The Fatal Distraction

September 8, 2011 by · Leave a Comment 

By Paul Krugman

Friday brought two numbers that should have everyone in Washington saying, “My God, what have we done?”

One of these numbers was zero — the number of jobs created in August.

The other was two — the interest rate on 10-year U.S. bonds, almost as low as this rate has ever gone. Taken together, these numbers almost scream that the inside-the-Beltway crowd has been worrying about the wrong things, and inflicting grievous harm as a result.

Ever since the acute phase of the financial crisis ended, policy discussion in Washington has been dominated not by unemployment, but by the alleged dangers posed by budget deficits. Pundits and media organizations insisted that the biggest risk facing America was the threat that investors would pull the plug on U.S. debt. For example, in May 2009 The Wall Street Journal declared that the “bond vigilantes” were “returning with a vengeance,” telling readers that the Obama administration’s “epic spending spree” would send interest rates soaring.

The interest rate when that editorial was published was 3.7 percent. As of Friday, as I’ve already mentioned, it was only 2 percent.

I don’t mean to dismiss concerns about the long-run U.S. budget picture. If you look at fiscal prospects over, say, the next 20 years, they are indeed deeply worrying, largely because of rising health-care costs. But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all.

And by obsessing over a nonexistent threat, Washington has been making the real problem — mass unemployment, which is eating away at the foundations of our nation — much worse.

Although you’d never know it listening to the ranters, the past year has actually been a pretty good test of the theory that slashing government spending actually creates jobs. The deficit obsession has blocked a much-needed second round of federal stimulus, and with stimulus spending, such as it was, fading out, we’re experiencing de facto fiscal austerity. State and local governments, in particular, faced with the loss of federal aid, have been sharply cutting many programs and have been laying off a lot of workers, mostly schoolteachers.

And somehow the private sector hasn’t responded to these layoffs by rejoicing at the sight of a shrinking government and embarking on a hiring spree.

O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.

For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?

So short-run deficits aren’t a problem; lack of demand is, and spending cuts are making things much worse. Maybe it’s time to change course?

Which brings me to President Obama’s planned speech on the economy.

I find it useful to think in terms of three questions: What should we be doing to create jobs? What will Republicans in Congress agree to?

And given that political reality, what should the president propose?

The answer to the first question is that we should have a lot of job-creating spending on the part of the federal government, largely in the form of much-needed spending to repair and upgrade the nation’s infrastructure. Oh, and we need more aid to state and local governments, so that they can stop laying off schoolteachers.

But what will Republicans agree to? That’s easy: nothing. They will oppose anything Mr. Obama proposes, even if it would clearly help the economy — or maybe I should say, especially if it would help the economy, since high unemployment helps them politically.

This reality makes the third question — what the president should propose — hard to answer, since nothing he proposes will actually happen anytime soon. So I’m personally prepared to cut Mr. Obama a lot of slack on the specifics of his proposal, as long as it’s big and bold. For what he mostly needs to do now is to change the conversation — to get Washington talking again about jobs and how the government can help create them.

For the sake of the nation, and especially for millions of unemployed Americans who see little prospect of finding another job, I hope he pulls it off.

13-37

More War! The Road to Armageddon

August 11, 2011 by · Leave a Comment 

By Paul Craig Roberts

[Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury.  His latest book, HOW THE ECONOMY WAS LOST, was published by CounterPunch/AK Press. This article is from the Summer 2011 issue of the Trends Journal, a publication of Gerald Celente’s Trends Research Institute.]

As the second decade of the 21st century began, the US economy had not recovered from the Great Recession that began in December 2007.

The economy’s failure to recover was despite the largest fiscal and monetary stimulus in the country’s history. There was a $700 billion bank bailout, a $700 billion stimulus program, a couple of trillion in “quantitative easing,” that is, in debt monetization or the printing of money to finance the government’s expenditures. In addition the Federal Reserve’s balance sheet had expanded by trillions of dollars as the Fed purchased troubled mortgage bonds and derivatives in its effort to keep the financial system solvent and functioning. According to the Government Accountability Office’s audit of the Federal Reserve released by Senator Bernie Sanders, the Federal Reserve provided secret loans to US and foreign banks totaling $16.1 trillion, a sum larger than US Gross Domestic Product (GDP).
Despite the enormous fiscal and monetary stimulus, the economy remained dead in the water.

In 2011 the deficit in the federal government’s annual expenditures was 43 percent of the budget. In other words, the US government had to borrow, or the Fed had to monetize, 43 percent of federal expenditures during fiscal year 2011. Despite this unprecedented fiscal and monetary stimulus, the economy did not recover.

At the end of the first decade of the 21st century, the economy’s decline was temporarily halted by federal subsidies for car and home purchases. The $8,000 housing subsidy helped newlyweds purchase starter homes as the subsidy was a big chunk of the down payment in a depressed housing market. The car purchase subsidy moved future demand into the present. When these subsidies expired, the economy’s life support was turned off.

Problems with the statistical reporting of unemployment, inflation, and GDP disguised the worsening economy. Seasonal adjustments used to smooth the data over the course of the year were not designed for prolonged recession. Neither was the “birth-death” model used by the US Bureau of Labor Statistics (BLS) to estimate non-reported jobs from new start-up companies and losses from companies that have gone out of business. The birth-death model was designed for a growing economy and during downturns overestimates the number of new jobs created.

The “substitution effect” used in the consumer price index (CPI) underestimates inflation by assuming that consumers substitute cheaper foods for those that rise in price. For example, if the price of New York strip steak rises, this does not show up in the CPI, because of the assumption that people shift their purchases to a less expensive cut such as round steak.

Cooking the Books

The widely used “core inflation” measure does not include food or energy. Core inflation is a useful measure for those who want to put an optimistic spin on the outlook.

By underestimating inflation, the government can overestimate real GDP growth, thus creating a fictional rosy outlook. Similarly, by using the employment measure known as U.3, the government underestimates unemployment.

The “headline” unemployment rate, the one emphasized by the media and the financial press, stood at 9.2 percent in June, 2011. But this rate does not include any discouraged workers. A discouraged worker is a person who has ceased looking for a job, because there are no jobs to be found. A discouraged worker is not considered to be in the work force and is not counted among the U.3 unemployed. The federal government knows that this is phony and has a U.6 measure of unemployment that counts the short-term discouraged. This measure, seldom reported by the media, stood at 16.2 percent in June, 2011.

Statistician John Williams (shadowstats.com) continues to count also the long-term discouraged workers according to the way it was officially done in 1980. In June, 2011, this full measure of the US unemployment rate was 22.7 percent.

In other words, by 2011 between one-fifth and one-fourth of the US work force were without jobs.

As 2011 progressed, the United States faced three simultaneous economic crises. One crisis arose from the loss of US jobs, GDP, consumer income, and tax base caused by corporations off-shoring their production for the US market. Instead of making their products at home with American labor and providing Americans with jobs and states and localities with tax revenues, US corporations provided countries such as China, India, and Indonesia with GDP, jobs, consumer income and a tax base. This practice meant that economic stimulus was unable to revive the US economy as Americans cannot be called back to work jobs that have been moved abroad.

Another crisis was the financial crisis resulting from deregulation, fraud, and greed. Securitization of mortgages meant that issuers of mortgages no longer had any incentive to ascertain the credit worthiness of the borrower, because the issuers sold the mortgages to third parties who combined the mortgages with others and sold them to investors.

As mortgages were issued for fees, the more mortgages issued, the higher the income from fees. In order to collect fee income, some issuers faked credit reports for borrowers. With the housing market booming, many people took mortgages in order to make money on the resale of the properties. With housing prices rising rapidly, down payments and credit worthiness became concerns of the past. The financial crisis was made worse by the ability of investment banks to get around capital requirements and, thereby, leverage their equity by incurring enormous debt. When all the bubbles burst, the house of cards collapsed.

Economic Armageddon

The third crisis was the $1.5+ trillion annual federal budget deficits, which were too large to be financed without the Federal Reserve buying the Treasury’s new debt issues. Known as monetizing debt, the Federal Reserve purchased the Treasury’s bills, notes, and bonds by creating a checking account, which the Treasury would then draw upon to pay the government’s bills. The outpouring of Treasury debt raised concerns about the dollar’s exchange value and role as reserve currency, and it raised fears of inflation. Gold and silver prices rose as the dollar declined in foreign exchange markets.

Any one of these crises was serious. All together, they implied economic Armageddon.

There was no obvious way out, but even if one could be found, the government was focused elsewhere — on wars.

In addition to ongoing military operations in Iraq, Afghanistan, Pakistan, Yemen and Somalia, the US and NATO began military operations against Libya on March 19, 2011. As with the existing wars, the real purpose of the aggression against Libya was not acknowledged, but it became clear that the war’s purpose was to evict China from its oil investments in eastern Libya. Unlike the previous Arab protests, the Libyan rebellion was an armed uprising in which some saw the CIA’s hand.

The Libyan war upped the risk, because although hiding behind the veil of Arab protest, the US was actually confronting China. Similarly, in the US-supported armed rebellion in Syria, Washington’s target was the Russian naval base at Tartus. Overthrowing the Assad government in Syria and installing a US friendly regime would put paid to Russia’s naval presence in the Mediterranean.

By hiding its purposes behind Arab protests in Libya and Syria that it might have initiated, Washington avoided face-to-face conflicts with China and Russia, but nevertheless the two powers understood that Washington was striking at their interests. This elevated the recklessness of Washington’s aggressive policies by initiating confrontation with two nuclear powers, one of which held financial power over the US as America’s largest foreign creditor.

China’s oil investments in Angola and Nigeria were another target. To counter China’s economic penetration of Africa, the US created the American African Command in the closing years of the first decade of the 21st century. Disturbed by China’s rise, the US undertook to prevent China from having independent sources of energy. The great game that in the past has always led to war is being played out once again.

September 11, 2001, provided Washington with a new “threat” to replace the Soviet threat, which had expired in 1991. Despite the absence of the Soviet threat, the military/security budget had been kept alive for a decade. September 11, 2001, injected rapid growth into the military/security budget. A decade later the budget stood at approximately $1.1 trillion annually, or approximately 70 percent of the federal deficit which was crippling the dollar and threatening the US Treasury’s credit rating.

Focused on Middle Eastern wars, Washington was losing the war for the US economy.

As the expectation of economic recovery evaporated over the course of 2011, the need for war became more imperative.

13-33

The Fake Outrage of the Israel Firsters

May 26, 2011 by · Leave a Comment 

By MJ Rosenberg

ISRAEL-PALESTINIANS/NETANAYHU

An Ultra Orthodox Jewish man walks past mannequins on a street in Jerusalem’s Old City May 25, 2011. Palestinians and Israelis alike saw little prospect of a fresh start to Middle East peace talks on Wednesday after Israeli PM Netanyahu’s keynote speech to Congress. 

REUTERS/Ronen Zvulun

There was absolutely nothing about President Barack Obama’s Middle East speech to get excited about (and even less in his statement following Friday’s meeting with Prime Minister Binyamin Netanyahu). The president did not even attempt to set out an action plan; he offered broad principles, ones that have been offered before by five previous presidents.

He delivered the speech in an effort to get the jump on Netanyahu who is in town to address Congress and AIPAC. Bibi’s goal is to mobilize his followers against any U.S. efforts to promote an Israeli-Palestinian agreement. Netanyahu, who grew up in the United States, is a de facto Republican and, as in 1998 when President Clinton was in office, he wants to strengthen the GOP vis a vis the Democrats.

Delivering the speech was probably a mistake. But Obama felt that he had to deliver it — to preempt Netanyahu’s war-mongering with some good pro-Israel boilerplate and to neutralize some of the opposition to U.S. policies toward Israel that is weakening our standing with the evolving Arab democracies.

For obvious national security reasons, the United States cannot afford to have a new generation of Arab democrats in nations as significant as Egypt hating us because they view America as being in Israel’s pocket. A strong rhetorical endorsement of peace would both help neutralize Netanyahu’s demagoguery and defuse opposition to both America and Israel in the Muslim world. Meanwhile, it would please Netanyahu’s followers.

In the end, it didn’t turn out that way. As the Wall Street Journal reported in an article called “Jewish Donors Warn Obama on Israel,” a tiny (but incredibly well-heeled) group of donors told Obama in advance that any deviation from the line laid down by Netanyahu would cost Obama campaign contributions. The article quotes a bunch of fat cats, unknown to most Jewish Americans who essentially threatened Obama.

It’s crazy. In 2008 78% of Jews voted for Obama. According to the definitive American Jewish Committee poll, Israel ranks 7th on the list of issues on which Jews cast their votes with 3% citing it as the top concern. 54% mentioned the economy, and many more cited health care, energy and a host of other issues.

But the self-appointed fat cat representatives of the Jewish community tell the White House that our #1 concern is Israel. And, for the AIPAC directed donors, it probably is.

And that is why President Obama delivered a speech on Thursday that was utterly innocuous. There was nothing in it that has not been said before by a host of previous presidents. Virtually all his empathy was directed at Israel while he offered a little sympathy, and nothing else, to the Palestinians. He did what he thought he had to do: appease AIPAC and Netanyahu while pleasing Arab democrats too.

But he failed. Arabs saw the speech as a bunch of empty words. And the Israeli firsters went ballistic. Why? Because of one paragraph.

The president said:

The United States believes that negotiations should result in two states, with permanent Palestinian borders with Israel, Jordan, and Egypt, and permanent Israeli borders with Palestine. We believe the borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps, so that secure and recognized borders are established for both states. The Palestinian people must have the right to govern themselves, and reach their full potential, in a sovereign and contiguous state.

And suddenly all hell broke loose. But not immediately. Initially, the right-wing of the “pro-Israel” claque praised Obama for not saying anything that challenged Netanyahu but then Netanyahu, said that he was outraged by the reference to the 1967 lines.

But then the robotic Israel-firsters switched their line as quickly as Red 1930s folk singers changed their lyrics when Moscow complained of deviation. (Stop bashing Nazi Germany; we just signed a pact with it).

This is beyond ridiculous. Obama did not say that Israel would have to go back to the 1967 borders; he said that the “borders of Israel and Palestine should be based on the 1967 lines…”
That means that Israelis and Palestinians would sit down with a map that dated back to 1967 and decide what would be Israel and what would be Palestine. What other “lines” could a deal be based on? The border between China and Russia?

As far back as the 1967 United Nations Resolution 242, which Israel signed, it has been the stated policy of the entire world (including Israel) that Israel would return to the ‘67 borders, with alterations made, as necessary, to guard Israel’s security. Every American president has said that and every Israeli government has accepted it. Even AIPAC supports the “two-state solution,” which means a Palestinian state in the territories captured by Israel in 1967. Where else?

So what are these people up to when they suddenly decide to descend into faux-rage when Obama says what they have been saying all along?

The answer is simple. The Israel-first crowd has decided on two things: (1) They do not want Israeli-Palestinian peace, period. They want Israel to keep all the land. And (2) they want to see President Obama defeated in the next election, hoping against hope that they can drive the Obama Jewish vote, and especially campaign contributions, way below 2008 levels. They don’t trust him. They suspect (hopefully, rightly) that in his heart he does not believe the status quo loving nonsense Dennis Ross is feeding him.

Obama’s mistake is to think he can appease these people by going to AIPAC (as he will do next week) or to Israel (as he probably will this summer) and trying to explain himself. Unless he is prepared to tell AIPAC and right-wing Israelis that he supports both settlements and the permanent disenfranchisement of Palestinians, he will not win over these people. They are not potential friends, not of him or of U.S. interests. Or, frankly, of Israel’s. (They seem to prefer the West Bank over Israel itself).

Instead, he should mobilize Americans, pro-Israel Jews and non-Jews, like those of J Street who support the two-state solution and territorial compromise. He should reach out to Palestinians who are prepared to live in peace with Israel (including Hamas, if it will permanently end violence against Israel). And he should support moderate Israelis (still a sizable percentage of the population) who hate the occupation and are desperate to achieve peace with the Palestinians.

Trying to appease Netanyahu and AIPAC empowers the right and cuts moderates off at the knees. It’s time for Obama to treat these people as what they are: enemies of everything he aspires to do. Why would the president think he can possibly find friends on the right? He can’t.

13-22