Political Economy

I. The Parable of the Broken Window

Frédéric Bastiat

In 1850, classical liberal theoretician Frédéric Bastiat published his landmark essay That Which Is Seen and That Which Is Unseen (Ce qu’on voit et ce qu’on ne voit pas). In it, he introduces his acclaimed scenario — the “parable of the broken window.” The story is a simple one: a shopkeeper’s son accidentally breaks a pane of glass and hire a glazier. And so it goes:

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child.

But what if windows continue to be broken purposefully; what if the child is, by some oddity, conspiring with the glazier to reap the benefit of profit? In short, “destruction is not profit.” The issue of destruction, and its subsequent fixing, is that of which creates no real value. It merely moves moves money from one hand to another (in this case, from the shopkeeper to the glazier).

The opportunity cost of such an action, the repeated breaking of windows, is at the expense of other actions that could add more net benefit to the town. For one, the glacier may be distracted from other necessary tasks by fixing the shopkeeper’s window repeatedly, acting as a negative constraint on his labor, or the shopkeeper might have rather used the money spent on repairs on either investment or consumption. It best can be summed by Bastiat’s phrase: “society loses the value of things which are uselessly destroyed.”

What will you say, disciples of good M. F. Chamans [French politician], who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

Bastiat goes on to use his argument against protectionism (one which the Austrian school of thought uses often), which is, I feel, an incorrect application of the actual parable. Bastiat was functioning within the French colonial economy and he failed to address the difficulty of smaller firms lacking the economies of scale to compete with already-established firms. This is demonstrated by the Hamiltonian “infant industry argument,” and the adoption of protectionism in the United States, allowed for the development of American industry that would have been eaten up by British competitors had they not been protected. However, this is a separate issue entirely — Bastiat’s parable can be properly applied to the opportunity cost of war and those that claim it “brings growth.” Naturally, he actually applied his thinking to the “war economy” and wrote directly of it. He differentiates between what is “seen” and costs that are “not seen.”

A hundred thousand men, costing the tax-payers a hundred millions of money, live and bring to the purveyors as much as a hundred millions can supply. This is that which is seen.

But, a hundred millions taken from the pockets of the tax-payers, cease to maintain these taxpayers and the purveyors, as far as a hundred millions reach. This is that which is not seen. Now make your calculations. Cast up, and tell me what profit there is for the masses?

Therefore, a war-driven economy does not actually create sustained growth since it takes away necessary labor by enlisting them and deviates capital to military use rather than civilian use.

II. Rapid Growth in the Post-War Era

The Post-WW2 era brought with it a period of unprecedented economy growth. The process of rebuilding Europe was relatively quick and economies sprang back on their feet. Called the “Golden Age of Capitalism,” Western European nations experienced GDP growth rates never seen before in their history and some of the lowest unemployment rates ever recorded. To many, it appeared to be the triumph of capitalism in rebounding from the previous years of carnage and war. Titles were given for each nation’s “recovery miracle” — Wirtschaftswunder in Germany, the Trente Glorieuses in France, and others. However, when placed in context, it was a development consist with capitalism’s short but sporadic history.

Source: The Economics of World War II: Six Great Powers in International Comparison

*Based on Table 1 found in Mark Harrison, The USSR and Total War: Why Didn’t the Soviet Economy Collapse in 1942? from Mark Harrison, “The Economics of World War II: an Overview,” in Mark Harrison, ed., The Economics of World War II: Six Great Powers in International Comparison, Cambridge University Press (1998), 10.

The GDP during the war differed tremendously year by year. The UK economy began feeling the economic consequences of the war after 1943, France after 1939, Italy after 1942, Germany after 1944, and Japan also after 1944. Europe had to be rebuilt — the broken window had to be fixed.

And after the war, the war-torn nations called upon their glaziers: industry. Production soared and is perhaps best demonstrated in automobile production alone, which rose drastically after 1946.

Main sources: WMVD, SMMT, JAMA, IRF, CCFA, OICA

Military spending also increased as military armaments accumulated in the post-war period. In the years between 1950 to 1960, France doubled their military spending from 11 billion to 22 billion, West Germany from 0 to 22 billion, the United Kingdom from 23 to 29 billion, and the United States from 69 to 168 billion [1]. The need for a permanent armament reserve for potential war against the Soviet forces proved to be a constant in the Cold War economies that would arise in the years after World War 2. Likewise, this stirred production levels to meet these new demands. With the increases in production, fresh new labor was needed to sustain it. Luckily, many troops from the war provided such manpower necessary to sustain these new production levels. They were absorbed into the economy with relatively ease and Western Europe experienced unemployment levels that were at historical lows. Deputy Commissioner Robert J. Myers of the Bureau of Labor Statics writes in 1964:

From 1958 to 1962, when joblessness in [France, former West Germany, Great Britain, Italy and Sweden] was hovering around 1, 2, or 3 per cent, [the U.S.] rate never fell below 5 percent and averaged 6 percent.

However, the reason is quite clear — Europe had room to grow. After being devastated by war, its cities ravaged by bombings, it had to be rebuilt. Industry began to grow rapidly and profits accrued as large inflows of labor were coming into these nations from individuals that were once fighting in the front lines. The conditions were set and the growth was focused on repairs and war production with the help of the Marshall Plan put into effect by the United States. Thereby it can be said, had the war not occurred, GDP would be much higher in these Western nations since they would not forgo the opportunities that were missed in focusing on rebuilding repairs. Once again, Bastiat’s argument can be evoked — “society loses the value of things which are uselessly destroyed.”

III. The Inevitable Crisis

As was expected, the economic boom of the post-WW2 era would not last indefinitely. A conglomeration of issues arose with the advent of the 1970s: the end of the Breton Woods Agreement in 1971, the Oil Crisis of 1973, and the policies of liberalization that ensued. The crisis and murky economic future that followed can best be characterized by employing an analysis of the rate of profit of these Western powers. The fluctuations of the rate of profit can help us better understand the crises that set in and its ramifications in the years that followed. The rate of profit can be best explained by the following simple equation:

S / (C + V)

Whereas S is surplus value, C is constant capital, and V is variable capital. The surplus value can be thought of as undistributed profits, one which do not go towards the costs of the initial labor power and machinery needed to construct the commodity. The difference between constant capital and variable capital is relatively simple — constant capital is machinery, which is relatively constant in the short run, and variable capital is mainly manifested as fluctuating wages. This relationship is crucial because, in a capitalist economy, industrialists want to maximize efficiency in order to better compete. Consequently, the more commodities are produced, the more prices fall. This translates to capital rising and surplus value subsequently falling which causes, in the long run, a tendency of the rate of profit to fall. Granted, this is only a tendency, since there are counter measures to prevent such a phenomenon from occurring (as seen in the neoliberal years of the 1980s).

United States, index numbers: 1960-5 = 100; Source: The Spain-U.S Chamber of Commerce

A crisis was inevitable after the post-WW2 boom since production had exhausted itself. The all-too-common crisis of overproduction soon followed, with the rate of profit dropping sharping starting from 1965 in conjunction with the rise of more radical movements in labor and demands for wage increases and better conditions. The fact that the rate of profit plummeted likely caused the economic malaise and stagflation of the 1970s. And the response was one we are too familiar with today — outsourcing. In order to increase profits, corporate bodies began to move to the Third World to lower their labor costs (variable capital) thus increasing their rate of profit. This is represented by the neoliberal boom of the 1980s with the rise of Reaganomics and Thatcherism

The Rate of profit in the United States; Source: The Spain-U.S Chamber of Commerce

The graph above provides us with a different look of the same data. The average rate of profit fluctuates around 24.4% from the period of 1946-1973, drops down to 18.9% from 1974-1983, and finally rises 1.2% to 20.1% from 1984 to 2009. However, bear in mind, the rate of profit begins to drop at the 2006 mark, serving as a precursor to the Great Recession and the current crisis.

Point being — what does this necessarily have to do with the supposed “Golden Age of Capitalism?” Many Keynesian economists point to their policies and argue they spurred the growth of the post-WW2 era. However, with Europe broken and demolished, their economies could only grow. Growth had to follow since so much capital was required to rebuild post-war Europe. As efficiency increased exponentially and production soared, it was safe to assume another crisis would soon follow, since the inherent contradiction of overproduction always brings with it economy calamity. And to curtail these decreasing rate of profits a new economic ideology was introduced — neoliberal doctrine, which worked to cut taxes, deregulate, and cut labor costs through Third World exploitation. The shaky footing that the “Golden Age” brought gave individuals blissful optimism, as they hoped that the policies instated would continue growth indefinitely, however they failed to curtail the inherent contradiction of the profit accrued and capital needed, which would evoke the crisis that would follow in the 1970s.

***

– Rate of profit graphs were obtained from Short and Long-Term Dynamics of the U.S Profit Rate in the Context of the Current Crisis

– Capital Accumulation and Growth in Central Europe, 1920 – 2006

– The Post-World War II Golden Age of Capitalism and the Crisis of the 1970s

– The “Millennium Crisis” and the Profit Rate

– System Failure: The Falling Rate of Profit and Economic Crisis

A Brief Economic Analysis of Yugoslavia

January 4, 2013

History, Political Economy

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I. Nationalization and Reindustrialization

The port city of Zadar in Croatia after many bombings during the war.

The port city of Zadar in Croatia after many Allied bombings from 1943 to 1944.

The victory of the Yugoslav Partisan army in World War II created many hefty challenges for the newly-liberated Balkan region. After being occupied by the Ustaše from 1941-1945, the destruction was severe – “the human and material losses were the greatest in Europe after the USSR and Poland” [Simon, Jr. 5]. The former Kingdom of Yugoslavia was virtually left in ruins, being usurped of its raw materials and resources, and stripped of its transport infrastructure, mining, and manufacturing industries.

Being granted the honor of victors after World War II, the Partisans formed their own government, based on the ideology of Southern Pan-Slavism and a socialist economic philosophy in the Marxian tradition. The Socialist Federal Republic of Yugoslavia was established on the 29^th of November, 1945 and, after its creation, quickly allied itself with the Soviet Union. It immediately began to implement programs to rebuild its broken post-war state. Power became strongly centralized, based on the Soviet model of state socialism, and order firmly kept in place by Marshal Josip Broz Tito’s Communist Party. Six regions were then created, of relatively equal political power, in the newly drafted Constitution of 1946: Croatia, Montenegro, Serbia, Slovenia, Bosnia & Herzegovina, and Macedonia. Soon after, sweeping restructuring began to take root; property was transferred from its former private owners to the communist-run state, financial capital was expropriated from formerly being privatized, and the means of production was converted to public ownership. Firstly, large financial institutions, such as the banks, were nationalized to control the money supply and the flow of financial capital. After that was achieved, large industries were then overtaken by state control to promote industrialization in the war-crippled socialist republic. Then, finally, the smaller transport, commercial, and agricultural industries followed suit; they were also nationalized to increase production [Simon, Jr. 5].

II. Deterioration of Yugoslav-Soviet Relations

Edvard Kardelj, one of the creators of the Yugoslav model of socialism.

Although the initial recovery program enacted under Tito’s leadership was derived from Stalin’s 5-year plan model, significant splits shortly began to ferment between the Soviet leadership and the Yugoslav communists. Economic blockades were being placed on the young socialist state because of their alliance with the Soviet Union, and Tito’s independent stance on issues angered Stalin and his associates. Moreover, Yugoslav theoreticians began to formulate their own strains of Marxist thought and began to criticize the internal political and economic structure of the Soviet Union. Consequently, this gradually led to Yugoslavia’s expulsion from the Cominform by the end of the 1940s. It was at this point Yugoslavia began to economically develop differently than its socialist counterparts – creating a unique form of decentralized market socialism based on workers’ self-management [Simon, Jr. 6]. Frankly, the idea behind it was simple; the withering of bureaucratic state would only occur if innovative mass-participatory structures were created. Egalitarianism and populism became more of a principle rather than a political tool, contrary to the Soviet Union. Decentralized socialization of industry quickly followed Yugoslavia’s alienation from the Soviet Union. Led by the efforts of thinkers by the likes of Edvard Kardelj and Milovan Đilas, the original state-control of industry began to be broken down into localities and councils were created for respective industries. The profits were distributed amongst the workers in each individual firm, and some functions of state control were relinquished and allocation became more relied on the basic mechanisms of the market to ensure self-management and proper distribution [Frei, 45].

III. An Economic Revolution

Strictly speaking, this economic transformation can be described as taking place in three major stages: Firstly, in the 1950s, workers’ collectives were created but were restricted by the state’s regulation of capital construction. This was actually a remnant of the Soviet model of socialism. Secondly, the 1960s and 1970s were a radical shift from the aforementioned control that was present in the previous decade; rather than allow the state to control capital allocation and production, socialized markets began allocating it themselves with a self-managing structure using the labor involved. Thirdly and finally, liberalization reform followed until the ultimate collapse during the 1980s and late 1970s mainly caused by inflation and debt [Simon, Jr. 7].

Lunch break for Yugoslav workers, 1952.

The decentralized Yugoslav model mainly employed during the 60s and early 70s was localized, but complex and interconnected. Authorities in certain districts were authorized to oversee consumption and production services, to ensure each commune (the basic local government units) were working in each others interests. Moreover, each autonomous region in Yugoslavia was different; each had different legislative procedures for planning. However, it did still remain a federalist system of governance – most of executive power was exerted in creating land uses, the geographic location of large industries, traffic networking, and grandiose public service projects that required cooperation with different regions [Simmie, 272]. Most of power was derived from the legislative regions, but the localities were actually given little statutory powers. Rather, they were consulted and functioned as “pressure groups” to ensure local interests within the regions are met such as in the areas of housing, settlement, education, national defense, and the likewise [Simmie, 274]. It was a demonstration of a collective economy at work, absent of a real large-scale “free market,” where different elements of production were decided by long-term plans, medium-term plans, and annual action plans – while also being guided by the mechanisms of the supply and demand curves in a regular market, except profits were socialized as was production [Simmie, 276].

The economic growth seen during the period of decentralization was upward and dynamic. Comparatively speaking, Yugoslavia experienced the greatest per capita GDP growth out of all the Eastern Bloc economies [Groningen]. It also embraced a tight-controlled policy on imports from developed capitalist countries after the restoration of Soviet-Yugoslav relations in 1954-1955; foreign trade with socialist countries increased from 1.8% to about 28% in the decade following the return of good relations, while the share from Western capitalist nations dropped from 80.9% to 57.7% mostly due to the policies enacted by the Committee on Foreign Trade which was given extra power in 1956 to protect infant self-managing industries in developing Yugoslavia. Equally important, Yugoslavia enjoyed a balance of trade with the socialist nations during this period – amounting to $176 million of exports and $169 million of imports in 1962. Manufactured goods, machinery, and equipment were traded with the Eastern Bloc nations, while trade with developed capitalist countries consisted mainly of raw materials, food, and tobacco [Frei, 45, 46]. Banking was also heavily regulated, but broken down locally. In 1961, it consisted of eight large sub-national banks and over 380 communal banks, all overseen by the National Bank of Yugoslavia, the main credit institution of the country and giver-of-loans. The sub-national bank, granted on a regional basis, served as intermediaries between the National bank and the communal banks. The idea behind this was to encourage development by focusing giving loans to regions in need of aid, and they used communal banking institutions to do so [Frei, 48, 49].

IV. The Collapse of Yugoslavia

Despite strong economic growth and potential – experiencing an annual GDP growth of 6.1%, a life expectancy of 72 years, and literacy rate of 91% according to 1991 World Bank Statistics from 1960 to 1980 – the experimental Yugoslav system soon imploded on itself due to a variety of factors. Perhaps more importantly, the Oil Crisis of the 1970s had the greatest impact on Yugoslavia and was a precursor to the catastrophe that would unfold after Tito’s death in 1980, ultimately leading to the breakup of the federation in a bloody civil war. The recession in the developed nations in the West severely hurt Yugoslavia, and hindered the economic growth it was experiencing for 30 years. Massive shortages followed in electricity, fuel, and other necessities and unemployment reached 1 million by 1980 due to the energy crisis and the increasing economic embargos imposed by Western powers. Soon, structural economic issues came to light and richer regions became frustrated from over-subsidizing the poorer regions of southern Yugoslavia, called “economic black holes” [Asch, 26]. Production severely dropped, and conditions only worsened as the decade went on; GDP dropped -5.3% from 1980 to 1989, the regions of Kosovo and Montenegro being hit the hardest [Kelly]. Real earnings dropped 25% from 1975 to 1980, further crushing the poorest regions. In an effort to curb the domestic crisis, Yugoslavia began to take loans from the IMF to boost infrastructure development and bring back production levels to their pre-crisis levels. Soon, its debt skyrocketed – Yugoslavia incurred $19.9 billion in foreign debt by 1981 [Massey, Taylor, 159]. As a request for incurring so much IMF debt, the IMF demanded market liberalization and many regions began to implement economic shock therapy: cutting subsidies, privatizing, and quickly opening trade to allow foreign capital, which only worsened Yugoslavia’s economic crisis. Inflation rates soared and Yugoslavia entered a period of hyperinflation, unable to cope with the currency crisis because of its complex banking system – it soon began printing large amounts of Yugoslav dinar banknotes, created a new note of 2,000,000 Yugoslav dinars in 1989. As the broken nation spiraled into further calamity, the terrible war, which would be the bloodiest on European soil since World War 2, would soon begin to rear its dark head and finally put an end to the Yugoslav experiment that lasted little over just 40 years.

The Yugoslav Partisan Army marching through the city of Bitola, Macedonia.

V. Bibliography

– Simon, Jr., György. An Economic History of Socialist Yugoslavia. Rochester: Social Science Research Network, 2012. 1-129.

– Simmie, James. The Town Planning Review , Vol. 60, No. 3 (Jul., 1989), pp. 271-286

– The Groningen Growth and Development Centre, n.d. Web. 3 Jun 2012. http://www.rug.nl/feb/onderzoek/onderzoekscentra/ggdc/inde&xgt;

– Frei, L. The American Review of Soviet and Eastern European Foreign Trade , Vol. 1, No. 5 (Sep. – Oct., 1965), pp. 44-62

– Beth J. Asch, Courtland Reichmann, Rand Corporation. Emigration and Its Effects on the Sending Country. Rand Corporation, 1994. (pg. 26)

– Mills Kelly, “GDP in Yugoslavia: 1980-1989,” Making the History of 1989, Item #671, http://chnm.gmu.edu/1989/items/show/671 (accessed June 03 2012, 10:32 pm).

– Douglas S. Massey, J. Edward Taylor. International Migration: Prospects and Policies in a Global Market. OxfordUniversity Press, 2004. (pg. 159)

– Government of the Republic of Croatia – Information on Croatian Economy http://www.vlada.hr/en/about_croatia/information/croatian_economy

– Ballinger, Pamela. “Selling Croatia or Selling Out Croatia?” Bowdoin College, 24 Oct. 2003. Web.

– Vojmir Franičević. Privatization in Croatia: Legacies and Context Eastern European Economics, Vol. 37, No. 2 (Mar. – Apr., 1999), pp. 5-54

Miniature Corporate States

November 17, 2012

Critical Theory, Political Economy

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The merging of state and corporate power, commonly called “state monopoly capitalism” by those of us on the Left, has molded itself into creating a complex system of corporate structures. Interconnected in a globalized marketplace, they have set forth a new economic paradigm that infringes on the very liberty of peoples. Domineering and implicitly bureaucratic in its handlings, these international giants, in all their lucrative prowess, very much resemble what I would call ‘miniature states.’ Contextually, I use miniature very sparingly; only in their appearance they are not truly states, but in their real socio-political power they are on par with actual state apparatuses.

The network of corporate structures have become infused into the superstructure of the social strata. Culture, relations, political power, and institutional power have all been influenced by its overreaching grasps. And at its very heart lies the base, the means of production, which bring mechanization, blandness, and uniformity in its wake which is the staple of corporate development. Now, given all these attributes, can we compare the corporate model to an authentic state one? Statistics reveal a stark parallel.

In 2011, according to Fortune 500, Walmart reported its earnings:

Revenue: $421,849,000,000 – 3.3% change from 2009
Profits: $16,389,000,000 – 14.3% change from 2009

Exxon Mobil, ranked number two:

Revenue: $354,674,000,000 – 24.6% change from 2009
Profits: $30,460,000,000 – 58.0% change from 2009

Now, as large as these numbers are, let’s look at nominal GDP numbers gathered from the United Nations (2010) in comparison to these revenue numbers [2]. Bear in mind, GDP is the market value of all the final goods and services from a nation for a given year.

If we place Walmart’s revenue in comparison to GDP, it would rank above Norway’s GDP which is $413,056,000,000 and ranked 24th in the world.
If we place Exxon Mobil’s revenue in comparison to GDP, it would rank above Thailand’s GDP which is $318,850,000,000 and ranked 30th in the world.

In essence, Walmart would be the 23rd largest economy in the world, and Exxon Mobil would be 29th, if they were countries.

The fact that corporations possess more moneyed power than most nations is daunting, however we can break it down even further in resemblance to modern countries. Let’s take it, for the time being, that number of individuals employed by a corporation is its supposed “population.”

In 2011, according to Fortune 500, Walmart employed 2,100,000 individuals [3]. Thereby, if we were to make Walmart a sovereign entity, it would have a population of over 2 million people and a GDP ranked 23rd in the world. The income inequality in this ‘state?’ — in comparison to its CEO, Mike Duke, to his workers, it’s 1,167 times greater [4].

So granted that corporations maintain political power, market power, cultural holds, and employ a sizable amount of individuals to constitute, essentially, a ‘nation’ — would be be appropriate to call these institution under the category of states? States generally function under the guise of expansion, it caters to its interests, and it wishes to expand its influence over its contemporaries. Modern corporate institutions, generally speaking, do the same thing although in the marketplace. They expand their market share, they compete with other firms, and they engage in associations (i.e. “diplomacy”) with other institutions.

Why do we reject government tyranny, but we condone corporate tyranny? Arguably, both are shades of the same tint and both contain hierarchical and bureaucratic structures of organization. The cognitive dissonance of supporting one, while turning a blind eye to the other, is a form of confirmation bias at its very worse — and it only serves to facilitate the bullying institutions that control the all of our relations.

The Myth of the American Sovereign Debt Crisis

October 25, 2012

Political Economy

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Anti-austerity protests in Spain.

Since the initial days of the Obama administration, pundits and politicians alike have been predicting what, they call, “a complete government shutdown.” Fix the deficit, we need a balanced budget, cut spending; such is the rhetoric coming out of the Republican establishment that has deluded the political mainstream. As the federal public debt now approaches $16 trillion, it begs the question — when can we expect this doomsday scenario? When can we expect this assumed government collapse? And then there’s the endless threats of future hyperinflation — by the same crowd that has been making such silly “predictions” for over a century.

With all these individuals expecting a inflationary Armageddon and looming debt crisis, you would expect the argument to hold some water. To understand why such fears are unfounded, the nature of money has to first be properly understood in modern context. Its techicalities can be explained with an economic theory I find particularly fascinating; Modern Monetary Theory (MMT).

To start, we must realize that money is no longer pinned to gold. Its subsequent value is backed by the state (i.e. fiat money). This has profound implications in economic theory. For one, it means that the validity of the currency itself is based on the government maintaining a monopoly in controlling it. The government asserts this value through taxation. Thus, private confidence and taxation establish the basis of exchange value in a national economy; fiat value has no intrinsic value on its own. From this basis, can government truly “run out” of money, if it is its sole provider? Before the end of the Bretton Woods System in 1971, when currency was still pinned to gold, it most definitely could. Since moneyed printing was linked to gold in ratio, states were forced to limit their spending in accordance to revenue or be forced to promptly borrow from other governments. Now, the monetary system has been changed. Government is no longer like a a “credit card,” as its so absurdly claimed, that we just add our expenses to and pay for it a later. It is the issuer of currency, not a receiver of it as households in the United States are.

The economic flow can be broken down into two main spheres — the private sector and the public sector. The private sector accumulates assets by spending less than its income, resulting in savings. In retrospect, this savings increase is an accumulation of government-backed currency and bonds. Therefore, in order for private wealth to accumulate, government liabilities must rise parallel to it. In order for this to be done, government must spend more than it receives from taxation to create more IOUs (fiat money). This is what is commonly as known as “the deficit,” which is the stock of government debt minus its tax revenue. Therefore, government’s financial liabilities are equal to the private sector’s net private financial assets, since a creation of private financial wealth demands a greater circulation of fiat money, which is created through printing currency. Interestingly enough, this means that when the budget is fully balanced, the net private financial wealth is at zero. And if a government enters a surplus, net financial falls into the negatives, since the private industry is now indebted to the public. Likewise, it is impossible for both the public and private sector to simultaneous experience surpluses since one’s ‘debt’ is the others surplus [1].

The above graph shows the aforementioned relationship. It can be represented by the following formula:

G – T = (S – I) + (M – X)

In which, government spending (G) minus taxation revenue (T) gives the fiscal situation, either deficit or surplus, represented by the blue line on the graph; this equals savings (S) minus investment (I) added to balance of payments (i.e imports minus exports) represented by the red line. The relationship is demonstrated quite clearly; in order for financial assets to rise, financial liabilities in the form of government deficits must rise as well. The correlation is especially strong in the dates after the dismantling of the Bretton Woods agreement, after which the United States become fully based on fiat currency rather than be linked to gold. Ever since, the values of deficit to private wealth has been relatively equal in their absolute values.

This, in itself, has profound implications. For one, now we understand the link between government deficits and accumulations of private financial assets. But now, ever more, we can now use taxation to curb negative externalities and to regulate key industries rather than to simply gather revenue since we now understand government’s monetary role. The function of government, in essence, changes and allows for it to further alleviate unemployment woes & elements of poverty. However, keeping economic oversight is crucial, since if deficit spending exceeds full employment, inflationary pressures can ensue because accumulation of financial assets, for the moment, would stagnate.

Now, the inevitable question — what about Greece?

Greece is in a complex situation, much different than that of the United States. Greece uses the Euro, which is controlled by the European Central Bank of the Eurosystem, the monetary central authority of the European Union. Since Greece lacks control over its own currency, it has been brought into complete chaos with forced austerity cuts, bailouts with strings attached, and violent public unrest. Since it lacks monetary sovereignty, being restrained to reserves beyond its grasp, it is unable to control its debt crisis. The same situation plagues the rest of Europe. The Euro states are unable to print their own currency, and are thus forced to succumb to the bullying of Germany to balance their budgets, which has left countries like Spain in disastrous economic conditions.

Oftentimes, the issue of Germany or even Zimbabwe is also brought up as a counter-argument to the validity of modern monetary theory to showcase hyperinflation caused by fiat currency. Economist Randal Wray addresses this issue in his writing, talking about Germany after WW1:

Yes, once the economy gets to full employment, then extra government deficit spending can start driving up prices. But what happened in Weimar Germany was very different. During that time, the government was forced to pay extremely large war reparations in foreign currencies which it didn’t have. So it had to aggressively sell its own currency and buy the foreign currency in the financial markets. This relentless selling continuously drove down the value of its currency, causing prices of goods and services to go ever higher in what became one of the most famous inflations of all time. By 1919, the German budget deficit was equal to half of GDP, and by 1921, war reparation payments represented one third of government spending. And guess what? On the very day that government stopped paying the war reparations and selling its own currency to buy foreign currency, the hyperinflation stopped [2].

Now, there is one particular example we can point to to show the prowess of MMT. Currently, Japan’s debt to GDP ratio is over 200% and growing:

And yet they experience no instances of “government shutdown.” Perhaps even more interestingly, they are the largest single non-eurozone contributor to the rescue projects that have been instated to ‘save’ the European Union — a total of $60 billion in March of 2012. Japan is even responsible for pumping in $100 billion dollars into the IMF during the height of the crisis in 2009, all whilst its adversaries deemed it to be “bankrupt” [3]. How is this possible? Why is Japan not defaulting? The key is in its monetary system and its handling of deficits. Most importantly, Japan controls its own debt; 95% of it is held domestically by the Japanese themselves, the rest being foreign owned by other central banks [4]. Since the debt is largely owned by the Japanese themselves, they are able to collectively maintain their deficits whilst also keeping an impressive social program system.

Although I elaborated on a really rudimentary view of Modern Monetary Theory, this should suffice as to how misguided the current discussions in the political realm are. Rather than discuss the structural issues of the American economic system, we’re bickering over the technicalities of a budget whilst standards of livings drop and income inequality rises. To make matter worse, a crucial aspect of debt is consciously ignored — the issue of private debt. Households are crippled by personal debt to make up for stagnant wages, an issue I actually discussed in detail in my piece on debt deflation and crisis. The situation is dire and the proposals to cut necessary programs for already-struggling families to “balance the budget” is laughable at best, and downright frightening at its very worst.

***

– The Deficit: Nine Myths We Can’t Afford

– Deficits Do Matter, But Not the Way You Think

– Marxism and Monetary Theory: A Bibliography

– Understanding the Modern Monetary System

– Debt, Deficits, and Modern Monetary Theory

The Great Recession: Debt Deflation and Crisis

August 14, 2012

Older Posts, Political Economy

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When analyzing debt and economic growth, usually only government debts are examined. They are seen as a corollary to economic crises, devaluation of currencies, and government defaults — and while I’m not going to dispute or discuss these claims here in this post, perhaps on a later day, I will say that they are misleading trends of analyses in relation to the current financial crisis. There is another ‘kind’ of debt that is up for discussion and more pertinent to the crisis of 2007 — credit market debt, which consists of domestic non-financial sectors (household debt, business/corporate debt, and government debt) and domestic financial sector debt.

This explosion of credit began around the time of the institution of ‘Reaganomics,’ where individuals took to lending and spending over saving despite stagnant wages.

A more detailed look of the trend since 2002, with its peak. The shaded area depicts the length of the recession.

However, the above graphs show the total credit market debt. Broken down, household (consumer) credit debt depicts the same trend.

What does all this mean? Fundamentally, this means that the expansive economic growth of the previous three decades were on shaky footing to begin with, likely leading to the global economic collapse that followed. The impact of the credit boom since the 1980s is described in an article by the research institute Center for American Progress (CAP) by Christian E. Weller. He writes:

“The debt is highest among the middle class. Middle-income families before the crisis had a debt-to-income ratio of 155.4 percent in 2007, the last year for which data are available, for families with incomes between $62,000 and $100,000, which constituted the fourth quintile of income in our nation in 2007. This ratio is higher than for any other income group. Families in the top 20 percent of income (with incomes above $100,000) had a ratio of debt to income of 123.6 percent, and families in the third quintile (with incomes between $39,100 and $62,000) owed 130.7 percent of their income. Households in the bottom 40 percent of the income distribution (with incomes below $39,100 in 2007) owed well below 100 percent of their income.”

Shocking as it is, this is the not the first time such a credit upsurge occurred. There was a similar phenomenon that occurred before the Great Depression of the 30s. Samuel Brittan, in his review of Richard Duncan’s ‘The New Depression: The Breakdown of the Paper Money Economy,’ writes:

“It is certainly striking how both the 1929 Wall Street crash and the 2007-08 financial crisis were preceded by a huge credit explosion. Credit market debt as proportion of US gross domestic product jumped from about 160 per cent in the mid-1920s to 260 per cent in 1929-30. It then fell sharply in the 1930s to its original position. Later it surged ahead in two upswings after 1980 to reach 350 per cent of GDP in 2008.

This analysis of crises in relation to credit market debt is attributed to economist Irving Fisher, and his ideas were largely ignored in favor of mainstream Keynesian view of economic crises, which argued that they were caused by an insufficiency of aggregate demand. Since the recent economic crash of 2007, Fisher’s ideas have enjoyed a resurgence in economic thought. His theory on debt deflation has been of significant fascination in the heterodox Post-Keynesian school of economics, and is now beginning to enter the mainstream. Economist Paul Krugman discusses Fisher’s ideas in one of his posts on his blog “Conscious of a Liberal” in the NY Times — below is the graphic taken from the article (with added information).

Since the total credit market debt owed has been stagnant since late 2009, reaching its ‘peak,’ and if GDP steadily keeps rising, it is likely that debt deflation will occur all the same as it did during the Great Depression. However, the issue of private debt and its hindrance on the consumer is still an issue — and if spending is ever to increase significantly, the issue of wages and consumer debt must be addressed.

***

– An analysis of the total credit market debt by Crestmont Research.

The American Economic Miracle

July 13, 2012

History, Older Posts, Political Economy

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In 1893, Frederick Jackson Turner presented his landmark essay The Significance of the Frontier in American History to a gathering of academics at the World’s Columbian Exposition. Turner, in his thesis, argued that the unique American frontier experience shaped the United States’ development and created a distinct culture and political condition. In essence, the frontier was responsible for molding the American character into what it is.

While his thesis certainly stands true, the “Old West” also brought with it an economic anomaly — a differentiating aspect that made the United States’ economic upbringing particularly strange. From its colonial origins and throughout the 1800s, the U.S economy was consistently plagued with shortages of labor. These shortages would influence the development of slavery in the South, where plantation owners find it necessary to import more slaves to sustain their agricultural output. These shortages would also be the reason for the influx of immigrants throughout the 1800s, who where subject to extreme prejudice from nativists once some forms of unemployment actually became evident.

The above graph depicts estimates made by the Bureau of Labor Statistics. However, they are relatively high due to the impossibility of knowing the actual levels of unemployment. Little surveying was done, regional statistics were not kept, and much of the American population was self-employed. This makes assessing the unemployment rate during this period of exceptional American growth difficult. And further complications arise when youth employment is added into the calculations — which customarily started the from age of 10 in most areas. Since not all households required their children to work, making fully accurate estimates is nearly impossible.

However, given the growth of American industry during the 1800s, basic assumptions can be made. For one, the inventiveness of the U.S industrial economy can be properly explained if the labor shortages are taken into account. Because of the lack of labor in the United States, industrial capitalists had to rely on new technology to be able to increase their output and balance the lack of laborers. From this predicament, the American System of Manufacturing, as it was called, was developed. Because of its efficiency, it was revered amongst industrialists in Europe. The most important contribution being — the creation of interchangeable parts. This allowed industry to drastically increase their output and keep costs to a minimum. This also coincided with the high degree of mechanization that was starting to take root in the United States with the beginnings of the first Industrial Revolution.

Much of this technological advancement was also a product of the contention between agricultural and industrial regions during the United States’ great economic expansion. Although these clashing interests date far back to colonial times, the creation of the General Land Office in 1812 was a turning point. This independent federal agency was responsible for distributing and surveying public domain land in the largely unexplored territories of the United States. Two laws in particular addresses the rationing of these lands — the Preemption Act of 1841 and the Homestead Act. The former was passed to ration pieces of the uncultivated territory at a price. Up to 160 acres could be purchased at a time, and at very low prices. It was done to encourage those already occupying federal lands to purchase them. The Homestead Act, first enacted in 1862, was similar in its intent. Its aim was giving applicants roughly 160 acres of land free of charge west of the Mississippi River. Now, northern industrialists not only had to deal with labor shortages — they also had to satisfy their workers enough so they would not opportunistically leave and go westward.

The frontier experience did much more than cultivate the unexplored land westward; it intensified the shortages of labor in the United States. This scarcity created an inventive industrial sector that had to compensate by developing new technology, which would ultimately lead the United States to the economic dominance it enjoys today. Economist Richard Wolff, in a few of his lectures and writings, theorizes that it was this remarkable condition that created a very different experience for those living in the United States.

“What distinguishes the United States from almost every other capitalist experiment is that from 1820 to 1970, as best we can tell from the statistics we have, the amount of money an average worker earned kept rising decade after decade. This is measured in “real wages,” which means the money you earn compared to the prices you have to pay. That’s remarkable. There’s probably no other capitalist system that has delivered to its working class that kind of 150-year history. It produced in the U.S. the expectation that every generation would live better than the one before it, that if you worked hard, you could deliver a higher standard of living to your kids.”

Frankly, Wolff’s analysis makes sense. Rising wages kept the worker class’s morale high, and attracted immigrants — it also served as an incentive for working people to stay as laborers rather than receive land and move westward. So, fundamentally speaking, American employers experienced competition in the labor market for two specific reasons. One, the federal land programs provided incentives for workers to move westward and entrepreneurs had to provide reasons for them to stay and work in the form of higher wages. And second, since the labor supply was constantly in high demand, workers were not easily replaceable. This implicitly forced firms to increase their wages, to attract laborers to their respective industries.

In 2006, Michael Lind published an article in the Financial Times titled “A Labour Shortage Can be a Blessing,” which indirectly supports Wolff’s thesis on wages. He writes:

“In the ageing nations of the first world, the benefits of a labour shortage, in the form of higher productivity growth and higher wages, might outweigh the costs. Where labour is scarce and expensive, businesses have an incentive to invest in labour-saving technology, which boosts productivity growth by enabling fewer workers to produce more. It is no accident that the industrial revolution began in countries where workers were relatively few and had legal rights, rather than in serf societies where people were cheaper than machines.”

In order to validate Lind’s and Wolff’s claims, two specific economic topics must be properly historically analyzed. The first one being — is there evidence for such a labor shortage, and if so, how severe was it?

Given the estimates made by the Bureau of Labor Statistics, it would be safe to assume that unemployment was not a major issue during the 1800s. When youth employment is taken into consideration, the estimates become very inflated, since the labor pool was so large. However, beside macroeconomic analysis, there are specific scenarios which shows that such a dilemma in production was indeed persistent in the United States during the 19th century. The PBS television series “American Experience” gives one particular scenario during the construction of railroads in the 1860s that validates this assumption.

“In early 1865 the Central Pacific had work enough for 4,000 men. Yet contractor Charles Crocker barely managed to hold onto 800 laborers at any given time. Most of the early workers were Irish immigrants. Railroad work was hard, and management was chaotic, leading to a high attrition rate. The Central Pacific management puzzled over how it could attract and retain a work force up to the enormous task. In keeping with prejudices of the day, some Central Pacific officials believed that Irishmen were inclined to spend their wages on liquor, and that the Chinese were also unreliable. Yet, due to the critical shortage, Crocker suggested that reconsideration be given to hiring Chinese…”

Historian Rickie Lazzerini portrays a similar issue in Cincinnati, Ohio during the beginning of the 1800s.

“…the busy industries created a constant and chronic labor shortage in Cincinnati during the first half of the 19th century. This labor shortage drew a stream of Irish and German immigrants who provided cheap labor for the growing industries.”

The second question that must be asked is — was there actually a persistent increase in wages during the 1800s?

To properly answer this question is immensely complex, since such little data is available. However, there exists one specific academic paper on the subject that addresses this question and the one posed prior. In 1960, economist Stanley Lebergott authored a chapter addressing wages in 19th century United States in a full volume called “Trends in the American Economy in the Nineteenth Century” published by the Conference on Research in Income and Wealth. The chapter itself was titled “Wages Trends, 1800 – 1900.” He writes:

“Associated with the enormous size of these establishments was the
need to draw employees from some distance away. Local labor supplies
were nowhere near adequate. One result was the black “slaver’s wagon”
of New England tradition, recruiting labor for the mills. The other was
the distinctly higher wage rate paid by such mills in order to attract
labor from other towns and states. Humanitarian inclinations and the
requirements of labor supply went hand in hand. Thus while hundreds
of small plants in New York, in Maine, and in Rhode Island paid 30 to
33 cents a day to women and girls, the Lowell mills generally paid
50 cents” [451].

Regions that lacked adequate quantities of labor had to rely on larger wages to attract workers from afar. However, apart from the industrial north of the United States, farm wages also increased — perhaps signifying a competitive rift between the agricultural sectors and the industrial ones.

Professor Lebergott, later in his analysis, then provides the full wage computations that he was able to calculate given individual data and trends recorded by local media. He combined the data he acquired on a state by state basis, starting locally and then branching out to create a national average. Also note, the drop in wages between 1818 – 1830 he attributes to “the close of the Napoleonic Wars and the end of the non-importation agreement.”

Based on economist Stanley Lebergott’s analysis, Richard D. Wolff’s assertions are validated; the United States, for the most part, did enjoy increasing real wages throughout the 19th century. Even more so, it goes further in proving Michael Lind’s claim that shortages of labor can indeed cause wage increases and heighten technological innovation. It is very likely that the combined frontier experience and shortages in the production processes created a unique variant of capitalism that was unique to the United States. It gave American households the confidence that if they worked harder, they would earn a better living. It also gave to them the optimism that their children would enjoy a better standard of living.

This unprecedented century of growth and success also had often overlooked impact on the American psyche. Because of the inflated expectations, it instilled a unique mentality amongst working class Americans. As John Steinbeck put it, the poor don’t see themselves as victims — but rather as “temporarily-embarrassed millionaires.” It is this aspect of the American psyche that has allowed the broken system to flourish in the decades since the persistent stagnation of wages of the 1970s. Admitting the issue is just to difficult, for some; if we believe enough, the American dream just might become real again, as it was for those traveling out West to find riches and fortunes. In retrospect, the sooner working class Americans awake from this fantasy, the sooner they will realize that times have changed — and not in their favor.

***

– A lecture where Wolff discusses the frontier experience and 19th century wage increases.

– Some statistics and fact on U.S economic growth during this time period.

– A decent article on this topic from the Wall Street Journal (you need a subscription to view it).

Aristotle and Markets

July 3, 2012

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Aristotle_Altemps_Inv8575 Writings on the different kinds of exchange can be traced back to Classical Antiquity. The Greeks were fascinated with markets, especially the ethical implications of such transactions, and soon began to formulate their own opinions on the emerging markets in ancient Greece. Aristotle, especially, devoted some of his writing to understanding its complexity. He observed four types of exchanges in the developing market of Ancient Greece:

1. C –> C ; where C = commodity

Better known as bartering, Aristotle had little issue with this mechanism of exchange in the market. He found it to be the most “natural” out of all exchanges, but saw major drawbacks in its inability in dealing with surpluses and deficiencies properly. The reason for exchange, from Aristotle’s understanding, was because an individual viewed the seller’s surpluses as being of higher value than his or her own surpluses, thus creating a transaction of equal value. He based the need for exchange around the concept of “use value” or “true value,” which a commodity holds if it is necessary for one’s life, household, or even community. He equated value with necessity. Therefore, Aristotle’s reasons for exchange can be seen as one of the early precursors the the subjective theory of value, since it acknowledges different use values for different households — based on their respective surpluses.

2. C –> M –> C ; where M = Medium of exchange (i.e money)

The most prevalent method of exchange today — Aristotle was ambivalent to it. He found money to be necessary in establishing a common comparable measurement for all commodities in the market, however he also felt it facilitated the next two forms of exchange (3 & 4). This particular transaction is very similar to barter in that the purpose of it is consumption. The use-value for each receiving end of the transaction is virtually the same, therefore the exchange is equal, with money serving as simply ameans, rather than as an end. Important to note also, is that Aristotle did not see money as a representation of value or wealth; it was a representation of want by agreement. Keep this in mind, because this is the one of the foundations for his criticism of the next two transactions.

The economy of Ancient Greece is useful to bear in mind when trying to understand Aristotle’s analysis of markets. The majority of the work in Ancient Greek society was done by slave labor, mostly agricultural work, and many of the commodities on the market were products of individual artisans. Therefore, the full value was realized in its exchange of another commodity because the artisan’s sweat and work was fully accounted for in the transaction — the artisan kept all of what he produced, including his surpluses, and traded it likewise for a commodity of relatively equal value.

3. M –> C –> Mp ; where Mp = M prime or M + profit

This mechanism of the market Aristotle found to be ethically problematic and abominable. He calls this retail trade and the issue, he felt, was that money served as a starting and end point of a transaction, rather than a medium of exchange. He also felt this violated the principle that market transactions should serve the needs of thehousehold, rather than succumbing to endless exchanges to increase profit. Aristotle did not consider this to be true wealth because the end goal is a greater quantity of money; it is simply a representation of exchange value in moneyed form — because it is purely qualitative, it lacks a limit, which was present in the first two kinds of market transactions. He believed there was no natural restrain on this form of transaction because the market exchange, in and of itself, was not entirely equal. In the first two methods of exchange, trade was limited to commodities that were produced by, presumably, individuals – therefore the starting point required an exertion of labor, and the transaction itself was virtually equal in its entirety. Because the starting point of this transaction, “M,” lacks that necessary productive capacity and because the individual is acquiring more of the same item he started with there is fundamentally no restriction on how much profit can be acquired — and the need to acquire more is intensified. Frankly, the major difference lies in that the first two transactions were to consume, this particular one is to accumulate.

4. M –> Mp

This market behavior is usually grouped with the third one shown, but Aristotle groups it differently because “C” is absent. He calls this usury, and the most unnatural of all market exchanges. He considered the reason for loans to be exploitative in that the giver of the loan was demanding higher returns than what was handed out — abusing the situation of the receiver of the loan.

Granted, there are issues with Aristotle’s understanding of basic market functions. The fourth market mechanism, in particular, is lacking in analysis — it fails to understand that that the interest payed back is a portion of the new productive potential that was created by that loan (i.e what it was put to use for, invested in, etc). Requesting a loan does not necessarily mean an individual is in distress, but since Aristotle was primary concerned with ethics, it is easy to see why he made that assumption. Aristotle’s fascination with ethics is also the driving reason he criticizes the moneyed interests driving the marketplace. His bare-boned economic analysis as an ethicist, albeit lacking in much empirical reasoning, does bring an important aspect of the market to light — the market is amoral. This is crucial. It is precisely due to this amorality, and because the market lacks any moral mechanisms and requirements, that the market sometimes succumbs to moneyed excesses of the socially damaging kind.

***

– Much of the information mentioned can be found in this article titled “Aristotle and Economics”

– More information on Plato’s and Aristotle’s economic views can be found here.

The American War Obsession

June 21, 2012

Older Posts, Political Economy

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Since its creation, the United States has virtually been involved in perpetual war. Specifically speaking however, militarization has especially escalated, and remained high, since World War II.

As of 2011, according to the Stockholm International Peace Research Institute, the United States accounts for 41% of the world’s military spending — spending roughly 711 billion dollars, accounting for roughly 5% of GDP. These statistics are troubling as is, but perhaps even more troubling is the stranglehold the military has on the American economy. Let’s break down the facts, piece by piece.

More than one-third of all scientists and engineers are engaged in military related jobs [Sato, 8].
Many industrial sectors are intertwined with military spending, the main two being aerospace and shipbuilding [Sato, 8].
Shipbuilding is heavily dependent onmilitarization. In 2002, shipbuilding brought in 11 billion in profits — only 3.8 billion of this was from commercial shipbuilding [SCA, 1].
In total, based on 2001 data, the top 11 aerospace and defense corporations employ over 900,000 people [Sato, 9]. This number can only be assumed to have increased since the Afghanistan and Iraq wars.
War-profiteering is high, especially in the last decade. To name one, Halliburton’s KBR, Inc. division profited $17.2 billion from the Iraq War during 2003-2006 alone. More information can be found here.
The arms trade in the United States is a multi-billion dollar industry. It accounts for roughly 39% of the total world market, ranking in 170 billion dollars from ’03 to ’10.
The top sellers are ironically 5 permanent members of the UN security council; U.S, France, China, Russia, and the UK. The majority of the buyers are developing nations.
Many U.S taxpayer subsidies go toward the arms trade as well.

The United States is also a main supplier of foreign aid to other nations, especially military aid. As of 2010, much of it is allocated to Israel and Egypt.

Israel was given 3.2 billion U.S dollars in 2010, while Egypt was given 1.6 billion. However, there is little consistency; West Bank/Gaze was given 69 million in aid and other Middle Eastern states are given upwards of 100s of millions of dollars to essentially “leave Israel alone.”
Certain regions also are heavily funded. 3.3 billion U.S dollars were allocated, for example, to South and Central Asia, however that is minuscule to the total combined amount given to Egypt and Israel.

Based on 2007 statistics

As percent of federal spending (2007)

The issue with looking at American military spending is that much of it is withheld and convoluted. When military space expenditures, veteran payments, foreign aid, and other military-related costs are added in, the total actual budget is much higher than what was mentioned earlier in this post — surpassing 1 trillion U.S dollars. Moreover, the percentage of federal spending is also misleading if taken at face value; it also includes transfer payments, such as social security and medicare, which are self-financed and do not use income tax revenue. The actual military spending curve shown to the right takes this into consideration. Keeping this in mind, GDP and budget percentages soar to shocking levels.

Equally disheartening, though, is the effect this has had on poverty in the United States. There is a correlation, in recent years, to war spending and individuals living under the poverty threshold.

Fundamentally, this all of this is a reason for concern. With the United slipping from the economic dominance it once had, will it be forced to resort to military bullying to stimulate its industrial sectors and to maintain its intentional prestige? Although high military spending has been a staple in American policy for decades, it has spiked in recent years — and since the Cold War and the fall of the Soviet Union, the political machine is promoting it quite overtly since now it has little reason to hide. Frankly, using militarism to promote imperial ends must cease — there is much blood on American hands, and fostering success through war is both inhumane and unsustainable. All great empires collapse by overreaching its boundaries, due to excessive military budgets and overly-ambitious expansionist interests. The United States is on the path to be doomed to a similar fate if this jingoistic culture persists.

***

– Sato, Eiko. Culture of Peace: Rediscovery of Human Innate Potential and Capability for Peacefulness: Culture of Peace and Violence in the United States. Honolulu: University of Hawaii Library, 2005. Web.
– Shipbuilders Council of America. Economic Contribution of U.S Commercial Shipbuilding Industry. Washington D.C: , 2002. Web.
– The actual military figures were acquired from an article titled “U.S Imperial Triangle and Military Spending” from the Monthly Review.
– The written manuscript of Martin Luther King Jr.’s speech titled “Why I am Opposed to the War in Vietnam.”
– A relevant article that provides more insight: U.S Military Industrial Complex: Profiting from War

The Credit Illusion

April 2, 2012

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The United States has grown economically, for the most part, throughout all of its history. And for much of its history, this growth was accompanied by corresponding increases in real wages. It was assumed that with economic growth, the purchasing power of your wage for all your hard work would pay off and it would increase with time; it was part of the American Dream.

Ever since the 60s, real wages have remained mostly stagnant – even taking a downward trend in the past year. Although maybe our nominal wages have increased, our real wages have remained the same and even more alarming the purchasing power of income has plummeted. Even worse so, the price of food and energy has gone up in recent years and we’re still working the same amount of hours, sometimes more. Where is the improvement and, most importantly, why is the middle class shrinking? Although all this issues would usually mean a rise in unionization amongst workers and rallies to demand for higher wages/benefits and perhaps more equal distribution of wealth, as happened during the Great Depression and the 1910s, union membership has actually paradoxically decreased in the last 50 years.The Bureau of Labor Statistics reports that only 6.9% of workers in the private sector are union members.

Although I’ve oftentimes heard the right demonize unions as dangerous to the delicate fabric of a free market, and oftentimes advocate enacting legislation to curb their power, there is no question the decrease in union membership has had a direct effect on the concentration of wealth in the United States and the middle class share of aggregate income. Here is are the results that were found by Karla Waters and David Madland of the at the Center for American Progress (CAP):

Now, before I get to the credit illusion, which is likely the culprit, first we have to dispel a few arguments against the stagnation of real wages in the United States – three of them specifically I want to talk about.

Q: Well, maybe workers’ productivity has not increased and their real wages are a direct result of a stagnation in their output? This cannot be true, hourly outputs per workers have actually been steadily increasing. This is based on information from the Bureau of Labor Statistics and Bureau of Economic Analysis; there is indeed a growing gap between output and real wages:

Q: The average income per household has gone up, isn’t that inconsistent in the stagnation of real wages?

No, it is not. The Second Wave of feminism, which started in the early 60s, brought many more women to the workforce. It’s not that the workers are bringing more real income home, it’s that more people are working in the household. In an article in the journal article by Rebecca A. Clay of the American Psychological Association:

In 1940, according to the Employment Policy Foundation’s Center for Work and Family Balance, 66 percent of working households consisted of single-earner married couples. By 2000, that percentage had dropped to less than 25 percent. By 2030, the center estimates, a mere 17 percent of households will conform to the traditional “Ozzie and Harriet” model.

It is this phenomenon that has caused an increase in average income per household – there are now many more new sources income per family, but that doesn’t necessarily tell us anything about the average real wage for each individual bringing it home.

Q: You are not adding benefits to the real wage. The Bureau of Labor statistics has shown there has been a upward trend in real compensation per hour since the 1940s. Does this not explain the stagnation of wages?

It is true there has been a steady increase of real compensation (wages + benefits) per hour, below is a graph taken from the Bureau of Labor Statistics;

However, we have to look at this data with the increase in workers’ output rather than by itself. Since the year 2000, there has been especially a disconnect between real compensation per hour and output.

But this disconnect in average hourly compensation and productivity started far before the 00s; it actually began in the late 70s and got progressively worse since the Reagan years. Below is a graph from the Economic Policy Institute;

And although this graph does not show the growing gap between productivity and average hourly compensation since ’07, it has gotten much worse since then. So yes, average hourly compensation has been increasing but not as nearly as the same rate as productivity has.

————————————————————————————————————————————-

Now, for the topic of this post which may actually be shorter than the background information; Why aren’t the workers mobilizing and demanding higher wages as they did in the first half of the 20th century? There are many reasons; one being the destruction of unionism during the Reagan years and another being the of spending money you don’t actually have; the illusion of credit. Ever since real wages have become stagnant and the sharp decline of unionization in the 80s, there has been a sharp increase in household debt in the United States, which actually dissuades workers from demanding higher wages in some respects. It is this exploitative dichotomy that has kept corporate profits high and wages low; all in the guise of “buy now, pay later!” and ‘economic growth.‘

Below is a graph of household debt versus persona savings taken from ‘The Basis Point,’ a blog by mortgage banker Julian Hebron:

Why is the middle class shrinking and being anesthetized by credit? It is this type of behavior that drives society outside of its means and gives it working class families the false perception that their wages are increases; maybe nominally they are, which is deceptive in itself, but the main hurdle we must overcome is realizing the distraction of mass consumption by credit going forward. This requires questioning this entire system which has, for the most part, become based on credit and money yet to be paid. I highly fear the collapse of this ‘credit culture’ and the shaky foundation it is built on; And perhaps worst of all, we are unjustly condemning future posterity to debt bondage. What happened during the crisis of 2008 we may find to become a staple in the modern 21st century economic model; and since debt wasn’t properly liquidated, worse may be yet to come. The functionality of such an illusionary market method I am highly skeptical of, and its outcome will most definitely hurt the current mainstream liberal capitalist model.

Free Trade in Death

April 1, 2012

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The United States is often credited with reaching global economic status with free trade; that laissez faire capitalism and open trade with all nations brought us to modernity.

In actuality though, protectionism was vital in establishing American economic dominance and hegemony. The American System first promulgated by Henry Clay was critical of the British variant of economic thought and advocated high tariffs, a central bank, and federal subsidization of internal improvements (i.e canals, schooling, roads) amongst other things. It was built on Hamiltonian principles and the infant industry argument – that smaller industries must be protected from larger foreign competitors because they do not have the monetary means to compete.

Usually this put regional interests at end and created a bitter American divide – the North wanted high tariffs and subsidization and the South wanted complete free trade to be able to sell its goods (predominately cotton) to Britain and other foreign markets. It was one of the main causes of the Civil War; the clash of economic ideologies. South’s dependence on foreign markets was so strong that it firmly believed it could fully sustain itself without the North’s industry. The “King Cotton”ideology was used as a slogan to convince Southern public opinion; Southern legislatures promoted the message that since Britain’s and France’s dependence on Southern cotton for their textile mills was so strong, they would be forced to aid them in their struggle of secession. As the Union began blocking Southern seaports, this rallying call proved to be unfounded – foreign markets just found elsewhere to purchase cotton. The British Empire turned back to its colonies for cotton markets. India increased its cotton production by 700% and Egypt did likewise. The South was severely crippled and took many decades to recover. In addition, their laissez faire ideology was downgraded. The Republican (former Whig) American System became the dominant school of economic thought.

Average tariffs percentages were at their highest from 1865 – 1900; when the United States underwent its second Industrial Revolution. Despite the predictions of the powers of Europe, who believed the American Experiment would never recuperate from the Civil War, the United States underwent the one of the greatest economic growth periods in its history and established itself as a great power and then ultimately, much later, as a superpower. The Gilded Age ensued, which was arguable one of the most corporate-concentrated periods of power in U.S history; where the pervading ideology was that the wealthy were the “best of society” and the poor “did not work hard enough.” It was this concept that gave rise to the illusion of the American Dream and dissuaded the working class from mobilizing, in some respects. It worked in the interests of the wealthy most definitely.

But aside from that, in looking at today’s economic situation; why are we imposing free trade on other developing nations if we did not prosper from it ourselves when we were emerging as a power? The IMF and its associate organizations parade around promoting free trade and pressuring other nations to open to foreign capital only to further fill the pockets of the Western ruling class, and further impoverishing those not in high positions of power.

In South America, locals have been exploited for over a century by foreign ownership of land. Many of the legislatures have been complicit with the policies of the United States and the West and allowed for large corporate entities to buy out land; usually unused and to save for “later use.” Is this the benefit of free trade? The disproportionate ownership of global assets by Western powers? To make matters worse, a failure to allow foreign capital can have disastrous consequences. Many Latin American countries had coups staged, usually led by American interests, to halt any redistributing of land to the peasants. It is apparent that the First World depends on the Third World’s impoverished state to maintain their hegemony and economic superiority; they want these impoverished nations to remain dependent on their capital and investment. Well-calculated and planned underdevelopment, as its called.

But it seems that the leftist streak in Latin America may be changing this, hopefully soon. Some Latin American countries have already enacted legislation to redistribute unused private land to the poor, such as Hugo Chavez’s Plan Zamora in Venezuela. As of now, much of Latin American land remains in the hands of foreign investors. In Uruguay, the 2000 census showed that 17 percent of its arable land was foreign-owned, but it is predicted to be 20 to 30 percent today. In Brazil, the Brazilian Institute for Colonization and Agrarian Reform estimates that 4.5 million hectares are owned by foreigners – but this figure is low and it may be twice as large, according to government officials. Argentinian authorities place its national estimates at 17 million hectares, about 10 percent of Argentinian territory, and about half of all arable land.

Moreover, sometimes when the land is returned back to “local hands” they’re heavily concentrated. The Landless Worker’s Movement in Brazil estimates, according to 1996 census records, that just 3% of the populations owns two-thirds of all arable land in Brazil. This only disempowers the majority and furthers economic inequality. According to World Development Indicators [2000] 10% of the population owns 47.6% of the wealth in Brazil. A study done by the Instituto de Pesquisa Econômica Aplicada (Institute of Applied Economic Research or IPEA) paints a even grimer picture “…in São Paulo the wealthiest 10% had 73.4% of while in Rio they retained 62.9% and in Salvador 67%.” A product of unequal land distribution caused by free trade and neo-colonialism, it seems.

The moral of the story; modern free trade is not fair trade. Business clusters that congregate around areas of high GDP are inherently exploitative of poorer regions, taking their land disproportionately. The last things these emerging nations want is foreign capital owning their assets and preventing them from prospering. This forced underdevelopment is imposed through laissez faire legislation, and kept in place by multiple transnational organizations that preach the same ideology. It is dangerous to the self-determination of peoples and their long-term prosperity. It is exploitative by nature, but it seems that some free market fundamentalists just cannot abandon their distorted dream. And then their obscurities are imposed on the rest of us, with disastrous global economic consequences.

More info on the land crisis of Latin American can be found here and here. Statistics and general info on Brazil’s widening wealth gap and poverty crisis can be found here.