Reports from the Economic Front

A January 22, 2012 New York Times story, The iEconomy: How U.S. Lost Out on iPhone Work, has been getting a lot of coverage.   The article makes clear that Apple and other major multinational corporations have moved production to China not only to take advantage of low wages but also to exploit a labor environment that gives them maximum flexibility. The following quote gives a flavor for what attracts Apple to China: 

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

The article highlights these conditions to make the point that manufacturing is not coming back to the United States because these conditions cannot be replicated in the United States. 

One aspect not stressed in the article is that many of the labor policies described are actually against the law in China and contrary to Apple’s own claims about its labor standards.  See William K. Black’s analysis here.

If you are interested in a more detailed picture of just what goes into making Apple products so profitable you should listen to or read the transcript of a This American Life radio segment which aired in January.  The segment is based on a Mike Daisey performance in front of a small audience.  Mike is a self proclaimed technology geek who just adores Apple products.  At least that was before he visited the Foxconn (Taiwanese multinational corporation owned) factory located in China in which many Apple products are assembled.  The program discusses the labor conditions at Foxconn and other similar multinational corporations operating in China.

These multinational corporations have helped make China the world’s top exporter of manufacturers, both overall and of high technology goods more specifically.  China’s share of world exports of information and communication technology products (such as computers and office machines; and telecom, audio and video equipment) has grown from 3 percent in 1992 to 24 percent 2006, and its share of electrical goods (such as semiconductors) from 4 percent to 21 percent over the same period.  Of course, while these exports are officially recorded as Chinese exports, approximately 60 percent of all Chinese exports and 85 percent of all Chinese high technology exports are produced by foreign companies operating in China.

The issue here isn’t one of China stealing manufacturing jobs from the United States or other developed countries.  According to the U.S. Bureau of Labor Statistics, total manufacturing employment in China actually fell by over 9 million over the period 1994-2006, from 120.8 million to 111.61 million.  Total urban manufacturing employment, which would include most foreign operations, declined sharply from 54.92 million to 33.52 million. 

In fact, China’s growth has generated few decent employment opportunities for urban workers, regardless of their employment sector.  The International Labor Organization did an extensive study of urban employment over the period 1990 to 2002.  Although total urban employment increased slightly, almost all the growth was in irregular employment, meaning casual-wage or self-employment—typically in construction, cleaning and maintenance of premises, retail trade, street vending, repair services, or domestic services.  More specifically, while total urban employment over this thirteen-year period grew by 81.7 million, 80 million of that growth was in irregular employment.  As a result, irregular workers in China now comprise the largest single urban employment category. 

The issue here isn’t even one of China versus the United States.  It also isn’t one of dictatorship versus democracy.  Rather it is one of capitalism’s logic.  Said simply, large multinational corporations and their allies in both the United States and China have successfully created a global system of production and consumption that gives them maximum freedom of operation.  It is this logic that keeps pushing more free trade agreements, attempts to create more flexible labor markets, and more attractive conditions for business investment, both here and in China.   And it is this logic that needs to be challenged on both sides of the Pacific. 

The Federal Reserve Bank recently released 1,197 pages of transcripts of its 2006 closed door meetings.  As the Wall Street Journal comments: “The transcripts paint the most detailed picture yet of how top officials at the central bank didn’t anticipate the storm about to hit the U.S. economy and the global financial system.”  

Federal Reserve officials suspected that housing prices were peaking (see chart below).  But since they didn’t believe that prices had been driven up by a well entrenched bubble, they were not very concerned that they were coming down. 

The Financial Times described the general Federal Reserve stance as follows:

Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment but expected that to offset strength elsewhere in the economy, leading to continued growth overall.

“Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.” . . . .

Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy. “As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years — and doing so is unavoidable if we want to correct the sector,” said Thomas Hoenig, then president of the Kansas City Fed, at the September 2006 meeting of the FOMC. 

The transcripts show that the Federal Reserve was so confident that the economy was on solid footing that many officials were, according to the Wall Street Journal:   

offering praise for outgoing Fed Chairman Alan Greenspan, who attended his final Fed meeting in January 2006. Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.” . . . .

The transcripts also suggest that Fed officials misgauged the potential for housing problems to spill over into the broader economy.

“Our recent financial-market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward,” Mr. Geithner said at a meeting in December 2006.  

So how did the best and the brightest get it so wrong.  Perhaps the major reason is because it served their interests to pretend there was no housing bubble.  The recovery from our 2001 recession was driven by consumption and that consumption was supported directly and indirectly by the housing bubble.  In other words stopping the bubble would have revealed the weakness in our economy and the need for serious structural change.  It was far easier and more lucrative for those at the top to just let the bubble go on expanding and pretend that it didn’t exist.

The following chart from the New York Times puts the movement in housing prices highlighted above into a longer term perspective, revealing just how strong speculative pressures were in the housing market.

As Dean Baker, one of the very few economists to warn about the dangers of the bubble, explains:  

First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.

By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.

This was a huge problem - because this bubble was driving the economy. It drove the economy directly by creating a boom in residential housing construction. We were building housing at near record pace in the years 2002-2006. This was in spite of the fact that we had an ageing population and record levels of vacancies at the start of that period.

The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than US $8tn in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.

In reality, a lot of the consumer spending driving growth was financed by home refinancing, which helped many housholds compensate for stagnant wages and weak job creation at the cost of a sharp rise in debt.  As a Wall Street Journal blog post pointed out, “From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.”

As we now know only too well, the collapse of the housing bubble reverberated through the economy, including the financial sector, triggering the Great Recession.  Tragically, many of the “best and brightest” remain in leadership positions today, still arguing for the soundness of economic fundamentals. 

The recently issued December 2011 employment report, coming four years after the official start of the recession in December 2007, included some good news: 200,000 jobs were added and the unemployment rate fell to 8.5%.  Although a hopeful development, there remains strong reason for caution.

Looking first at the job numbers, Doug Henwood, writing at his Left Business Observer blog, noted the following:  

Over a fifth of that gain, 42,000, came from couriers and messengers—meaning all those FedEx and UPS folks delivering holiday packages ordered from the likes of Amazon. Online retailers had a great December. Not so much for brick and mortar retailers, who’d apparently expected otherwise and hired ambitiously, adding another 28,000 to the headline figure. Given the ultimate disappointment of the holiday season, retail-store-wise, and the explicitly temporary nature of the courier jobs, these gains—which together accounted for over a third of the total—are likely to be reversed in January.

Considering the unemployment rate he added: 

[T]he unemployment rate, which is down from its recession peak of 10% in October 2009, has been flattered by what’s known in the trade as labor force withdrawal. That is, you’re not counted as unemployed if you’re not actively looking for work. Many of the unemployed have simply given up on finding work, and they’re not counted as unemployed. So even though the unemployment rate is down a point and a half from that 10% peak, the share of the adult population working for pay, the so-called employment/population ratio, is exactly the same now as it was at that peak.  That is not what we’d see in a normal recovery. We’re still 6 million jobs below the pre-recession peak at the end of 2007. At the growth rate we’ve seen over the last six months, it would take almost four more years to recoup those losses—and that’s not allowing for population growth. We’re still in a very deep hole and emerging only very slowly.

In fact, according to the Economic Policy Institute, “The jobs deficit of the 2008-09 period, defined as the number of jobs lost since the recession started plus the jobs we should have added to keep up with the normal growth in the working-age population, remains well over 10 million, and at December’s growth rate the United States will not recover its pre-recession unemployment rate until 2019.”

Here is an Economic Policy Institute chart illustrating just how far the employment/population ratio has fallen and thus how many people remain marginalized. 

To provide a different perspective on how bad labor conditions are in the United States, the Wall Street Journal recently ran an article describing how a number of U.S. multinational companies were pressing Canadian workers to accept sharp pay cuts or face layoffs by citing lower wages elsewhere.  “But instead of pointing to the usual models of cheap and pliant labor, such as China or Mexico,” companies like Caterpillar are “using a more surprising example: the U.S.”

Yes, we are now pulling everyone else down.  According to the Wall Street Journal, U.S. manufacturing unit labor costs fell 13% from 2000 to 2010.  By comparison, unit labor costs rose by 2.3% in Germany, 18% in Canada, and 15% in South Korea over the same period.  The chart below illustrates trends in hourly compensation (as compared to unit labor costs) for workers in manufacturing.  Nothing to be proud of in those figures.

On January 1st, the minimum wage increased in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. These eight states all have laws which require them to automatically increase their respective minimum wages by the rate of inflation. Nevada also indexes its minimum wage but its increase takes place in July.

The state of Washington has the highest state minimum hourly wage at $9.04.  Oregon has the second highest at $8.80.

Eighteen states plus the District of Columbia have minimum wages above the federal minimum wage which remains at $7.25 per hour.  A full-time worker making the federal minimum wage earns just $15,000 a year.

There are those who argue against state laws requiring an inflation adjustment to the minimum wage.  Their most common argument is that such government mandated increases are a threat to business profitability and the health of our capitalist, free-market economy.  This is an interesting argument.  At one time, the conventional wisdom was that capitalism was a means to an end, the end being a better standard of living.  Now it appears that capitalism has become the end itself, and to sustain a healthy capitalism workers will have to make sacrifices.     

Actually, those arguing against increasing the minimum wage are really arguing for the necessity of a declining real wage.  The minimum wage has not kept up with inflation. This is true even in states that currently index their minimum wage.  The reason is that indexing began after years of real wage decline. For example, Oregon’s January 2012 increase to $8.80 from $8.50 still leaves the real inflation-adjusted Oregon minimum wage below what it was in 1976.  In 2011 dollars, Oregon’s 1976 minimum wage was $9.09.

The federal government does not automatically index the federal minimum wage and the chart below highlights the extent of the decline in its real value. The blue line shows the actual or nominal dollar value of the federal minimum wage; increases are the result of a vote by Congress.  The red line shows the real value of the minimum wage in 2010 dollars.  In real terms the federal minimum wage remains considerably below its value in the 1970s.

A second common argument against inflation adjusted increases in the minimum wage is that it is just a training wage for young teens and therefore not important to family survival.  This argument misses the mark for several reasons, the most important being that, as the chart below shows, 80% of minimum wage workers in the eight states with mandated increases are over the age of 20, and more than 75% work more than 20 hours per week (just over half work full-time). In fact, according to an Economic Policy Institute study of national data, families with a minimum-wage worker rely on their earnings for nearly half the family income.

The extent of our labor market problems has been highlighted many times and in many ways.  Yet, with little being done to correct them, it is worth keeping the issue in the public eye.

What follows are three charts from the Economic Policy Institute.  This one highlights the ratio of unemployed persons to job openings.  Although the ratio has fallen since the “end” of the recession, it remains considerably higher than a decade ago.  It currently stands at 4 unemployed per job opening.

This one breaks down the data by industry.  It reveals that there are problems across the board. 

This final one shows that the job crisis is hitting everyone.  As the Economic Policy Institute explains: “Those with higher levels of education are leaving (or never entering) the workforce at the same rate as those with just a high school degree.” Only those with less than a high school diploma seem to be experiencing improved employment opportunities.

And the response of many political and business leaders to this dismal situation?  Primarily calls for austerity–or better said cuts in social spending.  Some economists have even developed a theory of austerity-led growth, arguing that slashing government spending will unleash private investment and job creation. 

We have been witnessing a test of this theory in Europe and not surprisingly it hasn’t produced positive results.  As the economist Kevin O’Rourke explains:  “One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary.”

Here is a short (less than 4 minute) video that illustrates the fact that 53% of our tax dollars, conservatively estimated, go to finance our military.   

And here is a link to a recent study by Robert Pollin and Heidi Garrett-Peltier on the employment effects of military spending versus alternative domestic spending priorities, in particular investments in clean energy, health care, and education.

The authors first examine the employment effects of spending $1 billion on the military versus spending the same amount on clean energy, health care, education or tax cuts.  The chart below shows their results. 

Moreover, even though jobs in the military provide the highest levels of compensation, the authors still find that “investments in clean energy, health care and education create a much larger number of jobs across all pay ranges, including mid-range jobs (paying between $32,000 and $64,000) and high paying jobs (paying over $64,000).”

Let’s see if these facts come up in the next Congressional budget debate.

Europe is experiencing a growing economic crisis.  Tragically, the recent meeting of the 27 European Union nations in Brussels produced an agreement, which if ratified, is bound to make things worse.

Growing numbers of European countries are running large national budget deficits which their governments are finding increasingly difficult to cover through borrowing.  According to the New York Times, “Euro zone governments have to repay more than 1.1 trillion euros, nearly $1.5 trillion, of long- and short-term debt in 2012, with about 519 billion euros, or $695 billion, of Italian, French and German debt maturing in the first half alone.”  The Wall Street Journal provides the following national breakdown:

The danger is that some European governments will be unable to secure the funds required to pay their debts.  Such defaults would threaten the financial stability of a number of large European banks, which are major holders of government bonds, and eventually the U.S. financial system because of the close ties between many large European and U.S. financial institutions.

At the Brussels meeting, government leaders agreed to raise some $270 billion and give it to the IMF which is supposed to use it provide loans to those governments in need, with its usual austerity conditions attached, of course.  The leaders also agreed to speed up the introduction of a new European rescue fund that would do much the same.  This determination to impose austerity on European workers stands in sharp contrast to another agreement. According to the New York Times, “The leaders sent an important signal to the bond markets by scrapping a pledge to make private investors absorb losses in any future bailout for a euro nation.” 

The leaders rejected what would have been the most useful action—empowering the European Central Bank to directly buy government bonds, much like the Federal Reserve does for the U.S. government.

The leaders did approve two major long term policy initiatives.  As the Wall Street Journal explains:   

After a marathon session of negotiating that started Thursday and ran until early Friday morning, the leaders emerged with two principal achievements: Euro-zone members who run outsize government deficits will face automatic penalties, and all governments will put balanced-budget procedures of some form in their national laws.

Germany had wanted this limit on government borrowing made part of the EU constitution, thereby giving EU institutions the authority to enforce it.  It was unsuccessful in achieving its goal only because of UK opposition; such major changes require unanimous approval on the part of all 27 member countries.  As a result, the other 26 leaders have agreed to implement this “fiscal stability compact” by winning approval for it in each of their respective national parliaments.

This fiscal stability compact reflects the continuing belief of European political leaders that the current crisis was caused by runaway government debts and can only be contained through adoption of a balanced budget amendment.  This is precisely the argument being made by conservatives in the United States.  And it is just as wrong headed in Europe as it is in the United States.

Paul Mason, the economic editor of Newsday put it well, saying:

I can only add at this stage that, by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy. . . .

It has done what the US Republicans would like to do - and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal. 

The result, if it works will be stability. It is hard to see how it promotes long-term growth.

Mason is probably overoptimistic that such a policy will even prove able to ensure stability.  As for the claim that the current crisis is the result of out-of-control deficits, take a look at the chart below:

As you can see, Spain and Ireland, two of the countries with the biggest debt problems, were actually running strong surpluses before the crisis.  On the other hand, Germany was in violation of the Euro zone agreement to keep yearly budget deficits below 3% of GDP from 2001 to 2005.  Not surprisingly, once the crisis hit, almost every country was forced into running large deficits.  Said differently, in almost all cases, large budget deficits are the result of the crisis not the cause.     

In short, pushing austerity will produce a deeper economic downturn, resulting in bigger government deficits and a worsening debt problem.  As the economist Kevin O’Rourke explains:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.comis predicting declines in eurozone GDP for late 2011 and early 2012. . . .

What is needed to save the eurozone in the medium term is a central bank mandated to target more than just inflation – for example, unemployment, financial stability, and the survival of the single currency. . . . This will require a minimal fiscal union; a full-scale fiscal union would be better still. Yet none of this was on the summit’s agenda.

Europe’s current approach to its crisis is crazy, and one can only hope that few if any national parliaments will endorse it.  I suppose there is some reason to be optimistic.  As the Wall Street Journal reports:

One particular complication is the bid to make sanctions automatic. It recycles an idea that the euro zone rejected in October 2010. At that time, the European Commission, the bloc’s executive arm, proposed that penalties for violating the fiscal rules be automatically imposed; unless the countries voted affirmatively to block them, they’d stand.

The longstanding rules work the other way around. Penalties are imposed only if countries vote for them. That led to the ignominious spectacle, in 2003, of France and Germany each breaking the deficit ceiling and each voting against condemning the other, killing enforcement efforts.

In the meantime, governments in Europe, much like in the United States, continue to defend the very economic structures and patterns of economic activity that led to the current economic mess while demanding that working people pay the costs.  What a nightmare.

Good old Ireland—according to the leaders of France and Germany, things would be a lot better in Europe if all the countries were like Ireland.  Their reason: the Irish have generally accepted their austerity “medicine” quietly while workers in other countries (like Greece and Spain) have been in the streets protesting.

The problem with being the “good” country is that while austerity helps ensure that the Irish government is able to make payments to the country’s international investors (especially French and German banks), the Irish people are suffering and their economy is close to sinking back into a new recession.  Some deal.

Not so long ago Ireland was known as the Celtic Tiger.  Ireland’s recent economic rise, which began in the 1990s, was fueled by multinational corporate investment, much of it from US high-tech firms.  As Andy Storey explains:

Ireland, accounting for a mere 1% of Europe’s population, managed to attract 25% of all US greenfield investment into the EU in the early 1990s. US investment in Ireland, at $165 billion, is greater than US investment in Brazil, Russia, India and China combined. Multinationals, the majority of them from the US, account for 70% of Irish exports.

The attraction: Ireland’s extremely low tax rates and tariff-free access to the EU.

Unfortunately for Ireland, the 2001 collapse of the US high-tech bubble meant the end of US investment in the country.  Ireland was “saved,” however, by a debt-driven housing boom. Sound familiar? 

Irish banks were able to borrow cheaply thanks to the country’s 1999 adoption of the Euro.  And with manufacturing in a slump, they aggressively and profitably pushed loans to Irish home buyers and builders.  Storey highlights the importance of real estate activity to the Irish economy as follows:  

Investment in buildings accounted for 5% of output in 1995 but for over 14% in 2008. By 2006/07, the construction industry was contributing 24% to Irish income (compared to the Western European average of 12%), accounting (directly and indirectly) for 19% of employment (including high levels of migrant labor) and for 18% of tax revenues (property transaction taxes have now collapsed as construction activity has nosedived).  

Just like in the United States, this housing boom temporarily masked the fact that the country’s industrial base and public infrastructure was decaying, overall job growth was slowing, and household debt was soaring.  When the global crisis hit in 2008, triggered by the collapse of the US housing market, it was the end for Irish growth as well.  Irish banks lost access to foreign credit at the same time as their own real estate loans went bad.  The Irish financial sector was on the ropes and unable to repay its creditors.

So, what did the Irish government do?  In September 2008 it announced that it would guarantee all deposits and payments to foreign creditors.  Thus, the people of Ireland found themselves taking on all the debts of the Irish financial sector.  Not surprisingly, government debt as a share of GDP greatly increased.  

The main beneficiaries of this policy were the country’s foreign lenders, including French and German banks.  No wonder the French and German governments view Ireland as a good nation and role model for Europe.  This history challenges the notion, widely pushed by the leaders of France and Germany, that the region’s crisis was caused by out-of-control government spending.  

Of course, with low tax rates and an economy in recession the Irish government was in no position to pay the private debts it had taken over.  The answer, supported by European elites, was austerity.  The Irish government slashed spending on public sector projects and workers as well as social programs to free up funds.  But even that was not enough.  The Irish government had to borrow as well, an action that further increased the country’s national debt.   

The foreign creditors got paid, all right.  But the austerity only made things worse for Ireland.  The cuts drove the economy deeper into recession, again driving down revenue, and forcing the government to seek new loans.  However, foreign lenders could see the handwriting on the wall and were unwilling to substantially increase their lending to Ireland.  Instead of renouncing or renegotiating the debts, the Irish government went to the IMF and EU for help.  It was ”rewarded” with a major loan of approximately $90 billion in December 2010, at the cost of yet more austerity involving higher sales taxes and sharply reduced spending on social programs. 

And the consequences of this strategy for the Irish people?  As the New York Times reports:   

“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”

Ireland’s GDP fell by 3.5 percent in 2008, another 7 percent in 2009, and a further 0.4 percent in 2010.  The economy grew 1.2 percent the first half of this year but even this weak expansion will likely be short-lived.  According to the New York Times:

The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to under 1 percent. It cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.

In fact, the Irish government announced in November that it will be forced to raise taxes and cut spending again in 2012.  The reason: despite all its efforts the size of the national debt continues to growth.  The budget deficit is projected to hit 10 percent of GDP this year, still sizeable even though down from 32 percent of GDP in 2010.  The government fears that without drastic action it will be unable to continue paying its debts. 

Perhaps not surprisingly, the Irish people are beginning to say “enough is enough.”  The New York Times highlights one indicator of the change:

On a recent frosty night in Dublin, David Johnson, 38, an I.T. consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank. “This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”

The December 3rd Spectacle of Defiance and Hope in Dublin, captured in the video below from Trade Union TV, is another.  

The following charts published in the New York Times highlight some of the trends discussed above.

Ireland’s road to debt and austerity is illustrative of the general situation in Europe.  Working people are being squeezed to protect profits and ensure the stability of existing economic relations.  Significantly, the leaders of France and Germany have just announced their long term plan for ending Europe’s crisis: adoption of tough new limits on government borrowing.  Clearly this is a desperate attempt to head off any meaningful challenge to the existing system.  At some point, and one hopes sooner rather than later, working people throughout Europe will see through this game, recognize their common interests, and take up the difficult but necessary job of economic restructuring. 

Some things just have to be shared. 

Chris Moody, writing for Yahoo News, reports that a major theme at the recent Republican Governors Association meeting in Florida was: “How can Republicans do a better job of talking about Occupy Wall Street?”   

Apparently Republicans are really worried.  Moody quotes Frank Luntz, an influential Republican strategist, as saying:

I’m so scared of this anti-Wall Street effort. I’m frightened to death.  They’re having an impact on what the American people think of capitalism.

Not surprisingly, Luntz had advice for those present.  The following are his “10 do’s and don’ts” for Republicans: 

1. Don’t say ‘capitalism.’ 

“I’m trying to get that word removed and we’re replacing it with either ‘economic freedom’ or ‘free market,’ ” Luntz said. “The public . . . still prefers capitalism to socialism, but they think capitalism is immoral. And if we’re seen as defenders of quote, Wall Street, end quote, we’ve got a problem.”

2. Don’t say that the government ‘taxes the rich.’ Instead, tell them that the government ‘takes from the rich.’

“If you talk about raising taxes on the rich,” the public responds favorably, Luntz cautioned. But  ”if you talk about government taking the money from hardworking Americans, the public says no. Taxing, the public will say yes.”

3. Republicans should forget about winning the battle over the ‘middle class.’ Call them ‘hardworking taxpayers.’

“They cannot win if the fight is on hardworking taxpayers. We can say we defend the ‘middle class’ and the public will say, I’m not sure about that. But defending ‘hardworking taxpayers’ and Republicans have the advantage.”

4. Don’t talk about ‘jobs.’ Talk about ‘careers.’

“Everyone in this room talks about ‘jobs,’” Luntz said. “Watch this.”He then asked everyone to raise their hand if they want a “job.” Few hands went up. Then he asked who wants a “career.” Almost every hand was raised.“So why are we talking about jobs?”

5. Don’t say ‘government spending.’ Call it ‘waste.’

“It’s not about ‘government spending.’ It’s about ‘waste.’ That’s what makes people angry.”

6. Don’t ever say you’re willing to ‘compromise.’

“If you talk about ‘compromise,’ they’ll say you’re selling out. Your side doesn’t want you to ‘compromise.’ What you use in that to replace it with is ‘cooperation.’ It means the same thing. But cooperation means you stick to your principles but still get the job done. Compromise says that you’re selling out those principles.”

7. The three most important words you can say to an Occupier: ‘I get it.’

“First off, here are three words for you all: ‘I get it.’ . . . ‘I get that you’re angry. I get that you’ve seen inequality. I get that you want to fix the system.”Then, he instructed, offer Republican solutions to the problem.

8. Out: ‘Entrepreneur.’ In: ‘Job creator.’

Use the phrases “small business owners” and “job creators” instead of “entrepreneurs” and “innovators.”

9. Don’t ever ask anyone to ’sacrifice.’

“There isn’t an American today in November of 2011 who doesn’t think they’ve already sacrificed. If you tell them you want them to ’sacrifice,’ they’re going to be be pretty angry at you. You talk about how ‘we’re all in this together.’ We either succeed together or we fail together.”

10. Always blame Washington.

Tell them, “You shouldn’t be occupying Wall Street, you should be occupying Washington. You should occupy the White House because it’s the policies over the past few years that have created this problem.”

BONUS: Don’t say ‘bonus!’

Luntz advised that if they give their employees an income boost during the holiday season, they should never refer to it as a “bonus.” “If you give out a bonus at a time of financial hardship, you’re going to make people angry. It’s ‘pay for performance.’”

CLEARLY GOOD THINGS ARE HAPPENING

The deficit commission failed to produce a plan to cut deficit spending by $1.2 trillion over the next ten years.  According to the ground rules of the agreement that created the commission, its failure is supposed to trigger approximately $1 trillion in “automatic” spending cuts that will go into effect beginning January 2013. 

The agreement included the following stipulations for guiding the automatic cuts:

• Approximately 50% of the required reduction is to come from the so-called security budget (national security operations and military costs).  
  

•  Approximately 32% is to come from non-defense discretionary programs (health, education, drug enforcement, national parks and other agencies and programs).  

• About 12% is come from Medicare (reduced payments to Medicare providers and plans).   

• The rest is to come mostly from agricultural programs.  

To be clear, these are reductions to be made in projected budget lines.  In other words, the cuts to the security budget will not produce an actual decline in security spending, only a slowdown in the projected increase previously agreed to by Congress. 

As previously discussed the failure of the commission is a good thing.  The commission was actively considering structural changes to a number of key social programs.  One was to change the formula for calculating social security payments so as to reduce them.  Another was to raise the age at which people could access Medicare. The automatic cuts, if enacted, will reduce spending on important programs, but at least they do not include steps towards their dismantling.  In fact, Social Security and Medicaid are exempt.

The next stage of the budget battle has been joined.  Political forces are maneuvering to change the formula for the automatic cuts mandated by the budget agreement.  In fact, this maneuvering began weeks before the commission formally announced its failure to agree on a deficit cutting plan.  According to a November 5, 2011 New York Times report:  

Several members of Congress, especially Republicans on the House and Senate Armed Services Committees, are readying legislation that would undo the automatic across-the-board cuts totaling nearly $500 billion for military programs, or exchange them for cuts in other areas of the federal budget.

We need to enter this budget battle with our own plan.  That plan must include blocking further cuts to non-defense discretionary programs and Medicare.  It is worth recalling that the agreement that established the deficit commission already included approximately $1 trillion in cuts to non-defense discretionary programs.

It is the security budget that we need to focus on.  And we need to be clear that our aim in demanding cuts to that budget, as well as tax increases on the wealthy and corporations, is to help generate funds to support an aggressive federal program of economic restructuring not deficit reduction.

The table below makes clear just how important it is to target the security budget.  It shows the pattern of  federal spending on discretionary programs, defense and non-defense, over the years 2001 to 2010.  The big winner was the Department of Defense, which captured 64.6% of the total increase in discretionary spending over those years.  It was still the big winner, at 36.9%, even if one subtracts out war costs.   

While the defense gains are staggering, they do not include spending increases enjoyed by other key budget areas dedicated to the military.  For example, many costs associated with our nuclear weapons program are contained in the Energy Department budget.  Many military activities are financed out of the NASA budget.  And then there is Homeland Security, Veteran Affairs, and International Assistance Programs.  It would not be a stretch to conclude that more than 75% of the increase in spending on discretionary programs over the period 2001 to 2010 went to support militarism and repression.  No wonder our social programs and public infrastructure has been starved for funds.

There is no way we can hope to reshape our economy without taking on our government’s militaristic foreign and domestic policy aims and the budget priorities that underpin them.