The US Economy Is On Death Row by jolinmilioncherie


									                          The US Economy Is On Death Row
                                   Will there be a reprieve?

                                     Dr. Paul Craig Roberts

According to reports on the websites Casaubon’s Book and Mother Jones, BP cannot cap the oil
and methane gusher that is destroying the Gulf of Mexico because the internal structure of the
well has been destroyed. America’s economic policymakers face a similar problem. Low
interest rates and large federal deficits cannot revive an economy that has been moved
offshore. The internal structure of the economy has been destroyed.

The current recession—which the National Bureau of Economic Research, the official arbiter of
when recessions begin and end, has not yet declared over—is blamed on the financial crisis
and the erosion of confidence resulting from the declines in real estate and equity prices.
However, there is a more fundamental structural problem to the current economic crisis. This
structural problem is as immune to monetary and fiscal policy as the ecological catastrophe in
the Gulf of Mexico is to BP’s technology.

The Structural Economic Problem

The structural economic problem began in 1990 with the collapse of the Soviet Union. The
failure of the Soviet Union brought about the demise of socialism in India and China, two
countries with enormous excess supplies of labor. CEOs in the US (and Europe) discovered
that they could dramatically boost corporate profits, and their performance-driven bonuses, by
moving high-value-added, high-productivity jobs offshore to locations with cheap labor.

CEOs who were reluctant to abandon their home communities and labor forces were driven
offshore by Wall Street’s demands for increased profitability, by “shareholder groups”
demanding higher returns and threatening takeovers, and by retailers, such as Wal-Mart,
demanding that its suppliers “meet the Chinese price.”

Soon, plants producing goods for the US market were being located offshore. Not long
afterward, professional services, such as software engineering, IT work, other tradable services,
and then research, design, and development positions, were moved to low-salary areas. Some
law firms have moved legal research offshore, and accounting firms are moving basic
accounting work. Some hospitals send MRIs and CAT scans to India to be read by doctors
charging $20 per review. The savings realized flow into profits and bonuses.

The Redistribution of Income: Up, Up and Away

Income inequality in the US has widened dramatically. This warning sign that consumer

demand—70% of the US economy and the driving force of US economic growth—was being
undermined by shifting US jobs, and the spending that went with them, to China and India, was
ignored by America’s economists.

America’s economists became the possessions of the globalist CEOs, who became fabulously
rich by converting what had been American wages and salaries into their performance bonuses.
Chinese workers, paid 50 cents an hour rather than the $22 in hourly pay and benefits of US
workers, drove profits, share prices and managerial bonuses to new highs. America’s
economists received grants and consultancies for “studies” that described the offshoring of the
US economy as “the beneficial workings of free trade.”

I have explained in detail [How the Economy Was Lost, CounterPunch/AK publishers, 2010] that
offshoring is an example of corporations seeking “absolute advantage,” not “comparative
advantage,” the basis of David Ricardo’s two-century-old case for free trade. Ricardo himself
made it completely clear that the pursuit of absolute advantage was the antithesis of free trade.

However, accepted economic theory did not prevent economists from becoming prostitutes for
the transnational corporations. The bought-and-paid-for economists produced “studies” that
“proved” that America was prospering from the loss of industrial and manufacturing jobs and
moving into the “New Economy” of financial services.

More generally, economists proclaimed the replacement of a real economy with a “service
economy.” America would do all the innovating, somehow independent of any industrial,
manufacturing, or engineering base. Such absurd claims persisted long after many US
corporations announced the relocation of their research and development abroad.

The new “service economy” turned out to be low-paid, non-tradable domestic services, such as
waitresses and bartenders, hospital workers and social assistance, retail trade, and while the
artificial real estate boom lasted, construction workers.

With a larger percentage of US wages and salaries paid at a lower rate and a dramatic increase
in CEO and financial sector pay, US income distribution became the most polarized in the
developed world. There has been no increase in American real family incomes in the 21st
century, and perhaps for longer. If the gain in income to the rich is discounted, US real
incomes have declined in the 21st century.

Debt Expansion Takes the Place of Income Growth

So, how was the economy kept going when real incomes have ceased to grow? The answer is,
by the expansion of consumer debt. Federal Reserve chairman Alan Greenspan’s low interest
rate policy inflated real estate prices and allowed consumers to refinance their homes and to
spend the equity, thus driving the economy with debt expansion.

Credit card companies, believing that the high interest rate charges covered the default rate,
issued credit cards without care. After consumers maxed out one card, they moved to another.
The accumulation of credit card debt added to the spending power of home refinancing and
continued to drive US economic growth.
The expansion of consumer debt, as an alternative to the growth of consumer incomes, has now

run its course. The majority of Americans are over-indebted. Foreclosures and job loss imperil
consumer debt. The spillover effects are undermining commercial real estate. Strip malls are
becoming half empty, and some are shuttered entirely. Even large shopping malls now have
closed stores and no new tenants. A commercial real estate crisis is beginning to unfold.

Retired people living on fixed incomes have no spending power as the Federal Reserve’s low
interest rate policy, designed to favor the financial sector, deprives retirees of interest income.
The stock market is unreliable for older people who have lost 50% of their savings in the dot-
com bubble of 2000 and the derivative collapse of 2008-2009.

The Federal Reserve’s low, essentially zero, interest policy has collapsed the purchasing power
of America’s large retirement cohorts, thus seriously inhibiting consumer demand. One has to
ask how a central bank can be so blind.

Postwar US Economic Policy

The answer is Keynesian fundamentalism. Unreformed Keynesians, such as Obama’s chief
economic advisor, Larry Summers, and New York Times columnist, Paul Krugman, believe that
the solution to unemployment is more debt: All the government needs to do is to have a large
enough deficit. Keynesians such as Krugman are on record as expressing doubts that the
current unprecedented federal deficits are sufficiently large.

This unreconstructed Keynesianism is a throwback to the Keynesian response to the 1930s US
depression. American Keynesians believed that “savings exceeding investment” caused the
Great Depression. What they mean is that the rich didn’t spend enough of their income and that
investors did not invest the rich’s savings in plant and equipment. Therefore, the rich’s savings
became withdrawals from monetary circulation, and this withdrawal of spending caused prices
and employment to fall.

The solution, the American Keynesians said, was for the government to run bigger budget
deficits, thus spending more than it collected in taxes, thereby compensating for the uninvested
savings of the rich that had drained spending from the economy.

As Milton Friedman and Anna Schwartz showed in their Monetary History of the United States
(1963), the cause of the Great Depression was not an excess of savings but monetary
contraction. There was no federal insurance for bank deposits in those days. When a bank
failed, the money supply shrank by the amount of the bank’s deposits. The Federal Reserve’s
response to widespread bank failures was insufficiently expansionary to prevent the money
supply from shrinking by one-third. With less money in the economy, consumer demand, sales,
and employment could not be maintained at full employment levels.

A similar monetary contraction occurred in the UK during the 1920s, when the government’s
decision to return the British pound to pre-World War I parity with gold required that the war-time
inflation of the money supply be withdrawn. The withdrawal, or shrinkage, of the money supply
collapsed prices and employment.
Michael Polanyi, in his 1945 book Full Employment and Free Trade (Cambridge University
Press), was the first to understand that the depression was caused by monetary contraction.
Polanyi wrote that as the problem was a dearth of money, the obvious solution was for the

government to print money to finance its deficit, thus restoring monetary circulation to the
quantity required to maintain full employment. This approach, Polanyi noted, also has the
advantage of not creating public debt and its interest burdens.

Polanyi’s monetarist explanation of the depression was ignored by the Keynesians, who
discovered that budget deficits, justified in the name of full employment, were a way to expand
the size of government without having to raise taxes and incur the wrath of taxpayers.

Initially, Keynesians relied on fiscal policy and assigned little importance to monetary policy.
Keynesians believed that managing aggregate demand was the key to full employment.
Aggregate demand consists of consumer spending, investment spending, and government
spending. If consumer and investment spending are insufficient to maintain full employment,
the government adds to total spending by running a budget deficit. To achieve a budget deficit,
taxes could be cut while holding government spending constant, or the government could
increase its spending over the amount it collected in revenues.

If inflation was the problem, a budget surplus achieved by higher taxes or by lower government
spending was the answer.

Eventually Keynesians accepted the monetarists’ position that fiscal policy was not effective
unless it was accommodated by monetary policy. In most circumstances, to finance a
government deficit by borrowing from the public simply transfers private spending to government
spending with no increase in spending. A budget deficit increases aggregate demand only if it is
accompanied by monetary expansion. Similarly, to restrain inflation, a government budget
surplus has to go hand in hand with a tight monetary policy.

By the time of Jimmy Carter’s presidency, demand management had resulted in worsening
trade-offs between inflation and unemployment. Each time that employment needed a boost,
the price was a larger rise in the rate of inflation. Each time that inflation needed to be curbed, it
required a higher rate of unemployment. “Stagflation” appeared on the scene—the specter of
simultaneously rising inflation and unemployment.

Keynesians had no answer to this problem except wage and price controls, which they called an
“incomes policy.” Congress had recently had a disastrous experience with trying to fix one
price—that of oil—and was not about to take on responsibility for fixing all prices and incomes.
The impasse created an audience for supply-side economists.

Supply-side economists pointed out that Keynesians, focused on managing demand, ignored
the supply-side effects of fiscal policy. Monetary expansion stimulated demand, but the high
marginal tax rates (the rate of tax on additions to income) restricted supply.

Supply-side economists pointed out that the tax rate on additional income affects the choice
between savings and current consumption and the choice between work and leisure. The price
of current consumption is the foregone future income given up by not saving and investing. The
price of leisure is the foregone current income from not working.

As investment and wage income are after-tax phenomena, the higher the tax rate, the less
future income is given up by choosing current consumption over saving, and the cheaper is
leisure in terms of current income. Thus high tax rates lower the rate of saving and investment

and the supply of labor.

As inflation had moved much of the work force into tax brackets intended for the rich, the
disincentive effects of high marginal tax rates were resulting in a weak response from the
supply-side of the economy to the expansionary monetary policy. Absenteeism rates rose, and
investment rates fell. Firms found it more profitable to raise prices than to expand output.

Supply-side economists said that the solution was to reverse the policy mix: tighter monetary
policy to restrict demand and lower marginal tax rates to increase output. The supply-side
policy worked, and stagflation disappeared from the American scene.

The Impotence of Economic Policy Today

Supply-side economics was a necessary correction to Keynesian demand management.
However, supply-side economics is no more a solution to the loss of jobs from an off-shored
economy than are low interest rates and large government budget deficits.

There is a big difference between unemployment in the 21st century and the 20th century. In
the 20th century, recessions would result when the Federal Reserve reduced money supply
growth in order to combat rising inflation. The Fed would sell Treasuries, thus draining reserves
from the banking system. Government bonds would rise as a percentage of bank portfolios, and
new loans would fall. The result was a reduction in the growth rate of the money supply. Fewer
goods and services would be sold, inventories would rise, and firms would lay off workers.

Rising unemployment would cool the economy, and then the Fed would reverse course. The
Fed would buy Treasuries, thus pumping reserves into the banking system and raising the
growth rate of money. As more money found its way into the economy, demand would
increase, and workers would be called back to work.

The key to the policy was the fact that there were jobs waiting to which to call workers back.

In the 21st century, jobs have been moved offshore. There are fewer jobs to which stimulative
economic policy can call workers back.

Jobs offshoring takes US GDP and transfers it abroad. US GDP becomes Chinese GDP, for
example, and US disposable income becomes disposable income for Chinese workers.

When the offshored production of US firms comes back to the US to be sold in US markets, it
comes as imports. Thus the trade deficit rises by the amount of the offshored goods.

The trade deficit has to be financed, and it is financed by foreign countries recycling their trade
surpluses with the US by purchasing US Treasury debt, US equities and corporations, and US
real estate, and taking long-term leases on the revenues from US toll roads. Thus, income
flows—interest, dividends, capital gains, profits, toll revenues, and rents—are redirected from
Americans’ pockets to foreign pockets, worsening the current account deficit and further
lowering the income basis for US consumption. Almost the entirety of foreign direct investment
in the US consists of the acquisition of existing assets, not new investment in plant and

Years of trade and budget deficits have undermined the US dollar as reserve currency. US
indebtedness is as bad as Greece’s, which allegedly has caused a collapse in the euro’s
exchange value. When the US dollar comes under similar pressure from US debt burdens, it
may lose its reserve currency role, and this loss would make it impossible to finance the US
trade and budget deficits by borrowing.

To finance the budget deficit, the US government would have to print money. As the jobs have
been exported, employment and output could not respond to the higher monetary demand
resulting from money creation. The 21st century result would be rising prices that the
unemployed work force (currently over 20% if measured by the government’s methodology in
1980) would be unable to pay.

In other words, the US faces the prospect of an inflationary depression.

Economic policy has no solution for an inflationary depression or for unemployment caused by
jobs gone offshore. Policies used to fight inflation are the opposite of those used to fight
unemployment. Thus, there is no known solution to the economic dilemma, just as BP
apparently has no solution to the ongoing ecological catastrophe in the Gulf of Mexico.

Once the US loses the reserve currency role and can no longer pay its bills in its own currency,
it will, under its debt load, become a third world country. What could be done to avoid this

A Reprieve?

The answer is that the US must focus on saving the dollar’s role as reserve currency. This can
only be done by a believable program to reduce trade and budget deficits.

The budget deficit can be reduced by immediately ending the government’s wars for hegemony.
The US cannot afford its expensive wars in Iraq, Afghanistan, Yemen, North Africa, and soon,
perhaps, Iran. The US military budget has no need to be greater than that of most of the rest of
the world combined, and the US has no need for 700+ military bases abroad.

The trade deficit can only be closed by bringing offshored production home. This can be
accomplished by changing the way US corporations are taxed. Instead of an income tax,
corporations should be taxed according to the location at which value is added to their product.
If the majority of value is added in the US, the tax rate would be low. If the majority of the value
added is offshore, the tax rate would be high. If the tax is high enough, US corporations would
bring their production of goods and services back to US labor markets, and America’s vanishing
cities could slowly come back to life as income returned to the US population.

Or Continuing Collapse?

While bought-and-paid for economists produced fabricated reports of America’s benefits from
jobs offshoring, America’s greatest cities went into decline. Recently, Detroit, Michigan, once
the powerhouse of American manufacturing, announced plans to shrink the city by 40 square

miles. The city lacks the resources to supply services to streets on which only one or two
houses remain standing or occupied. The city wants to relocate those living in unpopulated
areas, like frontier settlers, to the remaining populated parts of Detroit. The problem is that the
city estimates the cost at $300 million and there is no money and no federal help, because the
US government is spending hundreds of billions of dollars each year on wars that benefit no one
except the military-security complex and Israel, with profits recycled in campaign contributions to

As Iraqi, Afghan, and Yemeni citizens die, so do Detroit, St. Louis, Milwaukee, and the rest of
America’s former industrial and manufacturing base.

The Bureau of Labor Statistics monthly releases of nonfarm payroll jobs data show that, in the
21st century, the vast majority of new jobs are in nontradable domestic services. Waitresses,
bartenders, and hospital orderlies do not produce exportable services to close the huge trade
deficit resulting from the offshoring of US manufacturing and tradable professional services.
Thus, US job growth has no impact on the trade deficit. [Nontradable services are those that
require direct contact with the customer, such as hair stylists, dental care, and waiters.
Tradable services are those that can be performed at remote locations, such as software
development, and sent to the home office via the high speed Internet.]

The BLS forecasts no change in this pattern of US jobs growth. The BLS jobs projections for
the next ten years consists almost entirely of low-paid domestic services that do not require a
college education.

The fact that US college graduates increasingly cannot find employment, because the jobs that
they used to take to enter the workforce have been moved offshore or are filled by foreigners on
H-1B and L-1 visas, together with the increasingly high cost of a college education, puts the
existence of US universities in doubt. Why should anyone pay such a high cost for an education
that does not raise his or her lifetime earnings?

The mantra that education is the answer to job layoffs due to offshoring is nonsense when every
tradable industrial, manufacturing, and service job can be offshored.

The dire economic straits in which the US finds itself is on a par with that of life in the Gulf of
Mexico. Just as the encroaching oil and methane are destroying the Gulf and everything in it
and on its shores, the US economy finds itself without jobs to which to recall the unemployed
people with “stimulus plans,” without assets to back its mounting debt, without exports to
balance its imports, and without tax revenues to pay for its expenditures.
Just as the Gulf of Mexico is on the verge of extinction, the US economy is on the verge of
failure from imperial overreach that lacks a resource base. The American Empire is financed by
China, Japan, and OPEC. How much longer will these countries purchase US Treasury debt
that cannot be repaid?

The latest jobs report and retail sales suggest that the economy is about to resume its decline,
despite low interest rates, large budget deficits, and stimulus programs aimed at automobile and
house purchases. The money supply as measured by M3 in the data series maintained by
statistician John Williams [] continues to decline. The decline began in 2008
and entered negative territory in 2010. Historically, M3 declines are associated with economic
contraction. M3 is declining because banks are not using the excess reserves that the Fed has

provided to expand bank lending. Instead, consumer credit outstanding is declining.

The 20th century was the American century. The 21st century is shaping up to be the century of
American collapse.

Americans, in their hubris, think of themselves as “the indispensable nation.” But America’s
20th century success was due to the mistakes of other countries. Europe destroyed itself in two
world wars. The Soviet Empire and Asia were prevented by communism/socialism from being
economically competitive. The US emerged from World War II as the only intact economy.
Germany and Japan recovered rapidly, but the rest of the world was impeded by ideological
programs that impaired economic performance.

The historical conditions that elevated the US no longer exist. In the post-cold war era, the US
has proved to be as incompetent as those countries whose stupidities elevated the US to

In America today, propaganda in behalf of vested interests prevails, not truthful analysis of
issues. If the US is to avoid the trash bin of history, the economic trends that are destroying the
country must be recognized and reversed.


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