23 January 2010

Roger Baker : Is America Already a Failed State?

Is America already a failed state?
No public trust for a dysfunctional system

The main obstacle to progress is a corporate dominated political system that resists favoring broad long range public benefits over the short term profits of the few.
By Roger Baker / The Rag Blog / January 23, 2010

It is getting harder to argue that America is not already a failed state. One important reason is the fact that the public, to an alarming degree, doesn't trust the government anymore. When the public is suffering economically and stops trusting their government to bring relief, nothing the government does is likely to bring much contentment. This is especially true where it is unlikely that the underlying problems causing the pain will get much better soon.

Broadly speaking, top political leaders including Obama and Congress are not being very honest about the poor prospects for economic recovery. The resulting political backlash is a big part of the explanation for the Democratic Party defeat in the Massachusetts senate election. Governmental distrust is now widespread, as Adam Nagourney acknowledges in The New York Times.

Public anger has elevated job creation toward the top of the political agenda. In contrast to their own economic plight, people see the bank bailouts and giant banking bonuses and naturally blame greedy unregulated banks for their economic misery. And not without good cause. In reality, however, the crisis required active cooperation between Wall Street and the politicians who ultimately regulate banking behavior, whereas the politicians involved are inclined, by nature of their job, to hide their own role.

The U.S. political system is already deeply dysfunctional, and is effectively under the bipartisan control of corporate money, a kind of domination just reinforced by the Supreme Court in its decision on corporate campaign financing. This money control normally prevents most Democrats from moving to the left.
The lobbies of greed rule America. The White House, Congress, even the federal judiciary are impotent in the face of capitalist greed. The recent Supreme Court decision permitting corporations to use shareholders’ money in corporate treasuries to influence elections increases the control that corporations have over the outcome of elections and the decisions of the government of the United States.

There is no government of the people, for the people, by the people, only the rule of private interests.
As a consequence of widespread grassroots economic pain, an irresistible political pressure is building that demands change. Here Robert Reich describes the new political dynamics behind the sudden trend for all politicians, but especially the Democrats, to blame banks. Banks make great political targets, and this explains why Obama is finally getting tough on Wall Street:
But suddenly the winds are blowing in a different direction over the Potomac. The 2010 midterms are getting closer, and the Dems are scared. Their polls are plummeting. The upsurge in mad-as-hell populism requires that Democrats become indignant on behalf of Americans, and indignation is meaningless without a target. They can’t target big government because Republicans do that one better, especially when they’re out of power. So what’s the alternative? Wall Street.
If the root problem is based on private corporate control of the whole government, it follows that trying to manage the behavior of bankers with tough-sounding rules imposed by such a government is not likely to lead to a recovery. Not until there are rules that force the banks and private money to invest in ways that they currently see as unprofitable.

The basic reason the economy can't recover is that for it to recover there have to be new domestic jobs created by the too-big-to-fail investment banks that can get low interest loans from the Federal Reserve. But the banks, not without reason, think that American consumers lack a bright future. Since most states are broke, that leaves the federal government as the jobs creator of last resort. The Treasury is broke in a sense, but it has an unlimited ability to create more money in cooperation with the Federal Reserve. Here is a good explanation from a widely followed, independent energy economics analyst, Tom Whipple:
To support the policy of keeping federal interest rates close to zero, the U.S. Federal Reserve also has been buying up billions dollars worth of new treasury securities. Thanks to the $1 trillion plus deficit the U.S. is now running, Treasury securities are being issued in quantities that have never been seen before and as government revenues continue to plunge are likely to be issued in ever greater quantities.

Amidst the chaos of rising unemployment, spiraling foreclosures, collapsing real estate prices, amazingly enough, the U.S. equity markets have been rising steadily. Some astute observers are beginning to question just what it going on. How can tens of billions of U.S. Treasury securities be auctioned off at such low interest rates each week while many traditional foreign buyers, like China, are backing away from purchasing more U.S. debt as fast as they can without crashing the value of their holdings? How can sensible investors be buying so much stock that prices continue to rise steadily at a time when real unemployment likely is above 20 percent and the prospects for earnings growth by U.S. companies is as bad as it has been in the last 80 years?

The answer, of course is that they probably can't, and this is why suspicions about just what is going on are starting to be raised. Close examination of available data suggests to some that traditional buyers of U.S. stocks such as retail investors, hedge and mutual funds and foreigners simply aren't there on a scale needed to support nine months of some of the fastest growth the equity markets have ever seen.

There are suspicions about the Treasury's auctions too which are consistently oversubscribed with buyers clamoring to buy massive quantities of debt. Obviously there is only one place that all these billions can be coming from and that is the US Federal Reserve which has the capability of creating unlimited amounts of money simply by typing on a computer -- you don't even have to bother to print money anymore.

The theory of what is going on is simple -- the Federal Reserve creates a trillion or so dollars and sends lots of it to the big investment banks, called primary dealers, in return for stacks of nearly worthless mortgages the banks collected during the recent housing boom. In return for letting them unload nearly a trillion dollars of worthless securities on the taxpayer, the banks oblige the government by using many of those billions to buy Treasury securities from the government at close to zero interest and to buy enough stocks to keep the market steadily rising.
Everybody is happy. The great depression has been halted in its tracks, the stock market is soaring, signaling to the unwary that all is well, and Wall Street's multi-million dollar salaries and bonuses are preserved for yet another year.

The question of the year is how long this federal effort can continue. The controlling factor will be interest rates and the length of time the government can keep interest rates close to zero as it issues trillions in new and refinanced securities. A few interest points higher and housing becomes unaffordable given the strictures on lending. A few more and the U.S. debt becomes unaffordable.
The dollar is no doubt overvalued, given the fact that the government, with the help of the private Federal Reserve, is creating so many of them, and so suddenly. It is only when spending picks up that people can discover that there are a lot more dollars than there are things to buy with them. Because of the political pressure generated by the current depression level unemployment, the government has little choice but to borrow and spend enough to try to calm the situation, and try to cause the dollar's loss in buying power to happen gradually. For political reasons, Obama is afraid to acknowledge this reality.

What does dollar devaluation imply? Arguably, this is a prescription for stagflation as the domestic economy stagnates at the same time as the dollar depreciates in buying power, meaning commodity price inflation. It means soaring fuel and food prices for U.S. consumers before long, since these items are often freely traded global commodities, with prices set by global buyers beyond U.S. governmental control. Many economists spanning the political spectrum now see the current situation as being unsustainable.

In the following piece, David Goldman comes to many of the same conclusions, and now regards the U.S. as an ungovernable failed state. Writing under the pen name Spengler. Goldman is smart Wall street ex-banker, with a good understanding of politics. It is vital to understand politics in order to be a very good economist, or at least to understand the big picture very well.
Is America a failed state?
During December, more than 600,000 workers disappeared from the official count of the American labor force, erasing the illusion that the employment situation would recover. But the voters knew that before the economists. The most reliable index of economic sentiment is the president's deteriorating approval rating. For a by-the-numbers explanation of why the U.S. economy will not recover, see my October 6, 2009, essay, "Obama's permanent depression."

America is the world's most successful state, and the one with the greatest longevity in its present constitutional form. But neither of the major parties is presently capable of governing it. The Republicans have been hoping that rage against Obama's failed economic policies would carry the party through the November congressional elections. But it is entirely conceivable that the Obama presidency will implode as quickly as the Obama campaign metastasized during the 2008 primaries, and that the electorate will call the Republicans' bluff.

Americans understood well enough in early 2008 that the traditional leadership of both parties had led them into a dead-end. As I wrote in January 2008 ("Obama bin lottery") after Obama's surprise landslide in the South Carolina Democratic primary:
People of modest means do not understand the stock market, but they are sly: they can read the panic in the eyes of their leaders. After assuring them for months that all was well, Washington last week offered an emergency interest rate cut for the first time since September 11, 2001, and an emergency economic package which will send a small check to every American family earning less than a certain
threshold. Both President George W. Bush and [Bill] Clinton proposed essentially the same program. If that is "managerial ability," thought the voters of South Carolina, we might as well buy the lottery ticket.
Most of what Goldman says about the USA being a failed state and why seems to be on target, but the last part of his essay looks to the general public to subsidize the private sector as the price of a possible recovery.
We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes." Americans need to be told that they will need to invest before they can consume, and that the cure will take years rather than months to take effect. It's not a happy message, and no one in politics is willing to deliver it -- if indeed anyone in politics understands it.
This amounts to saying we should change our national laws to reward investment and savings at the expense of public consumption. In effect Goldman says we need to revive the industrial engine by redistributing wealth away from consumption toward investment if we want to revive the economy. This is akin to saying that we need to gun the engine of our ship to save ourselves, but without steering it.

There are those of us who believe we will have to gun the engine and steer the ship if we want to save ourselves. Those who warn of energy problems, and to a degree the Obama administration, take the position that we need to immediately deal with our addiction to imported oil, largely through a revival of domestic investment in alternative energy. All presidents since Carter have advocated much the same thing, but without delivering.

Wise minds see that we are rapidly headed toward an energy disaster and need to steer around it. Here for example is Jeff Rubin, a Canadian banker, describing the situation.

If there is a way to avoid a wrenching energy and commodity crisis, someone in charge needs to create a targeted industrial policy, with rules that specifically reward investments in energy reform, rather than rewarding new investments in general.

The following is from "Why Obama’s Economic Plan Will Not Work--And a Better Plan" by Robert Freeman
If Obama wants to revive the American economy, he needs to adopt a much more aggressive program than has been contemplated to date. Specifically, he needs to address the chronic shortfall in workers' incomes and the recent collapse of middle class wealth which are the root causes of the crash. The most effective way to do that is with a Manhattan Project-like program to reconfigure the way the nation uses energy.
This all amounts to saying we need a different kind of government with different kinds of rules to conserve and direct the remaining wealth of our nation. If there is a chance to revive the economy, we need new centralized rules and a coordinated industrial policy that will channel both public and private investments into areas that the private money lenders now consider unprofitable. The main obstacle to progress is a corporate dominated political system that resists favoring broad long range public benefits over the short term profits of the few.

[Roger Baker is a long time transportation-oriented environmental activist, an amateur energy-oriented economist, an amateur scientist and science writer, and a founding member of and an advisor to the Association for the Study of Peak Oil-USA. He is active in the Green Party and the ACLU, and is a director of the Save Our Springs Association and the Save Barton Creek Association. Mostly he enjoys being an irreverent policy wonk and writing irreverent wonkish articles for The Rag Blog.]

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