The American Economy RIP
Paul Craig Roberts
“Permit me to issue and control the money of a nation, and I care not who makes its laws.” —Mayer Anselm Rothschild, 1790
Thirty-eight years ago when I was in charge of United States domestic economic policy, the US Treasury and President Reagan believed that the purpose of economic policy was to serve the country, not Wall Street and the banks or the corporations or any of the various organized interest groups. Our idea was that policy could not be for this or that part of the economy. It had to be for everyone.
This changed in the last year of the Reagan administration after I was gone. The George H.W. Bush Republicans, who by then had taken over the Reagan administration, decided that economic policy had to serve the election of Bush as Reagan’s successor. They created the “Plunge Protection Team,” consisting of the Treasury and the Federal Reserve. Its purpose was to stand ready to intervene in financial markets and to support financial prices in the event of a stock market downturn for which the Bush Republicans had set themselves up to be blamed.
Reagan was elected because the post-war Keynesian demand management policy of pumping up consumer demand with money supply growth and easy credit, while maintaining high tax rates on work and investment, had broken down. The result was the rising inflation and unemployment trade-offs known as stagflation.
The small handfull of Supply-side economists that existed understood that the high tax rates were restraining labor and investment inputs into the economy, because the after-tax rewards were low. A 50% tax rate on wages and salaries meant that when a person’s income reached the threshold of the 50% rate, he was working for half pay. For the investor, the situation was worse. At the 70% bracket, he was taking investment risks for 30% of his earnings.
Consequently, when the Federal Reserve pumped up consumer demand, the response from output was weak. When real output does not respond sufficiently to absorb the new money, prices rise instead of employment. The solution was obvious, but not to the Keynesians who had been running US economic policy since the Second World War.
The solution was to cut the tax rates in order to encourage a larger response of supply to demand.
The Bush Republicans and Reagan’s Budget Director, David Stockman, were unable to understand the Supply-side policy. They could not get their minds out of demand-side economics. In demand-side or Keynesian economics, the purpose of cutting marginal tax rates is to increase consumer spending. As inflation was already a problem, the Bush Republicans and Federal Reserve Bank Chairman Paul Volcker thought that Reagan’s tax rate reductions would cause inflation to explode, driving up interest rates and collapsing the values of Wall Street’s stock and bond portfolios. To restrain the expected inflation from Reagan’s Supply-side fiscal policy, Volcker slammed on the monetary brakes and caused a recession before the tax rate reductions went into effect. The deficits from Volcker’s recession were blamed on Reagan’s Supply-side policy. The appearance of the budget deficits convinced Bush Republicans that a stock market crash was in the cards. To prevent the expected crash from keeping Bush out of the White House, they set up the Plunge Protection Team to guarantee the price of financial assets.
The Team was not needed for that purpose. The success of the Supply-side policy caused inflation to fall and real output to rise despite the budget deficits. What the creation of the Plunge Protection Team did was to give the Federal Reserve enormous new powers. The Federal Reserve can now intervene in all financial markets, not merely the bond market. This intervention is never discussed in the financial press, a collection of presstitutes like the rest of the media.
Today central banks not only support bond prices by heavy purchases, they do the same thing in the equity market. The Bank of Japan, for example, owns 77.5% of Japan’s ETF (Exchange Traded Fund) market, having bought nearly 23 trillion yen of the ETF market since 2013. https://www.reuters.com/article/us-japan-economy-boj/kuroda-defends-japan-central-banks-etf-buying-sees-no-near-term-exit-idUSKBN1O602Q
The Federal Reserve owns assets equal to 20% of US GDP. The European Central Bank owns assets equal to 40% of the euro-zone economy. The Bank of Japan’s asset hoard now exceeds the Japanese economy in size. https://www.bloomberg.com/news/articles/2018-11-13/bank-of-japan-s-hoard-of-assets-is-now-bigger-than-the-economy
With this background, we can now get on with the story.
For a decade we have had a stock market based on (1) the profits from lower labor costs by producing offshore the goods and services corporations sell to Americans, thereby destroying the American middle class and the tax base of cities and states, (2) the use of corporate profits for buying back the corporations’ stock, and by borrowing to buy back stock, thus decapitalizing the corporations in order to support stock prices, managerial bonuses and shareholder capital gains, and (3) Quantitative Easing (QE) which pumped trillions of dollars into US financial markets, thus pushing up the prices of financial assets. If the money the Federal Reserve created in order to support the solvency of the “banks too big to fail” had gone into the economy, hyperinflation in consumer prices would have been the result. Instead the money caused inflation in the prices of financial assets, and this is the explanation of why a small percentage of people—shareholders—have accumulated most of the gains in income and wealth.
The extraordinary increase in the inequality of incomes in the United States is the consequence of using economic policy to support the New York Banks, which has meant supporting the prices of the bad assets on their balance sheets.
In America today truth gets no respect from anyone whether right, left, liberal, conservative, Democrat, Republican. The idiot Hillary has alleged that the only sane Democrat—Tulsi Gabbard— is a Russian agent! It blows the mind. And the presstitutes treat the absurd allegation as if it is a fact.
Right-wing talk radio hosts Rush Limbaugh and Sean Hannity are just as unrealistic on pro-Trump subjects. Both of them boast of the great American economy with 3.5% unemployment.
As I have explained so many times, the 3.5% unemployment rate results from not counting unemployment. If you are unemployed, but have not searched for a job in the last 4 weeks, your unemployment is not considered to be a fact. If you have looked for a job for a year without success and have become long-term discouraged, you are not even counted as being a member of the work force. So how can you be unemployed?
Job growth is largely a fiction. Increasingly jobs are not jobs. They are gigs. American companies hire through agencies and cycle people in and out as needed. The jobs at which a person worked for decades with medical coverage and a retirement pension are largely gone.
The monthly payroll jobs reports do not translate directly into employment. Many of the jobs are part-time and two or more are held by the same person who struggles to make ends meet. As I have emphasized in my reports for the past two decades, the reported new jobs are in low-pay domestic service occupations–the kind of labor force India had decades ago.
In the Western world employment for white heterosexual males is hard to come by. In the US the small hiring that takes place after jobs are offshored and filled by foreigners on work visas is geared toward women, people of color, and those claiming to be transgendered.
It seems to me that if a person, despite their obvious gender, can claim to be of the opposite gender, a person can claim to be whatever race he or she thinks, or pretends to think, that they are. It is amazing that white males, who suffer discrimination in the corporate, government, and academic job market, are not claiming to be transgendered, transrace, transsexual-preference black lesbian women.
What American transnational corporations do is to produce wage and salary income, not for Americans, but for the offshore producers of the products that the American firms send back to the US to be sold to Americans who have lost their middle class jobs. Americans are able to buy products devoid of their labor input only by the expansion of consumer debt. The limit to debt is the amount that can be serviced. And that limit has been reached.
Americans now have 7-year auto financing in which the outstanding payments exceed the value of the auto. Trade-ins can only occur because the negative value of the car in relation to the amount owed is rolled into the new loan. You can see where this leads. It is like the Americans who can only make the minimum payment on their credit card balance, thus becoming more indebted monthly by the interest charges on the outstanding balance.
An economy such as America’s has nowhere to go but down. Student debt prevents the formation of new households and marriages. This affects real estate sales and home construction, home furnishing sales and appliance sales.
Officially the US has 3.5% unemployment but no real growth in median family income or retail sales.
The US has rigged inflation measures in order to prevent them from measuring inflation. The government’s inflation measures were “reformed” by the Boskin Commission. Today if a price goes up in the control basket of goods, the item is thrown out and a lower quality item is substituted in its place, or else the price rise is said to be a “quality improvement” and not counted. This way of measuring inflation makes it possible to have high inflation that does not show up in the inflation measures.
As inflation is under-reported, American GDP can be misrepresented as expanding. This is because nominal GDP must be deflated for inflation. The lower the inflation measure, the higher the real GDP. Thus manipulated inflation measures enhance the perception that US real GDP is on the rise.
What America has is an economy stagnating in debt with a growing amount of consumer income diverted to the service of debt. This is not Trump’s fault. It is the fault of corporations moving middle class jobs offshore and filling many that remain in the US with lower paid foreigners on work visas. It is the fault of the Federal Reserve’s policy of saving the banks rather than the economy. It is the fault of the policy of supporting aggregate demand by substituting consumer debt for the missing growth in consumer income. This is a huge problem, and a president alone cannot correct it.