Friday, June 29, 2012

The Cause and Cure of the Second Great Depression

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The Second Great Depression, which afflicts the West while the Rest booms, is the direct result of the 1994 General Agreement on Tariffs and Trade (Gatt) now administered by the World Trade Organization (WTO). The Gatt agreement opened the Western economies to free trade with four billion Third Worlders working for pennies an hour.

The immediate impact was slight. It takes a while to mobilized tens and hundreds of millions of the children of peasant farmers to work in the sweatshops, factories and plantations of of BanglaDesh, Indonesia, China and Africa. And as the process got underway, the US tech sector boomed, the stock market zoomed, banking was deregulated, the profits of finance exploded, and Bill Clinton was easily reelected US President in 1996.

But by 2000, the steam was going out of US high-tech. Software developers were learning how to exploit cheap Asian brain-power and Chinese universities were turning out more engineers and programmers than all the universities in the West combined. Tens and then hundreds of thousands of IT jobs moved to India, along with MicroSoft's call center. In the Philippines, University accounting courses taught American accounting rules to students preparing to do off-shored back-office work for US financial and accounting firms.

The result? Al Gore lost the US Presidential election to "compassionate conservative" George W. Bush.

In response to the tech-sector bust, The Greenspan Fed slashed interest rates and set off a real estate boom. Construction is labor intensive, and it stimulates local industries: lumber, cement and steel, so that by 2004 the US economy was good enough to get "humble foreign policy" George W. Bush reelected, notwithstanding that he had launched the US on the NeoCon war for global hegemony. In fact, the war for global hegemony was one reason the US economy was as good as it was in 2004. Spending on weapons and pre-emptive war in Iraq was a key factor preventing the US from falling into recession despite the massive bleeding of manufacturing, design, engineering and research jobs overseas.

Within a year of Bush's reelection, the Greenspan Fed pricked the property bubble with 17 consecutive interest rate increases. The housing crash and the consequent financial crisis ended the Republican hold on the White House.

But nothing much went right for Democrat President Obama. GM and Chrysler went broke. Most of the banks went broke. Dell computer gave up snapping Asian-sourced components together in Texas, instead bringing fully assembled boxes from China. Brutal violence continued in Iraq. The struggle to subdue Afghanistan seemed endless. And today, as the presidential election approaches, US Unemployment remains over 9% according to the headline rate, or 16% according the the U6 definition, and even higher if you take account of those who just gave up looking for work. And an unprecedented number of Americans are on food stamps or some other form of welfare.

Nobel Peace Prize winner, Obama, has done what he could within the limits of the clearly inadequate advice he received.  With the aid of "we have a technology called the printing press" Ben at the Fed, he's printed trillions of dollars, he's expanded the wars to Libya, Syria, Yemen and Pakistan. But the dark shadow of depression still falls across the land: meaning that Republican Romney's up next.

What will President Romney do? Pursue the wars, surely, and, as a buyout specialist, restructure the US economy. But can a Romney administration revive the US economy where the Obama administration failed? Sure, although whether it will do so is another matter.

What to do?

The terms recession and depression are ill-defined, but it is impossible to end either a persistent recession or a great depression without ending mass unemployment. So to end America's economic malaise, the US must instigate policies that lead to the creation of tens of millions of new jobs within four years. These jobs will be mainly for the low-skilled factory operatives and construction workers who've lost their jobs to off-shoring and outsourcing or to the housing bust.

How to do it according to the pundits?

In the public realm, only two approaches are commonly promoted: those of the Keynesian and of the Austrian Economics school.

The Keynesian solution:
According to the Keynesians, more spending is all that is required. Since the private sector won't spend enough, the government must spend more. This Obama has done. The Obama administration has run a budget deficit of more than $5 trillion over four years, yet US unemployment is higher now than when Obama was elected.

To the Keynesians, the failure of the Obama administration to end the depression has been due to the failure to run large enough deficits. Maybe if the deficit had run at 16% of GDP instead of only 8%, or perhaps 24%, then all would have been well.

But there are two problems with this:

First, the debts created by the deficit have to be repaid.

Second, little if any of the deficit spending does anything to increase national output of useful goods and services that generate income that will ease the eventual repayment of debt. Mostly, the money's gone on such things as the wars, Homeland Security and its blue-gloved goons feeling up airline passengers thus destroying a huge chunk of the US tourism industry, and shoving politically correct propaganda down kids' throats in the name of education.

 The Austrian dream:
The Austrians are too nutty to take very seriously, but their dream is to return to a gold-based currency, end the money-printing Fed, without which they believe, incorrectly, that government deficit spending would be impossible, and let all those who borrowed too much go broke. Then the Austrian school fanatics, with their hoards of "physical gold," will be able to buy up prime down-town real estate, the stock market, whatever, for pennies on the dollar.

Oh, and then the economy will recover -- somehow.

What would actually work

You cannot, as the Keynesians believe, pay wages for unproductive work with printed money indefinitely. Debts increase but real income to support the debt does not, so prosperity is ultimately destroyed. And you cannot, as the Austrians believe, revive the economy by sending much of it into bankruptcy.

Which means finding ways of employing idle resources, both human and physical, in ways that generate a positive net return.

Which means promoting new, productive investment at home, not abroad.

What are the greatest restraints in the West to investment at home? There are three:

First, is the corporation tax, which should be abolished. Corporate income should be taxed only once, and that should be when received in the hands of shareholders as dividend payments.

Second, is the minimum wage, which denies employment to those whose labor is worth less than the minimum wage, i.e., most of America's black youth, half of the youth workers in Spain, etc.

Third, is the freedom to import goods and services produced under conditions, or in ways, that contravene Western standards on environmental protection and workplace health and safety.

Putting the solution into place

Eliminating the corporation tax:
Eliminating the corporation tax is easy. Just do it. The immediate result will be a reduction in government revenue and an increase in the government deficit, but in time there will be a compensating increase in income and sales tax revenue from the resultant increase in investment and the consequent expansion of the economy.

Eliminating the minimum wage:
Eliminating the minimum wage is a little more complicated. The solution, as I have discussed elsewhere is a wage subsidy scheme that, in effect, eliminates the minimum wage so far as employers are concerned, but not for employees, who will therefore receive a living wage.

Such a scheme will make redundant most welfare programs and the bureaucratic empires that administer them, resulting in a massive saving in government spending. Among other savings will be huge reductions in the cost of crime and mental illness to which mass unemployment gives rise.

Most importantly, though, this scheme creates a huge addition to the labor force in the West that is competitive in cost with the labor force of the Third World. This new resource will result in a wave of business start-ups, both large and small. Once again Western firms will be able to make shoes and shirts, computers and car parts in competition with overseas producers. At the same time, those formerly unemployed will gain workplace skills that increase the market value of their labor, and thus their future income. 

Creating a level international playing field:
Eliminating the regulatory disadvantage of home industry will require a blunt instrument. Each nation or trade zone must calculate the cost to its own industry of unfair competition due to overseas workplace and environmental regulation and then impose an across the board tariff to compensate. Such a measure will do a great favor to workers in the Third World, where governments will be forced to adopt Western standards of environmental protection and workers' rights.

With these three measures, Western prosperity will be rapidly restored, and the need for the ultimate Keynesian economic stimulus, World War III, will be eliminated. Unfortunately, the leadership of US/NATO seems unanimous in support for the NeoCon war for global hegemony. So whether the Second Great Depression is ended in one way or another, we'll likely all end either broke, due to endless "stimulative" and totally unproductive war spending,  or dead.


Rolling Stone Magazine: The Sharp, Sudden Decline of America's Middle Class

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