Posts Tagged ‘US economy’

Annually for the past three years this writer has made leading edge predictions about the trajectory of the US and global economies for the 12-18 months to come. The last previous set of predictions appeared in the January 2012 issue of ‘Z’ magazine. Eighteen months later, it appears most have materialized. The following briefly summarizes those prior predictions, and makes further predictions for the next 18 months, through December 2014:

I. Review of January 2012 Predictions

1. The forecast that the US would enter a double dip recession around late 2013 or 2014 is yet to be determined. However, the US and global economies both appear to be slowing significantly (see my blog piece ‘US GDP Longer Term Trend Analysis’), while China, the BRICS, and in particular Europe all are slowing even faster. Japan has engaged in a desperate and risky monetary stimulus that will fail in the longer term. Simultaneously, financial instability worldwide grows as asset bubbles peak and begin to deflate.

2. It was also predicted in the January 2012 issue that the US Federal Reserve would introduce a third version of its QE program. That prediction was realized, with the Fed introducing an open ended $85 billion a month liquidity injection.

3. A third previous prediction in January 2018 was that deficit cutting would begin again in ‘great earnest’ immediately following the November 2012 elections. That of course also happened, with fiscal cliff, sequestration, and all the rest.

4. In 2012 it was predicted Social security and Medicare spending would be cut a minimum $700 billion, based on what Obama had proposed in the summer of 2011, but backloaded into later years of the coming decade. That is yet to be determined, but appears likely as Obama’s 2012 budget again called for $700 billion in such cuts.

5. Two predictions in January 2012 did not prove accurate: that home prices would continue to fall and foreclosures rise. Single family home prices began to rise slowly in late 2012, albeit only one fourth of the original decline. More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013

6. In the January 2012 predictions, it was forecast that US manufacturing and exports would slow in late 2012, which did, and the minimal job growth in manufacturing would level off and decline, which also has occurred.

7. Prior predictions forecast that jobs recovery would undergo a series of ‘false starts’ determined by seasonal and other statistical factors. The result would be little net reduction in total unemployment. This proved partially true: some jobs were created, but more workers than expected left the labor force entirely. The previous prediction of 24 million jobless compares to today’s official 21 million jobless. But the numbers are largely the same if one considers the 4-5 million ‘jobless’ who left the labor force altogether. As a related new prediction: There will be still be no sustained recovery of jobs over the coming year. Jobs will continue to ‘churn’, with high wage replaced with low wage, full time with part time/temp, current workers with jobs leaving the labor force and new entrants and lower pay taking their jobs, etc.

8. Past predictions were more accurate with regard to the global economy. It was predicted the Eurozone sovereign debt crisis would stabilize, then worsen again. The temporary stabilization occurred in the late summer of 2012. The worsening once again is pending. It was also predicted two or more Euro banks would fail. More than that failed in the periphery of the Eurozone alone, with others in Belgium, Netherlands and elsewhere.

9. It was predicted both France and Germany would enter recession in 2012 and the UK experience a double dip—all of which occurred.

10. It was predicted that global trade would slow and begin to contract in 2012—a prediction that also proved correct.
The following constitute this writer’s predictions for the US and global economies in the coming 18 months. (For a more detailed explanation of why these predictions, see the July issue of ‘Z’ magazine, and this writers article “Predicting the US and Global Economy”. This article will be posted on the writer’s website, http://www.kyklosproductions.com/articles, in late July. See also the writer’s weekly radio show on the Progressive Radio Network, ‘Alternative Visions’, archived on Wednesday, June 12, 2013, for an audio explanation of the bases for the predictions).

Economic Predictions: 2013-2014

1. The U.S. will enter a double dip recession around late 2013 or 2014, providing both of the following occur: that either U.S. policymakers continue deficit cutting and a more severe banking crisis erupts in Europe. Either event may be sufficient to precipitate recession. Both most certainly will.

2. The Fed will begin reducing its $85 billion a month liquidity injection significantly within the next 12 months. Monetary retraction will severely disrupt both stock and bond markets. A major stock market correction will ensue and may have already begun at this writing. The additional financial markets at greatest risk are corporate junk bonds, real estate investment trusts, and money market funds.

3. There will be yet another round of deficit cutting later in 2013 and it will be associated with a major revision of the U.S. tax code. That tax code change will include a big reduction in corporate tax rates, from the current 35 percent to somewhere around 28 percent, perhaps phased in over time. Multinational corporations will also get a sweet deal on their $1.9 trillion offshore cash hoard, paying less in the end than their legally required 35 percent rate. R&D tax credits and other depreciation acceleration tax cuts will also occur as part of the deal.

4. In the next round of deficit cutting, Social security and Medicare spending will be cut a minimum of $700 billion—already proposed in Obama’s 2014 budget—and perhaps much more.

5. The much-touted current housing recovery will stall and single home price increases will slow and perhaps even level off. (More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013.) Housing will bounce along the bottom much like other sectors of the economy. Institutional speculators will continue to drive the market and once again convert it into a speculators dream, different in form from the subprime fiasco but similar in content.

6. Manufacturing and U.S. exports will slow still further, drifting in and out of negative growth as the global economy and world trade continues to contract further.

7. There will be still be no sustained recovery of jobs over the coming year (today’s official jobless is 21 million). High wage jobs will be replaced with low wage, full-time with part-time/temp, current workers with jobs leaving the labor force, and new lower paid entrants taking their jobs.

8. The current negotiations between the Obama administration and Pacific Rim countries to create a Trans Pacific Partnership (TPP)—NAFTA on steroids—will be concluded, but will not pass Senate approval until after 2014, or take effect until 2017.

9. With regard to the global economy, the Eurozone sovereign debt crisis will again worsen and the banking system grow more unstable. Austerity policy will focus more on direct attack on wages and benefits.

10. More economies in the Eurozone will slip into recession, including Denmark and perhaps Sweden. France’s recession will deepen. Germany will block the formation of a bona fide central bank in the Eurozone and the UK will vote to leave the European Union.

11. China growth rate will continue to drift lower and it will be forced to devalue its currency, the Yuan, as Japan and other currencies are driven lower at its expense by QE policies. A global currency war, now underway, will intensify.

12. Gobal trade will continue to decline.

13. Japan’s risky experiment with massive QE and modest fiscal stimulus will prove disastrous to the global economy, resulting in still more speculative excess and financial instability. Japan’s stock and asset markets will benefit in the short run, but not the rest of the economy in the longer run.

14. Capitalist economies worldwide will converge around QE monetary policies, more modest deficit spending cuts, and a more focused attack directly on workers wages and especially social benefits like pensions, healthcare services and the like—i.e. the U.S. formula. The consequence will be more income inequality worldwide and no noticeable positive impact on economic growth. The next financial crisis event may not come in the form of a crash of a particular market, but in the form of a grinding slow stagnation of markets in general. With general stagnation of the real economy, a slow drift into no growth scenarios is a distinct possibility.

Jack Rasmus
June 15, 2013

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, Pluto Books, 2012, and host of the weekly radio show, Alternative Visions, on the Progressive Radio Network. His website is http://www.kyklosproductions.com; his blog: jackrasmus.com; and twitter handle #drjackrasmus.


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Nearly daily in recent weeks, indicators of the US economy have fluctuated wildly. One day reports of manufacturing and factory orders show a declining economy, another day housing prices and residential home building appear to rise; the next day purchasing managers show a services (88% of the economy) employment trend of absolutely no gain in job creation, followed by a monthly jobs report from the Bureau of Labor Statistics that 170,000 jobs were created in May 2013. What to make of these conflicting indicators?

Stock and bond markets and investors—especially the average ‘herd’ mentality driven average types—become schizophrenic, buying one day and selling off the next. A true sign that the so-called ‘experts’ have no idea what’s coming next and that the US economy is churning and ‘frothing’, a sign of instability that could flip either way—toward more growth or toward a major relapse of the same.

As this writer has argued on numerous past occasions, the ‘experts’—whether of the business press or professional economist variety—tend to focus and hype the most recent report and indicator as revealing the ‘true’ emerging trend. But a better view is to consider the longer term trends behind the daily numbers and latest report. Furthermore, to factor in to this purely economic data analysis considerations of government (US and global) economic policy shifts, as well as highly potential ‘tail risk’ developments (a bank crash, a ‘Cyprus’ event, intensification of a currency war, etc.).

With that in mind, what follows is this writer’s analysis of the ‘longer term’ apparent trend in the US economy over the past year—as reflected in US Gross Domestic Product (GDP) numbers. However, US GDP is notoriously insufficient to fully reflect the US economic trend, for various reasons that will not be discussed here, except for two points: one is that US GDP does not accurately reflect the rate of inflation and therefore the proper adjustment for inflation to get ‘real GDP’. It underestimates inflation, thereby overestimating real GDP. It also fails to account for population growth and therefore real GDP per capita, which is the real estimate of how well the economy is doing. There are other major issues with GDP calculation that result in its overestimate of real US economic growth, that will remain unaddressed for now.

Despite its limitations, however, GDP is still the best of the worst indicators of the general state of the US economy. What follows, therefore, is an ‘intermediate’ term analysis of US GDP, over the past four quarters since summer of 2012. What it reveals is that the US economy is not accelerating onto a path of more sustained growth; to the contrary, that growth is slowly declining, which means all the hype based on short term, monthly reports and indicators should be considered with a good dose of skepticism.

Over the past year, July 2012 to June 2013, it appears US GDP has been fluctuating between virtually zero growth and 3%. But when special one-time, one off factors are adjusted for, the average growth rate is actually no more than 1.5% on average—or about the same average growth in 2012 and 2011. In other words, the economy has remained stuck in an historical, well below average recovery for the past two and a half years. Moreover, when properly further adjusted for actual inflation and for population growth, the US growth rate is averaging well less than 1% annually—i.e. has been stagnating for some time.

For example, in the 3rd quarter 2012 GDP rose by 3.1%. But the growth was heavily determined by a one time major surge in government spending, largely defense expenditures. Politicians typically concentrate spending before national elections and 2012 was no exception. That one time surge in defense federal spending was clearly an aberration from the longer term government spending trend since 2010, which has been declining since 2011 every quarter. The same pertains to state and local government spending.

The 3rd quarter 2012 defense spending surge reverted back to its longer term trend in the 4th quarter 2012. The economy and GDP then quickly collapsed to a meager 0.4% GDP rate, after being upward revised from a -0.1% actual decline. Whether -0.1% or 0.4%, when averaged with the preceding quarter’s 3.1%, the result was about 1.7%–which has been the average annual growth for the past two and half years.

The 4th quarter would have been even lower were it not for a surge in business spending on equipment in anticipation of a possible tax hike with the ‘fiscal cliff’ negotiations scheduled to conclude on January 1, 2013. But that late 2012 business equipment spending surge has also proved temporary as well, flattening out and declining in 2013. Another one off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which account for a full 1.5% of the total 2.5% of the 1st quarter 2013 GDP. And that one time exceptional event disappeared too in the 2nd quarter. So when the temporary, one off effects of pre-election government defense spending, business equipment spending at year end, and inventory surge in early 2013 are ‘backed out’ of the longer term trend, that longer trend is a GDP growth of no more than 1.5%–or about half that normally at this stage, five years after the recession.

As noted previously, moreover, even that is an overestimation. What’s important is real GDP, not just price increases for goods and services. So adjustment is typically made for inflation. But the official inflation index used to calculate real GDP is called the ‘GDP Deflator’, the most conservative measure of inflation; that is, the index that minimizes inflation the most. And by minimizing inflation, the result is to maximize real GDP, making GDP appear larger than it actually is. For example, both the Consumer Price Index (CPI) and the Personal Consumption Expenditure Price Index (PCE) record a significantly higher inflation rate than the GDP Deflator, and therefore a significantly lower real GDP than the Deflator index. Using the CPI, the average for GDP since July 2012 through March 2013 would be well below 1.5% and likely closer to 1% average growth. Finally, when population growth is taken into account and ‘per capita GDP’ is considered—i.e. the real effect of growth on real people—than the growth rate is adjustable further by another 0.5%. We’re now talking about US GDP and economic growth at a sub-par less than 1%. That’s economic stagnation and an economy drifting toward, and teetering on the edge, of another recession—a condition of fragility that would take little to push over the edge into another, ‘double dip’ recession.
For the past 18 months this writer has therefore been predicting that a double dip recession in the US is quite possible, and even likely, somewhere in the late 2013 or early 2014 timeframe should the two following conditions occur: first, the continuation of government program spending cuts and, second, a new eruption of a banking crisis in Europe which is today the weakest link in the global economy. This prediction is reiterated, adding now a third possible major disruptive factor: a shift in Federal Reserve Monetary policy (slowing or stopping its current $85 billion per month ‘quantitative easing’ (QE) money injection into the economy) that would result in a sharp upward rise in general interest rates in the US.

Stated alternatively: given the slowing global economy and the deepening recession and financial instability in Europe, should the US continue to implement additional fiscal spending cuts (aka ‘austerity American style’) late in 2013 and, simultaneously, have the Federal Reserve act such that interest rates continue to rise—then the probability is high the US economy will slip into another ‘double dip’ recession.

Perhaps anticipating this possibility, the US government agency responsible for calculating GDP, the Bureau of Economic Analysis, is planning this summer 2013 to significantly revise the way it does so. That revision will increase GDP by as much as $500 billion, according to a report by the global business daily, The Financial Times, this past April 2013. Already a relatively weakly accurate indicator of the performance of the US economy, GDP will likely soon become even more so.
In other words, while an actual double dip recession may occur later in 2013-14, especially when properly adjusted for inflation and population growth, it may nonetheless be conveniently ‘defined away’ by the forthcoming changes in its method of calculation.

Jack Rasmus, June, 2013

Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”; host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network; and ‘shadow’ chairman of the Federal Reserve in the recently formed Green Shadow Cabinet. His website is: http://www.kyklosproductions.com, his blog: jackrasmus.com, and twitter handle: #drjackrasmus.

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Last week, George W. Bush’s presidential library was dedicated. The Media were there in droves. So too were presidents Obama and Bill Clinton. They were all buddy-buddy, smiling, shaking hands and mutually jovial in the realization, no doubt, of the successful implementation of their very similar policies of the past 20 years–policies which, of course, have their ultimate origins in their common policy ancestor, Ronald Reagan.

The policy differences between the three (and Reagan) are far less than the similarities. It’s all just a matter of degree and emphasis. GW Bush, however, represents an extreme in that common spectrum. The damages to the US and global economy by the Bush regime have been almost immeasurable, and continue to this day, as they will for years to come.

Liberal economist, Paul Krugman, briefly recounted some of the more momentous damages in his recent column. But a brief column cannot do justice to the full scope and severity of George W. Bush’s toxic legacies.

This writer wrote a lengthier assessment back in December 2008 of the Bush Ten Toxic Legacies (a short list). Given all the hoopla about Bush and his library dedication (and the accompanying attempt to resurrect his reputation surrounding the event), I thought it was appropriate for readers to review in more depth and detail just what George W. Bush had done to destroy the US economy and US society, written by yours truly in December 2008. That assessment is as follows:


“Bush’s First Economic Legacy: The Mountain of Debt

During Bush’s two terms in office more than $3 trillion have been poured down the black hole of wars in Iraq and the Middle East. More than $5 trillion has been served up in tax cuts for corporations and the wealthiest 10% households in the U.S.

According to U.S. Federal Reserve Bank data, since Bush assumed office in January 2001 Government debt levels have risen by more than $3 trillion. But that’s only the total as of the end of March 2008. It does not yet include the cost of bank bailouts this past September: $300 billion for Fannie Mae/Freddie Mac, $85 billion for the insurance company giant, AIG, and the infamous $700 billion ‘TARP’ (Troubled Asset Relief Program) bailout at the close of the month. The September bailouts thus amount to another minimum $1.085 trillion.

The above $1.085 also doesn’t include pending bailouts by the U.S. government’s FDIC (Federal Deposit Insurance Corp.), the agency that is tasked with closing down failed banks and reimbursing depositors. Banks like IndyMac and others. As of the end of September, The FDIC has only $35 billion in available funds remaining for additional bailouts. It is potentially liable for 8,600 banks in the U.S. with deposits and assets totaling $13.3 trillion. It expects 800-1000 regional and smaller banks to fail in coming months. Its bailout this past summer of Indymac Bank cost $8 billion alone. After the November elections, it will have to ask Congress for hundreds of billions, and perhaps even a trillion or more, in additional funding to cover bank failures yet to come. And that’s only banks! What happens when large hedge funds or a large pension fund goes under? Will the Government bail them out as well? It seems anyone with a corporate balance sheet is now eligible for a Government-Taxpayer income transfer.

For example, non-financial corporations have already begun to queue up at the bailout trough. The three big US auto companies have just been handed $25 billion by Congress, in a separate bill that quietly slipped by the public and press in September, amidst the cacophonous wailings for bailout assistance by banks and financial institutions. Even foreign auto makers doing business in the U.S. are now demanding a piece of that pork as well. Like hogs in a pen, Corporate America’s lobbyists, financial and non-financial alike, noisily rush to the fence as the farmer approaches with his slop-pail of goodies. And it’s only the beginning. Corporate defaults are expected to rise tenfold in the next eighteen months, according to Standard & Poor’s, the corporate rating agency.

But there’s still more trillions in this Bush mountain of debt legacy picture. Between 2002 and 2007 the ‘subprime’ mortgage loan crisis was created by the Bush administration. Total mortgage debt in the U.S. more than doubled, rising from $5 trillion in 2001 to more than $11 trillion in 2007. The poor quality subprime and other risky mortgage loans amounted to approximately $2 trillion of that $6 trillion.

The Bush administration was forewarned time and again from 2003 on, by regulators and elected officials alike, at both federal and state levels, that the subprime situation was a time-bomb. Bush not only did nothing but actively discouraged federal intervention. The Bush administration officials at the Securities & Exchange Commission, SEC, in particular were instructed to look the other way as Banks set up ‘shadow banks’ operated off their regulated books. The shadow banks, called Structured Investment Vehicles, or SIVs, served as the trash receptacles in which various securitized bad subprime mortgage bonds were stuffed. Cooking separate books like this, off ‘balance-sheet’ as it is called, was precisely what CEOs and CFOs at Enron went to jail for a few years earlier. But similar behavior at banks and financial institutions in the case of subprimes was apparently not a problem for the Bush administration. When certain investigators and prosecutors got too close or appeared to have too much success, such as ex-New York attorney-general and governor, Eliot Spitzer…well… the FBI found a way to remove him from the scene.

Bush directly contributed to the subprime bust and financial crisis in yet another way. This required the active assistance of Federal Reserve (FED) Chairman, Alan Greenspan. In 2003 Greenspan was awaiting reconfirmation of his position at the FED by the Bush administration. The economic recovery from the 2001 recession had stalled by 2003. After a weak recovery in 2002, job growth was declining once again, even though jobs had still not recovered to pre-2001 levels. Bush was intent on going to War in Iraq. And 2004 elections were but a year away. The economy needed a special boost.

Bush-Greenspan struck a partnership that led directly to the subprime bust. Here’s how it happened: Greenspan and the FED accommodated Bush by lowering interest rates to 1% and then keeping them there far longer than was economically justified in any sense. The Bush-Greenspan strategy paid off for both partners. Super low interest rates produced a housing and commercial property driven economic boom from 2003 to 2006. Greenspan was awarded with reappointment as FED chairman by Bush in spring 2004 and Bush got his economic over-stimulus in time for the November 2004 elections. Financial speculators, banks and the mortgage industry raked in superprofits. They were able, as a result of Greenspan policies, to borrow virtually free money from the FED, which they then ‘leveraged’ to purchase ten times more volume of subprime mortgage bonds. Some of the more aggressive Investment banks, like Bear Stearns and Lehman Brothers, leveraged themselves 30 times or more. Greenspan’s 1% interest rate policy helped fuel the speculative excesses in the mortgage industry that created the subprime boom of 2003-06. When the FED finally began to raise rates again in 2005-06 it provoked the subprime bust of 2006-07. The end result of it all was a record housing price spike from 2004 to 2006, followed in turn by the consequent subprime mortgage price collapse.

In the process of borrowing for leveraging and housing speculation, banks and financial institutions added roughly $8 trillion in new debt during the first seven years of Bush’s term–$6 trillion of that during the subprime speculative boom period of 2003-07.

But there’s still another $ trillion to account for. That’s the amount of new credit card debt that American middle and working class consumers also took on since 2001. It is a lie and misrepresentation that consumers have been increasing their credit card debt in order to engage in spending on luxury and unnecessary items. Most of credit card debt has been taken up in order to pay for big ticket necessities, like college education for children, payment for medical bills their employer insurance plans no longer cover, for medical services by those no longer able to afford insurance at all, for basic transportation needs, for general cost of living by retirees no longer able to survive on social security, and so on. The credit card has replaced the annual wage increase that many employers used to but no longer give. It has substituted for wage increases that unions, now but a shell of their former selves, used to negotiate but no longer can. Credit cards are now relied upon by the more than 40 million workers who used to have full time permanent jobs but now have to make due with lower paid part time or temporary work; and by the more than 8 million workers whose once decent paying manufacturing jobs have gone offshore and have had to accept lower paid service jobs.

To the $3 trillion in government debt was thus added $6 trillion in household mortgage debt, $8 trillion in banking debt, another $1 trillion in new consumer credit card debt, and $3.5 trillion in additional non-financial business debt. A total of more than $21 trillion in accumulated debt of various kinds over the course of Bush’s term in office. That’s a stack of $500 bills 3,297 miles high; or, roughly the distance from New York City to London.

Second Economic Legacy: Financial System Collapse

The ‘unwinding’ of the $21 trillion in net debt accumulated during the Bush administration is the direct, root cause of the current financial crisis.

The write-downs and write-offs by banks and other financial institutions, the bankruptcies by companies and consumers, the losses of home values, the foreclosures, etc.—all represent the ‘unwinding’ of that record level of $21 trillion new debt accumulated since Bush took office. The September bank bailouts, from Fannie Mae to TARP, represent an effort by the US government on behalf of banks and financial institutions to transfer the cost of the banks’ $8 trillion debt unwinding from their banking friends to the general taxpayer. More specifically, the September bailouts represent a strategy by Finance Capital and America’s corporate elite to shift a major portion of this debt from their corporate balance sheets to the ‘public balance sheet’ and taxpayer.

But the bank bailouts will not stop the debt unwinding. They do not address the fundamental causes of housing and commercial property price collapse underway since the beginning of the year and now accelerating. Housing prices have yet to fall another 20-30%, and new phases or stages of the financial crisis will continue to emerge. Furthermore, housing deflation will continue to spill over to the commercial property market, to the stock markets that have yet to fall another 20% as well, and eventually to producer and consumer prices and wages should the recession prove deep and long. The bailouts only relieve the banks of their share of the pain of that collapse. Bailouts like those enacted in September are designed primarily to transfer the costs of the crisis—from big banks, financial institutions, and other corporations and their investors to the general taxpayer, worker, and consumer. But shifting the ‘bad’ debt from private to public balance sheets does not eliminate it. The only thing settled by the bailouts—TARP, Fannie Mae, AIG, and others—is who will pay for the crisis, not how to end the crisis.

Once a fundamental debt-driven financial crisis gains momentum it is not easy to stop. The US Federal Reserve’s strategy has been to throw ‘liquidity’ at it. Since December 2007 the FED has committed nearly a trillion dollars in special and emergency loans—to no avail. Time and again the FED has upped the ante—and the crisis has deteriorated further. It is amazing that the current chairman of the FED, Ben Bernanke, has not learned that throwing liquidity at the problem, i.e. a money supply solution, is not working after a year of such repeated attempts. The problem is not the balance sheets of banks and financial institutions; the problem is the ‘balance sheets’ and insufficient incomes of workers, consumers and homeowners—i.e. a demand side problem. The financial crisis is not a liquidity crisis. It is a solvency crisis. It is a general systemic crisis and a deepening crisis of confidence in the financial system itself.

The debt-driven financial implosion is thus the second major economic legacy of the Bush administration. What Bush has left the nation is a classic Debt-Deflation crisis that has resulted in a near freeze up of the entire financial system. The last time this occurred was 1929-34, and before that in the 1870s and the 1890s. Moreover, the Bush legacy of financial collapse is not finished. It will continue to reverberate and make itself felt for years to come.

Third Economic Legacy: Epic Recession

The direct consequence of financial crisis and implosion is a general ‘credit crunch’. A ‘credit crunch’ is a system-wide severe and sharp contraction of credit. A credit contraction has been progressively growing in the economy since last January. A credit contraction occurs when banks and financial institutions have, or expect to have, significant losses due to bad loans and investments, and therefore are increasingly reluctant to loan out reserves they may have on hand. They are uncertain they may need the cash on hand and reserves to cover anticipated losses and prevent becoming technically bankrupt if their losses exceed their reserves. Over the past year financial institutions have step by step tightened their lending terms. But even the slow down in lending hit a wall and entered a new, more intense and serious stage with the financial events of September—i.e. a credit crunch. In the wake of the collapsing of Fannie Mae, Lehman Brothers, Merrill, AIG and others, in September credit market after market began to freeze up and virtually shut down

From housing and commercial property markets, to industrial loans, to municipal and corporate bonds, to commercial paper, and even markets in which banks loan to each other, such as Libor—all began to shut down in September. There is no inter-bank lending market at present in the U.S. or even globally for that matter. They have shut down. The FED and other central banks have become, in effect, the only banks willing to lend to other banks. Even money markets are contracting. Money market funds, mutual funds, pension funds, and hedge funds are all in the process of contracting and reducing lending.

The credit crunch is the transmission mechanism by which the current financial crisis translates into a recession. It is the linking event. Financial crisis and recession are therefore but two sides of the same coin, driven by the same set of fundamental causes. The debt-deflation drives the bank, consumer and corporate losses, which results in the credit crunch. Without available funds to borrow, or even borrowing at extremely high rates, businesses in turn begin to cut back, announce mass layoffs, and then shut down or go bankrupt.

The extreme levels of accumulated debt since 2000 has produced a financial crisis correspondingly severe and unlike anything since 1929-34.. The severe and protracted financial collapse has created a credit crunch of equal historic dimensions as well. So there is no reason to assume the recession now emerging will be anything less historic or severe. The current financial crisis and credit contraction is producing a recession of equally deep scope and magnitude—i.e. ‘Epic Recession’—as I have called it last June in an earlier article in this publication. An Epic Recession of particularly long and/or deep duration that shares characteristics of a typical postwar recession but also characteristics of a classic Depression similar to 1929-34, 1873-78, or 1892-97. A recession that is fluid and unstable, and can easily accelerate in the direction of a bona fide Depression.

What Bush has therefore bequeathed the country is an economic crisis of historic proportions—in terms of debt, systemic financial collapse, and Epic recession. In so doing, Bush has turned the clock back on the American economy more than a century.

Fourth Economic Legacy: Record Budget Deficits and Fiscal Crisis of the State

With bailouts, with expected losses in tax revenues in 2009 due to the now deepening recession, and with the certain need for further fiscal stimulus by the federal Government to save State and Local governments from bankruptcy and provide unemployment insurance for the millions more jobless to come—the next U.S. budget deficit will easily double from its current projected level of around $500 billion. (Yes, that’s another $1 trillion!) A mind-boggling $trillion dollar budget deficit that will all but ensure that, whoever wins the November 2008 election, few if any of their campaign promises or programs will see implementation. Instead, a national economic ‘austerity program’ will likely be the agenda come January 2009 regardless who wins. Come January 2009, critical programs like national health care reform, student loans, sustainable environment, jobs creation and protection, foreclosure mortgage relief, retirement systems reform, etc. will all be sidelined more or less permanently, or at best proposed by the new President in only token form with insufficient funding.

The fiscal-budget crisis of the US government that now looms large on the horizon also has potentially enormous consequences for the non-financial economy. The massive budget deficit is the consequence thus far of three primary causes: the $3 trillion Mideast Wars, the $5 trillion tax cuts for corporations and the rich, and now more recently the multi-trillion, still rising bailouts of finance capital at taxpayer expense. A fourth and fifth cause will balloon the budget deficit further. The fourth is the deepening recession itself, which will result in a major shortfall of tax revenues to the federal government. The fifth is need for the federal government to spend significantly more in order to stimulate recovery from the downturn.

Very little to date has been expended by government to help consumers and homeowners and thus stimulate demand to generate any recovery from recession. The depth of the fiscal-budget crisis may thus neutralize to a large extent the ability of the government to engineer a recovery from the recession. Monetary policies of low interest rates have clearly failed to have any effect on recovery, and the FED has little further leeway to lower interest rates in any event. Traditional monetary policy has clearly failed. The full burden of recovery is thus now shifted to Congress, the President, and fiscal policy. But can the government—having wasted so much on Wars, tax cuts for the rich, and bailouts—still afford to stimulate the economy given the pending trillion dollar deficits? That kind of fiscal spending constraint did not exist in 1929-33, whereas it now clearly does.

As the fiscal crisis deepens, it may have no recourse but to pull out of the wars it can no longer afford, find some way to raise taxes on corporations and wealthy investors, and slow the free flow of bailout money to the banks. However, it is highly problematic that Congress and the new President will have the political will to do any of the above.

Trillion dollar budget deficits may also have serious consequences for the U.S. economy in a global sense. It means the US government will have to borrow much of that trillion deficit from foreign sources—central banks, banks, wealth funds, and foreign investors. If it cannot borrow, it will have to print the money. But will foreign sources want to loan that amount to the US? Perhaps not, if they believe the value of their loans might decline overnight. But if they do not, it may mean a collapse of the U.S. dollar as a world currency. And that will in turn hasten the decline of the U.S. dollar still further, in a vicious downward cycle. If the U.S. government cannot borrow enough to cover the trillion deficit, it will have no recourse but to turn to printing money. That will lead to an explosion of inflation, a further decline of the dollar, and even less willingness by foreign sources to loan to the U.S., and so on. In short, the fiscal crisis legacy of Bush carries the very real risk of spawning a consequent U.S. currency crisis of epic dimensions as well.

Fifth Economic Legacy: Chronic Job Loss and Jobless Recessions

More than 3 million US workers have lost jobs to China alone during the two Bush terms, and another million have been lost due to free trade with Mexico, Central America and Canada. Bush’s first recession in 2001 resulted in loss of millions more jobs. It took 48 months, four years, just to return to employment levels that existed in January 2001 on the eve of Bush’s first recession. It was the longest ‘jobless recession’ on record in the post world war II period. We are now in the third Bush jobs recession. The first occurred between 2001-2002. A brief and weak recovery of jobs followed in 2003, followed in turn by another jobs decline in 2003-04. It was not until just before the 2004 elections that job levels fully recovered. By late 2007, after just a brief few years of jobs growth the economy once again began to gush jobs at an alarming rate. After three jobs recessions under Bush, it now appears jobs recessions are becoming endemic to the US economy.

The most recent jobs recession began in 2007 and now has begun to accelerate once again. Officially, more than 750,000 jobs were lost through September in 2008. The actual number is much higher, however, given the conservative way the US government calculates unemployment. For example, in September the government estimated 159,000 jobs were lost. But 337,000 part time workers were hired that month. That means many tends of thousands of US workers were cut back from full time and rehired as part time. Part time work should represent a ‘half’ of job loss, but the government counts part time and fully employed. Since January 2008 at least another 750,000 part time workers were hired. The true job loss since the start of 2008 is thus closer to 1.5 million than the estimated official 800,000 or so.

The Bush jobs legacy has thus been one of shifting more jobs offshore as a result of free trade policies, weak and brief job creation during recoveries from recessions, at least three ‘jobs recessions’ during his watch, and the replacement of millions of higher quality full time jobs with lower paid, lower benefits (or no benefits) part time and temporary jobs. It is an abysmal legacy that explains a good deal why 91 million middle-working class households’ pay and incomes have stagnated or declined.

Sixth Economic Legacy: Middle-Working Class Earnings and Income Stagnation

The real weekly earnings of the 91 million households in the U.S. earning—i.e. 80% of all households earning roughly $80,000 a year or less—are less today than when Bush took office. To maintain standards of living these households—those that constitute the middle and working class—have out of necessity turned to credit cards, refinancing their mortgages when it was possible, and working second and third part time jobs. The chronic loss of jobs due to free trade and repeated jobless recessions, the shift to lower paying service jobs, and companies transferring workers from full time permanent employment to more part time-temporary jobs explains a good deal of the stagnant or declining incomes. But not all. The decline of unions and effectiveness of collective bargaining during Bush’s term has also contributed to the income stagnation, as has the shifting of the cost of rising health insurance, deductibles, and copayments from employers to workers during Bush’s term.

In stark contrast to the Bush legacy of stagnating and declining earnings for the 91 million as a group, the Bush legacy has meant turning a blind eye to multi-million dollar, and even billion dollar, CEO pay packages—including those granted bank executives who received multi-million dollar payoffs even when their companies crash and burn. No wonder the general public were incensed this past September with Treasury Secretary, Paulson’s, proposal for $700 billion TARP bailout! That bailout failed—and continues to fail—to provide any effective constraints on Executive Pay or CEO ‘golden parachutes’. The obscene, uninterrupted, and historically unprecedented explosion of executive pay is thus one of the more visible hallmarks of the Bush economic legacy.

Seventh Economic Legacy: Regulatory Chaos and Endemic Corporate Corruption

Some argue the current financial crisis is the product of financial industry deregulation. But that is only partly correct. Deregulation is only an ‘enabler’ of the crisis, not a fundamental cause of it. Deregulation has allowed the banks to set up ‘shadow’ institutions, as noted above, in which to hide and bury their ‘junk’ securities. It has spurred the process called ‘securitization’, in which bad loans were bundled with other bad or good securities, cut up into 5 to 15 pieces, marked up in price to make a superprofit, and sold and resold around the world to other central banks, banks, funds and private investors. Deregulation allowed banks to work with mortgage lenders to generate record quantities of bad mortgages; allowed banks to spread contagion in the name of spreading risk; permitted excess leveraging by financial and non-financial corporation alike. But deregulation means nothing if debt is not readily available to borrow at excessively low costs. That’s where the FED’s quarter century long loose monetary policy and below normal market interest rates played a complimentary role. Speculation results in excessive leveraging of ‘bad debt’. But leveraging requires easy, low cost borrowing. Deregulation allows leveraging to happen. But super low interest rates by the FED makes it possible in the first place. The two go hand in hand.

The repeal of the Depression-era Glass-Steagall Act in 1999 and its replacement with the Gramm-Bliley Act removed a major impediment, while providing a major impetus, to financial speculation and excess. But Bush took the opportunity several steps further. Bush’s contribution was to encourage and promote excessive financial speculation; turn over what remained of policing of the banking industry, in particular the investment banks, to the banks themselves; and send the remaining regulatory agency, the Security and Exchange Commission (SEC), to the sidelines. This policy thrust went on from the very beginning of his term in 2001 up to the outbreak of the financial crisis in late 2007. It is possible to cite numerous and repeated attempts by state and even federal mid-level officials who warned of the dangers of growing financial speculation, in general and with regard to subprimes in particular, from 2002 on. Regulators at both the state and federal levels repeatedly warned from late 2003 on what was going on in the mortgage markets in particular. So it is simply not true that Bush Administration regulators “did not see what was coming”.

In April 2004 the floodgates were further opened. At that time the SEC decided to allow the ‘big 5’ investment banks—i.e. the Lehman Brothers, Bear Stearns, Merrill, Morgan Stanley, Goldman Sachs—to take on unlimited debt and ‘leverage’ as they began their manipulation of the emerging boom in the subprime market. They were no longer required to keep virtually any reserves on hand for emergency situations. They could borrow without limit from the FED, hedge funds, and other private funds and leverage to the hilt, which they did. Bear Stearns, Lehman and the rest typically took on any and all bad debt and leveraged themselves to more than 30 times their available reserves. Moreover, they would be allowed to self-regulate themselves with no further SEC policing or oversight. Without this strong encouragement by the Administration, the excessive bad debt accumulation associated with the subprime market would not have been possible.

Thus the Securities and Exchange Commission did not simply ‘look the other way’. The agency responsible for regulation actively participated in and enabled the deregulation. It helped dismantle the last vestiges of regulation under Bush. Its chief Commissioner, Christopher Cox, was handpicked by Bush because he, Cox, had a long track record as a representative in the House raising and promoting legislation to protect the investment banking industry from lawsuits, loosening accounting rules for executive stock options, and cutting staffing and inspections at the SEC. Bush awarded him with the position.

It is also often forgotten that Secretary of Treasury, Paulson, the administration’s point man for financial system re-regulation, assumed his current role as Treasury Secretary in mid-2006, barely two years ago, and immediately launched as his first act in office a major effort to deregulate the banking industry still further. As the subprime crisis began to emerge in late 2006, Paulson was proposing and championing legislation for looser oversight by the SEC of banks and mortgage companies responsible for the subprime bust. His ‘mantra’ was to replace defined rules governing banks’ practices and behavior with vague, undefined ‘principles’. He originated a special commission to report proposals to do just that, which it did. As part of the report, while controls were further lifted on banks, more controls and restrictions were implemented, in contrast, on regulators. The target of the report were attorney generals and governors, like Eliot Spitzer, who were beginning to act and intervene because the SEC was content to do nothing and ignore the growing crescendo of warnings about the pending subprime crisis.

The same Paulson, ex-CEO of the investment bank, Goldman Sachs, and champion of deregulation under Bush from 2006 on, is now entrusted with financial re-regulation. It should therefore have been no surprise that his original ‘TARP’ proposal called for no new regulatory controls on the banks or limits on executive pay, as he simultaneously proposed to give Banks a handout of $700 billion.

Deregulation is directly related to corporate fraud. In Bush’s first term, scores of CEOs and senior managers were indicted and convicted for various forms of fraud. These companies were mostly associated with the technology sector, in the wake of the dot.com boom and bust. The current financial crisis has yet to produce its own crop of corrupt captains of industry. But it will. Investigations are already well underway by the FBI, SEC, and Congress. The new corruption cases will make the post-dot.com bust fraud revelations pale in comparison in terms of the dollar value rip-offs. Bush will therefore leave office with one of the worst legacies of corporate corruption on his watch.

It is important to note that Bush’s legacy on deregulation and its huge costs to the economy and US taxpayer was not limited to the finance industry. Space does not permit a chronicling of the devastating consequences of other industries’ deregulation under Bush: transport, communications, cross-industry occupational safety and health, environmental, federal labor and wage standards, food and drug safety, and countless other areas. In all cases, however, the result has been greater profits for corporations at the expense of consumers, workers and taxpayers.

Eighth Economic Legacy: The Destruction of Retirement

Another Bush legacy has been the destruction of the retirement system established in the immediate post-World War II period. That system was based upon the idea of a ‘three legged stool’ structure that included Social Security, employer-provided pensions, and personal savings. All three were actively undermined by Bush and have resulted in a crisis of historic proportions, for the more than 44 million retirees today and the 77 million baby boomers who will start joining their ranks starting next year.

The crisis in Social Security is not as described by the Bush administration a few years ago, as Bush desperately attempted to privatize the system. The crisis is the more than $2.3 trillion dollars that has been siphoned out of the Social Security Trust Fund the last two decades, transferred to the U.S. general budget, and spent in order to pay for wealthy and corporate tax cuts, chronic wars under Bush, and ballooning defense budgets. Social Security payroll tax collections for two decades have actually subsidized the U.S. budget, not undermined it. Every year the Social Security program produces a surplus, at the rate of sometimes hundreds of billions of dollars a year. And that surplus is diverted in full and spent. Defenders of the historic theft say ‘we owe it to ourselves’ and can put it all back in the trust fund whenever we need’. True. But to replace it requires the US Government borrowing back the $2.3 trillion from banks and other private sources, paying interest on that debt, and thus adding at least $200 billion more a year for ten years to the coming $1 trillion a year budget deficit. In accounting terms it is possible; in economic and political terms it is not. Bush has borrowed over his eight years in office more than $1.3 trillion of the $2.3 trillion Social Security Trust Fund surplus.

The second ‘leg of the stool’, private pensions, have fared even worse under Bush. When Bush took office there were more than 35,000 defined benefit pension plans, single and multi-employer, in the U.S. Today there are barely 30,000. More than 5,000 have disappeared. That decline has been with the active encouragement of the Bush administration. Throughout his first term and well into his second, Bush allowed underfunded pension plans to defer payments, required by law, into their pension funds to ensure they were solvent. He called these ‘contribution holidays’. In 2004-05 the practice was particularly abusive, in the run-up to the passage of what he called the ‘Pension Protection Guarantee Act of 2006’. That 2006 Act, however, was not designed to rescue defined benefit plans but to hasten their further demise—as witnessed by the collapse of 5000 more plans during his term. His legacy in this area is yet to worsen, moreover. Key elements of that Act permitted pension funds to invest in risky Hedge Funds. The latter are about to go bust in large numbers, resulting in a further crisis of traditional defined benefit pensions and their funds.

Bush consistently pushed the dismantling of defined pensions and their replacement with 401K plans. In fact, the 2006 Act has allowed companies to force-enroll employees in 401Ks. But 401Ks are virtually unregulated and studies show they yield far less in returns available for retirement than do traditional pensions. In fact, the average balance in 401ks today is barely $18,000. That means tens of millions face the future of retirement in the 21st century with only $18K of retirement sources, apart from social security benefits.

The final ‘leg’ of the retirement system stool has been broken as well under Bush. That was supposed to be the accumulation of one third of necessary retirement resources from personal savings. However, under Bush the personal savings rate has collapsed. Americans now have a negative savings rate, as they’ve struggled to barely keep up with the cost of living. Falling annual earnings do not produce savings. In an ominous recent trend, moreover, it appears many are having to borrow from their already insufficient 401ks just to cover medical cost and other expenses.

Bush’s legacy in the area of retirement is a crisis of historic dimensions in insufficient resources for tens of millions.

Ninth Economic Legacy: Dismantling the Postwar Health Care System

Bush has been even more successful in privatizing, and thus dismantling, the post-war health care financing system. By allowing health care insurance premiums and other costs to double during his term, rising more than 10% every year in his first seven years, he has forced employers and workers alike to give up health care coverage altogether or to reduce that coverage in order to afford rising premiums and other costs. There are now more than 47 million Americans without any kind of health coverage whatsoever, an increase of 9 millions since 2000. Eight out of ten of those uninsured are working Americans. More than 1.3 working Americans lost their health insurance coverage in 2006 alone. Approximately 12% of all kids in the U.S. have no health coverage. Despite this collapsing coverage, the U.S. spends nearly twice as much, about 17%, of its total GDP on health care. That compares with 9%-10% for those countries with single payer health delivery systems in Europe, Canada and elsewhere. It means the U.S. spends more than $1 trillion a year on middle men, i.e. mostly insurance companies, to push paper and forms around while delivering not a single health service.

For those still with health insurance, the rising cost burden has also shifted significantly from employers to their workers—by as much as 30% according to some studies—to cover rising costs of not only monthly premiums but out of pocket deductibles and copayments. Thousands of companies have been allowed to abandon their health plans altogether, most notably in recent years the big auto companies which are in the process of dumping their health care funds, underfunded by $50 billion, onto the auto workers’ unions. Employers that once provided medical benefits for their retirees under their plans, benefits often negotiated with their unions, have simply arbitrarily and unilaterally discontinued those benefits. The administration and the courts have encouraged and endorsed such employer and court decisions.

Bush’s long run plan has always been to fully privatize health care, just as it has been to complete the privatization of defined benefit pensions and has attempted to privatize social security. Bush’s creation of so-called Health Savings Accounts, or HSAs, has been the center of the administration’s health care insurance strategy. HSAs are simply the analog of 401ks. Like the latter, they are designed to eliminate and replace group plans provided by employers or negotiated by unions. Bush and employers have as their goal the elimination of any central role by employers providing either retirement or health care coverage. That is what Bush has called his ‘Consumer Driven Society’. That too is his legacy—a health care delivery and financing system that is now as broken as the retirement system.

Tenth Economic Legacy: Massive Tax and Income Shift to the Wealthy

Every year for the first five years of his terms in office Bush pushed historic tax cuts totaling more than $5 trillion. Estimations from sources like Brookings, Urban Institute, and others are that about 73% of the cuts benefited the wealthiest 20% households. 30%, or $1.5 trillion, of that 73% benefited the wealthiest 1% households, or roughly 1.1 million out of the total 114 million taxpaying households in the U.S. But these figures don’t even include tax cuts for corporations, which have amounted to trillions more under Bush. Nor do they include similar massive tax shifting at the State and Local government levels. Where has all that tax cut money gone, one might ask? A good deal of it into Hedge Funds, Private Equity Funds, and other forms of private, unregulated banking—and thus stoking the fires of speculative investment in recent years in subprimes, derivatives and other unregulated financial securities. Other amounts have no doubt contributed to the explosion of offshore tax shelters. According to the investment bank, Morgan Stanley, in 2005 offshore tax shelters had increased their funds 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. A reasonable estimate is that wealthy Americans likely account for at least 40% of that total, or around $4-$4.5 trillion. Exactly how much is not currently 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.

The massive tax shift has been a prime cause of the Bush legacy of shifting relative income and wealth in the U.S. during his term—from roughly 91 million middle and working class taxpaying households to the wealthiest 1% (1.1 million) of U.S. households. There are of course numerous additional means by which income has been shifted from the bottom 80% to the wealthiest 1% (e.g. executive pay), but the tax system restructuring under Bush has likely been the most contributive sources.

An idea of how much this has all resulted in the explosion of income and wealth gains at the top at the expense of those at the bottom 80% has been estimated in recent academic studies by professors Emmanual Saez and Thomas Picketty. Based on their deep analysis of IRS taxes paid over the history of the Federal Income Tax since 1917, the wealthiest 1% of households in the U.S. received about 8.3% of total income in the U.S. in 1978. By 2006, however, that wealthiest 1% were receiving 20.3% of total income generated in the U.S. And that still does not include tax sheltered income. Nor does it include corporations’ retained income or profits diverted offshore to avoid taxes. But the 20.3% does represent a return to almost exactly what the top 1% received in 1928—i.e. 21.09%–on the eve of the last Great Depression!

For the Bush years, that 20.3% translates into incomes of the top 1% growing in real terms at a rate of 11% per year between 2002-2006. In contrast, the remaining 99% of taxpaying households in the U.S. grew in real terms at an annual rate of only 0.9%. It also means that top1% captured about 75% of all the incremental net income gains during the years 2002-06 under Bush. (1)

Two Final Comments

Bush’s ‘Toxic Economic Legacies’ have their roots in policies that are not uniquely his own. The above ten points represent policies that commenced in earnest in the 1980s under Reagan, and in some instances even before that during the last two years of the Jimmy Carter administration. The policies were continued in various form through the administrations of George Bush senior and Bill Clinton with different emphases. What characterizes the administration of George W. Bush is that the toxic legacies were carried to the extreme, accelerated in terms of their effects, as well as their inevitable negative consequences. Whether income shift, financial deregulation and crisis, tax shift, budget deficits and fiscal crisis, the destruction of the retirement and health care systems, etc., Bush represents the continuation of the policies and legacies on an accelerated rate, on a magnified scale—i.e. ‘a toxicity writ large’.

A second, final comment is that these toxic economic legacies are interdependent, one feeding upon and exacerbating the other. It is not possible, for one example, to understand the current financial crisis and emerging global epic recession apart from the massive shift and concentration of income in the hands of the wealthiest household-speculators and corporate-speculators. That is not the sole explanation of the present systemic financial collapse or growing threat of global depression increasing now almost daily. But the financial and economic crisis underway at present cannot be fully comprehended apart from the former either. Reversing the legacies, removing the toxic effects on the future of American economy and society cannot take place without correcting the fundamental causes. And that includes reversing once again, as in the 1930s and 1940s, the perverse and distorted income and wealth distribution afflicting society itself.

Dr. Jack Rasmus

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The following 2nd contribution to the debate summarizes in brief my perspective—neither Mainstream nor contemporary Marxist—on the causes and consequences of the crisis in general, and specifically how financial cycles and real cycles interact to create a crisis that is not a normal recession and not yet a bona fide depression—or what I have called an ‘Epic Recession’. The latter cannot be resolved, I argue, by traditional fiscal-monetary policies, and so long as it remains unresolved the potential increases for it transforming into a bona fide global depression. My perspective is presented in the form of 20 propositions, which I apologize for beforehand as, due to the requirements of debate, are necessarily too brief and general.

Proposition 1:

Deep capitalist cycle contractions (depressions and epic recessions) are driven by endogenous forces, both real and financial, that mutually determine each other, with different relative magnitudes and directions of causality that vary with the phase of the long run boom-bust cycle.

Proposition 2:

The key endogenous Independent variable is not profits but Investment—the latter comprised of two fundamental components: real asset investment (Ig) and financial asset investment (If).

Proposition 3:

Over the boom phase of the cycle, the composition and relative weight of total investment shifts from Ig to If. In the early boom phase, financial assets are created as a one-to-one representation of the market value of real assets. A mortgage is equivalent to the original market value of a new structure, for example. But as the boom phase of the cycle progresses, If expansion becomes increasingly independent of Ig—driven by excess money liquidity, proliferating forms of credit decoupled from money, increasingly leveraged debt financing, and the increasing demand driven character of financial asset price inflation over the boom phase of the cycle.

Proposition 4:

Money may serve as credit; but credit is not limited to the money form. Credit is simultaneously money and more than money. Money may function as ‘outside credit’, but credit is also created ‘inside’ and autonomous of money. Money and autonomous credit are key to understanding the relative shift from Ig to If over the boom phase of the cycle.

Proposition 5:

The relative and absolute shift from Ig to If over the boom phase of the cycle creates destabilizing asset price bubbles and financial crashes that in turn produce deeper and more durable contractions of the real economy than typically occurs in the case of ‘normal’ recessions that are not precipitated by, or associated with, financial instability events. Depressions and epic recessions are not normal recessions ‘writ large’, but reflect the outcome of unique qualitative forces associated with financial cycle volatility.

Proposition 6:

An explosion of both money credit and autonomous credit has been occurring since 1945—the process accelerating with the collapse of the Bretton Woods International Monetary System after 1973; with the global ending of international capital flow controls in the 1980s; with the digitization of financial transfers in the 1990s; and with the global expansion of shadow banking institutions, very high net worth professional investors, highly liquid secondary financial markets, and the proliferation of multiple new forms of financial asset instruments.

Proposition 7:

Decades of excessive liquidity and autonomous credit creation has resulted in a shift to greater debt and growing debt-leveraged financing, which accelerates If forms of investment more than Ig, and short term speculative financial forms of If in particular. Rising debt leveraged financing results in more frequent, larger, and more globalized asset price bubbles and corresponding financial instability.

Proposition 8:

There is no such thing as ‘the’ capitalist price system. There are several price systems. They do not behave alike. The system of financial asset prices is more volatile, in terms of both inflation and deflation, than product or factor (e.g. wage) input prices. Unlike the latter, financial asset prices are driven increasingly by speculative demand over the course of the boom phase of the cycle, and late boom phase in particular. Financial asset prices are subject to little or no supply force constraints during the boom phase, unlike product or factor prices. As financial asset inflation occurs, demand drives prices higher, invoking still more demand, until further price increases are unsustainable and the asset price bubble collapses. Asset price deflation following the financial bust in turn drives product and factor (wage) deflation. All three price systems mutually determine each other in a negatively reinforcing way during the initial stage of the bust phase of the cycle. Asset and product price deflation together dampen Ig, leading to employment declines, wage deflation, and falling household income and consumption. Business and household defaults follow, in turning provoking more asset, product, and factor price deflation that result in rising real debt levels. A generalized downward spiral of debt-deflation-default sets in, resulting in a deeper and more durable contraction of the real economy. The capitalist price mechanism thus plays a central role in destabilizing the system—both in the boom and bust phase—contrary to prevailing mainstream economic ideology that the price system works to restore equilibrium and stability.

Proposition 9:

The forces driving financial asset investment, If, slow real asset investment, Ig, during the late boom phase by diverting financing from Ig to If, and thereafter subsequently accelerating the already declining Ig during the initial bust phase. The growing frequency, magnitude, scope, and duration of financial investment, bubbles, and crashes over the long run thus have a combined negative impact on Ig—i. e. more slowly during the boom phase (a structural effect) and more rapidly during the bust phase (a cyclical effect). This long run decline of Ig relative to If due to both structural and cyclical causes convinces successful real asset investment companies to shift more toward If forms of investment. Thus, a company like General Electric, for example, perhaps the largest manufacturer in the world, increasingly shifts to and relies upon portfolio (e.g. financial asset) investing over the longer term.

Proposition 10:

This overall ‘Financial Shift Effect’ further results in non-financial capitalist enterprises seeking to reduce labor and other factor input costs over the longer term by various measures—i.e. reducing labor costs by moving to offshore markets, demanding further tax concessions and subsidies from the state, reducing inter-capitalist competition costs (free trade), shifting operating cost burden to workers and consumers (industry deregulation), and restructuring labor costs in the home market (de-unionization, more part time-temp labor, cutting social security-medicare and private pension ‘deferred’ wages, shifting medical costs to its workforce, reducing paid time off, delaying minimum wage adjustments, etc.), to name but the most obvious.

Proposition 11:

Income for the ‘bottom 80%’ primarily wage earning households progressively stagnates and declines over the boom phase of the cycle, as operating income for both financial and non-financial corporations in contrast rises. To offset declining real income for the 80%, consumer household credit and debt grow—especially mortgage, student loan, credit card, and installment loan forms. Terms and conditions of debt repayment are typically ‘lenient’ during the boom phase, thus serving to accelerate credit and debt accumulation. Financial institutions are more than willing to extend credit and debt to such households, charging interest that in effect represents a claim on future, not yet paid wages.

Proposition 12

Systemic Fragility grows over the boom phase, accelerating in its later stages, composed initially of both business Financial Fragility and household Consumption Fragility. Fragility is a ratio and a function of three elements: rising indebtedness, declining liquid income, and the terms and conditions for which payment on incurred debt is made. Mainstream economics bifurcates this ratio: the Hybrid Keynesian wing considers income but largely disregards finance, credit and debt as equivalently important variables; the Retro Classicalist wing considers credit and debt but de-emphasizes the role of income. Both minimize the importance of ‘terms and conditions’ of repayment by focusing only on a subset—the interest rate—of this third element determining fragility.

Proposition 13:

Over the boom phase, rising household indebtedness amidst stagnating and declining household income represents rising ‘Consumption Fragility’ (CF) within the system. Similarly over the boom phase, rising financial institution (banks, shadow banks, and portfolio operations of large corporations) indebtedness that occurs with the increasing shift to debt-leveraging financing of If, represents ‘Financial Fragility’ (FF). Financial fragility during the boom phase is obscured by rising financial asset inflation. Consumption fragility is obscured by the continuing growth of consumption driven by debt. Both obscured effects disappear with the onset of the boom phase, revealing the true condition of fragility deterioration during the boom.

Proposition 14:

During the boom phase, a third form of fragility—Government Balance Sheet Fragility (GBSF)—also grows, as successive financial instability events of growing intensity require repeated government bailouts of financial institutions and as fiscal stimulus policies are introduced in successive (normal) recessions to assist recovery of non-financial corporations. In addition to these cyclical contributions to GBSF, structural causes also contribute to GBSF, as legislated tax cuts and subsidies for corporations adds further to government debt and thus GBSF. Thirdly, in the particular case of the United States, the policy choice since the 1980s to run annual and growing trade deficits adds still further to total deficits and debt levels. Dollars accumulate abroad due to the trade deficits and US trading partners agree to recycle the dollars back to the US by purchasing US Treasury bonds. Knowing the bond purchases will continue, the US federal government cuts taxes and increases spending further still, thus raising the deficit and total government debt. Federal debt consequently grows from less than $1 trillion to more than $15 trillion in the process. GBSF rises due to rising debt and falling (tax revenue) income.

Proposition 15:

During the initial bust phase following a financial crash, financial asset prices collapse and financial fragility accelerates, with its consequent effects on real Ig, employment declines, and the debt-deflation-default processes previously noted. Simultaneously, Consumption Fragility—already rising during the boom phase—deteriorates even more rapidly, driven by income declines due to mass layoffs, wage-benefit reductions, shorter hours of work and weekly earnings, and negative wealth effects as savings levels and rates of growth collapse. The financial crash thus precipitates a further ‘fracturing’ of both financial and consumption fragility. By means of the price system and the debt-deflation-default process, Financial and Consumption Fragility thus exacerbate each other in the course of the downturn. Just as the financial side of the economy causes a deterioration of real side conditions, the latter in turn cause a further deterioration of the financial side. The internal transmission mechanism of this mutual feedback is the debt-deflation-default process, which also contains its own inter-causal feedback effects.

Proposition 16:

Rising real debt, deflation across the three price systems, declining cash flow and disposable income, and the corresponding collapse of available credit transmits to the real economy in the form of a rapid decline in business and consumer spending, which in turn feedback upon each other. A faster, deeper and more protracted recession results, not a ‘normal’ recession precipitated by external demand or supply shocks, but an ‘epic’ recession precipitated by a financial crash and accelerated by an endogenous condition of extreme ‘systemic fragility’.

Proposition 17:

As the bust phase of the cycle continues and recession deepens, Government Balance Sheet Fragility—already growing per forces noted in proposition #14 above—rises further as well, as government fiscal-monetary stimulus policies attempt to halt the downturn. However, GBSF is not without limits. Under particularly severe conditions of Financial and Consumption Fragility, attempts to halt the momentum of decline by means of tax cuts and spending may prove insufficient while nonetheless adding to GBSF. The result is an extended period of ‘stop-go’ recovery, with short and brief real economic growth punctuated by repeated relapses, and even double dip recessions. This ‘stop-go’ recovery trajectory may continue for years, and even decades, should Systemic Fragility rise or remain high.

Proposition 18:

Systemic fragility in its three basic forms, and their mutual amplifying feedback effects, transmit to the real economy by means of reductions in fiscal and monetary multiplier effects. In the attempted recovery phase, the State engages in fiscal stimuli to bail out banks, corporations and investors. However, Systemic Fragility means business tax cut multipliers have sharply declined, to less than 1.0. State fiscal stimulus consequently results in business, and especially Multinational Corporations, cash hoarding. Cash hoarded is then diverted to corporate stock buybacks and dividend payouts, diversion of real asset investment to offshore emerging markets, and into new financial asset speculative investing in an effort to resort collapsed asset values and corporate balance sheets. Real investment and thus job creation subsequently lags and a stagnant stop-go recovery results.

Proposition 19:

Systemic fragility and its amplifying effects also serves to reduce money multipliers. Massive money supply injections by central banks are initially hoarded, then redirected to lending offshore, to financial speculation, and to ‘safer’ large corporations. Banks reduce lending to ‘less safe’ smaller businesses and households, further reducing investment, jobs and consumption demand. Money demand and money velocity thus offset money supply injection by central banks. Central bank QE and zero interest policies provoke instead new financial bubbles in stocks, junk bonds, real estate, foreign exchange and derivatives trading. Currency wars erupt as money injection policies depress currency exchange rates. Banks and financial markets become increasingly addicted (dependent upon) central banks money injections. Globally, financial speculation raises the specter of further financial instability on a real economy base further weakened by the preceding cycle of economic contraction. The risk of bona fide global depression rises in time.

Proposition 20:

In the context of conditions noted above—of systemic fragility and growing feedback amplitude effects—traditional fiscal-monetary policy tools attempting to expand the economy are rendered increasingly ‘inelastic’ (i.e. less sensitive or effective) in generating a sustained economic recovery. Conversely, when such tools are employed to contract the economy, via austerity fiscal policies and/or central bank raising of interest rates, the effects are more ‘elastic’ (i.e. more sensitive and effective) in contracting the real economy. Fiscal-monetary policies are therefore not simply increasingly non-productive but, over time, become counter-productive in generating recovery. Solutions to recovery consequently lie in the necessity of a major restructuring of the economy along multiple key sectors including, but not limited to, the tax system, banking system, retirement and healthcare systems, labor markets and public investment—with the purpose of redistributing income while simultaneously reducing debt. That is, reducing systemic fragility in aggregate as well as its mutual amplifying effects.

Jack Rasmus, copyright April 2013

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A correct identification and analysis of the causes of the crisis is important. It is essential for proposing effective solutions. Failure to understand true causes leads to proposing ineffective solutions and, in turn, to adopting wrong strategies.

Allow me to begin this debate with a brief overview of mainstream-bourgeois, left-liberal, and contemporary Marxist explanations of the causes of the crisis, and explain why they are in error. Following that, I will offer a brief outline of my own view of the fundamental causes of the crisis, represented by 20 fundamental propositions.

Contending explanations of the global economic crisis that surfaced in 2007-08 reduce to the key question: what is the relationship between the financial and non-financial (real) sectors of the economy in the origination, precipitation, and continuing evolution of the current global economic crisis? Is the crisis essentially a financial event, that subsequently negatively impacted the real economy; or is the financial crisis just the appearance of a more essential development originating in the real side of the economy.

Simple observation shows that Finance Capital has had something fundamental to do with the current crisis. Nevertheless some argue it is not fundamental and that the originating locus of the crisis resides with variables on the real side of the economy—i.e. profits, wages, private real asset investment(structures, equipment, inventories, etc.). But to argue that such real side forces are solely—or even primarily—responsible for the crisis, and that financial forces (global financial institutions, new liquid markets, new securities creation, exploding credit-debt relationships, etc.) and financial instability (number, frequency and magnitude of financial bubbles and crashes) are merely derivative of those real forces, is as incorrect as to argue that financial forces solely explain the current crisis.

More precisely: to argue that a falling rate of profit is responsible for the crisis of 2007-08 is as simplistically incorrect as to argue the mortgage market bust caused the deep collapse of the real economy post-2007, and the subsequent double and triple dip recessions, and bona fide depressions in the Euro periphery, now beginning to appear globally .

There is no simple linear causal relationship from profits to crisis. Profits are not the sole, or even primary, determinant of investment and the current global crisis is fundamentally about investment—both declining real asset investment and escalating financial asset investment. The fundamental driving force behind the crisis are the changing causal relationships between the two forms of Investment—real asset and financial asset—and the mutually reinforcing transmission mechanisms between them. (A more detailed initial treatment of the relationships between real and financial asset investment is available in my 2010 book, ‘Epic Recession: Prelude to Global Depression’, by Pluto).

The task of analysis therefore is to explain the relationship between the financial and the real forces in the crisis, beginning with the two forms of investment. To explain to what extent financial and real forces are autonomous of each other and to what extent they determine each other. Precisely how do those mutual determinations occur; that is, what exactly are the empirical ‘transmission mechanisms’ that represent the feedback effects between financial and real?
It is unfortunate that much of economic analysis today (left, right and mainstream academic) claiming to have identified causes of the crisis is mostly identification of simple correlation relationships assumed to reflect causal relationships. Moreover, the ‘correlations as causation’ are typically one-directional, from real to financial or financial to real. Nor do the unidirectional ‘correlations as causation’ claims both to explain the transmission mechanisms by which the real side variables determine the financial.

For example: One wing of mainstream economists claim the collapse of the real economy is correlated strongly with central banks’ money supply mismanagement; therefore money supply mismanagement caused both the financial crash and the consequent deep contraction of the real economy. This views the capitalist economy as fundamentally stable and that (monetary) policy makers simply screwed it up. Another wing of mainstream economists argue regulatory policy was the cause of the crisis, as financial deregulation provoked the crisis that began 2007-08. Similar ‘single correlations’ analyses abound in mainstream economic analyses of the crisis, mostly associated with ‘this or that’ policy error that appears correlated with the crisis and therefore assumed to be causative. Fundamental systemic forces endogenous to the capitalist system are never considered. Neither real nor financial forces are considered primary determinants of crisis. (For my critique of these views, see ‘Obama’s Economy: Recovery for the Few’, 2012, Pluto Books).

Views on the left correctly reject this view that the system is basically stable and crises are due to policy errors. Left views recognizes endogenous forces are responsible for the crisis. However, endogenous forces are always ‘real’ and ‘financial’ forces always derivative, as in the case of mainstream analysis. Correlations are assumed causative and no transmission mechanisms from the real to the financial are described—let alone mechanisms that represent mutual feedbacks and inter-determinations.

For example, the prevailing left-progressive critique of Neoliberalism identifies the compression and stagnation of wages since the 1980s as responsible for the recovery of corporate profits thereafter. Above historical average excess profits obtained at the direct expense of wages consequently fueled the expansion of profits and in turn the financial excesses that followed that eventually caused financial instability.

Disagreement with the Neoliberal critique view on the timing and direction of profits and wage change, but still agreeing with the idea that real forces are primary and financial forces derivative, a variant of contemporary Marxist analysis argues wage and profit decline actually preceded the 1980s by a decade. By means of various convenient redefinitions of what constitutes profits and adopting a very narrow definition of wages, this view argues real wages have not really stagnated and therefore profits from real asset investment have continued to steadily decline since the 1980s. Thus, profits decline on the real side of the economy, not profit expansion, is behind financialization and financial profits as Capitalists have offset the tendency toward real profits decline by turning to financial profits. (For my more detailed critique of this view, readers are referred to the forthcoming article, “The Bifurcation of Marxist Economic Analysis”, in the March 2013 issue of the World Review of Political Economy).

In all the preceding explanations, moreover, terms of analysis are left vague and undefined, on both the real and financial side. On the left, problems of profit definition, global profits data access, and profits under-reporting are ignored. Wages are narrowly defined, excluding various categories of labor and pay. For the mainstream view, explanation occurs in the ‘conceptual ether’ above all reference even to profits, wages, or any other real variables. Money supply mismanagement thus occurs in a theoretical ‘black box’.

Linear correlations passed off as causation, high level generalizations without explanation of ‘transmission mechanisms’ and feedback effects, vague definitions of key terms, reference to insufficient data—all these fundamental errors of analysis characterize bourgeois, left-liberal, and even some contemporary Marxist analyses of the current crisis. The crisis is not viewed as the result of mutually determining real and financial forces. The fundamental variable of investment in its two key elements—real asset and financial asset—and their shifting causal interrelationships are not considered primary. The role of the capitalist price system as a major system destabilizer is not considered in any of the above approaches to ‘real side only’ analysis.

In my follow-up second contribution to this debate, I will review 20 ‘fundamental propositions’ that summarize my alternative perspective on the causes and consequences of the crisis—a perspective that integrates real and financial variables, the price system, and the new realities of 21st century Finance Capital to produce what will be referred to as a growing ‘systemic fragility’ in the global Capitalist System today. A perspective that explains why no sustained recovery has occurred after five years of crisis, why double and triple dip recessions are now appearing globally, and why the current ‘Epic’ recession is drifting toward a bona fide depression.

Jack Rasmus
March 2, 2013

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Tune in to my weekly radio show, Alternative Visions, today (wed. 2pm est and archived) for my discussion of US GDP numbers for 4th quarter 2012 showing a negative -0.1% drop, and my analysis of prospects for GDP in the 1st and 2nd Quarter 2013 in the US. Is a double dip recession in the works? The show is available on the progressive radio network, PRN.FM, called Alternative Visions, at this url: http://prn.fm/shows/political-shows/alternative-visions/#axzz2K5w5xy34

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This week the first presidential candidates’ debate will be aired on television. A good part of the topic of the first debate will focus on economic programs of the respective candidates. They will say they represent fundamental differences. This is in part true. But equally true is that their positions on the economy in many important aspects are strikingly, and disturbingly, similar. Read the following except from my just published article on this topic in Z magazine.

This week the first televised debate between the two presidential candidates will be held and a good part of the debate will address programs for economic recovery for the next four years. Both parties and candidates are now proclaiming there are historic, stark differences and choices between them; that this election will mean choosing two fundamentally different paths for the country for years, and perhaps decades, to come with regard to the future of the economy in terms of jobs, taxes, deficits, housing, state and local governments, and other economic indicators. A closer examination reveals, however, that while there are some clear differences between the two candidates on economic matters, the similarities in their economic proposals are both striking and disturbing.
Upon entering office in 2009 Obama promised to create 6 million jobs if his $787 billion stimulus bill of (mostly business) tax cuts and spending subsidies to states and unemployed were passed. But after 18 months neither the tax cuts nor subsidies resulted in any appreciable job creation. Between June 2009 when the recession was officially declared over, and 18 months later in December 2010, an additional 1.1 million private sector jobs were lost. By year end 2010 the president had to resort to the claim he had at least had ‘saved’ further millions of jobs. With the effects of the $787 billion stimulus mostly spent, his job creation strategy then shifted mid-2010. A second recovery program passed late 2010 composed totally of an additional $800 billion in tax cuts—including $450 billion in extended Bush tax cuts Obama promised in 2008 he would not do.
This $800 billion more in tax cuts was supplemented by a new policy focus on manufacturing and promoting exports as the primary program to create jobs. Multinational corporate CEOs , like General Electric’s Jeff Immelt, were put in charge of his job creation program. That meant more free trade agreements, more deregulation for business, and more subsidies for U.S. export companies.
In 2011-12 still more business tax cuts were proposed as the way to create jobs. In 2011 tens of billions more for small business to hire unemployed and a so-called ‘JOBS’ (Jump Start Our Business Startups). JOBS was nothing more than a cover for more tax breaks and financial deregulation for start up companies, but Obama praised it as ‘a game changer’ for employment. More subsidies to the states to hire teachers and emergency responders, now being laid off in the hundreds of thousands, was also proposed but never passed Congress.

Obama’s Jobs Programs over the past 42 months therefore amount to the following:
• Tax cuts and more tax cuts for businesses
• Manufacturing-centric policies driven by more Free Trade agreements, more manufacturing export subsidies, and more business deregulation
• More subsidies to the states to hire teachers and emergency responders
These programs have proved pretty much a total bust, however: After $3 trillion in tax cuts and spending, total private sector employment has risen by only 2 million, or about 50,500 per month, which is well less than half that needed just to even absorb new entrants to the labor force. Total unemployment, as measured by the labor department’s U-6 rate, has fallen by a mere 1.3 million—from 24.6 million in June 2009 to 23.3 million in July 2012. Between June 2009 and July 2012 a paltry 200,000 manufacturing jobs were created, for an average of a mere 5,000 per month. And Obama’s much vaunted recovery of the Auto Industry has produced 157,000 auto jobs, which is still 180,000 fewer than existed at the start of the recession in December 2007.
Despite this embarrassing record on job creation, the President in his September 6 convention speech indicated clearly he would ‘stay the path’ with this business tax cuts + manufacturing promotion + free trade as his basic approach to job creation. He made it clear his second term’s strategy would be to “export more products” and that he would continue to work with business leaders to “create 1 million more manufacturing jobs over the next 4 years”. In his speech he also proudly proclaimed he had signed free trade agreements “bringing jobs back” and declared he would sign still more—a clear reference to his proposal for creating a ‘Trans-Pacific Partnership’ (TPP), a free trade agreement with all the countries of the pacific rim which Obama has been promoting for several months and an even bolder goal than George W. Bush’s Free Trade of the Americas that was proposed in 2005 to create a free trade zone throughout all of north and south America. In other words, in terms of jobs creation programs don’t expect much different from his first term in either job creation programs or results in an Obama second term.
Romney’s view on how to create jobs focuses even more heavily on tax cuts as the primary approach. Romney proposes to create 12 million jobs by 2017. The primary engine would be extending the entire $3.4 trillion in Bush tax cuts of the last decade as is for another decade (minus extending the cuts for those households earning less than $40,000 a year). Obama would extend the Bush tax cuts for all but the top 3% households. So Obama cuts out part of the ‘top tier’ of households from the Bush tax cuts extension, while Romney cuts out the ‘bottom tier’ of households. (Both support, however, reducing the top corporate tax rate from current 35%, as noted below).
To create the 12 million, however, Romney proposes more than just extending the Bush cuts: he calls for even more tax cuts for corporations (as does Obama), reduced business regulations and more Free Trade agreements (ditto Obama), but adds more oil drilling and some token worker retraining as addenda to his jobs program.
However, Romney’s 12 million jobs goal is somewhat of a sham. It amounts to creating only 180,000 jobs a month on average, i.e. just 50,000 more than needed for new entrants to the labor force each month. That means reducing the current 23 million jobless by only 50,000 a month, which would leave 20 million still unemployed by 2017. So the Romney program is not really a program to eliminate the massive jobless overhang today—apart from the question of whether more business tax cuts, free trade, oil subsidies, etc. will even create the 12 million jobs in the first place.
In short, the relationship between job creation programs and business tax cutting is just a matter of degree between the two presidential candidates. Romney advocates ‘Bush tax cuts on steroids’ to create jobs, while Obama exempts the top 3%. Both strongly propose Free Trade and more business deregulation as job creation measures. Obama proposes subsidies to states to hire teachers and firefights, while Romney doesn’t and proposes token job retraining. Romney wants still more cuts and subsidies to oil companies; Obama does not. Both support multiple handouts to small businesses. But all these programs have been proven failures to date, so the unemployed have little to expect from either candidate once elected.

As previously mentioned, Obama proposes to discontinue the Bush tax cuts for the wealthiest 3%. The top marginal tax rate for individuals would be allowed to rise from 35% to the 39.6% level of the Clinton years, impacting wealthiest households earning more than $250,000 a year. Taxes on the wealthiest 1% (earning more than $600,000 a year) would rise $93,000 a year. (For millionaires a tax hike of $296,000 a year). The tax on capital gains, now at only 15%, would also increase to 20% under Obama proposals. Oil and gas industry tax breaks would be reduced.
But what Obama proposes to ‘taketh away’ from the top tier of the personal income tax he proposes ‘to giveth’ to their corporations. His proposals include reducing the top corporate tax rate from current 35% to the 28% it was under Reagan. This shift is proposed despite the fact that in 2011 corporate taxes amounted to only 12.1% of profits—compared to the 1987-2008 period when corporate taxes averaged 25.6% of profits. For all businesses, corporate and non-corporate, the super-generous ‘bonus depreciation’ provision of the past two years, in which businesses can write off the cost of all capital investment in the first year of purchase, would also be continued despite its costing a whopping $55 billion a year.
Obama also favors changing the taxing of U.S. multinational corporations, reducing taxes on their offshore profits, even though that group today is hoarding $1.4 trillion of in their offshore subsidiaries and refusing to pay US taxes on it. In exchange for this tax reduction, Obama proposes to raise taxes in a yet unspecified way on those multinationals that offshore jobs.
Romney’s tax program is once again an extreme version of Obama’s but with many content similarities. In addition to extending all the Bush tax cuts of the past decade, for yet another decade, which would cost the US Treasury another $4.6 trillion according to the Congressional Budget Office research arm, Romney proposes the following tax changes:
• Cut the personal income tax rate for the rich even further than Bush, by 20% across the board.
• Cut the top corporate tax rate from 35% to 25% (vs. Obama’s 28%)
• Introduce a ‘territorial tax’ for US multinational corporations, which would in effect end the current foreign profits tax they pay (or in fact now refuse to pay)
• Repeal the Medicare 2.9% additional tax on the wealthy contained in Obama’s 2010 ‘Affordable Care Act (Obamacare) by repealing the entire Act.
• Allow tax credits for those earning less than $40,000 a year to expire (i.e. earned income, child care, and other tax credits).
• End all taxation on capital gains, dividends and interest income for households earning less than $200,000 a year.
• Keep the capital gains, dividends and interest income taxed at current 15%.
• Bigger tax cuts for business research and development
• End the Alternative Minimum Tax (AMT) altogether, which impacts those earning around $150,000 a year and above
• End the Estate Tax altogether
In summary, apart from their respective positions on extending the Bush tax cuts, both Obama and Romney are largely in synch on introducing more massive cuts in corporate income taxes, reducing corporate taxes to the 25%-28% range from current 35%–despite corporations today paying the smallest share of taxes from profits. Both have plans as well to provide multinational corporations even more tax concessions. Romney differs in proposing to give upper middle class households bigger incentives to invest in stocks, bonds and other interest bearing securities—an ultimate boon to his stock-bond market buddies. He also proposes to give the wealthy big tax bonuses by ending the Estate, Alternative Minimum, and forthcoming Medicare 2.9% taxes. Both propose more tax cuts that will not reduce the projected US budget deficits over the coming decade, but actually make them worse—and much, much worse in the case of Romney—leading in both cases to even more massive cuts in spending programs than either candidate is so far admitting to.
Obama’s policy with regard to US deficits is his pledge to reduce the deficit by $4 trillion over the next decade. That has been Obama’s stated goal since the deficit debates in 2011 leading up to the debt ceiling crisis of August 2011. That $4 trillion goal, moreover, is the same as proposed by his Deficit Commission (Simpson-Bowles), Paul Ryan in the House of Representatives, and various other Senate and ex-government officials. Details of the president’s $4 trillion deficit reduction plan are to be found in his 2012 budget. It is perhaps of some interest to note that Obama’s budget projections include a $5.8 trillion bill for defense spending over the decade, an amount which is 23% greater on an annual average than defense spending during the Bush years, 2001-2008.
The Congressional Budget Office has issued a different estimate of the likely budget deficits over the next decade. Given current tax cuts and spending projections, the CBO estimates the Obama deficits will amount to $6.4 trillion from 2013-2022. In January 2013 government spending will decline by $1.2 trillion over the coming decade, based on the debt ceiling deal agreed upon by Obama and the Republican House of Representatives in August 2011. Raising the debt ceiling once again will therefore become a major issue in early 2013. That means major tax increases and/or further spending cuts will be on the agenda immediately after the November 2012 elections regardless who is elected president (the challenge sometimes referred to as the coming ‘fiscal cliff’ by the media). Republican insistence on no tax increases and on raising defense spending even higher than projected by law or in the Obama budget, will mean an historic confrontation between deficit reduction and massive cuts in social program spending, including not only Medicaid but Medicare, Education, Social Security, and other discretionary spending programs. As this writer has been predicting, the confrontation will start immediately, within days, of the upcoming November 2012 elections—again regardless of who is elected president.
As frightening as the upcoming budget deficit confrontation following the elections will be with the Obama budget as starting point, the Romney budget-deficit proposals represent a deficit crisis of even far greater magnitude.
Romney tax cut proposals include the major elements of a continuation of the Bush tax cuts for another decade, at a cost of $4.6 trillion, plus adding trillions more in business-investor tax cuts. The result is deficits for the next decade equivalent to approximately $10 trillion! To address this massive deficit Romney proposes cutting federal spending from its current 24% of GDP to 18%-20%. That 6% of GDP in 2013 equals an immediate reduction in spending and/or increase in working poor and middle class tax cuts amounting to $300 billion. By 2015 the estimate is $500 billion, presumably rising further thereafter. In addition, he proposes to reverse the sequestered scheduled $500 billion in defense spending cuts agreed to in Congress in August 2011. The increases in working poor and middle class tax cuts were noted above. The spending cuts would mostly come from discretionary non-defense spending on items like education, transportation, healthcare, etc., for which Romney proposes a 5% cut across the board. The 5% represents no more than $60 billion a year. As others have pointed out, the Romney proposals do not add up and it is unclear how the 5% discretionary cuts, no defense cuts, retaining Bush tax cuts, adding trillions more in corporate-wealthy individual tax cuts can cover the $10 trillion. Proposing to reduce federal spending by 6% of GDP means spending cuts and/or tax increases totaling at least $900 billion a year. It can only mean unmentioned additional massive cuts in Medicaid-Medicare-Social Security and historic reversals in middle class tax breaks that are left conveniently unmentioned.
The Romney deficits therefore mean not only massive social spending cuts but hundreds of billions more in middle class tax increases as well. High on the list of the latter would have to include the elimination of tax deductions for health care and pension contributions by workers, virtually ending the mortgage interest and state income tax deductions, new taxation on Medicare benefits, and ending most of the earned income tax deduction for the working poor. Sharply reducing, or even ending, these deductions would be necessary to accommodate Romney’s proposed business and investor tax cuts. Romney would additionally end Obama’s Affordable Healthcare Act, reducing the deficit by another $.9 trillion. The rest presumably would come from other spending cuts in education, Medicaid, Medicare, and Social Security.
In summary, whoever wins the election, get ready for massive social spending cuts and a fight over how little to raise taxes. The deficit reduction proposals of both candidates envision historic cuts in social spending. Both envision more tax cuts for corporations that would additionally have to be made up from spending cuts and/or middle class tax hikes. Obama’s deficit reduction plan envisions some tax increases on the wealthiest individuals, while Romney’s envisions trillions of dollars more tax cuts for the wealthy, paid for by tax hikes by the poor and middle class as well as historic cuts in social spending of even greater magnitude than Obama’s.
There is virtually no difference between the two candidates on trade policy, and free trade agreements in particular. Both strongly supported recent free trade agreements with Panama, Columbia, and South Korea. And Romney supports Obama’s current drive to implement the biggest expansion of free trade with the ‘Trans-Pacific Partnership’ (TPP) pacific rim free trade policy, a development that will dwarf in scope and magnitude even Bill Clinton’s passage of NAFTA and his opening of China trade. According to the Economic Policy Institute, China trade alone has cost the US 2.7 million jobs just in the past decade. NAFTA millions more. Neverthless, both candidates unreservedly advocate accelerating free trade agreements.
The battle between Romney and Obama on trade amounts to token differences on how to show they are ‘tough on China’. Romney accuses Obama of being ‘too soft’ on China and demands more punitive action. Both candidates talk in vague generalities about the ‘offshoring’ of US jobs that has occurred by the tens of millions in recent decades, but neither offers any specific proposals for addressing the issue.

The heart of Obama’s Healthcare policy is, of course, the retention of his 2010 Affordability Care Act. Costing nearly $1 trillion over the rest of the decade, the Act does provide a number of meaningful benefits for the general populace. However, it has two great flaws: first, it amounts to a health insurance company subsidy bill. Health insurers will receive hundreds of billions of dollars of extra business. The second flaw is that it fails fundamentally to control health insurance and other health care costs. The problem of runaway healthcare costs will thus re-emerge and continue under the ACA, a problem which has already emerged as health insurance premiums and other costs have once again begun surging in 2011-12.
On the positive side, the ACA raises taxes on the wealthy by another 2.9%–which is the real source of much of the opposition to the ACA by the wealthy, transmitted through their manipulation of the Teaparty on the issue. But it also includes a reduction in payments to doctors and health providers in the amount of more than $700 billion. That will inevitably lead to doctors and providers refusing increasingly to provide services to Medicare patients. The ACA is thus a form of income shift that promises to reduce health care access. That is the price to be paid for the subsidization of health insurers and coverage extension to the tens of millions without any coverage.
It should further be noted, that Obama has signaled in July 2011, as he sought desperately an agreement with Republicans on the debt ceiling debate, that he was willing to cut Medicaid and Medicare by $700 billion despite the proposed expansion of Medicaid in his ACA. That public proposal provoked a near revolt by Democrats in Congress and was withdrawn. Nevertheless, it remains ‘on the table’, as they say, and will most certainly arise again immediately after the November elections. Voters will not hear of this during the election campaign, but will most certainly once the election is over.
Romney’s program with regard to health programs and policy top priority is to repeal Obama’s health care act of 2010. Next in priority is his complete embracing of his Teaparty Vice President, Paul Ryan, view for Medicare. The Ryan plan is to voucherize Medicare, provide payments to senior to then go and buy private health insurance—an even bigger windfall for insurance companies than Obama’s subsidies to insurers in his ACA. Ryan has projected this will ‘save’ the federal government $700 billion. However, not all seniors will receive the same voucher payment. Some will get less than others, thus creating a kind of ‘two tier’ voucher system. Moreover, there are no assurances the value of vouchers will increase annually with the rising cost of healthcare services, thus requiring seniors to increasingly pay more out of pocket for healthcare insurance. The main beneficiary from this, apart from health insurance companies, is the federal government which Ryan estimates will save $700 billion in government spending over the next decade. The Romney-Ryan Medicare voucher plan thus represents an income transfer of hundreds of billions from seniors to both insurers and the government.
Romney-Ryan are also major proponents of massive reductions in the Medicaid program, proposing to cut federal and state Medicaid costs by turning it into block grants to the States—many of which would refuse to participate or would take the money in the block grant and spend it elsewhere.
Proposals by both candidates are almost identical with regard to social security. Both are purposely saying little before the election about how they would address social security. Romney proposes vaguely that the age for eligibility for retirement benefits should be raised, as does Obama. Neither say raised to what or how quickly. Both suggest cost of living adjustments annually should be lowered. Obama implies by changing the way the consumer price index is applied. Romney goes further and recommends the creation of a ‘two tier’ system in the future (similar to Medicare) in which seniors with a certain level of retirement income would receive less social security benefits. What’s left unsaid by both is their agreement to target social security disability benefits for major reductions.
Apart from the failure to create jobs, the next greatest economic policy failure of Obama’s first term has been his reluctance to direct confront the housing crisis. The housing sector has languished in a veritable depression for three and half years, with home building and jobs stuck at only a third to half of pre-recession levels. More than 12 million of the 54 million mortgaged homeowners in the US have been forced into foreclosure, often illegally by the banks. More than 8.5 million on Obama’s watch, while than 10 million similarly languish with mortgages in ‘negative equity’.
From the beginning in 2009 Obama’s policies have focused on subsidizing mortgage lenders and mortgage servicers (big 5 banks), to help them move foreclosed homeowners out of their homes and to resell to new buyers. Early 2009 Obama programs like HAMP (Home Affordability Modification Program) are acknowledge failures, providing tens of billions of dollars of subsidies to banks and homebuilders and token assistance to homeowners.
In 2010 Obama then ignored the ‘robo-signing scandal’ that broke that summer, leaving it to state attorneys general to deal with. However, when it appeared legal suits would cost the banks potentially hundreds of billions of dollars, only then did the Obama administration intervene in 2011. That intervention was designed to help the banks—not homeowners—by limiting banks’ liability to homeowner and state legal suits. As part of that compromise, banks’ liability from legal suits arising out of robo-signing illegal foreclosures was capped at a mere $25 billion. Payments to homeowners illegally foreclosed have averaged only $1,500 each in the settlement and less than a billion of the $25 billion. Recent reports are that the $20 billion is not going to reducing loan balances for homeowners in ‘negative equity’ but is being deducted by banks against the $25 billion in the form of charges against short sales of homes in negative equity. In other words, homeowners are not being assisted to remain in their homes, but assisted in vacating them—which the banks then resell to new buyers at still further profit.
In exchange for the limits on liability, the banks were ‘encouraged’ to participate in latest OBAMA housing recovery program, his 2012 program called HARP 2.0. The HARP program was a ‘quid pro quo’ for relieving from pending massive liability action by the States. But HARP 2.0 is, in final analysis, just another ‘banker subsidy’ program. Not only are the big mortgage banks protected from further legal suits, but they are profiting nicely from the program. In exchange for refinancing homeowners in negative equity, the banks involved receive a commission of 5 ‘points’ (each point=1% of the value of the mortgage) from the quasi government mortgage agencies, Fannie Mae and Freddie Mac. Five points on a $500,000 mortgage refinancing amounts to a generous $25,000 fee paid to banks by the federal government for each refinancing. In turn, these costs incurred by Fannie and Freddie will have to be restored with funding from Congress and thus the taxpayer. HARP 2.0 remains as Obama’s latest centerpiece program for rescuing the millions of homeowners illegally foreclosed or in negative equity.
Romney’s program for ending the Housing crisis includes the following measures: first, to sell the 200,000 estimated local government owned homes. Somehow that is supposed to help raise home values, according to Romney, but will actually increase the excess supply of homes on the market and thus further depress home prices in most cases. Another Romney proposal is a vague demand to ‘restart lending’ to credit worthy borrowers. How to force banks to lend to homeowners, when they have been clearly reluctant to lend to small-medium businesses, is not explained in the Romney proposals. Romney’s Housing solution also calls for major reform of the Fannie Mae-Freddie Mac government mortgage institutions as well as still further deregulation of mortgage lenders and banks—i. e. two long time conservative demands designed to further privatize and deregulate the housing market.
While there are several dramatic differences between the Obama and Romney economic programs, there are also several almost identical programs shared by both. Both favor major reductions in corporate taxes. Both advocate hundreds of billions in social spending cuts, including entitlement programs. Both are almost identical in their positions on Free Trade.
Concerning tax policies, both propose to extend much of the Bush tax cuts—Obama suspending the cuts for the top 3% and Romney eliminating tax credits for the working poor and lower middle class. Obama has proposed some minor tax loophole closings, while Romney proposes additional, massive tax cuts for investors and businesses on top of the Bush tax cuts. Obama’s deficit over the decade amounts to a sizeable $4-$6 trillion but Romney’s more than $10 trillion. Both mean massive cuts in social programs coming immediately after the November elections, with Romney requiring major middle class tax hikes as well. Obama’s budget is very generous to Defense, and Romney’s even more so. A big difference between the two exists with regard to healthcare programs, including Medicare and Medicaid. Romney wants to destroy Obama’s ACA immediately and Medicare eventually. Both appear quite willing to gut Medicaid spending, with Romney cutting other discretionary spending by additional trillions over the decade.
These comparisons mean that, regardless who is elected president, an historic reduction in social program spending is on the agenda for the weeks immediately following the November 2012 elections. Defense spending will be either totally or partly protected from the cuts. And taxes will be further reduced for corporations, tokenly raised for wealthy individuals, and most likely significantly raised for middle class and the working poor. Nothing of any significance will be done to address the Housing crisis and programs to create jobs will continue to fail to have much impact.
It is this scenario that has prompted this writer repeatedly to predict the likelihood of a double dip recession in 2013, especially if the Eurozone crisis continues to deteriorate and China and the rest of the global economy continue on a path to an economic ‘hard landing’. It is possible, if Obama is re-elected, the fiscal austerity coming in early 2013 may be delayed a year and effectively ‘back loaded’ to start taking its greatest effect a year later in 2014. But if Romney is elected and Republicans control either, or both, houses of Congress the more draconian austerity programs will take effect earlier in 2013. That alone will ensure a double dip recession. And if the Eurozone slides deeper in recession and banking instability, virtually guarantee a double dip.
Dr. Jack Rasmus
Jack is the author of the new book, “Obama’s Economy: Recovery for the Few”, April 2012, and host of the radio show, ALTERNATIVE VISIONS, on the Progressive Radio Network, PRN.FM, in New York, on Wednesdays at 2pm. His website is http://www.kyklosproductions.com and blog, jackrasmus.com. Copies of the book can be purchased at the website or blog bundled with a DVD and a 66 slide powerpoint slideshow on the current state and future direction of the US economy.

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On Friday, July 27, 2012 the US Department of Commerce released its report on Gross Domestic Product (GDP) results for the 2nd quarter for the US economy, with GDP revisions for the economy as well from 2009 through 2011.

Last winter the broad consensus among mainstream economists, politicians and the press was the US economy was finally on the way to recovery. Economic indicator after indicator was flashing green, they argued, proving recovery was in full swing. GDP for the 4th quarter 2011 recorded a moderately healthy 4% growth rate and was predicted by widespread sectors of the media would continue. But GDP numbers just released on July 27, 2012 show that 4% growth dropped precipitously by half, to only 2%. And in the latest report issued last week, 2nd quarter 2012 GDP continued to fall further to only 1.5%.

GDP for the first half of this year therefore has averaged about 1.7%–which is about the same 1.7% GDP growth for all of 2011. The US economy, in other words, is not growing any faster this year than it did last year. It is essentially stagnant, unable to generate a sustained recovery despite $3 trillion in spending and tax cuts over the past three and a half years. This scenario will at best continue, and may alternatively even worsen in the coming months; and if not worsen this year, certainly so in 2013.

This rapid slowing of the US economy in 2012 was predicted by this writer early last December 2011, in a general economic forecast for 2012-13 that appeared in the January 1 issue of Z magazine. Contrary to the 4th quarter 4% GDP trend, in December 2011 this writer contrarily predicted “the first quarter of 2012 will record a significant slowing of GDP growth” and “the US economy will weaken further in the second quarter, 2012”.

The US economy has been essentially stagnant for at least the past two years, bumping along the bottom at a sub-par 2.5% GDP growth rate. The economy needs to grow in excess of 2.5% for net job creation to occur. Given the economy’s longer term 1.7% growth rate, it is not surprising net job growth the past three months has averaged barely 80,000 a month—i.e. well below the 125,000 or more needed just to absorb new entrants into the labor force. So we are in fact losing jobs again this year, 2012, despite what the official unemployment rate says.

Readers should note this 1.7% sub-par GDP growth the past 18 months has occurred despite the $802 billion tax cut passed by Congress in December 2010, virtually all of which was tax cuts for businesses and higher income household investors. In fact, it was more than $802 billion if further tax cuts for small businesses over the past 18 months are also factored into the total. Perhaps as much as $900 billion in pro-business/investor tax cuts have been passed, which have had minimal to zero impact on the economy and job creation. So much for that myth, and conservative-corporate ideology constantly pushed by politicians and the press, that ‘tax cuts create jobs’. Readers should keep that factual absence of any positive relationship between tax cuts and jobs and economy in mind, when more tax cuts for corporations and the wealthy are proposed by both parties once again as part of the year end deal coming immediately after the November elections. Expect both sides, Republicans and Democrats alike, to agree on reducing the top bracket tax rate on personal and corporate income both, from current 35% to at least 28% (the old Reagan years rate).

1st Quarter GDP: Temporary Growth Factors Disappear

While the hype about economic recovery was in full swing last winter, this writer pointed out in various publications that the 4th quarter GDP numbers were based almost totally on one-off developments that would disappear by mid-year 2012. At least half of the 4th quarter’s 4% growth rate was due to business inventory spending, making up at year end for the collapse of the same in the preceding 3rd quarter. Auto sales driving consumer spending was also noted as a temporary effect, given they were based on deep discounting and temporary demand that would not continue. Business spending that surged in the 4th quarter was also identified as temporary, as it was driven by year end claiming of tax credits, while manufacturing export gains in late 2011 would soon dissipate, it was predicted, as the global economy and trade slowdown eventually reached the U.S. in 2012.

The halving of GDP growth by the 1st quarter 2012 was due in part, as predicted, to the slowing of auto sales. The previously predicted slowing of business inventory spending occurred, while the 4th quarter’s business investing also disappeared as predicted. In addition to the dissipating temporary factors, new developments added to the 1st quarter’s GDP decline: Consumer spending slowed, as escalating gasoline prices began once again (for a third year in a row) taking their toll on consumers and as auto sales growth began to show signs of weakening. The global slowing of manufacturing also finally began to penetrate US economy by 2012, as US exports grew more slowly than imports and thus depressing GDP still further. Finally, the 30 month long decline in government spending, especially at the state and local government level, continued unabated into 2012.

In late April this writer predicted that the 2% first quarter 2012 GDP would continue to decline still further. In a piece in Truthout.org on May 8, it was predicted the 1st quarter GDP “decline will likely continue further in the months immediately ahead, to possibly as low as 1.5% the second quarter, April-June 2012.” (In a piece in Znet on May 6 it was predicted for the second quarter 2012 that “The growth rate could slow to possibly as low as 1.5%”).

2nd Quarter GDP’s Continuing Downtrend

The same factors that have been driving the 4% GDP to 2% in the January-March 2012 period have driven it lower still, to the recent 1.5%.

In the most recent 2nd quarter 2012, both consumer and business spending showed even further weakening—while government spending continued to contract for the 33rd consecutive month and the contribution to GDP by exports fell further as well.

Consumer spending on goods declined from its 5.4% rate in the 4th quarter to only 0.7% this past quarter. Durable goods spending in particular fell off a cliff last quarter, as auto sales not only slowed dramatically, as in the 1st quarter, but now in the 2nd actually turned negative. But perhaps the most dramatic indicator is the fall off in retail sales in general. Retail sales April-June fell in each of the three months. That is the first time for a three consecutive month decline since the deep collapse of 2008! Even services consumption recorded its slowest and lowest growth in two years!

What consumer spending did occur in the 2nd quarter was driven by sharply rising credit card debt as well as household auto and education debt, credit cards growing by 11.2% and auto-student loans by 8%. In other words, to the extent consumer spending is occurring at all it is not due to rising household real disposable income—which is actually falling—but due to households taking on more debt. So much for the mainstream argument that consumer spending is slowing because households are working off debt (i.e. so-called deleveraging). That may be true for the wealthiest 10% households with income growth from stocks and bonds, but not for the bottom 90%, i.e. the more than 100 million rest of us. But consumer spending increasingly dependent on credit cards and other borrowing portends poorly for further spending down the road. It is not sustainable and will result in yet a further slowing of consumer spending and consequently economic growth.

Consumer spending is not the only major trouble spot in the 2nd quarter that promises to continue into the 3rd and beyond. Business spending also showed new signs of trouble in new places as well as the old last quarter. Business spending on plant expansion, which shows up as business ‘structures’ spending, collapsed last quarter from prior double digit levels in the 4th quarte—from 33.9% to only 0.9% in the last three months. That plummeting structures spending will eventually translate into a slowing of new job creation going forward as well. Businesses that don’t expand don’t add jobs. Slowing business spending was also evident in new orders placed for manufactured goods that turned negative for each of the past three. Watch next for the other business spending sector, on equipment and software, soon to flattened out in the future as well.

A third sector of the economy that contributed to growth in 2011, but has also reversed now as well, is exports. New orders for US exports have declined the past two months in a row, the first back to back fall since 2009. That confirms that any contribution of exports and manufacturing to GDP is now clearly over. It never really contributed that much in the first place, despite all the Obama administration hype in 2010-11 that manufacturing and more free trade would ‘lead the way’ to sustained US economic recovery. It was all hype to reward multinational technology and other companies—big contributors to Democratic election coffers—while diverting attention away from the obvious failures to generate sustained recovery after the three Obama ‘recovery programs’ introduced in 2009, 2010, and 2011.
Not least there’s the continued poor performance of the government sector in the 2nd quarter. It has continued to decline every quarter since the 3rd quarter of 2009, or 33 consecutive months now. That spending decline at the state and local government level has been the case despite more than $300 billion in federal stimulus subsidies to the states since June 2009 and hundreds of billions more in unemployment insurance payments by the federal government to the states. Why state-local government spending has declined every quarter since mid-2009 despite the massive subsidies is an anomaly yet to be explained. Like corporations hoarding their tax cuts, and banks hoarding their bailouts, both refusing to use the money to lend and create jobs—perhaps the states and local governments also hoarded their subsidies. Perhaps that’s why the Obama administration quickly shifted its promise that its stimulus package would create jobs, to a message that it would, if not create, at least ‘save jobs’.

In answer to the obvious further deteriorating in the 2nd quarter in both consumer, business, and government spending, the press and media in recent weeks have tried to grab at straws and hype a ‘recovery underway in the housing sector’. But this line has been based on the slimmest of evidence: the indicator that home builders’ new construction has risen. But the media hype in recent weeks regarding housing has conveniently ignored various other indicators recently showing continued housing sector stagnation: For example, new home sales declined by 8.4% in June, the largest fall since early 2011. Mortgage loan applications and new building permits also fell, while median home prices recorded a –3.2% decline compared to a year earlier. That amounts to nothing near a housing recovery. To the extent home building has risen, it has been largely limited to multi-family units—i.e. to apartment building. That’s not surprising, given the 12 million plus homeowners who have been foreclosed since the recession began and need some place to live. But housing sector indicators as a whole still show that sector languishing well below half of what it was pre-2007 and with little indication of any kind of sustained growth or recovery. As in the case of net job creation, without a housing recovery leading the way there is no sustained general US economic recovery.

In all the 11 prior recessions since 1947 in the U.S., state and local government spending increases, net job creation in the private sector equivalent to 350,000 jobs per month for six consecutive months, and housing sector recovery have all been necessary to ‘lead the way’ out of recession. But for the past four years none of the above has been the case. There have been no effective jobs program, housing-foreclosures solution program, or state-local government spending program. That tripartite failure is at the heart of the failed economic recovery of the Obama first term.

Jack Rasmus
Jack is the author of the April 2012 book, “Obama’ Economy: Recovery for the Few”, published by Pluto Press and Palgrave-Macmillan. His other recent articles, radio and tv interviews, are available on his website, http://www.kyklosproductions.com

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The US Labor Department released its monthly jobs numbers for June 2012 this past week. Once more the numbers showed a dramatic slowdown in job creation for the third consecutive month. Job creation averaged around only 80,000 a month for April to June, about a third of that in the 1st quarter, January-March period earlier this year.
The reason most often offered for the jobs relapse in June and for the past three months—the third such mid-year jobs relapse in as many years—is that the weather last winter quarter was the cause of the last three months’ dramatic drop off in job creation. As the argument goes, the ‘good weather’ of this past winter somehow drew forward the economic activity and therefore job creation that would have been otherwise created the past three months. That explanation, however, is nothing more than an excuse designed to avoid an otherwise more fundamental analysis why job creation has been collapsing once again in recent months.
Never mind that the last three months’ job creation collapse represents the third consecutive mid-year slowdown in job creation. If good winter weather were the explanation for the latest, 2012, such slowdown, then good winter weather should have been the explanation for 2010 and 2011. But those previous winters were quite ordinary. Second, if winter weather were the primary cause in 2012, then an inspection of those sectors of the economy—construction, agriculture, transport, retail—over the past six months should show significant jobs gain in the winter months followed by the exceptional collapse in jobs in those sectors this past April-June. But there is no such evidence, if one bothers to take a look at these potentially seasonal sectors.
The industries that might conceivably benefited seasonally from extraordinary better weather last winter—in effect pulling jobs into the winter quarter from this spring and thereby lowering net job creation this past three months—in fact produced very few additional jobs this past winter. We’re talking about around 20,000 jobs at most for all the preceding sectors noted—out of a reported total of 700,000 new jobs created in the winter quarter.
So if it wasn’t weather and seasonality that produced the 700,000 extra jobs over this past winter quarter, what then was responsible for that growth? Equally important, what then was responsible for the collapse in jobs the past three months, April-June, if it wasn’t winter weather effects? And will those real (non-weather) factors continue to have a similar impact on job creation going forward?
The ‘Good Weather’ Metaphor Explanation of Job Creation
When economists explain by resort to metaphor it is usually a good indication they have little idea as to what the actual causes may be.
The inordinate ‘good winter weather’ was no more responsible for job creation this past winter, and the consequence decline in job growth the past three months, than arguments that ‘sunspots activity’ can explain economic growth and job creation—i.e. an argument that in fact was once offered in the distant past by economists to explain economic growth despite its obvious ridiculousness. ‘The weather last winter’ thus represents a retreat by economists to past absurd modes of ‘analysis by natural metaphor’—in effect an excuse substituted for a real explanation and analysis of the sad state of the jobs market in the US today. Such explanations should be left to political and press pundits who are more inclined to avoid the facts than reveal them.
Actual Explanations of the Jobs Reports
So what might otherwise explain the 240,000 average job creation record of this past winter, followed by the dismal record of only 80,000 jobs a month on average created this past April-June?
The reasons are threefold and none has to do with weather hypotheses: (1) growing evidence of a problem with statistical methodologies used by the US labor department to estimate jobs; (2) the timing of policies, both fiscal and monetary, by the Obama administration and the Federal Reserve bank over the past three years; and (3) the convergence of global economic developments.
1. A Problem with Statistical Estimation?
As this writer has been arguing in publications the past six months, the 240,000 average jobs creation this past winter did not represent actual job creation. It was the outcome of statistical estimation methods by the US labor department that have consistently over-estimated job creation over the winter quarter for three consecutive years now. Without repeating the arcane details here (see the blog, jackrasmus.com), suffice to simply say those methodologies are based on an economy pre-2007, and are now, in today’s relative economic stagnation in the US (and increasingly globally), no longer as accurate and should therefore be fundamentally overhauled.
2. Ineffective Policy Responses to the Labor Market
The recent collapse in job creation is more obviously due, in part, to policies both fiscal and monetary of the past three years: specifically, with the timing of government policies in 2009, 2010 and 2011 that provided an insufficient dose of tax-spending stimulus earlier in the year that quickly dissipated by the following mid-year. The Obama administration has introduced three ‘fiscal stimulus programs’ (tax cuts and spending) to date that provided in each case a limited boost to the economy around year end that subsequently ran out of steam by the following mid-year. The reasons for the rapid dissipation of the stimulus are only in part due to the inadequate magnitude of each of the three programs. The rapid fading of the stimulus has been due even more so to the problems of composition and timing at the heart of the recovery programs.
Concerning monetary policy, the past three years have also been characterized by three Federal Reserve ‘quantitative easing’ policy programs that have also been ‘seasonal’ in their timing and impact, and subsequently therefore dissipated in their effects by mid-year as well.
Considering just the current year, 2012, an analysis that doesn’t rely on the excuse of ‘good winter weather’ must ask what happened in the winter quarter of this year that resulted in the definite slowing thereafter of the US economy, and job creation, the past three months? Among the possible real explanations, there was the spike in gasoline prices in the first half of this year, together with other inflation factors, that hit median households hard in the winter, with after-effects on consumer spending just felt in recent months. Food prices, utility cost increases, health insurance premium hikes, rental costs escalation—to name but the most obvious—are now having a major influence on real disposable income growth for the majority of US households. This is now showing up in recent months’ retail sales weakness and service sector spending slowdown, the latter of which represents 80% of the economy.

Service sector jobs rose by about 250,000 in both the first and second quarters. But the composition of those jobs created in this sector differed significantly in the 2nd quarter compared to the 1st. Service sector jobs this past quarter have tended to be heavily weighted toward part time and contingent work. Since March more than 500,000 involuntary part time (i.e. non-agricultural) jobs have been created, along with more than 100,000 temps and who knows how many middle management & professionals laid off who immediately designate themselves as ‘self employed’ and thus avoid the unemployment rolls.


Given weak to non-existent real disposable income growth, businesses have begun to add only part time jobs in the 2nd quarter in anticipation of a potential slowdown in services spending. Simultaneously, they are also eliminating full time jobs, as more than 700,000 full time jobs were eliminated the past three months. In other words, a kind of ‘churning’, from full time to part time employment has been occurring in recent months. And when that occurs, few net jobs are added.
Another ‘non-weather’ factor explaining the real slowing of job creation the past quarter is attributable to the global slowdown in manufacturing that inevitably began to penetrate the US manufacturing sector by the late spring 2012. Much has been hyped since late 2010 by large corporations and the Obama administration about how manufacturing is ‘going to lead the way’ to recovery and job creation in the US. But according to the Labor Department’s Table B-1 for June, manufacturing jobs grew by only 68,000 over the winter quarter, and since March by half that, at 34,000. Moreover, virtually all that roughly 102,000 manufacturing job creation in the first half of 2012 represents jobs for managers, supervisors and other professionals in the industry. Net job creation involving production and non-supervisory workers in manufacturing have actually declined by 170,000 from March through June 2012. This represents clear evidence that employers are now, effective the 2nd quarter, cutting back on production employment as the global manufacturing slowdown begins to impact the US in recent months. That job cutting will accelerate in coming months, given that new orders for factory goods in June fell at the worst rate since 2009.
A third real, non-weather, explanation involves job hiring trends involving government workers. Their numbers have been steadily declining over the past three years. Especially hard hit has been local government, and therefore teachers. Layoffs and decline in jobs reported for this group does not occur in the winter quarter, but does in the spring quarter. That also therefore, in part, explains the 2nd quarter fall off in job creation. But the ultimate causes here are government policies since 2009. Obama policies provided subsidies to the public sector to prevent (not create) job layoffs for one year. After mid-year 2010, those subsidies were gone and state and local governments began deep spending cuts that continue to the present.
Finally there is the Construction industry. Good weather also does not explain what’s happened with jobs in the industry. Employment in Construction declined by 13,000 in the industry over the 1st quarter, as typically occurs in winter months. But it has continued to decline, on a seasonally adjusted basis, from April to June, by another 42,000. That’s because there is no job recovery in Construction. The press has been contorting itself to try to pry some evidence that somehow housing is recovering. Because home prices did not fall last month, and home sales are bouncing along a bottom, according to the press that somehow constitutes recovery. However, the only evidence of growth in the industry is apartment construction—predictable since tens of millions have lost their homes since 2007 and must live somewhere. But construction employment has been unaffected by this ‘faux recovery’ in construction. Construction jobs declined by 13,000 in the first quarter of 2012, and then another 42,000 in the second.
When economists who should know better simply repeat the ‘weather’ as responsible for the April-June collapse in the monthly rate of job creation they in effect parrot the prevailing ‘spin’ of politicians and their media friends who prefer the public does not point fingers at their policy failures ultimately responsible for the jobs collapse. There has not been a bona fide job creation program since the current recession began. There have been massive tax cuts for business that never got invested to create jobs; there have been bail outs of banks who were supposed to lend to smaller businesses to invest and create jobs but didn’t; and there has been a turning over of jobs programs to manufacturing corporate CEOs, like GE’s Jeff Immelt, whose idea of a jobs program is more free trade and more deregulation, in exchange for hiring a couple thousand jobs temporary status workers in the US at half pay.
3, Converging Global Economic Slowdown
Combining with the preceding real explanations is an accelerating slowing of the global economy, led by a contraction in manufacturing across all major economies. This slowing began well back, in late summer 2011, recovered slightly and now is trending down once again more strongly. This time it also includes China, Brazil, India and other economies—in addition to the Eurozone wide recession now well underway and the clear slowing of the US economy in recent months as well.

Manufacturing was touted as the solution to job creation in late summer 2010, and the Obama administration made a concerted shift toward it as the solution to a then faltering recovery. That shift has produced little to nothing in terms of job creation, however. The third jobs relapse in as many years is therefore on the horizon this summer.
But one doesn’t need a weatherman to know which way the jobs winds are blowing in America.

Jack Rasmus, July 8, 2012

Jack is the author of the April 2012 book, ‘Obama’s Economy: Recovery for the Few’, available at discount at this blog. Click on the book icon on the right sidebar.

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COMMENTARY: Earlier this month, I wrote and predicted that central banks appeared to be moving toward a coordination of monetary policies in anticipation of an accelerating of the decline of the global economy. Today that appears to be the case.

On July 4, central banks in China, Europe and the UK simultaneously undertook action to stimulate monetary variables in an attempt to get ahead of the curve of the declining global economy. But they will find that monetary policy has very little impact on this current global condition.

The European Central Bank, ECB, cut rates to a record low of 075%, as it is now clear virtually the entire Euro economy, including the UK, are in recession or rapidly approaching it–as this writer predicted 8 months ago would happen.

The Bank of England, with rates already at near zero (0.5%), opted for even more ‘quantitative easing’, that is printing another $78 billion, an addition to its already nearly $500 billion such QE injection to date.

China simultaneously announced another surprise cut in interest rates, the second in as many months. China economic data forthcoming probably shows a weaker economy than even currently assumed. As this writer also predicted, China’s GDP is likely to fall well below 7% (which it needs to absorb new labor force entrants), and that notwithstanding the likely forthcoming fiscal stimulus China will have to undertake before year end.

That leaves only the US and Japan among major central banks not having yet taken action. Japan will likely wait on the US to do so first. The US federal reserve does not meet until July 31, but another round of QE can be expected if the June and July job figures remain in the dismal level that they have, below 100,000 jobs created a month (and thus also below new entrants to the labor force in the US), and if US manufacturing and services remain in decline or stagnant.

But monetary action by all these central banks, coordinated or not, will have little impact on stemming the global decline. Monetary policy, that is liquidity injections into the banking system, in the current ‘epic recession’ do not result in significant increases in bank lending and,in turn, business investment that creates jobs, income growth, and therefore economic recovery. The monetary injections largely are hoarded, or else committed to short term speculation in financial markets to realize quick profits. The QE and easy money results in a temporary stock and commodity markets surge, that eventually dissipates in less than a year.

As this writer has also written on this blog earlier this year, this cycle of QE and zero rates has led to the banking system and financial markets becoming increasing addicted to the free money.

Now the banking system itself also is showing signs of growing fragility. On the surface the Euro banks are apparently the main trouble spot, especially in Spain and the Euro periphery. But the core Euro banks are also increasingly in distress. The Eurozone’s last week summit was primarily focused on a pre-emptive bailing out of the Euro banks–or at least future plans to do so. But fiscal stimulus announcements were token and not of any consequence, at best indicating plans merely to ‘move the money around’ sometime in the future. Thus the Eurozone continues to focus on monetary solutions as well, which will prove disastrous to the effort to slow the decline toward a hard landing recession. (More on the Euro Summit and its solution in a couple days, now that the ‘dust is starting to settle’ on the initial overly ‘euphoric’ response to its pronouncements regarding use of its ESM fund to directly bail out the banks and create a more bona fide central bank out of the ECB at some distant point in the future.

Today’s coordinated central bank response to the growing global slowdown will no doubt result in more coordination to come. Despite the clear effort to coordinate, ECB president, Mario Draghi, denied ay such coordination–the last time such occurred was circa the Lehman Bros. collapse in 2008. Draghi also replied to the direct question of whether the global banking system was more fragile today than in 2008 by saying it was more stable today. That too is another misunderstanding of the global situation.

The weak point in the global banking system may not prove to be Spain and its banks, but what is going on in London today, the major financial center, and has been apparently since the 2008-09 collapse. London has become the ‘Cowboy Finance Capital’ center of the global economy. High risk taking and continuing speculative excesses have been the rule and now it’s becoming apparent. UK financial regulation has been a bigger joke than even the US Dodd-Frank bill. JP Morgan’s recent losses, centered on speculation in derivatives, is one indicator of London out of control. Another is the now emerging massive scandal involving Barclays and other banks’ manipulation of Libor rates–again to maximize derivatives revenues it appears. JP Morgan’s losses have risen to $9 billion from the original $2 billion estimate. And that doesn’t count its $25 billion plus, and rising, losses in stock values. The JP Morgan speculation involves its $350 billion portfolio. The losses may be much much greater, but we won’t know for months. Meanwhile, the Barclays-Libor scandal promises unknown financial losses. This is potentially of great significance. Hundreds of trillions of dollars of derivative trades were based on Libor, not to mention 90% of US mortgage contracts. How this scandal will result in liability suits and claims, and how that uncertainty will impact financial markets, remains to be seen. The unknowns are potentially significant.

In other words, the global banking system is growing more fragile, not less, and potentially even greater in terms of its negative impact on real economies already slowing rapidly. This is unlike 2008, when real economies were booming when the financial instability hit. 2008 also was a situation when central banks’ balance sheets were not overburdened with trillions of liabilities yet, as they are now. When the global consumer had not suffered five years of unemployment, negative income growth, trillions in asset wealth destruction, and real debt accumulation. Finally, 2008 was a period when government balance sheets were not in as terrible a shape as well, or the inclination as strong toward austerity and spending contraction.

No, Mr. Draghi, the global economy–especially in the Euro and UK, and increasingly in China and the BRICS, and soon again in the US as its economy now clearly slows, is not in a ‘better shape today’.

More on the Eurozone Summit and why the US economy will continue to slow, in a subsequent post.

Jack Rasmus
July 5, 2012
Jack is the author of the April 2012 book, ‘Obama’s Economy: Recovery for the Few’, which predicted 9 months ago the current US and global economic slowdown. The book may be purchased from this blog site at discount. (see icon).

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