Wednesday, July 21, 2010

Why Participatory Economics?

Why Participatory Economics?

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Markets subjugate ecology, abominate personality, breed poverty, and require gross inequality. War, what is it good for? Not people. Capitalism? It makes accumulation the goal of life and caring a token of failure. But, another world is possible nearly everyone replies. Really, what is it? We want the world and we want it now. Yes, but kind of world do you prefer?

Well, when I am asked that question about economics—and it is a good question about culture and kinship, and polity too—I answer, what I want is the fourth of four currently available options.

The first, capitalism, combines private ownership, remuneration for property, power, and, to a degree, output, corporate divisions of labor, and markets in ways primarily benefiting the capitalist class.

The second and the third, centrally planned and market (20th century) socialism combine markets or central planning with public or state ownership, remuneration for power, and, to a degree, for output, and corporate divisions of labor which primarily benefit a coordinator class of planners, managers, and others similarly empowered in the economy.

The fourth, participatory economics (parecon for short) combines social ownership, self-managing workers and consumers councils, remuneration for duration, intensity, and onerousness of work, balanced job complexes (that apportion labor so each job has roughly the same empowerment effects as all other jobs), and participatory planning where workers and consumers cooperatively negotiate economic outcomes with no class divisions.

I advocate participatory economics because it transcends capitalism and also market and centrally planned socialism by establishing core institutions that promote solidarity, equity of circumstance and income, diversity, participatory self management, classlessness, and efficiency in meeting human needs and developing human potentials. Here are more detailed reasons.

Reason 1: Parecon solves the problem of class

The usual approach to class has been that economic classes were a product of ownership relations. The main division was between capitalists owning the means of production and workers owning only their ability to do work. There were other classes such as peasants, but they were deemed less important. One could also distinguish between little or big owners, skilled or unskilled workers, and so on, but this was also secondary. The big issue was capital versus labor.

When some folks examined this time-honored left wisdom, we asked, what about managers, doctors, lawyers, engineers? Critics of the received left wisdom weren't satisfied with lumping these highly empowered workers in with either rote workers below or even more powerful owners above. We felt that the in-between group was different based on their economic position, yet not ownership.

What made a class, in this view, went beyond conditions of ownership to something more general—position in the economy—which gave classes interests collectively different and contrary to other classes, a different methodology for personal advancement, a different self image and image of others, and a potential to rule economic life.

Participatory economics extends the insights of anarchists like Bakunin and libertarian socialists like Barbara Ehrenreich that what was called socialism in the past had core institutions that didn't elevate workers while eliminating owners, but that elevated coordinators while eliminating owners. In the so-called socialist economies, we realized workers didn't decide economic outcomes and equitably share society's output. Instead, it was coordinators who dominantly decided economic outcomes and who aggrandized themselves from society's output.

So parecon's class insight was that beyond capitalism there is classlessness as one option, but there is also coordinatorism, as another option, where coordinatorism is an economic system that retains the class division between those who monopolize empowering circumstances in their work—the managers, lawyers, engineers, doctors, etc.—and those who mainly follow orders and suffer tedious conditions, the workers. In response, participatory economics, proposes a system that eliminates the familiar corporate divisions of labor through what it calls balanced job complexes. Each worker does a fair mix of tasks such that everyone's job is essentially equivalent in its total empowerment effects.

Participatory economics solves the class problem by (a) identifying the key classes; and (b) accomplishing economic functions without incurring class division and class rule. The features of Parecon that are most central to its solving the class problem are:

  • seeing that economies produce people and social relations, not simply outputs
  • understanding that not only ownership relations, but also the conditions under which people work and the things they do impact both their collective motives and their operational means
  • realizing that corporate divisions of labor and market allocation produce the coordinators as a separate and dominating class
  • committing to balanced job complexes and participatory planning in their place

Reason 2: Parecon solves the problem of economic self management

Many in my generation became radicalized in the mid-1960s. Controlling our own lives was a key theme of our new leftist commitments. It was quite natural, then, to like the idea of self management which came to mean that we each should have a say over decisions that affect us proportionate to the extent of their effect on us. Sometimes 50 percent rule was the best approximation to everyone having that level of influence. Other times consensus was the best way to achieve it. Sometimes requiring two-thirds for a decision was best or sometimes one person alone deciding, as in how to arrange his/her desk. Sometimes extensive discussion, debate, and refinement of proposals made sense. Other times, when less was at stake, quicker procedures were better. It didn't take long to realize that if we should all have a say in decisions in proportion as they affect us—to the point where trying for further precision would cost us more in time and hassle than it would gain in desirable decision making and process—the implications for economics were pretty extreme.

An economy is a general system in which each part, including each choice, sets the context for all other parts and choices. If I consume a pencil, you can't consume that pencil. More, if we, together, in our society produce 100,000 pencils, we aren't producing whatever else we could have with the labor and resources that went to the pencils. Doing any one thing foregoes using the component energy, resources, and labor to do some other thing. But this means every decision affects every actor, albeit some actors far more than others. So for an economy to be self managing, workers must have a say in their workplaces about their activities as producers and consumers must have a say about what they get to eat or wear or ride, and also about what is available.

So in a participatory economy, workers councils and consumers councils use self-managed decision-making in their local deliberations and choices. But it is also necessary that the interface between workers in various plants, between consumers in one region and another, and between workers and consumers throughout the economy, is handled in a way that all participants have appropriate influence.

Suppose workers in a plant make their local decisions, but central planners tell them how much they must produce or markets impose output levels on them over which they have little say. Goodbye self management. Likewise, suppose consumers get to choose what they want from among society's outputs, looking at lists of availabilities and freely choosing among them, but what they choose from is determined without their having an impact. Or suppose those who breathe pollution don't have a say in car sales, or those who produce bicycles have no say in the availability of rubber or of safe biking conditions. Again, goodbye self management.

Participatory economics solves the self-management problem by understanding and highlighting accomplishing economic functions without giving any one set of participants more than proportionate say. The features of participatory economics most critical to its solution to the self-management problem are understanding that

  • each person's freedom needs to extend to the point of others having similar freedom but should not extend further than that:
  • not only what we do day-to-day has to be self managed, but also the broad context in which we make those choices
  • familiar corporate divisions of labor and market allocation produce dominating elites with excessive say over outcomes
  • hierarchical decision-making destroys self management
  • self-managed councils, balanced job complexes, and participatory planning need to replace capitalist and coordinatorist options

Reason 3: Parecon promotes equity

Regarding equity, parecon examines remuneration and arrives at a particular norm—that we should each receive for our socially useful contributions to the economy a share of its outputs in proportion to the duration, intensity, and onerousness of our socially valued labor. We should get more income if we work at useful production longer, harder, or while enduring more onerous conditions, as should everyone else, and for no other reason.

Someone might think, instead, that it is equitable for Bill Gates to get income equal to that of whole populations of numerous countries by virtue of owning property. Or that it is equitable for Tiger Woods to get gargantuan income by virtue the value of his fantastic athletic talent to those who like to watch golf tournaments. Or that a thug with great bargaining power such as our corporate centers of industry deserve whatever income they can take. But parecon rejects remunerating property, or remunerating bargaining power, or even remunerating personal output. You get more simply for working longer, or harder, or at worse conditions, as long as you are producing valued output.

You can't work hard digging holes in your back yard and filling them and expect an income for it. Nor can you work hard at making something useful and desired, but doing the work in a slipshod or incompetent fashion that misuses inputs. In such cases, you are not creating socially desired outputs commensurate to the labor you are expending, which is to say not all the time or effort you are expending is warranted by the desirability of its product and therefore not all of it deserves full remuneration. I can't be shortstop for the Yankees or quarterback for the Indianapolis Colts in a participatory economy because my efforts would not be appreciated, just as if I were digging holes and filling them.

Parecon's combination of methods and structures ensures that each actor who is able to work is afforded a share of the social product of his or her choosing in proportion to the duration, intensity, and onerousness of his or her socially valued work. Parecon is not manic to the tenth decimal place about this, of course. Rather, in different parecon workplaces, workers will adopt methods and norms of measuring that they prefer, always consistent, however, with the overarching guidelines. What parecon contributes regarding equity is, first, clarification as to its meaning and composition and, second, institutions that facilitate attaining it, which are, again, the participatory planning system, balanced job complexes, and self-managed councils.

Reason 4: Parecon can help overcome cynicism

There is no alternative," Margaret Thatcher intoned many years ago, offering the claim as a reason for accepting capitalism. For Thatcher, as well as for most people, leftist entreaties to activism sound like juvenile whining. They believe if it isn't one war it will be another. If that group over there isn't homeless or starving, some other group will be. Massive suffering is just the way of the world, so stop whining about it. Their belief in the necessity of the pains all around us ensures social passivity. A person might have great energy for their job or interpersonal relations, or some sport or hobby, but they do not have great energy for social change because social change seems to be a dead end.

To me, this cynicism is an obstacle so centrally important that overcoming it is a precondition for building large and sustained movements. If participatory economics is widely shared and clearly enunciated and if I am right about its merits, it can help people recognize that indeed there is a viable and worthy alternative to capitalism.

Reason 5: Parecon can inform current activist focus in ways essential to success

It is an old anarchist adage, and I think a very correct one, that we need to try to incorporate the seeds of the future in the present. Our movements, in their internal organizational structure, decision-making methods, modes of remuneration, divisions of labor, and relations to other efforts should try as much as possible to reflect the values we'd like in a future society both to learn and to inspire. As such, we should have movements that embody what we seek in race, gender relations, decision making, and class relations.

Parecon can inform how we construct and carry out our projects, organizations, and movements, helping us to incorporate councils, self-managed decision making, equitable remuneration, balanced job complexes, and relations among people that embody the features of participatory planning.

Many people, and ironically it is often precisely those who by their values most desire a self-managed economy, think there is a contradiction between seeking liberty and freedom and espousing an institutional vision. They think advocating specific institutions for a new society forces us into authoritarian, sectarian dynamics, leading to a world we would rather not inhabit.

I am confused by this objection to parecon and to vision more generally. It says that unless the future is brought into being without being thought about, discussed, debated, refined, and widely self consciously sought, it won't be participatory, classless, and self managing.

But how can a movement win a different future unless, at some point, it is seeking it? How can a movement be participatory and attain a self-managing economy and society, unless it is seeking such a society based on the insights of huge numbers of people? How can a huge number of people be seeking particular institutional changes unless they know what these new institutions look like, why they are valuable, and how they would work? And how can a large number of participants have such knowledge and the confidence to act, unless they have discussed and refined their aims? How can movement activists become advocates of a shared vision which, however, doesn't exist in the public imagination?

People's justified fears of sectarianism actually suggest that we should adopt vision flexibly, with an open mind, and welcoming criticism and debate, always ready to make changes. People with concerns about giving time to developing and advocating vision often say that what we want for our future should arise from our experiences. I agree. Of course, it should arise from our experiences. Indeed, where else has participatory economics or any other vision come from other than our assessments of our accumulated experiences over about 200 years of anti-capitalist activism plus a few decades of personal experiences and experiments?

Movements that don't have shared compelling vision will not have large and powerful memberships that can embody the seeds of the future in the present, orient their actions to desirable goals, and give participants an equal chance to make the aims of the movement their own, understand the aims, adapt the aims, act in light of the aims, correct, refine, or supersede the aims, and finally win them.

What our movement needs is shared classless and self-managing vision offered in the most accessible possible language, welcoming debate and refinement, able to inspire support and action. Yes, vision should be minimalist in the sense of not specifying circumstances that are for future participants to decide. But it should also be maximalist in seeking that which allows future people to self manage classlessly.

For-profit universities thrive on unemployment

For-profit universities thrive on unemployment

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With unemployment at the highest level since the Great Depression, millions of workers have sought to improve their job prospects by continuing their education. Since public universities have drastically slashed admissions, the main beneficiary of this process has been the for-profit college industry, which provides degrees to students at rates far higher than that of standard colleges.

These so-called “career colleges”—primarily online institutions like the University of Phoenix, Capella, DeVry, and Kaplan University—hold out the false promise of a secure future, telling students that a college degree will enable them to find work.

Since 2000, enrollment in for-profit colleges has tripled, growing from 673,000 students to over 2.6 million in 2010. The University of Phoenix, the most prominent of these colleges, is now the second-largest higher education institution in America, after the State University of New York (SUNY) system. Its enrollment of nearly half a million students is larger than all Big Ten campuses combined, but its “instructional costs and services”—the total employee compensation—is $400 million, less than that of the University of Iowa, the smallest of the Big Ten’s public universities.

This growth has been largely a result of predatory recruitment and lending practices, in which these colleges seek to extract profit from the desperation of the poor and unemployed. Many of the programs are shot through with fraud and corruption, and rely on systematically misleading statements to dragoon potential students to sign up.

In Illinois, 350 former nursing students are suing the Illinois School of Health Careers after discovering that the program they enrolled in was not approved by the state Health Department. The students were not eligible to work as nurses with their degrees despite claims by the college that they would be “immediately qualified to take the state board exams.”

In December, the Apollo group, the Fortune 500 that owns the University of Phoenix, paid a $78.5 million fine for illegally paying recruiters based on the number of students they enrolled. This practice naturally led to abuses, as recruiters targeted anyone they could convince to enroll, regardless of their qualifications or ability to afford the classes.

These companies have profited significantly from federal student loan subsidies. Last year the University of Phoenix received $4.3 billion in income from federal student aid, nearly eight times as much as the largest non-profit recipient, Penn State, according to a report by Senator Dick Durbin.

One for-profit college recruiter commented in an online discussion that “we slam anyone…eligible for title IV funds…to take classes at almost $1,200 a five-week class. It doesn't matter if they have the competence or aptitude.”

As a result of these policies, recruiters at for-profit universities have turned to preying on the most defenseless sections of society. On June 17, 20 leaders of shelters and services agencies from across the country sent an open letter to Education Secretary Arne Duncan, complaining that recruiters were “systematically preying upon our clients.”

The letter said that “the for-profit education industry’s seductive marketing messages and well-trained, unethicalIy-incentivized recruiters are out-maneuvering lower-priced, higher-quality post-secondary alternatives. For-profit recruiters opportunistically target homeless men, women, and youth, luring them into taking on thousands of dollars in excessive debt.”

Indeed, for-profit universities rely on a far-more indebted student population than those of public universities. Ninety-six percent of students take out loans to pay for school at four-year for-profit schools, compared to only 64 percent of students at four-year public colleges. As a result, the average student at a for-profit university graduates with $29,900 of debt—$19,000 more than their peers at public universities, according to data from the College Entrance Examination Board.

Meanwhile, only a tiny fraction of students end up receiving degrees from these universities. Only four percent of University of Phoenix students graduate within six years, versus the national average of 57.3 percent.

Contrary to the deceptive claims of the for-profit education companies, even the small minority of those who graduate hardly benefits. A study by the industry’s own Online University Consortium found that employers prefer graduates of traditional school more than 4 to 1 over online college graduates.

Students are often led to believe that they can transfer their credits at for-profit universities to those at standard schools, but this is rarely the case. One worker at the University of South Florida admissions department told the World Socialist Web Site, “We would get a lot of people with degrees from for-profit universities who couldn’t get any transfer credit at USF. The students assumed their credits were just like those at any community college, and that they would be able to transfer. They were not told that their degrees weren’t accredited by the state. They usually spent 10 times more per credit at these schools, on totally worthless degrees.”

Employees at for-profit universities are treated no better than the students. Lecturers are paid as little as $850 per five-week course and are hired on single-course contracts, with no job security from term to term. Academic advisors have reported working with over 400 students at a time in what are essentially high-pressure, high-turnover sales jobs, which involve little “advising” other than signing up more students.

While some Congress members have raised these issues, with the Senate holding a hearing on for-profit universities in late June, they have made it clear that their main intention is to protect wealthy investors. The massive amounts of student loans given to “high-risk” students raises the threat of another default crisis similar to the implosion of the subprime housing market, holding the potential to wipe out billions of dollars in holdings.

While the Obama administration had announced on June 16 that these concerns would lead it to propose regulations of for-profit universities, recent statements by the administration have indicated that it fully supports these predatory institutions.

In a July 19 email statement to Businessweek, Education Department spokesman Justin Hamilton said that the White House’s proposal will strengthen the “critical role for-profit schools will play in helping us meet the president’s 2020 goal: for America to once again lead the world in the number of college graduates.”

With that, Mr. Hamilton all but announced that for-profit colleges will be allowed to con and defraud workers with the full support of the White House.

Israel land-grab escalates in East Jerusalem

Israel land-grab escalates in East Jerusalem

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Israel is planning a major land-grab in East Jerusalem worth tens of billions of dollars.

Attorney General Yehuda Weinstein has informed the Supreme Court that the state plans to apply the law on abandoned properties in East Jerusalem. This will mean that Israel can “legally” take over thousands of acres and buildings that are the property of Palestinians, some of whom fled to what the state claims were “enemy states” during the Israeli “War of Independence” and others who have property in East Jerusalem but reside in the Occupied Territories.

The issue was brought before the Supreme Court after four cases were tried in the Jerusalem District Court, which ruled in favour of the owners in two cases and against in two. A special legal panel later ordered the Attorney General to tell the District Court whether it intended to apply a 1950 law to properties in East Jerusalem.

The total worth of the property belonging to the four applicants that was seized in Abu Ghneim mountain is estimated at $10 billion—equivalent to the Israeli defence budget for a year.

The Israeli newspaper Ha’aretz noted that a legal shift was underway. In 1968, “Meir Shamgar, who was attorney general at the time, presented a legal opinion in which he concluded that the law should not apply to properties of Palestinians in East Jerusalem whose owners lived in the territories.” He wrote, “We did not see any justification that annexation of East Jerusalem should in itself bring about taking over properties of persons who were not essentially absent, but rather were present at the time their property came under our control.”

In 2005 Prime Minister Binyamin Netanyahu, who at the time was finance minister and whose department was in charge of abandoned properties, was warned by then Israeli Attorney General Menachem Mazuz “that applying the law vis-a-vis to residents of the territories could have serious international consequences.”

Mazuz enlarged on these remarks by saying, “The interest of the State of Israel is to avoid opening new fronts on the international scene in general, and in international law in particular.”

Ha’aretz quoted him telling Netanyahu that there was no logic in applying the law to East Jerusalem properties: “The properties became abandoned due to a unilateral action taken by the State of Israel ... at a time when both the properties and their owners were under the control of the state ... Essentially these are ‘present owners,’ whose rights to their property were stripped because of a broad, technical formulation of the law.”

Netanyahu clearly feels he is in a better position internationally to carry through annexations. The four owners in the Jerusalem District Court cases have been ordered to submit formal requests to a special committee on abandoned properties, asking for the properties to be released. The statement makes clear that “the deliberation will be held on the basis of the view of the state and the custodian of the properties that they are indeed abandoned.”

In addition to confiscating land claimed to be vacant, and demolishing Palestinian homes built without permits that are almost impossible to secure, Israel has for many years used the excavation and reclamation of Jewish historical sites as a reason for the removal of Arab dwellings within East Jerusalem.

In recent weeks, Jerusalem Mayor Nir Barkat has pushed through plans for a biblical recreational park in the Silwan district of East Jerusalem through the Jerusalem Planning and Building Committee. It will mean the destruction of 22 Palestinian homes declared illegal by the Jerusalem municipality. Hundreds of Arab and Jewish Israelis marched through the Silwan neighbourhood in protest against the park, in what was claimed by the organisers to be the biggest demonstrations against the takeover of East Jerusalem by Israeli settlers.

In March, Barkat dismissed United States Secretary of State Hillary Clinton’s request for a halt to the demolitions, but was told to hold his plans in abeyance by Netanyahu.

At the time President Barack Obama had been forced to rebuke Netanyahu after Israel announced the building of 1,600 more Jewish homes while Vice President Joseph Biden was visiting Jerusalem. A “partial freeze” was declared by Netanyahu in order to alleviate Obama’s embarrassment and allow the Arab states to continue their own collusion with Washington.

This freeze runs out in September, but since then Obama has done everything possible to champion Netanyahu’s government and legitimise its plans to seize East Jerusalem and vast swathes of the West Bank. On July 7, Obama praised Netanyahu as a man who is “willing to take risks for peace” at a White House meeting, just five weeks after the May 31 raid on the Mavi Marmara Gaza aid convoy in which Israeli forces murdered eight Turkish activists and a dual Turkish-US national. He echoed Netanyahu’s demand that the Palestinian Authority resume face to face talks with Israel, while saying nothing about Israel’s intention to resume in full its settlement construction drive.

The “absent property” case being brought before the Supreme Court and the pushing through of the recreation park project is the payoff for Obama’s endorsement, alongside the renewed bulldozing of Palestinian homes in East Jerusalem.

Netanyahu’s government insists that Jerusalem must remain the undivided capital of Israel and opposes the demand of the Palestinians that East Jerusalem should be the capital of their putative state. A quarter of a million Palestinians are estimated to live in East Jerusalem. Since the Israeli capture of Jerusalem in the 1967 war an estimated 200,000 Jewish settlers have moved into the area. This influx breaches international laws concerning the colonisation of an occupied territory.

Such was the haste in pushing through the Silwan park plan that no less than 250 defects were found by the departments empowered to inspect building plans. Jerusalem City Engineer Shlomo Eshkol put forward a separate list of 30 criticisms, including demands for major changes. The municipality’s legal advisor also found it did not meet the legal standards necessary. Barkat dismissed the legal arguments by hiring a private lawyer to oversee the plan on behalf of the municipality. He dismissed his Deputy Mayor Pepe Alalo of the Meretz Party for voting against the Silwan Plan and threw out the remaining three Meretz councillors. Meretz advances itself as a pro-peace party. The municipal coalition is now dominated even more by ultra-Orthodox partners. Meretz now forms a rump four-man opposition alongside Meir Turgeman of the Lma’an Yerushalem party.

The proposed park is being given such priority status because it is the start of a bigger plan to force out the Palestinian communities, providing a centre for an upmarket bar and restaurant area.

A few days later, a blueprint was released for the whole of East Jerusalem that will include plans to expand Jewish neighbourhoods. Most of the land earmarked for development is privately owned by Arabs. Ha’aretz reported that when the plans were first touted, right wing elements complained to the Interior Ministry that it would mean large residential areas for the city’s Arab population. The protesters said that land earmarked for recreational use and for Jewish residents would be lost. On the orders of the Mayor, changes were made in line with broadening the Jewish presence in the Holy Basin of East Jerusalem. It claims that a non-governmental organization, The Elad, that is close to Barkat, bought up homes in the village of Silwan in order to “Judaize” the area.

US Senate advances stripped-down jobless benefits bill

US Senate advances stripped-down jobless benefits bill

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The US Senate on Tuesday passed a bill extending federal unemployment pay. The vote came seven weeks after the June 1 expiration of the benefits.

The bill, which resumes the period of benefit coverage to 99 weeks of unemployment for most parts of the country, is expected to pass the House and be signed into law by President Obama on Wednesday.

Two Republican senators from Maine, Olympia Snowe and Susan Collins, joined 58 Senate Democrats to break a Republican filibuster blocking the $33.9 billion bill, which will restore unemployment benefits to roughly 2.9 million workers who lost them during the hold-up. The vote took place moments after Democrat Carte Goodwin was sworn in as the replacement for the late Senator Robert Byrd of West Virginia. One Democrat, Senator Ben Nelson of Nebraska, voted against the measure.

Obama made a public show of supporting the bill only on Saturday after its passage was assured with the addition of Goodwin to the ranks of Senate Democrats. For more than three months, while the bill was stalled in the Senate, Obama did virtually nothing to push for an extension of jobless benefits, even as millions of workers lost their only source of cash income. In recent appearances to promote his economic agenda, Obama did not even mention the lapse in benefits for the long-term unemployed.

Tuesday’s vote was based largely on electoral calculations. Democrats hope that Obama’s attack on Republicans, whose opposition to the temporary extension was nearly unanimous, will resonate under conditions of the worst jobs crisis since the Great Depression.

The longer-term prospects for those depending on extended jobless benefits remain grim. Whereas an earlier version of the bill would have expired at the end of the year, in the new Senate version benefits will dry up in November, soon after the midterm elections. With Republicans widely anticipated to add seats in the Senate, it is highly likely that extended jobless benefits will cease after the start of the 112th Congress next January, if not sooner.

The bill itself is a stripped-down version of similar “jobs bills” passed over the past two years. While it will retroactively reinstate benefits to millions of laid off workers, what has been left out of the legislation will result in increased hardship and poverty.

The bill does not provide billions of previously anticipated federal funds to assist struggling states in meeting the increased need for Medicaid, the joint federal-state low-income health insurance program. The decision, now evidently final, leaves at least 30 states plus the District of Columbia with budget shortfalls that will result in hundreds of thousands of new layoffs of teachers and other public employees and cuts in basic services.

A number of states are planning to exclude tens of thousands of people from their Medicaid roles and eliminate such services as dental, optical and even dialysis.

Also left out from previous versions of the bill is assistance for laid-off workers in maintaining their previous employer-based insurance through federal COBRA benefits.

As for jobless benefits, the bill will on average provide about $300 per week to the unemployed. Computed over the course of a year, this comes to $16,500—about $6,000 less than the official poverty threshold for a family of four. In a futile attempt to attract more Republican support, the Obama administration and the Senate Democratic leadership included a cut of $25 per week from the benefits that had been allocated in previous bills extending the federal jobless pay.

The jobless benefits system in the US is, even in better times, woefully inadequate. Payments vary widely depending on the state, with jobless workers in some states receiving well under $250 per week. Nationally, fewer than half of unemployed workers receive benefits at all.

The Republican Party and its media spokesmen have provocatively blamed mass unemployment on the jobless, with Arizona Senator Jon Kyl declaring that providing benefits is a “disincentive for [the jobless] to seek new work,” and Representative Tom Price of Georgia warning of a “moral hazard” created by the provision of a degree of sustenance to the unemployed.

This in an economy where nearly 10 percent of workers are officially unemployed, where an average of five jobless workers compete for every opening, and where the average length of unemployment is over eight months—the longest duration on record.

It follows, moreover, the allocation of trillions of dollars in public funds to bail out the banks and lucrative federal contracts to businesses under last year’s stimulus bill.

The near unanimity with which Republicans opposed the bill and the half-hearted efforts of the Democrats to pass it reflect an erosion in ruling class support for even the most modest ameliorative measures like extended jobless benefits, which in previous recessions were passed with little controversy. In February, a single Republican senator, Jim Bunning of Kentucky, was left largely isolated by his party’s leadership in his bid to hold up a similar bill. Now, as the Associated Press notes, “the GOP has grown increasingly comfortable opposing the legislation.”

Obama and the Democrats fully support the underlying logic to the Republican position—that the working class must be made to pay for the economic crisis precipitated by the financial elite.

On Monday, Obama delivered brief remarks on the bill with three unemployed workers standing behind him in the White House Rose Garden. The president criticized Republicans “who didn't have any problem spending hundreds of billions of dollars on tax breaks for the wealthiest Americans are now saying we shouldn’t offer relief to middle-class Americans.”

Obama’s effort to pose as a defender of “middle-class Americans”—he pointedly avoided using the term “worker” or “poor”—is absurd.

The Obama White House has done nothing to directly create jobs. Funds allocated under its 2009 American Recovery and Reinvestment Act went largely to private-sector firms. Now stimulus money for state and local governments that helped to plug gaping budget holes has begun to run out, leaving the states to face what has become commonly known as “the budgetary cliff.”

While the Democrats for weeks proclaimed themselves powerless before Republican parliamentary maneuvers, they joined hands with the minority party in mobilizing congressional support for the US wars in Afghanistan and Iraq. Prior to the July 4 recess, a supplemental war funding bill of $33 billion—the same size as the jobless pay bill—was passed by the Senate unanimously.

The turn to austerity in the US has been spearheaded by Obama. His health care “reform,” signed into law earlier this year, aims to save hundreds of billions by reducing costs and the provision of medical care for the working class. Obama’s 2010 budget, dubbed “A New Era of Responsibility,” was coupled with an executive order enacting a long-term freeze on non-military discretionary spending—i.e., the programs that benefit the broad mass of the population.

The passage of the bare-bones jobless benefits bill after weeks of delay makes clear that workers cannot defend their most basic interests through appeals to the Democratic Party.

US chain store boycotts Israeli goods

US chain store boycotts Israeli goods

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An American chain store has boycotted sales of Israeli products to protest at the policies of the Tel Aviv's regime against Palestinians.

The board of directors of the Olympia Food Co-op in Washington decided last week that no more Israeli goods will be sold at its two grocery stores in the city.

"We met last Thursday for the board members meeting and a pretty large group - about 40 people - presented the boycott project and answered our questions," board member Rob Richards told Ha'aretz on Tuesday.

"A couple of board members were concerned about what will be the financial effect on the organization, but it's minimal," he added.

Richards also said that two members on the board were from the Jewish community who supported the boycott.

The co-op grocery stores carried Israeli products including ice cream, crackers and a line of baby wipes.

Olympia is the hometown of Rachel Corrie, a US peace activist who was run over and killed by an Israeli bulldozer in Gaza in 2003 as she attempted to prevent a Palestinian home from being demolished.

Report: Tab for 'War on terrorism' tops $1 trillion

Report: Tab for 'War on terrorism' tops $1 trillion

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The United States has spent more than $1 trillion on wars since the September 11, 2001, terror attacks, a recently released Congressional report says.

Adjusting for inflation, the outlays for conflicts in Afghanistan, Iraq and elsewhere around the world make the "war on terrorism" second only to World War II.

The report "Cost of Major U.S. Wars" by the Congressional Research Service attempts to compare war costs over a more than 230-year period -- from the American Revolution to the current day -- noting the difficulties associated with such a task.

Since the the 9/11 terror attacks, the United States has spent an estimated $1.15 trillion. World War II cost $4.1 trillion when converted to current dollars, although the tab in the 1940s was $296 billion.

World War II consumed a massive 36 percent of America's gross domestic product -- a broad measurement of the country's economic output. The post-9/11 cost of the conflicts is about 1 percent of GDP.

Comparisons of costs of wars over a 230-year period, however, are inherently problematic, the report says.

"One problem is how to separate costs of military operations from costs of forces in peacetime. In recent years, the DOD (Department of Defense) has tried to identify the additional 'incremental' expenses of engaging in military operations, over and above the costs of maintaining standing military forces."

"Figures are problematic, as well, because of difficulties in comparing prices from one vastly different era to another," according to the report. "Perhaps a more significant problem is that wars appear more expensive over time as the sophistication and cost of technology advances, both for military and for civilian activities."

The costs associated with the "war on terrorism" could still go much higher.

A Congressional Budget Office estimate from 2007 said the cost of the wars in Afghanistan and Iraq could total $2.4 trillion by 2017, more than double the current amount.

NAFTA & Political Economy of Immigration

NAFTA & Political Economy of Immigration

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International migration is not, strictly speaking, a new phenomenon. However, in recent decades, the ascendancy of the global economy and the (short-lived?) triumph of neoliberal economics produced a parallel ascendancy in the rate of international immigration. Specifically, in Mexico the effects of neoliberal structural-adjustment programs in the 1980s, NAFTA in the 1990s, and the ongoing Security and Prosperity Partnership have produced successive waves of Mexican migrants to the United States.

As trade negotiations and immigration policy were formally joined in the Immigration Reform and Control Act of 1986, the Commission for the Study of International Migration and Cooperative Economic Development was created to study the causes of immigration to the United States and to offer advice on how to filter and contain it. The commission's first report to President Bush in 1990 found that the primary motivation for migrating north was economic.

The Backdrop

A reminder of the backdrop against which NAFTA was implemented is crucial for understanding the broader implications for both Mexico and the United States. The globalization campaign, of which NAFTA is one stage, had been met with popular protest and mass resistance all over the world. Popular movements against the corporatist crusade to globalize the doctrines of "laissez-faire" began in the global South, eventually penetrating the affluent core of the global economy and climaxing (as of yet) in mass protests against the pillars of the global economic order in Seattle. Similarly, NAFTA was implemented in spite of general public opposition. Typically, dissent and thoughtful criticism of the expected consequences of NAFTA were silenced in the United States, with rare but revealing exceptions. As President Salinas toured the U.S. explaining why NAFTA would set Mexico on a path toward first-world status, an analysis by the Office of Technology Assessment, a research bureau of Congress, concluded that NAFTA would likely harm the majority of the North American population. Negotiations moved forward with this well in mind. In the New York Times, hardly hostile to state and corporate power, Tim Golden reported, "Economists predict that several million Mexicans will probably lose their jobs in the first five years after the accord takes effect."

In the southern provinces like Chiapas and Oaxaca, where the vast majority live on the land, native Indian populations rose up in mass resistance to NAFTA in January 1994. The Zapatista uprising coincided directly with the enactment of NAFTA and attracted worldwide solidarity in defiance of policies that clearly sought to undermine Mexican sovereignty. A major motivator for the uprising was President Salinas's decision to repeal Article 27 of the Constitution of the Mexican Revolution, which had established thousands of pueblos with inalienable community land-holdings called ejidos. As the centerpiece of Mexico's post-revolutionary land redistribution reforms, this integral part of the Mexican social safety net was the ultimate symbol for social justice in peasant communities. As noted by Noam Chomsky in Profit Over People: Neoliberalism and Global Order, such barriers to unfettered implementation of neoliberal reforms were detected in a 1990 Latin America Strategy Development Workshop in Washington: "A 'democracy opening' in Mexico could test the special relationship by bringing into office a government more interested in challenging the U.S. on economic and nationalist grounds." Mexican democracy was seen from the beginning as a primary threat to the architects of NAFTA, for reasons that are abundantly clear upon examination of the record.

Before the formal establishment of NAFTA, Mexico had been successfully co-opted by key purveyors of the neoliberal paradigm, including the U.S. government, IMF, World Bank, and WTO. Evelyn Hu-Dehart acknowledges in her Globalization and Its Discontents that NAFTA should be seen as one stage, albeit a major stage, in a larger process of restructuring the Mexican economy, a process still underway. The first wave of reforms began during the financial crisis of 1982, amid the developing world debt crisis, with Mexico joining the GATT in 1985, NAFTA in 1994, and culminating in the Bush administration's Security and Prosperity Partnership (SPP). Plans for Mexican integration into the global economy pre-dated NAFTA. Essentially, Mexico was to integrate into the New World Order through the standard neoliberal formulas: export-oriented growth models, removal of trade/investment barriers and price controls, sweeping privatization of the public sector, deregulation of industry and finance, and removal of state-provided social services.

By the mid-1960s, the United States and Mexico had established the Border Industrialization Project, which created a multitude of now-infamous assembly plants (maquiladoras) along Mexico's northern border. The preferred model for production in the era of globalization, these Export-Processing Zones were essential for transferring cheap consumer products (apparel, electronics, auto parts etc.) to those living in the affluent global core. Agricultural Devastation

More than any other sector, agriculture in Mexico has been devastated by NAFTA. Agriculture is integral to Mexican heritage and cultural values. For thousands of years, indigenous Indian populations lived and worked on the land, primarily as subsistence farmers, providing for local families, communities, and markets. The decade preceding NAFTA had seen sharp increases in poverty rates, with more than two million new rural poor produced as a result of reforms. By 1998, the rural poverty rate had reached 82 percent according to World Bank figures. In line with World Bank/IMF prescriptions, Mexican agricultural production shifted towards crops for export, including animal feed and other cash crops, much to the benefit of giant agribusiness firms and foreign consumers.

Post-NAFTA, Mexico began exporting its agricultural output. A country with a proud tradition in farming and agriculture now suffered increasing rates of hunger and malnutrition, with over half the people lacking access to basic necessities. According to the Department of Agriculture, exports from Mexico grew at an astonishing annual rate of 9.4 percent between 1994 and 2001, while annual U.S. agricultural exports to Mexico grew to $12.7 billion by 2007. As employment in agriculture declined, productive lands were abandoned and Mexico began to import massive amounts of food and other basic necessities, suffering the consequences of global market volatility.

In Displaced Peoples: NAFTA's Most Important Product, David Bacon discusses how NAFTA forced Mexican farmers/producers of yellow corn to compete in their own local markets with corn grown in the United States by industrial agribusiness operations, subsidized by the public sector through the U.S. farm bill. As NAFTA and earlier reforms eliminated price supports and state food subsidies in Mexico, the U.S. government set up huge protections by subsidizing industrial corn production. Traditionally, through the National Popular Subsistence Company (Conasupo), the Mexican government bought corn at subsidized prices, turned it into tortillas (a staple in Mexican households), and sold them at state-franchised grocery stores at low prices. NAFTA eliminated Conasupo and rural Mexican farmers went hungry trying to compete with American firms who were saturating the local markets with imported crops. Similarly subject to the whims of the global market, and with state assistance banned by NAFTA, Veracruz coffee growers were devastated by a global coffee glut.

Falling Manufacturing Wages

In Happily Ever NAFTA?, John Cavanagh and Sarah Anderson document how, from 1993-1996, real manufacturing wages fell 20 percent. In 1999, wages in the maquiladoras were about $1.74, considerably lower than the rest of Mexican manufacturing with average wages of $2.12. Manufacturing became totally dependent on foreign consumer markets, with over 85 percent of exports and a majority of imports dependent on the American market. Between January 2001 and March 2002, over 500 maquiladoras shut down due to the U.S. recession. Industries became victims of external economic downturns, capital flight, and the search for even cheaper labor. While NAFTA did create 700,000 jobs in the maquiladora plants by 2000, 300,000 of them had disappeared to China and Southeast Asia by 2003. With the demise of the Consupo stores and price supports, the prices of tortillas more than doubled after the adoption of NAFTA, leading to the "tortilla riots." Tortilla production is now monopolized by the Mexican oligopoly Grupo Maseca.

Bacon notes that under the pre-NAFTA Mexican economy, foreign automakers like Ford and GM were required by law to purchase some materials for production from local Mexican producers. Post-NAFTA new laws prohibited requiring foreign producers to use a minimum percentage of local content for production of goods, allowing the auto giants to supply their assembly lines with parts from their own subsidiaries, usually located in other countries. Thousands of Mexican auto workers lost their jobs in the process. As a report by the Economic Policy Institute noted, "NAFTA also prohibited governments from imposing restrictions such as local content requirements and local R&D sourcing and provided an expansion of investor rights in the investment chapter, thus reducing the costs and risks associated with foreign investment." Over half of all U.S. trade with Mexico consists of intrafirm transactions of the type described above.

According to Cavanagh and Anderson, Mexican air pollution more than doubled under NAFTA, while Mexican government environmental expenditures have fallen 45 percent since 1994. Chapter 11 NAFTA provisions allow foreign (primarily American) investors to sue governments directly, in highly secretive arbitration panels unaccountable to the public, for any acts or regulations that might diminish their bottom line. Mexico was forced to pay a California firm $17 million for denying the company a permit to operate a hazardous waste facility in an ecologically sensitive location.

According to Bacon, by the mid-1990s, the majority of publicly-owned mines in Mexico had been sold off to Grupo Mexico, owned by the powerful and wealthy Larrea family. A steel mill in Michoacan was bought by the Villareal family, while the public telecommunications firm was sold to the wealthiest person in Mexico, Carlos Slim, the same oligarch who recently bailed out the New York Times. After having driven the city's bus system into extreme debt, former Mexico City mayor Carlos Hank bought the same public transit system he had destroyed at public auction after NAFTA. Wealthy narrow centers of power in Mexican society were not the only beneficiaries of these privatization schemes. In partnership with the Larrea family, American-based Union Pacific absorbed Mexico's primary north-south railway systems and immediately eliminated passenger service. In pursuit of ever-decreasing production costs, railway employment in Mexico fell drastically. After NAFTA, American firms now own and operate Mexico's ports and shipping terminals, with negative consequences for labor and the environment.

Militarizing the Border

It is no coincidence that, a few days after the passage of NAFTA, the Senate passed sweeping "anti-crime" legislation, militarizing the Mexican-American border and establishing the foundations for an emerging North American security-state. In an op-ed in the LA Times, Henry Kissinger called NAFTA "the single most important decision that Congress would make during Mr. Clinton's first term...the most creative step toward a new world order taken by any group of countries since the end of the Cold War...not a conventional trade agreement but the architecture of a new international system." The NAFTA model was to be the prototype for bilateral and multilateral trading systems in the era of globalized capital, a process which Rockefeller accurately identifies as originating in Pinochet's Chile.

Projects of this scale produce inevitable backlash, part of what economists prefer to call "externalities." As the fabric of social life decays, communities begin to disintegrate and people begin to seek out any means of survival. Once the neoliberal project is underway, in any given society, critical security and military infrastructure is often necessary for containment and suppression of the victims—the general population. From the 1970s on through the 21st century, from South America's Southern Cone to Russia to China to North America, these policies have necessitated the use of force and coercion to protect both the state and other vested interests from popular revolt.

When NAFTA was signed, there were 2.4 million undocumented Mexicans in the U.S. More recent data shows that number at 4.8 million and the total number of Mexican-born people in the U.S. doubled to 9 million by 2000. Over 600,000 Mexicans migrated north in 2002 alone. Mexican migration has increased so much that remittances have become something of a lifeboat for the Mexican economy. NAFTA was to be extended to the realm of security and defense via SPP, a highly secretive regional security initiative launched between President Bush, Vicente Fox, and Canadian Prime Minister Paul Martin in 2005. Quietly launched by the Bush administration, the SPP circumvents elected legislatures, media scrutiny, and general public oversight entirely. In this sense, it is not a treaty or law (which would require consent of the public), but a loose network of interests collaborating behind closed doors as a means of not only enhancing the architecture of NAFTA, but as a way of institutionalizing the infamous Bush National Security Strategy of 2002, the most hegemonic expression of American power since the Monroe Doctrine. Thomas Shannon, the U.S. Assistant Secretary of State for Western Hemisphere affairs, described SPP's purpose with revealing candor: "To a certain extent, we're armoring NAFTA." Mexicans and other Latin Americans have learned that adopting the U.S.-promoted neoliberal economic model—with its economic displacement and social cutbacks—comes with a necessary degree of force, but this was the first time that a U.S. official had stated outright that regional security was now about protecting a regional economic model.

Washington had three fundamental objectives embodied in the SPP:

  • to create more advantageous conditions for transnational corporations and remove remaining barriers for the flow of capital and cross border production within the framework of NAFTA
  • to assure secure access to natural resources in the other two countries, especially oil, which had yet to be fully privatized in Mexico
  • to create a regional security plan based on "pushing its borders out" into a security perimeter that includes Mexico and Canada

Through the SPP, the Bush administration sought to push its North American trading "partners" into a common front that would assume shared responsibility for protecting the United States from external threats, promoting and protecting the "free trade" economic model, and bolstering U.S. global control, especially in Latin America where the State Department sees a growing threat due to the recent elections of center-left governments. Post 9/11, a massive industry was spawned around the creation of the Department of Homeland Security and, increasingly, defense/security/intelligence. Disaster-response matters are now outsourced to the private sector (firms like Boeing, GE, Lockheed Martin, Blackwater, etc.).

Plan Mexico

The latest step forward is Plan Mexico (also known as the Merida Initiative), passed by Congress, and signed into law by Bush in June 2008, which allocates $400 million to Mexico for 2008-09. The original plan foresees about $1.4 billion over a 3-year period to the Mexican military, police, and judicial systems for training and equipment. Plan Mexico is an adjunct to SPP with the expressed intent of arming Mexican security forces in order to protect the "shared economic space" of North America. Hiding behind an empty gesture to combat the deadly drug trade along the Mexican-American border, the Bush administration set in motion a scheme to militarize North America, including widespread border and domestic surveillance and expansion of the private prison complex, allegedly to combat increasing illegal immigration and underground criminal networks. The counter-terrorism/drug war model elaborated in the SPP and embodied later in Plan Mexico encourages a crackdown on grassroots dissent to assure that no force, domestic or foreign, effectively questions the future of the system. As Laura Carlsen notes in her report for the Center for International Policy, "All of these programs are directed to the goals of supply interdiction, enforcement, and surveillance—including domestic spying.... This military model has proved historically ineffective in achieving the goals of eliminating the illegal drug trade and decreasing organized crime, and closely related to an increase in violence, instability, and authoritarian presidential powers." By extending NAFTA into regional security, Washington decided—and the Mexican government conceded—that top-down economic integration necessitated shared security goals and actions. Given the huge imbalance of economic and political power between Mexico and the United States, this meant that Mexico had to adopt the foreign policy objectives and the destabilizing, militaristic counter-terrorism agenda of the U.S. government.

Under the rubric of "Counter Narcotics, Counter Terrorism, and Border Security," the initiative would allocate $205.5 million for the Mexican Armed Forces. Over 40 percent of the entire package goes to defense companies for the purchase of 8 Bell helicopters (at $13 million each, with training, maintenance, and special equipment) for the Mexican Army and 2 CASA 235 maritime patrol planes (at $50 million each, with maintenance) for the country's Navy. Most of the $132.5 million allocated to Mexican law enforcement agencies also lines the pockets of defense companies for purchase of surveillance, inspection, and security equipment, and for training. The Mexican federal police force receives most of this funding, with customs, immigration, and communications receiving the remainder. The rest of the 2008 appropriations request is comprised of $112 million in the "Rule of Law" category for the Mexican Attorney General's Office and the criminal justice system. This money is earmarked for software and training in case-tracking and centralizing data. The initiative would also give $12.9 million to the infamous Mexican Intelligence Service (CISEN) for investigations, forensics equipment, counter-terrorism work, and to other agencies including the Migration Institute for the establishment of a database on immigrants. The U.S. government allots $37 million of the packet to itself for administrative costs.

War on Drugs Model

For the Bush administration, the war on drugs model has served to lock in pro-corporate economic policies and U.S. military influence in the region. When the United States exports its "war on drugs" it becomes a powerful tool for intervention and pressuring other nations to assume U.S. national security interests as their own. This global police role creates dependency on the U.S. military and intelligence services and militarizes diplomacy. The Pentagon takes the lead in international policy, while relegating international law and diplomacy to a distant second place.

What does this all mean for Mexican migration to the U.S.? The answer is relatively simple. NAFTA finalized the restructuring of the Mexican economy that began in 1982. As Mexico was "locked in" to the neoliberal economic model, peasant farmers and assembly plant workers sought economic refuge in the country directly to the north, the center of the world's economy. As "free" market policies pressured the state into cutting budgets for social services, Mexican communities were left with few options. Displacement of Mexican workers is the defining legacy of NAFTA-era Mexico while U.S. industries benefit from "illegal" migrants who demand much less than their U.S. counterparts in terms of wages, benefits, and legal protections. In 2001-2002, while the American economy was shedding millions of jobs, Mexican migrants arrived in staggering numbers. Currently, the vast majority of international migration in the global economy is forced migration.

NAFTA and the SPP should be seen as stages in larger plans for the expansion of corporate and state control over economic, social, and political life in North America. These policy developments of the previous two decades have established a continental economic system and the necessary rules to govern it: private corporate control with the force of the state at its disposal. The criminalization of Mexican immigrants, essentially adopting the counter-terrorism/war-on-drugs approach to addressing the issue, is a recipe for continued failure. Without repealing the systemic reforms established by NAFTA and earlier structural adjustments, actively resisting the radical militarization of North America via the SPP, and establishing self-sufficient Mexican communities, we can expect northbound Mexican migration to continue unabated.

An Economic Crisis Balance Sheet

An Economic Crisis Balance Sheet

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In April 2009, proclamations by Obama administration chief economic advisor Larry Summers, Treasury Secretary Tim Geithner, and President Obama himself assured the public that the Administration's $787 billion fiscal stimulus bill, together with measures to bail out the banks, would create millions of jobs and get credit flowing again. But neither jobs nor credit followed. Total job loss, measured by the Department of Labor's unemployment rate, the most comprehensive indicator of joblessness, rose from 15.4 percent in April 2009 to 16.5 percent a year later. At the same time total bank lending in the U.S. declined by 10 percent throughout 2009 and another 3.25 percent in the first three months of 2010.

This past spring, once again, the hype of emerging recovery was fed to the public. According to Summers, the recovery was well underway and was "more vigorous than was common in such crises." The U.S. economy was now "moving toward escape velocity" that would "result in increased job creation." Evidence cited included a nascent rebound of manufacturing and exports, plus net new jobs created since January 2010. A V-shaped (rapid bounce back) sustained recovery was claimed to be finally underway.

Such perennial premature proclamations have all proven wrong. To understand why, it is necessary to understand the recent three-year-long crisis within a broader general context. In fact, most released economic data for May-June 2010 point to the U.S. and other global economies once again either slowing, or about to slow, while global financial instability is growing worse.

August 2007-April 2009

August 2010 marks the third year of the economic crisis since its initial eruption in early August 2007, precipitated by the collapse of the housing and subprime mortgage market. In a matter of weeks, that financial implosion quickly spread to the shadow banking system of unregulated and highly speculative hedge funds, investment banks, private equity firms, finance companies, etc. It thereafter infected, in turn, the commercial banks (e.g., Chase, Citigroup, Bank of America, etc.), which after decades of deregulation from Reagan to George W. Bush, had become tightly integrated with the unregulated shadow banking sector. By December 2007, Commercial banks had virtually stopped lending, even to each other. By year end 2008, the entire financial system was, in effect, freezing up. Nothing remotely close to that had happened before, at least not since the 1930s.

The initial financial instability eruption that occurred in the form of the subprime mortgage bust and its spread to other financial sectors in 2007 soon precipitated a corresponding decline of the real (non-financial sectors) economy. By December 2007, the real economy in the U.S. rapidly slid into recession, followed soon after by most of the advanced economies of Europe, Japan, and elsewhere. Thus, unlike normal recessions, the crisis was synchronizing globally by 2008. Moreover, financial instability and the real economy were also becoming more interdependent, with each feeding off the other. That too was unique compared to prior normal recessions. Both the financial and the non-financial, real economy were becoming increasingly fragile—with fragility on the real side of the economy expressed in terms of consumption, as two-thirds of consumers' incomes stagnated while their debt levels rose.

By late summer 2008, the crisis shifted to a new, even more serious phase, leading to the well-known collapse of major financial institutions like Lehman Brothers, AIG, Merrill Lynch, and the effective insolvency of banking giants like Citigroup and Bank of America. With the banking panic of September-October 2008, financial fragility provoked an accelerated decline of the real economy within just a few weeks. Industrial production and business spending nearly shut down in the closing months of 2008. Lending by virtually all sectors of financial institutions dried up. Non-financial businesses rushed to cancel new investment plans, suspend investment projects in progress, and dramatically cut back even current production. Mass layoffs of a dimension not seen since the 1930s immediately followed in October-November 2008, at a rate of one million a month or more from November through April 2009—a rate of job loss that exactly tracked the collapse of jobs between 1929 and 1931. Six million were laid off in a matter of six months. To the six million were added an additional seven million reduced from full-time to part-time employment. Millions more were thrust into discouraged status and forced to leave the labor force. Millions of the employed were experiencing foreclosure, and tens of millions were experiencing collapse of retirement funds and housing values. After a quarter century of virtual stagnation of real weekly earnings for a hundred million workers in the U.S., and thus growing long term consumption fragility, consumption fractured after November 2008 concurrent with financial fragility in the banking system. Never before had both occurred more or less concurrently—at least not since 1929-30, or before that in 1907-08.

Throughout 2008 the Federal Reserve under its chair, Ben Bernanke, was late to respond and fell consistently behind the crisis curve. Treasury Secretary Henry Paulson performed even worse. He sat on the sidelines until the summer of 2008, allowing the Federal Reserve to expend nearly its entire available $900 billion of funds on hand bailing out the investment banks. Even more behind the crisis curve, trying to catch up with events, was the U.S. Congress under Bush. It passed a paltry $168 billion stimulus bill that was mostly composed of business tax cuts. That stimulus had virtually no effect on the deepening decline of the U.S. economy.

Paulson was finally forced to act in mid-summer 2008 with the imminent collapse of the quasi-government housing mortgage agencies Fannie Mae and Freddie Mac. Paulson bungled that as well and was forced eventually to intervene with $200 billion in July to assure foreign bond holders in Fannie/Freddie that the U.S. government would not let them fail. If it hadn't, the purchase of U.S. bonds by foreign investors and banks would likely have plummeted. Paulson allowed Fannie/Freddie common stockholders, however, to bear the brunt of losses, as Fannie-Freddie stock was also driven to near zero by short-sellers and other speculators.

Following the temporary bailout of Fannie/Freddie, Paulson refused to bail out either bond or stockholders at the investment bank Lehman Brothers, the main competitor to Paulson's own company, Goldman Sachs, where he was once CEO. Lehman collapsed, followed quickly by a string of others, precipitating the banking panic of 2008. At that point, the economy crossed the economic rubicon from normal to epic recession, with mass layoffs, a collapse of production and investment, and a freefall in U.S. gross domestic product (GDP) not witnessed since the 1930s.

Most of the big 19 banks were technically insolvent by October 2008. Paulson's answer was to browbeat Congress into giving him a $700 billion check called TARP (term asset relief program) to buy the bad assets from the banks, thereby releasing reserves for them to lend to get credit flowing again. But the banks refused to sell except at inflated prices, not at the real collapsed market values of the bad assets, and Paulson couldn't buy at inflated market values with funds provided by Congress. So nothing happened. The bad assets remained on bank balance sheets and lending continued to free fall. For cover, Paulson threw the money around to institutions that didn't need it, often forcing them to take it. Other uses were found for the funds, such as the auto companies and their finance arms, or the buying of insurance giant AIG, which amounted to merely a money pass through to AIG's biggest debtor, Goldman Sachs, Paulson's old company.

Much attention has been given to TARP and the $700 billion. But TARP was just a minor back story. The real plot and real money spigot involved the Federal Reserve. Bernanke's Federal Reserve didn't need Congress's appropriation and money. It could print its own if needed. Moreover, it didn't have to tell Congress a thing about how it dispensed its bailout funds, to whom, on which terms, etc. The Fed threw more than $3 trillion at the banks, essentially giving them free money at near zero interest rates. In fact, it actually paid them to take the money by paying them interest on the money it gave them. Of course, the banks took the free money. Both the big 19 name banks, as well as many of the remaining 8,000 regional-community banks. So did many of the unregulated shadow banks, like market funds, finance companies, and insurance companies. But they didn't lend to businesses in the U.S. to create real products and jobs. Instead they lent to other hedge funds and shadow banks that speculated in foreign currency, offshore real estate, commodities, gold, emerging market funds, and the like. The business press euphemistically calls it trading. In fact, it is financial speculation—practices that created much of the current financial instability in the first place. The arrangement did result in rising profits for banks, which in turn drew in more investors buying bank stocks. Those profits and the bank stock appreciation were sufficient to just about offset half of the bad assets and debts remaining on bank balance sheets. By the end of 2009, banks would accumulate about $1 trillion in cash and sit on it, except for speculative investing forays offshore.

Key conclusions from the first 18 months of the crisis are as follows:

  • Normal fiscal and monetary policies designed to engineer a recovery from normal recessions have little effect on epic recessions
  • Leaving bad assets on bank balance sheets and offsetting the values of those assets with temporary trillion dollar injections by the Fed and Treasury only partially stabilizes the banking system
  • Bailing out the banking system cannot generate a sustained recovery of the real economy
  • Only massive fiscal spending on job producing investment can produce sustained recovery
  • The fiscal stimulus of 2008 represented a token attempt, with virtually no prospect of success, at generating economic recovery as it was mostly free tax cut handouts to business and a one-time consumer tax rebate, little of which was actually spent

From Collapse to Stagnation

As late as June 2009 the economy was still losing 500,000 jobs a month. The two key measures proposed by the early Obama administration to engineer recovery were the $787 billion stimulus package of spending and tax cuts, roughly half each, and a series of three banking stabilization measures: the PIPP, TALF, and HAMP. The PIPP was merely TARP warmed over. It, too, like TARP, proposed the government assist the removal of bad assets clogging bank balance sheets. Unlike TARP, the government would not buy the assets directly, but subsidize buyers' and sellers' market prices for the assets. But neither banks nor investors rose to the occasion. Banks still did not want to sell at below inflated prices; and investors didn't want to buy risky assets, often worth a tenth of their original value, above the deflated true market price. PIPP was dead on arrival and dismantled within months. Similarly, TALF was designed to subsidize investors to buy up the bad securitized mortgages, consumer credit, and auto and student loans. But again few takers. It was largely dismantled by the Fed within months. Finally, HAMP was designed to subsidize mortgage lenders and servicers to entice them to offer lower mortgage rates for new home buyers. The idea was to get them to buy up the large volume of new housing inventory (thus aiding home builder companies) still on the market that couldn't be sold due to accelerating foreclosures and excess housing supply. At merely $75 billion allocated, HAMP had little effect as well. It was given a second boost, however, with the supplemental first-time homebuyers subsidy program enacted by Congress after the passage of the original $787 billion stimulus.

The official bank bailout programs of the Obama administration were largely programmatic cover for the real bank bailout strategy, which included Congress lifting the requirement that banks report their losses at true market value, suspending what was called mark to market accounting. Banks could now legally lie and misrepresent their actual losses and bad assets, making them appear more profitable. A second measure was the Administration's way to make it appear that the big 19 banks were not insolvent. The third was the Administration's encouragement of the banks to engage once again in trading—i.e., speculative investing in offshore financial markets in order to quickly raise profits. And bank profits did rise as a result. The combination of false accounting, phony stress tests, and renewed speculation did the trick. Stockholders re-entered the market buying bank common stocks, further capitalizing bank losses.

All these measures originated circa April 2009, once it became clear PIPP and TALF were essentially dead on arrival. Almost immediately bank stock prices surged. Speculative profits flowed in, enabling bank stock prices to continue to grow. This continued throughout 2009 into early 2010, when a host of events slowed bank profit accumulation and stock price gains. In the interim, however, the big 19 banks did accumulate a hoard of about $1 trillion in cash—although their bad assets, according to the International Monetary Fund, still amounted to about twice that amount. Further banking collapse had been avoided, but at the cost of more than $3 trillion in loans and spending by the Fed, the FDIC, and other government bank bailout agencies. The bad assets had been offset, temporarily, but at the cost of a corresponding increase in bad assets on the public balance sheet of the U.S. government.

On the fiscal side, the Obama $787 billion official package of spending and tax cuts was even less successful. Half of it was comprised of tax cuts, mostly targeting business, nearly all of which had little impact over the next 18 months. On the spending side, the remaining $400 billion or so was not designed to create jobs. The stimulus was primarily designed to offset the growing consumption collapse by spending on extended unemployment insurance, subsidizing medical insurance premiums for the millions more newly unemployed, plugging up state and local governments' massive loss of tax revenues due to the deep recession, providing aid to schools, and a one-time $250 check to social security recipients.

While useful measures in the very short run, these programs did not generate jobs any more than did the business tax cuts. In other words, it was a completely "free market" approach to ending the crisis. The Obama strategy was never to create jobs directly, but to buy time for markets to recover to do the task.

Dissecting GDP and a Faltering Recovery

In the third quarter of 2009, the first positive growth of Gross Domestic Product (GDP) occurred, at a 3.5 percent rate. However, almost all of that growth was the consequence of two programs, cash for clunkers and first time homebuyers credit, plus a slowdown in the rate of inventory depletion compared to the previous quarter, which gets recorded as a technical growth in GDP. The first two programs accounted for nearly two-thirds of the 3.5 percent and inventory technicalities just under another third. In other words, the $787 billion stimulus accounted for less than .5 percent of the 3.5 percent. In the fourth quarter, GDP surged even more, at 5.7 percent. But 3.5 percent of that was technical inventory adjustment. Another .5 percent was due to a manufactured export surge driven by Asian and European demand for U.S. products, which had become more competitive as the dollar declined. Another 1 percent was due to the twin supplemental programs, leaving less than 1 percent due to the original stimulus.

In the first quarter of 2010, GDP began to falter after only two quarters, to 3.0 percent. This reversal was significant. In normal recessions, for example, GDP growth continues to accelerate beyond two quarters and at levels far higher than what has been occurring this time. Typically, GDP growth surges at quarterly rates of 8-9 percent for at least four quarters. Moreover, 1.6 percent (or more than half) of the 3.0 percent gain was again due to inventory change, with another .75 percent due to cash for clunkers boosted by its announced discontinuation at quarter's end and a similar surge in first time homebuyers also anticipated to be ending at the time. The remainder first quarter growth was due to exports-manufacturing, driven by foreign factors once again. Data for the second quarter of 2010 is not yet available but may well show a further slowing in GDP growth rates.

The point of the above data is twofold. First, what growth and economic recovery has occurred since mid-2009 has been driven by temporary programs, temporary adjustment factors, and exports. The $787 billion has had little effect due to its poor composition of spending, excessive business tax focus, and insufficient magnitude. Second, the temporary factors driving the last 12 months of tepid growth have come or are about to come to an end. As of June 2010, both the cash for clunkers and first time homebuyers programs have been suspended. Both the auto sales and housing construction blip likely only pulled future sales into the present, rather than generated net additional long-term output. The technicalities of inventory adjustment have all taken place. And the export-manufacturing mini-surge is about to end, as China, Brazil, and other countries have recently moved to cool off their economies and the dollar rises against the Euro. Finally, the Federal Reserve is preparing to raise interest rates once the November elections are over, and will no longer buy back trillions in bad mortgages.

It is increasingly clear that the deficit cutting hawks are gaining momentum in Congress. States, cities, and school districts will turn to massive layoffs, wage cutting, and local tax hikes as a consequence—all of which will impose further pressure on an already slowing economy. Should Democrats lose further seats in the House and Senate, a highly likely event, federal spending will be almost certainly be further reduced in 2011. Even extending unemployment benefits has run into trouble at mid-2010 and both parties in Congress have agreed that the unemployed will no longer have medical insurance premiums subsidized by government spending.

The Truth About Jobs

Perhaps the best indicator of the faltering recovery is the jobs numbers since January 2010. Much has been said about the economy having turned the corner based on an alleged positive upturn in job creation. But a closer look reveals, for example, that since January a total of 575,000 federal jobs have been created. But 574,000 of these have been temporary federal census workers, who will be rapidly laid off in the fourth quarter of 2010. In addition, state and local governments have shed 81,000 jobs through May 2010. In the private sector of the economy, of the 495,000 jobs added, a total of 468,000 were involuntary part-time workers. At the same time, hundreds of thousands of full-time permanent jobs have been eliminated. The picture is one of a heavy churning of jobs, from regular full-time to temporary and part-time, the latter of which are paid far less and with few benefits.

The duration of unemployment has continued to rise, on a base that is already the worst since records were first kept of the statistic. There are reportedly six workers for every job opening. One in four workers in the U.S. labor force has experienced some period of unemployment since the crisis began, also an unprecedented figure. The true total jobless, when properly calculated, are between 23-25 million, not the official 15 million. And these don't account for the tens of millions of inner city youth, undocumented, and itinerant workers who are never interviewed by the Labor Dept. in its estimating of unemployment rates. These groups no doubt suffer from an even higher jobless rate. The true level of jobless workers is thus likely in excess of 25 million and the true, effective unemployment rate between 18 to 19 percent. To recover the jobs lost since the current recession began in December 2007 would require hiring more than 300,000 workers every month from now until 2017. Some key conclusions from the second 18 months of the recent crisis are:

  • The Obama administration's bank bailout strategy was in essence no different than Bush's, with the exception that even more money was thrown at the banks on even more generous terms; trillions of dollars of bad assets still remain on bank balance sheets, threatening future instability
  • Despite massive injections of money and liquidity by the Federal Reserve, banks have continued to reduce lending
  • Obama's primary focus on getting credit flowing again has not produced its declared, intended results
  • Bailing out the banks and putting a floor under the banking system collapse is not sufficient to generate a sustained recovery
  • The Obama short term strategy to subsidize banks, state and local governments, and the unemployed and stave off further collapse relied on market forces to generate sustained recovery, but the markets have failed to do so
  • The Obama stimulus package's spending had little to do with the job creation necessary to break out from long-term stagnation

It appears the Obama focus on allowing banks to return to speculative activity to generate capital and profits to offset losses has gone as far as possible, with bank stock prices and profits now flattening once again and more than half of bad assets and losses still remaining on bank balance sheets. Similarly, it appears the strategy of relying ultimately on bank lending to generate sustained GDP and job creation has begun to dissipate as well. Prospects for continued, let alone accelerating, GDP growth appear increasingly limited for the remainder of 2010 and 2011.

Threats to Recovery in 2010 and Beyond

The longer run scenario for the U.S. economy is not particularly positive. Jobs and housing continue to represent a serious problem for the economy, and appear to be heading for further softening rather than recovery. Twenty-five million jobless and seven million foreclosures represent serious consumption fragility in the system.

And those two figures do not tell the full story of jobs' and housing's negative impact on consumption and the economy. The hiring that has occurred has been at lower pay and fewer benefits levels. Higher paid full-time jobs continue to disappear at the rate of tens and hundreds of thousands a month. Mass layoffs will soon hit the public employee sector in 2011, adding still further to the job losses at a time when the 600,000-plus temporary government census workers will have also just been laid off in late 2010.

Wage cutting via furloughs, benefit cuts, shorter work weeks, and lower entry pay have also been reducing the consumption base still further. Housing construction and sales, already off 75 percent from pre-crisis highs in 2006, have begun to weaken once again and home prices are predicted to fall a further 10 to 20 percent in the period ahead. Foreclosures are also forecast to rise further. One in five mortgages will foreclose or default in the current cycle, and between 30 to 40 percent home values are already under water This is not a scenario for positive consumption growth or sustainable economic recovery.

States and cities in the U.S. are simultaneously facing a growing fiscal crisis. Over the past year, reductions in state and local government spending more than offset the amount of the Obama fiscal stimulus. Little attention has been given to that fact or the full dimension of the local government fiscal crisis. And that crisis will further worsen in the year ahead, as it appears that federal subsidies to the states will not continue as deficit cutting becomes the mantra of politicians at the federal level. Local government will be forced to raise taxes still further, as it lays off hundreds of thousands at minimum and reduces pay and benefits for millions more. To complicate local government financial stress further, signs of trouble have begun to reappear anew in the municipal bond markets. Should a crisis re-emerge here, the fiscal crisis, layoffs, and tax hikes by state and local government will intensify several fold.

The slowdown in government spending at all levels, within a context of further housing deterioration, job losses, and wage decline is not a scenario for robust recovery. It is impossible to imagine a V-shape trajectory with just these three—jobs, housing, government spending—thus deteriorating further.

The private sector shows additional signs of growing weakness as well. Most notable, the U.S. manufacturing-export sector's recent modest revival will likely fade as well in the coming months, due to China and other Asian economies' slowing as policymakers try to cool off growing bubbles in real estate and stocks, which will slow demand for U.S. exports. Also, the falling Euro against the U.S. dollar will make U.S. exports more expensive, leading to Germany and other economies displacing U.S. export sales.

Despite the multi-trillion dollar bailout of the banks, there remain serious points of stress on the financial side as well as a growing risk of further financial instability in the future. As of mid-2010, bank stocks are falling and bank profits leveling off. Should recently passed financial regulation in Congress limit banks' trading with hedge funds and other conduits to speculative markets globally, then bank profits and stock prices will decline further in the year ahead. Banks' diverting of funds to speculative markets has resulted in a serious decline in bank lending to small-medium businesses in the U.S. over the past year and this will likely continue. Although the big banks are sitting on and hoarding more than a trillion in cash, they will continue to restrict lending to U.S. businesses due to uncertainty about bank regulation, bank taxes, and increased capital requirements mandated by recent financial legislation.

The second tier of 7,800 regional-community banks is in even worse shape. Close to 300 have already failed or been merged by the FDIC, whose funds for future consolidation of local banks will require hundreds of billions of dollars. The commercial property market, on which these banks depend heavily, shows few signs of recovery. Almost 800 tier-two banks remain on the FDIC's trouble list and at risk of collapse or merger.

The Fed has been unable to revive the securitized markets for commercial and residential mortgages, which only a few years ago amounted to nearly $2 trillion and today account for less than $100 billion in loans. To complicate the mortgage picture further, the quasi-government agencies, Fannie Mae and Freddie Mac, which are required to buy up bad mortgages by law, are themselves moving toward a further financial crisis. Already having been subsidized by $200 billion from the U.S. government, they will soon need another $200 billion to keep going. Even hedge funds and other shadow banks, that had enjoyed a significant recovery in 2009, are showing signs of difficulty. Having lost $700 billion during the 2008-09 financial implosion, the funds recovered more than half of that loss last year. In 2010, however, losses have once again returned. Financial instability is growing as well in the municipal bond market and among pension funds, both public and private.

But the biggest risk to financial fragility and instability is the potential impact of government debt crises beginning to appear in Europe at mid-year, and the likely impact on Euro bank losses and on U.S. banks in the months ahead. Globally, bank exposures to potential losses in the European periphery countries of Greece, Spain, Portugal, and Ireland at mid-year amount to $2.6 trillion, according to data released in June by the Bank for International Settlements—i.e. the bank for central banks—located in Switzerland. European banks are exposed to $1.7 of the $2.6 trillion. It is likely that U.S. banks account for at least $500 billion of the remaining amount. French and German banks alone are exposed to more than $950 billion of the debt of those four countries. And that does not include other countries in trouble, like Italy, Hungary, and elsewhere in Europe. The potential risk is likely even much higher than reported. Given this pending financial instability, in a repeat of the U.S. in 2007-08, European banks have begun to stop lending to each other. Should a chain reaction implosion occur in Europe, sovereign debt losses promise to cascade to Euro bank losses and to U.S. banks as well. A third global financial implosion would consequently follow. The effects of that on the real economy globally, and in the U.S., would be significant.