Jack Rasmus

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

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.*

COMMENTARY:

The past two months, February and March 2011, showed a higher total jobs creation than had preceding several months. Business press pundits and the Obama administration now hail the numbers as showing jobs have finally turned the corner, but a deep look at the numbers shows something quite the contrary. The following article published later this week by the author challenges the official view.

“March Jobs Numbers: A Contrarian View”

by Jack Rasmus
April 3, 2011

On Friday, April 1, the U.S. Labor Department released its numbers for jobs and unemployment for the month of March. It reported 216,000 net new jobs created in March, after 192,000 the previous month. The two months are heralded as a definite shift in the labor market and jobs in the U.S. Business pundits at the New York Times declared the results represent a solid record in job gains, kicking (job creation) into high gear. Obama and the administration are calling it clear evidence of a new momentum in job creation, bragging that about 1.3 million jobs were created in the past 14 months since January 2010. However, a closer look at the numbers reveals that continuing, and emerging, problems in the jobs market in the U.S. should be of great concern.

About 658,000 jobs were created in the past three months, since the beginning of 2011, according to the Labor Dept. But the same data show 798,000 workers left the labor force over the same period. In other words, more are giving up finding a job than are locating one. The number is ever worse when the past 14 months are considered. 1,353,000 found jobs but 2,121,000 left the labor force. A jobs market truly recovering does not experience that kind of  massive number of discouraged workers leaving the labor force. Quite the opposite. A truly recovering labor market is characterized by large numbers of discouraged re-entering the labor force. Something else is going on here.

A closer look at the 1.3 million shows further interesting characteristics. First, more than 400,000 of the 1.3 million represent growth in involuntary part time and temp agency jobs, about 297,000 temp jobs and 117,000 part time jobs. These are jobs that pay 60%-70% of normal wages and virtually no benefits. Moreover, the 297,000 temp jobs reflect only temp agency hires; at minimum another 150,000 of the 1.3 million are temp workers directly hired by companies themselves. In other words, almost half of the 1.3 million are low pay, no benefit temp and part time jobs.

Another notable characteristic is that the 1.3 million private sector jobs created the past 14 months reflect a delayed recovery from the double dip in the job market that occurred last summer. From June to September the economy lost hundreds of thousands of jobs during the four months. The jobs gains since October represents a recouping of those jobs lost last summer, not a true net gain.

A breakdown view of the job growth by major sectors of the economy – Manufacturing, Construction, Government, and the Service Sector reveals another interesting fact. That is, only the Service Sector has clearly generated job creation to any significant extent. Manufacturing created a net growth of employment of only 110,000 over the past 14 months. Construction has experienced a net loss of 122,000, essentially offsetting the manufacturing growth. While the manufacturing sector experienced a small boomlet in production last year driven by exports, and produced significant profits for its companies and their investors, this boomlet has produced little in terms of employment gains. Manufacturing today only represents 7% of the entire US labor force, after decades of offshoring and outsourcing. Manufacturing may contribute significantly to total output and GDP in the US in a recovery, but it will never lead a jobs recovery from recession.

Construction today is even a worse condition. It is mired in a bona fide depression, on a par with the 1930s. New construction and housing starts are down 75% from pre-recession highs. Foreclosures are approaching 10 million (out of about 54 million mortgages). And home prices are now in their own double dip as well. 89,000 of the 122,000 job loss in construction over the past 14 months have occurred in the past three months.

Government job creation is no better. It declined by 313,000 in the last 14 months, with 93,000 of that total occurring in just the last three months. And that’s only the beginning. With States and cities planning major layoffs at mid-year and beyond, job losses totaling 500,000 this year in government are not out of the question.

Only the Service sector has actually added private sector jobs to any extent over the past 14 months and since the start of 2011. Of that sector’s 1,386,000 jobs created, however, many have occurred in the retail, hospitality-leisure and business services industries; that is, industries consist overwhelmingly of part time and temp jobs. The previously noted 500,000 plus part-time and temp jobs have been largely concentrated in this sector.

At the rate of 192,000 and 216,000 jobs created the past two months, assuming 130,000 new entrants into the labor force each month we have only a net gain of 70,000 jobs a month. At that rate, the economy will not return to its pre-recession total employment level of December 2007 for another 70.2 months. In short, that’s not until the end of 2016. And that’s using the Labor Department’s conservative U-3 unemployment rate. Using the Labor Department’s more accurate U-6 unemployment rate, a recovery to December 2007 pre-recession job levels will not occur for 188.8 months; that’s 15.6 years, or not until around 2025.

A more accurate picture of a jobs market still deep in trouble is possible by other job market indicators as well. For example, there’s what is called the JOLT measure, or job openings to labor terminations ratio. This simply compares the number of workers looking for jobs, given the number of job openings by business. Today there are five workers looking for every job offered by business. That 5 to 1 ratio is essentially unchanged since January 2010. At the start of the recession it was 1.8 to 1.

Yet another alternative measure of the condition of the job market is the Employment-Population Ratio. This reflects how well jobs are being created in relation to the growth of the population. That ratio too is unchanged the past fourteen months, from 58.4 to 58.5 today.

How many workers are long term unemployed is still another measure. There, once again, not much has changed. There were 6,133,000 long term (i.e. more than 27 weeks jobless) fourteen months ago; there are 6,122,000 today.

Future job creation prospects for the remainder of 2011 and into 2012 are not as great as optimists in the Obama administration and the business press would have us believe. The current US picture is not one of broad based, robust jobs growth. Manufacturing and construction, i.e. sectors that historically lead a recovery from a recession, show no evidence as serving as engines of continued job growth. And the government sector shows an accelerating rate of job loss, soon to approach a half million. That leaves only the Services sector, composed heavily of temp and part time job creation.

Even the modest growth in U.S. manufacturing employment shows signs of now tailing off. Manufacturing has been driven up to now by exports. However, recent sources of U.S. export sales are now slowing. China and Brazil are both slowing their economies to deal with inflation. Japan has re-entered recession, even before the Tsunami-Nuclear crisis which will reduce its consumption of U.S. exports still further. And Europe continues to teeter on financial instability. Add to that the continuing crisis in the Middle East – North Africa, the further rise in oil and commodity goods prices, and it all collectively adds up to a significant decline in global export demand and in turn US export sales, US manufacturing output, and jobs. Manufacturing will thus provide no significant source for job creation going forward.

In even worse condition, construction jobs have no light at the end of the tunnel and will decline further as that critical sector falters further and foreclosures rise while home prices fall. Congress and the Obama administration’s apparent consensus to dismantle the housing agencies, Fannie Mae and Freddie Mac, will mean even less housing construction, sales, and more falling prices.

Finally, in addition to the minimum of 500,000 more jobs soon to be lost in the government sector in 2011-2012, it is estimated that 600,000 additional jobs will disappear in the private sector as well, should Congress pass in the next few weeks the Tea Party-Republican $61 billion of cuts in this year’s U.S. budget. And this precedes the even bigger 2012 budget fight about to begin in Washington after April 8, bringing unknown further budget cuts before the end of 2011. In short, even the uneven, tepid, and largely low-pay job creation in the Services sector the past 14 months will be more than offset in the coming months, as a result of forthcoming fiscal austerity and budget reductions by government at all levels.

Jack Rasmus

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