Tuesday, November 23, 2010

PRESIDENT'S BIPARTISAN COMISSION ON DEFICIT PROPOSES A RETURN TO A CATFOOD DIET FOR ELDERLY


My wife and I saw Judy Woodruff's conversation with Democratic Representative Jan Schakowsky (D, Ill) on Channel 13's PBS Newshour (11-22-10). Representative Schakowsky said succinctly what I have been thinking after Bowles and Simpson released their plan to rape and pillage the poor, the elderly and the middleclass. "Right On" Congreswoman!" we both shouted out to the TV screen.See: http://messageboards.aol.com/aol/en_us/articles.php?boardId=529805&

What did she say? Schakowsky who is a popular Congresswaman in the 9th Illinois Congressional District, who has won there handily for a number of terms now, was appointed to the Commission by Speaker Pelosi. She spoke eloquently and clearly and what she said made a lot of sense. She has just released her own plan for deficit reduction that differs substantially from the Erskine Bowles --Alan Simpson plan. Schakowsky's plan would wipe 440 billion out the deficit column by 2015, but not cut Social Security and Medicare, which the Bowles-Simpson plan carve away at. Schakowsky's plan relies on closing tax breaks for big corporations, it cuts $110 billion from the bloated "defense" budget and generates other income by new revenues including taxing capital gains as ordinary income.See: http://psychoanalystsopposewar.org/blog/2010/11/12/krugman-dissects-catfood-commission-recomendations/


The so-called "bipartisan" commission was a bad idea from the start and President Obama was careless and shortsighted in dumping the problem on such a group. To begin with, any "bipartisan" plan in Washington is likely to fail since it must find middle ground between the likes of Genghis Khan and Attila the Hun. Whenever the progressives attempt to "compromise" they are dealing with colleagues who are so far removed from reality they end up having to re-invent the wheel and introduce the idea of fire to their comrades on the other side of the aisle. The commission has begun to be termed the "Catfood Commission" since its solutions are apparently aimed at getting the elderly and indigent to have to go on a catfood diet to survive.


Schakosky stated: “I thought it was important to put forth a proposal that says we don’t have to go after the middle and lower classes in our country in order to pay for deficit and debt that they had nothing to do with creating, and that we yet could take this problem seriously down the road to reduce the deficit and the long-term debt.” (Transcript from PBS Newshour)
See: http://www.zagasi.com/democratic-rep-jan-schakowsky-says-social-security-not-part-of-the-deficit-problem/221126/

Economist Paul Krugman (and NYT columnist) sees the Bowles-Simpson proposal this way:
"Actually, though, what the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate."

Beyond that the idea that our workers must work to the age of 69 years...rather than 65 strikes Krugman as unfair. It might not be bad for an office worker or accountant but a laborer? Also he states:" But beyond that, the proposal seemingly ignores a crucial point: while average life expectancy is indeed rising, it’s doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age"

Krugman ends with" It’s no mystery what has happened on the deficit commission: as so often happens in modern Washington, a process meant to deal with real problems has been hijacked on behalf of an ideological agenda. Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old — tax cuts for the rich and erosion of the social safety net."

So this is where Madam Schakowsky's proposal is so important. It at least puts the Bowles-Simpson proposal out there where it belongs--a right wing wish list. Ms Schakowsky's propsal presents a yardstick for the nation to gauge the commission's formal presentation. It helps to put it in its place...somewhere out with Genghis and Atilla.

Kudos Congresswoman Schakowsky!

Do you get the picture--now?

rjk




Friday, November 19, 2010

THE FED PRINTS UP MONEY AND CALLS IT QUANTITATIVE EASING

On a recent tour of our local stores Mrs. K. has been annoyed to discover that one of her favorite house-hold products, normally stocked on the shelves of several local stores is no longer available. The product--a stove-top cleaning agent-- was formally easily procured and widely available. But not so now.

“Why can’t I find this item any longer?” she asked with the annoyance.

“Well that product may not have a lot of demand, so Green’s, Walmarts, CVS, True Value, etc. do not wish to replace their stock so quickly, when they are gone. They are reducing or eliminating the shelf-stocks of products that don't sell quickly. It's just one way to reduce overhead," I said.

“So this is just a response to the bad economy then?”

“Yes, it’s a sign of low demand.”

"Yeah, that low demand may be the result of the fact that a good portion of the population is under or unemployed. Less money out there…less demand for stove-top cleaners and other stuff.”

Right now it is jobs, jobs, jobs that are on everyone’s mind. Today, I read in Portfolio.com, with some alarm that there are five applicants for every job that opens. Also, that there are some 15 million Americans out of work right now, and that nearly half a million have quit trying to find work. The formal joblessness rate is recorded as 9.6%, but that would be much worse were it not for the those, nearly 500,000 who simply just quit looking.

Also the inflation rate has dropped down to 1.1% and has been holding steady at this rate for some months. That is well below the 2% rate that is considered desirable.

“That doesn’t sound too threatening. Why should I be concerned with the fact that prices are not rising much?”

“Well the problem is that such a low rate of inflation is and indicator of low consumer demand for goods and services.

“So that’s why I can’t find that “cook top” spray cleaner, I like to use”?

“Exactly!“

“Some products which are not your big sellers are in lower demand anyway…and are simply eliminated off the shelves, as a way to reduce costs and raise profits.“

“That’s one way to control expenses, but it makes me mad!“

“But more importantly, these circumstances of low demand may develop into what the economists call a “vicious deflationary cycle” in which low consumer demand causes product prices to fall, (or they may be simply eliminated as your cook top cleaner), this causes shoppers (like you and me) to retard purchases since they anticipate the continuing fall in prices (Why should you pay more for some product today when you can get some product cheaper tomorrow?). Then the store-owner, responding to low demand, may decrease prices further, while the products manufacturer or producer who is faced with less orders for his product, sells his stock at lower prices since he has too much of it, and, as well, may decide to slow production. These results exacerbate the problem and result in lower demand for labor in both the production end and in the sales end of the economy, resulting in lay offs, and firings. But job losses and reduced employment only tend to decrease money in circulation, and thus depress demand even further. The end result is a continual spiral downward of demand, as prices fall and employees are laid off. This deflationary spiral can be described as a classic “vicious cycle” or a process which tends to exacerbate the cause or causes which generate it.

What can the Fed do? I read recently that Ben Bernanke is planning to decrease long term interest rates and stimulate growth by having the Fed purchase (“soak up”) Treasury Bonds. Bernanke will buy them with money he just freshly printed at the Treasury. That sounds like a nice way to say we are just printing money as we need it. But here’s how it works.

Treasury Bonds are safe but they do not make much interest. So to get the attention of buyers, the government has to keep interest rates at a level high enough to encourage sales. These practices will costs us in the long run. By buying up Treasury Bonds, a cash infusion is put directly into government coffers. Since the government would have less urgency to sell bonds, they need not encourage buyers by raising interest rates. This action would tend to decrease the value of the dollar, since in effect by creating money ex nihilo, the government is in effect is decreasing the value of its currency.

That might make the Chinese angry….since they hold so much of our debt they will be paid back in inflated currency.

But I’ve not heard anyone one claim that we are just printing up money as we need it. No the polite term for this process is called quantitative easing (QE). Formally this describes a policy used by central banks like the Fed to increase the supply of money. To do this they increase the excess reserves of the banking system. Quantitative Easing is resorted to when other “normal” methods of nudging the economy along have failed. Prior to QE you may remember the Fed lowered bank interest rates, and the interbank interest rate (or discount rate). But sine these are at or close to zero….there is only one other “tool” to try that is falling back on the printing presses.

In fact it is even simpler than that. The central bank simply credits own account with money it creates out of thin air (ex nihilo---out of nothing). Then using this account it purchases financial assets, including government bonds, debts, mortgage backed securities, corporate bonds and other assets. This process is referred to as “open market operations”. Once the funds are out there, it is hoped that banks will have more reserves so they can use these funds to lend out to firms or individuals.

From Japan article http://www.nytimes.com/2010/10/17/world/asia/17japan.html?src=me&ref=general


Still, as political pressure builds to reduce federal spending and budget deficits, other economists are now warning of “Japanification” — of falling into the same deflationary trap of collapsed demand that occurs when consumers refuse to consume, corporations hold back on investments and banks sit on cash. It becomes a vicious, self-reinforcing cycle: as prices fall further and jobs disappear, consumers tighten their purse strings even more and companies cut back on spending and delay expansion plans.

http://climateprogress.org/2010/10/17/is-this-what-america-faces-if-the-tea-party-triumphs/

Tuesday, November 9, 2010

US A BANANA REPUBLIC?

A few days ago, I read Nicholas Kristof's piece in the NY Times (November 6, 2010) wherein he likens the US, to a "Banana Republic". In these nations the wealthiest one-percent of the population may garner as much as 20 percent of the economic resources leaving only 80% to be divided among the 99% of the rest of the population. The term "banana republic" (think of Honduras or Guatemala as typical examples) are countries where powerful foreign companies exploit a nation for its agricultural output, pay-off elected officials and corrupt the legal government as a means to maximize profits. The United Fruit Company of the 1930s comes readily to mind. In such circumstances it is only to be expected that the chosen few elites who cooperate and collude with the foreigners are those who typically garner the lion's share of the wealth. Thus the hope for a reasonably humane life in such places is restricted --where basic infrastructure, medical care, housing, public transportation and other services are all lacking or severely limited since the elite and the foreigners care little for these benefits. But how can Kristof describe the conditions in OUR country as a banana-republic? Anyone I ask about wealth distribution and banana republics either have no clue about our wealth distribution, see themselves as "quite well off" and see no relationship between the USA and Guatemala. Those that have an opinion indicate that "perhaps the top wealthy 20% of the population may control about that much or a little more of the nation's income and goods. (I did get one interesting comment from a friend who lives in Manhattan. He was one of the few who was even aware of the purchasing power of the super wealthy. He used a count of the number of Christian Louboutin women's shoes he observed on Manhattan sidewalks as a rough measure of the local economy. Since the shoes are easily identifiable by their shiny red-lacquered soles, the exorbitantly priced footwear---some costing well over $2,500 a pair--are easy to spot. He was the only one I encountered who had some remote idea of the disparity in wealth in the City, his own modest economic status and the high level of others.

In an interesting study conducted in 2005, researchers from Duke and Harvard Universities probed the perceptions of wealth distribution in the USA by interviewing a large representative sample and posing the question: how much should the top twenty percent of the population earn?
"The report concludes, that 92 percent of the respondents....believed that the top 20 percent of a population should own only 32 percent of a nation's wealth. More than 90% of the respondents said they'd rather live in a country with a wealth distribution in which the wealthiest should not own more than about a third of the nation's wealth." (See:"Building a Better America -- One Wealth Quintile At A Time" by Dan Ariely of Duke University and Michael I. Norton of Harvard Business School from Huffington Post 9-23-10 http://www.huffingtonpost.com/2010/09/23/americans-support-wealth-redistribution_n_736132.html). (rjkspeaks author's note: In Sweden the top 20% own about 32 % of that nation's wealth, this is not unusual. In France the top 20% control about 40% of the nation's wealth. In Italy the top 20% control 36% of that nation's wealth, while in Germany the top 30% control about 51% of the wealth.)

But today, the USA, the richest nation in the world, is very much unlike Sweden (or other modern democratic industrialized nations for that matter). The way wealth and income are distributed in the US does resemble a banana republic as Kristof claims. Today, the richest Americans--those in the top one-percent take home about 24% of the nation's "pie" leaving only 76% of the wealth for the remaining 99% of the population. If we examine the top 20% of present-day American wage-earners, we learn that they garner about 84% of the total wealth leaving only 16%!!!!!! of the national pie to be divided up by the remaining 80% of the population. That does not seem fair does it? No, it is not fair and even seems un-American! In most modern, western industrialized nations...these USA figures stand out in contrast like a sore thumb.

But things were quite different here in the USA not so long ago. Back in 1976, the same 1%group at the top took home only 9% of the total nation's income (rather than the 24% of today). But since then, in little more than three decades, their "take" increased nearly three-fold. How did this great "condensation of wealth" occur? (See:http://en.wikipedia.org/wiki/Economic_inequality#Social_cohesion)


Paul Krugman of the NY Times states that one cause of inequality of wealth distribution in the USA is globalization (which has resulted in many higher paying jobs to disappear offshore), and to "fragmentation of means of production" where labor-intensive aspects of a manufacture process might be "farmed out" to nations where cheap labor can be used to reduce costs for production aspects, while engineering, marketing and advertising of a product might remain in the home country. Others argue that technological innovation and automation have reduced demand for labor.

How did this happen to the US?

One reason has been the American economic model which has been in place for these last decades. According to an off shore observer--German Finance Minister Wolgang Shauble (responding to a question regarding German export surpluses), states: "The American growth model.........is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses." (Der Spiegle: November 6, 2010)

So how did we get here? Is Schauble correct?: Have we inflated our financial sector and neglected our small and medium sized businesses? Our small and medium sized firms are the traditional heart of our economy, the businesses which employ the vast majority of our working population...where decent salaries are earned...where benefits generally are substantial and which help generate the bulk of our federal taxes. But we ignored these firms to favor the more influential US financial sector. This is not good for the USA in general and not too smart.

Favoritism to the financial sector helps to explain why our unemployment figures (formally now at 9.6%) are so difficult to change. By neglecting our small and medium sized businesses the engines of income and employment we have set the stage for the present unhappy employment situation. Now, after decades of neglect, we have fewer of these businesses and fewer places to stimulate for increased employment.

The financial sector which we have favored over the last decades by reducing government oversight and by Reagan-encouraged deregulation have increased questionable loans to home-buyers. They lowered the standards for borrowers. They encouraged banks to make more loans to less qualified lenders. Then they took these mortgages, bundled them together to create "assets" or commodities which they sold as "bank stocks", then, using these created assets, they further diced up the bundled mortgages to create other "products" or derivatives which permitted banks to take bets on the fact that these manufactured assists were going to increase or decrease in value. When the economy faltered, and people defaulted on their loans...many of these mortgages became worthless paper---but where were they? They were sliced and diced into many products and sold to investors by our biggest banks. The result was that the entire house of cards came down around the banker's shoulders. The government responded with a massive bailout of the the banks called the Troubled Asset Relief Program (TARP). But that did not stop them from accepting TARP funds for their erroneous ways-- a program which paid them handsomely for their perfidy. Finally, it did not prevent banks and financial institutions from continuing to give out massive and embarrassing bonuses to their top staff members. These activities only exacerbated the uneven distribution of wealth...


That's how we got here.






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