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Corporate Nihilism and the Roots of War

Involuntary Selective Service for All

by T P Wilkinson

CounterPunch (Weekend Edition, December 2 to 4, 2011)

Would conscription make the problems of today’s US/ NATO wars more visible and repulsive to populations who seem to have no grasp of the destruction their military wreaks on the world?

There are many who have argued that conscription would promote war by providing a steady flow of cheap human flesh to spoil in battle. Yet there is no denying that universal conscription has often fanned protest and opposition to wars throughout history – even modern wars fought with sophisticated psychological weapons.

Not only has the US had an “all volunteer” military for some forty years, other NATO members, like France and Germany recently ended universal conscription in favour of professional volunteer armies. Has this made military intervention for France and Germany (within NATO) easier? Has it immunised the population against the most basic form of anti-war feeling – the anger at a lost or disabled life from military action?

Although there are some problematic aspects of military indoctrination which should not be underestimated. Arguments that compulsory military service – and hence its abolition –  are directly related to a society’s militarism ignore the extent to which, for example, the US is subjected to saturation militarism in nearly every aspect of consumer life (that which substitutes for political life today). So while the number of standard issue cannon fodder produced by factories like Fort Jackson has been reduced by the end of the draft, the militarisation of the society as a whole has been severely enhanced – especially through the mass media. The proliferation of US war products – video and computer games and films – throughout Europe has certainly done nothing to promote anti-war sentiment here.

I think we can also recall that Selective Service only became an issue when it meant too many white folks without special exemptions were also getting sent to death, disability or drug addiction in Southeast Asia. If I am not mistaken the “all volunteer army” became an employer of last resort for many Americans who are the first to be denied work in the civilian sector. This may not be the case in Europe, but a stagnant employment market will certainly lead many youth to consider the relative security of a job under arms.

But does the new warfare even need the large battalions of expendable troops? Just as financial “engineering” has replaced industrial production as a means of wealth extraction, remote-control weapons deployment and mercenary subcontracting have replaced largely the mass armies that characterised US and UK warfare in Korea and Vietnam. In this sense warfare has become even more “corporate”. The fiction that wars of invasion and conquest are the result of State action is obsolete. The entire “national security” process has been fully de-politicised, in other words, the State is more clearly than ever a mere conduit for policies and practices whose origin and essential characteristics are those of boardroom strategic planning and marketing. The difference between global business and global warfare has in fact dissolved.

This presents a serious cognitive problem for anyone trying to find the root of this poisonous plant in order to tear it from the ground that nurtures it. The military sustained by the draft was mimetic of the steel mill in Gary or the cotton plantation. Today’s military operates like the headquarters of Microsoft or USX – the actual physical violence has been outsourced.

However, another point to consider when recommending reinstatement of the Draft is the summation of a historical fact – something to which Pilger also alluded in his Vietnam reporting. No mass movement has ever produced revolutionary change without a mutiny in the armed forces. The corporations that rule the US know this very well. That was an essential reason for disbanding conscription – a process now completed in Germany and France.

At the same time as NATO contingent units are now drawn from volunteer (career and mercenary) forces, covert action has focused on turning the military of target countries against their State in favor of corporate invaders. Foreign military assistance has never had any other goal than to create a segment of the host military willing to betray its own country in favour of the US and NATO. However, this is not always enough, especially in countries where the military has a strong popular component (for example, through conscription).

In the 1960s the US developed and propagated the overarching “national security doctrine” based on corporate-industrial ideology as an antidote to the nationalism of emerging countries and those who had developed their nationalism in the course of nineteenth century struggles (for example, Latin America). A whole generation of military cadre were trained to see the US corporation as the model for national interest and not the population – the Nation. The 1964 Brazilian coup was paradigmatic.

There is considerable confusion among many about how this approach – the corporate security model – can be reconciled with the events in North Africa and the Near East. I think the key to understanding this lies in two particular aspects: the corporation’s religious character and therefore its compatibility with reactionary religious movements (despite all the noise made about secularism) and the consolidation of the financial/ drug trade sector to provide the “central committee” of the entire global economy.

While the US government and NATO all complain that the Great War On Terror is a campaign against movements like “Islamic fundamentalism”, the reverse has been true (going back to Carter). The Great War On Terror is a battle against all forms of populism and populism from Casablanca to Kabul has always had some Islamic components to the extent that US-backed regimes effectively eliminated secular political movements (the actual aim of the Brzezinski organised insurgency against the Kabul government in the late 1970s). Qaddafi’s murder marked the end of the war against African secular populism that began with Nkrumah. The problem for corporations struggling to expand and maintain power is not Islam per se but the control of the State and popular institutions. Backing reactionary religious leaders and groups is one of the oldest tactics of Euro-American colonialism. Corporate management and religious reactionaries are structurally and ideologically very similar.

When the US with the help of France succeeded in replacing the 1979 secular Iranian revolution with Khomeini’s reactionary faction, it seemed like the sovereignty question could be suppressed in Iran in favour of a preoccupation with religious repression. The “Khomeini” solution was for his reactionary Islamic organisation to crush the Iranian nationalists because of their “secularism”. US corporations clearly underestimated the depth of Iranian nationalism. Ahmadinejad is a thorn in the side of US empire because he represents Iranian nationalism even as he appears to sustain the extreme form of Islam upon which the US had relied since 1980 to subdue the Iranian population. The fake “green revolution” was an attempt to introduce someone who appeared entirely secularised and Western on the assumption that Iranian youth are more easily seduced by mobile telephony than patriotism. To date this strategy has failed to produce either an entirely compliant pseudo-secular regime or an entirely “autistic” reactionary religious regime (like that of Khomeini). Apparently the Kermit Roosevelt strategy does not work either – there has been little success in penetrating the Iranian military so as to induce a coup. In Syria it appears that the ability of Russia and China to satisfy the vanities of Syrian military leaders has been sufficient to immunize them against US subversion. Hence the need for more outright terror – from Turkey and Israel.

These are not mass military strategies of the type applied in World War Two, Korea or Vietnam. They are global marketing strategies as designed in the boardrooms and staff offices of the major US and European corporations. Just as Apple contrives to launch products in such a way that customers have to stand for hours to compete for an item or Walmart announces potential shortages before major “shopping days” thus inducing masses of fanatical consumers willing to trample each other. Thus the wars the US corporations have been waging against the world all follow marketing stages which can be found in the voluminous literature from the academic exhaust pipes of inter alia Harvard Business School: boycotts/ sanctions or financial manipulation to create shortages or distortions in supply, followed by psychological operations to create tension in the population and international media campaigns to market the “problem/ product”, if this does not work or if the profit targets change, then the State itself is attacked covertly. When this kind of marketing does not work, then the slow escalation of military and political intervention begins until something breaks. The rash of wars we have seen in the past twelve years are simply the extreme expressions of endless war by US and European corporations called euphemistically “trade”. Trade for profit is all that remains of politics – and to paraphrase the ever-useful Clausiewitz – war is trade by other means.

This has been the universal strategy of what corporations call “globalisation” but in fact is just the euphemism for conquest. Paradigmatic was certainly the US/ UK success in Indonesia (too many people focus on the failures of Vietnam but thereby miss the bigger picture). None of the “success” stories required US intervention with ground troops. But as can be seen the US corporate landscape is populated with a wide variety of vermin and not everyone functions like a rat, hence there have always been competing or even contradictory strategies. The importance of the 2008 coup by the banking/ drug/ weapons cartel is that it has led to a coherence in strategy and a consensus among the financial elite as to the means and ends of corporate domination. The archaic industrialists have been marginalized. People whether as cannon fodder or as consumers have always been critical for industrialists. Bankers have never been seriously interested in people – but in cash flows. It is also a mistake to see the current world war as directed toward a “new order” or a final strategic position. That is the main fallacy of the “US will overextend itself” argument. This is not a war for stability in any sense of the word. It is a war for war’s sake – trade for trade’s sake, profit for profit’s sake – in that sense a fanatically nihilistic approach to human existence.

With this strategy and this concentration of power in the hands of the misanthropists and nihilists, the last thing any of them want is popular institutions and organisations – not even mass armies. That is why liberals are utterly useless today as are most of the faux gauche. They abandoned mass organisation after 1989 in favour of enhanced individualism (really political egotism). They abandoned mass education in favour of allegedly “tailored” learning (really autistic dependence on electronic devices). If any one doubts this, one only has to listen to all those who insist that freedom depends on access to and by Google or the ability to own and use personal digital devices, if only to listen to one’s preferred music.

At the same time very few of these “digital liberators” seem to ask the question “what human freedom means if it is reduced to the consumer prerogatives of digital life?” Those who have been induced with the years to rave over the Internet and all its appurtenances seem to have utterly forgotten that man (and conscripted armies) cannot live by data alone.

_____

T P Wilkinson writes and teaches politics and literature in Heinrich Heine’s birthplace, Dusseldorf. He is also the author of Church Clothes, Land, Mission and the End of Apartheid in South Africa (Maisonneuve Press, 2003). Currently he is working on a book called: 1959: Unbecoming American.

He can be reached at beda.v@maisonneuvepress.de

http://www.counterpunch.org/2011/12/02/corporate-nihilism-and-the-roots-of-war/

Categories: Uncategorized

Thud of the Jackboot

by Alexander Cockburn

CounterPunch (Weekend Edition,  December 23 to 25 2011)

Too bad Kim Jong-il kicked the bucket last weekend. If the divine hand that laid low the North Korean leader had held off for a week or so, Kim would have been sustained by the news that President Obama is signing into law a bill that puts the United States not immeasurably far from the Democratic People’s Republic of  Korea in contempt of constitutional protections for its citizens, or constitutional restraints upon criminal behavior sanctioned by the state.

At least the DPRK doesn’t trumpet its status as the last best sanctuary of liberty. American politicians, starting with the president, do little else.

A couple of months ago came a mile marker in America’s steady slide downhill towards the status of a Banana Republic, with Obama’s assertion that he has the right as president to order secretly the assassination, without trial, of a US citizen he deems to be working with terrorists. This followed his betrayal in 2009 of his pledge to end the indefinite imprisonment without charges or trial of prisoners in Guantanamo.

Now, after months of declaring that he would veto such legislation, Obama has now crumbled and will soon sign a monstrosity called the Levin/McCain detention bill, named for its two senatorial sponsors, Carl Levin and John McCain. It’s snugged into the 2012 National Defense Authorization Act.

The detention bill mandates – don’t glide too easily past that word –  that all accused terrorists be indefinitely imprisoned by the military rather than in the civilian court system; this includes US citizens within the borders of the United States.  Obama supporters have made strenuous efforts to suggest that US citizens are excluded from the bill’s provisions. Not so. “It is not unfair to make an American citizen account for the fact that they decided to help Al Qaeda to kill us all and hold them as long as it takes to find intelligence about what may be coming next”, says Senator Lindsay Graham, a big backer of the bill.

And when they say, ‘I want my lawyer’, you tell them, ‘Shut up. You don’t get a lawyer.’

The bill’s co-sponsor, Democratic senator, cosponsor of the bill, Carl  Levin says it was the White House itself that demanded that the infamous Section 1031 apply to American citizens.

Anyone familiar with this sort of “emergency” legislation knows that those drafting the statutes like to cast as wide a net as possible. In this instance  the detention bill authorizes use of military force against anyone who “substantially supports” al-Qaeda, the Taliban or “associated forces”. Of course “associated forces” can mean anything. The bill’s language mentions  “associated forces that are engaged in hostilities against the United States or its coalition partners, including any person who has committed a belligerent act or who has directly supported such hostilities in aid of such enemy forces”.
 
This is exactly the sort of language that can be bent at will by any prosecutor. Protest too vigorously the assassination of US citizen Anwar al Awlaki by American forces in Yemen in October and one day it’s not fanciful to expect the thud of the military jackboot on your front step, or on that of any anti-war organizer, or any journalist whom some zealous military intelligence officer deems to be giving objective support to the forces of Evil and Darkness.

Since 1878 here in the US, the Posse Comitatus Act has limited the powers of local governments and law enforcement agencies from using federal military personnel to enforce the laws of the land. The detention bill renders the Posse Comitatus Act a dead letter.

Governments, particularly those engaged in a Great War on Terror, like to make long lists of troublesome people to be sent to internment camps or dungeons in case of national emergency. Back in Reagan’s time, in the 1980s, Lieutenant Colonel Oliver North, working out of the White House, was caught preparing just such a list. Reagan speedily distanced himself from North. Obama, the former lecturer on the US constitution, is brazenly signing this authorization for military internment camps.

There’s been quite a commotion over the detention bill. Civil liberties groups such as the ACLU have raised a stink. The New York Times has denounced it editorially as “a complete political cave-in”. Mindful that the votes of liberals can be useful, even vital in presidential elections, pro-Obama supporters of the bill claim  that it doesn’t codify “indefinite detention”. But indeed it does. The bill explicitly authorizes “detention under the law of war until the end of hostilities”.

Will the bill hurt Obama? Probably not too much, if at all. Liberals are never very energetic in protecting constitutional rights. That’s more the province of libertarians and other wackos like Ron Paul actually prepared to draw lines in the sand in matters of principle.

Simultaneous to the looming shadow of indefinite internment by the military for naysayers, we have what appears to be immunity from prosecution for private military contractors retained by the US government, another extremely sinister development. Last Wednesday we ran here an important article on the matter from Laura Raymond of the Center for Constitutional Rights {1}.

The US military has been outsourcing war at a staggering rate. Even as the US military quits Iraq, thousands of private military contractors remain. Suppose they are accused of torture and other abuses including murder?

The Centre for Constitutional Rights  is currently representing Iraqi civilians tortured in Abu Ghraib and other detention centers in Iraq, seeking to hold accountable two private contractors for their violations of international, federal and state law. In Raymond’s words,

By the military’s own internal investigations, private military contractors from the US-based corporations L-3 Services and CACI International were involved in the war crimes and acts of torture that took place, which included rape, being forced to watch family members and others be raped, severe beatings, being hung in stress positions, being pulled across the floor by genitals, mock executions, and other incidents, many of which were documented by photographs. The cases – Al Shimari vs CACI and Al-Quraishi vs Nakhla and L-3 – aim to secure a day in court for the plaintiffs, none of whom were ever charged with any crimes.

But the corporations involved are now arguing in court that they should be exempt from any investigation into the allegations against them because, among other reasons, the US government’s interests in executing wars would be at stake if corporate contractors can be sued.  And Raymond reports that

they are also invoking a new, sweeping defense. The new rule is termed “battlefield preemption” and aims to eliminate any civil lawsuits against contractors that take place on any “battlefield”.

You’ve guessed it. As with “associated forces”, an elastic concept discussed above, in the Great War on Terror the entire world is a “battlefield”. So unless the CCR’s suit prevails, a ruling of a Fourth Circuit federal court panel will stand and private military contractors could be immune from any type of civil liability, even for war crimes, as long as it takes place on a “battlefield”.

Suppose now we take the new powers of the military in domestic law enforcement, as defined in the detention act, and anticipate the inevitable, that the military delegates these powers to private military contractors. CACI International or a company owned by, say Goldman Sachs, could enjoy delegated powers to arrest any US citizen here within the borders of the USA, “who has committed a belligerent act or who has directly supported such hostilities in aid of such enemy forces”, torture them to death and then claim “battlefield preemption”.

Don’t laugh.

On this issue of the “privatization”, T P Wilkinson has a brilliant essay in our latest newsletter on “corporate nihilism and the roots of war”. Wilkinson starts with a critique of the familiar argument that a return to the draft would bring America’s wars home to the citizenry and the prospect of their children being sent off to possible mutilation by IEDs or death would spark resistance. Wilkinson suggests that this underestimates the saturation of our society by  militarism. He goes on:

But does the new warfare even need the large battalions of expendable troops? Just as financial “engineering” has replaced industrial production as a means of wealth extraction, remote-control weapons deployment and mercenary subcontracting have largely replaced the mass armies that characterized US and UK warfare in Korea and Vietnam. In this sense, warfare has become even more “corporate”. The fiction that wars of invasion and conquest are the result of state action is obsolete. The entire “national security” process has been fully depoliticized; in other words, the state is more clearly than ever a mere conduit for policies and practices whose origin and essential characteristics are those of boardroom strategic planning and marketing. The difference between global business and global warfare has, in fact, dissolved.

This presents a serious cognitive problem for anyone trying to find the root of this poisonous plant in order to tear it from the ground that nurtures it. The military sustained by the draft was mimetic of the steel mill in Gary, Indiana, or the cotton plantation in the south? Today’s military operates like the headquarters of Microsoft or USX – the actual physical violence has been outsourced.

In this latest newsletter {2}, hot from the presses, we continue our series on Obama’s record, with David Macaray’s fine dissection of the Democratic president’s treatment of the people whose organizing and also money put him in office: we mean the labor movement. And how did Obama reward the labor movement?  Read Macaray to get the full, sordid story.

What is the Obama administration really up to in the Pacific, deploying US Marines in Australia amid much fanfare, pumping the alarm buttons about China’s military might? Read Conn Hallinan’s report {2}.

He’s slithering down in the polls right now, but Newt Gingrich created a stir with his innovative proposals to put youngsters to work, instilling in impressionable youth the beauties of the work ethic, cleaning toilets. Co-editor Cockburn puts Gingrich in a time machine and takes him back to the coalmines and chimneys of nineteenth-century England, when his dream world of unregulated labor was in full flower.

Only in our exclusive CounterPunch newsletter.

SUBSCRIBE NOW! {2}

Links:

{1} http://www.counterpunch.org/2011/12/21/do-private-military-contractors-have-impunity-to-torture/

{2} http://www.easycartsecure.com/CounterPunch/Annual_Subscriptions.html

Alexander Cockburn can be reached at alexandercockburn@asis.com

http://www.counterpunch.org/2011/12/23/thud-of-the-jackboot/

Categories: Uncategorized

Modern Money Blog Number Twenty Eight – Responses

Government Spending with Self-Imposed Constraints

Responses to Comments on Blog Number Twenty Eight

by L Randall Wray

New Economic Perspectives (December 21 2011)

Comments are thankfully few and I already dealt with some of them. I doubt there will be many readers this week, but here we go:

Q1: Is it possible to show these transactions simply from a nominal perspective?

A1: Look if you buy a stick of gum we need to show the “real” – you exchange a demand deposit for gum, your store gets the demand deposit and you get the gum. We can stick to purely “nominal” only if it is a financial transaction only. But you do pay “money” (the gum you buy was denominated in dollars) so it is valued in nominal terms: $1.45. If you did not think it was worth that you would not buy it. So that is the nominal value we put on it. Kenneth Boulding had a very nice way of looking at it. You exchange your liquid savings (deposit) for illiquid assets (gum); then you dissave over time as you consume them. As Boulding said, consumption is destruction of your assets – you chew your assets away. He said you get no satisfaction from consumption = destruction of assets. Tires on your car are a clearer example. You “consume” them over five years as you wear them out. You’d rather that they do not wear out, but they will. That is destruction of assets. It is a stock-flow consistent model. Boulding was among the most clever and greatest of economists.

Q2 by WH: You wrote in Blog #24, referring to foreigner’s accumulation of reserves, such as China’s:

Neither of these activities will force the hand of the issuing government – there is no pressure on it to offer higher interest rates to try to find buyers of its bonds … Government can always “afford” larger  keystrokes, but markets cannot force the government’s hand because it can simply stop selling bonds and thereby let markets  accumulate reserves instead.

In world with self-imposed constraints like the US’s, it doesn’t have the option to stop selling bonds if it wants to deficit spend.  However, like you mention, bonds are an interest-earning alternative to reserves.  So:

(1) If bonds are an interest-earning alternative to reserves, is there an economic reason why the ultimate holder of reserves (whether it’s China or whoever China sells dollars to) would not place their reserves into US debt and at an interest rate consistent with the future path of FFRs?  In other words, it’s generally understood interest rates on US debt follow the expected future path of FFRs.  Why would this change if foreigners hold the debt (even a majority portion of the debt)?

Translation: FFR apparently means “Federal funds rate”, a benchmark interest rate with a target set by the Federal Reserve in the United States.

(2) Let’s assume foreigners arbitrarily abstain from buying the debt.  Could the US and its holding of reserves as well as credit creation abilities still fund the US debt at rates consistent with the path of expected FFRs?

A2: First, sovereign government can target any interest rate it wants – overnight, short-term, long-term. It can refuse to offer long-term debt and instead stay at short end of market. Thus it can offer Chinese 0.50% on thirty days, or zero percent on overnight. Period. They’ll take the thirty days, but if they decide not to, so what? And in any case, all the monetary operations undertaken to let the Treasury spend have nothing to do with Chinese – it is the special banks in the US.

Q3 by wh10: It seems if we take foreigners out of the picture, then there is a smaller amount of reserves/treasury debt with which to buy/rollover into new debt.  However, in sort of a reversal from my alien scenario, why couldn’t the US just hold smaller but more frequent auctions to overcome any ‘funding’ issues?

A3: It is not a funding issue and yes, the US can do whatever it wants. The foreigners are never in the “funding” part – it is special domestic banks.

Q4 by Paul Krueger: Thanks, this is a nice exposition of the (at least partial) equivalence of different views of the process. To really prove a complete functional equivalence it seems to me that you would need to show that the interest rate paid on government bonds was the same in any of the cases. Is that a correct assumption or does that not matter for some reason?

Q5 by wh10: I believe at the end of Fullwiler’s paper, he also comments that bank primary dealers can take on the government’s treasuries in a manner similar to your case 3 (as opposed to non-bank primary dealers having to engage in repurchase agreements to obtain the deposits to purchase the treasury).  Is there a practical difference between these two types of primary dealers?  Can bank primary dealers handle a greater government debt load or do it more easily?  What is the ratio of these bank primary dealers to non-bank primary dealers? Secondly, Fullwiler has commented to me that it is possible that a treasury auction could fail if the government conducted a treasury auction, say, two to three times the size of what it normally does (or some conceivable size).  This is because investors do have to secure financing to participate in the auction, and they might not be able to do it readily enough with such a large issuance.  Although, he says, the next time around, they’d likely have no problem getting things together.  Though this doesn’t present an issue to a government normally, I think it does underscore a real difference between a government being able to simply spend first whatever it pleases (for example, if it had overdrafts from the Fed) and a government needing to tax/sell debt to the private sector in order to spend.  That is, the private does have to secure financing for a government debt auction to succeed.  So just because the final balance sheet position is the same, the path to get there may be more obstructive in the real world.  Usually, it is not an issue at all, but it seems it could conceivably be.  I just think these types of qualifiers are worth mentioning when teaching MMT to others who may be skeptical about ‘government spends first’, since it paints a more accurate picture and clarifies why the real world doesn’t operate exactly like the general case of a consolidated Fed/Treasury.

Q6 by Neil Wilson S: Is there any benefit from all those extra transactions? Or is this, like allegedly private pensions that ‘invest’  in Treasuries, simply a Job Guarantee scheme for financial sector workers?

L R Wray Answers:

Paul: A treasury that understands what bonds are would only sell bills and so would have no impact on interest rates; that said, there might be an impact if treasury tries to sell too many long term bonds into markets. Solution: don’t sell long term bonds.

wh10: Scott is the expert and I won’t disagree. And aliens might explode a supernova at some distant place in the universe precisely when the treasury tries to auction, causing a temporary hiccup. We cannot possibly deal with every unlikely event. Treasury and Fed converse every morning to go over plans. They aren’t going to try to auction of three times what the market can handle. In any case, the primary dealers are “banks” so not sure what you are getting at. While the path could be more difficult in practice it is not. Except when Congress refuses to raise debt limit!

And that leads to Neil: No, obviously all the intermediate transactions just introduce the possibility that something could possibly go wrong. You can be a much better boxer if you do not tie your hands behind your back and your shoes together. These constraints arise because Congress doesn’t understand monetary operations.

http://neweconomicperspectives.blogspot.com/2011/12/government-spending-with-self-imposed.html

Categories: Uncategorized

Modern Money Blog – Number Twenty Eight

Government Spending with Self-Imposed Constraints

by L Randall Wray

New Economic Perspectives (December 18 2011)

In the Primer we discussed the general case of government spending, taxing, and bond sales. To briefly summarize, we saw that when a government spends, there is a simultaneous credit to someone’s bank deposit and to the bank’s reserve deposit at the central bank; taxes are simply the reverse of that operation: a debit to a bank account and to bank reserves. Bond sales are accomplished by debiting a bank’s reserves. For the purposes of the simplest explication, it is convenient to consolidate the treasury and central bank accounts into a “government account”.

To be sure, the real world is more complicated: there is a central bank and a treasury, and there are specific operational procedures adopted. In addition there are constraints imposed on those operations. Two common and important constraints are (a) the treasury keeps a deposit account at the central bank, and must draw upon that in order to spend, and (b) the central bank is prohibited from buying bonds directly from the treasury and from lending to the treasury (which would directly increase the treasury’s deposit at the central bank). The US is an example of a country that has both of these constraints. In this blog we will go through the complex operating procedures used by the Federal Reserve (“Fed”) and US Treasury. Scott Fullwiler is perhaps the most knowledgeable economist on these matters, and this discussion draws very heavily on his paper. Readers who want even more detail should go to his paper, which uses a stock-flow consistent approach to explicitly show results.

First, however, let us do the simple case, beginning with a consolidated government (central bank plus treasury) and look at the consequences of its spending. Then we will look at the real world example of the US today. Readers have asked for some balance sheet examples, so I am using some simple T-accounts here. It might take some readers a bit of patience to work through this if they have not seen T-accounts before. (Note: these are partial balance sheets – I am only entering the minimum number of entries to show what is going on.)

Let us assume government buys a bomb and imposes a tax liability. This is shown as Case 1a:

http://1.bp.blogspot.com/-hnEDmGmqxRU/Tu7EwDEVg6I/AAAAAAAAAS0/jBMXCk1FnrQ/s1600/1.png

The government gets the bomb, the private seller gets a demand deposit. Note that the tax liability reduces the seller’s net worth and increases the government’s (after all, that is the purpose of taxes – to move resources to the government). The private bank gets a reserve deposit at the government.

Now the tax is paid by debiting the taxpayer’s deposit and the bank’s reserves:

http://4.bp.blogspot.com/-mQmv8hUq8vs/Tu7E_WuflYI/AAAAAAAAAS8/84JOufyrpj8/s1600/2.png

And so the final position is:

http://2.bp.blogspot.com/-xvJl-eEZwf4/Tu7FFyRNeJI/AAAAAAAAATE/1NzPN3sUFBI/s1600/3.png

The implication of “balanced budget” spending and taxing by the government is to move the bomb to the government sector – reducing the private sector’s net worth. Government uses the monetary system to accomplish the “public purpose”: to get resources such as bombs.

Now let us see what happens when government deficit spends. (Don’t get confused – we are not arguing that taxes are not needed; remember “taxes drive money” so there is a tax system in place but government decides that this week it will buy a bomb without imposing an additional tax).

http://4.bp.blogspot.com/-M8U8tdpwnsQ/Tu7FN0Saz8I/AAAAAAAAATM/bCSvMIC3MFQ/s1600/4.png

Here, the bomb is moved to the government, but the deficit spending allows net financial assets to be created in the private sector (the seller has a demand deposit equal to the government’s financial liability – reserves). However, the bank is holding more reserves than desired. It would like to earn more interest, so government responds by selling a bond (remember: bonds are sold as part of monetary policy, to allow the government to hit its overnight interest rate target):

http://1.bp.blogspot.com/-3JOJ4IOChIY/Tu7Gk_Oe_7I/AAAAAAAAATk/FsW76ejz_qo/s1600/5.png

And the end result is:

http://3.bp.blogspot.com/-Pz3AqKZPerA/Tu7GpoVEo9I/AAAAAAAAATs/cpunjo63odc/s1600/6.png

The net financial asset remains, but in the form of a treasury [bond] rather than reserves. Compared with Case 1a, the private sector is much happier! It’s total wealth is not changed, but the wealth was converted from a real asset (bomb) to a financial asset (claim on government).

Ah, but that was too easy. Government decides to tie its hands behind its back by requiring it sell the bond before it deficit spends. Here’s the first balance sheet, with the bank buying the bond and crediting the government’s deposit account:

http://2.bp.blogspot.com/-C2NkNEaQplI/Tu7Gx7Kn46I/AAAAAAAAAT0/AJlvT3Dm_c4/s1600/7.png

Now government writes a check on its deposit account, to buy the bomb:

http://3.bp.blogspot.com/-nQbmubtdbjo/Tu7G6qH_KXI/AAAAAAAAAT8/UZqOZkyNFOo/s1600/8.png

The bank debits the government’s deposit and credits the seller’s. The final position is as follows:

http://2.bp.blogspot.com/-ArRbJju-6O0/Tu7HCn6EKII/AAAAAAAAAUE/RYmHxriphJE/s1600/9.png

Note it is exactly the same as case 1b: selling the bond before deficit spending has no impact on the result, so long as the private bank is able to buy the bond and the government can write a check on its deposit account.

That, too, is too simple. Let’s tie the government’s shoes together: it can only write checks on its account at the central bank. So in the first step it sells a bond to get a deposit at a private bank.

http://4.bp.blogspot.com/-ttmHMFxnGeY/Tu7HIJBNidI/AAAAAAAAAUM/tc6EoV2HF2U/s1600/10.png

Next it will move the deposit to the central bank, so that it can write a check.

http://3.bp.blogspot.com/-JpIyq6D3T2c/Tu7HN469F7I/AAAAAAAAAUU/r-Lu2C5MRV4/s1600/11.png

We have assumed the bank had no extra reserves to be debited when the Treasury moved its deposit, hence, the central bank had to lend reserves to the private bank (temporarily, as we will see). Now the treasury has its deposit at the central bank, on which it can write a check to buy the bomb.

http://3.bp.blogspot.com/-ovfjqO0wDSM/Tu7HWCtIBhI/AAAAAAAAAUc/tDyT-MPYLaA/s1600/12.png

When the treasury spends, the private bank receives a credit of reserves, allowing it to retire its short term borrowing from the central bank (looking to the private bank’s balance sheet, we could show a credit of reserves to its asset side, and then that is debited simultaneously with its borrowed reserves; I left out the intermediate step to keep the balance sheet simpler). The private bank credits the bomb seller’s account. The final position is as follows:

http://3.bp.blogspot.com/-FeJfcqZ4ERA/Tu7HbjrqMaI/AAAAAAAAAUk/PFZzQ_kdhLw/s1600/13.png

What do you know, it is exactly the same as Case 2 and Case 1b! Even if the government ties its hands behind its back and its shoes together, it makes no difference.

Okay, admittedly these are still overly simple thought experiments. Let’s see how it is really done in the US – where the Treasury really does hold accounts in both private banks and the Fed, but can write checks only on its account at the Fed. Further, the Fed is prohibited from buying Treasuries directly from the Treasury (and is not supposed to allow overdrafts on the Treasury’s account). The deposits in private banks come (mostly) from tax receipts, but Treasury cannot write checks on those deposits. So the Treasury needs to move those deposits from private banks and/or sell bonds to obtain deposits when tax receipts are too low. So let us go through the actual steps taken. Warning: it gets wonky.

Note: The following discussion is adapted from Treasury Debt Operations – An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies, by Scott T Fullwiler, September 2010 (edited April 2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1874795.

The Federal Reserve Act now specifies that the Fed can only purchase Treasury debt in “the open market”, though this has not always been the case.  This necessitates that the Treasury have a positive balance in its account at the Fed (which, as set in the Federal Reserve Act, is the fiscal agent for the Treasury and holds the Treasury’s balances as a liability on its balance sheet).  Therefore, prior to spending, the Treasury must replenish its own account at the Fed either via balances collected from tax (and other) revenues or debt issuance to “the open market”.

Given that the Treasury’s deposit account is a liability for the Fed, flows to/from this account affect the quantity of reserve balances. For example, Treasury spending will increase bank reserve balances while tax receipts will lower reserve balances. Normally, increases or decreases to banking system reserves impact overnight interest rates. Consequently, the Treasury’s debt operations are inseparable from the Fed’s monetary policy operations related to setting and maintaining its target rate.  Flows to/from the Treasury’s account must be offset by other changes to the Fed’s balance sheet if they are not consistent with the quantity of reserve balances required for the Fed to achieve its target rate on a given day.  As such, the Treasury uses transfers to and from thousands of private bank deposit (both demand and time) accounts – usually called tax and loan accounts – for this purpose.  Prior to fall 2008, the Treasury would attempt to maintain its end-of-day account balance at the Fed at $5 around billion on most days, achieving this through “calls” from tax and loan accounts to its account at the Fed (if the latter’s balance were below $5 billion) or “adds” to the tax and loan accounts from the account at the Fed (if the latter were above $5 billion). (The global financial crisis and the Fed’s response, especially “quantitative easing” has led to some rather abnormal situations that we will mostly ignore here.)

In other words, timeliness in the Treasury’s debt operations requires consistency with both the Treasury’s management of its own spending/revenue time sequences and the time sequences related to the Fed’s management of its interest rate target.  As such, under normal, “pre-global financial crisis” conditions for the Fed’s operations in which its target rate was set above the rate paid on banks’ reserve balances (which had been set at zero prior to October 2008, but is now set above zero as the Fed pays interest on reserves), there were six financial transactions required for the Treasury to engage in deficit spending.  Since it is clear that current conditions for the Fed’s operations (in which the target rate is set equal to the remuneration rate) are intended to be temporary and at some point there is presumably a desire (by Fed policy makers) to return to the more “normal” “pre-crisis” conditions, these six transactions are the base case analyzed here (though the “post-crisis” operating procedures do not significantly impact conclusions reached).

The six transactions for Treasury debt operations for the purpose of deficit spending in the base case conditions are the following:

A. The Fed undertakes repurchase agreement operations with primary dealers (in which the Fed purchases Treasury securities from primary dealers with a promise to buy them back on a specific date) to ensure sufficient reserve balances are circulating for settlement of the Treasury’s auction (which will debit reserve balances in bank accounts as the Treasury’s account is credited) while also achieving the Fed’s target rate.  It is well-known that settlement of Treasury auctions are “high payment flow days” that necessitate a larger quantity of reserve balances circulating than other days, and the Fed accommodates the demand.

B. The Treasury’s auction settles as Treasury securities are exchanged for reserve balances, so bank reserve accounts are debited to credit the Treasury’s account, and dealer accounts at banks are debited.

C. The Treasury adds balances credited to its account from the auction settlement to tax and loan accounts.  This credits the reserve accounts of the banks holding the credited tax and loan accounts.

D. (Transactions D and E are interchangeable; that is, in practice, transaction E might occur before transaction D.)  The Fed’s repurchase agreement is reversed, as the second leg of the repurchase agreement occurs in which a primary dealer purchases Treasury securities back from the Fed.  Transactions in A above are reversed.

E. Prior to spending, the Treasury calls in balances from its tax and loan accounts at banks.  This reverses the transactions in C.

F. The Treasury deficit spends by debiting its account at the Fed, resulting in a credit to bank reserve accounts at the Fed and the bank accounts of spending recipients.

Again, it is important to recall that all of the transactions listed above settle via Fedwire (T2).  Also, the analysis is much the same in the case of a deficit created by a tax cut instead of an increase in spending.  That is, with a tax cut the Treasury’s spending is greater than revenues just as it is with pro-active deficit spending.

Note also that the end result is exactly as stated above using the example of a consolidated government (Treasury and Central Bank): government deficit spending leads to a credit to someone’s bank account and a credit of reserves to a bank which are then exchanged for a treasury [bond] to extinguish the excess reserves. However, with the procedures actually adopted, the transactions are more complex and the sequencing is different. But the final balance sheet position is the same: the government has the bomb, and the private sector has a treasury [bond].

http://neweconomicperspectives.blogspot.com/2011/12/mmp-blog-28-government-spending-with.html

Categories: Uncategorized

The Daily Losses from Unemployment

by Bill Mitchell

billy blog (January 13 2010)

I have been doing some work again on the costs of unemployment and this blog gives a snapshot of part of that research. One of the strong empirical results that emerge from the Great Depression is that the job relief programs that the various governments implemented to try to attenuate the massive rise in unemployment were very beneficial. At that time, it was realised that having workers locked out of the production process because there were not enough private jobs being generated was not only irrational in terms of lost income but also caused society additional problems, such as rising crime rates. Direct job creation was a very effective way of attenuating these costs while the private sector regained its optimism. In fact, it took about fifty years or so for governments to abandon this way of thinking. Now we tolerate high levels of unemployment without a clear understanding of the magnitude of costs that that policy position imposes on specific individuals and society in general. The single most rational thing a government could do was to ensure that there were enough jobs to match the available labour force. Mostly, they fail badly to achieve this level of sophistication.

In the growth period before the current crisis few countries had returned to the full employment states that they achieved in the Post World War Two period up until the mid-1970s when the OPEC oil shocks led to a paradigm change in macroeconomic policy setting. The neo-liberal approach emphasised fiscal austerity to support an increasing reliance on monetary policy for counter-stabilisation.

So already in this period of relatively better economic growth there were substantial losses being recorded both in terms of lost GDP (production and income foregone) and the additional personal and social costs that accompany persistent unemployment.

It is well documented that sustained unemployment imposes significant economic, personal and social costs that include:

* loss of current output;

* social exclusion and the loss of freedom;

* skill loss;

* psychological harm;

* Ill health and reduced life expectancy;

* loss of motivation;

* the undermining of human relations and family life;

* racial and gender inequality; and

* loss of social values and responsibility.

These costs are enormous and dwarf the measures that various governments have come up with to estimate losses arising from so-called microeconomic inefficiencies (such as transport systems not running on time et cetera).

In the past I have done work on this with a colleague Martin Watts and you can see an early working paper {1}, subsequently published but the working paper is free, which outlined the sort of method we used to compute the “costs of unemployment”.

Even before the crisis hit, these costs in most countries were huge and they are irretrievable every day that the economy remains above full employment. It shows the powerful hold that neo-liberal thinking has had on policy makers that these massive losses have largely been tolerated. Policy makers began using unemployment as a policy tool rather than a policy target as the obsession with inflation-targetting took hold.

To some extent these losses are a mystery to society in general. While the unemployed and their families are certainly aware of them, the remainder of the society are less aware. For example, we might notice rising crime rates in our neighbourhoods but do not associate it with unemployment.

Neo-liberalism has also changed the way we think about unemployment. In the past we understood clearly that it arose as a result of a shortage of jobs. In recent decades, we have been conditioned by a relentless (lying) press and government statements to perceive unemployment as an individual problem.

So the unemployed are lazy; have poor work attitudes; refuse to invest in appropriate skills; are subject to disincentives arising from misguided government welfare support, and all the rest of the arguments that mainstream uses to obfuscate the social problem. In Australia, this sort of “blame the victim” approach was accompanied by a new nomenclature that entered our daily public discourse and was promoted by government ministers including successive prime ministers.

We were told that the unemployed were bludgers, job snobs, cruisers and worse. Television current affairs programs targetted unemployed families and lured them into looking as though they didn’t want to work.

All of this despite the overwhelming evidence from studies in most countries that the unemployed were highly motivated to find work and were victims of a shortage of jobs.

The dominance of the neo-liberal ideology led governments in most countries to eschew the adoption of policies of direct job creation to reduce the rate of unemployment and to minimise these massive costs. Fiscal policy became geared to the achievement of budget surpluses as some sort of token of prudent financial management.

Employment policy shifted from a demand-side emphasis to a supply-side focus (active labour market) which targetted individuals with futile training programs divorced from a paid-work context and pernicious welfare-to-work rules.

What was going on with respect to the deregulation of labour markets and the retrenchment of the Welfare State in the face of persistent unemployment was being mirrored in the approaches governments were taking to financial markets. The lack of oversight of the latter has been the fundamental reason we are now enduring the worst crisis in eighty years.

Given the costs of unemployment are so large and irretrievable, one would think that at the very least direct macroeconomic intervention should have been a priority in these years – that is, direct job creation.

In 1978 while still a student at the University of Melbourne and in recognition of the then rising economic and social costs of unemployment, I formulated an early model of what I now call the Job Guarantee {2} approach to full employment.

The Job Guarantee would work under the principles of a buffer stock mechanism and the jobs would be designed to increase per capita social welfare by satisfying social needs that are not met by the private sector in areas including environmental services, community and social services, health and education.

Thus this increase in public sector employment would contribute to the reduction in the negative externalities that tend to increase with increasing levels of production by increasing the share of final output that is associated with green, public sector employment.

With the current crisis, it should be clear to everyone that the neo-liberal construction of unemployment is (and always was) patently false – just an ideological gimmick to transfer power away from workers to ensure a greater share of national income was available for capital.

Now it is clear – six or so percent of the US labour force; or ten per cent of the Spanish labour force; or two per cent of the Australian labour force didn’t suddenly get lazy; or were waylaid by government welfare benefits; or lost their skills – in the space of a year or so.

The crisis should make it obvious that unemployment arises when there are too few jobs being created (net) relative to the available labour force. There should be no mystery about that now for anyone.

But despite the transparency of the causes of mass unemployment, governments have failed to use direct job creation as a way of dealing with the rising costs associated with the joblessness. The vestiges of neo-liberal ideology are proving hard to shake.

If governments had have had a Job Guarantee in place there would be hardly any discernible rise in official unemployment and the costs of the crisis would have been significantly reduced. Yes there would have been some skills-based structural underemployment (high skills workers taking Job Guarantee jobs) and some obvious loss of income.

But overall these losses would have been attenuated and some of the other costs would have been mostly negated. Of significance, which shows you how ideologically-blinded our policy makers have become – their budget deficits would not have risen by nearly as much as they have. While I don’t pay much attention to the actual budget deficit figure, you might have thought a government facing a chorus of squawking neo-liberal mouthpieces (the media) would have found the lower deficits to be something of a political advantage.

Anyway, today I was doing some updated calculations on the daily costs of persistent unemployment as a consequence of the economic crisis. In this blog, I will report some results for Australia and the USA.

While the previous work I have done on this topic has sought to compute the broadest possible measure of costs, in this blog I just focus on lost GDP income.

In focusing on the foregone output resulting from unemployment and underemployment you have to decide a benchmark to measure the current situation against.

In the work that follows, I used the low-point unemployment rate prior to the crisis – for the US 4.5 per cent in March 2007 and Australia 4.0 per cent in March 2008 and the high-point participation rate prior to the crisis – 66.3 per cent for the US and 65.5 per cent for Australia.

The high-point participation rate allows us to adjust the labour force to eliminate the cyclical decline that occurs in a crisis as the discouraged workers who stop looking for work are not counted by the statistician as being unemployed. Economists call these people the hidden unemployed – they would work immediately if a job was offered to them.

The use of the low-point unemployment prior to the crisis is just a convenience and does not presupposes that this level was a full employment state. The question being asked is: What are the daily GDP losses arising from the increases in the unemployment rate as a result of the crisis?

For Australia, I also compute the daily GDP losses that arise from the economy being away from full employment (which I assume would occur at an unemployment rate of two per cent – the so-called frictional level of unemployment). So the question that is being asked then is: How has the divergence from full employment which has been exacerbated by the crisis impacted on daily GDP losses.

I also ignore underemployment in this analysis. So the estimates that follow are underestimating the true costs of the fiscal austerity. I use the term fiscal austerity because even though governments are running relatively large (historically) budget deficits as a proportion of GDP, they are still inadequate to effectively deal with the unemployment problem. The austerity reflects an overhang of the destructive neo-liberal ideology.

Method

First, I computed potential employment – so this can be computed as the employment level that would have existed given population growth had the crisis not occurred. In this way we fix the participation and unemployment rates at the peak of the last growth cycle as described above (we do this for the US and Australia).

Also for Australia, I computed the potential employment level which would exist if the unemployment rate was two per cent (that is, the full employment unemployment rate).

Second, I computed potential GDP using the potential employment levels multiplied by actual labour productivity (real GDP per person employed). So this series tells us what real GDP would have been if employment was at its potential level (defined above) and those workers were producing the average GDP per unit. Note that the concept of potential in this case does not mean the maximum GDP that could be produced.

Remember the selective way I am defining potential employment – as a departure from the maximum achieved prior to the crisis. For Australia the full employment employment potential is more accurately thought of as the highest employment level one could attain given other parameters.

Further, some will ask – why use average productivity when it is obvious that the unemployed are typically drawn from the lowest productivity pool? Surely putting these people back to work will not generate average productivity per person. That is true but not relevant in this case. By using actual labour productivity series I am actually understating the production gains that would occur.

Third, I calculated the daily real GDP losses in billions of dollars per day for the US and millions of dollars per day for Australia by dividing the gap between actual and potential real GDP by the number of days in each quarter.

This approximates the daily loss (never to be regained) in real income that is foregone by allowing unemployment to remain either above the level that was achieved immediately prior to the crisis (in US and Australia) or in the second case for Australia, by allowing unemployment to depart from its true full employment level of two per cent. The first estimates (deviations since the start of the crisis) understate the true costs by a greater margin than the second estimates for Australia (the departure from full employment).

Given the results are terrible as they stand and demand immediate policy attention, the fact the true results are in fact worse than these estimates just adds to culpability of our national governments.

Finally, I also computed as a standalone exercise a simulated real GDP series for the US and Australia based on the assumption that from the respective peaks (June 2008 for the US and September 2008 for Australia) real GDP continued to grow at the average rate of real GDP that had held for the eight quarters prior to the peak – 2.4 per cent per annum for the US and 3.6 per cent for Australia.

These simulations converted into index numbers to allow for comparability are shown in the first graph below along with the actual path of real GDP for each country.

The comparison gives you a good idea of the relative depths of the crisis in each country.

Results

The following graph shows the indexed time series for actual real GDP and the simulated potential GDP (if potential employment was achieved) where the base = 100 was the GDP peak quarter (June 2008 for the US and September 2008 for Australia). The horizontal axis represents the quarters after the peak up until September 2009 (the last available national accounts data). The index numbers allow us to compare the evolution of the two economies.

So actual US real GDP went from 100 at the peak to 96.2 at the trough and in September 2009 was 96.7 (index number values). Over the same period, its potential GDP rose from 100 to 103 leaving a huge gap of 6.3 percentage points.

For Australia real GDP went from 100 at the peak to 99.1 at the trough and in September 2009 was 100.5 (index number values). Over the same period, its potential GDP rose from 100 to 103.7 leaving a smaller gap of 3.2 percentage points.

So the cumulative GDP losses have been much smaller in Australia’s case but still significant.

Real GDP and Potential real GDP indexes, Australia and US
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/01/US_AUS_GDP_YPOT_indexes.jpg

The daily GDP losses that the US economy is enduring as a result of the decline in economy activity below it previous peak are shown in the following graph. You can see that in the September quarter these stood at 10.3 billion per day.

Just say it to yourself – every day the US government is allowing $10.3 billion to go down the drain in lost income just because they are too stupid to implement sensible direct job creation strategies.

There has been a marked unwillingness by the US government to engage in direct job creation. How can these deadweight daily losses be justified? The policy inaction is culpable in the extreme in this regard.

US: Daily GDP losses $US billions
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/01/US_daily_losses.jpg

For Australia, I compared the daily losses that have occurred since the crisis began in Australia with the actual losses that have been on-going for some 35 years as a result of the contrived departure from full employment that has been imposed on us by the free-market ideological dominance?

One of the reasons I didn’t do this for the US is because I am less sure what the frictional unemployment rate is. The point is that it is probably below the 4.5 per cent benchmark I used so the daily losses I report are likely to seriously understate the actual losses.

There was also no point comparing the US and Australian losses in equivalent units because the relative costs for Australia are very small when you convert into billions of USD. But relative to each economy the respective losses are enormous.

The following Table shows the calculations. Relative to our recent best unemployment rate we are now losing $A74 million every day as a result of allowing the unemployment rate to rise. When considered against the current departure from true full employment unemployment rate (two per cent) we are foregoing $147 million every day.

Just say it to yourself – every day we are throwing $A147 million down the drain because of our neo-liberal policy obsessions. No one in their right mind could justify that. It is the ultimate con of the mainstream economics profession.

The average daily loss since June 2006 as a result of the Australian government allowing unemployment to persist above the full employment level of two per cent was $A95.5 million.

Those losses are enormous and as noted above understate the true cost of the policy failure in allowing the unemployment rate to rise in the current crisis and also maintaining a fiscal regime that has stopped the economy achieving full employment.

http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/01/Australia_daily_losses_4_2_percent_table.jpg

The following graph shows the comparison for Australia (that is, just graphs the data in the Table above).

Australia: Daily GDP losses $A millions for different unemployment benchmarks
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/01/Australia_daily_losses_4_2_percent.jpg

Conclusion

Even under conservative assumptions, the economic and social costs of sustained high unemployment are extremely high. The inability of unemployed individuals and their families to function in the market economy gives rise to many forms of social dysfunction, in addition to output loss.

The apparent failure of neo-liberal supply side policies to reduce unemployment prior to the crisis is now highlighted during the crisis. There is now an urgent need to address the large pools of unemployment in world economies.

The daily income losses alone are enormous and overwhelm other inefficiencies notwithstanding the productivity heterogeneity that exists across the workforce.

There is no financial reason why the government should not deal with this problem directly by introducing a Job Guarantee. If the Government had the political will, it could readily overcome the problem of persistently high unemployment.

Tomorrow – the Australian Labour Force survey for December comes out and so I will surely have something to say about that data.

Links:

{1} http://e1.newcastle.edu.au/coffee/pubs/wp/2000/00-04.pdf

{2} http://e1.newcastle.edu.au/coffee/job_guarantee/JobGuarantee.cfm

http://bilbo.economicoutlook.net/blog/?p=7308

Categories: Uncategorized

Bail-out Bombshell

Fed “Emergency” Bank Rescue Totaled $29 Trillion Over Three Years

by J Andrew Felkerson

AlterNet (December 15 2011)

Speculation about the the Federal Reserve’s (Fed’s) actions during the financial crisis has made headlines on and off again over the last several years.  The latest drama occurred on November 27 when Bloomberg published an article, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress”, which gives an account of the news agency’s struggle to bring to light the details of the Fed’s emergency programs. Bloomberg throws out some very large numbers, revealing that as of March 2009, the Fed lent, spent, or committed $7.77 trillion worth of aid to the financial system and that banks used the low interest rates charged on these loans to make an estimated $13 billion in income.

On December 6, the Fed struck back, issuing a four page unsigned memo intended to correct recent “egregious errors and mistakes” found in various reports of its emergency lending facilities.  The Fed argues that the “total credit outstanding under liquidity programs was never more than about $1.5 trillion”.  While Bloomberg wasn’t mentioned explicitly in the Fed memo, it was fairly clear to whom the response was directed.  The following day Bloomberg defended its reporting, and the Wall Street Journal’s David Wessel came to the Fed’s defense, characterizing Bloomberg’s methodology as a “great story”, but ultimately not “true”.

All this may sound like controversy, but it’s little more than a tempest in a teacup.

Here’s the hurricane: In reality, no less than $29.616 trillion is the total emergency assistance provided by the Fed to foreign and domestic entities during the Global Financial Crisis. Let’s repeat that: $29 trillion. This astounding number is over twice US gross domestic product, the nominal value of all goods and services produced for the year 2010.  This is the total of the bailout as calculated by Nicola Matthews and myself as part of the Ford Foundation project, A Research And Policy Dialogue Project On Improving Governance of the Government Safety Net in Financial Crisis.  We will be presenting the results of our analysis in a series of papers published by the Levy Economics Institute, the first of which, “29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient”, is already available here: http://www.levyinstitute.org/publications/?docid=1462.

The results we have calculated are presented below, and it is important to note that the totals are cumulative and in billions of US dollars. (The numbers in parentheses indicate amounts still outstanding as of November 10 2011).

Wray Table 1

I want to be clear. These are the totals of Fed lending and asset purchases actually undertaken since the bail-out began. There is no double-counting. And we do not include any credit facilities created by the Fed unless they were actually used. These figures accurately reflect the cumulative totals over the approximately three years actually used by the Fed to prop-up domestic and international banks, shadow banks, central banks, and even some non-financial institutions.

Banks in the Shadows

The programs above constitute the crisis prevention machinery rolled out by the Fed to combat the worst financial panic since 1929. All the programs above were designed and implemented to target domestic financial and non-financial corporations or foreign central banks or markets, or both. Only one of the facilities, the Term Auction Facility, can be viewed as being consistent with the Fed’s mandate to protect the commercial banking system from systemic failure. The rest are the result of the increasing relevance of the “shadow banking” to our economy  –  and of the Fed’s attempt to rescue the shadow banking sector.

Shadow banks are highly leveraged financial institutions that perform functions historically relegated to the commercial banking system. It is important to note that these financial concerns do not have access to the conventional means of Fed support. Nor were they ever really regulated or supervised by the Fed. They engaged in extremely risky behavior that in large part led to the global financial crisis. And when it hit, the Fed spent and lent $29 trillion, much of it devoted to rescuing the shadow banking system.

Thus, we see a host of unconventional programs designed to aid these institutions rather than the Fed’s traditional patrons. The information used to calculate the totals above is freely available (thanks in large part to the valiant efforts of a group of lawmakers led by Senator Bernie Sanders) as the result of an amendment inserted into the Dodd Frank bill. Moreover, this information has been freely available since December 10 2010 on the Fed’s website.

So why didn’t someone else already put the data together in this way?

The Fed’s Secrets

Obviously, $29 trillion is much bigger than the previous estimates of $7.77 trillion (Bloomberg) or $1.5 trillion (the Fed and the Wall Street Journal). An in-depth account of each of the facilities above is a rather lengthy process as the Levy working paper attests. The main difference in our analysis is the variables we identify as essential in understanding the Fed’s response. In our paper we report three measures that we view as critical to capturing the size and magnitude of the bailout. Each of the three measures deals exclusively with programs put into place by the Fed that transcend its conventional “lender of last resort” (LOLR) function. That is, we only include the emergency facilities the Fed created. We agree with the Fed that only facilities which were actually made operational should be considered in any account of the Fed’s actions. But we take the side of Bloomberg regarding the general lack of transparency by the Fed  –  the Fed fought tooth and nail to keep the details of its programs secret.

At any given moment inspection of the amount owed to the Fed resulting from non-conventional lender of last resort actions provides a reasonable account of what the Fed was doing in the period leading up to that time. However, looking at this number over time and in the context of the weekly amount lent provides insight into how the Fed’s efforts evolved over the run of the crisis. These two approaches to measurement (a “stock” or outstanding balance and a “flow” or cumulated amount spent and lent weekly) only provide us with details regarding the scope of the Fed’s bailout. To get a clear picture we need some account of the magnitude. We believe that this is captured by looking at the cumulative totals of all programs.

Perhaps the largest difference in our analysis is that we learned our money and banking theory from the late Hyman Minsky. He taught us that the modern economy is essentially financial, and as such, is prone to systemic financial crises that if left unchecked can lead to “bone crunching depressions”. Therefore it is essential to have a lender of last resort. Thus, any transaction between the Fed and the markets which is not part of conventional monetary operations, such as lending from the discount window or open market operations, represents an instance in which private markets were not able to or were unwilling to engage in the normal financial intermediation process. If it any point in time the private markets were capable (or willing) to carry out business as usual, Fed intervention would not have been required. Thus, we need to account for each extraordinary event, and the best way that we know to do this is by summing each instance – which results in a cumulative total of over $29 trillion dollars.

Who does the Fed serve?

A figure as large as $29.616 trillion should not be taken lightly, but focus on the specific magnitude of the figure diverts our attention from a larger issue that is at stake: how should the “lender of last resort” responsibility to be discharged in the future? With unemployment remaining persistently high and millions continuing to lose their homes to foreclosure as the result of lost income from a poor economy or outright fraud in the mortgage lending and foreclosure process, it becomes increasingly difficult to justify the ability of a single institution staffed by unelected officials to carry out such a targeted commitment of the obligations of the United States citizenry. Thanks to the actions of Senator Sanders and other individuals possessing the temerity to question the authority of the Fed we now have access to much of the data regarding what the Fed did during the recent crisis.

But we still need to go through the data from the past three years of bail-outs to answer the following questions: Who got funds from the Fed? How much did they get? And why did they get them? The Fed has not adequately explained why its emergency lending and asset purchases went on for so long and accumulated to such a large number.

_____

J Andrew Felkerson is a Interdisciplinary PhD student at the University of Missouri – Kansas City

(c) 2011 Independent Media Institute. All rights reserved.

http://www.alternet.org/story/153462/

Categories: Uncategorized

How Germany Builds Twice as Many Cars as the US …

While Paying Its Workers Twice as Much

by Frederick E Allen, Forbes Staff

Forbes (December 21 2011)

In 2010, Germany produced more than 5.5 million automobiles; the US produced 2.7 million. At the same time, the average auto worker in Germany made $67.14 per hour in salary and benefits; the average one in the US made $33.77 per hour. Yet Germany’s big three car companies – BMW, Daimler (Mercedes-Benz), and Volkswagen – are very profitable.

How can that be? The question is explored in a new article from Remapping Debate, a public policy e-journal. Its author, Kevin C Brown, writes that “the salient difference is that, in Germany, the automakers operate within an environment that precludes a race to the bottom; in the US, they operate within an environment that encourages such a race”.

There are “two overlapping sets of institutions” in Germany that guarantee high wages and good working conditions for autoworkers. The first is IG Metall, the country’s equivalent of the United Automobile Workers. Virtually all Germany’s car workers are members, and though they have the right to strike, they “hardly use it, because there is an elaborate system of conflict resolution that regularly is used to come to some sort of compromise that is acceptable to all parties”, according to Horst Mund, an IG Metall executive. The second institution is the German constitution, which allows for “works councils” in every factory, where management and employees work together on matters like shop floor conditions and work life. Mund says this guarantees cooperation, “where you don’t always wear your management pin or your union pin”.

Mund points out that this goes

against all mainstream wisdom of the neo-liberals. We have strong unions, we have strong social security systems, we have high wages. So, if I believed what the neo-liberals are arguing, we would have to be bankrupt, but apparently this is not the case. Despite high wages … despite our possibility to influence companies, the economy is working well in Germany.

As Michael Maibach, president and chief executive of the European American Business Council, puts it, union-management relations in the US are “adversarial”, whereas in Germany they’re “collaborative”.

Does such a happy relationship survive when German automakers set up shop in the US? No. As a historian observes in the article,  “BMW is a German company and it has a very German hierarchy and management system in Germany”, yet “when they are operating in Spartanburg [in South Carolina] they have become very, very easily adaptable to Spartanburg business culture”. At Volkswagen’s Chattanooga plant, the nonunionized new employees get $14.50 an hour, which rises to $19.50 after three years.

The article’s author, Kevin C Brown, asked Claude Barfield, a scholar with the American Enterprise Institute, why the German car companies behave so differently in the US. He answered, “Because they can get away with it so far”.

Read the complete Remapping Debate article here: http://www.remappingdebate.org/article/tale-two-systems

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Frederick E Allen is the Leadership Editor of Forbes.

http://www.forbes.com/sites/frederickallen/2011/12/21/germany-builds-twice-as-many-cars-as-the-u-s-while-paying-its-auto-workers-twice-as-much/

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