It’s time for the American electorate to stop listening to television “news organizations” that are more interested in stirring emotion and ratings than providing objective and meaningful analysis. Borrowing the title of this article from the iconic band Chicago, circa 1969 is oddly appropriate to where economic and political conditions currently stand in the U.S. While the majority of people in the U.S. would rather see which amateur songbird can “win” a stupid competition than learn why were are in a protracted economic downturn, perhaps the public would be better served by offering another Wheel of Fortune instead of the broadcast in the evening “news” half hour.
For Those Who ARE Interested In How and Why We’re Here
30 years ago, politicians began systematically dismantling the laws that have protected the public since being enacted after the Great Depression. The U.S. Republican Party, who elected large numbers in 2010, ostensibly elected to address economic policies and get our economy revved up, has instead focused on social policies while obstructing every single bill put forth by Democrats to deal with the stubborn, fragile economic recovery. Adding fuel to the fire, Republican presumptive nominee Willard Mitt Romney, has laid out not one single detail as to how he would deal with the recovery other than picking a stray agency here or there to use as a dog whistle like Planned Parenthood, or the Commerce Department.
Darling of the Right, and possible running mate for Romney, Paul Ryan, has published two very similar budget proposals that have easily passed the Republican-controlled House of Representatives that gut virtually every discretionary expenditure other than ones that provide subsidies to industries which do not even need them.
And it seems that no matter how much proof is presented to the public that our system of politics is failing this country badly, we somehow shrug it off and resume our daily lives with the blind ignorance that comes from easy answers, or finger-pointing, or bumper stickers. At the very time that we should be more aware, more enlightened and better educated with more objective information at our fingertips than ever before, we resort to listening to modern day “town criers” who serve at the whim of the corporate kings and televised information spoon-feeders.
Major Protections Repealed From The Great Depression
See if you can remember the reasons or consequences of the major economic collapses in just the last generation.
1) The Garn-St. Germain Act of 1982: De-Regulated Savings & Loan Institutions and allowed them to provide Adjustable Rate Mortgages for home loans and lowered value-to-debt ratio. Ronald Reagan quote on signing: “This bill is the most important legislation for financial institutions in the last 50 years.”
- By 1983– 35% of the country’s S&L’s weren’t profitable, and 9% were technically bankrupt.
- By 1989, Congress and the president had to bail out the industry and taxpayer-financed bailout measure known as the FIRREA providing $50 billion to close failed banks and stop further losses, eventual total collapse of S&L Industry
2) Wendy Gramm- presidential Task Force on Regulatory Relief in the Reagan administration, chairwoman of the U.S. Commodity Futures Trading Commission from 1988 until 1993, wife of Senator Phil Gramm(R), Texas— applied for and was subsequently granted government exemption for energy commodities from government or public disclosure. This closed energy commodities accountability from government and public disclosure requirements, despite being a Publicly-Traded Company.
- Wendy Gramm was paid over $2 million, never convicted, while ENRON donated more than $97k to Phil Gramm campaigns during the time his wife served as Enron Board Member while Chairwoman of the Commodities Futures Trading Commission
- $70 billion loss to investors from embezzled funds, misappropriated trust funds, pension plans and retirement plans of 22,000 employees. Arthur Anderson, a Big-5 accounting firm was forced into bankruptcy due to malfeasance of behalf of ENRON
- Sarbanes-Oxley Act of 2002 was enacted to re-institute proper accounting procedures and transparency for Publicly Traded companies-Repealed by Jobs Acts in 2012
3) Gramm Bliley Leach Act of 1999(Also known as Financial Services Modernization Act) Sponsored by Senator Phil Gramm(R) Texas-Repealed the Glass-Steagall Act of 1933 and allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate. Granted exemption to private insurance companies for insuring Publicly-Traded Investment Banks. AIG insured $50 to every $1 it was actually able to pay in the event of defaults by customers of Investment Banks.
- Real Estate collapse of 2008 and Investment Bank collapse of 2008, bankruptcy of Lehman Brothers Investment Bank and AIG(American International Group),government bailout of $750 billion.
4) Commodity Futures Modernization Act of 2000-Repealed the Commodity Exchange Act of 1936-Investment Banks, Hedge Funds, and Pension Funds may now use depositor money to buy and sell commodities based on pure speculation without oversight. Financial institutions now own 61% of all investments in wheat, oil, and maize and can raise of lower prices through pure speculation and ignore actual supply vs demand.
- Price Spiking, and Price Bubbles, are caused by speculation without the institutions ever having to actually buy the contracts or receive the products in order to effect the prices.
So, here we are at a point in time when the public no longer has the luxury of simply going about their daily business and hoping that everything will work out. It won’t. If you don’t start paying attention NOW, you may not get another chance in this still-new millennium.
It’s Your Economy-Pay Attention!
If either the U.S. or Europe has any hope of pulling out miraculous come backs in their respective economies, the clock is ticking down ….quickly. For gosh sakes, when will Americans quit listening to the economists who are saying that austerity is the answer? It is simply is the wrong play for this stage of the game.
It may seem like a good Conservative idea but it is not a good ECONOMIC idea. We all have ample proof right in front of our eyes that it’s not working in Europe, yet the Conservatives plow ahead, with Paul Ryan releasing budget after budget to cut all spending except for Conservative stalwart-defense.
But glance at actual results of austerity measures put in place in Europe between two and three years ago which have yielded the following results:
The United Kingdom
George Osborne has sold his plan for the UK as the only way to avoid becoming another Greece. In the US, rightwing academic economists have raised the prospect of Washington becoming another Athens without a concerted attack on public services. Daniel Mitchell, of the libertarian-minded Cato Institute, argues that Europe has not been austere enough and that much more is needed. “European countries talk about austerity but they don’t mean cuts,” he says.
But the government’s turmoil since Osborne’s badly received budget and his entire lack of success since taking over in May 2010 have taken a fresh turn for the worse with the latest set of growth figures showing Britain plunging into its first double-dip recession since 1975.
Unlike the United States or Germany, UK economic output has yet to return to the levels before the recession began four years ago. Activity is still more than 4% lower than it was at its peak in early 2008 and has recovered more slowly than it did after the Great Depression of the 1930s.
Where does one begin? We’ve all hear about Greece and Republicans often point to them as some sort of example that could happen to the U.S. if austerity isn’t implemented here, so let’s leave Greece for last.
How about Spain?
It was not supposed to work out this way. Spain’s strict austerity budget, topped-off with an additional round of deep spending cuts in recent months, was intended to shore up investor confidence by showing that the government was corralling its budget deficit. Meanwhile, eurozone governments were pumping some $1.33 tillion (1 trillion euros) into weak European banks, including Spanish banks, to restore financial order and, hopefully, to encourage more business lending.
But so far the moves seem to be backfiring. Spain is particularly important because sovereign troubles there would swiftly spread to other peripheral eurozone countries, such as Italy and Portugal, and related banking problems would quickly infect the rest of Europe and move on to the United States. That would threaten to derail a fragile economic recovery there and in the rest of the world, not to mention risking another full-blown global financial crisis. What’s more, unlike Greece or Portugal, it is understood that Spain’s (like Italy’s) economy is too large for a bailout once a crisis would pass a critical point, so heading off problems early is crucial to preventing global contagion.
Wharton finance professor Franklin Allen points out that Spain’s “severe challenges” are now at the center of the eurozone crisis, replacing those of Greece. Unemployment in Spain is near 24%. Youth unemployment is over 50%. “One begins to wonder where the political limits are. Will the politicians be willing to go to 30% or 35% unemployment, and 60% or 70% youth unemployment?” In the face of budget slashing of 5.5% from now through 2013, such unemployment levels “seem quite possible and the potential long-term term consequences are devastating. What is disheartening is the apparent lack of concern in Northern Europe and in Brussels about this economic disaster. There seem to be very few proposals to improve the situation other than austerity and more austerity.” In Allen’s view, current policies have failed in Europe, and “unfortunately, very few people are willing to say that.”
How did Spain get into such a tight position? Cheap credit, much of which was provided by German banks, led to a real estate bubble in Spain, perhaps even larger in relative terms than the one in the U.S. As Allen explains it, when the real estate bubble burst, it “devastated Spain’s construction industry and that was the initial cause of the high unemployment.” Sound familiar?
Cuts and taxes are one thing, yet I saw little within Monti’s plan setting out measures to boost growth and carry out structural reform. More worrisome? The tone and nature of measures was reminiscent of announcements in Athens, Dublin and Lisbon. Across Europe there seems to a monotonous lack of inventiveness. If, and when, Monti starts to introduce more radical change, the political volume is bound to get louder and vested interests more resistant.
Italy’s prime minister, Mario Monti announced shortly after taking office in May 2010 that the Italian economy will contract by 0.4-0.5% next year, and growth will be flat in 2013. Italy has barely grown over the past decade and the average Italian was worse off in 2010 than in 2000. Each year 90,000 people leave Italy – almost a million in the last decade. Italy’s bigger problem is a lack of growth and until the country addresses these profound challenges, its problems will remain. To enable long-term growth, far deeper and more radical measures are required.
How has austerity worked? Italy’s jobless rate rose to the highest in more than a decade in February and the International Monetary Fund forecast on April 17 that unemployment will reach 9.9 percent this year from a low of 4.2% in January 2010 when the euro zone crisis began in earnest and austerity measures were forced upon smaller members by Germany.
More Trouble in Europe
Greece, Portugal and Ireland — the three countries that have already received a debt bailout — had unemployment rates of 21 percent, 15 percent and 14.7 percent respectively.
With unemployment rising at a time of austerity, consumers have been reluctant to spend and that’s been holding back the eurozone economy despite signs of life elsewhere, notably in the U.S. and in emerging markets. “Soaring unemployment is clearly adding to the pressure on household incomes from aggressive fiscal tightening in the region’s periphery,” said Jennifer McKeown, senior European economist at Capital Economics.
So How Much Time Does the U.S. Have and How Would Austerity Work for Us?
It has been my experience that most forecasters that focus on the economy, both domestic and foreign, fit into two groups.
- Those who honestly think that they can predict the future but cannot, and
- Those who have enough sense to know that they cannot predict the future with anything resembling precision.
Most of the time, changes of significance are already happening before even the best of economists are aware of it. How else can economists explain that the U.S. and the euro zone had near collapses with no one screaming for a stop to the obvious insanity in the real estate markets?
Not only did we miss the signs of collapse, the collapses were so severe that the economies of both the U.S., the U.K., and euro zone are still sufficiently precarious as to be classified as “fragile”. Logic would therefore dictate that any assumptions, conclusions, or judgments regarding the U.S. economy should be cautious at best.
But the common denominator in ALL of the economic downturns are Conservative Economic Policies!
We have seen a modicum of growth for the first time in four years, so sustainability is at least possible. I have personally witnessed premature predictions by economists that claim they have identified distinctive and historically accurate evidence that the economy has turned a corner and is decisively headed in a positive direction…only to see their predictions dashed like waves against a jetty.
There are, to be sure, a few indicators that are positive.
- Employment growth has been running well ahead of population growth.
- The stock market level is higher and its expected volatility lower than at any time since the crisis began in 2007.
This indicator alone could mean that the dreaded “uncertainty” that so many pundits and experts blame on myriad declines, is abating. But, as I’ve said before, if one is looking for certainty, one should put his money in a Certificate of Deposit. Investing (gambling) without risk means the game is fixed, not that it’s a good bet.
- Consumers who have been deferring purchases of cars and other durable goods have created pent-up demand.
- The housing market seems to be stabilizing. For years now, the rate of family formation has been way below the norm for the previous 40 years as more and more young people moved in with their parents or vice versa.
- Innovation around mobile information technology, social networking and newly discovered oil and natural gas seems promising, assuming appropriate regulatory policies, to drive significant investment and job creation are not squashed by over-zealous Neo-Confederates who would have the U.S. cede all authority and restraint to states.
Yes, the risks of high oil prices, further and far worse problems in Europe, and financial fallout from anxiety about future deficits remain significant. However, it is possible, maybe even probable, that these risks are already priced into markets and factored into most outlooks for consumer and business spending.
Despite a significant escalation in oil prices, and despite the fact that the European situation is hardly resolved, good news in any of these areas could actually contribute to upward revisions in current forecasts.
Of course continued clamoring by Republicans regarding the deficit, which happens every time their party isn’t occupying the White House, is a huge psychological drag on the economy. This “uncertainty” factor (fear) that they gleefully heap upon the consumer and small business, is by design and always has been. It’s an effective self-fulfilling prophesy of sorts that they have used to great advantage over the last 40 years. Say it in sufficient volume and repetition, and it does have a dampening effect on the American psyche.
Then, of course, if the Republicans win back the White House, or worse, take back the Senate; they resume their free-spending, tax-cutting, deficit-raising ways so that the next time a crash comes along they can once again blame the hapless and timid Democrats. It’s a time-honored tradition and works very well for the Republicans, thank you very much.
So, What Are the Implications for Macroeconomic Policy?
The timid recovery that we are enjoying is less a reflection of the natural resilience of the U.S. economy than of extraordinary steps that both fiscal and monetary policymakers have taken to offset private-sector deleveraging. Not that the process complete; far from it. As any doctor will tell a patient, take the full regimen of antibiotics or risk a more virulent and dangerous return of an invading bacterium.
The most serious risks to recovery over the next several years are
- The possibility that either financial strains or external shocks will shift our current policy too quickly away from maintaining adequate demand
- Failure to match the correct fiscal policy to fit the conditions at hand…not vice versa as so often happens
Contrary to the rhetoric of Neo-Confederate statists, small government activists and both Republican and Libertarians alike, Capitalism ONLY works if greed and avarice are offset by laws and regulations to prevent fraudulent and deceptive practices. Free Markets are not created by profit goals that have been afforded the advantage of taking away the inherent risks that enable the risk vs reward formula to evolve naturally.
Flexibility remains the hallmark and the cornerstone of capitalism’s longevity. Its claim to success is its ability to change in response to what ails it at any given time. If all diseases were the same, then the smallpox vaccine would cure polio as well. But neither diseases nor economies are static or have their feet in cement. Conditions have to be analyzed objectively, not politically.
A pessimistic reading of the economys potential would indicate that unemployment remains 2 percentage points above normal levels. Even with the economy creating 300,000 jobs a month and growing at 4 percent, it would take several years to get back to “normal”.
Further reductions in federal, state and local government employment will stagger the economy back towards decline. How hard can it be to see that for every individual that loses his or her job, whether public or private employee, it means that many fewer dollars are paid in taxes by the employee, that many more government dollars spent in unemployment, and that demand for goods and services fall. Less spending on groceries, clothing, and entertainment. More drain on government coffers.
Indeed, recent research on what economists label hysteresis effects suggests that slowing spending could have highly adverse consequences not unlike those failing under austerity plans in place in Europe and the UK.
Brad Delong of the Brookings Institute and Larry Summers recently published a paper that specifically states that premature and excessive movements toward fiscal contraction by shrinking the economy risk exacerbating long-run budget problems, not alleviating them. The only approach is to pursue policies that fit the conditions. In this case, to commit to normalizing conditions but only once certain measurable thresholds are crossed. Not to promote political expediency for elected officials for one party or the other.
Fit the policies to conditions and results-oriented analysis.
- If we really want to run government like a business, then commit to it for everyone, including the Republicans.
- Bind them to starting subsidies from scratch and making lobbying illegal.
- The Federal Reserve might commit to maintain the current Fed Funds rate until some threshold with respect to unemployment or expected inflation is crossed.
- Commitments to fund infrastructure over many years might include a financing mechanism that would be triggered once some level of employment or output growth has been achieved.
- Tax reform could phase in new rates at a pace in sync with measurable rising economic performance.
- Tax laws enacted should be reviewed by independent watchdogs similar to the Congressional Budget Office and analyzed for results. Those that are not performing would be fixed or eliminated
- Look at every subsidy currently being paid and perform detailed cost/benefit analysis on them rather than basing tax policy on party ideology and meaningless rhetoric.
Commitments, contingent on results/outcomes, like those above have the virtue of providing clarity to households and businesses as to how policy will play out, what will happen when they do or if they do not. They provide standards of operation and in areas where legislation is necessary, eliminate the political uncertainty and legislate under rules of mathematics, not philosophy.
They allow policymakers to project simultaneous occurrences based on performance, not political philosophy or gamesmanship.
But it’s extremely important to understand : Austerity is not a bad economic policy!
The timing, however, has to be paired with the conditions. The time for cutting back, or saving, is when the economy is racing. Why does this make so much sense to individuals except when it comes to governments? You can’t save money when you are in debt up to your ears. Yes, paying down debt is absolutely a sound and responsible thing to do.
But the U.S., since the beginning of the Ronald Reagan era, has seen fit to practice the voodoo economics of supply-side economics and it has never, ever worked…EVER! You simply cannot give all the tax cuts to the public, much less the wealthy, fund wars, and take care of social responsibilities by simply reducing spending ONCE YOUR ARE ALREADY BROKE. THIS IS NOT ROCKET SCIENCE.
When consumers are making less, they consume less or go into debt. We’ve seen the debt already. So consumers spend less. When consumers spend less businesses sell less. When businesses sell less, they lay off workers or cut quality. In either event they lose more customers and the vicious cycle of Recession turns into Depression.
We have seen this happen once already. Do we really have to see it again to believe it?
An element of contingency in policy is necessary when volatile conditions persist. Recognizing that the conditions exist and making sound economic policies contingent on measurable outcomes is the way to provide confidence and protect credibility in a situation whose future no one has ever been able to gauge with precision.
And while we’re at it, enact the proven methods of getting our nation’s debt under control by putting my One-Penny-Solution, or a reasonable facsimile thereof, into effect. It will eventually pay off the national debt, restore dignity and respect to the U.S. in the eyes of all nations by providing a blueprint for which they too can control their debts, and it will force every single person living in or visiting the U.S. to contribute to the liberties and freedoms that people enjoy while in our country.
It’s time to act.
It’s time to act with sense and forethought.
It’s time to act in economically sensible ways rather than ideological ways.
It’s time to act with compassion but also intelligence.
It’s time to stop demonizing one another for having different opinions, mores, and traditions.
It’s time for “News” organizations to go back to reporting the news and not offering 24/7 opinions and inflaming the public just to spark conflict for the sake of ratings.
And it’s time for Americans to pull together for a change rather than in different directions.
- The JOBS Act: Brother Can You Spare a Dime? (hg.scimth.net)
- The JOBS Act: Dumbest ‘Bipartisan’ Move Since Repealing Glass-Steagall (alternet.org)
- Forget Dodd-Frank: Reinstate Glass Steagall (hg.scimth.net)