Two items in the news yesterday left me wondering, again, whether schizophrenia is the norm today.
The first item said that IBM was axing yet 5,000 more Americans in favor of, according to the surmise of the article, Indians. The second item was a report that one economist saw a light at the end of the tunnel, as it were. He predicted the recession would end sooner than other economists and pundits have been predicting.
What none of the positive spin predictors, pundits, and prognosticators has delivered is a reason to believe them, since they offer no explanation of how "insufficient demand" will be replaced with "sufficient demand" in the days to come. Until that happens, reasonable people will reach conclusions based on direct experience. They may not know exactly what "insufficient demand" means to an economist, but they recognize when they, and their neighbors, can't afford to spend today what they spent yesterday or last week or last year.
Here is some of the direct experience that matters:
- High value jobs continue to be sent to places like India, Russia, and China. The cheaper wages are due partly to repressive governments and partly to currency manipulation. "Insufficient demand" worsens everytime one middle class wage earner is traded for greater corporate profit.
- Income and wealth skewing to the few from the many continues unabated, if not accelerating. "Insufficient demand" worsens as income concentration grows.
- Government continues to protect large capital sinks, in particular the so-called Financial Services sector of the economy. Said sector is approaching the proportion of national income (GDP) which it held up to and during the Great Depression. Would the last insurance company leaving Hartford turn out the lights? "Insufficient demand" grows as these too big to fail corporate leviathans amass yet more billions from the pockets of taxpayers.
- All that job creation touted by Bush (remember him?) was overwhelmingly in low wage, low skill jobs (I refuse to call them occupations much less careers). "Insufficient demand" grows each day a job is created with earnings below yesterday's median income.
- It is accepted wisdom among the policy wonks, sociologists, political scientists, and historians that modern (post agrarian, at least) societies can be described by a two by two matrix, or two sides of two coins. I'll discuss in the coin metaphor.
We have the Bad Coin: on one side is fascism, wherein the State and the Capitalists control the society for their mutual benefit, not that of the polity at large. (For those who consider the f* word one which ought not to be spoken, I direct you to any history book [well, one written before 1980]. Therein you will read how Mussolini coined the word, and what he defined it to mean.) On the other side we find a society where the many are poor, and the few are rich. There is no middle class, as we came to know it in the USofA during the 1950's and 1960's.
We have the Good Coin: on one side is Democracy (not a Republic; be clear here, the USofA is not, by its Constitution, a Democracy) where the State is not deferential to Capitalists. On the other side we find a society where there are few poor and few rich, mostly in this middle class, where productivity accrues to earned income and capitalists earn just enough to dissuade them from selling out and working for wages like the rest of society. This was the fantasy of (the original) Adam Smith, capital as a non-dominant input to production; the English economy when he wrote was not the idyllic free market of which we have been told. It certainly does not exist in contemporary USofA.
What we face is not a drift, but headlong rush, thanks to Newt Gingrich, Phil Gramm, and two generations of Bush to a small pouch of Bad Coin. It is a small pouch because so few will have coins. What is clear to those not being paid to shill for Big Business is that as income continues to concentrate, the economy continues to suffer from increasing "insufficient demand". That's economist jargon for the simple fact that most folks simply have no income to buy stuff. Mr. Obama uses the term, as do his surrogates, but neither he nor the surrogates sees the disconnect between bailing out the Financial Services corporations, and the need to regenerate a middle class that is the dominant middle. This recession (no matter what occurs, it will not be called a Depression) will continue unabated until such time as income/wealth distribution returns to a level akin to the 1970's. There is no other way to end it. Mr. Obama's head and heart are in the right place, but until he can stomp on the right wing wingnuts, the headlong rush will continue.
Big Media is complicit here, since it has, for at least 3 decades, been Big Media rather than Local Media. Big Media is about cheap goods sold dear just like any capitalist, rather than being the Fourth Estate, that wide ranging antagonist of power, whether that of the State or Capital. And, of course, there is the inherent conflict of interest; it would be declasse' for Big Media to bother other corporations, friends don't pester friends.
30 March 2009
26 March 2009
Inflation is Coming! Inflation is Coming! Everybody to Get From Street
UPDATED
The laissez faire moneterist dingos are loose in the neighborhood, braying that the stimulus will cause inflation and hurt pensioners on fixed incomes!! They're at it again, protect your women and children. The only ones the dingos are trying to protect are Park Avenue coupon clippers.
The forthright economist, that black swan among the white horde, will tell you that there are three sources (or kinds) of inflation: wage push, cost push, and demand pull. The dingos traditionally only talk about wage push. And they're wrong again.
Since the Reagan/PATCO tango, wage push inflation has disappeared. In 2008 (BLS data), 12.4% of workers were in unions. The number for 1980 was 23.6%. It is no coincidence that median income has fallen during this period. For wage push inflation to happen, one event must happen: workers across the board must receive wage increases in excess of productivity gains. For that to happen one of two events must happen: workers negotiate the increase, or workers disappear from the workforce driving up wages for those that remain. Negotiations for increases are not going on, and it was seen that the rise in wages which first created a middle class in Europe was driven by the massive reduction in the workforce by plagues. In today's terms, an all out war between India and China would do nicely. In fact, productivity gains have not been going to wages, and median income has fallen. In 2009, there exists no mechanism for wages to push inflation; in fact, the out sourcing boom to Asia has deflated wages and will continue to do so.
Cost push is the source of stagflation in the 1970's. The economists who worked as mouthpieces for corporations kept saying that stagflation couldn't be explained. Well, of course it could. If the primary driver of society, petroleum, goes scarce and expensive, the inevitable result is no growth and inflation. But those economists who pointed this out were labeled socialist or communists (this was still in vogue). The out of control increases of last summer in gasoline and related were due to manipulated markets; classic cost push.
Demand pull happens when consumers suddenly have more money while production is running at full capacity. How does this happen? As anyone who has seen Shiller's graph of housing prices 1890 to 2006 (or lives in areas subject to localized inflation such as Washington, DC) can see that too much money can be thrown at a particular good or service. The housing rocket can be credited to easy credit, the appearance of more money chasing too few goods; the price (contracted price) of housing went up, but the *expenditure* didn't initially. When the *expenditure* was ratched up by the contracts, the houses of cards collapsed and deflation set in. Equally, there have been continuing reports that hedge funds and institutional investors are parking in cash and government securities, waiting for the stock market to "turn around". Their withdrawl of cash caused deflation in stocks. It was the influx of that Global Pool of Money (of NPR fame) into the stock market which caused it to soar. This was sector specific inflation, by any other name, but since it advantaged the stock mavens, it was never described as such.
These holders of cash don't admit that the stock market is, by definition, a pyramid scheme. Under most circumstances, such large holders of cash control the scheme and manage to benefit both when it expands (inflation) or contracts (deflation). Fiduciary investing isn't investing in the real economy after all; excepting the rare public offering, none of the money involved in stock trading goes to the corporations for plant, equipment or any real capital. The rise in stock price does benefit those managers with low strike price options, of course. The rise or fall in the (equity) stock market is just sector specific inflation and deflation. Putting money in the stock market is toward reaping capital gains, not dividends. Reaping capital gains is a euphemism for the pyramid scheme. Or, as my Pappy used to say: "genius is a rising market". Warren Buffett has been a genius.
So, how does the government printing press affect the consumer price index, by far the most common gauge of inflation? It doesn't in any direct way since the money isn't distributed to normal consumers. The trillion dollar, or whatever it turns out to be, financial sector bailout can only affect the CPI if the cash gets into the hands of consumers, those lowest on the totem pole schlubs who have been studiously ignored so far. Nothing about the bailout, and little about the stimulus will do this. The real problem that may surface is, if the cash is not horded by those receiving it (which has been the case so far) and does make its way into the hands of consumers, on what will consumers spend? Only if they buy goods and services of American manufacture will the stimulus have any useful effect. Retailers, who don't care where the goods come from, will benefit. Retailing employment is low skill, low wage however; it cannot be the engine to a new American supremacy. The most likely scenario, and actually hoped for by some, is that the stock market with be the object of this massive cash pile. Those who buy in early will see the capital gains. That 401(k) you've been depending on may recover. Consumer prices will be less likely to take the hit, just because the cash is not being funneled to Main Street, but Wall Street. To the very folks who caused the implosion; I guess in the hope that they will generate a new explosion.
Moneterists managed, mostly through the wily Milton Friedman, to turn a tautology into a theory. The tautology is that the stock of money divided by the stock of goods and services yields the price level. The implicit price deflator is just that. The theory is that controlling the money supply affects the real economy. But, money, income, and wealth are relative values; they adjust themselves relative to the real economy. A new gold mine in this country, holding ten times the current world stock, would not make us any better at building real things. It would only ratchet down the value of gold. As Goldfinger understood, destroying the stock at Fort Knox would increase the value of remaining gold stocks, and would not change the productive capacity of the country.
Only fiduciary capital that is used to create real capital has a real impact. Monetary fluctuations matter only when they cause the diversion from real investment to solely fiduciary investment, such as has happened in the last decade. Bubbles are the result. Hyperinflation, as has been experienced at various times and places, makes for inconvenient commerce, but nothing more. For those who live off unearned income, capital gains from stock in particular, want increasing capital values but static prices. Since they lack skills for which they could be paid wages, growth of the real economy is of no consequence. The real problem in such times is autocratic government/business behaviour.
UPDATE:
14 April 2009, the Producer Price Index continues to fall. If, and when and not until, any of this stimulus gets into the hands of consumers can there be an inflationary trend. The bailouts have not done so, nor will they. The essay on who benefits from deflation needs writing. I'd better get to it.
UPDATE II:
15 April 2009, Consumer Price Index falls.
The laissez faire moneterist dingos are loose in the neighborhood, braying that the stimulus will cause inflation and hurt pensioners on fixed incomes!! They're at it again, protect your women and children. The only ones the dingos are trying to protect are Park Avenue coupon clippers.
The forthright economist, that black swan among the white horde, will tell you that there are three sources (or kinds) of inflation: wage push, cost push, and demand pull. The dingos traditionally only talk about wage push. And they're wrong again.
Since the Reagan/PATCO tango, wage push inflation has disappeared. In 2008 (BLS data), 12.4% of workers were in unions. The number for 1980 was 23.6%. It is no coincidence that median income has fallen during this period. For wage push inflation to happen, one event must happen: workers across the board must receive wage increases in excess of productivity gains. For that to happen one of two events must happen: workers negotiate the increase, or workers disappear from the workforce driving up wages for those that remain. Negotiations for increases are not going on, and it was seen that the rise in wages which first created a middle class in Europe was driven by the massive reduction in the workforce by plagues. In today's terms, an all out war between India and China would do nicely. In fact, productivity gains have not been going to wages, and median income has fallen. In 2009, there exists no mechanism for wages to push inflation; in fact, the out sourcing boom to Asia has deflated wages and will continue to do so.
Cost push is the source of stagflation in the 1970's. The economists who worked as mouthpieces for corporations kept saying that stagflation couldn't be explained. Well, of course it could. If the primary driver of society, petroleum, goes scarce and expensive, the inevitable result is no growth and inflation. But those economists who pointed this out were labeled socialist or communists (this was still in vogue). The out of control increases of last summer in gasoline and related were due to manipulated markets; classic cost push.
Demand pull happens when consumers suddenly have more money while production is running at full capacity. How does this happen? As anyone who has seen Shiller's graph of housing prices 1890 to 2006 (or lives in areas subject to localized inflation such as Washington, DC) can see that too much money can be thrown at a particular good or service. The housing rocket can be credited to easy credit, the appearance of more money chasing too few goods; the price (contracted price) of housing went up, but the *expenditure* didn't initially. When the *expenditure* was ratched up by the contracts, the houses of cards collapsed and deflation set in. Equally, there have been continuing reports that hedge funds and institutional investors are parking in cash and government securities, waiting for the stock market to "turn around". Their withdrawl of cash caused deflation in stocks. It was the influx of that Global Pool of Money (of NPR fame) into the stock market which caused it to soar. This was sector specific inflation, by any other name, but since it advantaged the stock mavens, it was never described as such.
These holders of cash don't admit that the stock market is, by definition, a pyramid scheme. Under most circumstances, such large holders of cash control the scheme and manage to benefit both when it expands (inflation) or contracts (deflation). Fiduciary investing isn't investing in the real economy after all; excepting the rare public offering, none of the money involved in stock trading goes to the corporations for plant, equipment or any real capital. The rise in stock price does benefit those managers with low strike price options, of course. The rise or fall in the (equity) stock market is just sector specific inflation and deflation. Putting money in the stock market is toward reaping capital gains, not dividends. Reaping capital gains is a euphemism for the pyramid scheme. Or, as my Pappy used to say: "genius is a rising market". Warren Buffett has been a genius.
So, how does the government printing press affect the consumer price index, by far the most common gauge of inflation? It doesn't in any direct way since the money isn't distributed to normal consumers. The trillion dollar, or whatever it turns out to be, financial sector bailout can only affect the CPI if the cash gets into the hands of consumers, those lowest on the totem pole schlubs who have been studiously ignored so far. Nothing about the bailout, and little about the stimulus will do this. The real problem that may surface is, if the cash is not horded by those receiving it (which has been the case so far) and does make its way into the hands of consumers, on what will consumers spend? Only if they buy goods and services of American manufacture will the stimulus have any useful effect. Retailers, who don't care where the goods come from, will benefit. Retailing employment is low skill, low wage however; it cannot be the engine to a new American supremacy. The most likely scenario, and actually hoped for by some, is that the stock market with be the object of this massive cash pile. Those who buy in early will see the capital gains. That 401(k) you've been depending on may recover. Consumer prices will be less likely to take the hit, just because the cash is not being funneled to Main Street, but Wall Street. To the very folks who caused the implosion; I guess in the hope that they will generate a new explosion.
Moneterists managed, mostly through the wily Milton Friedman, to turn a tautology into a theory. The tautology is that the stock of money divided by the stock of goods and services yields the price level. The implicit price deflator is just that. The theory is that controlling the money supply affects the real economy. But, money, income, and wealth are relative values; they adjust themselves relative to the real economy. A new gold mine in this country, holding ten times the current world stock, would not make us any better at building real things. It would only ratchet down the value of gold. As Goldfinger understood, destroying the stock at Fort Knox would increase the value of remaining gold stocks, and would not change the productive capacity of the country.
Only fiduciary capital that is used to create real capital has a real impact. Monetary fluctuations matter only when they cause the diversion from real investment to solely fiduciary investment, such as has happened in the last decade. Bubbles are the result. Hyperinflation, as has been experienced at various times and places, makes for inconvenient commerce, but nothing more. For those who live off unearned income, capital gains from stock in particular, want increasing capital values but static prices. Since they lack skills for which they could be paid wages, growth of the real economy is of no consequence. The real problem in such times is autocratic government/business behaviour.
UPDATE:
14 April 2009, the Producer Price Index continues to fall. If, and when and not until, any of this stimulus gets into the hands of consumers can there be an inflationary trend. The bailouts have not done so, nor will they. The essay on who benefits from deflation needs writing. I'd better get to it.
UPDATE II:
15 April 2009, Consumer Price Index falls.
22 March 2009
Why the Stimulus Will Fail
Failure is not success. In the context of a Federal government stimulus program, success means there are more wage earners earning more than they did before the stimulus. Success is *not* simply a rise in GDP/GNP; we had that during the Bush years, and we find ourselves in a bit of a mess, since the most of that growth went to a small fraction of the population. It can be argued, and I certainly would, that the Bush approach to economics is a cause of the current mess, although the approach was not original with him; he didn't have one original thought.
The reason failure is more likely than success derives from the structure of the American economy. That structure *is* attributable to the Bush/Right Wing policies since 1981. Yes, 1981 was Reagan not a Bush; the policies of the capitalist coddling Right Wing finally made it back to the White House after the long years in the wilderness following Hoover. Reagan revivified the shibboleth that your neighbor (not you, of course) was a lazy leech on society, and if we just brought him to heel, the country would be so much better off. Let's start with the air traffic controllers; they're really greedy and worthless. Labor takes too much of the GDP, we'll see to changing that; not you of course, just your lazy neighbor.
Today, it is any unionized worker. In desperate times, eviler enemies. The fact that few workers are in unions is swept under the carpet; it is an inconvenient truth. It is not a coincidence that median income has, at best, stayed flat since 2000. Some quote data that it has fallen in the period. That's been the goal all along. Not a mess, a success.
A review of economic history reveals that depressions/severe recessions/panics have been preceded by gross income shifts of this type, increasing inequality, and magnitude seen under Republicanism now.
How does a stimulus program increase demand for those goods and services still capable of manufacture by Americans? That is the question being avoided by all.
In order for a stimulus program to be successful, there must be a way for the Federal government to buy goods and services which are American in creation, and which constitute a significant fraction of those not employed when the program begins. It is an American stimulus program, not a global stimulus program. In 1939, those who were unemployed had been working in manufacturing in American factories making goods for American consumers. It was not difficult, once the decisions were made, for the Federal government to buy goods from those factories (some needing to shift from automobiles to tanks, for example), thus re-employing workers. The goods needed for WWII were capable of manufacture in those factories by those workers. After all, there wasn't much left of European or Asian manufacturing anyway and what there was wasn't going to be sold to us; it was a state of explicit trade isolationism, a fact ignored by professional commentators when discussing stimulus programs then and now. Except for the millions killed in the War, it worked out well from an economic recovery point of view.
In 2009, who are the unemployed? Not, by and large, workers in factories that will make goods for American consumers. The deindustrialization of the economy, in progress since the 1970's, makes any stimulus program a low probability gamble. Will the stimulus program re-employ the leeches in the financial services industry that sent us over the edge in the first place? It is important to realize that this sector of the economy had grown to a very large proportion; possibly unprecedented. Even if the Federal government chose to reward them with new employment, what is it that the Federal government could buy from the sector? Variable annuities? Would those who are re-employed as a result of the stimulus program spend their newly increased incomes in the financial services sector, thus re-employing all those folks? Would that be rational?
They'll most likely buy 'stuff', physical goods that they can hold in their hands. Just as they always have. Only, Americans make a decreasing fraction of those physical goods. If the auto makers cease to exist, how will those factories be re-opened to re-employ those workers? If what constitutes American economic activity is not tied to our soil (or Homeland as some like to say now), then stimulus programs will just reward capital that continues to move off shore. Services industries are unfettered by national boundaries.
Without domestic consumption and production, the multiplier effect of economic stimulus decreases, since the incomes don't circulate as domestic spending, they leak off shore. China is experiencing that now; what they've built, with American capital's help, is an economy that is not self-sustaining, since Chinese workers can't buy Chinese production. That is the generally ignored dark underbelly of trade zealotry: trade is beneficial only for those with sufficient incomes who can afford the lower cost imported goods. If you couldn't afford the domestic product, but still can't afford the lower cost import, you've gained nothing from trade. If trade benefits only the few, is it proper for this outcome to be supported and driven by public policy? Is that a democratic society, or a fascist one?
In the China/US bargain, most Americans and most Chinese lose. Americans lose jobs and manufacturing infrastructure on the front end, Chinese lose jobs and incomes on the back end.
There is also a strategic implication. Can a superpower really be such if it has no manufacturing core? If it is dependent on foreign manufacturing, it is not a power, much less a super one. If, as I believe, our only military power is solely the capability to incinerate the planet (we haven't done well in conventional warfare since 1945), and we have no strategic manufacturing; how are we super? Who should fear us? Do we become Switzerland, or Uruguay in the 1960's (they deindustrialized into a financial economy and it didn't work out so well for them, at all).
Yes, there is still some manufacturing done in the United States, but if the companies close down (as they are), not just slow down or close some factories, then by what mechanism can the unemployed be re-employed? Will the Federal government re-open factories as government operations?
Henry Ford was vilified for increasing the wages of his hourly workers above those paid by other car manufacturers. His reasoning was not altruistic (Ford thought highly of the Nazis, at least early on). He stated that he would sell more cars if his workers could afford them. He determined that it was in his interest to spread the wealth around. This truth is still widely ignored by Right Wing professional commentators, and, I would wager, the likes of John Thain.
Yet, simple observation yields the answer which few will speak: American capitalists are winning the war over American labor (Warren Buffett made a trenchent comment about that, and he didn't defend his own kind); in a few short years (1981 to present) the top 1% of households take 21% of income. In a few more years, this country will be little different from India or any banana republic, if not already. The clarion cry from the Right Wing is that labor (unionized, that is) is just too expensive, and "we" can't afford to keep them in health insurance. The problem is all those whining working folk. Can't they just eat cake? Or just have the decency to die young?
A common canard is that education will pull us out of the problem. We must invest in education. Mr. Obama uses it with some frequency. We just need to be better educated, and we will be higher earners, over all. But this advice is contradicted by what is easily observed: just as capital fled New England in the 19th century for the more comforting South, so capital is fleeing now to Asia and Eastern Europe; anywhere that labor is more easily exploited. Not only low skill, low wage manual labor jobs as happened in the 19th and 20th centuries, but also an increasing number of jobs requiring high skills, education, and training.
In India (I know a lot of Indians) for example, that higher education is largely government funded, thus allowing workers to earn lower wages, in American dollars (in addition to the effect of exchange rate gaming) to finance a "middle class" lifestyle. Or to put more pointedly, if one is offered two alternatives, same wage of course, either spend one's day out in the fields of muck or in an air conditioned office, which would you take? In such a circumstance, the reward for education is not what Americans have come to understand; it is rather closer to the bone, not more income just less misery. The irony lies in American corporations exploiting the fruit of socialized education. I doubt any CEO notices.
How can a Federal stimulus program with the intent of employing American workers making goods and services for American consumers succeed when American capitalists are fleeing to autocratic regimes? This is the root of the problem, which must be addressed if success can be achieved. The Chamber of Commerce had a fit with the Buy American clause, as if this were Un-American. And they were treated with respect by corporate media.
When I was an undergraduate, I recall being puzzled by the notion of Comparative Advantage, discussed in any Econ. 101 course. I didn't believe it. Simply put, the assertion is that some economies have "natural" superiority in the production of certain goods and services versus other economies. The source of this superiority is the ethereal ability to combine the gross inputs of land, labor, and capital more efficiently in some areas of production. Or so the argument goes. I never bought it, but never had the opportunity to be a policy maker and discuss it. The reason I never bought it is that there is an unspoken assumption: that all three inputs are immobile. Even in the 19th century when David Ricardo was creating this notion, capital was not immobile. And it certainly isn't now. Some professional commentators are now openly disagreeing, and have redefined the term, "absolute advantage" to recognize that capital has and will migrate to governments which allow maximum labor exploitation. How can a stimulus program succeed when capitalists have an interest in making it fail? Rush is not alone.
Finally, the ultimate point: Mr. Obama exercised a Freudian slip when he used the phrase "spread it around". He was accused by the Right Wing professional commentators of running, not to be president, but "redistributer in chief". Guess what, that's what has to happen to get us out of this mess. The real issue is that the Right Wing likes to see labor devalued; they don't see the current situation as a mess, but a return to the way the world should be.
Income, as all else in human activity, is relative. If I have $100 and you have $10 today, then if tomorrow I still have $100 and you have $5, I'm now twice as rich. A middle class economy (where that middle class does have most of the income) is necessary to a democracy. For some years, this country has been transforming itself to autocracy. We are a constitutional republic, despite what the common phrase is. Economies with a few haves and mostly have-nots are always fascist. They need repressive governments to keep the legions of poor from killing the few rich. That was true in the 18th century, and it is true today. It can happen here. It will happen if income is not "spread around".
The reason failure is more likely than success derives from the structure of the American economy. That structure *is* attributable to the Bush/Right Wing policies since 1981. Yes, 1981 was Reagan not a Bush; the policies of the capitalist coddling Right Wing finally made it back to the White House after the long years in the wilderness following Hoover. Reagan revivified the shibboleth that your neighbor (not you, of course) was a lazy leech on society, and if we just brought him to heel, the country would be so much better off. Let's start with the air traffic controllers; they're really greedy and worthless. Labor takes too much of the GDP, we'll see to changing that; not you of course, just your lazy neighbor.
Today, it is any unionized worker. In desperate times, eviler enemies. The fact that few workers are in unions is swept under the carpet; it is an inconvenient truth. It is not a coincidence that median income has, at best, stayed flat since 2000. Some quote data that it has fallen in the period. That's been the goal all along. Not a mess, a success.
A review of economic history reveals that depressions/severe recessions/panics have been preceded by gross income shifts of this type, increasing inequality, and magnitude seen under Republicanism now.
How does a stimulus program increase demand for those goods and services still capable of manufacture by Americans? That is the question being avoided by all.
In order for a stimulus program to be successful, there must be a way for the Federal government to buy goods and services which are American in creation, and which constitute a significant fraction of those not employed when the program begins. It is an American stimulus program, not a global stimulus program. In 1939, those who were unemployed had been working in manufacturing in American factories making goods for American consumers. It was not difficult, once the decisions were made, for the Federal government to buy goods from those factories (some needing to shift from automobiles to tanks, for example), thus re-employing workers. The goods needed for WWII were capable of manufacture in those factories by those workers. After all, there wasn't much left of European or Asian manufacturing anyway and what there was wasn't going to be sold to us; it was a state of explicit trade isolationism, a fact ignored by professional commentators when discussing stimulus programs then and now. Except for the millions killed in the War, it worked out well from an economic recovery point of view.
In 2009, who are the unemployed? Not, by and large, workers in factories that will make goods for American consumers. The deindustrialization of the economy, in progress since the 1970's, makes any stimulus program a low probability gamble. Will the stimulus program re-employ the leeches in the financial services industry that sent us over the edge in the first place? It is important to realize that this sector of the economy had grown to a very large proportion; possibly unprecedented. Even if the Federal government chose to reward them with new employment, what is it that the Federal government could buy from the sector? Variable annuities? Would those who are re-employed as a result of the stimulus program spend their newly increased incomes in the financial services sector, thus re-employing all those folks? Would that be rational?
They'll most likely buy 'stuff', physical goods that they can hold in their hands. Just as they always have. Only, Americans make a decreasing fraction of those physical goods. If the auto makers cease to exist, how will those factories be re-opened to re-employ those workers? If what constitutes American economic activity is not tied to our soil (or Homeland as some like to say now), then stimulus programs will just reward capital that continues to move off shore. Services industries are unfettered by national boundaries.
Without domestic consumption and production, the multiplier effect of economic stimulus decreases, since the incomes don't circulate as domestic spending, they leak off shore. China is experiencing that now; what they've built, with American capital's help, is an economy that is not self-sustaining, since Chinese workers can't buy Chinese production. That is the generally ignored dark underbelly of trade zealotry: trade is beneficial only for those with sufficient incomes who can afford the lower cost imported goods. If you couldn't afford the domestic product, but still can't afford the lower cost import, you've gained nothing from trade. If trade benefits only the few, is it proper for this outcome to be supported and driven by public policy? Is that a democratic society, or a fascist one?
In the China/US bargain, most Americans and most Chinese lose. Americans lose jobs and manufacturing infrastructure on the front end, Chinese lose jobs and incomes on the back end.
There is also a strategic implication. Can a superpower really be such if it has no manufacturing core? If it is dependent on foreign manufacturing, it is not a power, much less a super one. If, as I believe, our only military power is solely the capability to incinerate the planet (we haven't done well in conventional warfare since 1945), and we have no strategic manufacturing; how are we super? Who should fear us? Do we become Switzerland, or Uruguay in the 1960's (they deindustrialized into a financial economy and it didn't work out so well for them, at all).
Yes, there is still some manufacturing done in the United States, but if the companies close down (as they are), not just slow down or close some factories, then by what mechanism can the unemployed be re-employed? Will the Federal government re-open factories as government operations?
Henry Ford was vilified for increasing the wages of his hourly workers above those paid by other car manufacturers. His reasoning was not altruistic (Ford thought highly of the Nazis, at least early on). He stated that he would sell more cars if his workers could afford them. He determined that it was in his interest to spread the wealth around. This truth is still widely ignored by Right Wing professional commentators, and, I would wager, the likes of John Thain.
Yet, simple observation yields the answer which few will speak: American capitalists are winning the war over American labor (Warren Buffett made a trenchent comment about that, and he didn't defend his own kind); in a few short years (1981 to present) the top 1% of households take 21% of income. In a few more years, this country will be little different from India or any banana republic, if not already. The clarion cry from the Right Wing is that labor (unionized, that is) is just too expensive, and "we" can't afford to keep them in health insurance. The problem is all those whining working folk. Can't they just eat cake? Or just have the decency to die young?
A common canard is that education will pull us out of the problem. We must invest in education. Mr. Obama uses it with some frequency. We just need to be better educated, and we will be higher earners, over all. But this advice is contradicted by what is easily observed: just as capital fled New England in the 19th century for the more comforting South, so capital is fleeing now to Asia and Eastern Europe; anywhere that labor is more easily exploited. Not only low skill, low wage manual labor jobs as happened in the 19th and 20th centuries, but also an increasing number of jobs requiring high skills, education, and training.
In India (I know a lot of Indians) for example, that higher education is largely government funded, thus allowing workers to earn lower wages, in American dollars (in addition to the effect of exchange rate gaming) to finance a "middle class" lifestyle. Or to put more pointedly, if one is offered two alternatives, same wage of course, either spend one's day out in the fields of muck or in an air conditioned office, which would you take? In such a circumstance, the reward for education is not what Americans have come to understand; it is rather closer to the bone, not more income just less misery. The irony lies in American corporations exploiting the fruit of socialized education. I doubt any CEO notices.
How can a Federal stimulus program with the intent of employing American workers making goods and services for American consumers succeed when American capitalists are fleeing to autocratic regimes? This is the root of the problem, which must be addressed if success can be achieved. The Chamber of Commerce had a fit with the Buy American clause, as if this were Un-American. And they were treated with respect by corporate media.
When I was an undergraduate, I recall being puzzled by the notion of Comparative Advantage, discussed in any Econ. 101 course. I didn't believe it. Simply put, the assertion is that some economies have "natural" superiority in the production of certain goods and services versus other economies. The source of this superiority is the ethereal ability to combine the gross inputs of land, labor, and capital more efficiently in some areas of production. Or so the argument goes. I never bought it, but never had the opportunity to be a policy maker and discuss it. The reason I never bought it is that there is an unspoken assumption: that all three inputs are immobile. Even in the 19th century when David Ricardo was creating this notion, capital was not immobile. And it certainly isn't now. Some professional commentators are now openly disagreeing, and have redefined the term, "absolute advantage" to recognize that capital has and will migrate to governments which allow maximum labor exploitation. How can a stimulus program succeed when capitalists have an interest in making it fail? Rush is not alone.
Finally, the ultimate point: Mr. Obama exercised a Freudian slip when he used the phrase "spread it around". He was accused by the Right Wing professional commentators of running, not to be president, but "redistributer in chief". Guess what, that's what has to happen to get us out of this mess. The real issue is that the Right Wing likes to see labor devalued; they don't see the current situation as a mess, but a return to the way the world should be.
Income, as all else in human activity, is relative. If I have $100 and you have $10 today, then if tomorrow I still have $100 and you have $5, I'm now twice as rich. A middle class economy (where that middle class does have most of the income) is necessary to a democracy. For some years, this country has been transforming itself to autocracy. We are a constitutional republic, despite what the common phrase is. Economies with a few haves and mostly have-nots are always fascist. They need repressive governments to keep the legions of poor from killing the few rich. That was true in the 18th century, and it is true today. It can happen here. It will happen if income is not "spread around".
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