Paul Craig Roberts wrote a piece entitled “Our Collapsing Economy and Currency,” found today at The Daily Bell. His focus is the oncoming “fiscal cliff.”
Is the "fiscal cliff" real or just another hoax? The answer is that the fiscal cliff is real, but it is a result, not a cause. The hoax is the way the fiscal cliff is being used.
The fiscal cliff being faced in less than a month is not real – at least not very significant; it is a step off of the curb, compared to the Grand-Canyon-sized fiscal issues of Medicare and Social Security.
The fiscal cliff is the result of the inability to close the federal budget deficit. The budget deficit cannot be closed because large numbers of US middle class jobs and the GDP and tax base associated with them have been moved offshore, thus reducing federal revenues.
This offshoring of jobs is one of several important contributors to the immediate budget situation, but is relatively minor in the grand scheme of the fiscal situation of the US Government budget.
The fiscal cliff cannot be closed because of the unfunded liabilities of eleven years of US-initiated wars against a half dozen Muslim countries − wars that have benefitted only the profits of the military/security complex and the territorial ambitions of Israel.
It isn’t the unfunded liabilities (veterans’ benefits?) that are the issue in war, but the funded ones: Every dollar spent on overseas adventurism is a dead-end dollar, adding nothing to this increase of wealth of economic participants.
The budget deficit cannot be closed because economic policy is focused only on saving banks that wrongful financial deregulation allowed to speculate, to merge and to become too big to fail, thus requiring public subsidies that vastly dwarf the totality of US welfare spending.
There is a germ of truth here: much is being wasted in saving the banks. A good place to start would be to bring austerity to this part of government accounts. A good chunk of this can be found in the governments’ fiscal budget, but the vast majority will be found in Federal Reserve actions. But there is nothing about regulation or deregulation that is at the root of this problem. As long as there is a central bank, the big banks know that their back is covered, and can take risk without concern – the reward belongs to the management and the failures belong to the central bank and federal government.
Further, the mergers and size do not automatically require “public subsidies.” Let them fail. Had this been done four years ago, life would be quite normal again by now for the vast majority (just not for New York and Washington).
The hoax is the propaganda that the fiscal cliff can be avoided by reneging on promised Social Security and Medicare benefits that people have paid for with the payroll tax and by cutting back all aspects of the social safety net from food stamps to unemployment benefits to Medicaid, to housing subsidies.
This is no hoax. The demographics throughout not only the west but much of the world make clear that the promises of Medicare and Social Security cannot be kept. This will occur whether or not the subsidies to banks are dealt with – the only difference being sooner vs. later.
The right-wing has been trying to get rid of the social safety net ever since Franklin D. Roosevelt constructed it, out of fear or compassion or both, during the Great Depression.
Most certainly this isn’t true. As recently as Bush II, with Republicans in control of Congress, not one attempt was made to do this. Had Bush approached these issues with the same determination that Obama approached Obamacare – to get it passed no matter the political fallout – he could have greatly reformed these programs. He did not. It is fallacy to fall in line with this false left-right debate.
Ever since John Maynard Keynes, economists have understood that tax increases and spending cuts suppress, not stimulate, economic activity.
I was waiting for Roberts to state that this claim isn’t true. He never does. It is true that tax increases are a drag on the economy. It is not true that spending cuts do the same. More resources left to the private sector – how is this a drag?
Further, show me the spending cuts – in the US or in Western Europe. When in the century since the Federal Reserve has spending been cut? Even the current fiscal cliff discussions do not propose a cut, but only some maybe, one-day, believe us reduction to the rate of spending growth.
There was one instance of a massive spending cut, and that immediately after WWII. The US economy thereafter experienced a boom.
The US economy has two serious diseases, and neither one is too much welfare spending.
One disease is the offshoring of US middle class jobs, both manufacturing jobs and professional service jobs such as engineering, research, design and information technology, jobs that formerly were filled by US university graduates but which today are sent abroad or are filled by foreigners brought in on H-1B work visas at two-thirds of the salary.
What is the root of the offshoring? I propose two: Federal Reserve policy keeping interest rates lower than where the market would otherwise set them. This results in facilitating capital investment. If one is to invest capital, is it not more efficient to invest it where operating costs are cheaper? In other words, Federal Reserve policy makes assets already in place less valuable, because it makes replacement of those assets too inexpensive.
Second is so-called free-trade agreements, which of course aren’t free-trade but are trade on terms that favor large manufacturing concerns. It is much easier for these large concerns to internationalize their operations than it is for smaller, local concerns to do so.
Finally, as to foreigners coming in with H-1B work visas: demographics make clear that the only possible solution to the Medicare and Social Security issues is a massive influx of foreign labor. But given the demographic situation throughout most of the world, this is no solution.
The other disease is the deregulation, especially the financial deregulation, that caused the ongoing financial crisis and created banks too big to fail, which has prevented capitalism from working and closing down insolvent corporations.
It wasn’t “deregulation” that caused this – there was no deregulation, only different political regulation. What has “prevented capitalism from working and closing down insolvent corporations” is that government regulation has stopped private regulation from doing what it would naturally do – close down insolvent companies.
The Federal Reserve's policy is focused on saving the banks, not on saving the economy.
This is the Fed’s role in life, to save the largest money-center banks thus enabling the massive wealth transfer to continue. This single sentence should have been the focus of Mr. Roberts’ commentary (as it is here where the root of the economic ills is to be found), as opposed to delivering various forms of Keynesian “solutions.”
For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US. This can be done, as Ralph Gomory has made clear, by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate. The difference in tax rates can be calculated to offset the benefit of the lower cost of foreign labor.
This is no solution. It is just another cockamamie idea of government regulation standing in where the market is perfectly able. I can’t even imagine the bureaucracy needed to calculate this, let alone the economic waste brought on by such a scheme.
The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years as well as future budgets due to the cost of veterans' hospital care and benefits.
Amen. But this is a drop in the bucket compared to a) the bankers’ and oligarchs’ take supported by central banking, and b) unfunded liabilities of Medicare and Social Security.
I will suggest that there are no pain-free solutions. However, sooner or later, the only possible solution will be either enacted by legislature (not likely) or imposed by market forces (quite likely): these promises of Medicare and Social Security will be broken, not only in the US but most of the developed world. It might take longer, but the market will also bring some form of justice to the central banking cartel.
Whatever the ultimate solutions, none will be found via increases in government involvement and activity in the market, as Mr. Roberts proposes.