Paul Craig Roberts February 17, 2016
The US economy died when middle class jobs were offshored and when the financial system was deregulated.
Jobs offshoring benefitted Wall Street, corporate executives, and
shareholders, because lower labor and compliance costs resulted in
higher profits. These profits flowed through to shareholders in the form
of capital gains and to executives in the form of “performance
bonuses.” Wall Street benefitted from the bull market generated by
higher profits.
However, jobs offshoring also offshored US GDP and consumer
purchasing power. Despite promises of a “New Economy” and better jobs,
the replacement jobs have been increasingly part-time, lowly-paid jobs
in domestic services, such as retail clerks, waitresses and bartenders.
The offshoring of US manufacturing and professional service jobs to
Asia stopped the growth of consumer demand in the US, decimated the
middle class, and left insufficient employment for college graduates to
be able to service their student loans. The ladders of upward mobility
that had made the United States an “opportunity society” were taken down
in the interest of higher short-term profits.
Without growth in consumer incomes to drive the economy, the Federal
Reserve under Alan Greenspan substituted the growth in consumer debt to
take the place of the missing growth in consumer income. Under the
Greenspan regime, Americans’ stagnant and declining incomes were
augmented with the ability to spend on credit. One source of this credit
was the rise in housing prices that the Federal Reserves low inerest
rate policy made possible. Consumers could refinance their now
higher-valued home at lower interest rates and take out the “equity” and
spend it.
The debt expansion, tied heavily to housing mortgages, came to a halt
when the fraud perpetrated by a deregulated financial system crashed
the real estate and stock markets. The bailout of the guilty imposed
further costs on the very people that the guilty had victimized.
Under Fed chairman Bernanke the economy was kept going with
Quantitative Easing, a massive increase in the money supply in order to
bail out the “banks too big to fail.” Liquidity supplied by the Federal
Reserve found its way into stock and bond prices and made those invested
in these financial instruments richer. Corporate executives helped to
boost the stock market by using the companies’ profits and by taking out
loans in order to buy back the companies’ stocks, thus further
expanding debt.
Those few benefitting from inflated financial asset prices produced
by Quantitative Easing and buy-backs are a much smaller percentage of
the population than was affected by the Greenspan consumer credit
expansion. A relatively few rich people are an insufficient number to
drive the economy.
The Federal Reserve’s zero interest rate policy was designed to
support the balance sheets of the mega-banks and denied Americans
interest income on their savings. This policy decreased the incomes of
retirees and forced the elderly to reduce their consumption and/or draw
down their savings more rapidly, leaving no safety net for heirs.
Using the smoke and mirrors of under-reported inflation and
unemployment, the US government kept alive the appearance of economic
recovery. Foreigners fooled by the deception continue to support the US
dollar by holding US financial instruments.
The official inflation measures were “reformed” during the Clinton
era in order to dramatically understate inflation. The measures do this
in two ways. One way is to discard from the weighted basket of goods
that comprises the inflation index those goods whose price rises. In
their place, inferior lower-priced goods are substituted.
For example, if the price of New York strip steak rises, round steak
is substituted in its place. The former official inflation index
measured the cost of a constant standard of living. The “reformed” index
measures the cost of a falling standard of living.
The other way the “reformed” measure of inflation understates the
cost of living is to discard price rises as “quality improvements.” It
is true that quality improvements can result in higher prices. However,
it is still a price rise for the consumer as the former product is no
longer available. Moreover, not all price rises are quality
improvements; yet many prices rises that are not can be misinterpreted
as “quality improvements.”
These two “reforms” resulted in no reported inflation and a halt to
cost-of-living adjustments for Social Security recipients. The fall in
Social Security real incomes also negatively impacted aggregate consumer
demand.
The rigged understatement of inflation deceived people into believing
that the US economy was in recovery. The lower the measure of
inflation, the higher is real GDP when nominal GDP is deflated by the
inflation measure. By understating inflation, the US government has
overstated GDP growth.
What I have written is easily ascertained and proven; yet the
financial press does not question the propaganda that sustains the
psychology that the US economy is sound. This carefully cultivated
psychology keeps the rest of the world invested in dollars, thus
sustaining the House of Cards.
John Maynard Keynes understood that the Great Depression was the
product of an insufficiency of consumer demand to take off the shelves
the goods produced by industry. The post-WW II macroeconomic policy
focused on maintaining the adequacy of aggregate demand in order to
avoid high unemployment. The supply-side policy of President Reagan
successfully corrected a defect in Keynesian macroeconomic policy and
kept the US economy functioning without the “stagflation” from worsening
“Philips Curve” trade-offs between inflation and employent. In the 21st
century, jobs offshoring has depleted consumer demand’s ability to
maintain US full employment.
The unemployment measure that the presstitute press reports is
meaningless as it counts no discouraged workers, and discouraged workers
are a huge part of American unemployment. The reported unemployment
rate is about 5%, which is the U-3 measure that does not count as
unemployed workers who are too discouraged to continue searching for
jobs.
The US government has a second official unemployment measure, U-6,
that counts workers discouraged for less than one-year. This official
rate of unemployment is 10%.
When long term (more than one year) discouraged workers are included
in the measure of unemployment, as once was done, the US unemployment
rate is 23%. (See John Williams, shadowstats.com)
Fiscal and monetary stimulus can pull the unemployed back to work if
jobs for them still exist domestically. But if the jobs have been sent
offshore, monetary and fiscal policy cannot work.
What jobs offshoring does is to give away US GDP to the countries to
which US corporations move the jobs. In other words, with the jobs go
American careers, consumer purchasing power and the tax base of state,
local, and federal governments. There are only a few American winners,
and they are the shareholders of the companies that offshored the jobs
and the executives of the companies who receive multi-million dollar
“performance bonuses” for raising profits by lowering labor costs. And,
of course, the economists, who get grants, speaking engagements, and
corporate board memberships for shilling for the offshoring policy that
worsens the distribution of income and wealth. An economy run for a few
only benefits the few, and the few, no matter how large their incomes,
cannot consume enough to keep the economy growing.
As an economist, it is a mystery to me how any economist can think
that a population that does not produce the larger part of the goods
that it consumes can afford to purchase the goods that it consumes.
Where does the income come from to pay for imports when imports are
swollen by the products of offshored production?
We were told that the income would come from better-paid replacement
jobs provided by the “New Economy,” but neither the payroll jobs reports
nor the US Labor Departments’s projections of future jobs show any sign
of this mythical “New Economy.”
There is no “New Economy.” The “New Economy” is like the
neoconservatives promise that the Iraq war would be a six-week “cake
walk” paid for by Iraqi oil revenues, not a $3 trillion dollar expense
to American taxpayers (according to Joseph Stiglitz and Linda Bilmes)
and a war that has lasted the entirely of the 21st century to date, and
is getting more dangerous.
The American “New Economy” is the American Third World economy in
which the only jobs created are low productivity, low paid nontradable
domestic service jobs incapable of producing export earnings with which
to pay for the goods and services produced offshore for US consumption.
The massive debt arising from Washington’s endless wars for
neoconservative hegemony now threaten Social Security and the entirety
of the social safety net. The presstitute media are blaming not the
policy that has devasted Americans, but, instead, the Americans who have
been devasted by the policy.
Earlier this month I posted readers’ reports on the dismal job
situation in Ohio, Southern Illinois, and Texas. In the March issue of Chronicles,
Wayne Allensworth describes America’s declining rural towns and once
great industrial cities as consequences of “globalizing capitalism.” A
thin layer of very rich people rule over those “who have been left
behind”—a shrinking middle class and a growing underclass. According to a
poll last autumn, 53 percent of Americans say that they feel like a
stranger in their own country.
Most certainly these Americans have no political representation. As
Republicans and Democrats work to raise the retirement age in order to
reduce Social Security outlays, Princeton University experts report that
the mortality rates for the white working class are rising. The US
government will not be happy until no one lives long enough to collect
Social Security.
The United States government has abandoned everyone except the rich.
In the opening sentence of this article, I said that the two
murderers of the American economy were jobs offshoring and financial
deregulation. Deregulation greatly enhanced the ability of the large
banks to financialize the economy. Financialization is the diversion of
income streams into debt service. When debt service absorbs a large
amount of the available income, the economy experiences debt deflation.
The service of debt leaves too little income for purchases of goods and
services and prices fall.
Michael Hudson, who I recently wrote about, is the expert on finanialization. His book, Killing the Host,
which I recommended to you, tells the complete story. Briefly,
financialization is the process by which creditors capitalize an
economy’s economic surplus into interest payments to themselves. Perhaps
an example would be a corporation that goes into debt in order to buy
back its shares. The corporation achieves a temporary boost in its share
prices at the cost of years of interest payments that drain the
corporation of profits and deflate its share price.
Michael Hudson stresses the conversion of the rental value of real
estate into mortgage payments. He emphasizes that classical economists
wanted to base taxation not on production, but on economic rent.
Economic rent is value due to location or to a monopoly position. For
example, beachfront property has a higher price because of location. The
difference in value between beachfront and nonbeachfront property is
economic rent, not a produced value. An unregulated monopoly can charge a
price for a service that is higher than the price that would bring that
service unto the market.
The proposal to tax economic rent does not mean taxing you on the
rent that you pay your landlord or taxing your landlord on the rent that
you pay him such that he ceases to provide the housing. By economic
rent Hudson means, for example, the rise in land values due to public
infrastructure projects such as roads and subway systems. The rise in
the value of land opened by a new road and housing and in commercial
space along a new subway line is not due to any action of the property
owners. This rise in value could be taxed in order to pay for the
project instead of taxing the income of the population in general.
Instead, the rise in land values raises appraisals and the amount that
creditors are willing to lend on the property. New purchasers and
existing owners can borrow more on the property, and the larger
mortgages divert the increased land valuation into interest payments to
creditors. Lenders end up as the major beneficiaries of public projects
that raise real estate prices.
Similarly, unless the economy is financialized to such an extent that
mortgage debt can no longer be serviced, when central banks lower
interest rates property values rise, and this rise can be capitalized
into a larger mortgage.
Another example would be property tax reductions and legislation such
as California’s Proposition 13 that freeze in whole or part the
property tax base. The rise in real estate values that escape taxation
are capitalized into larger mortgages. New buyers do not benefit. The
beneficiaries are the lenders who capture the rise in real estate prices
in interest payments.
Taxing economic rent would prevent the financial system from
capitalizing the rent into debt instruments that pay interest to the
financial sector. Considering the amount of rents available to be taxed,
taxing rents would free production from income and sales taxation, thus
lowering consumer prices and freeing labor and productive capital from
taxation.
With so much of land rent already capitalized into debt instruments
shifting the tax burden to economic rent would be challenging.
Nevertheless, Hudson’s analysis shows that financialization, not wage
suppression, is the main instrument of exploitation and takes place via
the financial system’s conversion of income streams into interest
payments on debt.
I remember when mortgage service was restricted to one-quarter of
household income. Today mortgage service can eat up half of household
income. This extraordinary growth crowds out the production of goods and
services as less of household income is available for other purchases.
Michael Hudson and I bring a total indictment of the neoliberal economics profession, “junk economists” as Hudson calls them.
UNZ
