Jack Rasmus

COMMENTARY: As the deficit-debt debates intensify it is becoming increasing clear that Teapublicans want only draconian cuts in spending, social security-medicare-medicaid and public education in particular. Democrats want cuts but also modest tax increases. Both have agreed already that the cuts will be several times the tax hikes, if any. Democrats are content to pare the edges of the massive tax cuts for corporations and wealthy that have been put in place over the last 30 years, and the past decade in particular, creating a historic ‘Great American Tax Shift’. Working and middle class households, the 90%, are asked to contribute the most to a ‘shared sacrifice’ for an economic crisis, deficits and debt they did not create–in order that the wealthiest 10% can keep the lion’s share of the tax cuts of the past three decades. At the recent Emergency Labor Network Conference held June 24-26 in Ohio, Jack Rasmus proposed the following ‘R.A.T.S. Tax’ Program to make those who created the crisis pay for it.

“The R.A.T.S. Tax Program To Make the Rich and Corporations Pay” By Jack Rasmus, Copyright 2011

The breakdown on debt limit negotiations between Republicans and Democrats last week was over draconian cuts in the social wage (social security, medicare, education, etc.) and tax hikes. Both Republicans and Joe Biden, heading the Democrats team, reportedly agreed on $1 trillion in cuts in social wages, according to the US business press. Where the negotiations broke down was over how much to raise taxes in addition to the trillion dollar cuts in spending.

Republicans, led by House representative, Cantor, refused any compromise on taxes, revealing once again that their real objective is to protect and expand the Bush tax cuts not matter what the cost of deficits or debt. The latter, deficits and debt reduction, are apparently just a cover issue to force reductions in social wages–i.e. social security, Medicare, and the like as a means to continue the tax cuts for corporations and wealthy investors for another decade.

The Biden-Democrats proposals for tax hikes appear focused on tax loopholes more than on restoring top tax rates or reversing the Bush tax cuts that will cost $270 billion a year for the next decade and doom any possibility of deficit or debt reduction and require further cuts in social security and medicare-medicaid down the road.

This writer was recently asked to provide a keynote speech to the important new grouping within the US labor movement called the Emergency Labor Network. About 130 local union officers, organizers, central labor council and state federation of labor activists gathered last week in Ohio to propose an alternative budget and program for action to both the Republican and Democratic versions. He was asked to suggest an alternative tax program that would make the wealthy and corporations pay, and in the process not only resolve the deficit but expand social wage benefits such as social security, medicare, medicaid, and jobs.

The program offered and discussed at the Emergency Labor Network conference was dubbed The R.A.T.S. Tax Program, an acronym which stands for Reverse the American Tax Shift of the past thirty years that has occurred on three levels: a shift in the personal income tax–from the top 10% wealthy households and investors enjoying capital gains, dividends, carrying interest, and rental income–to the 100 million bottom 90% households whose income is almost exclusive earned from wages, salaries and pensions. Since 1980, a tax shift in favor of capital incomes benefiting the top 10% households together with a 50% decline in tax incomes from the corporate income tax (from about 20% to 10% of federal tax revenues), and a doubling of payments into the payroll tax (from roughly 20% to 40% of federal tax revenues)has resulted in a total annual shift in income by 2011 approaching $1 trillion a year. In other words, a Great American Tax Shift.

The RATS TAX Program is the response to this shift. And as the attendees at the conference put it in terms of a slogan: I don’t give a RATS Tax About the Rich! The 10 point RATS TAX program adopted by the conference is as follows:

THE RATS TAX PROGRAM

1. Repeal the Bush Tax Cuts on all capital incomes (capital gains, dividends, interest, inheritance) and related corporate tax cuts for accelerated depreciation and credits.

2. Restore the capital gains and dividends tax rates, from their current 15% to their levels of 70% in 1980.

3. Restore the top income bracket personal income tax rate to the 70% in 1980.

4. End tax loopholes for corporations and millionaires

5. Lift the annual income cap on the social security payroll tax for all earned income (wages and salaries) above its current $106,800 ceiling. Extend the 12.4% payroll tax to all capital incomes over $100,000 per year. (Note: per the Social Security Trustees, this would provide 150% of what is needed to resolve all funding issues for social security retirement and disability benefits)

6. Increase the Medicare payroll tax by 0.25%, from its current 1.45%, for both employee and employers over the next ten years. Add a second 0.25% for each in 2022. (Note: per the Social Security Trustees, this would resolve all funding problems for Medicare).

7. End multinational corporations offshore tax fraud. Make multinational corporations bring back their $1 trillion current cash hoard in their offshore subsidiaries and pay their 35% tax. If they refuse, place a 50% tariff on all their imported goods to the U.S.

8. Repatriate wealthy investors $4 trillion illegally sheltered hoard now in 27 offshore tax havens identified by the IRS and pay their legally required taxes. If they refuse to repatriate within 90 days, impose 10% penalties for consecutive 90 days. If the 27 country tax havens refuse to cooperate in the repatriation, freeze their assets in the US until they comply.

9. Stop the States corporate tax cut competition and tax revenue race to the bottom. Introduce a Federal State Corporate Relocation Equalization tax to even out state-to-state corporate tax differentials. Use the federal revenue from the equalization for State job training.

10. Tax the banksters (commercial and non-commercial banks). Levy a three part financial transactions tax as follows: 1.A tax of 10 cents on all common stock trades. 2. A tax of $1 per $1,000 value for all corporate bond sales. 3. A tax of 5 cents per dollar value on all forms of derivatives trading and swaps by counter-parties.

Jack Rasmus

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COMMENTARY: Worrisome signs are beginning to appear that the Obama administration and Republicans are quietly negotiating a ‘deal’ on cutting social security and Medicare as part of a ‘grand bargain’ in the 2012 budget due this coming October. This moves up the cuts before the 2012 elections, contrary to what was the previous understanding between Republicans-Democrats to wait until after 2012 to go after Social Security and Medicare. Proposals from both Republicans and Democrats almost exclusively focus on benefit cuts and more cost burdens by retirees as solutions to the so-called ‘entitlements funding crisis’. But some very simple solutions can avoid the benefit cuts altogether and, in fact, expand both Social Security and Medicare in the process. The following piece explains the new intensification of attacks on Social Security and Medicare, and contrasts ‘their’ solutions to this writer’s proposals.

THE ATTACK ON SOCIAL SECURITY IS ABOUT TO INTENSIFY

Jack Rasmus
Copyright June 15, 2011

The current offensive underway against Medicare by Paul Ryan and the House Republican majority is well known. Less well known is the somewhat hidden undermining of Medicare in the 2010 Obama health bill, that will take effect in a few more years and cost retirees a significant increase in out of pocket costs and caps on benefits. In contrast to Medicare, Social Security retirement and disability programs were, according to the Washington political consensus, to be delayed from cuts until after the November 2012 elections. But there is new evidence that the growing coziness between Obama and mainstream Republicans, on the one hand, and corporate interests on the other is about to result in a new offensive against Social Security before the 2012 elections. What this means is that the old age retirement benefits fund as well as the disability insurance fund programs of Social Security are now, like Medicare, about to become prime targets for cuts in the 2012 budget this fall.

The assault on the disability fund is already well underway. Disability benefits administrative law judges, who decide on granting long term disability benefits under Social Security, have recently come under intense attack for being too generous in granting permanent benefits to the disabled. The new offensive was initiated in the wake of a May 19 Wall St. Journal editorial attacking disability administrative judge, David Daugherty. In the wake of the Journals opening salvo, Republicans and Democrats in the House quickly joined forces calling for an investigation of disability benefits judges in general. In response to the House investigation, the offensive quickly turned even more aggressive. It has now taken on the character of a criminal probe. All this no doubt will have a chilling effect on decisions to grant benefits by judges.

The disability benefits trust fund is a prime and easy target from which to attack Social Security across the board. The disability fund pays out $124 billion in benefits to 10.2 million in 2010. That’s a juicy cost-cutting plum.

Rumors now abound that Obama’s golf summit with House majority Republican leader, Boehner, will discuss Social Security cuts as part of a larger understanding of broad federal budget cutting in the 2012 budget starting next October. Obama is apparently willing to use Social Security as a bargaining chip now, instead of waiting for a second term.

Obama’s new soft position on Social Security in general was evident in his last December 2010 decision to reduce the payroll tax by 2% for workers. That resulted in more than $100 billion shortfall in revenue for Social Security this year alone, when the chronic jobless problem24 million still out of work for three years now has already meant a major falloff in Social Security revenues for its various funds for the first time in decades. The 2% cut in the payroll tax was supposed to boost consumption, but it hasn’t. Estimates are that 60% of the 2% payroll tax cut last December has already been absorbed by oil companies to pay for $4 a gallon gasoline.

Not deterred by this fact, the Obama administration nonetheless in recent weeks has begun floating the idea of cutting the employers 6.2% share of the payroll tax, giving yet more income to business that has been sitting on a cash hoard of $2 trillion and not investing in the US and creating jobs. The logic why corporations need still more cash from a payroll tax cut in order to invest is unconvincing. This second cut will drive the Social Security retirement and disability funds further in the red, making it even more convenient for those who argue for cuts now instead of after 2012.

With the imminent new offensive against Social Security in the air, groups like AARP last week did an about face. AARP led the defense against Bush Jr. attempts to privatize Social Security last decade. Now, however, they are jumping on the cut Social Security retirement benefits bandwagon. As the Wall St. Journal recently gleefully noted, AARP is dropping its long standing opposition to cutting Social Security benefits, a move that could rock Washington’s debate over how to revamp the nations entitlement programs. Does anyone believe AARP hasn’t discussed this already with the Obama team? That some kind of new consensus to cut early and deep is being formed?

The most recent 2011 report by the Trustees of the Social Security program stated that the retirement benefits trust would run out of revenue to provide full benefits to retirees in 2036, after which only 77% of benefit levels could be paid. The Medicare trust will run out of funds for full benefits earlier, in 2018.

The Obama-Republican-Corporate Solutions

Republicans, Obama and Corporate interests are proposing to solve the Social Security retirement/disability benefits and Medicare benefits problems with the following measures:

1. Raise the retirement age to 70, which would cover 28% of the projected shortfall

2. Eliminate the annual cost of living benefit increases for retirement benefits, which would cover another 23% of shortfall.

3. Make new state and local government workers go into the social security system instead of receiving negotiated state-local pension plans, saving another 7%

4. Reduce benefits for middle income retirees and significantly for higher income retirees, raising another 39%.

Those four measures would amount to 97% of the projected shortfall and make the retirement benefits trust fund solvent past mid-century.

For Medicare, their proposals are not to maintain benefits but to reduce them by various measures while raising the costs for the reduced benefits. These include:

1. Cap government payments while prices are allowed to rise. Or, as in the Ryan plan, give retirees vouchers to buy insurance, which is capped as well while insurance rates rise.

2. Raise the amount of monthly premiums by double or more. Currently retirees must pay between $95-$115 for doctors costs coverage and an additional amount per month to cover only part of prescription drugs. Combined premiums will thus rise to $250-$300 per month. And that’s not counting higher deductibles and co-pays for doctors and drugs.

The Real Causes of the Social Security-Medicare Funding Crisis

The shortfall in the Social Security retirement benefits fund and disability fund are due first and foremost to the chronic lack of job creation, and thus payroll tax revenue generation, for more than a decade now. Today fewer are employed in the US than in 2000. The 2001 recession resulted in loss of jobs followed by weak job creation for the following four years. The 2007-11 recessions resulted in 24-27 million lost jobs and continuing weak job creation for more than three years now. These cyclical job losses were combined with chronic structural job losses at the same time: multinational corporations created 3 million jobs offshore and reduced 2.4 million jobs in the US. In addition, for those with jobs, wage gains have been lagging for a decade as well. That adds up to less payroll tax revenue as well. Then on top if it all, Obama cuts the payroll tax and is about to propose even more cuts in the payroll tax.

As for Medicares shortfall in funding, the problem has several dimensions. First, the payroll tax of 1.45% for the employee and same for employer is ridiculously low. Where else are 47 million recipients of medical care covered for so small a cost? The typical employer provided health insurance, in contrast to 2.9%, costs 20-24% the equivalent of a typical workers monthly take-home pay. Thats almost ten times more expensive. The second major problem with the Medicare funds shortfall is rising health insurance premiums and other healthcare costs for the past 15 years. Unfortunately, there’s no solution to check rising health costs in Obama’s 2010 healthcare bill.

Some Simple Alternative Solutions to the Funding Crisis

Solving either of the funding shortfalls, for Social Security retirement-disability or for Medicare, without cutting benefits or shifting more costs to retirees is not very difficult. A recent Washington Post/ABC News poll conducted last April indicated 65% of the American people opposed Paul Ryan’s plan to cut Medicare. In fact, the poll showed 60% did not want any cuts in Medicare and Indicated they would rather pay higher taxes for Medicare to maintain medical services. Only 17% were willing to cut Social Security, compared to 45% who wanted military budget cuts. This shows overwhelming public opinion support for not cutting these programs and a willingness to pay higher taxes to maintain current benefit levels. To listen to the debates in Washington, Republican and Obama administration and Democrat alike, one would think cuts were the only solution.

But here’s some alternative solutions:

1. Eliminate the current cap of $106,800 on earnings for the 12.4%. This would raise revenue to cover 86% of the projected shortfall for the next 75 years.

2. Raise the payroll tax rate by 1% more both for employee and employer, to 14.4%, in stages over the next 20 years. According to the Social Security Trustees latest 2011 report, the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2085. So items 1 and 2 amount to 186% of needed funded.

3. I then propose to use the excess 86% funding to reduce the retirement age to 64 for everyone, instead of the current 67. Why reduce it 3 years instead of raise the retirement age three years? To open up more jobs for young workers who are suffering the worst unemployment. Today, the fastest growing segment of the work force are those over age 65, as more older workers are forced by economic conditions to continue working past 67 or are forced to re-enter the labor force just to pay their bills. With a decent, higher level of benefits they could retire earlier.

4. As for the Medicare shortfall, that can be solved simply by raising the current 2.9% Medicare payroll tax by a paltry 0.25% for workers and employers each for the next ten years, then another 0.25% each starting year eleven for the second decade. Thats a mere 1% raise over the next 20 years.

5. Better and simpler yet, make everyone pay the 14.4% and 3.4% for the next ten years, not just those earning wages and salaries. Make all forms of capital incomes (capital gains, dividends, interest, rents, etc.) pay the 14.4% and 3.4%. Do that and you not only solve the so-called entitlement funding crisis for the remainder of this century but you have now raised enough additional revenue to pay for single payer health care for all, as well as fix social security retirement and disability for the next 75 years and even increase the level of those benefits and/or reduce the retirement age.

But you wont hear these ideas and solutions coming off the golf course summit between Obama and Boehner this week.

Jack Rasmus
Jack is the author of ‘Epic Recession: Prelude to Global Depression’, Pluto Press and Palgrave, May 2010; and the forthcoming ‘Obama’s Economy: Recovery for the Few’, Pluto and Palgrave, late 2011. His blog is jackrasmus.com and website: http://www.kyklosproductions.com.

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COMMENTARY: This month marks the tenth anniversary of the beginning of a series of tax cuts under George W. Bush in 2001, extending into 2006, that would result in $3.8 trillion in income to investors, corporations, and the wealthiest households. Those cuts promised to create investment and jobs–and didn’t. They were extended at a cost of another $400 billion last December 2010 with the same promise–and haven’t. And as this entry predicts, will most likely be extended once again in 2012 for more years to come with the same effect. What the Bush tax cuts did accomplish, is accelerate the historic shift in income from middle and working class households to the wealthiest 1% and their corporations–a shift begun under Reagan and intensified severalfold under Bush. The consequence has been a stagnation of incomes for the ‘bottom’ 90% households and the inability in turn of the US economy to generate consumption to enable a sustained economic recovery, as the current slowdown of the US economy now shows with growing clarity.

ON THE TENTH ANNIVERSARY OF THE G.W. BUSH TAX CUTS, by Jack Rasmus, June 7, 2011

This month marks the tenth year anniversary of the first of George W. Bushs three general tax cuts, passed between 2001-2003, which reduced taxes by a total of $3.4 trillion over the decade, 2001-2010. These general cuts were followed by a series of additional $1.1 trillion industry-specific tax cuts in 2004-2006 that, together with the 2001-2003 cuts, would raise the total Bush era tax cuts to approximately $4.5 trillion.

Various studies during the last decade estimated that 80% of the $3.4 trillion in general tax cuts–$2.7 trillion–were distributed to the top 20% richest households, and most of that to the wealthiest 1%. Thus, conservatively, together with the $1.1 trillion enacted specifically for businesses, a total of about $3.8 trillion in tax cut income were distributed to corporations, investors and the wealthiest households during the Bush years.

That $3.8 trillion is just about equal to the total growth under Bush in the federal government debt between 2000-2008. Bush entered office in 2001 with a federal debt of about $5.6 trillion and left it with approximately $9.5 trillion. The federal debt has since risen to $14.3 trillion, due to continuing costs of war and defense spending, falling tax revenues due to the current recession, direct bailouts, and the continuing negative impact of health care costs on Medicare and Medicaid.

So where has all that $3.8 trillion in tax cut money gone, one might ask? To expand jobs? No. Today there are fewer jobs in the U.S. than there were when Bush came into office. Workers wages? No. Real wages are lower today than a decade ago.

A good deal of it went into Hedge Funds, Private Equity Funds, and other forms of private, unregulated banking–thus stoking the fires of speculative investment during the Bush years in subprime mortgages, derivatives and other unregulated financial securities that produced the financial collapse of 2007-08 and which, in turn, provoked the current recession.

Another significant part of the trillions was redirected by corporations and wealthy investors into investing in emerging markets, like China, India and Brazil, in lieu of what might have otherwise been investing in job creating projects here in the U.S.

Still other amounts were simply diverted by institutional investors and corporations alike into offshore tax shelters. According to the investment bank, Morgan Stanley, in 2005 offshore tax shelters had increased their investible assets from only $250 billion in 1983 to more than $5 trillion by 2004. More recent estimations by the Tax Justice Network indicate tax shelters now hold more than $11 trillion. Of course those are global numbers. But a reasonable estimate is that wealthy Americans likely account for at least 40% of that total.

Exactly how much of the Bush tax cuts for the rich and their corporations was redirected offshore into tax havens is not precisely knowable, since there are around 27 offshore tax shelters, according to the IRS, in mostly sovereign nations like the Cayman Islands, the Seyschells, Isle of Man, Vanuatu and the like which have closed their tax doors and do not cooperate with IRS attempts to investigate how much wealthy US taxpayers have stuffed away in their electronic vaults. When Obama first came into office, an initial attempt was made to identify the tax avoiders. But that effort by the administration was quickly downgraded as Obama moved to court business allies more aggressively in 2010.

Like individual and institutional investors, multinational corporations also redirected a good part of their share of tax savings to their offshore subsidiaries in order to avoid paying taxes to Uncle Sam. In 2004 it was estimated about $700 billion was hidden offshore in this manner. The multinationals then blackmailed Congress, offering to repatriate some of the money if Congress reduced the 35% normal corporate tax rate to 5.25%, which it obligingly did. About half the $350 was brought back in 2005, but it wasn t used to create jobs. Instead, the overwhelming evidence is that they used the repatriated funds to buy back their stock, pay dividends, and buy competitors. The same gaming by multinationals is about to happen again; but more on that in another article.

In short, offshore shelters, offshore corporate subsidiaries, emerging markets like China, and unregulated global financial institutions like hedge funds, private equity, etc., were the recipients of the lions share of the $3.8 trillion. Little of that went to domestic investment and job creation in the U.S. Gross private domestic investment in the U.S. grew at a mere 2.25% annual rate over the eight years of George W. Bush. No wonder so little net job creation occurred in the US over the past decade while Bush tax cuts were in effect; and why that investment, and job creation, is still not forthcoming so long as those tax cuts remain and the proceeds redirected to offshore tax havens, offshore subsidiaries, emerging market investments, and financial speculation globally.

Another important legacy of Bush’s $3.8 trillion handout to corporations and the rich has been an acceleration in the shift of income and wealth to the top 1% wealthiest households and their corporations. This historic shift in income and wealth can be traced back to its origins in the Reagan period, but it accelerated severalfold under Bush during the last decade.

A series of academic studies since 2003 by economics professors Emmanuel Saez and Thomas Picketty have uncovered the true extent of this massive income shift. Based on their deep analysis of IRS taxes paid over the history of the Federal Income Tax since 1913, Saez and Picketty found that the wealthiest 1% of households in the U.S. received about 8.3% of total income in the U.S. in 1978. By 2007, however, that wealthiest 1% received 23.5% of total income generated annually in the U.S. And that includes only reported income to the IRS, excluding offshore tax sheltered income. Were offshore income stuffed away in the various tax havens included, the percent would not doubt amount to significantly more than even the 23.5%.

What that 23.5% represents more concretely is average income gains between just 2002-2007 for the top 1% wealthiest households–those earning more than $400,000 a year–of 62%. The top 0.1% households with a minimum income of $2 million a year did even better, with a gain of 94%. The next lowest 9% realized only a 13% gain from the Bush tax cuts, while the bottom 90% of households–about 104 million households in total–realized a mere 3.9% gain in income from the Bush tax cuts.

It is perhaps interesting to note that the 23.5% share of income accruing to the wealthiest 1% households represents a return to almost exactly what the top 1% wealthiest households received in 1928i.e. on the eve of the last Great Depression! Could it be that such lopsided concentration of income at the top is somehow related to the onset of severe recessions and depressions? Unfortunately, few economists today bother to explore that relationship to any extent or degree.

Unfortunately, the legacy of the Bush tax cuts remains, extended for two more years last December 2010, at a cost to the US budget of $400 billion more in addition to the original $3.8 trillion.

Last summer the US economy went into a relapse and it appeared the tepid 12 months of recovery from June 2009 was about to end. The Federal Reserve quickly pumped $600 billion into the economy in response last fall, 2010, to re-energize the economy. The Obama administration sought to supplement the Fed with whatever fiscal stimulus it could get past the new Teaparty Republican Congress. Accordingly to Democratic party policy makers, the $400 billion further extension of the Bush tax cuts was the cost for getting agreement from Republicans to further extend unemployment benefits and to pass a middle class consumption boost by lowering the payroll tax for wage earners. The unemployment benefits and payroll tax cuts amounted to barely $120 billion, compared to the $400 billion.

Since January of this year, however, 60% of the $120 billion has been eaten up by gasoline price hikes and much of the rest by other inflation in food, health care, education, and local tax hikes. The payroll tax cuts will expire in one year; the $400 billion goes on for two years, up to the eve of the 2012 general elections.

The $400 billion was passed based on the claim business tax cuts would help get jobs going again–a claim made for every year of the original Bush tax cuts back in 2001-03. In fact, every Bush tax cut bill was called a job creation bill. But the facts are that Bush’s tax cuts had little impact on job creation. Between 2001-2003 jobs consistently declined. It took 46 months of jobless recession before, in late 2004, the number of jobs lost after January 2001 was eventually recovered. It was the longest jobless recovery in US post-1945 history up to that point.

Unfortunately, today’s jobless recession is expected to last at least 72-84 months despite the recent two year extension of the Bush tax cuts last December. As for the extensions immediate effects, in the past five months a total of only 14,000 full time jobs have been created, according to the US Labor Department. Not much for an initial effect from extending the cuts another two years!

Nonetheless, we are still being smothered with the same economic nonsense by the US Chamber of Commerce and Wall St. Journal editorial page pundits, who continue to argue that the Bush tax cuts will create jobs. Meanwhile, the concentration of income at the top goes on while consumption by the bottom 80% of households still stagnates. Given that consumption accounts for 70% of the economy, that all but ensures that the US economy will not soon recover.

To sum up the legacy of the Bush tax cuts: trillions of dollars shifted to the wealthiest and corporations, a chronic and historically low growth in US based investment for 8 years and continuing, jobless recoveries and fewer jobs today than a decade ago, and stagnant or declining income for the bottom 90% 104 million middle class households earning $110,000 or less a year. Moreover, that legacy unfortunately will not soon disappear, even when the recent two year extension of the Bush cuts expires in late 2012. The Bush cuts, this writer predicts, will almost certainly be extended into the next decade when the current Congress and Obama administration will almost certainly renew the tax cuts once again on the eve of the November 2012 elections.

The Bush tax cuts thus promise to linger in the US body-economic like a chronic, debilitating disease. And instead of treating the deadly economic virus, politicians are today intent on practicing instead medieval remedies like bleeding the economic patient with deficit cutting of health care and retirement social programs–Medicare, Medicaid, and Social Security. But in so doing, they just may kill the patient in the process.

Jack Rasmus
June 7, 2011

Jack is the author of the 2010 book, EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION, Palgrave-Macmillan and Pluto Press, and the forthcoming, OBAMA’S ECONOMY: RECOVERY FOR THE FEW. His website is: http://www.kyklosproductions.com and blog is jackrasmus.com

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COMMENTARY: The May Jobs report released last friday, June 3, threw cold water on all the hype of preceding months that the job recovery was underway. As this writer has been pointing out in several preceding posts, the jobs situation was far worse than being reported in recent months and would soon collapse once again. The reasons were a retreat of the economy on many major fronts. The post below examines official Obama administration responses to the May report and corporate perspectives as well, from the US Chamber of Commerce and Wall St. Journal. Both the administration and corporate America reveal neither has any solution to the jobs crisis, which will almost certainly continue to deteriorate further and in turn cause further problems in the housing foreclosures and state-city fiscal crises. (Watch for the next posting, ‘Liberal Economists on the May Jobs Report’, and equal confusion on what to do about the problem)

OBAMA AND CORPORATE RESPONSES TO THE MAY JOBS REPORT by Jack Rasmus, June 4, 2011

Over the past six months this writer has been warning, in various publications and blogposts, that the job crisis in the US was not abating but rather was about to get worse. This message ran directly counter to mainstream media and policymakers who had been hyping March and April employment numbers reporting average monthly job growth of 220,000. It was explained these numbers were inaccurate and distorted by various questionable statistical methods for estimating job creation used by the US Labor Department, and that a deeper look behind the numbers showed a jobs picture that not only was not improving but was about to get worse. This months Labor Department report on May jobs confirms it has.

On friday, June 3, the Labor Department released its numbers for May confirming this writers predictions. Officially, non-farm employment grew only 54,000 in May, barely a third of the 150,000 needed each month to absorb new workers entering the economy. But these official numbers are actually much worse than even reported.

If this writers previous critique of Labor Department job estimates for the past three months, as explained in prior publications below is correct, then there were actual net job losses between 100,000 and 150,000 in May, i.e. far worse than even the paltry gain of 54,000.

Other evidence corroborates the view that the May jobs picture is worse than even reported. For example, the Labor Departments May report shows that full time jobs fell by 142,000 last month, essentially erasing all prior full time job gains that occurred between January and April 2011. For the last five months, the economy added a mere 14,000 full time jobs, according to Labor Department data.

In contrast to full time job stagnation the past five months, part time job creation continued to accelerate. Since January a total of 417,000 part time jobs have been created. In other words, to the extent jobs were being created at all, they have been reduced pay (often no benefits) part time jobs. The unemployment rate has barely budged since January because, in calculating the rate, part time jobs are considered the equivalent of full time jobs. But behind the facade of job creation, a churning of jobs from full time to part time continues to occur.

Other indicators of the continuing deterioration of the job market buried deep in the May report include the increase of 361,000 in the long term unemployed last month alone; the layoff of 103,000 teachers in just one month at the State level (with no doubt hundreds of thousands more at the local level education to occur this June); and the government sector shedding jobs at the annual rate of 350,000 even before federal deficit cuts begin in earnest. On the private sector side, the much touted expansion of the manufacturing sector, and manufacturing jobs, for the past year has now reversed. Manufacturing has begun losing jobs instead of adding.

The response of the Obama administration, business groups, and their economists to the May jobs report is revealing.

Obama administration spin-doctors are saying its only one month. You cant call it a trend. Obama’s chairman of the council of economic advisors, ex-businessman Austin Goolsbee, response is there are always bumps on the road to recovery. Or, like Obama himself, speaking before Chrysler workers, they quickly change the subject and point to the paltry1.8 million jobs created the past 17 months, conveniently ignoring the fact that 1.8 million is barely 100,000 jobs a month and well below the monthly job creation necessary just to absorb new entrants to the workforce. Since Obama came into office, 1.75 million workers have also left the labor force. That 1.75 is roughly the net number of 1.8 million jobs the administration brags have been created on its watch. So the same number that got jobs is about equivalent to those who gave up and left the labor force because they couldn’ t find jobs. Yet another example how the US job markets are churning and basically stagnant for two years.

At best, the job market has been flat for two years now, providing one doesn’t count the four month collapse of jobs last summer 2010–a sinkhole more than a mere ‘bump’–or the repeat of last summers job collapse, i.e. another sinkhole now coming in 2011.

The Wall St. Journal and US Chamber of Commerce have giddily grabbed the May jobs report and are now hyping it. The Chambers answer to the now abundantly evident jobs relapse is that Washington is stifling hiring and failing to alleviate the uncertainty businesses are feeling by creating a mountain of new regulations and foot-dragging on free trade agreements. More deregulation, more free trade is thus their answer to creating jobs, despite the fact that evidence is overwhelming that both deregulation and free trade result in net job loss not job gain.

The Chambers economists conveniently ignore the fact that big business is sitting on a $2 trillion cash hoard, having been the sole beneficiary along with big investors of the $13 trillion bailout by the Obama administration and the Federal Reserve since 2008. That’s a $2 trillion cash hoard that they refuse to spend to create jobs here in the U.S. That’s a cash hoard that this writer has been predicting is earmarked for stock buybacks, dividend payouts, and mergers and acquisitions–and not for job creation. Meanwhile, at the other end of the business spectrum small businesses (which are responsible for half of all job creation in the US) are unable to expand and add jobs because big banks refuse to lend to them. Despite a $1 trillion in excess reserves, the banks have been reducing their lending to small businesses since the end of the recession in mid-2009.

The Wall St. Journal editorialists have taken on the Administrations mere bumps in the road incredulous explanation and are also hammering it. Like their Chamber of Commerce cousins, they too blame the lack of job creation on a so-called climate of hostility toward job creators that still prevails in Washington. Some hostility. Having spent trillions on business tax cuts, corporate subsidies, and corporate bailouts that have left $2 trillion in cash on hand for Big Business America is hardly an indication of hostility toward big banks and businesses.

The Journals solution is not only less regulation of the banks, and more gutting of agencies like the National Labor Relations Board and the EPA, but a return to Reagan economic policies of the 1980s. That is, the same policies that gave us millions more temp and part time workers, the offshoring of our manufacturing base and loss of 10 million good paying jobs, the virtual destruction of pension plans, de-unionization of much of the work force, free trade treaties, the housing and junk bond speculative bubbles and multi-billion dollar bailouts in the 1980s and 1990s, and, not least, the beginning of escalating multi-billion dollar annual trade and budget deficits. All that is the legacy of Reagan. In other words, all those policies that led to the epic recession that began in 2007-08, $13 trillion in bailouts of banks and businesses, and the stagnant recovery in which the US economy is now immersed. Despite Reagan’s abysmal economic record and legacy, the Journals solution to the jobs crisis is to repeat it all again. Without it, business confidence will continue to decline and job creation remain stagnant, they maintain.

However, recovery of the economy and jobs is not a question of restoring business confidence and it wont end by going back to policies (Reagan) that in fact are the root cause of today’s crisis. The fundamental problem today is that Obama policies of the past two years have bailed out big corporations and big banks, filling their coffers with trillions of dollars of taxpayer money (and choking government with record debt in the process), but Obama policies have also let those same corporations and investors sit on their cash hoards instead of investing in job creation. Moreover, it appears the Obama administration is intent on continuing the same failed strategy. As Goolsbee, its chairman of economic advisors, insists: The main driver of recovery at this point has got to be the private sector. But that driver has failed. So what now?

Our prediction is the jobs crisis will continue to get worse, business media and interest groups will continue to hammer the administration with telling political effect, and the Obama team in the coming months will continue to offer feeble excuses and explanations. This will go on until it is realized the only way out of the jobs crisis is for the government to engage in direct job creation and to launch its own job creation programs, financed by a fundamental restructuring the tax system and by spending the $2 trillion corporate cash hoard itself directly on job creation so long as Big Corporations and Big Banks continue to refuse to do so.

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COMMENTARY: Today, June 1, the US and stock markets across the world experienced major declines. Further significant corrections are almost sure to follow. The causes were the increasingly obvious fact that the US economy is once again about to slow significantly, and has already begun to do so.  On wednesday, a preliminary jobs report by ADP showed virtually no creation in May, contrary to expectations of another 200,000. In addition, manufacturing indexes in the US have plummeted by huge amounts, both for current and new orders. Housing prices are again in free fall and housing lingers in depression like conditions. Meanwhile, China, India, and Brazil are sharply cutting back their economies, while Japan, UK, and Australia are all entering deeper recessions, and the Euro debt crisis deteriorates with no solution in sight. These are all events this writer has been predicting for months, and forecast as far back as late 2009 when his book, EPIC RECESSION, was written and sent to publishers. The US economy is closely tracking a previous Epic Recession of 1907-1914.

‘THE COMING DOUBLE DIP RECESSION, by Jack Rasmus, copyright June 2011

“Today, June 1, stock markets in New York and around the world declined in levels not seen since last summer 2010. Days and weeks immediately ahead will likely register even further significant market declines, as the obvious becomes increasingly evident: the U.S. and other major global economies are once again on the cusp of a significant slowdown.

In a recent post a few weeks ago, entitled Why March-Aprils Job Gains Will Collapse This Summer, this writer warned that the official hype about job recovery promoted by the business press, and distorted US government data, was grossly inaccurate. Behind the false jobs data lay a growing picture of imminent economic relapse. The U.S. Labor Departments jobs numbers due this Friday, June 3, will likely further corroborate this view.

But the coming economic slowdown is not simply a result of the failure to create a sustained recovery of jobs in the U.S. for the past two years of so-called economic recovery. Nearly all economic indicators have been deteriorating since the beginning of 2011, even though policy makers and Wall St. investors have been diligently ignoring the fact.

Consumption growth, which represents 70% of the U.S. economy, early in 2011 fell by half compared to the previous period in 2010, from 4% to 2.2%. Real spending, adjusted for inflation, has been mostly flat so far in 2011. Rising gas prices have accounted for 60% of consumption gains in 2011. Escalating prices for food, health care, local taxes, and education costs have taken a further toll. The wealthiest 10% of consumer households now account for 60% of spending, buoyed by the past year of stock market gains that are now about to be reversed. High end retail stores, like Tiffany’s, rake in record sales while low end retailers like Wal-Mart struggle for sales. Apart from the wealthiest households, there has thus been no real sustained recovery of consumer spending in the US economy for the past two years. Retail sales have fallen the last three months in a row. And the lack of job growth, falling home values, rising core inflation (food & energy), and declining real incomes for the 95 million households earning less than $100,000 a year means a flat at best scenario for consumer spending for 2011.

Housing, which accounts for another 10% of the US economy, is in a deep depression, a condition comparable only to the 1930s. So no help here. Housing starts, sales, building permits are off by 75% from 2007 highs. After having dropped by 25% in the first phase of the recession, then briefly leveling off, home prices are in decline once again. Another 15% drop is predicted. There’s never been a sustained recovery from any of the ten post-1945 U.S. recessions without a housing recovery; and the latter is clearly more unlikely than ever today, given the nearly 10 million foreclosures and 16 million–i.e. more than a third of home in negative equity.

What little economic growth has occurred since June 2009 has been the result of inventory buildup by business, moderate spending on tech equipment, and a brief surge of manufacturing, with much of the latter driven by export sales. But manufacturing represents only 10% of the US economy and cannot by itself lead the economy onto a sustained growth path. Moreover, it too has begun to slow and decline in the past two months as the global sources of demand for US exports begin themselves to decline. The U.S. index measuring manufacturing activity in May fell a full 7 points and new orders by almost 11 points–one of the largest declines in recent years and back to the low point of June 2009. Global sources for US exports are drying up as well. China, India, and Brazil have all taken action to dramatically slow their economies growth rates down by at least half. Meanwhile, Japan, Australia, the United Kingdom have all re-entered a recession, while the periphery economies of the Eurozone continue in an ever-deepening economic contraction.

The so-called economic recovery that has been underway since the official end of the recession in June 2009 has been the weakest and most lopsided recovery from recession in the post-1945 period. The best quarters of economic growth, which occurred in the second half of 2009, were merely half that typical of recoveries from recessions. In all normal recessions before 2007, growth averaged 8%-9% in the quarters immediately following the official end of the preceding recession; following the June 2009 low point of the current recession, however, U.S. economic growth was barely half that averaging only 4%-5%. In 2010 it further trended down. And in the first quarter of the current year, 2011, it was only 1.8%. For the second quarter of 2011 it will almost certainly fall below 1.8%.

The recovery from the June 2009 recession trough actually lasted only 12 months. The U.S. economy suffered a relapse by the summer 2010. Unemployment started rising in June 2010 and continued for the next three months and home foreclosures hit record highs by August 2010. Nearly all other indicators recovered, at best, only half of their previous losses by late last summer.

This led to the Federal Reserve Bank of the U.S. policy of pumping another $600 billion into the economy last fall in the form of direct bond purchases from the public, a policy called Quantitative Easing 2, or QE2. That effort is now over and comes to an end this month, June 2011, however. The Fed policy succeeded in giving a final, last boost to the stock market, which is now dramatically coming to an end. It also succeeded in lowering the value of the US dollar and thus in temporarily stimulating export sales. But QE2 failed to lower mortgage rates much and resurrect the housing markets. And it totally failed to get banks to lend to small businesses and create jobs. Bank lending has fallen nearly every month since June 2009. Meanwhile, large businesses sit on their $2 trillion cash hoard and refuse to spend in the US to create jobs.

What the US economy is about to experience this coming summer 2011 is therefore a return of the economic relapse that began a year ago, in summer 2010, but that was temporarily checked by government and Fed policies late last year. However, now that the Fed is in retreat once again, now that states and cities are beginning to cut spending and raise taxes in earnest, and now that the Teaparty Congress and the Obama administration are about to dramatically cut federal spending as well–the combined effect will almost certainly result in another major economic relapse of the US economy in the months ahead.

For a further, more in depth analysis of the Coming Double Dip Recession, the reader is encouraged to read the writers forthcoming article in the July-August issue of Z magazine; or his predictions of an inevitable double dip in his recent book, Epic Recession: Prelude to Global Depression.

Jack Rasmus
June 1, 2011

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COMMENTARY: In the past two months the US Labor Department has announced employment gains of more than 200,000 each month. Once again–as in the past three springs–we’re told that the job crisis is over and employment is about to recover. But a closer look at the jobs numbers shows every spring the numbers surge–only to sag and decline once again in the summer. The reason for the false jobs reports typical of March-June has to do with questionable statistical methods used by the Labor Department to estimate jobs; specifically the use of what is called the ‘net business formation model’ that plugs in an arbitrary number every spring into the actual job surveys and artificially boosts the numbers. In contrast, nearly all indicators in the US economy are converging this spring on a new retrenchment of the economy, and jobs, in the future. The jobs crisis is far from over, and will soon get worse–as this writer has predicted in his recent book, EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION.

‘WHY MARCH-APRIL’S JOB GAINS WILL COLLAPSE THIS SUMMER’ by Jack Rasmus, as appears in the public blog, TRUTHOUT, May 22

“Every spring for the last three years the business press and government policy makers declare with great fanfare that the job markets in the US have finally turned the corner; sustained recovery in job creation has begun. But every summer following t heir pronouncements the opposite occurs: employment and job creation retrenches from the spring and declines.

In recent months the US Labor Department has reported that jobs for March and April 2011 grew by more than 200,000 each month. Apart from the fact that 130,000 new workers enter the labor force each month, and therefore the net gain is really only 70,000 (and a third to half of gains represent part time and temp workers), the 200,000 jobs represents an apparent relative improvement over the dismal job creation picture since last June 2010. But appearances are deceptive, and sometimes even false.

How real is the job growth in recent months? And will it continue for the remainder of 2011? Our answer to the first query is not very and to the second, not likely. Here’s why.

If the past three years, 2008-2010, are any indicator, employment gains that occur in the spring are not a true, reliable indicator of actual job creation. And the gains of this spring will once again likely disappear in the coming summer-fall of 2011.

The reason has to do with serious problems with the way the Dept of Labor calculates employment gains every spring, and in particular during the 2nd quarter of April-June. When the economy is growing, the problems in calculation are minimal. But when the economy is in a deep downturn, or remains stagnant, the problems are exacerbated.

At the heart of the calculation of employment problem is a practice the US Labor Department employs called the net new business formation model, officially called the Business Employment Dynamics model (BDM). Every spring the Labor Dept. plugs in a number of job gains from this model into the Current Establishment Survey (CES) which gathers the actual data on job totals in the economy from more than 400,000 establishments or businesses. The raw data on actual jobs created from the CES is relatively accurate. But the BDM is not. The BDM is not an actual tally of jobs. It is a convoluted model that estimates how many jobs are created from the formation of new businesses minus the number of companies going out of business. The numbers for the creation of new businesses, and corresponding new jobs associated with those new businesses, comes from state unemployment insurance records that are a minimum of 9 months old. And by the time the data is recorded, it is at least one year old. On the other hand, there is no accurate data on the death of old businesses. So the Labor Department takes the number for new businesses, a year ago, and picks a number for death of old businesses (for which there are no records), and then plugs the net result into the actual number of jobs obtained from the regular CES survey of jobs for the month. But that’s not all. The plug in number is not only from data a year old. It is an historically averaged long run assumed number. So new business formation from years ago, when the economy is doing well, further upward biases the jobs in the model when the economy is in a deep downturn. Even the Labor Department itself admits, even in a year where total non-farm employment declines, the residual net birth-death employment component is positive. We can have a major collapse of small businesses by the hundreds of thousands a month during a recession, which is what in fact happened and still continues to happen, but nonetheless the addition to jobs is positive.

What this all results in is a falsely boosted number of jobs created from the BDM model that are added to the 2nd quarter raw jobs numbers. The spring jobs numbers thus are always heavily inflated.

The Labor Department then takes the models inflated numbers, adds them to the actual CES raw jobs numbers, and then seasonally adjusts the combined numbers upward every spring-2nd quarter. Voila! We get a misrepresented improvement in job creation numbers every spring. But the false boost in job creation in the spring-2nd quarter declines just as quickly in the summer-fall 3rd quarter when the BDM and seasonality adjustments level off.

Looking at just the actual, raw jobs data from the CES survey for the 2nd quarter for the last several years, compared to the preceding 1st and subsequent 3rd quarters, shows how the gains of the 2nd quarter always run-up compared to the first and then collapse in the 3rd. This data is from the US Labor Departments CES for the past four years.

TABLE 1
Employment Gains/Losses 1st Through 3rd Quarters
2007-2011
(in thousands of jobs created per quarter)

Years   Quarter 1   Quarter 2   Quarter 3

2007   -2,310        +2,620           -643

2008   -2,033        +1,636          -1,427

2009   -4,122         +663             -1,092

2010   -1,677     +2,517               -174

2011   -2,385

When the above raw data from the CES combined with the BDM is subsequently adjusted for seasonality, the result is the typical rosy picture for job creation reported every 2nd quarter for the past four years by the Labor Department. As Labor Department representatives admitted in a public online Q&A session on the BDM model, at which this writer attended, months with generally strong seasonal increases such as April, May, June generally have a larger positive birth-death factor. When that seasonal upward bias disappears in the remainder of the year, jobs then collapse once again.

The problem with the BDM is that it does not reflect any actual job creation data. It is a model, not an actual survey or census of jobs. It is derived from a long run historical average for new business creation (and thus jobs), which includes economic growth periods when creation is higher than in recessions, when creation may in fact be negative for many months. It does not pick up actual business deaths and therefore job destruction. It is based on data that is lagged at least a full year. It results in a gross overestimation of net new jobs created, and in the spring in particular when seasonality adjustments are factored into the raw data.

What it all means is we can expect a retrenchment on job creation this coming summer once again. Nearly all economic indicators are pointing to a slowdown in the US economy. Housing is in a double dip, with record level collapse in prices, housing starts, sales, and just about everything else. Manufacturing has begun to level off as the global economy slows in turn, with Japan and UK and the Euro periphery in or entering new recessions, and China, Brazil and India taking action to slow their economies. Services growth in the US is also slowing, as the US consumer is hammered by increases in gas and food prices, as well as by continuing double digit costs of health care, education, and local taxes. State and local governments are on schedule to lay off at least 400,000 in the coming fiscal year, having sacked 300,000 last year. And the Federal government, where jobs have been flat, will lay off hundreds of thousands more if current directions in budget cutting are any indicator.

So don’t get too excited about US government jobs reports in the 2nd quarter. And hold onto your hat. The jobs crisis is far from over.

Jack Rasmus
Jack is the author of EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION, Pluto Press and Palgrave-Macmillan, May 2010; and the forthcoming OBAMAs ECONOMY: RECOVERY FOR THE FEW.

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COMMENTARY: For much of the past year conservative governors, the business press, and anti-union forces have been pounding the drum that public employees wages and benefits–and especially their pensions–are the prime cause of States’ budget deficits. A public employee pension funding gap ranging from $500 billion to $2 trillion is sinking State budgets, it is argued. But States budget deficits are caused by tax restructuring for decades favoring business and wealthy households, by failed speculative investments, and deep and frequent recessions followed by chronic poor job recovery.  Now new evidence has appeared in a report by Whitney Associates LLC indicating today’s pension funding gap of $1 trillion has been caused all along by politicians diverting pension plan contributions to cut business taxes and for spending elsewhere. Public employees have thus been subsidizing States’ budgets with their pensions for more than a decade, not undermining them. That created the pension gap. And now in a classic case of ‘blame the victim’, workers and their pensions are being blamed for the budgets they’ve in fact been subsidizing.

‘NEW EVIDENCE ON PUBLIC PENSIONS AND STATES’ BUDGETS,’ by Jack Rasmus, May 19, 2011

“A new study released May 18 by a pro-business source, Meredith Whitney Advisory Group LLC, confirms what this writer and others have been pointing out about current State budget crises: namely, state employees pensions and retirement health benefits are not the cause of States current budget deficits. Moreover, the underfunding gap in state employee pensions that does exist has been due primarily to state politicians and pension fund managers having failed to make necessary contributions to state pension funds for more than a decade.

The Whitney report estimates that about $1,000 billion of (states) spending over the past decade came from not adequately funding pensions, according to the business newspaper, The Financial Times. The Times further notes that the research concludes that state debt has surged over the past decade as states have subsidized budgets by not adequately funding retirement pledges.

In other words, the states diverted contributions to pension funds on a massive scale of $1 trillion, in the process creating the current pension funding gap, and then used the money to finance spending excesses elsewhere. They also used the diverted funds to offset billions in revenue loss due to widespread reduction in business taxes, in an escalating state vs. state race to the bottom aimed at competitively lowering business taxes in order to lure companies to their own state. The race to the bottom in state corporate taxes continues to this day, and is in fact accelerating

So public workers have been, in effect, subsidizing State budgets for years, not draining them. And not only have they been subsidizing state budgets, but the diversion of contributions to their pensions has enabled states to cut business taxes as well.

Whitney summed up her report in a guest editorial piece in the Wall St. Journal on Wednesday, May 18. In the article she points out The States have racked up over $1.8 trillion in taxpayer supported obligations in large part by underfunding their pension and other post employment benefits. She added that the off-balance sheet portion of that $1.8 trillion–i.e. the pension and retiree health benefit share of the total obligations constitutes $1.3 trillion of the total. In other words, $1 trillion and another $300 billion represents the contributions that should have been paid, respectively, into state employee pensions and health benefit funds but weren’t; funds that, if they had been paid, would have otherwise prevented the current $ 1 trillion public pension funding gap.

Politicians were able to get away with this scam so long as the economy was growing up to 2007 and other sources of tax revenues were maintained. But the recession blew a hole in the game by reducing all forms of revenues. The Obama administration plugged the hole temporarily with $260 billion in subsidies to the states in 2009-2010. Then the Obama subsidies disappeared and the hole reappeared by the end of 2010.

In anticipation of loss of funding from the federal government, the issue of underfunded pensions quickly came to the fore late last year. The crescendo of blame focusing on public workers pensions began escalating, led by the business press, Republican governors, and Teaparty politicians. Underfunded pensions obligations were targeted as the prime cause of States deficit problems–i.e. underfunded pensions that State politicians over the past decade themselves created by refusing to make contributions to their pension and retiree health benefit plans.

It is truly ironic that the diversion of $1 trillion in public workers pensions actually filled the states deficit hole for more than a decade, but public pensions are now being blamed for the budget deficits going forward.

Instead of addressing the real causes of states budget deficits, the politicians focus is on cutting public workers pensions and health benefits. It is a classic case of blaming the victim (i.e. public workers) for a crisis politicians created by diverting pension fund contributions to cover business tax cuts and other expenditures.

As an alternative solution, why not have the Federal Reserve Bank provide underfunded pensions a temporary $1 trillion bridge loan to cover the gap? After all, the Fed gave $9 trillion in similar loans, at an interest cost of 0.25%, to banks during the recent financial collapse–$1 trillion of which went to foreign banks. Pension funds are financial institutions. So why shouldn’t they be given similar bridge loans? That is, roughly the same amount that was given by the Federal Reserve to foreign banks? Public workers, who didn’t cause the crisis nor caused the underfunding gap, shouldn’t have to pay for a problem they didn’t cause. They’ve already given up $1 trillion in diverted pension and another $300 billion in retiree health care funds. Cutting their pension and health benefits would be requiring them in effect to pay twice for something they didn’t cause in the first place.

Jack Rasmus
Jack is the author of the book, EPIC RECESSION: PRELUDGE TO GLOBAL DEPRESSION, Pluto Press and Palgrave, May 2010; and the forthcoming OBAMAS ECONOMY: RECOVERY FOR THE FEW, Pluto Press, 2011.

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COMMENTARY

In our preceding blog entry, “Teapublicans, Timidcrats, and the $14.3 Trillion US Debt”, we provided data showing how the $9 trillion added to the US debt since 2000 was due to accelerating war and defense dept. spending to the tune of $3.3 trillion, Bush’s $3.4 trillion tax cuts for the rich, unfunding prescription drugs, runaway health care costs and their effects on medicare and medicaid, and bailouts of corporations after 2007. But there are additional areas that have contributed to the crisis in federal revenues that have caused the deficits and debt as well. The article below addresses the role of multinational corporations, their offshoring of 2.9 million jobs in the US since 2000, and their major methods of tax avoidance and tax fraud. Their amount adds up to another hefty $1 trillion in federal revenue loss over the past decade. (This article appeared in abbreviated version in the blog, Working In These Times, on April 21, 2011).

“JOBS, OFFSHORING, AND THE US BUDGET DEFICIT” by Jack Rasmus, April 24, 2011

Whats the connection between the 25 million still jobless today, US Multinational Corporations, and the estimated $1.6 trillion 2012 budget deficit?

The deficit and budget cutting have been given massive amount of attention in the public press. At least a dozen different proposals from the Obama administration, Republicans in the House, Democrats in the Senate, deficit commissions, and others are now debated daily. But as proposals and programs for deficit cutting at the expense of social programs proliferate, no one is discussing how creating jobs for the 25 million currently unemployed would essentially resolve the budget deficit and eliminate altogether the need to cut Social Security, Medicare, Medicaid, and other programs.

One of the major causes of current high, chronic levels of unemployment in the US is offshoring by US multinational corporations. Less well known, however, is that these same multinational corporations are a significant cause of not only millions of lost jobs, but of trillions of dollars of lost tax revenue as well, thus contributing significantly to current and future budget deficits.

A recent report by the US Commerce Dept., a pro-business source, indicated that big multinationals like General Electric, Caterpillar, and big tech and drug companies over the past decade reduced their US work forces by 2.9 million while increasing their jobs offshore by 2.4 million. Apart from the harm inflicted on US working families, this development has resulted in the loss of huge amounts of tax revenue to the US federal government, contributing in a major way to the current US budget deficit and rising government debt levels.

For example, if one averages the total 2.9 million jobs lost in the US over ten years, and assumes an average pay of $43,000 a year over the decade, assuming further an average 20% personal income tax rate, the 2.9 job loss equates to an average annual loss in total income in the US Treasury of around $25 billion a year. That’s a total revenue loss of about $250 billion over the past decade alone. That total does not include the loss of additional state and local tax revenue, or the additional federal revenue sharing with the states that was required the past decade by the federal government to make up for the state-local tax revenue loss.

For the coming decade, 2010-2019, the lost tax revenue tab for the US Treasury would be significantly greater still, as even more jobs will likely be offshored and the average annual money income will be slightly higher than $43,000. The amount for the decade ahead would be easily in excess of $300 billion more.

But the total US tax revenue loss is even greater due to the direct loss of jobs from offshoring. The loss of tax revenue due to the loss of 2.9 million jobs (and an equal or greater number of lost jobs due to offshoring in the coming decade) is only part of the tax revenue loss picture attributable to U.S. multinational corporations.

For example, current federal tax laws actually give corporations tax breaks for moving jobs offshore. Shutting down facilities in the US in order to move offshore is considered an expense for the corporation in question, and it thus may deduct such expenses from its US tax liability on its operations that remain in the US. This means tens of billions more in lost tax revenue. Then theres the investment tax cuts given corporations that move offshore that partially pay for the cost of the capital equipment they purchase when they set up operations offshore. Both those items represent further tax revenue loss to the federal government.

These two loopholes, expensing and investment tax credit, used by companies that offshore jobs are difficult to estimate precisely, but together likely amount to at least another $150 billion dollars over the past decade, 2000-2009, and even more going forward for 2010-1019.

So we have $250 billion in lost jobs-based tax revenue for the past decade due to offshoring plus another $150 billion or so due to expensing and investment credit loopholes associated with the same offshoring and job loss. That’s a total of $400 billion.

But an even greater revenue loss is the result of these same multinational corporations refusing to pay their required foreign profits tax. By means of yet another loophole, with the exception of one year, 2005, for more than a decade now they have been defering paying taxes on foreign profits earned from their offshored operations. In fact, through various internal accounting devices they even redirect profits made in the US to their foreign subsidiaries, and thereby increase the amount that is deferred from paying taxes to the U.S. government.

It has been estimated by the global business periodical, The Financial Times, that as of mid-year 2010 non-financial US multinationals were sheltering $1 trillion in taxable revenue in their offshore foreign subsidiaries. They are holding the $1 trillion offshore, refusing to pay their share of taxes on it.

Back in 2004, the same multinational corporations played the same game’that is refused to repatriate taxes owed per the foreign profits tax. The total hoarded at the time was $700 billion. They complained then, as they do once again now, that their payment to Uncle Sam at the 35% corporate tax rate was higher than tax rates to foreign governments. In 2004, they were consequently able to get Congress to pass the Homeland Investment Act. That reduced their corporate tax rate on offshore earnings they chose to repatriate back to the U.S. to only 5.25% instead of the normal 35% corporate tax rate. Approximately $363 of the $700 billion was repatriated and taxed at the 5.25% rate. The reduced tax rate and repatriated $363 billion was taxed at the 5.25% rate in the understanding in the Homeland Investment Act that the funds would be used to create jobs. But the Act wasn’t implemented according to the letter of the law in 2005. Most of the $363 billion went to buy back company stock and to purchase other companies, which resulted in more job losses. The remaining $337 billion of the $700 billion never came back to the U.S.

The result of the nearly 30% lower rate (35% minus 5.25%) on the repatriated $363 billion was a loss of $108.6 billion to the US Treasury at that time. The other $337 billion was never taxed at all, which amounts to another $117.5 billion in lost tax revenue. The unpaid corporate taxes and revenue loss on the $700 billion at mid-decade, 2005, thus amounted to a total of $226.1 billion.

But even that’s not the entire amount of lost tax revenue. The $337 billion left offshore in 2005, and never repatriated at even the special one time 5.25% corporate tax rate in 2005, has since grown once again to $1 trillion by 2010, according to the Financial Times. At the 35% corporate tax rate that additional $663 billion (1 trillion minus $337 billion) amounts to still another $232 billion in lost taxes between 2005-2010.

And the $226 billion and $232 billion covers only US non-financial multinational corporations. It does not include offshore income hoarding and income diversion from the US to offshore by US multinational financial institutions. Conservatively, if banks and financial multinationals are added to the above figures, the grand total would be at least another $150 billion more.

Adding the preceding tax revenue losses due to multinationals offshoring of 2.9 million jobs, manipulation of loopholes, and both financial and non-financial multinational corporations refusal to pay taxes on foreign earnings according to US tax law the total revenue loss to the US government comes to more than 1 trillion.

Having gotten away with their offshore earnings tax reduction scam in 2004, multinational corporations are now once again playing the same lobbying game today in 2011. They are in the process of blackmailing Congress and the Obama administration to reduce the tax rate again on foreign earnings. Should they get their way once again in 2012, when Congress takes up the task of a major overhaul of the entire tax code, it will mean still hundreds of billions more beyond the $1 trillion in lost tax revenue every year for another decade to come.

Multinational corporations like General Electric and others argue the reduction in the offshore profits tax is necessary to create jobs while they simultaneously cut jobs by the millions and intend to continue to do so. They further argue that the US corporate tax rate is among the highest in the world. But the tax rate is only part of the picture. Actual revenues collected are a result of corporate tax loopholes, not just corporate tax rates. Together rates and loopholes add up to the actual tax take. The US has among the most tax loopholes of any developed economy in the world. As a result, corporate taxes in the US represent only 3.2% of GDP, one of the lowest tax takes in the industrial world.

Today the revenue and budget deficit stakes are even higher than they were during the past decade. All US corporations today, whether doing business offshore or in the U.S., want the corporate tax rate on operations in the US, as well as offshore, reduced to 25% from the current 35% rate. That proposal is already embedded in the current U.S. House Republican (Paul Ryan) budget. The 25% rate is also supported by the CEO of General Electric, Jeff Immelt, who heads up President Obama’s special trade council. And GE, it was recently reported, not only paid no corporate taxes in 2010 on its global income of $14.2 billion ($5.1 billion of that earned in the US), but actually got a check from the US Treasury for $3.2 billion in tax subsidy.

It appears President Obama has been steadily drifting in the same direction of the 25% corporate rate tax cut as well. After having run in 2008 on a platform that assured voters he would enforce the 35% on corporate offshore profits, and force multinationals to pay up on their offshore sheltering, in 2010 Obama abandoned the idea of enforcing the foreign profits tax altogether. It was shelved. Now he is moving in the opposite direction toward allowing even more corporate tax cuts.

This writers prediction is that in 2012 he will trade the corporate tax cut for a token increase in the personal tax rate on millionaires. The corporate tax cut will be justified as necessary to create jobs. The token increase in the top rate of the personal income tax will yield far less revenue than will be lost in cutting the corporate tax rate. But it will provide political cover. General Electric and other multinational CEOs will politely nod their heads and smile (and continue to collect their subsidy checks from the government). Net tax revenues will fall. The budget deficit will get worse. And GE and other heads of US multinationals will continue to offshore millions more US jobs in the years to come, thus providing even more evidence to the contrary of the myth that business tax cuts create jobs.

Jack Rasmus

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COMMENTARY:

Current Budget Deficit debates consuming Washington politicians focus on social program spending cuts only. Republicans and their Tea Party allies have declared tax increases on the wealthy and defense spending ‘off limits’ for the deficit reduction agenda. Democrats allow themselves to be increasingly driven to this agenda. A closer look at the $14.3 trillion US debt and annual deficits shows, however, that the real causes of the deficits and debt since 2000 are: escalating defense and war spending, tax cuts for the wealthy and corporations, lost tax revenue due to chronic poor job creation, runaway medical care costs driven by insurers and for profit healthcare providers, Bush’s unfunded prescription drug program, and recent trillion dollar bailouts of corporations and banks. The following article provides the data and details. (This item will appear on the blog, Truthout, in early May)

TEAPUBLICANS, TIMIDCRATS, AND THE $14.3 TRILLION U.S. DEBT

President Obama on April 13 gave another of his now notorious maybe this/maybe that speeches. Raise taxes on the rich, he said. But in the same breath announced everythings on the table. This time the subject was the U.S. debt and deficits, as he responded to the policy gauntlet thrown down by the Teapublican party last week.

Last Friday the Democrats blinked once again and then caved in once more to the Teapublican deficit cutting offensive. After several weeks of so-called hard bargaining between the two parties in Congress, a compromise was reached. Some compromise. Two weeks ago the Democrats moved from their initial position of $6 billion in spending cuts to $11 billion, then moved their position a third time to $22 and finally a fourth time, with no Teapublican counter, to $38.5 billion. They ended up a mere $1.5 billion short of the position of House Speaker, John Boehner, and his fiscal wrecking crews initial $40 billion position at the outset of negotiations, thus earning themselves the new appellation of Timidcrats. As a former union contractor negotiator, this writer would love to face the Timidcrats across the bargaining table.

Smelling blood in the water, the Teapublicans quickly opened a second front as well last week, as the negotiations came down to the wire. Their fiscal darling, Paul Ryan, the likely future Teapublican vice-presidential candidate, hurled his draconian budget proposal across the bargaining table, targeting Medicare and Medicaid as the main source of deficit cutting to come in the next round of debate. Less noticed at the same time was the further Teapublican move that took defense spending off the table in future negotiations, joining their earlier untouchable topic of Bush tax cuts for the rich.

By maintaining momentum and thus control of the budget policy agenda, Boehner and crew have now cleverly succeeded in hedging in the Timidcrats by limiting future budget deficit cutting to Medicare and Medicaid in the short term and inevitably Social Security as well down the road.

But a consideration of the numbers shows conclusively that the current and projected budget deficitsand the current $14.3 trillion U.S. federal debtis the result of the very tax cuts and war and Pentagon spending that the Teapublicans have declared off limits. In fact, more than two-thirds of the increase in the federal debt since 2000 is directly attributable to wars and tax cuts for wealthy households, investors, and corporations. Heres why:

The total federal debt was less than $5 trillion in 2000 when George W. Bush came into office January 2001. Today it is $14.3 trillion, about 97% of the U.S. Gross Domestic Product, estimated to be around $14.6 trillion in 2010. So where did the roughly $9 trillion in additional debt added over the past decade come from?

War Spending As Cause of the $14.3 Trillion Debt

According to the U.S. Bureau of Economic Analysis, which maintains the national income accounts for the federal government, defense spending in 2001 was $342 billion. Thats Pentagon spending and doesnt include direct war funding which has been passed by Congress on a supplemental funding basis. By 2010 it was $698 billion, more than double.

If Defense Department spending had risen after 2001 at a rate equal to the inflation rate the rest of us had to deal witharound 2% per year on average for the decade instead of the actual 8.2% annual rate of increase for Defense Department spendingthen total Defense Department spending would have been a cumulative $1.526 trillion less than it actually was over the past decade. That is, if the Defense Department were limited to a normal 2% per year increase in defense spending from its base year of 2001, the US federal debt would be $12.7 trillion instead of todays $14.3 trillion.

The preceding paragraph does not yet take into account direct war spending on Iraq, Afghanistan, (and now Libya). According to the U.S. Congressional Budget Office direct war spending amounts to an additional $1.3 trillion. Thats a cost per U.S. soldier in Iraq-Afghanistan of $525,000 each. The CBO further estimates that if U.S. troop numbers are reduced to the 60,000 minimum expected to remain as the U.S. pulls out, by 2015 the costs will still continue to rise, to $1.88 trillion, roughly another $600 billion. But lets be good conservatives and not count that. In short, if we didnt have the endless wars, the $14.3 trillion federal debt would be reduced by another $1.3 trillion, lowering it to $11.4 trillion.

The combined $2.826 trillion has, of course, resulted in additional borrowing by that amount by the U.S. government. That means a further cost in terms of interest payments on the debt. Since defense spending runs around 20% of the US annual budget, we can add another $565 billion over the past decade to the total direct cost of 2.826 trillion. That raises the total cost of the wars and Defense Department cost over-runs to $3.381 trillion.

Even so, thats not the total cost of the wars. Theres the cost of Homeland Security, about $40 billion a year for each of the past ten years. The cost of nuclear weapons resides in the Energy Department budget, not in Defense. Thats more. Then theres the costs of CIA and the military component of US Aid. Lets not forget the future costs for vets medical, disability, and education benefits when they return. Thats also in other federal department budgets. And not least, theres the estimated $50 billion plus a year on black budget projects involving super-secret military research and development that isnt indicated in the federal budget. But we wont count any of that either.

Radical Tax Restructuring As Cause of the $14.3 Trillion Debt.

Between 2001 and 2004 George W. Bush pushed bills through Congress every year that cut taxes on wealthy households and investors capital gains, dividends, and inheritance. According to the Center for Budget and Policy Priorities, the total tax cut over the decade amounted to $3.4 trillion. 80% of that, or about $2.7 trillion accrued to the top 20% households and about half that to the wealthiest 5%. These tax cuts were extended by Obama and the Teapublicans last December for another two years, at a further cost to the U.S. Treasury of an estimated $400 billion. Add to this the approximately $320 billion in tax cuts passed in Obamas 2009 stimulus bill, and another $90 billion in Bushs economic stimulus package in the spring of 2008. Thats a total of about $3.5 trillion in tax cuts over the preceding decade lost to the U.S. budget.

The tax cuts were supposed to create jobs. But the Bush cuts between 2001-04 produced the weakest job recovery on record following the mild recession of 2001. It took a then record 46 months simply to recover to the level of jobs that existed in January 2001 before that recession. The period of actual job recovery, from mid-2004 to 2007, was also the briefest on record. Then came the collapse in 2007-09 and the worse job loss record since the 1930s, which some economists estimate will take 8-9 years just to return to employment levels of December 2007. History shows irrefutably that business tax cuts dont create jobs.

The chronic, slow and weak job creation also results in huge tax revenue loss. There are many estimates of what the tax loss from recessions of 2001 and 2007-09 and weak recovery after both recessions amounts to. Its certainly more trillions. But lets leave that out as well for now.

The conservative estimate of $3.5 trillion tax revenue lost to the US budget, plus the $3.4 trillion in war and defense cost run-ups, amounts to a $6.9 trillion contribution to the $14.3 trillion debt from these two sources alone. Thats more than 70% of the $9.3 trillion debt added since 2000.

The Remaining $2.1 Trillion

The two remaining major causes of the debt and deficits today are the recent bailouts of bankers, corporations, and investors by the Obama administration, and the accelerating rise in health care costs for the government (and all of us) that have driven the cost of Medicare, Medicaid, and prescription drugs to record heights.

Concerning bailouts, the 2009 stimulus provided $260 billion in subsidies to the states and cities in 2009-2010. However, it didnt resolve the state-city fiscal crisis that continues to worsen. Now that there is no more stimulus, the fiscal crisis of local government grows progressively worse. Other direct bailout costs include $500 billion in direct grants and aid to major corporations, like AIG, GM, the government agencies, Fannie Mae-Freddie Mac and others. Thats at least $760 billion in direct contribution to the deficit and debt.
Of course the banks got bailed out as well. To the tune of $9 trillion. But that was done through the U.S. central bank, the Federal Reserve, largely by means of 0.25% free money loans. But that $9 trillion does not show up in the federal budget or add to the total federal debt. Its another set of books.

The fourth, and last major cause of federal deficits and debt over the past decade can be laid at the doorstep of the health insurance companies, the for-profit hospital chains, and the prescription drug companies. George Bush s contribution to price gouging by this rentier-capitalist cabal was to pass a Drug Company Subsidy bill and then make sure it didnt get funded. That required borrowing and thus a further debt run-up of at least $500 billion and rising. Obamas contribution to the price-driven deficits in Medicare, Medicaid, and drugs was to utterly fail to control health care costs in his healthcare bill last year once he abandoned the public option. That failure to control costs will eventually doom the 2010 healthcare bill in the long run.

Meanwhile, in the short term, it has ensured the Teapublicans the policy hook with which to deflect the focus from the real causes of the current $14.3 trillion debt and chronic deficits. This failure to control health care costs, combined with the budget deficit and debt caused primarily by wars, runaway defense spending, and radical tax restructuring for the rich, has given the Teapublicans the historic opportunity to blame the retired, the poor, and those in medical need for the very same deficit and debt crisis that their tax cuts, their wars, and their bailouts created in the first place.

I think Ill go and find some Teaparty protesters to see if theyre interested in protesting on behalf of their Medicare again. But I dont expect the billionaires who funded their protests last summer will be willing to pay them to organize protests this time around.

Jack Rasmus
April 14, 2011

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COMMENTARY:

What’s really behind the public pensions funding gap. Causes seldom mentioned by the press, intent on blaming rising pension benefit payouts, include the practice of pension ‘contribution holidays’, failed speculative investments of the past decade, pension managers’ fraudulent accounting assumptions, a decade long slow or no job growth, and use of pension funds to subsidize rising healthcare costs. The solution is simple. Read below.

“THE TRUTH BEHIND THE PUBLIC PENSIONS FUNDING GAP”
by Jack Rasmus

State governors across the nation, led by newly elected right wing Republicans (with several Democratic governors in tow), are whipping up anti-union sentiment by declaring public workers and their unions are the cause of state budget deficits. They argue that various labor costs are driving up their deficits, but the lead cause of those labor costs is overly generous increases public employee pension benefits.

But increases in public employee pension benefits are not the cause of the States budget crises. There are, indeed, serious pension funding gaps in many states public pension plans. But a close investigation of these gaps shows clearly they do not exist because of states granting public employees exorbitant pension benefits.

The real reasons behind the pension funding gap are several. First, weak and delayed recoveries from the recessions of 1990-91, 2001, and 2007-09 have meant feeble job creation and thus less contribution to pension fund balances. Here the phenomenon of jobless recoveries plays a critical role. Each recession over the last half century in the US has resulted in a longer time period for jobs to fully recover to their pre-recession levels. After the 2001 recession it took 46 months just to get back to a level of jobs that existed before the recession. Estimates today are it will take 84-96 months, or 7 to 8 years, for jobs to recover to 2007 levels. That’s twice as long. And that means a projected larger pension gap.

But theres an even greater reason why pension funds have ended up short of income today. And that greater reason has been building for more than a decade. Its what is called the practice of contribution holidays; that is, pension managers refusing to put the necessary contributions into the fundsa practice in the public sector that has been going on since the mid-1990s and even before that in the private sector.

Contribution holidays in turn were made possible by fund managers employing fraudulent actuarial assumptions about rates of return on fund investments and, secondly, by assuming they would hire large numbers of younger workers when, in fact, that hiring never occurred. Both gimmicks allow a pension fund to appear adequately funded when in fact it isnt. They permit fund managers to maintain that the pension has more income and fewer liabilities than it in fact actually has.
The result of contribution holidays and fraudulent actuarial assumptions in the private sector contributed significantly to the collapse of many private pension funds since the 1980s and their replacement with 401k pension contribution plans. Whats starting in the public sector today is merely a repeat of what happened already in the private sector. The goal, once again, is to replace real defined benefit pensions of public workers with nearly worthless 401k plans. What CEOs have been doing in the private sector for three decades, now governors are attempting to do as well.
In the 1980s there were over 100,000 of defined benefit pension plans in the private sector. Today there are around 28,000. The rest were dissolved or converted to 401k plans or hybrid versions called cash balance plans. That is, they were in effect transformed into 401ks and thus privatized. The typical conversion resulted in a payoff to employees to transfer to a 401k that was barely half that compared to what they would have received in total benefits from their prior defined benefit pension. Today the average balance in a 401k is about $18,000. Thats all to fund an entire retirement period! The governors now want to do the same, to complete the shift to 401ks and privatization of the pensions in the public sector much like that already achieved in the private sector.
Inadequate pension funding due to recessions and weak job creation, due to the constant declaring of contribution holidays, and due to actuarial fraud are not the only causes of under-funded public pensions today.

The pension funding gap has also been magnified several fold since 2006 as a consequence of public employee pension fund managers gambling on risky speculative investments. Prior to 2006 and the passage of the so-called Pension Protection Act, public pension fund managers werent allowed to partner with Hedge Funds and other high risk financial institutions in high risk investments. After August 2006 it has become a widespread and common practice. After the Pension Act of 2006 pension funds were permitted to make loans to Hedge Funds and Private Equity firms, as well to plunge directly themselves into speculating in subprime mortgages and financial derivatives of all kinds. The 2006 Pension Act also permitted still further contribution holidays.
The result has been that since 2006 all pension funds have incurred great losses as a consequence speculative investing. These losses have added significantly to the pension funding gap in the public sector. It is estimated that public pension funds lost around 25%-30% of their total asset value in 2008-2010 as a result of their foray after 2006 into speculative investing in risky assets like subprimes, derivatives, foreign exchange, and the like. Most pension funds are considered adequately funded and are thus AAA quality if they are 85% funded. A loss of 30% means a funding drop to around 50% funded, as is the case of some of the worst funded state pensions like Illinois state pension fund. But a funding fall of 30% is, on average, about the funding gap attributable to the recent recession and speculative excesses of fund managers. Is Illinois worst case funding gap therefore solely the cause of these non-employee factors? It appears so. If Illinois is typical, then it may be that much of the current funding gap is due to investment lossesnot due to public employees pension benefit hikes.

Still another possible cause is escalating health care costs. It is a well known fact that Federal tax law allow businesses to take money from their pension funds to cover costs in their health benefit plans. While states don t pay taxes to the federal government, could the same diversion of funds in the public sector explain part of the pension funding gap? It would at least warrant an investigation.

Local government (city) employees pensions were especially hard hit by investments in over the counter derivatives interest rate swaps, which banks and other financial institutions talked them into in the run-up to the 2007-08 financial collapse. Their pension funding gap consequently grew even further as the pension funds experienced major investment losses. It is clear therefore the pension funding gap is not the consequence of escalating pension benefits of the average or even bottom 90% of the public employee labor force but is ultimately caused by the banks, by bad investments by public pension funds managers, by fraudulent accounting practices, by fund managers failure to make appropriate contributions to the plans, by recessions, by diversion of funds to cover rising health costs, and by past Congresses and Presidents permitting pension funds to gamble and speculate with workers retirement incomes.
Therefore before declaring employees pension benefits increases as the cause of the gap, a detailed investigation state by state should be undertaken to determine exactly how much these preceding non-employee causes have been responsible for each states pension funding gap.

Yet State governors, led by Republicans, are instead driving ahead and placing the blame on public employees and making them pay for the gap in pensions with their wages, jobs, and health care benefits. Their goal is converting state defined benefit pension plans to 401k plans and so-called cash balance plans that are a preliminary to 401ks. This conversion will lead in the public sector, as it did in the private before, to eliminating at least half of what public employees would have received in pension benefits. It will lead to the destruction of retirement security among workers in the public sector, just as it had previously among workers in the private.

Why should public workers pension benefits be reduced to resolve the funding gap when they arent the fundamental cause of it in the first place? Why not make those who created the pension funding gap pay the Hedge Funds, Banks, Insurance companies, and other financial institutions that were responsible for the massive investment losses and the pension fund managers who negligently risked workers pensions? Or the politicians who let them? And don’t forget the government regulators who looked the other way while it all happened?

Making the real perpetrators pay for the funding gap will take time, critics say. And the funding gap is now. True. But why not, in the short run, temporarily stabilize public employee pensions (and thus a good part of States budget deficits) by simply making the Federal Reserve provide direct loans to the pension funds at the same cost of 0.25% that the Fed has provided loans to other financial institutions the past two years. After all, pension funds are also financial institutions. And Fed loans wont add a cent to the federal or state budget deficits as an added plus.

It should not be forgotten that the same Federal Reserve provided $9 trillion to banks during the recent crisis of which $1 trillion was loaned to foreign non-US banks! If the Fed can loan $1 trillion to foreign bankers and their wealthy bondholders and investors, why cant it do so to protect the retirement of millions of US workers in the public sector who are the victims not the criminals responsible for the public pensions crisis.*

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