in the 24-25 million range throughout 2012, with a number of false starts in jobs recovery determined by seasonal and other statistical factors.

There are no effective programs in place today to fundamentally increase net jobs in the U.S. Further tax cuts in 2011-12 will not stimulate investment of jobs. Corporations will continue to refuse to commit their massive $2 trillion cash hoard to investment or jobs as they await the outcome of the Bush tax extensions in late 2012 and maintain a large cash cushion in anticipation of events in Europe and the possibility of another global credit crunch. Bank lending to small-medium business will also change little, with consequent investment and job creation by small business remaining largely on hold in 2012 as well. Simultaneously,
State-Cities-Schools will continue to layoff at the recent 20,000 a month rate–bringing the total of such public worker job loss to nearly 1 million during Obama’s first term. Post office employment will add to the layoff numbers, and federal government layoffs will commence in significant numbers in 2013.

5. Congress and the administration will pass two major tax bills in 2012

The first bill will bow to multinational corporations blackmail (and campaign contributions), and reduce the standard 35% corporate tax rate for offshore sheltered cash repatriation to the U.S. That tax rate will range between 5.25% and 10%, reduced from 35%. Multinational corporations will return about half of their current $1.4 trillion offshore profits hoard to take advantage of the lower rate–in a repeat of the same blackmail that occurred in 2004-05, when a similar bill reduced their rate to 5.25% from 35% to return about half of their then $700 billion offshore sheltered profits.

The second bill will be some kind of extension of the Bush tax cuts that will take place before the November 2012 elections; or, immediately after before year end. In the Bush tax extension deal, the top corporate and personal income tax rate of 35% will be permanently reduced to less than 30% in exchange for unverifiable tax loophole closings. The middle class will also pay higher taxes and the earned income credit for low pay workers will be reduced.

6. Home prices will continue to fall; foreclosures rise; and negative equity grow

Now at more than 11 million, foreclosures will continue to rise past 13 million. Home prices will continue to fall by 5-10% more in key markets (bringing the decline since 2006 to more than 40% on average). At least 17 million mortgaged homeowners (out of 54 million total) will experience negative equity. The Obama administration and Congress will force States attorneys general to accept the federal plan to let banks and lenders off the hook for robo-signing and illegal foreclosures, in exchange for a token fine. Housing and commercial property construction will continue to stagnate in 2012 at around current levels.

7. U.S. Exports and thus US manufacturing will slow in 2012

US exports will not outperform the global trade market and will slow, as will exports in general globally and including China and the Eurozone. As US exports soften, so in turn will their positive effect on US manufacturing production.

8. Should Eurozone banking implode, one or more major US banks will require further rescue by the Federal Reserve and US Treasury

In the event of a default by one or more sovereign economies in the Eurozone, major banks in France, Austria, Belgium and even Germany will become technically insolvent. In such case, the contagion will spread to US banks. Most vulnerable and requiring rescue are: Bank of America, Citigroup, Morgan Stanley.

9. The Eurozone Sovereign Debt Crisis Will Stabilize then Worsen Again

The Euro sovereign debt crisis will temporarily stabilize in early 2012 as the European Central Bank follows the US Federal Reserve and introduces quantitative easing while negotiations among the Euro states on a fiscal union begins. However, the sovereign crisis will erupt again in late spring 2012 as Italy and Greece encounter severe debt refinancing problems. Three to four times the currently available $1-1.5 trillion Euro bailout fund-more than $4.5 trillion will be eventually needed to resolve the Euro debt crisis.

10. Two or More Euro Banks will Fail

Several Euro banks will become technically insolvent and will be nationalized by their governments and bailed out. Major candidates include: the French banks, Societe General and BNP Paribas; the German Commerzbank; the Italian Unicredit, and possibly one or more Austrian and Finnish banks.

11. Both Germany and France will experience modest recession in 2012; the United Kingdom will experience a more severe double dip.

Germany and France economies slowed to virtually no growth at year end 2011 and both will slip into recession in 2012. A second round of severe austerity programs in the UK, introduced at year end by the conservative Cameron government, will produce a further economic contraction in the UK.

12. China’s Economic Growth Rate Will Slow

Having grown consistently in the 9%-10% range in recent years, Chinas GDP will slow dramatically in 2012, potentially to half the rate of previous years. Chinese manufacturing exports will contract. India and Brazilian economies will slow significantly as well. All three key economies will introduce stimulus programs, in contrast to the US, Eurozone, Japan.

13. Global Trade Will Slow and Begin to Contract in 2012

Already heading in the direction of contraction, given China’s slowing economy, continuing Eurozone instability, and slowing growth in the U.S. economy, the pace of declining world trade will quicken and global trade in general contract. Global manufacturing will follow in turn.

The foregoing bakers dozen of predictions about the US and global economy in the coming year are based upon a non-mainstream economic analysis this writer has developed in his 2010 book, Epic Recession: Prelude to Global Depression, and its forthcoming sequel this March 2012, Obama’s Economy: Recovery for the Few, both published and distributed by Pluto Books and Palgrave-Macmillan. Both works represent a new theoretical framework for analysis of the continuing economic crisis. This framework is the consequence of the recognition that the restructuring of the US and global economy that occurred in the 1980s in response to the earlier economic crisis of the 1970s has now collapsed with the events of 2007-08. Sometimes called neoliberalism this earlier 1980s restructuring has today run its course as capitalist economies are once again in the process of attempting to restructure the global capitalist economy anew once again. However, they have yet to do so. The result is continuing economic instability and volatility. The economy, U.S. and global, therefore continues in turn to reflect a degree of severe systemic fragility. To date this uncertain condition has been called by this writer a type I Epic Recession. But Epic Recessions have the internal tendency to transition from Type I to Type II, the latter a condition that is immediately preliminary to a global depression. In the book, Epic Recession: Prelude to Global Depression, written in late 2009, it was predicted the US and global economies would reach a juncture point to a potential transition circa 2012-14, during which time it would be settled whether today’s Type I epic recession would indeed transition to a Type II and a possible depression. The coming year, 2012, will reveal whether this process has begun, as the US and other economies weaken and the wild card of Euro banking instability runs its course. Should a bona fide banking crisis erupt in the Eurozone, it is all but certain that transition to a Type II epic recession will occur. The odds of a true global depression in turn will rise significantly.

from: Jack Rasmus, ‘Economic Predictions 2012′, Z Magazine, forthcoming January 2012

PART 2: PAST PUBLISHED PREDICTIONS 2008-11

…………………..
mass layoffs occurring later in 2008 and into 2009

the collapse of one or more of the mainstream banks in the U.S., setting off a major stock market correction of an additional 20-30 percent

record U.S. budget deficits of $700 billion plus

the rest of the global economy is slipping, along with the U.S., into a synchronized downturn

Both Fed monetary policy and the recent $168 billion Congressional tax cut package will prove grossly insufficient in dealing with the current financial crisis and recession.

Written: February 28, 2008
Published: Z Magazine, April 1, 2008, p. 36-37.

………………….
the economy is migrating toward very large job losses and unemployment over the next 18 monthsIt appears the current recession might attain 10 percent-plus levels of unemployment.

events since Bear Stearns represent not the beginning of the end (of the crisis) but rather the end of the beginning. (note: my parentheses)

Written: April 30, 2008
Published: Z Magazine, June 1, 2008, p 41, 38.
.

………………….
several U.S. big banks are still very much in trouble. The worst of the financial crisis in the U.S. may be yet to come.

Written: June 2008
Published: Amandla Magazine, August-September 2008, p. 35
..

………………….
The Fannie Mae/Freddie Mac bailout is inevitable so long as housing prices continue to drop, which they will.

housing prices will continue to fall at least another 20%. Foreclosures will continue to rise by the millions for some time.

Written: July 30, 2008
Published: Z Magazine, September 1, 2008, p. 38, 40

…………………..
Transferring the bad debt (of banks) to the government will cause a general fiscal crisis, the real budget deficit next year (2009) will be around $700-$800 billion–and that before the costs of the $1.6 trillion bailout are added. A fiscal train wreck is therefore coming. (my parentheses)

GDP will record a major drop in the third quarter of 2008 and jobless numbers will rise dramatically in the next few months. Companies will begin announcing mass layoffs in the final months of 2008.

Written: September 15, 2008
Published: Amandla Magazine, October-November 2008, pp. 20, 21 ..

………………….
The Obama campaign job creation proposals are

largely window dressing.  it is unlikely they will result in much job creation effect.

Written: October 30, 2008
Published: Z Magazine, December 1, 2008, p. 25
.

…………………
By the end of 2009 there will be effectively 25 million unemployed in the U.S. workforce: 15 million officially classified as unemployed, plus 5 million more discouraged and wanting to work if offered, and 10 million involuntarily working in part-time (equal to 5 million full time jobless).

Written: December 1, 2008
Published: Against the Current Magazine, January-February 2009, p. 7 An estimated 5 to 7 million (housing) foreclosures will occur over this cycle.

Written: January 30, 2009
Published: Z Magazine, March 1, 2009, p. 29

………………….
Concerning Obama’s $787 billion economic stimulus package:

it will not create many jobs

Written: February 28, 2009
Published: Z Magazine, April 1, 2009, p. 35
..

…………………
A series of several severe sovereign debt crises in Europe are a real possibility.

The Obama-Geithner PIPP-TALF-HASP bank bailout programs will produce few and insufficient results.

Foreign buyers of U.S. bonds–including Chinawill cut back on their purchases–that will set in motion a decline of the dollar.

Written: April 30, 2009
Published: Z Magazine, June 2009, p. 29
.

………………..

The possibility of a second banking crisis and panic in 2011-2014 is high.

The secondary tier of U.S. banks, the more than 8200 community and regional banks, will fail in increasing numbers in 2010

Bank lending to U.S. domestic businesses will continue to decline and remain stagnant.
Fed rescues will prove necessary to prevent commercial property defaults.

the big 19 banks will continue their trading binge, feeding credit to speculators in global currency markets, select offshore property markets, commodities, emerging markets, and exchange traded funds.

Should the Fed raise interest rates early, before 2011, the recent bubble in junk bonds will likely burst, as will the market for U.S. Treasuries.

job losses in 2010 will continue to rise. Should a jobs stimulus bill fail to be enacted in 2010, jobless ranks will rise to 27 million (from the current 24 million) and the governments truer U-6 unemployment rate will approach 19% (from 17.5%) by year end 2010. Hiring that does occur will increasingly include temporary and part time labor.

There will probably be no major second stimulus bill proposed or enacted in 2010.

The remaining TARP funds will be used in 2010 to pay for business tax cuts, as a pretext that more tax cuts (already 48% of the Obama stimulus bill of 2009) will create jobs.

Home foreclosures will rise past 7 million, on their way to a possible 10 million. Home asset prices will resume a decline. Between 33%-50% of homes will be under water.

State and local government tax revenues will fall and deficits rise, leading to more layoffs and wage cutting in 2010, unless the federal government provides additional aid to the states.

The Federal Reserve will continue its long run shift in policy priority to protecting the dollars value in world markets.throughout most of 2010 the Fed will keep interest rates at or near zero until the November elections. The fiction will end in 2011 as the Fed raises rates.

There will be no meaningful financial regulatory reform in 2010.

The U.S. dollar will drift lower slowly. An alternative global currency option will not displace the dollar. BRICs (Brazil-Russia-India-China) will increasingly trade directly with each others currencies.

the euro financial system will be shaken in 2010 by one or more debt defaults on its periphery.

Written: November 30, 2009
Published: Z Magazine, January 2010, pp 20-21

COMMENTARY: This past Monday the Supercommittee threw in the towel in their effort to come up with alternative recommendations to cut $1.5 trillion or more in deficits. The press is pitching the failure as a politicians unable to agree in an election year. But behind the apparent political differences appearance lay fundamental economic interests. The implosion of the Supercommittee is not about ‘politicians that just can’t agree’. It’s about the interests of corporations and wealthy investors pulling the politicians’ strings to ensure the continuation of their multi-trillion dollar tax cuts of the past decade. What happens next in Congress on the deficit cutting front and the economy is explored in the following article written a day after the Supercommittee dissolved itself.

“IT’S THE TAX CUTS, STUPID!, OR, SUPERCOMMITTEE POST-MORTEMS” by Jack Rasmus, copyright November 2011

The collapse of the Supercommittee’s effort to produce a joint package of recommendations for deficit reduction proves conclusively that for Republicans and their corporate allies that deficit reduction is, and always has been, a secondary objective. The primary objective is to protect and expand the Bush tax cuts.

From reports now leaking out it is apparent that Democrats on the Supercommittee had offered massive cuts to Medicare and Medicaid amounting to a minimum of $500 billion over the coming decade. Those cuts were in addition to the automatic $1.2 trillion automatic additional deficit cuts negotiated as part of last Augusts Debt Ceiling Deal. That deal already had authorized $1 trillion in spending-only cuts. So the Democrats offer was the $1.2 trillion automatic deficit cuts–all spending about equally divided between defense and non-defense cuts–plus another $500 billion in Medicare-Medicaid matched by another roughly equal $500 billion in tax revenue increases.

The Republicans on the Supercommittee offered a different mix of tax revenue and spending cuts. Their counter was $760 billion in Medicare-Medicaid cuts plus approximately $300 billion in tax revenue recovery. However, that tax revenue recovery was largely raised from increasing taxes on the middle class, by reducing the mortgage interest deduction and other middle class tax breaks. In addition, the Republicans required a further major tax break for the top personal income tax bracket and for the corporate income tax. Both currently are set at a 35% tax rate. Republicans proposed to reduce both to between 25%-28%. In other words, raise taxes on the middle class and give it to the rich and their corporations. And make seniors, retirees and the poor pay $760 billion in Medicare-Medicaid benefit cuts.

What these maneuvers by both parties shows is the following:

First, Republicans top priority is shielding the Bush tax cuts. Those cuts cost the U.S. budget a minimum of $2.9 trillion last decade. Another $450 billion in extensions 2010-12. And a projected $2.2 to $2.7 trillion if extended for another decade. By proposing further tax cuts for the top income brackets and corporations, it is clear Republicans aren’t all that concerned about the deficit and debt in fact. They are focused on protecting and further cutting taxes for the rich and their corporations. Whats new in their position, revealed by the Supercommittee’s machinations, is that they now propose that not only seniors and the poor pay more for continuing (and expanding) those tax cuts, but that now the middle class will also have to pay for them with more tax hikes.
Second, it is clear the Democrats continue to be more than willing to put Medicare-Medicaid on the chopping block. They proposed $500 billion cuts last June, in the secret negotiations between Vice-President, Joe Biden, that broke down. They repeated that offer in July as President Obama offered the same as part of a grand deal that also imploded. Obama subsequently offered up front $320 billion in Medicare-Medicaid cuts last September 19 as an enticement to get Republicans to agree to his $447 billion third recovery plan. And just a few weeks ago, the Democrats again proposed $500 billion. In other words, the Democrats have repeatedly offered massive cuts in Medicare-Medicaid. They will likely continue to do so in the coming months.

Third, the sticking point between the two is not whether Medicare-Medicaid will eventually be cut, but only when. Nor is the amount of these cuts really in question. It will be between $500 billion and $1 trillion when it happens–and it eventually will happen.

Fourth, the real bottleneck is the Bush tax cuts and Republican efforts to not only protect those cuts but extend them as well, even if now at the expense of the middle class.

What the breakdown of the Supercommittee’s efforts shows is that the Republicans calculated they would have a better chance at extending the $2.2 trillion Bush tax cuts for another decade by deferring the vote on their extension until next fall, 2012, in the midst of the final months of the 2012 election campaign.

Republicans no doubt looked beyond November 23 and see several legislative choke points that will enable them to extract more spending cut concessions from the Democrats without having to give up on the Bush tax cuts. The first of such choke points will come next month, in December 2011.

There are four major legislative bills that Democrats and Obama desperately want that will have to be decided by Congress before the end of 2011. The first has already been raised by Obama: continue the 2% payroll tax deduction for workers another year. That will cost another $112 billion to the budget and deficit this coming year. A second is an extension of unemployment benefits for millions of more workers, whose benefits run out at year end. That’s another $55 billion cost. The third is yet another year fix to the Alternative Minimum Tax, AMT, which impacts the upper middle class who earn more than $150,000 a year. That’s another $70 billion cost. The fourth is also another delay in the 29% cut in doctors fees for serving medicare patients. That’s tens of billions more cost to part B medicare spending. Were talking here about at least another $250 billion. If these bills are not passed, it will mean a major hit to GDP and the economy in the first quarter 2012, for an economy already extremely fragile and susceptible to a double dip early next year. In fact, the Federal Reserve now predicts the likelihood of a double dip occurring in the US economy early next year is now greater than 50%.

The Republicans will especially drive a hard bargain, and extract more than a pound of legislative flesh, in exchange for agreeing to pass the extension of unemployment benefits and the payroll tax cuts for another year. They will demand more spending-only cuts, likely to include Medicare-Medicaid, and also likely demand that the $450 billion in defense spending cuts mandated in the $1.2 trillion automatic deficit reduction are removed from the $1.2 trillion. Obama will be hard pressed not to agree to remove the defense spending cuts if he wants his payroll tax cut and unemployment benefits extensions passed before year end 2011. Obama and the Democrats will be desperate in an election year to have the unemployment benefits and payroll tax extended, as well as the AMT fix which otherwise would impact the independent voters that he is courting heavily in the coming election. The Republicans know all this, and will push to extract cuts in spending at least equal to the $250 billion cost for these various measures coming up in December 2011.

Republicans may also get another opportunity in early 2012 to extract spending cuts without having to touch their Bush tax cuts. According to last August’s debt ceiling deal, that reduced spending by $1 trillion immediately and the $1.2 trillion additional automatic cuts that will now go into effect, there would be no further need to raise the debt ceiling until after the November 2012 elections. That was the trade-off for the $2.2 trillion in spending cuts that the Obama administration and Democrats in Congress agreed to: i.e. no more debt ceiling crises in exchange for the $2.2 trillion in spending-only cuts. But the debt ceiling issue may still re-emerge before the elections, and maybe even as early as this spring 2012.

As part of the August 2011 deal the U.S. Treasury is authorized to raise another $400 billion or so this spring and increase the debt ceiling by that amount. But if the economy retreats in early 2012, as many now increasingly predict, that will mean less federal tax revenues than originally projected and a larger budget deficit in 2012 than originally forecast. That might potentially reintroduce the need to raise the debt ceiling again in mid-2012 even more than projected last August. If this scenario unfolds, the Republicans will have yet another bite at the apple of deficit cutting. That’s in addition to the four bills coming up next month costing $250 billion, for which Republicans will demand at least an equivalent spending cuts elsewhere to fund.

So look for the issue of cutting Medicare-Medicaid to continue to be on the negotiating table despite the Supercommittee’s recent breakdown. The Supercommittee may fade away, but not the fundamental issues behind it. Those issues are the continuing weak US economy and its impact on deficits, the intense commitment by the Republicans, corporations, and the wealthiest 1% to protect their Bush tax cuts at all costs, and the repeated willingness of Obama and the Democrats to offer up Medicare-Medicaid as a bargaining chip.

The Republicans are in the preferred bargaining position going forward. They will try to cash in on some of Democrats repeated offers to cut Medicare-Medicaid by $500 billion–first in exchange for agreeing to pass the $250 billion in bills in December and thereafter potentially in the spring should the debt ceiling issue raise its ugly head again.

As the November 2012 election grows nearer, Democrats resolve not to extend the Bush tax cuts another decade will also undoubtedly weaken. Republicans count on chipping away at Medicare-Medicaid and other spending over the coming year, while bidding their time for the best timing to extend the Bush tax cuts for another decade.

Its no wonder, therefore, that the Republicans on the Supercommittee were more than willing to allow the Supercommittee to implode. They can protect their tax cuts better, and extract spending cuts more effectively, by going at it piecemeal over the coming year.

Jack Rasmus
November 22, 2011

Jack is the author of Epic Recession: Prelude to Global Depression, May 2010, and the forthcoming Obamas Economy: Recovery for the Few, February 2012, both published by Pluto Press and Palgrave-Macmillan. He is also author of the just published 35pp. pamphlet, An Alternative Program for Economic Recovery, which can be purchased from his website:
www.kyklosproductions.com. His blog is jackrasmus.com

COMMENTARY: Within a week the Supercommittee will release its recommendations for massive budget cuts targeting predominantly medicare, medicaid, social security, and raising taxes on the middle class in order to fund tax cuts for the rich and their corporations. Even if there is no joint recommendation forthcoming from the Supercommittee, the separate groups will issue their own reports and Congress will then take up the deficit cutting in any event. The attached just published essay, ‘The 8 Real Causes of Deficits and the Debt’, provides documented numbers showing how medicare-medicaid-social security and other social programs are not the cause of deficits or the debt. It is an excerpt from my forthcoming book, OBAMA’s ECONOMY: RECOVERY FOR THE FEW, to be published by Pluto Press and Palgrave-Macmillan this coming February 2012. For a further detailed consideration of alternatives to the Supercommittee’s forthcoming recommendations, see my just published 35pp. pamphlet, AN ALTERNATIVE PROGRAM FOR ECONOMIC RECOVERY, which can be ordered for $5 from my website, www.kyklosproductions.com, that is accessible from this blogsite from the sidebar to the right.

‘The 8 Real Causes of Deficits and the Debt’ by Jack Rasmus, copyright 2011

In less than two weeks the congressional Supercommittee is scheduled to release its recommendations to cut $3 to $4 trillion or more from the U.S. budget, as the U.S. blindly plunges into a Greek-like austerity program based on the erroneous economic view that budget cutting leads to economic recovery. At the heart of the cuts will be historic gutting of Medicare and Medicaid. Already Democrats have proposed a minimum of $500 billion–just about what Vice-President Biden offered to Republicans last June and President Obama last July. Not to be outdone, the Republicans countered in October with $760 billion. Supercommittee recommendations for cuts in social security retirement programs may increase that amount to more than a $ trillion.

One of the main arguments claiming to justify the cuts in Medicare-Medicaid is that their costs are contributing significantly to unsustainable budget deficits and federal debt levels and must therefore be reduced. But the real causes of the deficits and the debt are hardly addressed by those calling for massive cuts in Medicare-Medicaid-Social Security. So how much is U.S. deficits and debt and what are their true causes?

The total US federal government debt rose between 2000 and 2011 by approximately $9.2 trillion, from $5.6 trillion in 2000 to $14.8 trillion today, according to the Federal Reserves Flow of Funds reports.

There are basically eight causes of the $9.2 trillion rise in the US federal debt over the past decade: excess inflationary defense-war spending; the Bush tax cuts from 2001-2011; the direct Congressional funded bailouts of banks and corporations following the banking crash of 2008; Bush and Obama’s successive fiscal (tax cuts and spending) stimulus packages of 2008-11; price gouging by health insurance companies and health services providers; and simple interest on the debt for all the above. The amounts and calculations for each are summarized in Table 1 as follows:

TABLE 1
Eight Major Causes of $9.2 Trillion U.S. Debt Increase

Debt Contributing Factor    Addition to Debt     Percent of $9 Trillion Debt

1. Pentagon-War Spending     $2,100 billion                          22.9%

2. Bush Tax Cuts 2001-12      $3,150 billion                           34.2%
& Extensions

3. Direct Bank & Other                $900 billion                              9.8%

4. Bush-Obama Stimulus       $1,896 billion                            20.6 %

5. Non-funding of Part D           $450 billion                               4.8%
Prescription Drugs Plan

6. Excess Inflation Costs for
Medicare-Medicaid                    $180 billion                                1.9%

7. Lost Tax Revenue from       $255 billion                         2.7%                                       18 million additional unemployed

8. Interest on the $9 Trillion     $270 billion                                 2.9%

____________                                                                                                                      $9,201 billion ($9.2 trillion)

Sources: (1)Office of Management & Budget historical tables & BLS for CPI change; (2) Center for Budget and Policy Priorities, June 28, 2010, based on Congressional Budget Office and Joint Tax Committee of Congress data; (3) U.S. Treasury, TARP Report; (4) (5), Medicare Trustees Report for 2011, (6) Wall St. Journal, New York Times, Economic Policy Institute, Center for Budget and Policy Priorities articles and analyses; (7) Federal Reserve Bank, Flow of Funds Report, July 2011 and authors calculations.

Explaining each of these eight causes in turn:

The $2.1 trillion in Pentagon and War spending as a contributing factor to the $9 trillion debt run-up over the decade represents just the excessive inflation in Defense and Contingency Operations (CO=direct spending on Iraq and Afghanistan) above the normal average consumer price index (CPI) rise of about 2%. War and Defense spending rose annually on average by 8.2% over the decade. The $2.1 trillion thus represents just that increase in War and Defense spending in excess of the 2% average CPI. The $2.1 figure is actually very conservative, since it does not include additional long-term indirect war costs associated with military construction, department of energy, veterans benefits, and the like. It also excludes arguable defense costs in the military and counterinsurgency elements of spending by the CIA, FBI, NASA, State Department, Foreign Aid, and Homeland Security. Also excluded are black or off budget secret project military weapons development spending that doesn’t show up in public budget data. The latter are estimated at around $50-$75 billion a year. Homeland Security is another $40 billion a year. In total, the US Defense spending is, at minimum, conservatively around $900 billion to $1 trillion a year. The inflation in these additional costs over the decade would easily increase the $2.1 trillion allocated to the $9 trillion debt run-up by another $200-300 billion or so.

The Bush Tax cuts contribution to the total debt includes a basic $1.7 trillion estimate for the Bush era 2001-2003 tax cuts from 2001 to 2008, and the Center for Budget and Policy Priorities estimate of another more than $1 trillion for 2009-10, plus the two year extensions of the Bush tax cuts agreed to by Congress for 2011 and 2012 costing about $450 billion more. These are also conservative estimates, since they don’t include major oil and energy industry corporate tax cuts enacted in 2004-05 by the Bush administration. Nor do they account for the $1.2 to $1.4 trillion that multinational corporations are hoarding in cash in their offshore subsidiaries today to avoid paying the normal 35% tax rate in the U.S. If the latter were included, the total tax cuts for corporations and investors would add another $400 billion or so to the Bush tax cuts of $2.9 trillion.

The $900 billion in bank and corporate bailouts refers only to the $700 billion TARP (Troubled Asset Relief Program) passed by Congress in October. It also includes the roughly $200 billion separately passed by Congress to bailout the government mortgage agencies, Fannie Mae and Freddie Mac. They too went broke as a result of the financial collapse of the housing sector in 2007-08 and were bailed out in July 2008. It is important to note that this $900 billion direct bailout does not include the roughly $9 trillions of dollars injected into the banks by the Federal Reserve, which was the true source of the bailout of the banks since 2008. The Federal Reserve has a separate set of books that do not add to the US deficit and total debt of the federal government.

Then there is the three main Bush and Obama fiscal stimulus packages in 2008, 2009 and 2010, which together amount to $1.89 trillion in tax cuts and spending that have failed to date to bring about economic recovery. They include the Bush April 2008 stimulus of $168 billion; Obama’s February 2009 stimulus of $787 billion and subsequent $84 billion in supplement spending and tax cuts in 2009-10; and Obama’s December 2010 package worth another $857 billion, of which a massive $802 was tax cuts.

The escalating health care cost, consisting mainly of unfunded Part D of Medicare and the excessive inflation in health care services well above the average national inflation rate contributed approximately $630 billion to that $9 trillion US debt run-up from 2000 to 2011. Most of that $630 billion was the $450 billion in Congress’s failure to fund the Part D prescription drug program, requiring the program be paid totally out of deficit spending. The remainder cost is attributable to the excess inflation for health insurance and services directly impacting Medicare and Medicaid costs.

Another $255 billion is from lost tax revenue due to chronic unemployment for the past three years. Before the recession began in December 2007, there were 7.1 million unemployed. For the past three years that number has been 25-26 million without change, or about 18 million. Assuming a median annual earnings of $47,000 for the 18 million, an unemployment period of 6 months on average, and an average income tax rate for the group of 20%, the total lost for the past three years in federal income tax revenue is $255 billion. And that does not count lost payroll tax or corporate income tax revenue associated with the layoffs.

The final item, interest on the debt is calculated based on a simple assumption of non-compounded interest over the decade, which comes to $270 billion for the $9.2 trillion.

In summary, the true causes of the deficits and therefore the $9.2 trillion run-up in the federal debt are wars and runaway Pentagon equipment spending, the Bush tax cuts, the bailouts of banks and corporations, the fiscal stimulus packages of Bush-Obama that didn’t result in economic recovery, the chronic three year long 25 million jobless situation, and price gouging by health insurance and health services providers.

Jack Rasmus

Jack is the author of An Alternative Program for Economic Recovery, Kyklos Productions, October 2011; Epic Recession: Prelude to Global Depression, Pluto Press and Palgrave-Macmillan, May 2010; and the forthcoming Obamas Economy: Recovery for the Few, same publishers, February 2012.