Saturday, February 28, 2009

The Patched Up Obama Stimulus Plan

Feb 27, 2009

By Lynn Walsh
In Denver on February 17, Barack Obama signed his ambitiously titled American Recovery and Reinvestment Act. It was only three weeks after formally taking over the presidency, though over a year since the onset of a severe economic downturn, which Obama himself has warned could turn into a ‘catastrophe’ unless checked.

The $789 billion package is unprecedented in scale – around 5.8% of GDP, spread over two years, compared with Roosevelt’s New Deal package of between 1-2% of GDP. However, the Congressional Budget Office estimates that the ‘output gap’, the difference between the capacity of the US economy and its likely actual output, will be $2.9 trillion over the next three years. The CBO comments that the impact of the package will be ‘uncertain’.

Out of the package, $281 billion is tax cuts, partly to ‘working families’ but including substantial tax concessions to business and around $70 billion (9% of the total) to adjust the alternative minimum tax (AMT) threshold, to prevent this tax affecting upper-middle-class families. This has nothing to do with economic stimulus, and was inserted under pressure from Republicans, although the AMT would clearly have been amended anyway in the coming months.

Additional government spending (repairs of bridges and roads and other infrastructure projects) is to be allocated $308 billion. Included in this is just over $50 billion of additional aid to state governments, though this is a tiny amount given the tax shortfall of many states. California alone has a $42 billion deficit, and the Republican governor, Arnold Schwarzenegger, is imposing massive cuts and public-sector layoffs.

Just under $200 billion of the package is increased benefits, for instance, food stamps, and the extension of unemployment from 26 to 36 weeks. While infrastructure spending will take time to work through to the economy, additional benefits to the unemployed and low-income families will have a much more immediate affect. But there is no provision in the package to ensure that any jobs created will pay union rates or for an increase in the minimum wage. These measures would be far more effective than tax rebates in rapidly boosting demand for goods and services.

Republicans in Congress fought to increase the tax cut element and reduce the additional public spending, despite Obama’s attempt to involve them in bipartisan negotiations. In the House of Representatives, where the Democrats have a clear majority, no Republicans voted for the package. In the Senate, Obama managed to win the support of three Republicans, on the basis of concessions, thus avoiding the danger of a filibuster by Republicans. Congressional Republicans are still clinging to neo-liberal ideology, still asserting that tax cuts for the wealthy are the magic remedy for all economic maladies. In contrast, a majority of Republican state governors, who have to grapple with the crisis, have supported Obama’s package.

A number of Senate Democrats successfully inserted clauses into Obama’s legislation imposing restrictions on the pay and bonuses of banks and corporations receiving any funds under the TARP bank-bailout program. This new provision prohibits cash bonuses and almost all other forms of incentives for the five most-senior officers and the 20 highest-paid executives at large companies receiving money under TARP. Although Obama recently denounced the recklessness and irresponsibility of top bankers, calling for a curb on bonuses, the president and his Treasury secretary, Tim Geithner, actually opposed this measure!

Obama claims that his package will create four million jobs. Most economic commentators, however, estimate that it will create between one and three million jobs at most.

But even four million jobs saved or created – Obama’s ‘bottom line’ – would be a very limited cushion for millions of unemployed workers. The jump of over half a million job losses in January brought the number of jobs lost since the beginning of the recession in December 2007 to 3.6 million. This means 11.6 million unemployed workers (7.6% of the workforce), but if part-time workers who need full-time jobs and jobless workers who have given up looking are included, the total rises to 21.7 million workers (13.9% of the workforce).

Reflecting protectionist pressures, House Democrats inserted a ‘Buy American’ clause into the stimulus bill. This is mainly aimed at ensuring that U.S.-made steel will be used in infrastructure projects. Steel makers’ organizations in Canada and Europe immediately protested at this ‘beggar-thy-neighbor’ policy. The clause was softened in the Senate, with language that the protectionist provision should be "applied in a manner consistent with the United States’ obligations under international agreements". But as Jagdish Bhagwati, an adviser to the WTO, warned, it is still possible for the US to restrict trade within WTO rules: "I would bet everything I have on a trade war breaking out within WTO-consistent rules", he said. There is little doubt that, if serious restrictions are imposed on the use of imported steel, other steel-producing countries will retaliate with similar measures.

The ‘biggest imponderable’ about Obama’s package is: "Will the plan work?" (The Washington Post, A Fiscal Gamble, editorial, February 13) It is not only left-Democrat, Keynesian commentators who are skeptical about the likely effectiveness of Obama’s plan. For instance, in a note to their clients, the business analysts, High Frequency Economics, comment: "We remain firmly of the view that the package now in Congress is the bare minimum required. It will ultimately prove too small".

Obama’s package, despite its size, is a hastily improvised patch-up job. The stimulus plan does not significantly increase expenditure on healthcare or education. There are no measures which will significantly raise the general income levels of workers and no measures to enhance the trade union rights of workers. Apart from the time-lag before most of the stimulus measures will have an effect, the package has to counter a deepening global downturn and the continuation of the credit crunch.

The first installment of TARP, implemented by George Bush and Hank Paulson, has so far prevented a domino-like collapse of financial institutions but has not overcome the paralysis of bank lending. Obama has proclaimed that TARP 2 (the second $350 billion installment) will be much more effective, but so far Geithner’s announcements remain extremely vague. One way or another, the bulk of the debt mountain will be shifted from the private sector to the public sector, with the cost being imposed onto the working class.

Fifty billion dollars or more will be used to try to prevent housing foreclosures, but this is primarily an indirect form of support for banks facing a rising number of mortgage defaults. Increasing negative equity (already about 28% of home buyers) and a tsunami of unemployment will mean more and more defaults and foreclosures. The only way to prevent this would be for the Federal government to impose a moratorium on all foreclosures and to subsidize the refinancing of mortgages or a switch to renting at affordable rates.

Obama’s huge package will have some cushioning effect, but whether it will actually stimulate renewed growth remains to be seen. One thing is certain, however: the Federal debt will balloon over the next few years. The Congressional Budget Office estimates that (including the current debt plus the cost of TARP and the stimulus package) Federal government debt will rise from 41% of GDP in 2008 to 70% of GDP by 2011.

The CBO estimates that after that the annual budget deficit will fall to 2% of GDP. But this estimate is based on extremely optimistic projections: a 4% a year average GDP growth 2011-14 and minimum growth of public spending in line with inflation. If the global slump continues beyond 2010, budget deficits would continue to soar. This would make it much more difficult for the U.S. to finance its debt on global financial markets.

Tuesday, February 17, 2009

Do you know where your money is tonight?

The Great Financial Crisis – Causes and Conflicts” ---
John Bellamy Foster & Fred Magdoff, 2009

These are astounding times for American Marxists. War and economic collapse are the mother of revolution. Right now we have two ‘small’ wars and one giant economic collapse – and that not limited to one country. Republicans are babbling about Obama being a ‘socialist.’ So socialism, safely buried by its association with Joseph Stalin, Leonoid Brezhnev and a sclerotic bureaucracy, is once again placed on the table. Though carried by the oddest of flag bearers!

While most people are scratching their heads over the financial crisis, making up various stories to explain what they see unfolding before their eyes, Foster and Magdoff explain this crisis based on long-running observation, for them personified by the American Marxist analysis of Paul Baran, Paul Sweezy and Fred Magdoff. Foster is the present editor of their magazine Monthly Review, and carries on their tradition, which started in the 60s.

To deal with the crisis, conservatives are still pushing to cut taxes and ‘big guvmint’; centrists want to take a bite from the tax-cut pie and the Keynesian pie too; while liberals think that lots of government spending will bring the ‘good times’ back.

Think again. John Maynard Keynes, the present patron saint after the fall of Saint Thomas Friedman, inspired Roosevelt to blunt the depression in the 1930s by using his approach to contain the fall in unemployment, the financial situation of the banks, and the productive character of manufacturing firms. Of course, Roosevelt borrowed most of his specific New Deal programs from real populists like Louisiana governor and senator Huey Long. A longerette-smoking East Coast patrician, Roosevelt was elected on a program of mild ‘improvements’ to counter the effects of the depression. While the Communist Party has put him on their banners, Roosevelt only did what he had to do to save capital – the ‘enemy,’ as they say, was at the gates. His solutions gave capitalism a 'human' face.

However, as Foster and others point out, what really ended the depression was World War Two, which boosted war-time production 6 times, far above the drop in production that had developed in the recession of 1938 under Roosevelt. Of course, liberals can’t face this. So the present worship of Saint Keynes as their savior. They hope that blunting this recession/depression will be sufficient. After all, what other choice do they have? Nationalization, without compensation, with workers control? We are at an actual situation where the banking, real estate/land, health care, auto and oil sectors of the economy should be nationalized. These are, of course, the pre-cursors to the workers state. So for liberals this is impossible.

Foster carefully analyses the 50s and 60s, and, like his predecessors, calls it a “golden decade’ but an EXCEPTION to normal capitalist development. Due to the destruction of competing productive forces in Europe during World War Two; the technological development of cheap oil, roads, suburbia and automobile technology; and the strong position of the U.S. military - the United States economy flourished for 25 years based on these exceptional circumstances. This all came apart at the beginning of the 70s, when stagnation overcame the U.S. economy. The imperialist boom was over. Vietnam was a defeat, on the battlefield and economically; the oil embargo showed the fragility of the oil economy, and the fall of the dollar were all symptomatic of an underlying malaise in the United States, a stagnating economic situation not seen in 25 years. That situation continued through the 70s, until financialization slowly took off.

The rulers at the time, quite clearly, wondered what to do. Nixon decided with his Treasury Secretary to abandon a ‘production’-based economy, and send work, instead, off-shore or across the border. It is no accident that Nixon was the one who lead 'detente' with China - which weakened the USSR, and eventually lead the Chinese to become our industrial heartland. Every production worker in the U.S. knows what that decisions meant. To substitute, the U.S. slowly started to build up FINANCIAL capital as a solution to the drop in profits from production. This is when financialization began to grow to dominance in the U.S. economy. Financialization is a phrase first popularized by Sweezy, Magdoff and Baran, according to Foster. However, I suspect there are prior Marxists who pointed to financialization as the final phase of capital. At its peak in 2005, the financial sector (FIRE – Finance, Insurance, Real Estate) of the U.S economy produced 40% of the profit, while the productive sector making actual things or goods, brought in 18%. The tables had turned.

However, with the domination of the financial sector has come a more robust and international bubble economy. Just as the jet plane allows disease to spread around the world at lightning speed, so the international capitalist markets allow a contagion from one market to infect all the others, in hours. This actually is not what was predicted by the Marketeers.

As we watched, the real estate bubble, created by rentier capital, was securitized by Wall Street, i.e. financial capital. Wall Street sold this new product around the world over 6 years, transferring the finance bubble from the tech economy to the sub-prime/CDO economy. In their enthusiasm for debt, and belief that bubbles never pop, the international banking sector over-leveraged themselves up to 43 times, which included decreasing the assets on hand in case of an old-fashioned ‘run’ on the bank. Encouraging debt, of course, is the core of finance-driven development. The banks backed financialization in Eastern Europe and other countries, and downplayed production, so as to impoverish them again through interest, rent and debt.

Now we see virtual bankruptcy of most of the largest banks in the U.S. – and many in the rest of the world. The recession, which may turn into a depression, is still accelerating across the globe. What Foster reminds us, in his last chapter, written in December 2008, is that it is the failure of the capitalist economy at its productive ROOT which has lead to this situation. In a quite interesting polemic with groups of left-liberals who assert that re-regulating finance capital and emphasizing productive capital will regenerate society, Foster and Magdoff assert it is precisely both financialization AND capitalist productivity that have failed. Hence the “stagnation” thesis that they embody seems to be more radical then the ‘re-regulation’ hypothesis.

One of the books few weaknesses is that they do not detail the specific roots of this stagnation – only hinting at over-production and the falling rate of profit – both classical Marxist categories. I think this was not within their purpose, however.

The main weakness of the book is its almost exclusive focus on the U.S. Foster and Magdoff only hint at the way imperial capital can blunt recessions by ‘exporting’ misery overseas – soaking the working, middle and farm classes in other countries to pay for their crisis. Just as they do to the domestic working class on a lesser scale. One characteristic of the 50s-60s that Foster somewhat ignores is this spread of U.S. imperial capital around the globe, while every other national finance sector was still weak.

Foster does assert that the particular conditions of the 50s-60s cannot be copied. He does not think that the internet (and, I suspect, though he does not address it, the ‘green’ economy) can substitute for the automobile and cheap oil. He does not think that U.S. military dominance will increase anymore - especially with the limited failure in Iraq. And he does not believe that increasing the productive side of U.S. capitalism again will work. On this latter, Obama and the Gore faction are counting on the ‘green economy’ to revive capitalism. Seeing as ecosphere and human survival also depend on a ‘green economy’, this is one of the most logical ways to try to get out of the crisis. I, too, however, doubt that it will work in a capitalist framework.

This books is short, clear and well-written - the best book-long analysis of the underlying cause of our present predicament. The graphs are illuminating, the rhetoric is minimal, the approach is factual. It proves once again that Marxism is still relevant, still scientifically perceptive, and still has the answers which people are looking for.

Red Frog – 2/17/09
--- and I bought it at MayDay books!