America and Europe: Saving the Rich and Losing the Economy

Dr. Paul Craig Roberts
Prisonplanet.comSept 26, 2011

Economic policy in the United States and Europe has failed, and people are suffering.
Economic policy failed for three reasons: (1) policymakers focused on enabling offshoring corporations to move middle class jobs, and the consumer demand, tax base, GDP, and careers associated with the jobs, to foreign countries, such as China and India, where labor is inexpensive; (2) policymakers permitted financial deregulation that unleashed fraud and debt leverage on a scale previously unimaginable; (3) policymakers responded to the resulting financial crisis by imposing austerity on the population and running the printing press in order to bail out banks and prevent any losses to the banks regardless of the cost to national economies and innocent parties.

Jobs offshoring was made possible because the collapse of the Soviet Union resulted in China and India opening their vast excess supplies of labor to Western exploitation. Pressed by Wall Street for higher profits, US corporations relocated their factories abroad. Foreign labor working with Western capital, technology, and business know-how is just as productive as US labor. However, the excess supplies of labor (and lower living standards) mean that Indian and Chinese labor can be hired for less than labor’s contribution to the value of output. The difference flows into profits, resulting in capital gains for shareholders and performance bonuses for executives.

As reported by Manufacturing and Technology News (September 20, 2011) the Quarterly Census of Employment and Wages reports that in the last 10 years, the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent.

These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures.

US politicians, such as Buddy Roemer, blame the collapse of US manufacturing on Chinese competition and “unfair trade practices.” However, it is US corporations that move their factories abroad, thus replacing domestic production with imports. Half of US imports from China consist of the offshored production of US corporations.

The wage differential is substantial. According to the Bureau of Labor Statistics, as of 2009, average hourly take-home pay for US workers was $23.03. Social insurance expenditures add $7.90 to hourly compensation and benefits paid by employers add $2.60 per hour for a total labor compensation cost of $33.53.

In China as of 2008, total hourly labor cost was $1.36, and India’s is within a few cents of this amount. Thus, a corporation that moves 1,000 jobs to China saves saves $32,000 every hour in labor cost.These savings translate into higher stock prices and executive compensation, not in lower prices for consumers who are left unemployed by the labor arbitrage.

Republican economists blame “high” US wages for for the current high rate of unemployment. However, US wages are about the lowest in the developed world. They are far below hourly labor cost in Norway ($53.89), Denmark ($49.56), Belgium ($49.40), Austria ($48.04), and Germany ($46.52). The US might have the world’s largest economy, but its hourly workers rank 14th on the list of the best paid. Americans also have a higher unemployment rate. The “headline” rate that the media hypes is 9.1 percent, but this rate does not include any discouraged workers or workers forced into part-time jobs because no full-time jobs are available.

The US government has another unemployment rate (U6) that includes workers who have been too discouraged to seek a job for six months or less. This unemployment rate is over 16 percent. Statistician John Williams (Shadowstats.com) estimates the unemployment rate when long-term discouraged workers (more than six months) are included. This rate is over 22 percent.

Most emphasis is on the lost manufacturing jobs. However, the high speed Internet has made it possible to offshore many professional service jobs, such as software engineering, Information Technology, research and design. Jobs that comprised ladders of upward mobility for US college graduates have been moved offshore, thus reducing the value to Americans of many university degrees. Unlike former times, today an increasing number of graduates return home to live with their parents as there are insufficient jobs to support their independent existence.

All the while, the US government allows in each year one million legal immigrants, an unknown number of illegal immigrants, and a large number of foreign workers on H-1B and L-1 work visas. In other words, the policies of the US government maximize the unemployment rate of American citizens.

Republican economists and politicians pretend that this is not the case and that unemployed Americans consist of people too lazy to work who game the welfare system. Republicans pretend that cutting unemployment benefits and social assistance will force “lazy people who are living off the taxpayers” to go to work.

To deal with the adverse impact on the economy from the loss of jobs and consumer demand from offshoring, Federal Reserve chairman Alan Greenspan lowered interest rates in order to create a real estate boom. Lower interest rates pushed up real estate prices. People refinanced their houses and spent the equity. Construction, furniture and appliance sales boomed. But unlike previous expansions based on rising real income, this one was based on an increase in consumer indebtedness.
There is a limit to how much debt can increase in relation to income, and when this limit was reached, the bubble popped.

When consumer debt could rise no further, the large fraudulent component in mortgage-backed derivatives and the unreserved swaps (AIG, for example) threatened financial institutions with insolvency and froze the banking system. Banks no longer trusted one another. Cash was hoarded. Treasury Secretary Paulson, browbeat Congress into massive taxpayer loans to financial institutions that functioned as casinos. The Paulson Bailout (TARP) was large but insignificant compared to the $16.1 trillion (a sum larger than US GDP or national debt) that the Federal Reserve lent to private financial institutions in the US and Europe.

In making these loans, the Federal Reserve violated its own rules. At this point, capitalism ceased to function. The financial institutions were “too big to fail,” and thus taxpayer subsidies took the place of bankruptcy and reorganization. In a word, the US financial system was socialized as the losses of the American financial institutions were transferred to taxpayers.

European banks were swept up into the financial crisis by their unwitting purchase of the junk financial instruments marketed by Wall Street. The financial junk had been given investment grade rating by the same incompetent agency that recently downgraded US Treasury bonds.

The Europeans had their own bailouts, often with American money (Federal Reserve loans). All the while Europe was brewing an additional crisis of its own. By joining the European Union and (except for the UK) accepting a common European currency, the individual member countries lost the services of their own central banks as creditors. In the US and UK the two countries’ central banks can print money with which to purchase US and UK debt. This is not possible for member countries in the EU.
When financial crisis from excessive debt hit the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) their central banks could not print euros in order to buy up their bonds, as the Federal Reserve did with “quantitative easing.” Only the European Central Bank (ECB) can create euros, and it is prevented by charter and treaty from printing euros in order to bail out sovereign debt.

In Europe, as in the US, the driver of economic policy quickly became saving the private banks from losses on their portfolios. A deal was struck with the socialist government of Greece, which represented the banks and not the Greek people. The ECB would violate its charter and together with the IMF, which would also violate its charter, would lend enough money to the Greek government to avoid default on its sovereign bonds to the private banks that had purchased the bonds. In return for the ECB and IMF loans and in order to raise the money to repay them, the Greek government had to agree to sell to private investors the national lottery, Greece’s ports and municipal water systems, a string of islands that are a national preserve, and in addition to impose a brutal austerity on the Greek people by lowering wages, cutting social benefits and pensions, raising taxes, and laying off or firing government workers.

In other words, the Greek population is to be sacrificed to a small handful of foreign banks in Germany, France and the Netherlands.

The Greek people, unlike “their” socialist government, did not regard this as a good deal. They have been in the streets ever since.

Jean-Claude Trichet, head of the ECB, said that the austerity imposed on Greece was a first step. If Greece did not deliver on the deal, the next step was for the EU to take over Greece’s political sovereignty, make its budget, decide its taxation, decide its expenditures and from this process squeeze out enough from Greeks to repay the ECB and IMF for lending Greece the money to pay the private banks.

In other words, Europe under the EU and Jean-Claude Trichet is a return to the most extreme form of feudalism in which a handful of rich are pampered at the expense of everyone else.

This is what economic policy in the West has become–a tool of the wealthy used to enrich themselves by spreading poverty among the rest of the population.

On September 21 the Federal Reserve announced a modified QE 3. The Federal Reserve announced that the bank would purchase $400 billion of long-term Treasury bonds over the next nine months in an effort to drive long-term US interest rates even further below the rate of inflation, thus maximizing the negative rate of return on the purchase of long-term Treasury bonds. The Federal Reserve officials say that this will lower mortgage rates by a few basis points and renew the housing market.

The officials say that QE 3, unlike its predecessors, will not result in the Federal Reserve printing more dollars in order to monetize US debt. Instead, the central bank will raise money for the bond purchases by selling holdings of short-term debt. Apparently, the Federal Reserve believes it can do this without raising short-term interest rates, because back during the recent debt-ceiling-government-shutdown-crisis, the Federal Reserve promised banks that it would keep the short-term interest rate (essentially zero) constant for two years.

The Fed’s new policy will do far more harm than good. Interest rates are already negative. To make them more so will have no positive effect. People aren’t buying houses because interest rates are too high, but because they are either unemployed or worried about their jobs and do not see a recovering economy.

Already insurance companies can make no money on their investments. Consequently, they are unable to build their reserves against claims. Their only alternative is to raise their premiums. The cost of a homeowner’s policy will go up by more than the cost of a mortgage will decline. The cost of health insurance will go up. The cost of car insurance will rise. The Federal Reserve’s newly announced policy will impose more costs on the economy than it will reduce.

In addition, in America today savings earn nothing. Indeed, they produce an ongoing loss as the interest rate is below the inflation rate. The Federal Reserve has interest rates so low that only professionals who are playing arbitrage with algorithm programmed computer models can make money. The typical saver and investor can get nothing on bank CDs, money market funds, municipal and government bonds. Only high risk debt, such as Greek and Spanish bonds, pay an interest rate that is higher than inflation.

For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising. Considering the extraordinary political incompetence of the Democratic Party, the right-wing of the Republican Party, which is committed to eliminating income support programs, could find itself in power. If the right-wing Republicans implement their program, the US will be beset with political and social instability. As Gerald Celente says, “when people have have nothing left to lose, they lose it.”

More on the End of American Empire

Darwin Was Right

We are descended from monkeys. There is no other explanation.

By Fred Reed

January 13, 2010 "Information Clearing House" -- -- Pondering Whither America, I reflected on a story, probably apocryphal but which I am going to believe because I like it, about catching monkeys. Tribesmen somewhere craft a heavy pot with a hole in it large enough that a monkey could insert an open hand, but not withdraw a closed fist. They then put monkey food in the pot. The monkey reaches in, grabs the food and, refusing to let go when the hunters approach, is caught and eaten.

Here we have our politics in a paragraph. The American national monkey can’t let go. The party is over, boys and girls, but we aren’t going to adapt.

For example: When people recently found that they could no longer afford the SUVs, the McMansions, the buying of absurdities in a frenzy of competitive consumerism, they just put it on the credit card. The monkey can’t let go. And now they are screwed.

Same-same domestic policy. The US has played War-on-Drugs for half a century, with no results but to make drugs an integral part of the economy. The evils engendered are great. Yet the monkey can’t let go.

It is internationally that the monkey principle really bites. The country is well on its way to being a merely regional power militarily, economically, and diplomatically. Short of a miracle, short of a conceivable but unlikely catastrophe in China, Americans will soon be medium potatoes. There is nothing we can do about it, but we will bankrupt ourselves trying. We can’t let go.

If you look beyond the Reader’s Digest patriotism of Fox News, and the high-school cheerleading of little Sarah Palin, if you look beyond the national borders, all of this is obvious.

By Chinese standards, America is a small country, having a quarter of its population. Their economy grows at close to double digits. Yes, it may slow down, or it may not. Short of unforeseen disaster, the question is not whether but when the Chinese economy will dwarf the American economy. Tell me why this is not true.

All power springs from economic power. While America decays, plays, and sucks its thumb, China invests. Everywhere. There is nothing unprincipled in this. It is just intelligent commerce.

Do not underestimate these people of the epicanthic fold. I have lived among the Chinese, in Taiwan years ago. I liked them, and still do. I know them to be smart, disciplined, studious, practical—as well as nationalistic and very racially conscious. No, we do not think these attitudes proper. It doesn’t matter what we think.

Note that China has that perfect government, an intelligent dictatorship concerned with advancing the country. The American government consists of self-interested lobbies and Wall Street looters. China is run by engineers, America by lawyers. Watch.

The US is midway through an inexorable suicide. If a country does not manufacture things, it does not have an economy, and manufacturing has fled American shores. Ship-building, steel, consumer electronics, railroads: gone. You may think your HP laptop is an American product, but in all likelihood every component was made overseas and it was assembled in Taiwan.

The country as a whole, as always, looks inwards and doesn’t understand, doesn’t know what stirs without. Communism no longer protects America from Chinese competition.

America is the world’s greatest debtor nation, China the greatest creditor. We cannot possibly repay what we owe, so we must either default or inflate. If another choice exists, I am unaware of it. And yet the government spends, spends, spends, and borrows, borrows, borrows. No one is in charge. No one cares. All line their own pockets. Wait.

Rationally, this would seem a good time to let go of unaffordable luxuries. But no. The US continues to buy things it can’t pay for, to play roles it can no longer maintain, because it pains the national vanity no longer to be the biggest kid on the block. The monkey can’t let go.

The millstone around the American neck is the Pentagon. The direct cost alone of feeding the military contractors is almost mortal to a sinking economy: $720 billion this year, plus another $120 billion requested for the unending wars, plus huge black programs, the Veterans Administration, and so on. A trillion wilting green ones, call it. The more perceptive note the opportunity cost of wasting so much engineering talent, so much money for research and development, on martial zoom-wowees.

China, Russia, the Moslem world, Latin America and all the rest who detest the US must be enjoying the spectacle. Spend on, spend on, oh round-eyed fools….

Vanity. We do not garrison South Korea because Pyong Yang may send its troops across our common border into Arkansas. We do it because we think it our birthright to rule the world. The monkey cannot let go.

Our practical choice is between retracting the military or going down hard. But we cannot retract. Once you have made your economy dependent on huge unproductive expendititures, there is no quitting. It might seem wise for example to reduce the military rolls by the 30,000 troops in South Korea. But they would simply increase the rate of unemployment, already dangeorusly high. Since most of the military contributes nothing to the defesne of the United States, releasing all unneeded soldiers into joblessness would probably precipitate an armed rebellion.

There is worse. Towns spring up around large bases to supply the troops and their families. Close the bases, and the towns die. Closing Camp Lejeune would kill Jacksonville; Fort Bragg, Fayetteville; Fort Hood, Killeen. Further, huge companies—Lockheed-Martin, much of Boeing, and dozens of others—being unable to compete in the civilian economy, have become obligate military suppliers. Cut their big programs and you unemploy tens of thousands for whom there are no civilian jobs.

The federal bureaucracy is much the same, employing vast numbers yet producing nothing. Politicians drone about wanting “smaller government.” How? Eliminate the Departments of Education, or Housing and Urban Development, or Commerce—and where do the people go?

We can pretend that the current recession is temporary, and not a manifestation of dying opulence, just as a fading beauty can pile on the make-up and hope that men don’t notice. We can spend while others grow, buy their goods on credit—for a little while longer. The monkey can’t let go.

And any who say that we ought to put our house in order and come to terms with reality? They will be said to Hate America. Well and good, until the bill comes due.

Who Can We Believe?

Deceptive Economic Statistics:
While the economists lied the US economy died

By Paul Craig Roberts

August 18, 2010 "Information Clearing House" -- On August 17, Bloomberg reported a US government release that industrial production rose twice as much as forecast, climbing 1 percent. Bloomberg interpreted this to mean that “increased business investment is propelling the gains in manufacturing, which accounts for 11 percent of the world’s largest economy.”

The stock market rose.

Let’s look at this through the lens of statistician John Williams of shadowstats.com. Williams reports that “the primary driver of a 1.0% monthly gain in seasonally-adjusted July industrial production” was “warped seasonal factors” caused by “the irregular patterns in U.S. auto production in the last two years.” Industrial production “shrank by 1.0% before seasonal adjustments.”

If the government and Bloomberg had announced that industrial production fell by 1.0%in July, would the stock market have risen 104 points on August 17?

Notice that Bloomberg reports that manufacturing accounts for 11 percent of the US economy. I remember when manufacturing accounted for 18% of the US economy. The decline of 39% is due to jobs offshoring.

Think about that. Wall Street and shareholders and executives of transnational corporations have made billions by moving 39% of US manufacturing offshore to boost the GDP and employment of foreign countries, such as China, while impoverishing their former American work force. Congress and the economics profession have cheered this on as “the New Economy.”

Bought-and-paid-for-economists told us that “the new economy” would make us all rich, and so did the financial press. We were well rid, they claimed, of the “old” industries and manufactures, the departure of which destroyed the tax base of so many American cities and states and the livelihood of millions of Americans.

The bought-and-paid-for-economists got all the media forums for a decade. While they lied, the US economy died.

Now, back to statistical deception. On August 17 the census Bureau reported a small gain in July 2010 residential construction housing starts. More hope orchestrated. In fact, the “gain,” as John Williams reports, was due to a large downward revision” in June’s reporting. The reported July “gain” would “have been a contraction” without the downward revision in June’s “gain.”

So, the overestimate of June housing not only made June look good, but also the downward correction of the June number makes July look good, because starts rose above the corrected June number. The same manipulation is likely to happen again next month.

If the government will lie to you about Iraqi weapons of mass production, Iranian nukes, and 9/11, why won’t they lie to you about the economy?

We now have an all-time high of Americans on food stamps, 40.8 million people, about 14% of the population. By next year the government estimates that food stamp dependency will rise to 43 million Americans. So last week Congress cut food stamp benefits. Let them eat cake.

Wherever one looks--food stamps, home foreclosures, bankrupted states, mounting joblessness, the message to long-suffering Americans from “their government” is the same: go eat cake, while we fight wars for Israel that enrich the military/security complex and while we bail out banksters whose annual incomes are in the tens of millions of dollars and up.

It is impossible to get any truth out of the US government about anything. If private companies used US government accounting, the executives would be prosecuted, convicted, and incarcerated.

“Our government” is committed to fighting wars to enrich the military/security complex and Israel’s territorial expansion at the expense of cuts in Social Security and Medicare. All most members of Congress, especially Republicans, want to do is to pay for the pointless wars by cutting Social Security and Medicare.

When they worry about the deficit, it is usually Social Security and Medicare--so-called “entitlements” that are in the crosshairs.

You don’t have to be smart to see that Wall Street’s and the government’s response to the amazing US budget deficit is not to stop the senseless wars and bailouts of mega-millionaires, but to cut “entitlements.”

I will end this column on unemployment. “Our government” tells us that the unemployment rate is just under 10 percent, a figure that would have wrecked any post-Great Depression administration. But, again, “our government” is lying. The reported unemployment rate is just below 10% because the US government no longer, since the corrupt Clinton administration, counts Americans who have been unemployed for longer than one year. Once the unemployed hit one year and one day, they are dropped from the unemployment roles and no longer counted as unemployed.

Compare this fact with the number you read from the financial press. Right now, if measured according to the methodology of 1980, the US unemployment rate is about 22%. Thus, the reported rate of unemployment hides more than half of the unemployed. (Editor's bold emphasis throughout)

And Secretary Treasury Tim Geithner welcomed us in the August 2 New York Times to “the recovery.”

Utterly amazing.

Didn’t We All See This Coming?

By Timothy V. Gatto

March 21, 2009 "Information Clearing House" -- The country is coming to conclusions that a year ago would be unthinkable. The current turmoil on Wall Street has convinced many Americans of something that has been said for years, but nobody really believed…entirely. That something was that lawyers and bankers cannot be trusted. The American people know by now that the advice is largely true, they can’t be trusted. Neither can politicians, stockbrokers and financial advisors. In fact, people are starting to realize the entire concept of capitalism can’t be trusted, not just for the average Joe, but for the entire country. Capitalism is not your friend; it never has been and will not be in the future. It will continue to feed the rich, in fact, more than just feed them, but it won’t help the average wage earner realize the American dream. That’s never what it was designed to do. It was put in place to insure that the rich got richer and that the not so rich would stay where they were and to be grateful they could feed their families.

This isn’t the first time that capitalism has failed. Every time it fails we use a form of temporary socialism to shore up the economy. When things start to return to normal, we give everything back to the capitalists. Why is that? Could it be that we have no choice?

Ever notice how people equate capitalism with belief in God and country? They defend capitalism as if any other kind of government will lead them into slavery. The truth is that capitalism is an express ticket into slavery. Still, for every worker that recites a story of abject horror, there is an example of how the shining example of individualism embodied in the dogma of “free enterprise” has lifted a poor person out of his or her misery into nirvana. Pulling yourself up from your bootstraps is another way of contributing to the myth that capitalism works for everyone. I would like to see the ratio of millionaires that inherited their wealth vs. those that made their own money. If it were true that people surmounted the difficulties of amassing wealth and that many had truly “made it on their own”, the empirical evidence would be touted from every capitalist media outlet to every citizen in the country, just to prove that “free enterprise” works, yet it just isn’t there.

We Americans watch as our leaders try every trick in the book to grease the skids of our languishing economic system. We watch as AIG and other parasitic financial institutions grasp at every stray dollar they can con out of the people in a vain attempt to shore up their crumbling empires. The Federal government has allocated another trillion dollars to shore up the secondary real estate market and attempt to get Americans to buy real estate again. Meanwhile, Richard Cook, an economist that worked on NASA’s budget proposes that instead of trying to ignite the fires of consumerism with money given directly to large capitalist financial markets, the government could better stimulate the economy by giving citizens $1,800.00 vouchers monthly to pay their utilities and mortgages and to buy food and other essentials. This he claims would stimulate the economy by putting hard cash in the hands of consumers. Wouldn’t this be the end result the government is trying to achieve? Yet nobody takes this proposal seriously, at least not the government or those failing institutions with their sweaty palms out. Seems as they believe that money would be better off left in the hands of those that have brought us to where we are today, to hoard it or to siphon it off in undeserved salaries or bonuses, anywhere but on the streets so that consumers could spend it.

If one were to look back and take an honest look at the economy, they would see that writers such as me and many others on both sides of the political spectrum were trying to capture the nation’s attention five years ago when the Middle Class was losing almost two thousand dollars a year. This was happening year after year. Not only was the median income slipping, but benefits were being cut, full time jobs were being outsourced overseas and many Americans found themselves working two part time jobs just to keep up their mortgage payments. Some writers and economists were using phrases such as “class warfare” to shock some sense into the political parties and the employers. Still the government did nothing to alleviate the suffering of the hourly wage earner. It wasn’t until the situation started to affect the affluent did the government start to heed the warning signs.

Now it is a common sight to see a politician on a news clip railing at the excesses of Wall Street. Where were these politicos when the average wage earner was being cut from the American dream? Were they still listening to the vermin that call themselves lobbyists telling them that all was well? We can see now that we had more than enough time to understand that everything wasn’t at all well. The people that believed in the fairy-tale of “trickle-down” economics should have been concerned when nothing at all was reaching the lower end of the economic spectrum. They should have started becoming concerned when more businesses were going under, when people were cutting back on their medications so that they could put food on their families table.

This should really erase any doubts about the myth of unfettered capitalism. Unregulated, gluttonous capitalism didn’t just “appear” when Goldman Sachs and Lehman Brothers started to cry “Uncle!”. The signs were there long before that. (Editor's emphasis throughout) This time when we finally realize that anything too big to fail should be nationalized, when we understand that government regulation should be mandatory when dealing with predators, let’s not take a giant step backwards and slide back into “free enterprise capitalism”, giving the reigns of financial power back to the people that only care about themselves.

Find Tim Gatto at: timgatto@hotmail.com--http://Liberalpro.blogspot.com