Sunday, August 22, 2010

The Coming Congressional Gridlock

Two observations can be made about the U.S. Congress, which many voters will agree with.

First, the approval rating of our Legislative Branch is abysmally low. Second, the legislative process is out of control.

The Republican dominance under President Bush made such a mess of things that the 2006 and 2008 elections produced that rare occurrence, a veto-proof Congress with both chambers controlled by one party. One could have hoped that this new arrangement would have produced decisive, effective legislation addressing the country’s numerous problems. Instead the Democrats produced two gargantuan bills vastly expanding the federal bureaucracy; a number of slush funds or bailout funds; and unheard of budget deficits.

The very size and complexity of the “reform bills” amply demonstrated that the current members of Congress are no longer capable of performing their main function, which is to produce meaningful and coherent legislation.

During the process of assembling the “major achievements” of this Congress it became painfully obvious members were voting on bills they had neither written nor read, larded with a variety of provisions favoring special interests, and creating a web of new functions, obligations and duties the national government cannot hope to discharge with any degree of effectiveness.

Hence the statement, repeated by many prospective voters concerning their intentions for the coming elections: “Anything but an incumbent!”

Such intentions have been voiced before in our election history, and were often revealed to have more bark than bite. There were times, however, when the electorate did in fact “throw the bastards out”. This might be one of those.

If political frustration was the only factor, voter anger could be dismissed as inconsequential. But this time there is real economic hardship as well. Unemployment, stagnant wages and rising income inequality are still in full force, and the “recovery” from the Great Recession is proving more questionable every month that passes. In fact the start of an economic “double dip” may well coincide with the election campaign.

This, paradoxically, may help.

The two established parties are too entrenched to be easily gotten rid of, and each will end up with, approximately, a third of the seats. The remaining third might well end up, if things get bad enough, in the hands of the new ABI (Anything But Incumbent) crowd. A number of those will still belong, nominally at least, to the traditional parties. But the mandate they will receive from constituents will no longer be satisfied by the old methods and ideologies.

This diversity of mandates, together with the lack of any strong majority, will preclude the passage of “monster bills” such as those over health care and finance. Even a pure pork “stimulus” will not make it, because of the fiscal rectitude stance that many in Congress are now adopting. In fact the long accepted legislative approaches might now be inadequate to pass anything at all.

The only exception is what could be called the “one-liner bill”.
Congress’ inability to deal with issues does not eliminate them. The electorate will still demand that something be done. To achieve both congressional consensus and electoral support such legislation must be simple, clear, targeted and effective immediately. It must not deal with broad, complex domains but with a single, obvious problem. Once properly formulated, such “one-liner” legislation will pass, take effect and deliver visible results. From there more similar initiatives will flow, and the now broken trust of the voters in their representatives could begin to heal.

Some examples of “one-liners”:

A progressive countervailing duty or sales tax on imports from countries engaging in predatory trade practices.

In parallel, a domestic investment tax credit for corporations setting up job-producing facilities in the United States (similar to John Kennedy’s 1961 initiative)

A transaction tax on excess leverage and trading frequency to prevent more Wall Street crashes.

A full freeze on the hiring, salaries, and other benefits of federal employees.

Each such bill will chip away at our problems and move Congress away from its current dysfunctional state. Later, if emergency conditions no longer prevail, such single items can be integrated into wider frameworks.

Wednesday, March 31, 2010

Job Destruction Through Mercantilism

You can’t keep water in a leaky bucket.

If there is a hole in the bottom, the water will run out. You cannot fetch and use water until the hole is plugged.

It is the same with jobs. One can create employment, but if jobs leak out of the country the effort is ultimately fruitless. One must prevent job destruction before attempting job creation. There are two causes, in the area of trade, for the disappearance of U.S. jobs: mercantilism and outsourcing. Here we will deal with mercantilism.

What is mercantilism? It is a policy through which a government uses trade to extract wealth from other nations and accumulate it in its own economy and treasury. This is achieved through government-imposed policies which make exports cheap, so other countries will buy them; and simultaneously making imports expensive, so that one’s own citizens will not purchase foreign goods. The difference between the value of imports and that of exports is called a trade surplus if positive, or trade deficit if negative.

Mercantilism seeks to maximize the trade surplus, which requires more goods to be produced domestically and less obtained from abroad. There are numerous ways to achieve this: currency undervaluation; high import tariffs; subsidies and other facilities for exporters; deliberate lowering of wages; removing restrictions such as environmental and workplace safety rules; disregard for patent rights; “buy national” legislation; targeted taxes and tax exemptions; and many other.

Other than some targeted duties and agricultural subsidies, the U.S. has few mercantilist policies. Its main commercial doctrine is free trade, which stands for the unencumbered circulation of goods, services and capital. Other nations, led by China, are highly mercantilist, using all the above methods to achieve a massive trade surplus and accumulate wealth within their borders. China’s trade surplus with the United States varies, but on the average it amounts to hundreds of billions per year.

This means that jobs tied to the production of goods are migrating from the U.S. to China, as well as to other countries where the costs of production have been artificially reduced through government action. These are not only “assembly-line” jobs, but all positions and careers associated with industrial production: research, engineering, product design, logistics, accounting, quality control, inventory and supply, and management. All of these are well-paid and involve skills that have been developed over generations. Once lost, such know-how can be extremely difficult to develop again. Also gone with it are product designs, technology and patents.

The U.S. has with its trade partners treaties and agreements aimed at preventing mercantilism. But these arrangements require good will from all the partners and can be circumvented if such good will is absent. In addition they require policing by international bodies requiring complex, time-consuming and expensive redress procedures, and lacking powers of effective enforcement. None of these agreements have been effective against determined mercantilist practices such as implemented by China.

Conventional redress is therefore costly, and involves lengthy, expensive and ultimately unreliable procedures. In such a situation more direct and effective measures are needed.

Current methods are in part ineffective because they focus on products. It must, for instance, be proven that automotive tires, or copper wire, or video game boxes are sold at an excessively low price. The success of the resulting investigations depends on the good will of the host country, which is unlikely to volunteer assistance against its own industries. In any case, a product-by-product approach leaves the rest of the economic field wide open to abuse. To use a sports-related analogy, it is pointless to discipline a single player when the entire team and its coaching staff are breaking the rules.

The redress policy must therefore be applicable across the board and be independent of the cooperation of the mercantilist party. It must address not only individual industries or products but the end result of mercantilism: the excessive trade surplus enjoyed by the practicing nation.

Such a policy is called a countervailing duty or an equalization tax. It is a levy, which can be paid at the border or, preferably, at the point of sale on all products originating from the mercantilist country, including those which are “recycled” through a convenient third party. It must have the following characteristics:

• Be applicable only if the trade deficit with said country rises above a pre-determined limit, to be set by the United States.
• Be progressive: for example, start at 5% and increase by an additional 10% every year after that. It should be conditional and subject to reduction if the trade deficit falls below the originally set limit.
• Be payable by the importer, who is in effect the agent of the mercantilist country
• Apply equally to all products from the designated country. This allows trade to shift over time to products where said country possesses a genuine and objective advantage.

The progressive nature of the duty provides for a period of adjustment during which trade flows can be rerouted. It is probable that once the duty is in place mercantilist policies will begin to be abandoned, as their future failure will rapidly become evident. It will also allow for investment in domestic industries to be restarted.

This duty can be established immediately by executive order or a simple act of Congress. It will therefore have instant impact, both psychological and material.

Saturday, March 27, 2010

The Outstanding and Urgent Issue: Economic Activity Means Employment

The United States is facing many challenges, both domestic and foreign. All the major ones will be addressed within the scope of the National Interest Platform. But some are more urgent than others, and heading the list are the two that can, and will if left unattended, unravel the collective life of the country. Those are: the state of the economy and immediately after that the unchecked growth of government spending.

The economy takes priority.

Let us first dispel an illusion. Officially, the U.S. economy is said to be “recovering”, albeit slowly. This statement is based on two gratuitous assumptions.

The first concerns the definition of “recovery”. Our economic life is still based on the concept of free enterprise, where economic developments are the result of initiative and productive work within the private sector. This gives the economic sector a life of its own, which proceeds in cycles. The economy will expand, contract and then recover as a result of individual and collective decisions by producers and consumers, after which the cycle eventually repeats.

By contrast the current “recovery” is almost entirely an artifact of large-scale government intervention and deficit spending. Such massive manipulation is bound to have some impact, hence the advertised “signs of recovery”. But it is more likely that this very intervention has both dampened and biased market mechanisms to the point where a spontaneous recovery cannot occur. The economy thus remains in a continued state of suspended animation, requiring a never-ending series of government actions just to keep limping along.

The second dubious assertion is summarized in the phrase “jobless recovery”. State intervention has indeed produced, at enormous expense, a recovery of sorts involving the financial sector and larger corporations. But the improvement in corporate balance sheets has been achieved through relentless cost cutting, of which large-scale unemployment is the primary consequence.

Economic health is not based on corporate balance sheets, which can be easily manipulated. It is much better expressed as the sum of the economic situations of individual wage-earners and consumers. And this, in turn, rests on one fundamental reality: the abundance or lack of gainful employment.

The individual paycheck is the heart of the economy: it provides for taxes paid at all levels of government, for consumption which supports corporate profits, for the growth of pension funds, for all kinds of insurance. It feeds the creation of new businesses, the provision of education and health care. Without individual income banks will close, houses are foreclosed, and enterprises fail. An economy without employment is a contradiction in terms.

Without growth in employment there is no recovery. We are still in a recession, or even depression, depending on the numbers one believes in. Corporate statements achieved through relentless lay-offs, and the transfer abroad of American jobs, are only bright paint hiding a rotting wall.

On that basis the current priorities of the national government, be it bank reform, health care or carbon taxes, are wrong. Our primary concern should be to increase employment. And such employment should be the self-sustaining, not government-supported sort.

Here an important caveat must be made. The government cannot create self-sustaining employment, unless this happens under a full socialist system with state majority ownership of the economy. Such a system is not, and never has been, a realistic alternative for the United States. Recent moves in that direction, labeled as “stimulus spending”, have so far been a resounding failure.

The current bust is not a plain business cycle, but a structural crisis that was years in the making. The last administration’s response was to cover up its ineptitude in supervising the economy with a taxpayer-funded rescue of the financial sector. In a court of law this would amount to forcing the victim to pay for the bail costs of the perpetrator.

The current administration has done no better, instead engaging in a series of massively wasteful legislative distractions. These will not only have little impact on employment, but greatly increase the government’s liabilities, reducing its future freedom of action.

Other policies are thus needed.

Such policies must aim at providing leadership, direction, and confidence for the private sector, particularly medium and small enterprises. They must also provide a framework within which the private sector can plan, invest and operate. It is with such initiatives that we will concern ourselves here.

These must achieve two goals. One is to foster job creation. The other is to prevent job destruction. Unless measures in both areas are in place no policy will be successful.

Specific measures for both will be outlined in the following articles of this series.

Wednesday, March 24, 2010

Approaching Politics in a New and Effective Way

The ongoing political battle over the creation of a national health care system is both sign and symbol of the current state of U.S. politics. The congressional majority is making use of questionable tactics to pass legislation that the majority of voters by all appearances do not want. This is both an absurdity and a huge waste of energy, time and resources at a time of national crisis.

The nation currently faces crises in several areas, of which the main, but not the only, ones are the state of the economy and a government budget crisis at all levels. In addition to those, the country is engaged in a series of drawn out foreign wars, running a huge trade deficit and faces ongoing terrorist threats.

Looming beyond those questions is the long-term issue of developing and building the infrastructure needed for the long-term sustainability of the national energy supply.

Each of the above problems closely affects every citizen and requires a concerted national effort so as to achieve resolution. Yet all are pushed aside for the sake of a bitter fight over an issue which, while important, poses no immediate threat to national life. Why?

If one avoids as fruitless the criticism of persons and factions, the main cause of discord appears to be partisan ideology. As outlined in Viable Energy Now, our politics have, since the Industrial Revolution, been largely determined by the struggle between capitalism and socialism. While this conflict has dominated the 20th century, both ideologies have by now lost most of their relevance, while their flaws have been exposed in the collapse of the USSR as well as the successive crises of global capitalism in the years following that landmark event.

As the opposed ideologies were gradually losing their relevance, governments over time became hybrids incorporating elements of both systems. While this initially blunted the intensity of the ideological conflict, these hybrids were neither very manageable nor particularly efficient. But each side continues to blame the other for these shortcomings so that, paradoxically, the gradual blending of the two approaches has actually sharpened their theoretical opposition.

Resolving our current problems or crises therefore demands first of all a change of attitude, leading to the relinquishing of obsolete positions. Those on the left must admit that government, while it can and should provide leadership, is in fact a poor and wasteful manager and provider. The right must be ready to admit that huge, globe spanning corporate entities are not the highest form of free enterprise and the ideal incarnation of economic efficiency. Each side must recognize that both the state and the market are imperfect and fallible and function best in cooperation, not conflict.

Such an attitudinal change will allow for approaching our problems on the basis of objective fact rather than from the perspective of a preordained template. While ideology brooks no compromise and always needs an enemy to damn, facts provide ground for understanding, agreement and collective action towards a resolution. Furthering the interests of the nation and its component communities then becomes the overriding goal.

Our “National Interest Platform” is an attempt to redefine the issues we now face on such terms: what is the problem, what means are available for its solution, and how one should proceed towards that end. Its purpose is to reduce or eliminate these problems on the basis of cooperation rather than through unilateral application of ideological principles.

Its purpose is to heal our rifts through common effort in each area where our country faces a crisis, current or potential. We believe all of these difficulties can be overcome and that this approach will lead to a stronger, more confident and more united nation.

This article is the first of a series, with each succeeding one focusing on a specific issue, detailing its underlying causes and a potential solution. We hope it will generate comments and discussion and result in a widening effort towards cooperative solutions.

Monday, March 8, 2010

Complexes Can Be Dangerous, But Also Mortal

In his 1961 farewell speech, President Eisenhower warned the nation against the potential rise of a “Military-Industrial Complex”, a potential alliance of ambitious officers and defense-oriented corporate chiefs with the capacity to become a “state within the state”, and take advantage of the Cold War to exert undue influence on American politics.

Possibly thanks to his warning, this never occurred in the U.S. But such a complex did arise in our Cold War adversary state, the USSR. There elements within the government, the military and the armaments industry cooperated in the creation of a privileged sector, which gathered to itself the lion’s share of state revenues, scientific talent and political influence.

The Soviet industrial-military complex not only sucked the economy dry, it also involved the Soviet Union in a number of questionable foreign ventures, both expensive and dangerous, and which distracted the leadership from pressing issues of internal governance and productive investment.

While the USSR acquired world-class armed forces, it also locked itself in a military doctrine based on past wars and neglectful of future threats. Despite having contributed to the U.S. failure in Vietnam, the Soviet military leadership ignored the potential of asymmetric warfare and thereby dug their army’s grave in Afghanistan. The end result of their hubris was the collapse of Soviet power and the dissolution of the USSR.

The Soviet Union was a tyranny, and its end a blessing for all mankind. But the errors of other states, even enemy ones, can provide a useful perspective for evaluating our own policies.

And the question is worth asking: Are we in the U.S. making a similar mistake?

As the Cold War ended and our brand of capitalism was declared triumphant, we allowed our own “complex” to build itself: not a military one, but a Financial-Political entity of equal reach and power.

For the last two decades the growth of the financial sector has far outpaced that of the economy. A close alliance has developed between Wall Street executives and Washington politicians, reinforced by revolving-door appointments and backed by intense lobbying and massive campaign contributions. What is good for Wall Street is now accepted as being good for the country.

The question here is not one of moral equivalence between Soviet and U.S. conditions, but of political wisdom: Is it prudent for any state, be it democratic or authoritarian, to allow within itself a privileged entity that is, by its very position and the power it wields, at least partially above, or to put it more accurately, “aside of the law”?

The growth of the Financial-Political complex has appeared benign until recently. Indeed many have praised and encouraged the “new financial capitalism” that the complex created, the growing economic activity that followed and the huge tax revenues that flowed from it.

Until, of course, the bill came due.

As the “New Financial Capitalism” acquired global reach it brought a series of bubbles and crashes in its train: the Asian crisis, the dotcom bust, and finally the current Great Recession. Connected to these were other disturbing phenomena: large and growing trade deficits, the decay of U.S. manufacturing, increased reliance on foreign lenders. Income inequality has skyrocketed while the wages of the majority stagnated.

The last crisis also gave us the Great Unemployment.

When the New Capitalism crashed worldwide, saving the financial sector was the government’s primary concern, and it was accomplished regardless of cost. Trillions were deployed to provide the banks with liquidity. The general population got extensions in unemployment compensation.

The financial sector, supported by taxpayers, is back to New Capitalism activities, profits and bonuses, which appear to be necessary for the general welfare. The rest of the population is unemployed, under-employed, or hanging on for dear life.

Is there something unequal here?

This is not a sound foundation for growth and stability. Neither were the long queues in Soviet groceries while well-financed and protected industries were building more submarines and advanced jet fighters.

The people eventually caught up and disposed of the status quo.

What happened there could also happen here. We should take heed.

The U.S. Economy – On the Edge

There is no question that, barring a major unforeseen event, the state of the economy will be the main determinant in the November election.

The official line is that despite issues with employment, mortgages and credit the overall picture is improving. Should this be so, the political map is not likely to be drastically altered in the fall. The Democrats will lose some seats in both houses of Congress, but with a stronger economy they will make up for it in 2012.

If such improvement, on the contrary, does not materialize, all bets are off.

This then leads to two questions: first, is the current recovery for real; second, if it is not, why? If the current recovery falters, whoever has the answer to the second question might emerge from the election a winner, possibly for the long term.

First then comes the analysis of the “recovery”, and that raises an important caveat: that whatever improvement there might be in economic conditions is not the result of “normal” economic forces.

In the past it has been assumed that the economic cycle had a “natural” life of its own, fed by investor and consumer psychology, supply and demand, speculative excesses and panics, and so on. Governments could influence this process to a degree, but not abolish or replace it.

The current “recovery” on the other hand is unique, due to a massive and coordinated intervention by governments across the globe. Left to themselves the markets, the current theory goes, would have crashed into a “second Great Depression”. To avoid such an outcome a massive bail-out of the financial system was needed, following which restored credit availability and consumption would lead to an economic revival.

In other words, the current economic cycle is a manufactured artifact. As this has never been attempted on such a scale, we have no past experience to tell whether it will succeed or not.

At the present time, that question is still unanswered. The financial bailout and unprecedented government spending have for the time being arrested the downward slide and in places brought some improvement. At the same time warning signs of further trouble abound: still rising mortgage delinquencies, state deficits and unemployment in the U.S.; real estate inflation and excessive credit expansion in China; sovereign default risk in Europe, and so on. Underlying it all is the often expressed warning that the “recovery” could collapse if government support is withdrawn at any time in the foreseeable future.

Also troubling is the fact that the financial sector, the practices of which have precipitated the crisis, has gone back with a vengeance to these very same activities. This is particularly true of the stock markets, the rise of which is out of all proportion to the improvement in the underlying economic data. A market panic, even a limited one, would bury whatever “recovery” there might be. What if one took place this month or next?

This leads to the second question asked above: why would the remedies currently employed not work?

The question itself generates another query: What was the focus of the measures put in place to fight the crisis? The crash originated within the financial sector, which had undergone extraordinary development over the last two decades. The remedial measures taken were, for the most part if not exclusively, aimed at rescuing the financial system from its own misdeeds, at very high cost to governments and, ultimately, taxpayers.

The key justification for this effort and expense was the assumption that the financial system in its current state was essential to the economy and therefore had to be rescued. This applied particularly to the largest financial institutions, which were the main recipients of governmental largesse, and were, unlike a number of smaller banks, duly bailed out by the state.

These large institutions were the primary culprits regarding the risky financial practices which caused the crash. These activities were, as mentioned by Lord Turner, head of the British Financial Services Authority, of questionable, if any, social value. That is, they contributed little or nothing to the overall economy.

To put it plainly, was the rescue aimed primarily at the financial system and its large banks? Was the fate of the overall economy only a secondary consideration, as well as a convenient cover for spending public money on institutions that in actuality deserved to fail?

The question is important because if the economy was secondary in the scheme, then its recovery is far less likely than if it had been the primary target, particularly with a financial system still dysfunctional and at the same time still hogging the attention and resources of government authorities.

And if that is indeed the case, we are in for a long, hot summer, and a messy, unpredictable election.

Monday, February 15, 2010

Globalization: The Twilight

The financial crisis has now been with us for well over two years, and going on three. A variety of exceptional measures, never before attempted, have been taken by government authorities around the world. For most of the second half of 2009 it seemed that these had their effect: some small, but consistent signs of recovery were appearing.

This tentative improvement is now being brought into question. As many commentators have pointed out, the primary policy of governments has been, through deficit spending and a series of liquidity enhancing measures, to rescue and “reset” the global financial system. This has in effect transferred the financial institutions’ liabilities to sovereign governments, some of which are now looking at the possibility of default.

At this time, default threatens only those countries with the weakest finances. The large countries such as the U.S. are assumed to be still immune. This argument, however, has been heard before: in the summer of 2007 the collapse of a few over-leveraged hedge funds was declared to be “contained” with no further threat to the rest of the system.

This proved an illusory assurance, as one institution after another was shown to be a house of cards and the crisis grew to its full extent.

It is therefore worthwhile to probe deeper, and to ask whether there is not a more fundamental issue at the heart of this apparently continuing crisis. Is the globalized financial system, with or without government support, basically viable? And, if not, what is to be done before the crisis deepens?

The goal of the measures taken to date, particularly in the United States, has been “to avoid a second Great Depression”. This assumes that the situation, now and then, is in the main similar, and would respond to the same remedies. These have now been applied, so problem solved.

The hitch is that in the 1930’s economies were national, whereas now they are globally interconnected. In other words, the lessons of the 1930’s are irrelevant, our situation is different, and a new analysis is required, one taking full account of globalization.

Globalization has been taking place on two levels: finance and trade.

Financial integration is the most advanced, and at this time can be considered to be nearly complete. This has two major consequences in the way the financial system operates: synchronicity and overwhelming mass.

Synchronicity means that financial movements propagate instantaneously throughout the planet. A sell-off of equities in favor of commodity futures, for example, can begin in Asia and be repeated everywhere else within 24 hours, often even faster.

Mass means that, as all financial assets worldwide tend to become fungible, the entire monetary mass in the world can theoretically be put to use at a single point.

Furthermore that mass can be multiplied several times over through the use of leverage and derivative products. This amplification, coupled with the separation of money from any fixed standard such as gold, means that the amounts available for financial operations tend towards the infinite.

The globalization of trade, on the other hand, goes in the opposite direction. Because it tends to locate fixed assets in the area of lowest cost, it gradually decreases the total value of these assets. Globalization thus has the specific effect of increasing the amount of money or equivalent instruments in circulation while simultaneously reducing the total amount of assets this money can buy or be otherwise applied to.

Within a national economy the monetary mass and the amount of fixed assets must remain in rough balance for the economy to keep operating. Within a globalized economy they tend to diverge. One increases while the other diminishes. A systemic unbalance is created. As the profit motive continues to operate, this unbalance directs it along the path of least resistance, favoring speculation over productive investment and further increasing instability.

A sufficiently globalized economy will therefore tend to be unstable, alternating between boom and bust with an increasing amplitude and a quickening periodicity. These fluctuations will overwhelm any attempts to control them since the global monetary mass will in every case swamp the resources available to national governments.

Theoretically, such worldwide instability could be dampened and controlled through the use of truly global measures implemented through a supra-national institution. But neither the necessary knowledge nor the means to apply it are even remotely available. The world is still structured on the basis of the nation-state or its various equivalents, and power is distributed accordingly. Within that real, as opposed to theoretical, context, globalization is a vast and dangerous overreach.

The continuing crisis is a manifestation of this very overreach. It leaves the government authorities with a stark choice: reducing globalization down to the level where national means of control can effectively operate; or continuing on the present course and eventually driving over the cliff at an ever greater speed.

The current crisis is the hinge, or the point of critical choice. It is the third one of its kind, after the 1997 Asian meltdown and the dotcom bust. A realization is growing that somehow control has to be improved, that some blind force is shaking the current global arrangement, and that a decisive step must now be taken.

There are two paths to choose from. One is to continue driving half-blind with the hope that globalization is indeed the next stage in the development of economic man. The other is a return to the manageable, to sanity and logic within the framework of viable national economies.

The choice is ours.