How Offshoring Has Destroyed the Economy

May 31, 2011

Nobel Laureate: Globalism Has Been Ruinous for Americans

By PAUL CRAIG ROBERTS

It is a very serious mistake to think that the employer class cares one fig about the working class. The historical record does not support that conclusion.

These are discouraging times, but once in a blue moon a bit of hope appears. I am pleased to report on the bit of hope delivered in March of 2011 by Michael Spence, a Nobel prize-winning  economist, assisted by Sandile Hlatshwayo, a researcher at New York University. The two economists have taken a careful empirical look at jobs offshoring and concluded that it has ruined the income and employment prospects for most Americans.

To add to the amazement, their research report, “The Evolving Structure of the American Economy and the Employment Challenge,” was published by the very establishment Council on Foreign Relations.

For a decade I have warned that US corporations, pressed by Wall Street and large retailers such as Wal-Mart, to move offshore their production for US consumer markets, were simultaneously moving offshore US GDP, US tax base, US consumer income, and irreplaceable career opportunities for American citizens.

Among the serious consequences of offshoring are the dismantling of the ladders of upward mobility that made the US an “opportunity society,”  an extraordinary worsening of the income distribution, and large trade and federal budget deficits that cannot be closed by normal means. These deficits now threaten the US dollar’s role as world reserve currency.

I was not alone in making these warnings. Dr. Herman Daly, a former World Bank economist and professor at the University of Maryland, Dr. Charles McMillion, a Washington, DC, economic consultant, and Dr. Ralph Gomory, a distinguished mathematician and the world’s best trade theorist, understand that it is strictly impossible for an economy to be moved offshore and for the country with the offshored economy to remain prosperous.

Even before this handful of economists capable of independent thought saw the ruinous implications of offshoring, two billionaires first recognized the danger and issued warnings, to no avail.  One of the billionaires was Roger Milliken, the late South Carolina textile magnate,  who spent his time on Capital Hill, not on yachts with Playboy centerfolds, trying to make our representatives aware that we were losing our economy.  The other billionaire was the late Sir James Goldsmith, who made his fortune by correcting the mistakes of America’s incompetent corporate CEOs by taking over their companies and putting them to better use. Sir James spent his last years warning of the perils both of globalism and of merging the sovereignties of European countries and the UK into the EU.

Sir James’ book, The Trap, was published as long ago as 1993. His book, The Response, in which he replied to the “free trade” ideologues in the financial press and academia who denigrated his warning, was published in 1995. [
Sir James called it correct, as did Roger Milliken.  They predicted that the working and middle classes in the US and Europe would be ruined by the greed of Wall Street and corporations, who would boost corporate earnings by replacing their domestic work forces with foreign labor, which could be paid a fraction of labor’s productivity as a result of the foreign country’s low living standard and large excess supply of labor. Anytime there is an excess supply of labor, or the ability of corporations to pay labor less than its productivity, the corporations bank the difference, Share prices rise, and Wall Street and shareholders are happy.

All of this was over the heads of “free trade” ideologues, who threw accusations such as “protectionist” at Goldsmith, Milliken, Daly, Gomory, McMillion, and myself. These “free trade” ideologues are economically incompetent.  They do not know that the justification for free trade is based on the principle of comparative advantage, which means that a country specializes in those economic activities in which it performs best and trades for those goods that other countries do best. Instead, the ideologues think that free trade means the freedom of capital to seek absolute advantage abroad in lowest factor cost.  In other words, the free trade incompetents have never read David Ricardo, who formalized the case for free trade.

Other economists, especially those high profile ones in high profile academic institutions, were bought and paid for. In exchange for grants from offshoring corporations these hirelings invented “the New Economy,” in which everyone would prosper as a result of getting rid of “dirty fingernail jobs.”  The New Economy wouldn’t make anything, but it would lead the world in innovation and in financing what others did make.  The “new economists” were not sufficiently bright to realize that if a country didn’t make anything, it couldn’t innovate.

Let’s go now to Michael Spence and Sandile Hlatshwayo, who have provided an honest report for which we should give thanks. Professor Spence could have made many millions using the prestige of his Nobel Prize to lie for the Establishment, but he chose to tell the truth.

Here is what Spence and Hlatshwayo report:

“This paper examines the evolving structure of the American economy, specifically, the trends in employment, value added, and value added per employee from 1990 to 2008. These trends are closely connected with complementary trends in the size and structure of the global economy, particularly in the major emerging economies. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, U.S. industries are separated into internationally tradable and non-tradable components, allowing for employment and value-added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the non-tradable side. On the non-tradable side, government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades. There are obvious questions about whether those trends can continue; without fast job creation in the non-tradable sector, the United States would already have faced a major employment challenge.

“The trends in value added per employee are consistent with the adverse movements in the distribution of U.S. income over the past twenty years, particularly the subdued income growth in the middle of the income range. The tradable side of the economy is shifting up the value-added chain with lower and middle components of these chains moving abroad, especially to the rapidly growing emerging markets. The latter themselves are moving rapidly up the value-added chains, and higher-paying jobs may therefore leave the United States, following the migration pattern of lower-paying ones. The evolution of the U.S. economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States. A related set of challenges concerns the income distribution; almost all incremental employment has occurred in the non-tradable sector, which has experienced much slower growth in value added per employee. Because that number is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce.”

What is Spence telling us?  Spence is careful not to say that globalism is the intentional result of enhancing capital’s profits at the expense of labor’s wages, but he does acknowledge that that is its effect and that globalism or jobs offshoring has the costs that Daly, Gomory, McMillion, Milliken, Goldsmith, and I have pointed out. Spence uses the same data that we have provided that proves that during the era of globalism the US economy has created new jobs only in nontradable services that cannot be offshored or be produced in locations distant from their market. For example, the services of barbers, waitresses, bar tenders, and hospital workers, unlike those of software engineers, cannot be exported. They can only be sold locally in the location where they are provided.

Tradeable jobs are jobs that produce goods and services that can be exported and thus can be produced in locations distant from their market. Tradeable jobs result in higher value-added and, thereby, higher pay than most non-tradable jobs.

When a country’s tradeable goods and services are converted by offshoring into its imports, it is thrown back on low productivity domestic service jobs for its employment. These domestic service jobs, except for dentists, lawyers, teachers, and medical doctors, do not require a university education. Yet, America has thousands of universities and colleges, and the government endlessly repeats the mantra that “education is the answer.”

But with engineering, design, and research jobs offshored, and with many of the jobs that remain within the US filled by foreigners on HB-1 and L-1 visas, we now have the phenomenon  of American university and college graduates, heavily indebted with student loans, jobless, and living with their parents, who support them.

Spence also acknowledges that the change in the structure of American employment from higher productivity to lower productivity jobs is the reason both for the stagnation in US consumer income and for the rising inequality of income. Sending middle class jobs abroad raised the earnings of capital. Spence understands that the lack of growth in consumer income has resulted in a shortfall in domestic demand, resulting in high unemployment.  He could have added that jobs offshoring also gave us the Federal Reserve’s policy of pumping up consumer debt as a substitute for the missing growth in consumer income. There is an obvious limit to the ability to maintain the growth of consumer demand via the growth of indebtedness.

The offshored economy is the “New Economy,” which the “free trade” hirelings of Wall Street and the global corporations invented in order to pay, with grants from the offshoring corporations, for their summer homes in the Hamptons.

As a graduate student in economics, I was fortunate to study with a number of professors who had or were subsequently awarded  Nobel Prizes. Among these creative people there are two economists whom I did not study under, but whose work I have read, and whose work is of great importance to our economic prospects. The two most important economists of our time, who, without any doubt, deserve the Nobel Prize are Ralph Gomory and Herman Daly.

Ralph Gomory’s book, “Global Trade and Conflicting National Interests,” coauthored with William J. Baumol, a past president of the American Economics Association, is the most important work in trade theory ever produced. This book, and subsequent papers by Gomory, prove beyond all doubt that the free trade theory set out by David Ricardo at the beginning of the 19th century is merely a special case, not a general theory.

Economists learn in their graduate courses that free trade is an unchallengeable doctrine and that only ignorant protectionists dispute the theory. This mindset was sufficient for Gomory’s book to be largely ignored, even though Paul Samuelson, the dean of American economics, acknowledged the critical point that there are situations in which free trade is not mutually beneficial.

The other deserving recipient of the Nobel prize is Herman Daly.  On the trade issue, Daly’s point is different from and less revolutionary than Gomory’s.  Daly makes the same point that I make, which is that the classic theory of free trade is based on comparative advantage, not on absolute advantage, and that offshoring is based on absolute advantage. Thus, offshoring is not free trade.

Daly’s revolutionary contribution to economics comes from his realization that the production function that is the basis of economic science is wrong.

This production function is known as the Solow-Stiglitz production function. This production function assumes that man-made capital is a substitute for nature’s capital. It follows from this assumption that whatever humans do to use up and destroy the natural environment can be overcome by the resourcefulness of science and technology.

Daly shows that this reasoning is incorrect.  If the Gulf of Mexico is destroyed by fertilizer run-offs from agri-business and by oil spills, only nature can correct the problem after many years measured in decades or centuries.  In the meantime, humans are without the resource.

Daly’s argument is brilliant in its simplicity.  In former times, nature’s capital was enormous, and man’s reproducible capital was small.  For example, fish in the oceans were plentiful, but fishing boats were not. Today fishing boats are in excess supply, but ocean fishing stocks are depleted. Thus, the limiting factor is not man-made capital, but nature’s capital. Daly stresses that by leaving ecological and social costs out of the computation of GDP, economists do not have a reliable measure of the effect of economic activity on human welfare.

All of economics is predicated on the notion that resources are inexhaustible, and that the only challenge is to use them most efficiently. But if resources are not inexhaustible and cannot be replicated by human capital, the world economy is being ruthlessly exploited to its detriment and to the detriment of life on earth.

Thanks to Bush/Cheney/Obama and the wars for military/security profits, we might not last long enough to test Daly’s hypothesis. As American hegemony confronts both China and Russia, hubris can rid the planet of humans before nature does.

To find a Nobel prize-winner documenting the high cost of globalism to developed economies is extraordinary. For the Council on Foreign Relations to publish it suggests that the Establishment, or some part of it, suspects that its hubris has run away with its fortunes, and that different thinking is needed to restore the US economy.

We must hope that Spence’s paper will encourage thought.  On the other hand, the bought-and-paid-for-economists will confront Spence with their fantasies that the US would be enjoying full employment if only government did not discourage employment with unemployment compensation, food stamps, income support programs, unions, minimum wages, and regulation.

Recently, yet another high-level warning came from the International Monetary Fund.  The IMF report said that the US economy has been seriously eroded and that the age of America is over.

Will the US business and economic establishments heed these warnings, or will the US become a third world country as I predicted at the beginning of this century?

Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury.  His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: PaulCraigRoberts@yahoo.com

For readers who wish to hear a speech given by Sir James Goldsmith  to the US Senate in 1994 warning of the perils of globalism, go to http://www.youtube.com/watch?v=maouTP8vTO0 and http://www.youtube.com/watch?v=4PQrz8F0dBI&feature=related]

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Activists Hack Fox News Times Square Ticker: Well done!!!

Pompous bullies like Bill O’Reilly have polluted the public mind for years with impunity (and grown rich in the process) thanks to the backing and protection of his puppetmasters, criminals like Roger Aisles and Rupert Murdoch, the Big Wigs behind the lies and crimes at Fox News. Now the people are beginning to wake up and fight back. Watch the video below: simply inspirational. 

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Obama administration seeks to block legal challenges to Medicaid cuts

By Naomi Spencer, WSWS.ORG | 31 May 2011

Phony of phonies: Many thought that by electing Obama they would not elect McCain, but they got McCain.

The Obama administration is seeking to block lawsuits challenging state budget cuts to Medicaid, the joint state- and federal-funded health care program for the poor and disabled. Many states are slashing already inadequate reimbursement rates for medical providers serving Medicaid recipients, even as the economic crisis has caused enrollment in the program to soar.

Medicaid serves low-income children, pregnant women, the elderly, blind and disabled—an enormous but politically disenfranchised segment of the population. Currently, some 60 million Americans receive health care through the program, including one in three children, four in ten pregnant women, and 70 percent of nursing home residents.

Coupled with skyrocketing health care costs, low state reimbursement rates over the past decade have created acute provider shortages in many areas of the country. Under-compensated for their services by state health departments, providers are forced to turn away Medicaid patients, making basic care increasingly inaccessible for enrollees. Medicaid patients may have to travel hundreds of miles, wait for weeks to see a doctor, or resort to crowded emergency rooms for treatment.

The consequences are a violation of the Medicaid program’s mandates, a number of lawsuits argue. Federal law stipulates that reimbursements must be “sufficient to enlist enough providers” to ensure enrollees have the same level of health care access as the general population. The Obama administration insists the law is “broad and nonspecific” and lawsuits against state officials “would not be compatible” with its federal enforcement.

The Justice Department’s solicitor general spelled out the administration’s position in a friend-of-the-court brief filed with the Supreme Court May 26 in answer to multiple suits against inadequate state reimbursement rates, which have been consolidated under a single lead case, Douglas v. Independent Living Center of Southern California, expected to be taken up later this year.

That the Obama administration has preemptively weighed in on the case brought by medical providers reveals both its contempt for the plight of the poorest Americans, as well as its reliance on state governments to carry out some of the severest cuts to social programs.

The attack on Medicaid is of a piece with the targeting of Medicare, public education, and other fundamental social programs upon which tens of millions of working class families depend. Bipartisan budget talks headed by Vice President Joe Biden are preparing trillions of dollars in cuts to the social safety net.

The budget plan adopted by the Republican-controlled House would slash Medicaid spending by $1.4 trillion over ten years. It would convert the program into a block grant to the states, limiting federal spending to preset amounts regardless of states’ needs, thus forcing the states to do the dirty work of tightening eligibility, benefits and provider reimbursements.

While the Obama administration has rebuffed the Republican proposal to phase out Medicare entirely, it has been relatively low-key in its response to the equally destructive proposal to block-grant Medicaid, which one study forecast would render 44 million more people uninsured over the coming decade.

Douglas v. Independent Living Center of Southern California consolidates a series of legal challenges to cutbacks in payments to physicians, hospitals, and pharmacies by the state of California in 2008 and 2009. Reimbursement rates for prescription medications were cut below costs, forcing pharmacists to stop dispensing to Medicaid recipients. Providers and recipients argued that the cuts violated federal law, under which state statutes on Medicaid were subordinate.

The US Court of Appeals for the Ninth Circuit in San Francisco ruled in favor of the health providers in three separate cases, citing the supremacy clause of the Constitution, which makes federal law “the supreme law of the land.” The California Department of Health Care Services appealed to the Supreme Court, which agreed in January that it would hear the case, primarily to address whether providers can challenge state budget cuts in the federal court system.

“I find it appalling that the solicitor general in a Democratic administration would assert in a Supreme Court brief that businesses can challenge state regulation under the supremacy clause, but that poor recipients of Medicaid cannot challenge state violations of federal law,” Washington and Lee University health law professor Timothy Jost commented to the New York Times May 28.

The National Governors Association, National Conference of State Legislatures, and 31 states have endorsed California’s appeal with friend-of-the-court briefs. State officials argue, “Allowing ‘supremacy clause lawsuits’ to enforce federal Medicaid laws will be a financial catastrophe for states.”

Numerous states are currently pushing through billions of dollars in cuts.

Last week, the Democratic governor of Oregon, John Kitzhaber, endorsed a plan to cut Medicaid payment rates by 19 percent beginning July 1, and an additional 15 percent beginning in July 2012. The proposal would cut $735 million, and result in the loss of $676 million more in federal matching funds. The consequences will be dire for enrollees and providers alike. Currently Oregon reimburses doctors for only 60 percent of costs for treating Medicaid patients.

Similar cuts are being inflicted in the Massachusetts Medicaid program. The Democratic-controlled state legislature passed a budget plan last week underfunding the health program by $750 million and cutting WIC, the Women, Infants and Children nutritional support program by $2.7 million. Some $8 million more in direct benefits for the poor are to be cut. (See “Massachusetts residents react to budget cuts”)

Other states are purging the Medicaid rolls with excessively tight eligibility requirements. New Jersey Governor Chris Christie, a Republican, proposed last week to save $300 million by denying coverage to adult enrollees who earn more than $5,317 per year for a family of three. This is one-fifth of the current income eligibility level, already absurdly low.

Ohio Governor John Kasich, also a Republican, released a budget plan last week outlining Medicaid funding cuts to nursing homes totaling $222 million. The state’s Department of Job and Family Services had already cut over $600 million in Medicaid expenditures in the first quarter of 2011.

Following the model established in Florida, Ohio is also privatizing case management. Kasich’s plan calls for moving 37,000 disabled children into managed-care plans that will base determinations of payment not on medical need but on cost savings. “To me, it’s good old-fashioned market competition,” the governor’s “Office of Health Transformation” director Greg Moody told the Columbus Dispatch.

The American working class overwhelmingly opposes cuts to the program. A recent poll by the Kaiser Family Foundation found that more than half of respondents reported having a personal connection with Medicaid, with either themselves or loved ones having received benefits. The poll found 60 percent of people wanted Medicaid to remain as an entitlement program, as opposed to a block grant program; only 13 percent of respondents said they would support cuts to Medicaid in the name of “deficit reduction.”

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Egypt’s “second revolution”

As the US whoremedia move on, the American public is denied once again a proper understanding of the evolution of a critical revolutionary process. Under all the gloss, keeping the American public ignorant is what the American media really excel at.

By Joseph Kishore, Socialist Equality Party / WSWS.ORG, 31 May 2011

Demonstrations last Friday in Egypt were among the largest since the revolutionary movement of workers and youth forced out the longtime dictator Hosni Mubarak on February 11. Hundreds of thousands gathered in the capital of Cairo and other cities to denounce the policies of the military government established after Mubarak’s downfall.

Among the slogans raised by the protesters was the call for a “second revolution.” Contained in this phrase is a critical understanding, namely that the fall of Mubarak three-and-a-half months ago has not solved the basic democratic and social aspirations of the mass protests.

On democratic rights, the military regime has kept in place the emergency laws, the abolition of which was a central demand of the revolution. In March, the military implemented a new law banning strikes or demonstrations that affect the economy. The military maintains a stranglehold on discussions over constitutional changes and will closely control any elections, if they are ever held.

Already, the military has brutally attacked youth demonstrators in Tahrir Square. Its methods of repression, however, are aimed at all sections of the working class, which was the basic social force that drove the Egyptian revolution. The strikes that erupted in the days leading up to February 11 continued and expanded afterwards, as workers sought to realize their demands for greater equality, improved wages, the reversal of privatizations and the democratic right to resist the dictates of the corporations. Recent weeks have seen an expansion of struggles, including factory workers and doctors.

In addition to repression from the state, the Egyptian working class now faces a deepening economic crisis. Unemployment has jumped to nearly 12 percent. The Egyptian ruling class will use mass joblessness to beat back demands for improved wages and conditions.

On foreign policy, the new government has maintained the cornerstone of the Egyptian state for decades: its alliance with the United States. The government has played a critical role in aiding the imperialist intervention in neighboring Libya. As for Israel, the limited measures taken, such as the partial opening of the Rafah border crossing with Gaza, have been aimed at containing domestic opposition and preserving Egypt’s strategic alliance with Israel.

The United States is playing a critical role in bolstering the military regime. For decades, the American government backed the Mubarak dictatorship, providing billions of dollars every year to finance the military-police apparatus. As demonstrations grew early in the year, the Obama administration first openly backed Mubarak, then worked behind the scenes to organize an “orderly transition” that would keep Mubarak in power for an extended period of time. Eventually forced to give up its client, the US is now working with the military to preserve its interests.

The US and the European powers are seeking to exploit the situation to open up the Egyptian economy even further to foreign penetration. It is this market liberalization that fueled the social inequality that helped produce the revolution in the first place.

In his speech on the Middle East earlier this month, Obama insisted that “America’s support for democracy” will be conditioned on “ensuring financial stability, promoting reform, and integrating competitive markets with each other and the global economy.” These are code words for breaking up nationalized industries and offering up the Egyptian working class for exploitation by transnational corporations. The G8 summit last week reiterated this point, linking paltry aid through the IMF and other institutions to “market reform.”

As the World Socialist Web Site warned on February 10, on the eve of Mubarak’s ouster, “The greatest danger confronting Egyptian workers is that, after providing the essential social force to wrest power from the hands of an aging dictator, nothing of substance will change except the names and faces of some of the leading personnel. In other words, the capitalist state will remain intact.”

New and explosive class conflicts are on the horizon. For these struggles to be successful, it is necessary to draw the lessons of the first stage of the Egyptian revolution. The course of the revolution is another powerful confirmation of Trotsky’s theory of permanent revolution, which holds that the democratic aspirations of the masses in an oppressed former colonial country like Egypt, and their liberation from imperialist domination, can be realized through the conquest of political power by the working class on the basis of an internationalist and socialist program.

In the absence of an independent political program and party of the working class, the early stages of the revolution in Egypt have been dominated politically by the parties of the bourgeois “opposition.” The essential role of the Muslim Brotherhood and the layers around Mohammed ElBaradei during the events of January and February, which initially developed outside of their control, was to act as a brake on the revolutionary strivings of the masses. They promoted illusions in the military as an “army of the people,” the better to disarm workers and head off a decisive struggle against the regime.

This role has been continued after the downfall of Mubarak. The Muslim Brotherhood openly backs the military government, denouncing the protests of this past Friday while attacking “secularists and communists” for organizing them. As for ElBaradei, in the pre-revolutionary days he warned that “Egypt is about to explode,” and that the “army must intervene to save the country.” Now, he is raising warnings of “another revolution, the revolt of the poor.” His aim is to counsel the United States and the military government as to the best way to head off such an uprising.

In the orbit of the official opposition forces are the various pseudo-left groups and “independent trade unions.” Groups like the Revolutionary Socialists and the Egyptian Socialist Party in Egypt, along with their international allies, including the Socialist Workers Party in Britain and the International Socialist Organization in the US, promoted ElBaradei and the Muslim Brotherhood as progressive agents of change before the departure of Mubarak.

Now, these groups have come together on the basis of a common platform whose essential purpose is to prevent an independent socialist movement of the working class. Earlier this month, the various “left” groups in Egypt united to form the so-called Socialist Front, which proclaims its aim to “cooperate with all progressive and democratic powers to achieve common national goals.” In other words, they will continue to work to subordinate the working class to the bourgeois opposition.

The basic task facing the Egyptian workers is the building of a new revolutionary leadership, which aims to mobilize the working class in the struggle for power and put an end to capitalist rule. However, the struggles unfolding in Egypt cannot be successful within Egypt alone, and the lessons of Egypt are not only lessons for Egyptian workers.

Two-and-a-half years into the financial crisis that began in the fall of 2008, workers have begun to fight back on a mass scale. The ruling class and its political representatives are engaged in a worldwide drive to turn back the conditions of workers gained through struggle over generations. The war in Libya and the efforts of the US to bolster the military regime in Egypt are part of a global process that includes historic cuts in social programs in Europe and the United States.

The February events in Egypt and the uprisings in the Middle East and North Africa were the beginning of a working-class counteroffensive. They resonated powerfully throughout the world. They gave impetus to the struggles of workers in the US state of Wisconsin, only the beginning of the reemergence of American workers into open struggle. Now in Europe, workers and youth are demonstrating in the tens and hundreds of thousands against an historic attack on every gain won during the course of the 20th century. The European continent teeters on the edge of a new economic crisis, coinciding with clear signs of a new downturn in the world economy as a whole.

In each country and in every struggle, the basic task presents itself: the building of a new revolutionary leadership, the International Committee of the Fourth International.

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Public Banking: An Idea Whose Time Has Come

Bank of North Dakota, Bismarck (new building inaugurated in 2008).

Editor’s Note: A public bank for the entire United States. Ah, what a refreshing idea, or, as the Victorians might say, “What a capital idea!”  We certainly think this is a solid concept, a motion whose time has certainly come.  In fact, we thought the taxpayer bailout of the Wall Street investment houses, insurance gamblers, and other players caught in the subprime scandal could have been avoided entirely by simply creating such a bank, a National Reconstruction Bank with precisely the funds wasted on these crooks. But the problem in America for at least 150 years now has always been not a shortage of good ideas but the political will to implement them, as it is this society’s mammoth corrupt vested interests at the top that run the nation, through their shills at all levels, and not honest representatives of the public weal.

We were reminded of this central truth recently, with the healthcare reform battle.  Besides introducing a nationalized banking system, even one that could run parallel to the private system to placate the banksters in its initial phases, what could be more desperately needed than a socialized healthcare system eliminating from the middle one of the most widely hated and wasteful capitalist industries in the land, one that not only torments countless private individuals every single day but millions of small businesses as well? And yet, it failed to pass, a failure assured from the start by the betrayal of the party in control, in this case the Democrats. So, the bottom line remains the same: the problem is political, not intellectual.  With that in mind, we welcome tactical and strategic ideas to remove this hurdle.—Patrice Greanville

By Stephen Lendman

The 1913 Federal Reserve Act let powerful bankers usurp America’s money system in violation of the Constitution’s Article I, Section 8, giving only Congress the power to “coin Money (and) regulate the Value thereof….” Thereafter, powerful bankers victimized working Americans, using money, credit and debt for private self-enrichment by bankrolling and colluding with Congress and administrations to implement laws favoring them.

As a result, decades of deregulation, outsourcing, economic financialization, and casino capitalism followed, eroding purchasing power, producing asset bubbles, record budget and national debt levels, and depression-sized unemployment far higher than reported numbers, manipulated to look better.

After financial crisis erupted in late 2007, harder than ever Main Street hard times followed, getting worse, not better. As a result, high levels of personal and business bankruptcies resulted. Millions of homes have been lost. Record numbers of Americans are impoverished. An unprecedented wealth gap grows steadily. America’s unstable economy lurches from one crisis to another, the current one miring Main Street in depression, still in its early stages.

Recovery is pure illusion. Today’s contagion spread out-of-control globally. No one’s sure how to contain it, so Wall Street got trillions of dollars in a desperate attempt to socialize losses, privatize profits, and pump life back into a corpse through grand theft by sucking public wealth to the financial sector, other corporate favorites, and America’s aristocracy already with too much.

Speculation and debt need more of it to prosper, but ultimately it’s a losing game. The greater the expansion, the harder it falls, especially when credit contraction persists. Job creation is moribund. Industrial America keeps imploding. High-paying jobs are exported. Economic prospects are eroding. Workers are exploited for greater corporate profits, and no one’s sure how to revive stable, sustainable long-term growth.

Privatized money control is the problem, representing democracy’s greatest threat. Regaining public control can restore it. The time for launching public banking across America is now when more than ever it’s needed.

Cause and Effect

Economist Michael Hudson explains that “debt leveraging” caused America’s economic collapse, so piling on more exacerbates conditions, especially the way it’s done:

— by bailing out giant Wall Street banks;
— letting them used trillions in public funds for more speculation, big bonuses, and acquisitions, not direct lending to revive growth;
— not acting as a lender of last resort to facilitate private investment to create jobs, turn around a sick economy, and stimulate demand; and
— letting federal debt unproductively skyrocket to stratospheric levels, affirming Adam Smith’s dictum that no country ever repaid theirs, especially the kind banking cartels create in lieu of workable alternatives not taken.

Key among them is:

— nationalizing the Fed; returning money creation power to Congress;
— abolishing Wall Street’s franchise;
— breaking up giant banks;
— liquidating insolvent too-big-to-fail ones; and
— replacing them with publicly run banks, providing low-interest loans to businesses, farmers, communities, households, students, and other worthy borrowers as a way to revive and sustain inflation-free prosperity. It’s no pipe dream. It’s real. It happened before and can again. Short of that, according to Hudson:

“debt service will (keep) crowd(ing) out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10% of the population (mainly the top 1%), operating via the financial sector.”

Eventually the economy will collapse, but not Wall Street, profiting hugely with public handouts – aided and abetted by corrupted public officials, turning America into what Hudson calls a “zombie economy” and banana republic.

Workable Alternatives Can Prevent It

Ellen Brown’s extraordinary book titled, “Web of Debt” explains how private money power trapped Americans in debt and how they can break free. At issue is private v. publicly created credit, Brown saying:

“Readily available credit made America ‘the land of opportunity’ ever since the days of the American colonists. What transformed this credit system into a Ponzi scheme, that must continually be propped up with bailout money, is that the credit power has been turned over to private bankers who always require more money back than they create” because they charge high interest rates for maximum profits.

In contrast, when federal, state or local governments lend their own money, profit isn’t at issue so rates can be low and affordable to businesses, farmers, and private individuals. Moreover, for federal and municipality needs, government-issued credit is interest-free.

Brown explained that “fractional reserve banking” dates from the 17th century, done then mainly in gold and silver coins. Early bankers soon realized it was simpler to use deposit receipts (called notes) as a means of payment so they began creating money by making loans through promises to pay, and more could be issued than the amount of coins on hand as only enough were needed to service redemptions – today’s idea of a reserve requirement.

What began earlier as notes, today are accounting entries that literally create money out of thin air. Moreover, it works the same for government as for privately-owned banks, except as publicly-run institutions, their mandate greatly differs:

— they don’t have to earn profits;
— they’re not beholden to Wall Street or shareholders; and
— only the state, community, (or federal government’s) creditworthiness matters. So far, in over 230 years, no state ever went out of business, and, except for Arkansas during the Great Depression, none ever defaulted, even when poorly governed.

Further, they can lend to themselves and municipalities interest-free, as well as to businesses, farmers, and individuals at low affordable rates to create sustainable, inflation-free growth. Moreover, the more often loans roll over, the more debt-free money is created – inflation-free if used productively for growth, not speculation, big bonuses and other excesses.

In fact, as long as new money produces goods and services, inflation can’t occur. Only imbalances cause problems – “when ‘demand’ (money) exceeds ‘supply’ (goods and services).” Price stability is assured when both increase proportionally, and that’s exactly how it worked in colonial America and under Lincoln during the Civil War.

Colonial America’s success is explained below. An earlier chapter discussed Lincoln’s achievements, reviewed again below. Brown’s “Web of Debt” also covered early 20th century Australia under its publicly-run Commonwealth Bank. Like others, it created money, made loans, and collected interest at a fraction of what private bankers charge. It worked well enough, in fact, for the country to have one of the highest global living standards at the time.

However, once private bankers took over, Australia became heavily indebted, its living standard falling precipitously. It showed benefits possible by government created credit compared to privatized banking power destructiveness – Australia one of several examples of what works best. “Web of Debt” explained them, including:

— colonial America:
— Lincoln’s achievements;
—- the Middle Ages, falsely portrayed as a backward and impoverishing era saved only by industrial capitalism; in fact, under its banker-free tally system, it prospered for hundreds of years;
— China did for thousands of years before the privatized banking, and today because Beijing directs The People’s Bank of China (its semi-independent central bank) to grow the nation’s economy and create millions of jobs for its burgeoning population; and
— Venezuela under its public service mandated quasi-public/private system, a topic a previous chapter explained about a far more stable/responsible system than America’s predatory Fed-run one.

Imagine the possibilities under public banks:

— federal, state and local debt could be substantially reduced or eliminated;
— so could personal and payroll taxes federal taxes;
— America’s manufacturing base could be rebuilt;
— social programs could be funded inflation-free;
— vital infrastructure projects could be undertaken on a scale never before imagined, including cleaning up the environment and developing alternate, sustainable, clean, safe, affordable energy sources;
— millions of new good-paying jobs could be created, ending unemployment for everyone able work; and for those willing but unable, aid could be provided;
— foreclosures would end, and the dream of home ownership would be reachable for everyone because mortgages would be plentiful, cheap, and not designed to scam the unwary;
— booms and busts would end;
— destructive currency devaluations and economic warfare for private gain no longer would threaten;
— private pensions, savings, and investments would be secure;
— Social Security, Medicare, and Medicaid would be secure in perpetuity;
— Washington, the states and local communities could produce comfortable surpluses; and
— sustained prosperity overall would result, providing everyone affordable or free healthcare, education, and other essential social benefits.

It’s not pie-in-the-sky. In colonial America, it worked impressively, first Massachusetts in 1691 with its own paper money called scrip, backed by the government’s full faith and credit. Other colonies followed, freeing them from British banks, letting their economies prosper, inflation-free, with no taxation for 25 years, paying no interest to bankers. The secret wasn’t issuing too much. It was recycling money into local economies for productive growth. Wherever it’s been tried, it’s work impressively. Brown’s “Web of Debt” explained it.

Lincoln did the same thing with government-created money, interest free. What followed turned America into an industrial giant by launching the steel industry, a continental railroad system, and new era of farm machinery and cheap tools. Free education was also established. The Homestead Act gave settlers ownership rights and encouraged land development. Government supported science.

Mass production methods were standardized. Labor productivity rose exponentially during America’s greatest growth period before the Fed’s 1913 creation changed everything.

Now’s the time to change back by replacing their franchise with public banking, giving federal, state and local governments their own money system, interest-free to grow their areas and the nation sustainably and impressively, interest-free with low or no taxes. America’s lacked it for the last century.

Doing so would revolutionize the country en route perhaps to ending predatory capitalism entirely, the ultimate aim, replacing a destructive system with an equitable one, serving everyone fairly.

More Evidence Why It’s Needed

A new US census report offers more evidence why, saying one-fourth of US counties are dying (760 of 3,142), meaning they’re showing more deaths than births. Why is at issue – because of the deepening economic crisis causing record high unemployment, home foreclosures, and human misery. According to Professor Kenneth Johnson:

“The downturn in the US economy is only exacerbating the problem. In some cases, the only thing that can pull an area out is an influx of young Hispanic immigrants or new economic development,” not forthcoming.

University of Albany senior fellow James Follain said, “The housing (market decline) is creating a new type of ghost cities” because of waves of foreclosures in overbuilt urban areas. Recovery will be very slow, he said, because of fiscal restraint when stimulus is badly needed.

Instead of curing the patient, we’re killing it because giant banks control money, and government is colluding with them to wreck Main Stream America to create assets they can buy cheap at the expense of working households losing out. That’s how private money power works – for them against the common good. What more incentive is there for returning it to public hands where it belongs, serving everyone equitably and fairly.

Replicating a Workable Model

One state alone has it, North Dakota establishing the Bank of North Dakota (BND) in 1919. Access its web site at:

http://www.banknd.nd.gov/

In contrast to privatized banks, it’s not insured by the Federal Deposit Insurance Corporation (FDIC) for good reason. Instead, its deposits “are guaranteed by the full faith and credit of the State of North Dakota,” proved trustworthy after over 90 years of sound money practices, unlike banks trapped by Fed control, wrecking many over decades.

Its deposit base is also unique, comprised mainly from state residents and funds of state institutions. However, other deposits are accepted from any private or public source. As mandated in 1919, North Dakota’s Industrial Commission oversees BND. Its members include the governor as chairman, attorney general and commissioner of agriculture. The bank also has a seven-member governor appointed advisory board, knowledgeable in banking and finance.

On December 8, 2010, Governor Jack Dalrymple’s 2011 – 2013 Budget Address highlighted a performance record other states would envy, struggling to cope with out-of-control deficits. In contrast, North Dakota had surpluses throughout the economic crisis. As a result, it’s budgeting “unprecedented funding for transportation infrastructure, housing, water supply and water control projects and other infrastructure investments throughout the state.”

Greater funding will also go for K -12 and higher education, economic development, agricultural research, health and human services, as well as quality of life enhancements, public worker pay increases, besides more for tax relief for state residents, amounting to $900 million in the 2011-2013 bienniums.

Moreover, strong reserves will be grown and maintained. Instead of cutting back like most other states, North Dakota is expanding and passing on benefits to residents. In December 2010, it also had the nation’s lowest unemployment rate at 3.3%. BNB deserves the credit.

On January 4, Dalrymple delivered his State of the State Address, saying:

“While other states (struggle with weak economies), we in North Dakota are in a position of strength and can use our surplus funds to meet the needs of the state” adequately, despite $174 million less federal human services aid than last year.

Nonetheless, North Dakota is prosperous. “You can see it in the progress of our industries, our main streets, in our schools, and in our overall economic growth. Our progress is getting national attention. It’s attracting people from other states and it’s allowing (our) people to stay close to home.”

North Dakota’s impressive record includes:

— large budget surpluses;
— merchandise exports nearly doubled to $2 billion in the last five years alone;
— 40,000 new jobs added in the last decade while the nation lost them;
— the country’s lowest unemployment rate at 3.3%; and
— much more revealing progress and prosperity, Dalrymple saying he’s “fortunate today to be able to say with complete confidence that the state of our state is strong and growing stronger!” As a result, more impressive things are planned because North Dakota has resources to implement them, while other states cut back.

On February 20, 2011 the Bismark Tribune reported:

“North Dakota’s economy has been (producing) black gold, a $1 billion budget surplus, the nation’s lowest unemployment,” even though some residents need help. “It means there are still people, and families, who face a variety of challenges.” As a result, state and local governments “have been proactive about” helping them get benefits they need and deserve. The state has plenty of resources to do it.

An October 12, 2010 Before It’s News headline said:

“North Dakota Has A One Billion Dollar Budget Surplus this year and is looking for ways to spend it – Maine has a billion-dollar deficit and is looking for ways to fund it.”

Sub head: “North Dakota is the only state with a surplus. It is also adding jobs when other states are losing them. Why is this not headline news?”

It’s not only solvent, it’s thriving with impressive 43% personal income growth besides 34% more in total wages.

According to Brown, it’s because BND has been a “credit machine,” for over 90 years, delivering “sound financial services that promote agriculture, commerce and industry,” something no other state can match because they don’t have state-owned banks.

With one, BND “create(s) ‘credit’ with accounting entries on (its) books” through fractional reserve banking that multiplies each deposited amount magically about tenfold in the form of loans or computer-generated funds. As a result, the bank can re-lend many times over, and the more deposits, the greater amount of it for sustained, productive growth. If all states owned public banks, they’d be as prosperous as North Dakota and be able to rebate taxes and expand public services, not extract more or cut them.

Brown explains that the BND:

“chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve,” that’s neither federal or has reserves as it’s owned by major private banks in each of the 12 Fed districts, New York by far the most dominant with Wall Street’s majority control and a Fed chairman doing its bidding.

In contrast, BND is a public bank, 100% owned by the state, operating in the public interest and those of the state. It “avoids rivalry with private banks by partnering with them.” Local banks do most lending. “The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more” as part of a continuing prosperity-creating virtuous circle. One of its functions “is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 to $600 billion” in a state with around 700,000 people and thriving.

Its function in the property market helped it “avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate….(Its other services) include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program.” When the state didn’t meet its budget “a few years ago, the BND met the shortfall.”

Year after year it works, freeing North Dakota from today’s credit crisis and worst of the economic downturn. It’s a win-win for the state, its agriculture, commerce, industry, entrepreneurial startups, students, homebuyers needing loans, and virtually anyone in the state able to qualify.

 

In sum, state-owned banks have “enormous advantages over smaller private institutions….Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders” demanding high returns, and they don’t speculate in derivatives or other high-risk investments. As a result, BND is healthy with a 25% return on equity, paying “a hefty dividend to the state projected at over $60 million in 2009” and well over five times that amount in the last decade, so it begs the question why other states don’t operate the same way. With them, they might be struggling the way nearly all of them are today, especially major ones like California, New York, Michigan and Illinois.

Growing State Interest in Public Banks

On March 25, 2011, Ellen Brown’s article headlined, “A Choice for States: Banks, Not Budget Crises,” highlighting the growing interest in state-owned banks, including new initiatives exploring the idea – at least 12 so far with pending bills or feasibility studies to determine their potential. They include Oregon, Washington, Maryland, Illinois, Virginia, Massachusetts, Louisiana, California, Arizona, Maine, Vermont and Hawaii, considering public bank options like North Dakota, America’s most prosperous state with one.

At issue is while “Wall Street is (thriving), local banks are floundering, credit for small businesses and consumers remains tight, and local governments are teetering on bankruptcy.” Congress is even considering new legislation to let states do it as a way to avoid pension and other obligations. Yet, according to what’s known, the Fed gave giant banks $12.3 trillion dollars, providing nothing for strapped states, local communities, and beleaguered households struggling to stay afloat.

North Dakota avoids economic hardships. So can other states and communities with publicly owned banks. It’s not rocket science. It’s simple. That’s its beauty, and what works for North Dakota can work anywhere. Size isn’t the issue. Policy is.

As a result, momentum’s slowly building for change, in Illinois, for example, on February 5, 2011 where Rep. Mary Flowers introduced the Community Bank of Illinois Act. It:

“Provides that the Department of Financial and Professional Regulation shall operate the Community Bank of Illinois. Specifies the authority of the advisory board of directors to the Bank. Provides that the Secretary is to employ a president and employees. Contains provisions concerning the removal and discharge of appointees. Provides that State funds must be deposited in the Bank. Contains provisions concerning the nonliability of officers and sureties after deposit. Specifies the powers of the Bank.”

“Contains provisions concerning the guaranty of deposits and the Bank’s role as a clearinghouse, the authorization of loans (to) the General Revenue Fund, bank loans to farmers, limitations on the loans by the Bank, the name in which business is conducted and titles taken, civil actions, surety on appeal, audits, electronic fund transfer systems, confidentiality of bank records, the sale and leasing of acquired agricultural real estate, and the illinois higher education savings plan.”

“Provides that the Bank is the custodian of securities. Amends the Illinois State Auditing Act to require that the Auditor General must contract with an independent certified accounting firm for an annual audit of the Community Bank of Illinois as provided in the Community Bank of Illinois Act. Amends the Eminent Domain Act to allow the Bank to acquire property by eminent domain.”

In California, on February 17, 2011, Assembly Member Ben Hueso introduced AB 750 (as amended March 31, 2011), “Finance: investment trust blue ribbon task force.”

Besides other provisions:

“This bill would establish the investment blue ribbon task force to consider the viability of establishing the California Investment Trust, which would be a state bank receiving deposits of all state funds. The trust would support economic development, provide financing for housing development, public works and educational infrastructure, provide stability to the financial sector, provide state government banking services, lend capital to specified financial institutions, and provide for excess earnings of the trust to be used for state General Fund purposes.”

“The bill would establish the membership of the task force, which would include designated Members of the Legislature and designees of the Governor, Controller, and Treasurer….The bill would require the task force to report to the Legislature by December 1, 2012, on its findings and recommendations to the viability of establishing the California Investment Trust” and state-owned bank.

Candidates in last fall’s November elections also proposed state banks in California, Florida, Idaho, Maine, Vermont, and Michigan, though legislation for them hasn’t passed.

In 2010, Michigan’s bill got the most coverage. An initiative for it can be accessed through the following link:

http://jobs4michigan.org/index.php?option=com_content&view=article&id=2&Itemid=3

It calls a State of Michigan Development Bank an instrument to “provide credit worthy (state) Businesses loans and lines of credit on fair terms to protect and expand existing businesses and jobs, to attract new high technology and manufacturing businesses to Michigan, to put Michigan’s skilled workforce to work, and provide needed credit for Michigan farm businesses and the important tourism industry.”

It proposed using some of the $58 billion from four Michigan pension funds as initial seed capital to launch it to help local businesses and create jobs. So far the measure stalled without a legislative majority to pass it.

In the 19th century, Louisiana once had a state bank but liquidated it in 1908. Louisiana State Bank Records show the legislature created the Louisiana State Bank in March 1818 after the charter of the Louisiana Bank neared expiration.

At the time, the bank was endowed with $2 million in seed capital. Funded with $100,000, each of five branches operated autonomously. Besides providing capital for state agriculture, the bank also participated in financing the railroad industry in the mid-1800s.

It operated during Louisiana’s unprecedented growth period, with state imports and exports rivaling most other states. In 1871, it became the State National Bank, then unfortunately liquidated 11 years before North Dakota’s BND was established. Perhaps its reemergence lies ahead.

Brown explains that today’s budget crisis affecting nearly all states didn’t “arise from too much spending or too little taxation.” A Wall Street created credit freeze caused them, easily avoided with a state bank like North Dakota’s, a prosperous oasis during the worst economic crunch since the Great Depression.

The Public Banking Institute: Banking in the Public Interest

Ellen Brown heads the initiative to promote an idea whose time has come, explaining that public banks are:

— viable economic solutions to promote sustainable growth and prosperity;
— available to states, cities and local communities of any size;
— owned and operated by states or local communities, not private investors, scamming the system for profit at the public’s expense;
— economically viable like private banks, but more stable and secure;
— “able to offset tax increases with returned credit income to” communities;
— ready resources for state and local governments, “eliminating the need for large ‘rainy day’ funds,” sitting dormant unused;
— help for local businesses, farmers, working households and students, not casinos to speculate recklessly like private banks; and
— legal according to the Supreme Court.

In contrast, public banks aren’t:

— run by politicians, but by bankers responsible to states, local communities and the public welfare;
— “boondoggles for bank executives; rather, their employees are salaried public servants (paid by states or local governments with transparent pay structures) who (won’t likely) earn bonuses, commissions or fees for generating loans;” or
— “speculative ventures that maximize (short-term) profits without regard to the long-term” public interest, what responsible banking is support to stress.

Overall, public banks differ from private ones by being mandated to serve the public interest, not shareholders or corporate executives seeking maximum profits for personal gain. Moreover, by returning profits generated, lower taxes and interest rates are possible. In addition, by not needing to pay themselves interest, state project costs can, on average, be reduced by 50%.

In short, public banks work, serving people responsibly, not greedy bankers, ripping them off for personal gain. The time for change is now. The way forward: public banks serving all Americans equitably and fairly for sustainable long-term growth and prosperity.

Besides peace, good will, democratic values, and equity and justice for all, what better idea is there than that.

Senior Editor Stephen Lendman lives in Chicago and can be reached at lendmanstephen@sbcglobal.net. Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

http://www.progressiveradionetwork.com/the-progressive-news-hour/.

INFO on the Bank of North Dakota: http://www.banknd.nd.gov/about_BND/history_of_BND.html

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