Economic policy in the United States and Europe has
failed, and people are suffering.
Economic policy failed for three reasons:
policymakers focused on enabling off-shoring 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
Jobs off-shoring 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
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 off-shoring. Some are the result of business
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 off-shored 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 $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
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
) 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 off shore, 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
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
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
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
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
In other words, the Greek population is to be
sacrificed to a small handful of foreign banks in Germany, France and the
The Greek people, unlike "their" socialist
government, did not regard this as a good deal. They have been in the streets
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 nothing left to lose, they lose