Tuesday, April 30, 2013

Austerity Bites Again

Christine LaGuarde, current head of the IMF is having second thoughts about austerity. Maybe we’re going to fast, she’s said recently. Is that because unemployment in Spain has just hit 27%, with about 60% unemployment among youth? Every time unemployment goes up, balanced budgets, the ostensible reason behind cutting back, become less likely since joblessness means higher costs and less income for government.

The IMF caught a lot of flack way back in the past for lending to governments which were so inept and/or corrupt the money was totally squandered. Thus they decided it was necessary to impose rules on receiving countries, and, at least in theory, that makes sense. Unfortunately, their rules are based more on ideology than practicality or benefit to the people at large. Naomi Wolf wrote a book called the Shock Doctrine which describes how need for international help places countries in a position where they’re required to adhere to a conservative bankers’ worldview of how to fix their economies. For instance, that was behind the insistence that Greece lower its minimum wage in order to qualify for help. The connection between a country’s minimum wage and its ability to service its sovereign debt to the banks, the wealthy and other countries is tenuous at best. It’s just another way to stick it to the people at the very bottom who’s lives are already on the edge.

If /when your country needs international help to prop up a corrupt, sleazoid banking system, you’ll need to impose crushing tax burdens on the poor and heavy job and program cuts on essential public services while you lower taxes on the wealthy and corporations.

The elite don’t really need the money, but they ‘create jobs’ so if we throw enough money at them, they might deign to put some people to work. Except… after all the austerity cuts amidst high unemployment the masses don’t have the money to buy things, or they save because they’re frightened of losing their jobs, so there’s no reason for corporations or banks to create new businesses. Instead they use the cash bestowed upon them to speculate on securities, commodities and property, all of which is detrimental to the needs of the 99%.

The money referred to in the above paragraph is being created out of thin air and given to the biggest banks at near zero interest rates. In America that amounts to $85b per month. In Europe it’s about $50b. That new money has served the 1% well by sending the stock markets to record highs at the same time that wages are going down. Maybe you heard that the US is growing at 2.5% per year. In aggregate that’s true, but when broken down it turns out that the bottom 80% has lost ground so when tallied up we see that more than 100% of the gains have gone to the very top.    

Europe is different than the states in the sense that they have relatively strong social safety nets. In America there are no advocates for the commoners. Aside from a few fringe legislators, nobody in politics cares. Thus in some ways it baffles me how completely obsessed European leaders are with austerity. And how tardy they are with creating jobs programs, which is Europe’s most pressing need. If they can feed their banks with $50b per month with free printed money, it can’t be that much of a stretch to use it to create public service or infrastructure jobs.

There needs to be a Europe-wide jobs program financed by the European Central Bank that would be available to all EU youth and long term unemployed. Applicants could apply to work anywhere in Europe, though the greater needs would be in countries having difficulties, so most of the jobs would be there. These jobs would have a limited duration and wouldn’t pay much but they’d keep people busy doing useful things and keep them from getting too discouraged by unemployment. They’d also get the chance to live in and experience other countries. Since financing would come from the EU as a whole, it would only improve the bottom line of struggling countries. The EU owes it to those countries in the Eurozone experiencing difficulties since it’s membership in the Euro which is causing many of their problems. But other EU countries outside the Eurozone are also going through financial upheavals so to be fair it needs to be for all EU countries. 

The southern European countries have archaic and ossified labor laws that preclude flexibility and efficiency. Some also have bloated bureaucracies. Economic shock will probably force wrenching changes in society, but regardless people need jobs now, so there’s no reason to punish the unemployed for the inadequacies of their governments. Or force them wait until austerity magically begins to work, a dubious proposition at best.

The other thing Europe needs to do is rethink its currency regime. Part of the problem of countries experiencing difficulties is being tied to the Euro. The common currency is very important for Europe, but it has overreached and made several countries’ problems more difficult to tackle.

In regards to Greece and Cyprus I’ve advocated they adopt a dual currency system similar to Cambodia’s where the US Dollar is used alongside the riel, the local currency. Actually, between 80% and 90% of all transactions here are in dollars. They’ve kept the value of the riel within 5% of 4000 to a dollar for as long as I’ve lived here, about 11 years, so it’s very stable. However, if need be in a fiscal emergency they could print more riel, thus having a little flexibility. The Cambodian government periodically talks about stopping use of the dollar as its main currency, but they receive big benefits in stability and convertibility so they’re very reluctant to give up that advantage. As for Greece and Cyprus and any other Eurozone country that gets into trouble, they have no choice, they’re stuck with the Euro.

I’ve changed my thinking about the Eurozone’s problems to the point where I now feel that a two tier system needs to be adopted with the core countries of France, Germany and maybe Netherlands and Belgium using the Euro exclusively and all the other countries, or rather any one that wanted, would have its own currency alongside the Euro. That way the Euro would remain rock solid and available for all the countries of the EU (both inside and outside the Eurozone) to use, while individual countries gain some flexibility by having their own currencies alongside the Euro. Whether or not an EU country is officially part of the Eurozone, there will be large amounts of Euro in circulation.

The problem with governments and large institutions is a built-in inertia that resists any kind of change, especially when it looks like a retraction or reversal, but if they don’t come up with innovative changes they’ll only sink deeper into the abyss. Investors took a big hit in the recent Greek rescue plan, but the country is still left with extreme debt levels which they are never likely to be able to service. They’ll just flail along indefinitely from one crisis to the next while the people suffer. The only realistic solution would be a total default and reversion to the Drachma in a dual currency regime. They also need a wholesale restructuring of their society and economy. Default and absence of international help would force those desperately important changes.

Meanwhile is it possible the IMF, etcetera are waking up to the folly of austerity after ‘only’ 5 years of abject failure? Seems hard to believe but you never know.

Thursday, April 11, 2013

Why Do They Hate Social Security So Much

What is it about a self-financed pension system that is funded 20 years in the future that enrages them so? What is so galling to them about the idea that millions of seniors don’t have to beg for sustenance as was the case before Social Security?

And yet, the moneyed elite and their idiot minions in the conservative base have been on a rampage against it from the minute it was passed into law in the 1930’s. And now they - and Obama, their enabler - want to cut benefits as a means of bringing down the country’s deficit when SS has absolutely nothing to do with the deficit, never has and never will. The Social Security Trust Fund has $2.7 trillion in the bank, actually it is held in US Treasury Bonds, the same bonds that foreign governments and rich people own.

The meme in Washington among the punditocracy is that ‘entitlements’ must be cut if there’s any chance of bringing down the deficit. Entitlements is in quotes because SS and Medicare are self funded; they are not entitlements, you only receive those benefits if you’ve paid into the program. Medicaid, on the other hand, the federal program that provides medical assistance to those who otherwise can’t afford it or have no access to insurance, is an entitlement because any American who fits the qualifications is eligible for aid.

Those three programs make up about 60% of the US budget, $2 trillion out of $3.4 trillion so they are easy targets for regressives. If you’re interested in this budget stuff, I highly recommend a web site called usdebtclock.org. It keeps a running total of debt and income totals; it’s truly fascinating to watch the numbers rolling along. But, once again, SS and Medicare really do not belong in the budget because they are self funded, so having them there clouds the issues.

It’s worth spending a few minutes on how SS became part of the budget. Lyndon Johnson started the practice of folding SS into the budget to try to mask or minimize the cost of his Vietnam war. SS being so large it made his war expenditures a much smaller part of the total budget. The reality was the same but the perception was different.

In 1980 Reagan doubled down on the scam. He looked 30 years ahead and said, My god, the Baby Boomers are going to overwhelm the system when they start retiring in the next century so we need to raise payroll taxes now to put some money away for the coming crunch. SS payroll taxes are as regressive as you can get. Not only does everybody pay their 6 ¼ percent regardless of how poor they are but the wealthy are exempt for all income over about $120,000 annually. So, raise taxes on the lower classes and it looks like you have an extra $200 billion a year coming in which you can then use to lower taxes on the wealthy, which is exactly what Reagan did.

It’s more familiarly called slight-of-hand. The additional money coming in off of the increased SS tax is borrowed from the SS trust fund, so it’s not really the government’s money, but it looks like the budget is more balanced than it really is. Despisers of SS say the SS Trust Fund is just a bunch of IOUs; very true, but China holds a trillion dollars of those same IOUs and you wouldn’t hear any American politician or pundit say that to China, now would ya?

The way Obama wants to reduce SS benefits is called chained CPI or consumer price index and it’s supposed to reflect the ability of people to substitute cheaper items when the price of the things they want to buy rise too much; so buy margarine instead of butter, pork instead of beef. This is Obama’s plan, the Repugs have not proposed it and if Obama gets his way the same Repugs who hate SS will use Obama’s Chained CPI to campaign as the true defenders of the program… fucking hypocrites, but that’s what will happen and it could easily cost the Dumbocrats in the next election, if they don’t find some intestinal fortitude take a stand against Obama.

The loss to SS recipients would not be a lot of money – 3% over 10 years up to 10% over 30 years if they live that long. But they don’t have a lot of money to begin with. The average monthly check is about $1200. That is not the high life. In many parts of America that is just scraping by. Some 60% of recipients depend on SS for 80% of their income. A lot of people like myself receive far less. Even the largest checks do not involve a lot of money. A fellow I talked to recently, who paid taxes at the maximum, said he’ll receive $2600 per month at 62. Plenty enough for me, but hardship for a lot of Americans.

And why are SS recipients, which to be clear include the disabled as well as seniors, being asked to make this sacrifice. What is the purpose? What is to be gained, vis-à-vis the budget?
This cut in benefits will reduce the total budget by about $163 billion over ten years, $16.3b per year. To put that number in perspective, last year GE, one of the world’s largest, most profitable corporations earned nearly $14 billion, of that they paid no taxes, but instead received a $3.7 billion refund. If they had paid the standard corporate tax rate of 35%, then the Treasury would’ve received about $5b. So add up the tax they should have paid and the refund they shouldn’t have gotten and that comes to $8.7b or more than half the savings the government would gain by screwing pensioners. Now that’s only one corporation, though admittedly one of the sleaziest. Or how about the $8b in corporate welfare that goes to the largest oil companies? Exxon needs a subsidy? Ripping off SS recipients is more important than ending that subsidy?

Meanwhile, once again, it’s not the government’s money anyway, it only looks better on their bottom line: it’s our money, we paid for our benefits. The government can borrow that money if they want, but if they renege on their commitments and raid the Trust Fund they’ll be stealing. In this case stealing from the poor to feed the rich, which is nothing new in today’s America, but still…