How the US
Economy Was Lost
By Paul
Craig Roberts
February 24, 2009 "Information Clearing House"
-- The American economy has gone away. It is not coming
back until free trade myths are buried six feet under.
America’s 20th century economic success was based on two things.
Free trade was not one of them. America’s economic success was
based on protectionism, which was ensured by the union victory in
the Civil War, and on British indebtedness, which destroyed the
British pound as world reserve currency. Following World War II,
the US dollar took the role as reserve currency, a privilege that
allows the US to pay its international bills in its own
currency.
World War II and socialism together ensured that the US economy
dominated the world at the mid 20th century. The economies of the
rest of the world had been destroyed by war or were stifled by
socialism.
The ascendant position of the US economy caused the US government
to be relaxed about giving away American industries, such as
textiles, as bribes to other countries for
cooperating with America’s cold war and foreign policies. For
example, Turkey’s US textile quotas were increased in exchange for
over-flight rights in the Gulf War, making lost US textile jobs an
off-budget war expense.
In contrast, countries such as Japan and Germany used industrial
policy to plot their comebacks. By the late 1970s, Japanese auto
makers had the once dominant American auto industry on the ropes.
The first economic act of the “free market” Reagan administration
in 1981 was to put quotas on the import of Japanese cars in order
to protect Detroit and the United Auto Workers.
Eamonn Fingleton, Pat Choate, and others have described how
negligence in Washington DC aided and abetted the erosion of
America’s economic position. What we didn’t give away, we let be
taken from us while preaching a “free trade” doctrine at which the
rest of the world scoffed.
Fortunately, our adversaries at the time, the Soviet Union and
China, had unworkable economic systems that posed no threat to
America’s diminishing economic prowess.
The proverbial hit the fan when Soviet, Chinese, and Indian
socialism collapsed around 1990, to be followed shortly thereafter
by the rise of the high speed Internet. Suddenly, American and
other first world corporations discovered that a massive supply of
foreign labor was available at practically free wages.
To get Wall Street analysts and shareholder advocacy groups off
their backs, and to boost shareholder returns and management
bonuses, American corporations began moving their production for
American markets offshore. Products that were made in Peoria are
now made in China.
As offshoring spread, American cities and states lost tax base, and
families and communities lost jobs. The replacement jobs, such as
selling the offshored products at Wal-Mart, brought home less
pay.
“Free market economists” covered up the damage done to the US
economy by preaching a New Economy based on services and
innovation. But it wasn’t long before corporations discovered that
the high speed Internet let them offshore a wide range of
professional service jobs. In America, the hardest hit have been
software engineers and information technology (IT) workers.
The American corporations quickly learned that by declaring
“shortages” of skilled Americans, they could get from Congress H-1b
work visas for lower paid foreigners with whom to replace their
American work force. Many US corporations are known for forcing
their US employees to train their foreign replacements in exchange
for severance pay.
Chasing after shareholder return and “performance bonuses,” US
corporations deserted their American workforce. The consequences
can be seen everywhere. The loss of tax base has threatened the
municipal bonds of cities and states and reduced the wealth of
individuals who purchased the bonds. The lost jobs with good pay
resulted in the expansion of consumer debt in order to maintain
consumption. As the offshored goods and services are brought back
to America to sell, the US trade deficit has exploded to
unimaginable heights, calling into question the US dollar as
reserve currency and America’s ability to finance its trade
deficit.
As the American economy eroded away bit by bit, “free market”
ideologues produced endless reassurances that America had pulled a
fast one on China, sending China dirty and grimy manufacturing
jobs. Free of these “old economy” jobs, Americans were lulled with
promises of riches. In place of dirty fingernails, American efforts
would flow into innovation and entrepreneurship. In the meantime,
the “service economy” of software and communications would provide
a leg up for the work force.
Education was the answer to all challenges. This appeased the
academics, and they produced no studies that would contradict the
propaganda and, thus, curtail the flow of federal government and
corporate grants.
The “free market” economists, who provided the propaganda and
disinformation to hide the act of destroying the US economy, were
well paid. And as Business Week noted, “outsourcing’s inner circle
has deep roots in GE (General Electric) and McKinsey,” a consulting
firm. Indeed, one of McKinsey’s main apologists for offshoring of
US jobs, Diana Farrell, is now a member of Obama’s White House
National Economic Council.
http://www.businessweek.com/globalbiz/content/feb2006/gb20060223_186829.htm?campaign_id=nws_insdr_feb24&link_position=link10
The pressure of jobs offshoring, together with massive imports, has
destroyed the economic prospects for all Americans, except the CEOs
who receive “performance” bonuses for moving American jobs offshore
or giving them to H-1b work visa holders. Lowly paid offshored
employees, together with H-1b visas, have curtailed employment for
older and more experienced American workers. Older workers
traditionally receive higher pay. However, when the determining
factor is minimizing labor costs for the sake of shareholder
returns and management bonuses, older workers are unaffordable.
Doing a good job, providing a good service, is no longer the
corporation’s function. Instead, the goal is to minimize labor
costs at all cost.
Thus, “free trade” has also destroyed the employment prospects of
older workers. Forced out of their careers, they seek employment as
shelf stockers for Wal-Mart.
I have read endless tributes to Wal-Mart from “libertarian
economists,” who sing Wal-Mart’s praises for bringing low price
goods, 70% of which are made in China, to the American consumer.
What these “economists” do not factor into their analysis is the
diminution of American family incomes and government tax base from
the loss of the goods producing jobs to China. Ladders of upward
mobility are being dismantled by offshoring, while California
issues IOUs to pay its bills. By shifting production offshore,
offshoring reduces US GDP. When the goods and services are brought
back to America to be sold, they increase the trade deficit. As the
trade deficit is financed by foreigners acquiring ownership of US
assets, the change in ownership means that profits, dividends,
capital gains, interest, rents, and tolls leave American pockets
for foreign ones.
The demise of America’s productive economy left the US economy
dependent on finance, in which the US remained dominant because the
dollar is the reserve currency. With the departure of factories,
finance went in new directions. Mortgages, which were once held in
the portfolios of the issuer, were securitized. Individual mortgage
debts were combined into a “security.” The next step was to strip
out the interest payments to the mortgages and sell them as
derivatives, thus creating a third debt instrument based on the
original mortgages.
In pursuit of ever more profits, financial institutions began
betting on the success and failure of various debt instruments and
by implication on firms. They bought and sold collateral debt
swaps. A buyer pays a premium to a seller for a swap to guarantee
an asset’s value. If an asset “insured” by a swap falls in value,
the seller of the swap is supposed to make the owner of the swap
whole. The purchaser of a swap is not required to own the asset in
order to contract for a guarantee of its value. Therefore, as many
people could purchase as many swaps as they wished on the same
asset. Thus, the total value of the swaps greatly exceeds the value
of the assets. (An excellent explanation of swaps can be found
here )
The next step is for holders of the swaps to short the asset in
order to drive down its value and collect the guarantee. As the
issuers of swaps were not required to reserve against them, and as
there is no limit to the number of swaps, the payouts can easily
exceed the net worth of the issuer.
This was the most shameful and most mindless form of speculation.
Gamblers were betting hands that they could not cover. The US
regulators had abandoned their posts. The American financial
institutions abandoned all integrity. As a consequence, American
financial institutions and rating agencies are trusted nowhere on
earth.
The US government should never have used billions of taxpayers’
dollars to pay off swap bets as it did when it bailed out the
insurance company AIG. This was a stunning waste of a vast sum of
money. The federal government should declare all swap agreements
fraudulent contracts, except for a single swap held by the owner of
the asset. Simply wiping out these fraudulent contracts would
remove the bulk of the vast overhang of “troubled” assets that
threaten financial markets.
The billions of taxpayers’ dollars spent buying up subprime
derivatives were also wasted. The government did not need to spend
one dime. All government needed to do was to suspend the
mark-to-market rule. This simple act would have removed the
solvency threat to financial institutions by allowing them to keep
the derivatives at book value until financial institutions could
ascertain their true values and write them down over time.
Taxpayers, equity owners, and the credit standing of the US
government are being ruined by financial shysters who are
manipulating to their own advantage the government’s commitment to
mark-to-market and to the “sanctity of contracts.” Multi-trillion
dollar “bailouts” and bank nationalization are the result of the
government’s inability to respond intelligently.
Two more simple acts would have completed the rescue without
costing the taxpayers one dollar: an announcement from the Federal
Reserve that it will be lender of last resort to all depository
institutions including money market funds, and an announcement
reinstating the uptick rule.
The uptick rule was suspended or repealed a couple of years ago in
order to permit hedge funds and shyster speculators to rip-off
American equity owners. The rule prevented short-selling any stock
that did not move up in price during the previous day. In other
words, speculators could not make money at others’ expense by
ganging up on a stock and short-selling it day after day.
As a former Treasury official, I am amazed that the US government,
in the midst of the worst financial crises ever, is content for
short-selling to drive down the asset prices that the government is
trying to support. No bailout or stimulus plan has any hope until
the uptick rule is reinstated.
The bald fact is that the combination of ignorance, negligence, and
ideology that permitted the crisis to happen is still present and
is blocking any remedy. Either the people in power in Washington
and the financial community are total dimwits or they are
manipulating an opportunity to redistribute wealth from taxpayers,
equity owners and pension funds to the financial sector.
The Bush and Obama plans total 1.6 trillion dollars, every one of
which will have to be borrowed, and no one knows from where. This
huge sum will compromise the value of the US dollar, its role as
reserve currency, the ability of the US government to service its
debt, and the price level. These massive costs are pointless and
are to no avail as not one step has been taken that would alleviate
the crisis.
If we add to my simple menu of remedies a ban, punishable by
instant death, for short selling any national currency, the world
can be rescued from the current crisis without years of suffering,
violent upheavals and, perhaps, wars.
According to its hopeful but economically ignorant proponents,
globalism was supposed to balance risks across national economies
and to offset downturns in one part of the world with upturns in
other parts. A global portfolio was a protection against loss,
claimed globalism’s purveyors. In fact, globalism has concentrated
the risks, resulting in Wall Street’s greed endangering all the
economies of the world. The greed of Wall Street and the negligence
of the US government have wrecked the prospects of many nations.
Street riots are already occurring in parts of the world. On Sunday
February 22, the right-wing TV station, Fox “News,” presented a
program that predicted riots and disarray in the United States by
2014.
How long will Americans permit “their” government to rip them off
for the sake of the financial interests that caused the problem?
Obama’s cabinet and National Economic Council are filled with
representatives of the interest groups that caused the problem. The
Obama administration is not a government capable of preventing a
catastrophe.
If truth be known, the “banking problem” is the least of our
worries. Our economy faces two much more serious problems. One is
that offshoring and H-1b visas have stopped the growth of family
incomes, except, of course, for the super rich. To keep the economy
going, consumers have gone deeper into debt, maxing out their
credit cards and refinancing their homes and spending the equity.
Consumers are now so indebted that they cannot increase their
spending by taking on more debt. Thus, whether or not the banks
resume lending is beside the point.
The other serious problem is the status of the US dollar as reserve
currency. This status has allowed the US, now a country heavily
dependent on imports just like a third world or lesser-developed
country, to pay its international bills in its own currency. We are
able to import $800 billion annually more than we produce, because
the foreign countries from whom we import are willing to accept
paper for their goods and services.
If the dollar loses its reserve currency role, foreigners will not
accept dollars in exchange for real things. This event would be
immensely disruptive to an economy dependent on imports for its
energy, its clothes, its shoes, its manufactured products, and its
advanced technology products.
If incompetence in Washington, the type of incompetence that
produced the current economic crisis, destroys the dollar as
reserve currency, the “unipower” will overnight become a third
world country, unable to pay for its imports or to sustain its
standard of living.
How long can the US government protect the dollar’s value by
leasing its gold to bullion dealers who sell it, thereby holding
down the gold price? Given the incompetence in Washington and on
Wall Street, our best hope is that the rest of the world is even
less competent and even in deeper trouble. In this event, the US
dollar might survive as the least valueless of the world’s fiat
currencies.
http://informationclearinghouse.info/article22087.htm