buddenblog

Barak Obama's Commencement Speech

HERE is the first truly inspiring speech by a Democrat in years.  It is Barak Obama's commencement speech at Knox College in Illinois. 

http://www.knox.edu/x9803.xml

The U.S. Budget Deficit: An unstoppable crisis?

In his op-ed piece, "When Weakness is a Strength," (The New York Times, November 26, 2004) Stephen S. Roach, chief economist for Morgan Stanley (investment bank) argued, essentially, that up is down and black is white as he assured us that the growing U.S. deficit and the decline of the dollar could be considered Good Things.  Being a non-economist, I'm willing to listen.

Here is his basic exposition:

• The fall of the dollar is a "logical outgrowth of an unbalanced world economy....and America's gaping current account deficit [665 billion dollars, 5.7% of GDB]...is just the most visible manifestation of these imbalances."
• The decline of the dollar is basically a good thing because it will help with "a sorely needed rebalancing."
• A weaker dollar will relieve economic and "even political tensions among nations," helping to promote a more sustainable growth in the global economy."
• Global imbalances are a shared responsibility: the U.S. consumes too much, but the rest of the world doesn't consume enough. 
• U.S. citizens don't save enough, but the rest of the world saves too much.
• The U.S. has to import foreign savings to make up for its own shortfall of savings.   In fact the U.S. absorbs (like it's a favor we do) 80% of the world's surplus savings.
• Foreign investors have a responsibility to prevent a crisis by NOT demanding better terms for financing our "spending spree."  If they DO demand better terms, they can cause the collapse of the dollar, soaring interest rates and a stock market plunge which of course would drag along the rest of the "America-centric" world along to disaster.

HOWEVER, not only can we avoid this scenario, but we can turn the current deficit to our advantage, and of course, the world's if the central banks of the world would only carefully manage "a gradual but significant depreciation of the dollar":

• The consequent gradual rise in U.S. interest rates would compensate foreign investors for "financing the biggest debtor in the world."
• Growth would be supressed in U.S. economic sectors -- housing, durable goods, business capital spending -- resulting in a higher domestic savings rate and reduced need for foreign capital," what Roach calls "a classic current-account adjustment. Roach sees this as a selective process which would be fairly gentle. That is, only certain sectors of the economy, those "most sensitive to interest rates like housing, consumer durables...and business capital spending" would be affected. He does not mention what would happen to employment in the U.S. if there were downturns in these sectors.  The dorllar falling would cause other currencies to rise, as the euro has already been doing.  And then those [nasty, uncooperative] Asian nations which have absolutely refused to let their currencies rise, would have no choice but to do so.
• More expensive exports from Asia and Europe to the U.S. would slow so that those areas would simply have to "stimulate domestic demand to compensate..."  According to Roach, Asia and Europe need us: we're all in this together.  They need to "unshackle" their internal demand.
• Somehow, the hoped-for restoration of "balance" might defuse global trade tensions with the weaker dollar increasing demand for U.S. exports (they become cheaper in foreign countries) and U.S. citizens will start being satisfied with domestic products (I didn't know we still made them).
• Roach says that the U.S. trade deficit should narrow, and the Euro should get some relief resulting in the lessening of overprotectionism and its risks.  As I understand it, this means that if we're all on more equal footing, other countries won't want to put taxes and duties on products from us that compete with theirs because in a more "balanced economy," we could do the same to theirs.
• So this is all good because "A lopsided world needs to be put back into balance....A weakening dollar is an encouraging sign that the world's relative price structure...essentially the value of one economy versus another -- is becoming more sensible.  If the world can manage the dollar's decline wisely [i.e. as we think they should] there is more reason for hope than despair."

Now the counterargument according to John Cassidy in this week's "Talk of The Town" in The New Yorker, Dec. 6, 2004). If you can, read the whole thing, it has a fair amount of grim humor. Maybe I'm a pessimist, but  I wouldn't put all my savings eggs in one basket.

According to Cassidy "Since the nineteen-seventies, the dollar's value has been determined in the financial markets where traders buy and sell currencies like any other commodity."  In recent weeks, its value has fallen sharply, meaning that whereas when they came into existence, you could exchange one euro for roughly one dollar.  Today, you can exchange one euro for roughly $1.30.  This means that say, a candy bar which just a little while ago cost one euro and one dollar today still costs one euro, but you'd have to pay $1.30, for it. This is what is meant by the depreciation of the dollar.

Cassidy points out that this reflects "two intractable, and related, problems:"

• "As manufacturing and production have shifted to countries with low labor costs, the trade balance has declined alarmingly: America cannot sell abroad as much as it buys."  As I noted above, it's not simply the declining dollar, it's the declining manufacturing base.  We no longer make much stuff like TVs in the U.S. Even if the world's central banks helped control the dollar slide, the import-export balance could not be restored.  Our manufacturers have folded when they could not compete in price with low-labor-cost Chinese goods like sweaters and lawn furniture and everything else. We have very little of this sort to sell, and we couldn't start up again without paying unacceptably low wages (more Mexican immigrants, anybody?).
• "The United States has emerged as the world's biggest debtor." Let's take Cassidy's comparisons: "Ten years ago, the country ran a modest trade deficit...[but] as a consequence of investments that Americans made overseas, the rest of the world owed us trillions of dollars.  Today the trade per cent is about five per cent of the gross domestic product -- bigger than it has ever been -- and we owe the rest of the world about three and a quarter trillion dollars.  [Italics mine]
• Deficits aren't always bad.  They are used by nations, especially poor ones, to invest "in industrial equipment, education, infrastructure" and the like needed for development.  BUT we are not borrowing to develop ourselves.  We are borrowing to finance the government's day-to-day expenses, and to pay for imported consumer goods, such as autos, toys and electronics." [Italics again mine] 
• In other words, we are exhibiting "a classic symptom of a country living beyond its means."

More depressing facts:

• Whereas "twenty years ago Americans saved about nine cents of every dollar earned, today, they save less than a penny." (And I remember back then hearing we didn't save enough.)
• "The federal government is spending about four hundred billion dollars a year more than it raises in taxes....[T]his means it has to sell about 34 billion dollars' worth of bonds every month to remain solvent." [Italics mine]
• China and Japan are the biggest purchasers of the U.S. debt.  According to Cassidy, last year alone, China and Japan purchased bonds totalling about 400 billion dollars of our debt.
• We depend on this purchasing of our bonds to support our currency.
• So we need them to buy our debt, and they use this advantage to keep growing their export business in our country. 
• In addition, they keep their currencies from rising so that their stuff will stay even cheaper in our country than it otherwise would be. This means in spite of our indebtedness, we keep buying Asian stuff. Don't be outraged. Asians are just following the ruthless rules of capitalism, same as we do where we can.  Or should I say our companies when they chase the cheapest labor.  It is in large part because our own U.S. companies chase the cheapest labor that Asian products are doing so well.
• To sum up the process, Cassidy says, "We import consumer goods from Asia, and they lend us the money to pay for them, at fixed exchange rates."

Both Stephen S. Roach and John Cassidy agree on the lopsidedness and basically untenable situation we are in, but they disagree on what could happen, what we should do.

Roach puts the burden on the central banks of other nations.  They should manage the decline of the dollar so that it is slow and steady.  After all, he says, some of this is their fault for saving too much and spending too little.  AND, he threatens in a veiled kind of way, if the U.S. had a serious recession, the rest of the "America-centric world would quickly follow."

Cassidy speaks in a way that appeals much more to my Northeastern understanding of responsibility, that is, that the burden is on us.  Though his "solutions" are similar to Roach's, the consequences aren't.  Cassidy notes that  "at some point, all countries have to pay their own way, which means restoring the trade balance and paying down the debts." Where Roach says you cut back consumer spending by reducing imports, however, Cassidy says you cut back imports by reducing consumer spending. Cassidy sees this as producing a recession, not a gentle decline.

The other way to slow the decline, according to Cassidy, is for the United States to devalue our currency rather than some well-behaved foreign central banks. And, according to Cassidy, John Snow, our Treausry Secretary and good ole Alan Greenspan seem to be attempting this. This is risky because:

• It can (and already has) lead currency traders losing confidence in the dollar as a safe bet (see the euro and recent further declines on the currency markets as Greenspan talks devaluation). This could lead to the dollar crashing.
• The same financial scenario: record trade, deficits, huge foreign debts and "prolonged fiscal irresponsibility" have led to full-blow crises in any number of countries, including Mexico, Argentina, Brasil, and Russia.  If investors panicked and tried to get all their money out of the U.S., the Feds would "be forced to raise interest rates...which in turn would torpedo the stock and real-estate markets.  The economy would be plunged into a deep recession."  And while this might be disastrous for us, I don't think it would necessarily be for the rest of the world.  I am no investment banker, but I think the world's economy is decreasingly America-centric: Europe and Asia seem to be getting fairly strong and fairly independent.
• Already, Russia is considering changing some dollar reserves into euros which would "undermine the dollar's privileged status."  And because the Bush administration tries to blame others for at least some of the problems (see Roach above), it is making other places pretty angry.  A Chinese quote: "'China's custom is that we never blame others for our own problem.  The united States has the reverse attitude.  Whenever they have a problem they blame others.'"
• I have read elsewhere that if OPEC decided to require payment for oil in euros instead of dollars, it would have a similarly disastrous effect.

Cassidy concludes:  "Ultimately, the value of a currency is an international verdict on the honesty and the competence of the government that issued it.  President Bush may have recovered in domestic polls, but in the currency marekts his ratings are still falling.  And, with his Administration determined to pursue further tax cuts and costly Social Security privatization, his numbers don't seem likely to turn around soon."

For me, the difference between the Bush loyalists, and the, what should I say, middle of the road, internationalist economist types is that the former seem to have a significant disability:  they become entranced with surfaces: surface numbers, surface words, surface glitter which protects  and in their minds enhances the status and worthiness of their own insider group.  They cannot grasp the stuff of reality: the paths of history, the flesh and blood of people making and selling and buying, the fact of decent people elsewhere thinking of themselves before they bow down to us.  They can't really understand that there are well-educated opinions, opinions vastly different from their own, which see alternative scenarios.  The current army of the right is stuck in a narcissistic bubble which, if it bursts, will scatter us all to places unknown and probably unpleasant at best.

Resources for this article:

Stephen S. Roach, "When Weakness is a Strength,"  The New York Times, November 26, 2004.  Stephen S. Roach is chief economist for Morgan Stanley.  This article is available on the NY Times site for purchase (or on this site for free)

John Cassidy, "Comment: Going Down," The New Yorker, Dec. 6, 2004.  This is in the hard copy of the magazine.  It is no longer on the website.   See the real world! Try your neighborhood library!

For a somewhat different, but no less alarming, take on the situation, see Larry Elliot, "US risks a downhill dollar disaster," The Guardian, November 22, 2004.  http://tbrnews.org/Archives/a1221.htm.  There are also a number of other interesting articles on the economy (and other things) on this site.

"When Weakness is Strength" Stephen S. Roach

An investment banker's view on the possible virtues of the decline of the value of the dollar. November 26, 2004OP-ED CONTRIBUTOR When Weakness Is a Strength By STEPHEN S. ROACH uddenly all eyes are on a weakening dollar. In recent days, the American currency has fallen against the euro, the yen and most other currencies around the world. The renminbi is a notable exception; China has kept its currency firmly pegged to the dollar for a decade. The fall of the dollar is not a surprise. It is the logical outgrowth of an unbalanced world economy, and America's gaping current account deficit - the difference between foreign trade and investment in the United States and American trade and investment abroad - is just the most visible manifestation of these imbalances. The deficit ran at a record annual rate of $665 billion, or 5.7 percent of gross domestic product, in the second quarter of 2004. While a decline in the dollar is not a cure-all for what ails the world, it should go a long way toward bringing about a sorely needed rebalancing. With a weaker dollar, economic and even political tensions among nations would be relieved, helping to promote more sustainable growth in the global economy. Still, a debate persists as to the wisdom of allowing the dollar to decline. The Bush administration seems to have given its tacit assent, and Alan Greenspan, chairman of the Federal Reserve, is finally on board. But outside the United States, where policymakers have long been vocal in their displeasure over America's deficits, officials are now objecting to America's cure. Europeans have referred to the dollar's recent decline as brutal. The Japanese have threatened to intervene again in foreign exchange markets. And Chinese officials have argued that global imbalances are "made in America." In this blame game, it's always the other guy. Yet global imbalances are a shared responsibility. America is guilty of excess consumption, whereas the rest of the world suffers from insufficient consumption. Consumer demand in the United States grew at an average of 3.9 percent (in real terms) from 1995 to 2003, nearly double the 2.2 percent average elsewhere in the industrial world. Meanwhile, Americans fail to save enough - whereas the rest of the world saves too much. American consumers have borrowed against the future by squandering their savings. The personal savings rate was just 0.2 percent of disposable personal income in September - down from 7.7 percent as recently as 1992. Moreover, large federal budget deficits mean the government's savings rate is negative. Lacking in domestic savings, the United States must import foreign savings to finance the growth of its economy. And it runs huge current-account and trade deficits to attract such capital from overseas. America's consumption binge has its mirror image in excess savings elsewhere in the world - especially in Asia and Europe. For now, America draws freely on this reservoir, absorbing about 80 percent of the world's surplus savings. Just as the United States has moved production and labor offshore in recent years, it is now outsourcing its savings. This is a dangerous arrangement. The day could come when foreign investors demand better terms for financing America's spending spree (and savings shortfall). That is the day the dollar will collapse, interest rates will soar and the stock market will plunge. In such a crisis, a United States recession would be a near certainty. And the rest of an America-centric world would be quick to follow. The only way to avoid this unhappy future is for the world's major central banks to carefully manage a gradual but significant depreciation of the dollar over the next several years. America, and the world, would gain in several ways. First, there would be a gradual rise in interest rates in the United States - compensating foreign investors for financing the biggest debtor in the world. That would suppress growth in those sectors of the American economy that are most sensitive to interest rates, like housing, consumer durables like cars and appliances, and business capital spending. The result: a higher domestic savings rate and a reduced need for foreign capital - a classic current-account adjustment. Second, when the dollar falls, other currencies rise. So far, the euro has borne a disproportionate share of the change. That puts increased pressure on Asian nations - including China - to share in the adjustment by allowing their currencies to strengthen. Most currencies in Asia are now rising, but the renminbi has remained conspicuously unmoved. Third, as the currencies of Asia and Europe strengthen, their exports will become less attractive to American consumers. This will force Asia and Europe to work to stimulate domestic demand to compensate - resulting in a reduction of both excess savings and current-account surpluses. This is easier said than done, especially since it may require painful structural reforms, like a loosening of domestic labor markets, to unshackle internal demand. Fourth, a weaker dollar might defuse global trade tensions. Dollar depreciation will support American exports, and higher interest rates should slow domestic demand and reduce imports. That means the United States trade deficit should narrow - tempering protectionist risks. And with Asian countries allowing their currencies to fluctuate, Europe gets some relief and may be less tempted to resort to protectionist remedies. What's certain is that a lopsided world needs to be put back into balance. The dollar is the world's most widely used currency, but its fall affects more than just foreign-exchange rates. A weakening dollar is an encouraging sign that the world's relative price structure - essentially the value of one economy versus another - is becoming more sensible. If the world can manage the dollar's decline wisely, there is more reason for hope than despair. Stephen S. Roach is chief economist for Morgan Stanley. Copyright 2004 The New York Times Company

Gap between rich and poor -- yet again

Health Care, Gap Between Rich and Poor Persists, W.H.O. Says

November 11, 2004
By ELISABETH MALKIN

 

MEXICO CITY, Nov. 10 - Despite significant gains in medical
science, disparities in public health persist between rich
and poor countries, the World Health Organization said in a
report released here on Wednesday.

The report, released in advance of a W.H.O. meeting here
next week of health ministers from 30 countries, called for
more research into how health care is delivered. .

"Half of the world's deaths could be prevented with simple
and cost-effective interventions," said the report. "But
not enough is known about how to make these more widely
available to the people who need them," it continued.

The study said that inadequate health systems in developing
countries had been a constraint in global programs to
fights AIDS, tuberculosis and malaria. "Countries with few
resources struggle with creaking infrastructure, inadequate
financing, migrating doctors and nurses and lack of basic
information on health indicators," the study's authors
concluded.

The study pointed to market reforms in the health sector,
promoted by the World Bank in the 1980's, as one reason for
steadily weakening public health systems in developing
countries. The push toward privatization might have
accentuated disparities in the health care available to
rich and poor, the report said.

It also pointed to "gross inequities in the research
process at both global and national levels" and said
treatments in the developing world must be tailored to
local conditions.

For example, the report cited a study in Haiti that found
that babies born to mothers treated with antiretroviral
drugs to prevent the transmission of H.I.V. might then die
of congenital syphilis.

A second report released here on Wednesday, by the Global
Forum for Health Research, a Geneva-based nonprofit group,
found that spending on health research rose from $84.9
billion in 1998 to $105.9 billion in 2001.

Despite this, there has been little headway in closing the
gap between rich and poor countries in financing for
research into the infectious diseases that
disproportionately affect developing countries, like
malaria and tuberculosis, the report said.

The Global Forum, which will hold its own meeting parallel
to the W.H.O. conference, said that less than 10 percent of
spending on health research goes to study 90 percent of the
world's diseases.

"Very few infectious diseases are getting sufficient
attention," said Stephen Matlin, the group's executive
director. "They remain neglected diseases."

Pharmaceutical companies account for 48 percent of the
spending for medical research, reflecting in part the
increased cost of bringing a drug to market. The public
sector, led by rising budgets at the National Institutes of
Health in the United States, spends 44 percent of all
research funds. Private foundations and universities
account for the other 8 percent.

Pharmaceutical companies are reluctant to release
information about their research, Mr. Matlin said, but the
evidence is that much of their spending goes to developing
therapies for noncommunicable diseases prevalent in
wealthier countries.

Mr. Matlin pointed to mergers that have left the industry
in the hands of a few companies and speculated that "it may
be that larger companies are getting less innovative."

"Our direct concern is to see an increase in spending on
infectious diseases in low- and middle-income countries and
to change priorities," he said.

http://www.nytimes.com/2004/11/11/health/11health.html?

Raising the federal debt limit

When you read this article, remember that the hopes of the Administration for reducing the deficit lie at least in part in the value of the dollar falling against the Euro (and maybe at some point, the Chinese currency, if they ever value it correctly) because a lower dollar means our goods are cheaper for people to buy overseas and exports become more expensive for us to buy.  This is certainly a questionable approach to a gigantic and growing debt.  Also remember that China and Japan hold a large amount of our debt and that U.S. companies increasingly buy their stuff from China to sell here.  China seems to be able to sell stuff at lower and lower prices...an unlimited, exploitable labor pool has something to do with this...so the chances that the balance of trade will be reversed are iffy.

Economics for beginners: why the decline of the dollar matters a lot

Our son lives in Barcelona and is in the process of buying a house.  We are helping him with the downpayment as parents often do.  The process of  transferring money in dollars to a country that uses Euros delivered the reality of the decline of the dollar against the Euro in our faces.  Within a few days, our dollars were worth a few hundred less than when we started the process!  Our currencies have not fallen so much against that of China and Japan only because they hold so much of our debt.  Read the editorial below which appeared today in the NY Times on this very topic. 

Editorial: As the Dollar Declines
November 13, 2004

For all its professed desire for a strong dollar, the Bush  administration has apparently decided that letting the dollar slide is a good way to shrink America's trade deficit. This is dubious economic policy. It provides a modicum of relief to American exporters, but it increases  the nation's vulnerability to higher prices and higher  interest rates, while ignoring fiscal measures that would more assuredly anchor the United States in the global economy.

The dollar, which has declined nearly 30 percent against  the euro since President Bush took office in 2001, fell to a record low this week. The decline has not been as marked against other currencies, largely because China and Japan prop up the dollar by investing heavily in United States Treasury securities - in effect, lending us money so we can buy their goods. Meanwhile, the Treasury secretary, John Snow, has largely eliminated the phrase "strong dollar" from his workaday vocabulary.

The underlying problem is that deficits in America's global transactions are at record levels, putting Americans at risk of either a slow deterioration in living standards or abrupt spikes in inflation and interest rates. There are three ways to get that deficit down: America can reduce the federal budget deficit, thus lowering the amount of interest we pay foreign countries to finance that deficit; trading partners like Europe and Japan can expand their economies, increasing their demand for American goods; or America can allow its dollar to fall to increase its exports.

The only lasting remedy is to reduce the federal budget deficit. That, in turn, calls for specific policies, like - we may have mentioned this before - rolling back the Bush tax cuts. Letting the dollar weaken is a far less responsible approach, an unwieldy and risky attempt to reduce the trade imbalance without the political pain of deficit reduction.

During the Bush years, 92 percent of the nearly $1 trillion increase in publicly held debt has been financed by foreign lenders. Foreign ownership of Treasuries has tripled from the peak of the Reagan deficits in 1983. Because of this enormous dependency, anything that might affect foreign lenders' willingness to invest in Treasuries - including dismay over the United States' long-term fiscal disarray,
better investment opportunities elsewhere, or geopolitical or economic strife - could cause the dollar to tank.

No one knows if or when that would actually happen, though the dollar's slide since the election doesn't inspire confidence. But we do know that financial flows are quick and unsentimental. A fiscal policy that esteems controlling the deficit over tax cuts is the best way to avoid a debilitating dollar decline.

There is truth to the complaint that countries in Europe and elsewhere are not doing enough to bolster consumption within their own economies. But there's precious little the United States can do about it. Instead of complaining,  Washington should get its own affairs in order.

The president, wed as he is to deficit-bloating policies, is not likely to step up to that responsibility without a stern shove from Congressional Republicans and Democrats alike. While they're at it, they should press Mr. Bush to choose Treasury officials who are true economic stewards, not merely cheerleaders for his "tax cuts above all" policies. If leadership is not forthcoming, the invisible hand of the global financial community is all too likely to provide the push.

http://www.nytimes.com/2004/11/13/opinion/13sat1.html?ex=1101358497&ei=1&en=edd832770271c856
For general information about NYTimes.com, write to
[email protected]. 

Copyright 2004 The New York Times Company

Does the National Debt Matter, and what is it, anyway?

So, children, today we will address the National Debt so that we can know what we are talking about when we argue against Bush policies.  I have put links to various sites I used under the Critical Issues typelist.  Also, I put Wikipedia under my typelist, "Adventures."  Wikipedia is a weird and wonderful resource, worth browsing just for the fun of it (if you are into that kind of browsing).

The National Debt

What does the debt include?

Government bonds, loans and Treasury securities, unfunded lilabilities which at this point include Social Security.  There is other debt. For instance, state government, city government, corporate and finance company debt, and personal debt. This is money owed both within the United States and to foreign entities. It is not included in the National Debt.

Who holds the debt?

People and companies in the United States that buy savings bonds and Treasury Bills.

Companies, individuals and Central (National) Banks in Foreign Countries: among them, Japan owns about 37%. China owns about 9%.  More United States debt is owned by foreign countries than the United States owns debts in foreign countries. 

How is the debt figured?

As with the Gross Domestic Product, there are a number of ways to calculate it. According to Wikipedia, these are some of the ways:

a. To include everything owed regardless of when it has to be paid. 

b. To calculate it as a percentage of the Gross Domestic Product, that is, as a ratio: for instance in 2002 the debt was 60% of the GDP. As pointed out in Wikipedia, it is still lower than in some other developed countries like Japan where the debt is over 100% of the GDP.

c. To calculate it as the amount owed in any given year.

There is manipulation of the way the National Debt is presented. For instance, according to Wikipedia, the budget office prepares its report and issues it assuming that existing laws continue or expire as planned and that “no new programs are added or subtracted.” Thus, the debt can be increased immediately after the budget is issued but the new debt does not show up.

The National Debt does not include money taken from one source to pay for another. Thus, The Department of the Treasury used the $2.4 trillion Social Security surplus to offset cash shortfalls. This is money taken from what was called, under Clinton , the Social Security “Lock Box.” Thus, in 2013, the Government will owe Social Security about $4 trillion dollars.

Sometimes it is hard to figure out which is being talked about, the deficit or the debt. The debt is much bigger than the deficit, but both are critical indicators of our status as a debtor nation. Lots of data on this growth can be found on The Grandfather Economic Report, home.att.net/~mwhodges/debt.htm. 

The debt rose dramatically during the presidencies of Ronald Reagan and the first George Bush. Growth leveled off to zero during the Bill Clinton’s presidency and increased its rise even more dramatically under the current George Bush. 

The debt breaks down to $23,270 per person in the United States. Of course this is a bit inexact, too. But it gives an idea.

Why do people worry about the national debt?

n 58% of Treasury securities were bought by foreigners, 60% by national banks, much by China and Japan (see above). If these large debt holders suddenly stop buying U.S. Treasury securities, or start selling them off, it could undercut our economy.

n OPEC might begin to price oil in Euros (Saddam Hussein had started to do this). I don’t understand all this, but apparently, if this happened, then countries would want the money it holds as a hedge against rising prices in Euros, not dollars. The needed reserve of funds is called a “float.” I gather that the conversion of this “float” from dollars to euros results in the dollars being used to purchase US goods. This leads to inflation, rises in interest rates, increases in bankruptcies and money again going overseas. This is a little beyond me at this point. This ultimately could lead to what is refered to as “a round of hyper-inflation” in the industrialized world.

n Every time the debt increases, and every time interest rates go up, we decrease our ability to pay back our debts. If the U.S. defaulted on its debt instruments: bonds, treasury notes, it would devalue the U.S. dollar and U.S. savings drastically. People still regard this as unlikely, but this is what happened to Argentina which followed U.S. instructions on economics to a T. Economic collapse leading to societal collapse followed patterns leading to hyper inflation in the Russia that emerged with the collapse of the Soviet Union and in pre-Hitler Germany

.

How do we repay the debt?

n With Tax revenues

n By not incurring new debt.

n By “growing” the Gross Domestic Product. Obviously this is why President Bush was so anxious that we keep buying stuff after September 11 and why it is so hard to figure out how to get us to slow down our consumption habits and materialism. It’s gotten to be simply un-American not to buy stuff!

n The worst way…by inducing inflation which can be done simply by the Government printing more money.

It’s good to remember that other governments can’t force a government into bankruptcy to pay the debt.

See my typelist Critical Issues for links to economic information sites. 

What IS the GNP/GDP?

The Gross National Product is the total cash value of all final goods and services sold on the open market in a given period.  The period is usually a year, but we hear of the ups and downs in the U.S. GNP every month.  The GDP or Gross Domestic Product is almost the same thing, but takes into account the fact that some companies in the US are at least partly owned by people in other countries and that some companies in other countries are at least partly owned by people from the U.S.  Thus, the income made here by foreigners is substracted from the Gross National Product and the income made by U.S. citizens overseas is added to it to come up with the Gross Domestic Product.

In order to prevent stuff from being counted more than once, the value of goods and services is determined at the end of the chain of production.  Thus, you count the price  of a new car when it's sold, but not the price of the steel that goes into the car.

Services are counted as well as goods: dental charges, lawyer bills, the salaries of people who are waiters or housecleaners or whatever.

There are three ways to arrive at the GNP/GDP.  I don't know which the government uses.  In theory all three ways should come up with a similar figure, but they don't always.  The first way is called the expenditure approach which is a sum of the estimates of all the money spent on goods and services by households (consumptin) businesses (investments), government (government purchases) and by people outside the country (net exports).  The second way of calculating the GNP/GDP is called the income  approach.  In this, estimates of kinds of earnings, including total wages and salaries, profits, rental incomes and interest incomes are added up and depreciation is subtracted.  In the output or product approach the GNP is a sum of all output of all individuals and organizations producing goods and services with costs for raw materials and depreciation subtracted.

The GNP/GDP is used to measure economic growth, for planning purposes and as an historical recotd.  The GNP/GDP is an estimate. 

Some things to be aware of when looking at the GNP/GDP:
It is only an undifferentiated summing of products and services.
-- It assumes that every monetary transaction is positive.  That is, for instance, if there was a big flu epidemic and people needed a lot more medicine, the production of that medicine would show up as a positive in the GDP even though it had to be produced for something negative happening in the society.
-- It includes stuff that HAS to be paid for, like government services you are taxed for.  These prices are not set on the free market. 
-- It does NOT include stuff  or services sold on any kind of black market, under-the-counter, or without any record, or goods and services that are called "demerit goods" like illegal gambling, drugs and prostitution.
-- It doesn't consider, for instance, the value of home production like people caring for their own kids, home repairs people do themselves, or housekeeping. It doesn't take into account volunteer labor or donations or production. Estimates of this hidden economy range from amounts equal to 5% to 30% of the GDP.
--It doesn't necessarily adequately taking into account inflation or other changes in currency.
-- It is not a good measure of either overall economic welfare or the well-being of individual citizens.

Groups with social and environmental concerns have, in addition to the above, pointed out quite accurately
-- that crime, divorce and natural disasters are treated as economic gain because the transactions needed to deal with them are included in the GDP.
--that damage to the environment can end up as pluses in the GDP: for instance, superfund cleanup of toxic sites, oil spill cleanups, and repair of environmental degradation.
-- In no way reflects the fact that real income for most people has gone down in the past thirty years while the GDP has risen over 50%.
-- That depletion of natural resources and damage caused to the environment by production is not held as an expense against the GDP the way business depreciation, for instance, is.
--That it may encourage the production of stuff that wears out -- so you can increase your market by consumer need to replace things often: planned obsolescence which I learned in my eighth grade trip to Washington was considered a perfectly respectable way to keep the economy going.  I suppose changing fashions and endless new gadgets and having people believe new is better does the same thing.

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What you need to know about economics before you vote

George Bush is fond of letting us know he makes decisions from his gut and doesn’t like to think too deeply about issues.  But as we know, his administration proclaims principles which, on the economic front, can be called neoliberal and on the international political scene, can be called neoconservative.  The neoliberal perspective is how we try to shape the economies of the of the world. 

In what is probably a dreadful metaphor, we can call neoconservatism and neoliberalism the Yin and Yang of the Bush administration world.  The reasons for this are the contradiction in terms that “neoconservative” and “neoliberal” might seem to imply – the overt existence of opposites, and also the notions that each produces its opposite and that under the surface of one the opposite exists.  Whether we are about to cycle from the extraordinary, self-serving dogmatism of the present age to a no-dogmatism age as the nature of yin and yang would suggest only the future knows.

It is also important to note that practices associated with both neoliberalism and neoconservatism are not new and are not limited to the Bush Administration, but have been gaining strength, especially since the early 1980´s.  Extremely briefly, neoconservatism emerged in the public consciousness maybe twenty five years ago when a bunch of intellectuals who had considered themselves liberals turned to a darker view of the international scene, a view in which internationalism, multiculturalism, etc. were scene as leaving us vulnerable to dark forces.  Neoliberalism, equally roughly, is what has happened to the liberalism we inherited from the American version of the Enlightenment first morphed into modern American corporate culture and now completely cut off from its roots as a system that was supposed to have the interests of individuals at heart and to be ethically grounded.  Neoliberalism is our heritage of laissez-faire economics and individualism so far run amuck that you can find neither laissez-faire economics nor individualism as the Founding Fathers intended (a varied picture, granted) in it. 

In this blog entry you will find my reading notes from an article called  THE ECONOMICS OF EMPIRE: NOTES ON THE WASHINGTON CONSENSUS by William Finnegan.  This appeared in Harper’s Magazine in May, 2003.  The link can be found in the left hand column of this blog under “Politics and Ideas 2004”.  It is worth reading the whole thing.

WHAT NEOLIBERALISM IS:  (also called The Washington Consensus, “free trade”):
It’s the economy, Stupid!  Promoted by U.S. foreign policy and multilateral financial institutions such as World Bank, International Monetary Fund, World Trade Organization.  Basically a theory of how the world economy should be run (with special implications for developing countries) “under American supervision.” It can be thought of as “Market fundamentalism globally applied.”  Quoting Bush: “free trade is good for both wealthy and impoverished nations.”

THE NEOLIBERAL CREED AS IT APPEARS IN “THE NATIONAL SECURITY STRATEGY OF THE UNITED STATES, 2002” (The same document that declared our right to make preemptive war)
-- We offer a “single sustainable model for national success.”
-- We will actively work to bring the hope of democracy, development, free markets, and free trade to every corner of the world.”
-- Through “lower marginal tax rates” and “pro-growth legal and regulatory policies.”
-- The concept of ‘free trade’ arose as a moral principle even before it became a pillar of economics.  If you can make something that others value, you should be able to sell it to them.  If others make something that you value, you should be able to buy it.  This is real freedom for a person- or a nation. To make a living.”

CORE TENETS:
Deregulation
Privatization
“Openness” to foreign investment and imports
Unrestricted movement of capital
Lower taxes

CORE ASSUMPTIONS:
-- That open markets and increased trade “lead invariably to economic growth”  Argument against: Latin America during 1960s and 70s, era PRECEDING trade boom of globalization per capita income rose 73%.  In last 80s and 90s under neoliberal globalization per capita income rose 6%.  IN the U.S. between 1947 and 1973, economic growth averaged 4% and non-managerial salaries (80% of US salaries) rose 63%.  Since 1973, real wages have FALLEN 4%, economic growth has averaged 3%.  While free marketers insist this is temporary, has lasted more than twenty years.  Markets favors the rich and are fickle.  They need careful regulation.
-- That the developed world is turning into postindustrial service economy while rest of world industrializes.  Argument against: See the rest of the article.
-- That everyone who wants to develop must go through the sweatshops, child labor, egregious pollution, health and safety nightmares, and subsistence level wages that accompany industrialization: “we went through it….” Argument against: not the same: now it is unregulated, untaxed foreign ownership with profits going abroad and good infrastructure not being built.
-- That lower taxes promote economic growth by encouraging people to work harder and invest more. Argument against: No study of US or other countries’ economies bears out a corollary between tax rates and growth.
-- That economic growth is automatically an overall social good. Argument against:  Unequal growth leads to heightened social conflict and increased repression.  Some economic growth is so environmentally destructive that it detracts from community’s quality of life.  Hidden environmental costs of trade itself: giant polluting transport ships, trucks and planes, for instance.  Literal Destruction of communities,family and group social structures and livelihoods as countries reshape their economies around exports and specialization.  In the United States, loss of millions of good jobs with globalization, just vanishing or going overseas with domestic job growth in low-paying, low- or no-benefit jobs like in Wal-Mart.
-- That the Gross Domestic Product (GDP) is a good measure of total economic output.  Argument against: It counts resource extraction as a plus but does not register resource depletion: strip mining, clear-cutting, overfishing, pumping an aquifer or oil reserve result in unaccounted-for and permanent losses.  Income distribution is not considered, that is while the GDP may register growth, most people may in fact be getting poorer.  Medical bills and legal bills count as growth. 
-- Democracy and free markets go hand in hand.  Argument against: China.
Singapore.  U.S. threatening Brazil’s economic situation  if anti-neoliberalist elected.  Situations in many other countries.
-- That trade always enhances the economy.  Argument against: See Japan’s collapse.  U.S. running a growing trade deficit, currently about $2.4 trillion dollars.  This is DEBT to foreign countries, including the biggest creditor, China.  What if some country started to call in the debts?  “While we make the world safe for multinational corporations, it is by no means clear that they intend to return the favor.” And of course the devolving economies of African countries among others.

THE ROLE OF THE INTERNATIONAL MONETARY FUND AND THE WORLD BANK IN NEOLIBERALISM AND GLOBALIZATION

-- The International Monetary Fund and The World Bank are the two most powerful institutions in the world today.
-- IMF and World Bank took effective control of large areas of public policy, imposed standardized “structural adjustment”…austerity and “openness” measures typically including removal of restrictions on foreign investments, abolition of public subsidies and labor rights, reduced state spending, deregulation, lower tariffs, tighter credit, encouragement of export-oriented industries, lower marginal tax rates, currency devaluation, sale of major public enterprises. 

The history and development of the IMF and the World Bank:
--Conceived at Bretton Woods, New Hampshire originally intended to finance post WWII reconstruction according to principles of John Maynard Keynes which included “assumptions that markets need state guidance, whether to stabilize currencies and prevent panics (IMF) or to build infrastructure necessary for economic development (WB). Marshall Plan took over this task, so World Bank turned to problems in Asia, Africa and Latin America lending money to poor governments for specific short-term projects meant to stabilize currencies and balance of payments and to promote international economic cooperation and to prevent another Depression.
-- Power originally divided according to relative financial strength and contributions: US had the most power from start.  US only country with effective veto over IMF decisions.  IMF evaluates a nation’s financial situation and as such as huge power to dictate public policy especially in developing world.
-- During Cold War, political influence of anti-communism: loans to anticommunist dictatorships and other repressive governments in Ethiopia, Uruguay, Philippines, Romania, South Africa.
--1968, The epoch of Robert S. McNamara with focus on poor countries: “aggressively expanded IMF-World Bank operations, pushing poor countries to accept loans to build factories, highways, huge power projects, vast agro-industrial schemes. 
-- 1981: End of McNamara tenure revealed many abandoned megaprojects, uprooted populations, ravaged forests and watersheds, loss of self-sustaining agriculture, huge debt.
-- 1980’s:  Reaganite and Thatcherite free-market economics pushed IMF and WB towards “the Washington Consensus.”  IMF is seen as more ideological than WB.  Idea that open markets and increased trade “lead invariably to economic growth” has repeatedly failed in practice and in fact “have had a negative effect on economic growth in participating countries as measured by 40% increase in numbers of people living on less than $1.00 day since 1972.  Nearly half world’s population lives on less than two dollars a day.   Some improvement in access to health care and education projects but multinational corporations the main beneficiaries.  American corporations received $1.35 in procurement contracts for each dollar the US government contributed to development banks.  The original $1.00 comes from U.S. taxpayers, not corporations.
-- Current additional major problems with this international development financing system:  New loans to indebted countries to “avoid the embarrassment of non-prforming loans” condemning poorest countries to permanetnt debt.  Policies and practices enrich corporations and poor-country bureaucras and politicians

RICH COUNTRIES AND CORPORATIONS PRACTICE ECONOMICS OF EMPIRE RATHER THAN FREE TRADE, THOUGH THEY DEMAND FREE TRADE FROM OTHERS:
--  IMF and World Bank took effective control of large areas of public policy, imposed standardized “structural adjustment”…austerity and “openness” measures typically including removal of restrictions on foreign investments, abolition of public subsidies and labor rights, reduced state spending, deregulation, lower tariffs, tighter credit, encouragement of export-oriented industries, lower marginal tax rates, currency devaluation, sale of major public enterprises
-- Export-processing zones (EPZs) also known as free-enterprise zones.  Used by multinationals for distributing “the different aspects of production and assembly to different contractors and subcontractors often in different countries with the lowest skilled, most tedious, unhealthy, labor-intensive work going to the least developed country.  Mobility is essential…ability to quickly transfer from country to country in search of cheapest production costs, least hassle.  EPZ facilities usually vast prefab sheds and plants that companies lease.”  Flaws of EPZs low wages, workers drawn from far-flung areas for temporary work,  fear that companies will withdraw meant little or no taxing or regulation, little or no profit for local governments.  Rarely introduces foreign technology or capital to the local landscape.

EXAMPLES OF BIG-TIME  NEOLIBERAL FAILURES IN DEVELOPING COUNTRIES:
Argentina:  in 1990’s privatization, deregulation, trade liberalization, tax reform…called model of neoliberalismo.  Collapsed in 2001.
Bolivia (Finnegan uses Bolivia as an extended example in the article):  Early 1980’s emered from military dictatorship in “economically impossible” position with overwhelming foreign debt, inflation at “surreal annual rate 24,000%.”  To halt inflation  implemented “structural adjustment” per measures described above.  In Bolivia, privatized railways, national airlines, telephone system, tin mines and many municipal utilities.   International companies invited in.  Countries flooded with cheap foreign products after 1985.  Hundreds of local Bolivian bankruptcies, World Bank and IMF more or less as the government of Bolivia, prosperity of los ricos.  After 17 years of “structured adjustment,” Bolivia is still poorest country in South America.  Benefits of controlled inflation and “modest” economic growth concentrated among wealthy.  Has been growth of “the informal sector” : sweatshops producing “knock-offs of brand name clothing,” street peddling and coca farming.  Privatization of national railway to Chilean multinacional consortium resulted in loss of numerous lines in a rugged, transportation-poor country, including line connecting third largest city to La Paz, the capital.
East Asia: successful pressure to liberalize capital markets and US recommendation against capital controls to impede international investors and speculators led to economic crisis of 1997-98 except in Malaysia which defied these recommendations.

ECONOMIC SUCCESSES INVOLVING VIOLATING PRINCIPLES OF NEOLIBERALISM during 1980’s and 1990’s and reasons for them: 
East Asia:
High protective tariffs around beginning industries (“infant industry trategy”) selectedf or export potential.
State planning
Local-content laws (requiring investors to buy locally produced components when possible)
Cutting deals for training local employees in technical skills
Capital controls (laws to impede international investors and speculators)
China:
Large populations providing cheap labor
Export processing zones also known as free-trade zones (EPZs) which are tzx free manufacturing zones with suspension of labor and environmental laws to attract foreign capital.  (Actually exist in seventy countries including Bolivia)
Strict capital controls.
Only limited stock ownership available to foreigners
Limited privatization
State control of the banking system
Does not have the democratic “niceties” that are supposed to come with a free market economy.
In China, tens of millions unemployed and destitute in capitalism upheavals, millions work seven days a week in dangerous, “abysmally paid factory jobs.”
India:
Less successful than china and has beenhurt by aspects of corporate globalization including seed patenting, huge World Bank –backed dams that have “displaced millions of villagers.”
Successes: growth of middle class benefiting from technology-led “boom”…outsourcing of software programming, back-office work.
Protection of domestic industries
Use of capital controls.
Large population of educated people

CURRENT ISSUES:
Proposed Free Trade Area of the Americas (FTAA)
Would include all 35 countries of the Amreicas except Cuba.
Would virtually eliminate barriers to foreign investment, strengthen investor rights, eliminate tariffs, ban capital controls, establish secret courts for multinational countries to sue governments over health, labor or environmental laws shown to impede profits.
Would go beyond NAFTA by demanding that national markets be opened to foreign corporations not only for banking and insurance but for public services like health, education and welfare.  Not popular among the people of Latin America.

THERE REALLY IS NO FREE TRADE – HOW THE UNITED STATES, THE EUROPEAN UNION AND JAPAN BEHAVE IN THE WORLD TRADE ARENA, SOME EXAMPLES:
--Forceful in demanding free trade from others as individual rich countries and through the IMF and the World Bank.
-- Protectionism in the United States include farm subsidies mostly going to big agribusinesses (possibly in amount of $180 billion over next ten years) . Tariffs on agricultural products. International effects: to close US markets to many poor country food producers.  Flooding poor-country markets with cheap food putting poor-country farmers out of business. 
--Consequence of NAFTA on Mexican farmers…Wages have fallen, half million families driven off their land by a collapse of prices as local markets swamped with subsidized corn produced by US agribusiness.
--  United States steel tariffs which have been protested with the WTO.
-- The European Union subsidizes farmers lavishly, as does Japan
--World Bank and International Monetary Fund  rules and appeals systems are designed by rich countries with the resources to make use of them in their own interests.  For example, the European Union had IMF and World Bank approval for dumping subsidized powdered milk in Jamaica and forcing the destruction of hundreds of thousands of gallons of fresh milk.  In similar fashion, the US dumped subsidized rice on Haiti putting thousands of Hiaitan rice farmers out of work and causing rise in child malnutrition.  (Not ironically, Haiti does well on IMF trade-openess rankings)
-- Structured obstructions: impose tariff peaks which raise tariffs according to how many levels of processing.  Like peanuts to peanut butter.  Keeps poor countries from adding value to raw products, thus preventing stages of industrial development.
-- AIDS drugs: in response to worldwide pressure, US acceded in November 2001 to consider public health and allow poor countries access to generics.  Reversed this in late 2002 under pharmaceuticals pressure.
--Balanced budgets:  In the US and other rich countries, deficits, often large ones, exist during a recession and other times as well! IMF insists on balanced budgets and high interest rates for borrowing for poor countries (ultraorthodox austerity approach)

IS THIS HOW THE RICH COUNTRIES REALLY WANT IT?
--Probably not (except for “vulture capitalists”)  because it destabilizes life, security, economics for everyone. But the basic model insures billions of people “struggling to stay afloat in the world economic maelstrom.”
-- The developing world understands that we provide very little foreign aid in addition to insisting on punishing trade policies.  Most Americans think we provide between 15 to 24% of our budget to foreign aid, but in fact, we only provide 0.1 % -- that’s one tenth of one per cent.  Net transfer of money in form of corporate profits and government deficits runs from the poor countries to the rich.