The Zero Economy

Friday, September 2, 2011

 By Robert Reich

Links:
[1] http://www.truth-out.org/print/5314
[2] http://www.truth-out.org/printmail/5314
[3] http://www.casavaria.com/cafesentido/2011/08/12/8434/four-days-of-radical-stock-market-swings-show/
[4] http://www.spiegel.de/international/world/0,1518,779008,00.html
[5] http://www.cepr.net/index.php/press-releases/press-releases/statement-on-the-sap-downgrade
[6] http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/
[7] https://secure.fhttps/secure.firedoglake.com/page/s/investigate-sp?source=web&subsource=jhposthttps://secure.firhttps://secure.firedoglake.com/page/s/investigate-sp?source=web&subsource=jhpostedoglake.com/page/s/investigate-sp?source=web&subsource=jhpost
[8] http://seekingalpha.com/article/285737-the-rise-of-financial-terrorism
[9] http://smartinvestor.in/market/story-83890-storydet-Indias_Deven_Sharma_led_SPs_US_downgrade_decision.htm
[10] http://www.broowaha.com/articles/10418/standard-poor
[11] http://disc.yourwebapps.com/discussion.cgi?disc=149495;article=124696;title=APFN
[12] http://www.domasjefferson.com/news/b...a-moles-inside
[13] http://www.webofdebt.com/
[14] http://www.ourbusinessnews.com/insiders-see-no-limits-to-e-c-b-arsenal-in-debt-crisis-fight/
[15] http://finance.yahoo.com/news/ECB-in-record-32-billion-bond-apf-3860572770.html?x=0&sec=topStories&pos=3&asset=&ccode=
[16] http://www.wtffinance.com/2011/08/bernankes-newest-trick-qe3-incognito/
[17] http://money.msn.com/top-stocks/post.aspx?post=77dc9185-ed4f-4b98-bdba-6b818b601f86
[18] http://www.dailymail.co.uk/news/article-2023809/Did-George-Soros-win-10-1-return-S-Ps-US-credit-rating-downgrade.html
[19] http://www.businessworld.in/businessworld/businessworld/content/SEC-Investigating-SPs-Downgrade-FT.html
[20] http://creativecommons.org/licenses/by-nc/3.0/us/
[21] http://www.truth-out.org/printmail
[22] http://www.truth-out.org/content/ellen-brown
[23] http://org2.democracyinaction.org/o/6694/p/salsa/web/common/public/signup?signup_page_KEY=2160
[24] https://members.truth-out.org/donate

The Market Has Spoken: Austerity Is Bad for Business

By Ellen Brown

August 12, 2011 

It used to be that when the Fed Chairman spoke, the market listened; but the Chairman has lost his mystique. Now when the market speaks, politicians listen. Hopefully they heard what the market just said: government cutbacks are bad for business. The government needs to spend more, not less. Fortunately, there are viable ways to do this while still balancing the budget.

On Thursday, August 4, the Dow Jones Industrial Average fell 512 points, the biggest stock market drop since the collapse of September 2008. Why? Weren’t the markets supposed to rebound after the debt ceiling agreement was reached on Monday, avoiding U.S. default and a downgrade of U.S. debt? So we were told, but the market apparently understands what politicians don’t: the debt deal is a death deal for the economy. Reducing government spending by $2.2 trillion over a decade, as Congress just agreed to do, will kill any hopes of economic recovery. We’re looking at a double-dip recession.

The figure is actually more than $2.2 trillion. As Jack Rasmus pointed out on Truthout on August 4^th:

Economists estimate the "multiplier" from government spending at about 1.5. That means for every $1 cut in government spending, about $1.5 dollars are taken out of the economy. The first year of cuts are therefore $375 billion to $400 billion in terms of their economic effect. Ironically, that's about equal to the spending increase from Obama's 2009 initial stimulus package. In other words, we are about to extract from the economy - now showing multiple signs of weakening badly - the original spending stimulus of 2009!

As others have pointed out, that magnitude of spending contraction will result in 1.5 million to 2 million more jobs lost. That's also about all the jobs created since the trough of the recession in June 2009. In other words, the job market will be thrown back two years as well.

We’re not moving forward. We’re moving backward. The hand-wringing is all about the “debt crisis,” but the national debt is not what has stalled the economy, and the crisis was not created by Social Security or Medicare, which are being set up to take the fall. It was created by Wall Street, which has squeezed trillions in bailout money from the government and the taxpayers; and by the military, which has squeezed trillions more for an amorphous and unending “War on Terror.” But the hits are slated to fall on the so-called “entitlements” – a social safety net that we the people are actually entitled to, because we paid for them with taxes.

The Problem Is Not Debt But a Shrinking Money Supply

The markets are not reacting to a “debt crisis.” They do not look at charts ten years out. They look at present indicators of jobs and sales, which have turned persistently negative. Jobs and sales are both dependent on “demand,” which means getting money into the pockets of consumers; and the money supply today has shrunk.

We don’t see this shrinkage because it is primarily in the “shadow banking system,” the thing that collapsed in 2008. The shadow banking system used to be reflected in M3, but the Fed no longer reports it. In July 2010, however, the New York Fed posted on its website a staff report titled “Shadow Banking.” It said that the shadow banking system had shrunk by $5 trillion since its peak in March 2008, when it was valued at about $20 trillion – actually larger than the traditional banking system. In July 2010, the shadow system was down to about $15 trillion, compared to $13 trillion for the traditional banking system.

Only about $2 trillion of this shrinkage has been replaced with the Fed’s quantitative easing programs, leaving a $3 trillion hole to be filled; and only the government is in a position to fill it. We have been sold the idea that there is a “debt crisis” when there is really a liquidity crisis. Paying down the federal debt when money is already scarce just makes matters worse. Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession.

Most of our money now comes into the world as debt, which is created on the books of banks and lent into the economy. If there were no debt, there would be no money to run the economy; and today, private debt has collapsed. Encouraged by Fed policy, banks have tightened up lending and are sitting on their money, shrinking the circulating money supply and the economy.

READ MORE.....

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust. http://www.webofdebt.com/ :

Article printed from Antiwar.com Original: http://original.antiwar.com

URL to article: http://original.antiwar.com/alison-weir/2011/08/10/israel-lobby-dominates-congress/

We now live in parallel universes.

One universe is the one in which most Americans live. In it, almost 15 million people are unemployed, wages are declining (adjusted for inflation), and home values are still falling. The unsurprising result is consumers aren’t buying — which is causing employers to slow down their hiring and in many cases lay off more of their workers. In this universe, we’re locked in a vicious economic cycle that’s getting worse. 

The other universe is the one in which Washington politicians live. They are now engaged in a bitter partisan battle over how, and by how much, to reduce the federal budget deficit in order to buy enough votes to lift the debt ceiling. 

The two universes have nothing whatever to do with one another — except for one thing. If consumers can’t and won’t buy, and employers won’t hire without customers, the spender of last resort must be government. We’ve understood this since government spending on World War II catapulted America out of the Great Depression — reversing the most vicious of vicious cycles. We’ve understood it in every economic downturn since then. 

Until now. 

The only way out of the vicious economic cycle is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win.

This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs. 

Yet the parallel universe called Washington is moving in exactly the opposite direction. Republicans are proposing to cut the budget deficit this year and next, which will result in more job losses. And Democrats, from the President on down, seem unable or unwilling to present a bold jobs plan to reverse the vicious cycle of unemployment. Instead, they’re busily playing “I can cut the deficit more than you” — trying to hold their Democratic base by calling for $1 of tax increases (mostly on the wealthy) for every $3 of spending cuts. 

All of this is making the vicious economic cycle worse — and creating a vicious political cycle to accompany it.

As more and more Americans lose faith that their government can do anything to bring back jobs and wages, they are becoming more susceptible to the Republican’s oft-repeated lie that the problem is government — that if we shrink government, jobs will return, wages will rise, and it will be morning in America again. And as Democrats, from the President on down, refuse to talk about jobs and wages, but instead play the deficit-reduction game, they give even more legitimacy to this lie and more momentum to this vicious political cycle.

The parallel universes are about to crash, and average Americans will be all the worse for it.

Perhaps all is not lost for the republic's economic future, even as its leaders let this nation hurtle toward the abyss of the Great Depression II. An immensely successful, sensible and practical solution is being signaled by increasingly thunderous shout-outs from prominent people: pundits Paul Krugman, Bob Herbert, Rich Lowry, former Labor Secretary Robert Reich, filmmaker Michael Moore and two new web sites[1] - not to mention millions of voters with long memories and the friends and families of the nation's 15,000,000 unemployed.

Their solution? Resurrect the phenomenally successful Works Progress Administration (WPA) of 1935-1943. It put food on the table, kept a roof overhead and put spending money in the pockets of nearly nine million jobless. They built everything from roads, bridges, dams and utility systems to schools and hospitals. They staffed libraries and taught more than a million adults and 90,000 draftees how to read.[2]

Also see: "The President's Jobs Plan (Not)"

Why not a WPA-II? We do have that civilian army of 15,000,000 unemployed, which could tackle the $2.2 trillion dollars of vital work needed by 2014 on our ramshackle infrastructure system.

Unlike the untold billions spent today - almost unquestioningly - on foreign wars and occupations and economic aid and infrastructure, the WPA's annual $2 billion budget was scrutinized by bitter enemies in Congress for every nickel it squeezed from the Treasury and for any whiff of abuse.[3] But today, 72 percent of Americans are demanding the US get out of Afghanistan altogether and 84 percent oppose getting further into the conflict in Libya. The US Conference of Mayors voted on June 20 to stop funding wars and "bring war dollars home" to meet crucial domestic needs such as infrastructure.[4] If the administration and Congress wants to win in 2012 - and obey these anti-war, anti-empire-building commands - charity could finally begin at home.

Because President Obama could scarcely ignore the eye-popping 10.2 percent unemployment rate back in 2009, he did what every nervous, overwhelmed leader does to either stall a politically dangerous action or look blameless if that action goes awry: he appointed a blue-ribbon group to study the problem.

His White House Jobs Summit was a "listening" session for ideas from 130 distinguished invitees: corporate and small-business owners, four big-city mayors, union leaders and academics. They were promised he would "immediately" push the best suggestions. One of the six recommendations was for instant pump-priming by hiring the jobless to fix infrastructure.[5] Obama ignored it, proving to House black leaders, progressives, national columnists and millions of unemployed that the Summit was a "publicity stunt" and his soaring, seemingly sincere words were hot air.[6]

In other calamitous eras, Roman emperors warded off unemployment riots by conscripting youth and sending them to far-off, endless, foreign wars and by providing grain and bloody circuses, to keep the jobless diverted from life's unspeakable realities.[7] These leaders had no compunctions about dipping deep into the treasury to fund monumental public-works programs to save their thrones. Their senates might have grumbled, but most wanted to retain power and money - and their lives.[8]

America now stands on the same brink Rome's emperors and senators did, but its president and political leaders are fiddling away the solution that could prevent the nation from plummeting over the edge. And they are doing so thanks to the same kind of financial cabal that counseled President Herbert Hoover that "prosperity was just around the corner" - right up to the Crash of 1929 and Hoover's 1932 defeat by Roosevelt.

Worse for Obama's overly optimistic re-election plans are his rote, fatuous statements that only private industry and small businesses - given grants or a few tax incentives - can solve America's unemployment crisis. His theatrical earnestness has become as unbelievable as his June 13 declaration to workers at a North Carolina lightbulb factory, where he called joblessness the nation's "single most serious economic problem" - and then continued, with a straight face:

I won't be satisfied until working families feel like they're moving forward again, that they're progressing again. That's what drives me every day when I walk down to the Oval Office - you, your families, your jobs, your dreams and everything it takes to reach those dreams.

Reich called it "fluff:" "Doesn't the White House get it? The President has to have a bold jobs plan, with specifics ... a WPA ..."

The president, however, could retort that he was trying. He'd set up yet another blue-ribbon group, the Council on Jobs and Competitiveness. He said it had a board of "leaders who have decades of experience in running some of America's best businesses," plus union leaders and academics. None were from the ranks of the jobless or staff from unemployment offices.

Interestingly, it's entirely possible that one of the sticking points in Obama's pallid July drawdown from Afghanistan of 5,000 troops - instead of the expected 100,000 -  has been concern that any reduction of the military anywhere will only add thousands to the unemployment lines. Too many people remember 1975, when unemployment was at 8.5 percent - almost 8 million people. Or 1983, when it was 9.7 percent, or over 10.7 million workers. Thousands of Vietnam veterans were in those lines, either because they couldn't find work or were emotionally unfit for the workplace.

Today, thousands of civilians are in the same physical and emotional shape as those despondent Vietnam and Gulf War veterans - and entertaining deadly remedies (alcohol, drug addiction, suicide, violence) as they become the latest statistics from the Bureau of Labor.

Nearly 14 million Americans are unemployed and 8.5 million are desperately clinging to part-time work. The worst hit, accounting for 822,00 people, are in their 40s and 50s. After fruitlessly pursuing any kind of job for over two years, they have given up on looking - and on any future.

Most can't spare dwindling savings for trade schools or college to change fields or upgrade skills and they know that even recent graduates can't find jobs. Those deciding to start a business have been unable to get small start-up loans because banks are either hoarding reserves or fearing inexperienced, first-time entrepreneurs may cost them collateral if they fail.

Fortunately for Obama and law-enforcement legions, nobody has begun to organize the army of unemployed into overthrowing an unresponsive government, as was beginning to happen when Roosevelt became president in 1932. Nor have the unemployed turned ugly individually, perhaps because they're told to be perpetual optimists, or because of learned helplessness about "fighting the system."

While unemployment was earning ho-hums from Obama and political leaders within and outside Congress, so was the nation's rapidly disintegrating infrastructure. It seemed the problem would continue to be ignored unless the very floors of the White House or the Capitol collapsed or the runways at Washington's airports cracked.

The latest report from the nation's premier engineering experts, the American Society of Civil Engineers (ASCE), estimated that such Congressional disinterest has caused damaging consequences so extensive that $2.2 trillion will be required by 2014 just to meet current demands. That estimate was prior to the June tornado that tore up an estimated $75 million worth of roads, bridges and public structures in Joplin, Missouri[9] and the rampaging Mississippi and Missouri rivers wracking up $4 billion to $9 billion in repair work.[10] Communities affected by Katrina and the BP oil catastrophes still await billions for infrastructure work - and this year's hurricane season has just started.

The ASCE gave the nation's infrastructure an overall grade of "D." Its report cited cracking levees, a quarter of the nation's existing bridges sagging, leaking pipes losing billions of gallons of drinking water per day, aging sewers releasing human waste into rivers and lakes, horrendous traffic congestion and air and water pollution. Paramount among the report's five major solutions was increasing federal leadership in infrastructure.

Obama and most of Congress have ignored the report, even though ASCE furnishes much of the structural engineering expertise for the Federal Emergency Management Agency (FEMA). Worse, Congress is actually mulling a long-term, 31 percent cut to infrastructure appropriations. The terrible irony is that billions could be available to cover that $2.2 trillion for infrastructure without depending on the political whims of a president or Congress.

For years, billions have been lavished on foreign econ . . . .

READ MORE: http://www.truth-out.org/put-15-million-back-work/1311271379

A Permanent Jobs Program

Revamping the WPA

By MIKE WHITNEY

When the recovery began 2 years ago, the rate of unemployment was 9.5 percent. Today it's 9.1 percent. Think about that for a minute. Doesn't that prove that the market isn't really self-correcting after all? I mean, if the market was self-correcting then unemployment would have gone down by now, right? But, it hasn't. Why?

There's a long answer for that, and a short answer. The short answer is that unemployment can stay high forever if the wrong policies are in place. If you don't believe that, then vote Republican in 2012 and watch what happens when they start hacking away at public spending. Unemployment will soar to 15 or 20 percent in the blink of an eye.

So, it's the policy that matters not the market. And when the wrong policies are implemented, then demand weakens, people get laid off, and the economy goes into a funk. The good news is that we know how to fix the problem and get the economy revved up again. But the bad news is the politicians are not interested in doing what it takes to put people back to work. In fact, unemployment isn't even on their radar. Maybe that's because some of their bigshot constituents aren't bothered by high unemployment; in fact, they kind of like it. It crushes big labor and puts pressure on wages. Maybe that's why they haven't been griping.

Look, the economy is just a reflection of the ideas of the people in power, right? That's why economics can't be separated from politics, because it is politics. And, it's totally agenda driven. There's no economic theory that's not agenda driven.

There's no reason why a recession has to drag on year after year. Everyone knows what needs to be done; it's just a matter of doing it. But, of course, that's not possible because "what needs to be done" conflicts with the objectives of the people who run the system. So the slump goes on and on and people get madder and madder until, finally, something snaps and the crowds pour out onto the streets and and start burning stuff down. That's how it works, isn't it? Have you checked out Athens, lately? How about Madrid, Lisbon, Dublin, or Reykjavik? People are pissed. And they're not pissed about the recession. They're pissed because they're getting reamed and they know it. They're pissed about the policy.

So, is that where America is headed; massive public demonstrations and street violence?

Could be. It's hard to tell. If the politicians stick with the same policies that created the recession and high unemployment, then we're headed for trouble. But if they make a course correction and fix the situation, then things will improve. It's up to them.

Think back to when Barack Obama first took office. The administration quickly slapped together an $800 billion stimulus package and rushed it through congress. What does that tell you?

It tells you that policymakers aren't really dopes, after all. It tells you that when the lights are blinking red they know what they need to do and they do it fast. The Obama stimulus stopped the bleeding (The economy was shedding 750,000 jobs per month when Bush left office) and gradually turned the economy around. It took a long time, but the patient finally started showing signs of life.

At the time, no one talked about the budget deficits because they knew that avoiding another Great Depression was more important than a little more red ink. And, no one suggested that we forgo fiscal stimulus and try to stop the downward spiral by purchasing trillions of dollars of government bonds (QE) in an experiment that may or may not work. No one said anything like that, because they already KNEW that the traditional tried-and-true Keynesian methods of reversing the plunge would work. And they did work.

So what does that prove?

It proves that the people in power actually know what to do, but they pretend otherwise so they can pursue their own agenda. All this deficit hawkery and QE2 is just agenda-driven gibberish. It has nothing to do with fixing the economy or putting people back to work.

So what should we be doing to reduce unemployment and get the economy back on track?

Well, we should do what we did in the '50s, 60's and 70s when the economy was growing and the middle class was at its apex. We should implement the policies that focus on job creation and wage growth. Here's an excerpt from "The Crisis of Capitalism: Keynes Versus Marx" by Robert Skidelsky which sums it up perfectly:

"Keynesianism dominated the political economy of developed economies from the 1950s through to the mid 1970s. As Thomas Palley argues, 'economic policy was designed to achieve full employment, and the economy was characterized by a system in which wages grew with productivity. This configuration created a virtuous circle of growth. Rising wages meant robust aggregate demand, which contributed to full employment. Full employment in turn provided an incentive to invest, which raised productivity, therefore supporting higher wages'." ("The Crisis of Capitalism: Keynes Versus Marx", Robert Skidelsky)

British economist John Maynard Keynes knew that capitalist economies perform best at full employment because the additional spending leads to widespread prosperity and stronger growth. But, as Skidelksy points out, the government has a role to play in sustaining employment to ensure the economy operates at maximum capacity. Here's more from the same article:

"Public Investment & Full Employment

Keynes's answer ... is for the state to ensure enough investment and/or consumption in the economy to maintain continuous full employment.....The key to any restoration of a Keynesian political economy is thus the rehabilitation of the state as an instrument of the public interest...."

So the government should be directly involved in maintaining full employment. That means that fiscal stimulus has to be provided at various points in the business cycle to keep things running smoothly. But, as Professor Alan Nasser points out in a recent article in CounterPunch, there are two kinds of fiscal stimulus; one that works, and one that doesn't. It's an important distinction that needs to be clarified. Here's an excerpt from Nasser's article:

"...Closing the employment gap requires a specifically targeted stimulus, intended to stimulate not merely aggregate demand, but "effective demand". This was the kind of stimulus Keynes had in mind as his remedy for chronic unemployment. Aggregate demand stimulation is not authentically Keynesian. Keynes was explicit that the goal of macroeconomic stabilization policy is "a closer approximation of full employment as nearly as is practicable." (The General Theory, p. 378-379) He was unambiguous as to the principal effective means of accomplishing this goal: direct government job creation through public works projects....

If boosting effective demand is the explicit goal of fiscal policy, then work projects and the jobs they require must be provided directly by government. A resurrected Works Progress Administration is what will do the trick." ("Putting People to Work; The Kind of Stimulus We Need", Alan Nasser, Counterpunch)

Bravo, Professor Nasser. That's exactly what we need, "direct government job creation through public works projects". Another W.P.A.

Full employment is not a pipedream. In fact, it's an easily achievable goal if we're willing to use state resources. The problem is that big business opposes public works programs because they encroach on a potential source of profits for private industry. So, the corporate bosses usually mount expensive public relations campaigns lambasting WPA-type programs as "inefficient" or wasteful "make work" projects in an effort to sway public opinion. The propaganda has had a damaging effect on people's perception of government workers and the vital services they provide.

Still, there have been times when progressives have made real headway on the issue of full employment, like in 1978 when The Humphrey-Hawkins Full Employment and Balanced Growth Act was finally passed. Here's an excerpt from an article by Nancy E. Rose in the Monthly Review:

"Support for a permanent jobs program resurfaced again in the 1970s with the Humphrey-Hawkins Full Employment and Balanced Growth Act. The original bill promised to "establish and guarantee the rights of all adult Americans able and willing to work to equal opportunities for useful paid employment at fair rates of compensation.".....Its centerpiece was a countercyclical public service employment program. The government would serve as employer of last resort for people unable to find jobs through the labor market, establishing a program that would go into effect when the unemployment rate rose above 3 percent. Wages would be set at "fair rates of compensation," the highest of prevailing local wage rates, the minimum wage, or wages specified in existing collective bargaining agreements." ("Lessons from the New Deal Public Employment Programs", Nancy E. Rose, Monthly Review)

If the government is expected to be the "buyer of last resort" for all manner of dodgy mortgage-backed assets (owned by the banks), then why can't the government be the "employer of last resort" for the millions of people who--through no fault of their own--can't find a job?

Humphrey-Hawkins doesn't encroach on the potential profit centers for big business, (The bill explicitly states that the government should rely on private enterprise whenever possible.) but it does give the government the ability to create a "reservoir of public employment" if the private sector can't keep enough people working.

Isn't that what progressives really want; a "permanent jobs program" that spares people the indignity and desperation of being unemployed?

It's all there in Humphrey-Hawkins. It just needs a little dusting off and a mobilized left that's willing to do the heavy lifting.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

This article was originally published by Counterpunch

http://www.counterpunch.com/whitney06132011.html

The Invisible Recession

By DEAN BAKER

Millions of Americans are still suffering from the Great Recession. People across the country are struggling to find jobs, and families nationwide have had banks foreclose on their homes. It is against this backdrop that President Obama gave his speech on the budget.

While he did make the point that the wealthy can afford to pay more taxes, the speech confirms the administration's agenda of deficit reductions. But with an 8.8 percent unemployment rate, a budget agenda that stresses jobs is what the nation needs.

To understand why the focus should be on jobs instead of deficit reduction, it is important to remember how we reached this point.

Two years ago the economy was in a free fall as a result of the collapse of the Wall Street-fueled housing bubble. In the four months between December 2008 and April 2009 alone, the economy lost more than 3 million jobs; it would go on to lose nearly 5 million more.

Almost $8 trillion in housing bubble wealth disappeared as house prices plummeted.

The private sector lost more than $1.2 trillion in annual demand, roughly half of this due to lost construction demand and the other half due to lost consumption demand.

President Obama rightly proposed a second stimulus package -- the first was passed in February 2008 and signed by President George W. Bush -- to try to make up for lost demand from the private sector.

Government stimulus was the right path because private sector spending would not increase on its own. There is no magical potion that can somehow generate $1.2 trillion in new demand from the private sector alone. Businesses invest and hire when they see demand for their products. They all had huge excess capacity in 2009; this meant that there would be little new investment.

Similarly, consumers were heavily indebted now that they had lost so much housing wealth. This meant that they would not consume.

If the government did not spend money, no one was going to. This would have meant high unemployment rates long into the future, just as happened during the Great Depression.

The stimulus package helped to reverse the economic decline, but it was not nearly large enough. The package came to roughly $300 billion a year in tax cuts and new spending, roughly one-quarter the size of the shortfall created by collapse of the housing bubble. And much of this stimulus faded out by the end of last year.

This is where President Obama's plan should have stepped in to make up for the lack of demand in the economy. Spending by the government has, in the past, helped to stimulate demand.

But instead of explaining to the public the need for the government to make up the spending gap until the private sector recovers, President Obama is now pushing the line from Wall Street that we have a huge deficit problem. Remarkably the same people who wrecked the economy in the first place are again dictating our country's economic policy.

The reality is that cutting the deficit means cutting demand in the economy and fewer jobs. There is no storeowner or factory manager anywhere in the country who is going to hire people because the government reduced its deficit.

President Obama is apparently prepared to abandon the tens of millions of unemployed and underemployed workers who are the victims of Wall Street's recession in order to please Wall Street bankers and Washington pundits. This is not a good day.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on CNN.  http://www.counterpunch.com/baker04182011.html



How Timidity in Washington Wrecked the Economy

By DEAN BAKER

We now have even more evidence that inept policies from Washington are causing enormous suffering across the country. It is not quite the line that the right-wingers are pushing. The new evidence is that the stimulus worked and was in fact more effective than had been predicted.

The new evidence comes in the form of a study by two Dartmouth professors, James Feyrer and Bruce Sacerdote. Past estimates of the impact of the stimulus on jobs and the economy relied on simply plugging the tax breaks and spending into standard macro models and reporting the predicted effect. In this sense, the impact of the stimulus was actually built into the model. However this new study directly measures the impact of stimulus spending on employment across states, comparing the number of jobs created to the amount of spending.

The study consistently finds significant results over a wide range of specifications. This means that states that got more stimulus money had more jobs. The multipliers varied across specifications and types of spending but the range was 0.5 to 2.0. (The multiplier is the ratio of the change in GDP to the amount of stimulus spending. If the multiplier is 1.5 this means that $1 billion in stimulus increases GDP by $1.5 billion.) While the authors view their multiplier estimates as being somewhat below those predicted by the standard macro models, given the nature of their study their estimates are almost certainly higher than would be expected.

The approach used in this study almost certainly understates the true multiplier effect for the stimulus because it is effectively measuring the in-state multiplier. In other words, it is measuring how much $1 billion spent in Indiana will increase the size of Indiana's economy.

This will certainly be far less than its impact on the U.S. economy for three reasons. First many of the people hired for stimulus related projects are likely to live out of state. If Indiana contracts to rebuild Indiana Harbor (adjacent to Chicago), it is virtually certain that many of the workers will come from Illinois. This will be true of spending in any state with major population centers near the border (e.g. New York City, Philadelphia, Chicago).

The second reason is that much of the inputs are likely to come from out of state. Very little of the steel, asphalt or other materials connected with an infrastructure project will come from the state where the project is taking place.

The third reason that the study would understate the multiplier is that the re-spending from stimulus is far more likely to go out of state. This is not just because many people may cross state lines to do shopping or go to restaurants. Even if a person were to go to a store or restaurant in state to spend the money they earned through working on a stimulus project, much of the money would end up going out of state.

An appliance or video game may have been made in the United States, but it would be unlikely that it was made in Indiana, or whatever state's spending is being investigated. Similarly, the food served in a restaurant may have been grown in the United States, but probably not in Indiana.

For these reasons, measuring the amount that stimulus spending in Indiana led to an increase in the size of Indiana's economy is going to hugely understate the actual multiplier for the country as a whole. The range of multipliers found in this study suggests that the actual multiplier for stimulus spending is quite likely higher than the 1.5 in most macro models.

This is hugely important for macro-policy debates because it suggests that more stimulus would provide a further boost to the economy and reduction in unemployment. This means that the only reason that we are sitting here with 25 million people unemployed and underemployed is that the politicians in Washington are too intimidated by the Wall Street deficit hawks.

The deficit hawks have used their enormous political power and control over the media to shut down any further discussion of stimulus. They have managed to completely dominate public debate with their brand of flat-earth economics. They are using the crisis that was created through their greed and incompetence to reduce hugely valued public benefits, like Social Security and Medicare. And, now they are using the crisis that they have created for state and local governments to destroy public sector unions.

This looks really awful because it is. Our nations' leaders are deliberately inflicting enormous pain on tens of millions of people to advance their political agenda. This new study helps to prove this fact.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by TMP Cafe.

The article was republished at: http://www.counterpunch.com/baker02252011.html

Read more: http://www.commondreams.org/view/2011/01/19-15

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Some four dozen former top U.S. diplomats and prominent policy analysts are urging President Barack Obama not to veto a proposed U.N. Security Council resolution that is expected to reaffirm the illegality of Jewish settlements in the Occupied Territories.

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"At this critical juncture, how the US chooses to cast its vote on a settlements resolution will have a defining effect on our standing as a broker in Middle East peace," asserted the letter, which was signed by among other diplomatic luminaries, former UN Amb. Thomas Pickering and former Defense Secretary Frank Carlucci. 

"But the impact of this vote will be felt well beyond the arena of Israeli-Palestinian deal-making – our seriousness as a guarantor of international law and international legitimacy is at stake," it went on. 

"America’s credibility in a crucial region of the world is on the line – a region in which hundreds of thousands of our troops are deployed and where we face the greatest threats and challenges to our security. This vote is an American national security interest vote par excellence. We urge you to do the right thing," it concluded. 

The letter, which featured signers from both Democratic and Republican administrations, as well as former career foreign service and intelligence officers, comes amid what appears to be disarray among current U.S. Mideast policy-makers in the wake of last month’s collapse of their efforts to persuade the Israeli government to agree to a three-month partial moratorium on settlement activity on the West Bank. 

The administration had hoped that Israel’s agreement – in exchange for billions of dollars worth of new warplanes, various security guarantees, and a pledge to veto any Security Council resolution critical of Israel over the next year – would help coax the Palestine Authority (PA) President Mahmoud Abbas to revive direct peace talks which broke off last September when an earlier, 10-month partial settlement moratorium expired. 

Settlement construction on the West Bank and the demolition of Palestinian property in East Jerusalem have increased sharply since then, according to the United Nations and Israeli and Palestinian human rights monitors. 

Abbas has refused to return to direct talks unless Israel freezes all settlement activity in the Occupied Territories, including in East Jerusalem. The Obama administration made a similar demand of Netanyahu last year but was rebuffed in what many analysts here and in the Middle East have characterized as a major blow to Washington’s credibility throughout the region. 

While Obama’s Special Envoy for Middle East peace, George Mitchell, struggles to keep proximity talks between the two parties alive, the Palestinians and their allies are currently floating a draft Security Council resolution that condemns the settlements as illegal under international law and an obstacle to peace. 

The resolution is part of a larger diplomatic effort that also includes gaining formal international recognition for a Palestinian state based on the pre-1967 war Green Line. That effort has scored some significant successes in recent weeks, as a number of Latin American states, led by Brazil, have granted such recognition, while key members of the European Union (EU) have upgraded their diplomatic relations with the PA or are considering doing so. 

The administration has indicated its opposition to all such moves, although it permitted the Palestine Liberation Organization (PLO) for the first time to hoist the Palestinian flag outside its office here. 

Even that move, however, elicited harsh criticism from the so-called "Israel lobby" here and its supporters in Congress, notably the new Republican chair of the House Foreign Affairs Committee, Florida Rep. Ileana Ros-Lehtinen. 

"Raising this flag in [the District of Columbia] is part of the Palestinian leadership’s scheme to manipulate international acceptance and diplomatic recognition of a yet-to-be-created Palestinian state while refusing to directly negotiate with Israel or accept the existence of Israel as a democratic, Jewish state," she complained. 

Ros-Lehtinen, whose top individual campaign contributor, Irving Moskowitz, is a major funder of the most militant settlements in the West Bank and East Jerusalem, also condemned the PA’s proposed Security Council resolution as "part of the same strategy aimed at extracting concessions without being required to meet international commitments." 

With respect to that resolution, the Obama administration now appears to find itself between a rock – the new Republican and pro-Likud majority in the House of Representatives, as well as most Democratic lawmakers who are wary of crossing the Israel lobby – and a hard place – fast-growing international support, including from its most important European allies, for the creation of a Palestinian state, as well as Washington’s own credibility as a good- faith mediator in the Israeli-Palestinian conflict. 

Virtually all the world’s nations and the World Court have regarded Israeli settlements in territory conquered during the 1967 war as illegal under the Fourth Geneva Convention. 

A 1978 State Department legal opinion agreed with that assessment, holding that the settlements were "inconsistent with international law", an assessment that, despite former President Ronald Reagan’s assertion that they weren’t "illegal" during a 1981 press conference, has never been repudiated or revised. 

Nonetheless, when asked publicly about the settlements’ legality, Washington officials since Reagan have generally declined to answer the question directly, insisting instead that they were an "obstacle to peace" or were "unhelpful". 

That practice has continued under Obama who, however, declared in his widely-hailed June 2009 address in Cairo that Washington did not accept the "legitimacy" of continued Israeli settlement activity. 

The administration’s discomfort with being confronted squarely with the question of legality was evident Tuesday when reporters grilled State Department spokesman P.J. Crowley on whether the administration would veto the resolution.

Aside from insisting that "our position on settlements is well known", he indicated that the administration opposed bringing the resolution to the Council and that "these issues should be resolved …through direct negotiations." 

But the letter, which was initially published by Steve Clemons, the director of the American Strategy program on his widely read thewashingtonnote.com website, stressed that the administration’s waffling on the issue should end. 

"The time has come for a clear signal from the United States to the parties and to the broader international community that the United States can and will approach the conflict with the objectivity, consistency and respect for international law required if it is to play a constructive role in the conflict’s resolution," it said. "[D]eploying a veto would severely undermine US credibility and interests, placing us firmly outside the international consensus, and further diminishing our ability to mediate this conflict." 

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(Inter Press Service)

Read more: http://original.antiwar.com/lobe/2011/01/19/greybeards-urge-us-not-to-veto-un-anti-settlement-resolution%C2%A0/