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More on the Economic Hardship of Young Adults

By Yves Smith. This article was first published on Naked Capitalism.

In the US, the cost of the aftermath of the crisis has fallen heavily on young people, mainly due to bad policy responses to the crisis that we’ve described at length as it was happening: the failure to restructure bad loans (particularly mortgages) and impose costs on banks and investors, not just homeowners; the refusal to engage in enough fiscal spending, not just during the crisis but in deficit fights during the Obama Administration. That isn’t to say that other groups haven’t suffered too. Remember that older, less educated whites have suffered a decline in lifespans, which is unheard in anything other than post-USSR economic collapse. And even though some people in their 50s and 60s are sitting pretty, virtually all the ones I know outside McKinsey and top Wall Street circles are looking at working till they drop.

But young people have suffered in a very large way and don’t have any reason to expect much improvement. And the impact on them of diminished earnings early in their career is more serious than taking a hit for a similarly long period later in one’s working life. Various studies have found that lower earnings at the start of one’s career lead to diminished lifetime earnings.

Reader UserFriendly flagged two disheartening sightings on how young adults are suffering. As we’ll see, the report from Fortune is directionally correct in showing how much lower typical incomes are for young people now versus in the 1980s. However, they over-egged the pudding by taking a period of time that ended with pre-recession peak incomes that it took the better part of a decade to reach again.

I also do not like the Boomer versus Millennial framing in that it implies Boomers were responsible for Reagan-era policies. Deregulation and the Fed crushing labor started in the Carter era, although Reagan cemented neoliberalism as the dominant ideology. The so-called “Greatest Generation” backed Reagan. The propensity to vote for Reagan correlated extremely highly with incomes. Needless to say, the oldest Boomer voters in 1980 would have been 25, which is too young to be very well off, save perhaps by inheritance. Boomers did not vote in Reagan; when you look at the breakdown by age cohort, it was not until you got to 30 year old and over groups that you saw Reagan getting the majority vote (interestingly, young people then also voted more heavily for Anderson than their elders).

Nevertheless, young adults had a good run in Reagan years before the nasty hangover of the 1990-1991 recession kicked in. From Fortune, summarizing a report by a group called the Young Invincibles, using Fed data:

The report found that millennials—15 to 34-year-olds in 2013—were worth roughly half as much as the boomer generation and are earning about 20% less in comparison to young adults in 1989. While millennials earned $40,581 on average in 2013, members of the boomer generation earned $50,910 annually in 1989.

Meanwhile, young adults with debt and a degree in 2013 earned roughly the same as those who had no degree at all in 1989: $50,000.

The lower number on the paycheck has also materialized in the form of a lower net worth. While Millennials are worth about $10,900, the Boomers were worth $25,035 at the same age.The lower number on the paycheck has also materialized in the form of a lower net worth. While Millennials are worth about $10,900, the Boomers were worth $25,035 at the same age.

While this does not break down income by age group, this chart illustrates how using 1989 as the basis for comparison over-eggs the pudding, since it was the peak year in a strong recovery after a severe recession (the Fred chart is interactive, so if you visit the site, you can see the values for each year. Unfortunately, the series does not go back before 1984):

Needless to say, one of the factors driving the lackluster post 2007 results is the lousy quality of jobs. 94% of the new jobs created in the Obama era were part-time or temporary.

The lack of a steady job makes it hard to save for a down payment and hard to have enough in the way of steady earnings to qualify for a mortgage. And in our society, where the property rights of tenants are generally poor (unlike some other societies) and landlords can and do raise rents aggressively, owning real estate historically was the way that the middle class accumulated wealth for retirement. The 30 year mortgage matched the typical productive earning years of the (male) head of the household. When he retired, he would own his house rent free and face much lower costs, or could move into a smaller home and free up equity. Housing was a tax-advantaged forced savings vehicle; the traditional model provided a wealth buffer for retirees even when real estate appreciated only at its long-term historical level of a mere 0.5% real price growth per year.

The resolution of the crisis again turned the old model on its ear. Housing before the crisis was at strained valuations in relationship to average incomes and rentals. Yet the priority after the crisis was to restore home prices to their former levels. Now in fact, outcomes have varied considerably, with the top 10% communities that have done well in the “recovery” seeing turbo charged home price gains (which in New York, San Francisco, and increasingly other major cities have been amplified by Russian and Chinese flight capital).

These high average prices have had a secondary effect: the McMansionization of what used to be starter homes. I see this in Birmingham, Alabama where my mother lives in an affluent suburb with the best school district in the state. Most of the houses near her are 1950s ranch or split-level homes, and when sold, they are either razed or have big additions made to them. Down the hill, a somewhat busy street was clearly one of the first to be developed, and when my parents moved there in the 1970s, it was full of nicely maintained classic 1940s starter homes on small plots. There are still a very few left, but when they are sold, they are replaced with new structures with at least double the old square footage of living space that max out the available land.

As a Washington Post story indicates, it isn’t just the terrible state of the incomes and balance sheets of the young that are keeping them from owning homes; it’s also that modest homes are going the way of the dinosaur. Key points from the article:

Here’s a look at some of the ways that home buying is becoming more difficult for young buyers:

1. More deals are falling through. The share of home sales that fail is on the rise, with more issues arising for people buying starter homes, according to a report released this week by Trulia…The fail rate was higher for starter homes, with 7 percent of deals falling through at the end of 2016…

New home buyers are more likely to face issues with their loans because they haven’t gone through the process and usually don’t have as much equity as older borrowers, [Felipe] Chacón [of Trulia]says. They are also more likely to be buying homes with loans secured by the Federal Housing Administration, which require smaller down payments but have more restrictions, he says.

2. They don’t have many options. One of the main challenges affecting all kinds of home buyers is that there is a shortage of homes on the market. Still, those shortages are growing most for low- and midpriced homes in many markets, according to Trulia. Inventory for starter homes fell by nearly 11 percent nationally at the end of last year when compared to the end of 2015, the company found. That compares to a drop of 6.5 percent for premium homes, or the priciest homes in the market…

3. More people are being priced out of the market. Mortgage rates have increased since the election, putting a squeeze on young home buyers. Rates for 30-year fixed-rate mortgages rose to 4.2 percent last week from about 3.4 percent at the beginning of October. Those higher mortgage rates pushed down the median mortgage that millennials can afford by 9 percent, according to a report released Thursday by Fitch Ratings.

It also doesn’t help that the list prices for starter homes are rising, according to Trulia, requiring bigger down payments. For aspiring buyers, that can mean having to move to a less-expensive area, or putting off the purchase until they have more cash in the bank.

As UserFriendly said by e-mail:

I know exactly who’s fault it is, that is half the problem. It’s like I live in a bubble because next to no one understands anything about economics and so many people only understand politics to the extent that the GOP is more racist and therefore always bad. It’s maddening. It’s especially maddening for people my age, who graduated in 2008. I’d say it’s a reasonable argument that between Clinton and Obama I am about $200k worse off than I would be. So are most of my peers. Which makes my blood boil when I see them cheer him.

I litteraly have no life to look forward to. Out of the 14 years of my adult life I don’t think there has been a single one where my debt load has decreased. Which is completely unsustainable but thanks to uncle joe there is nothing I can do about it.

The young are between student debt, background checks that result in anyone with even a minor incarceration record putting themselves at a big career disadvantage, and the surveillance state so hemmed in as to make it very unlikely that they will revolt. But the Soviet Union didn’t fail due to an internal uprising but due to its inefficiency, the erosion of its legitimacy and the withdrawal of support of its citizens. The US has massive, unsustainable military, higher education, and health expenses and no plan to reduce their growth, much less to shrink them. I’m not sure how this ends, but on current trajectories, it will end badly.

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Trump, turmoil and resistance

By Vijay Prashad. This article was first published on Frontline.

Donald Trump feels he has to undo a great deal from the eight years of Barack Obama’s presidency, and he is in a hurry. Obamacare has been ordered out and a “Muslim Ban” is signed in. His deregulation orders are just what the corporate sector wants. All this to “Make America Great Again”!

Time is of no consequence in America these days. President Donald Trump awakens early and fires off a tweet. These are as important as the executive orders he has been signing with remarkable frequency. He is a man in a hurry. There is a great deal, he feels, to undo from the eight years of Barack Obama’s presidency. It is almost as if Trump does not believe that he will be long in the job. Changes must be made, and speed is of the essence. The midnight oil burns in the White House feverishly.

The executive orders are hard to keep up with. Serious issues are deliberated in a few pages. Trump ordered federal agencies to set aside Obama’s health care initiative, which was one of the main social reforms passed in recent memory. Trump’s anger at what is known as Obamacare is part of the general corporate sensibility against regulations of any kind. Trump pushed for oil companies to be able to build their controversial pipelines and demanded that federal agencies must ease up on financial and environmental regulations. One order said that if the government introduces a new regulation, it must first abolish two others. This is sweet music to the corporate sector, which instinctively dislikes the fetters of government intervention. The Trump claim is that deregulation will spur business activity, produce growth and therefore deliver jobs to the “forgotten Americans” —Trump’s base.

The deregulation orders did not receive the kind of attention they deserve. These are dull compared with the more flashy orders, the ones that reflected Trump’s most dramatic campaign promises: build the wall against Mexico, ban Muslims, and fight “radical Islamic terrorism”. It was the flash of the orders on these issues that drew all the attention. No one expected Trump to actually enact these policies. It was felt by the encrusted establishment that Trump—like other politicians—would make grand social claims during the campaign but would then ignore these promises when the “realities” of governance settled in. But Trump and his team had no patience for such formulas. Trump and his advisers know full well that his base—the “forgotten Americans”—is hungry for action. They want their man to deliver something fast. Trump will not be able to take the American economy by the throat and make it cough out jobs. That is simply impossible. Far easier to tackle these social issues to prove his fidelity to his base.

When the orders came out, a frisson of delight went through Trump’s base. Early polls showed that the majority of Americans disapproved of Trump’s “Muslim Ban”, but 45 per cent of those asked said that they approved of it. That is about the same percentage of the electorate that voted for Trump. A seam of the Far Right —including the fascists—have long said that the decline in the fortunes of the white Americans came from the enfranchisement of blacks, Latinos, immigrants, gays, lesbians and Muslims. “Make America Great Again” is a line that Ronald Reagan used as his campaign slogan in 1980. During a speech in that campaign, Reagan said that his project was for a “national crusade to make America great again”. The word “crusade” with all its Christian implications is an old one for the American Right, but here it was linked to the suggestion that America—in 1980—had been lessened by the gains of the social movements of the 1960s and 1970s, which had been driven by secularism. These had to be put in their place. Reagan, and now Trump, would cleanse the country of its crud and reveal it for what it was always supposed to be: a white, Christian nation. It is fitting that the Trump administration will remove the white supremacist groups and the fascist groups from the terror listing; only “radical Islamic terrorists” will be on that list.

Orders can be delivered with ease, but implementation is another story. The “Muslim Ban”, for instance, created chaos between the Customs and Border Protection and the Department of Homeland Security. Officials in these government agencies, as well as in the State Department, did not know how to act on the basis of the orders. A hundred thousand visas were cancelled in the chaos. One minute no one from the seven countries was allowed to board a flight to the U.S., and the next minute people were allowed on aircraft. It is this chaos that has come to define the Trump administration. Deliberative statements from above do not translate easily for the massive apparatus of the U.S. government.

These orders came from Trump’s pen with a great flourish of royalty. Trump did not deign to explain his decisions or make any argument. There is no time for that. His language is simple and direct. “We’re going to do great,” he says, “we’ll make America great.” Complexity is not necessary. There is no conversation here about how computers and other technology have made workers more productive, which has led to a great haemorrhaging of jobs. It is this, rather than foreign trade, that has truly cut deep into the heart of employment in factories and in fields. None of this is on the table. Trump is able to blame a long list of people who have gained socially for the ailments of those who have been defeated economically. Hate crimes against the long list of Trump’s enemies —Mexicans, Muslims and those who look like them —have risen. Hatred has taken on a mundane quality. “Muslim-free zones” is a sign that can be found in Chattanooga, Tennessee, where there are only a handful of Muslims in residence. In Little Falls, Minnesota, two white men came to the home of a Somali family and told them to move out or else they would burn down the home. The Roth Family Jewish Community Centre of Greater Orlando (Florida), which runs a preschool, received three bomb threats in two weeks. In San Francisco (California), a white man accosted an Asian woman and said to her: “I hate your fucking race. We’re in charge of this country now.”

Will removing Bannon help?

Hatred of Obama defined Trump’s political life over the past eight years. He was one of the first to stoke the rumour that Obama was not an American and that he was a Kenyan immigrant. The “Birther Movement” embraced Trump, who thumped on this theme right until he became a presidential candidate. The sewers of the American Far Right—the fascists and racists—welcomed the attention given them by Trump’s celebrity. Here was a rich real estate baron and television star who was giving credence to the worst kind of falsehoods. It was in this drain that Trump met Breitbart News’ Steve Bannon.

Bannon drifted from Wall Street into the propaganda world of the Far Right, where he made films and curated a website that produced what is now known as “alt-facts” (alternative facts or, in more common language, lies). Over the years, Bannon has made clear his great dislike of the gains made by minority communities and of H-1B visa technocrats who surrounded him in the world of finance and media. His hatred of them was clarified in a March 2016 radio show, when he said: “Engineering schools are all full of people from South Asia, and East Asia. They’ve come in here to take these jobs.” American students, he said bitterly, “can’t get into these graduate schools”. Twenty per cent of the U.S. population is made up of immigrants, Bannon noted. “Is that not the beating heart of the problem?” These technocrats not only surrounded him, but they made him feel uneasy. “These are not Jeffersonian democrats,” he complained. “These are not people with thousands of years of democracy in their DNA coming in here.” Resentment and revenge are the contours of Bannon’s viewpoint. It is fitting that he used the term DNA in his statement. Skin is the limit of ideas such as democracy. America made an error, Bannon suggests, in allowing darker skins to participate in its democratic experiment. Trump brought him in as his main adviser for his campaign. Bannon is now, it is said, one of the main intellectuals of the Trump presidency.

Is Bannon Trump’s brain? Bewilderment at the depth of the Trump presidency has led some to think that the removal of Bannon would somehow bring normalcy to Trump’s world. But this might be wishful thinking. Each of Trump’s Cabinet appointments and many of his political appointments into the agencies seem Bannonesque in their world view. They are behind the “Muslim Ban” and the “Mexican Wall”; they would like to undermine public education and eviscerate regulations; they would like to lift up “alt-facts” to the status of reality and send pesky reporters to prison. This is a world view shared across the administration, from Vice President Mike Pence to Secretary of Homeland Security John Kelly. Talking to people in the Trump administration is startling: they believe that they have been out of power and are now, finally, in charge, with little time to spare. Bannon is not their leader. What unites them is the feeling of resentment and revenge that he articulates and Trump embodies.

Resistance

Trump’s ban on the entry of people from seven Muslim-majority countries was not going to be taken quietly. Organisations that work on civil liberties and refugee relief as well as Left groups and platforms such as Black Lives Matter and Occupy hastily mobilised people to flood the airports. From John F. Kennedy International Airport in New York to San Francisco International Airport, the crowds chanted “Let Them In” and “Not My President”. It was a powerful demonstration, with bodies on the line to resist the Trump order and to make it clear that such actions would not go unchallenged on the streets.

Democratic Party politicians hastened to the airports to give their support to the protests. Senator Elizabeth Warren went to Boston airport and said: “We will make our voices heard all around the world. We will not turn away children, we will not turn away families, we will not turn away anyone because of their religion.” Senator Kamala Harris, the first Indian American Senator in U.S. history, was forthright in her criticism. “On Holocaust Memorial Day, President Trump enacted an executive order that will restrict refugees from Muslim-majority countries. Make no mistake—this is a Muslim ban. During the Holocaust, we failed to let refugees like Anne Frank into our country. We can’t let history repeat itself.”

Trump’s threat to deport undocumented migrants received a sharp rebuke from Democratic politicians. Boston’s Mayor Marty Walsh said that any migrant who felt threatened could come to City Hall and take shelter. “If people want to live here,” he said, “they’ll live here. They can use my office. They can use any office in this building.” When a reporter asked him if this applied to “illegal immigrants”, Walsh was sharp with his rebuke saying that no one was illegal. Trump has threatened to withdraw federal money from cities and towns that do not enforce his anti-immigration agenda. “We will not be intimidated by a threat of federal funding,” said Walsh. “We will not retreat one inch.”

Popular resistance strengthened the spine of these leaders, many of whom come from political traditions not used to such forthright resistance. This is not the time for politeness, they suggest. Stiffer measures are needed.

Boycotts of businesses that operate alongside the Trump agenda have had an impact. During the airport protests, the New York Taxi Workers’ Union decided to go on strike at the airport. Seeing an opportunity, Uber suspended its surge fees and decided to break the strike. Thousands of people deleted their Uber app, sending a strong message to the company. Its CEO felt the pressure to resign from Trump’s business council. Department stores such as Nordstrom’s and Neiman Marcus have dropped the Ivanka Trump jewellery line. Amazon and Expedia took the Trump administration to court saying that the immigration orders would hurt their business.

When the acting Attorney General, Sally Yates, refused to execute the “Muslim Ban”, Trump fired her. The view from the White House is that officials of the federal government must be loyal to Trump and not worry about the U.S. Constitution. Trump’s allies came in to defend his action, blaming the bureaucracy for their allegiance to liberal and secular values. “This is essentially the opposition in waiting,” said Trump’s friend Newt Gingrich. “He may have to clean out the Justice Department because there are so many left-wingers there. [The] State [Department] is even worse.” A chill has gone through the administration. Judge James Robarts, nominated to the federal courts by Trump’s fellow Republican George W. Bush, stayed the “Muslim Ban”. Trump called him a “so-called judge”, like the “so-called protesters”. These are not real people to Trump. They are to be swatted aside. Whether by an executive order or on Twitter.

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Magician’s dust

By Vijay Prashad. This article was first published on Frontline.

Donald Trump takes office with an agenda so toxic that it could curdle milk. But the Democratic leadership seems to be in no mood for a fight, and much of the anti-Trump discourse is obsessed with the alleged Russian role in the presidential election. By Vijay Prashad

Not far from Trump Towers in New York City, where Donald Trump lives, is a slash of graffiti that disparages him. The language is harsh. One mocks Trump’s slogan—Make America Great Again—suggesting that its real meaning is “Make America Hate Again”. The poster dresses Trump in the clothes of Uncle Sam and calls him a “Loser”. This should not be a surprise. In New York City, Hillary Clinton won close to 80 per cent of the vote. This is not Trump country. Here the sentiment is one of dismay. It is as if the world has ended.

Promises of a resistance to the Trump presidency flood pockets of social media where the embattled liberals huddle. A group of former Congressional staff members released a detailed document called “Indivisible: A Practical Guide for Resisting the Trump Agenda”. These Democratic Party workers took their lessons from the Tea Party. When Barack Obama was getting ready for his inauguration, protests broke out across the country to challenge his legitimacy. Was Obama a real American, it was asked, or was he born in Kenya without the right to be President? At that time, Donald Trump became a minor player in this “Birther” movement. Racism, hatred of liberals, antipathy to “government” and other maladies coalesced into the Tea Party, which was then funded liberally by the billionaires of the Far Right. The Tea Party groups challenged the Republicans—whom they called RINOs (Republicans in Name Only)—and forced the party to lurch to the right. The Congressional staff members trying to build up resistance to the Trump presidency believe that a great deal could be learned from the Tea Party. They would like to adopt its audacity in order to “keep resisting”, they say. But—sadly—the Democratic Party does not have the appetite for resistance. It has already surrendered.

Hillary Clinton, with her husband, Bill, will attend Trump’s inauguration. The Democratic elite will follow their lead. Musicians who have refused to perform at Trump’s gala event have more guts than the Democrats. The Democratic leadership in the United States Congress has already suggested that it is willing to “work with” the Trump administration. It will not decline to cooperate, disrupt the nomination process for his Cabinet, or refuse to endorse his appointments for the local levels of the judiciary. Senator Chuck Schumer of New York, who will lead the Democrats, says that he will “hold Donald Trump’s feet to the fire” to make sure that he is accountable to the American electorate. Accountability is a low standard because Trump is already defining the terms for which he should be accountable. He pledged certain policies—many of them outlandish—in the campaign, and he would like to be held accountable to those promises. If that is all that the Democratic leadership plans to do, then it has decided not to offer substantial resistance to the Trump agenda.

Beware the Russian menace!

In the lead-up to Trump’s inauguration, all the talk has been on the Russian role in the presidential election. Television anchors hyperventilate over the hacking of the Democratic National Committee emails and the release of this trove by WikiLeaks in the weeks before the election. U.S. intelligence agencies, in a shockingly poor report released on January 6, argue that “Russian President Vladimir Putin ordered an influence campaign in 2016 aimed at the U.S. presidential election”. Putin, the U.S. intelligence agencies argue, “developed a clear preference for President-elect Trump”. What evidence was released to prove this was sophomoric (such as the role played by RT, the television channel, in giving prime time space to the libertarian and green parties, and by running stories critical of Hillary Clinton). Suggestions that the U.S. must respond to the Russian attack are legion. Senator John McCain, whose policy suggestion is always to go to war, argued that the U.S. should see this hack as an act of war.

That the U.S. has, for the past seven decades, interfered in elections across the world was not of any consequence. This is not hypocrisy but the outrage of the privileged. The Central Intelligence Agency (CIA), whose brand is synonymous with electoral interference through buying votes or assassination, now throws its hands up in dismay that the Russians would dare to assault the U.S. But even this outrage is specious. Apart from naming a well-known hacker, Guccifer 2.0, the report has no specifics. It does not even establish if these hacked emails actually influenced the outcome of the election.

It is more likely that the repeal of the 1965 Voting Rights Act by the U.S. Supreme Court in 2013 led to widespread suppression of the minority vote in key States such as Pennsylvania. The 2016 election was the first presidential contest without the Voting Rights Act. Evidence of voter suppression of minorities is plentiful. It just does not define the outrage. It is also more to the point to investigate the failure of both parties to tend to the severe economic malaise that has inflicted parts of rural and small-town America. The stagnation in that part of the country has fuelled forms of intolerance and bigotry that fester alongside drug addiction and general hopelessness. “White nationalism” masquerades as American patriotism behind slogans such as Trump’s “Make America Great Again”—make America, in other words, like it was before the Civil Rights Act of 1964. The key to Trump’s victory lay somewhere between the suppression of the minority vote and his crafty mobilisation of this “peasant revolt” in key battleground States. None of this is being investigated. For the Democratic Party, it is far easier to blame the Russians than to look deeply into the mirror.

A better world is impossible

Trump takes office with an agenda that could curdle milk. The U.S. Congress, controlled by the Republicans, will repeal the Affordable Care Act, sending tens of millions of Americans off the health insurance rolls. It will shrink the ethics office, making it difficult to investigate violations of basic norms by the government. Businesses will find that regulations, including labour and environmental regulations, will disappear or be weakened. Oil companies are sharpening their drill bits as Wall Street financiers are waiting to launch new Bespoke Tranche Opportunities (BTOs). Taxes will drop, particularly corporate taxes. None of this will guarantee the “return” of jobs to the U.S. Where labour is to be hired in large numbers, the chances are that businesses will do their hiring in low-income countries; within the U.S., hi-tech factories tend to employ as many robots as people. Trump’s “forgotten Americans” will remain forgotten.

But with his genius for propaganda, Trump will continue to highlight how he—personally—called a CEO and insisted that a factory remain in the U.S. Eight hundred jobs in Indiana at a Carrier plant, seven hundred jobs in Michigan at a Ford factory. These are statistically insignificant numbers compared with the 145 million workers in the U.S., and the 1.5 million people who lose their jobs in this market every month (many find new jobs, although the data show a slide in pay).

Trump will make these grand announcements, and the media will replay them as enthusiastically as Trump’s announcement of these achievements on Twitter. No general policy will be produced to tackle the acute underemployment and unemployment problem in the U.S. The magician will throw dust in the air and everyone will applaud.

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The New Democrats’ Addiction to Austerity Will Not Die

By William K. Black, January 16, 2017     Bloomington, MN

I know the Republicans are complete hypocrites about federal deficits and debt.  I know their dishonesty and faux deficit and debt hysteria, when a Democrat is president, harms the Nation and the world through the infliction of self-destructive austerity.  Austerity’s primary victims are the working class and government social programs for the poor and working class.  That means that the Democrats should never mimic the Republicans’ dishonesty, hysteria, and willingness to inflict austerity on the people of America and the world.

Cui Bono?

Unfortunately, the New Democrats embraced the economic malpractice of austerity with the passion of a convert.  Michael Meeropol, an economist whose work I respect greatly, has rightly chastised me for failing to explain that fiscal austerity produces enormous winners, not just losers, and that this fact helps explain why the economic malpractice of austerity is so common.  Austerity is a policy that aids the wealthy and harms the non-wealthy.  One of the greatest triumphs of the wealthy is to get vast numbers of the non-wealthy to fail to understand this point.   The New Democrats’ passionate support for austerity reflects the interests of its primary donors – Wall Street elites.

Austerity produces higher unemployment rates.  It can cause deflation.  It leads to cuts in public employment and funding for social programs.  High unemployment allows CEOs to force lower wages and creates a political climate in which CEOs are able to get legislation and rule changes embracing “labor flexibility.”  That phrase is a euphemism for making it easier for firms to fire workers without.  CEOs use high unemployment to induce an international race to the bottom on worker protections and wages under the pretext that doing so is essential for U.S. firms to maintain “global competitiveness.”

Deflation is a superb situation for (net) creditors.  They get repaid in a currency that is gaining value.  Deflation reduces interest rates, so the market value of existing long-term fixed rate debt instruments (bonds) can increase substantially.

Federal fiscal austerity could be implemented through tax increases, including tax increases on the wealthy and corporations.  But this would harm rather than aid the wealthy so it increasingly rare to see it done because it would harm legislators’ wealthy patrons (donors).

President Obama Embraced the New Democrats’ Desire to Inflict Austerity

President Obama famously told Congressional New Democrats that they represented his views.  Obama reluctantly agreed to a stimulus program that was considerably less than half of what economists knew was needed.  Even that inadequate stimulus spurred our (inadequate) recovery from the Great Recession and, unlike the eurozone’s austerity policies that through many nations into Great Depression levels of unemployment, the U.S. growth rate soon surged and unemployment rates fell.

Obama’s reaction to the meaningful success of (inadequate) stimulus was to abandon it and join the Republicans’ condemnation of stimulus.  In his January 27, 2010 State of the Union address he complained that when he took office he inherited “a government deeply in debt.”  The implication, which is false, is that the U.S. would be better off if there were no federal debt or at least dramatically less federal debt.  The U.S. would be worse off in either circumstance, for the alternatives – not winning World War II or having longer, deeper recessions – were very bad and the U.S. national debt causes no serious problems for our people or the people of the world.

Obama knew that was true.  In the same address he explained.

Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed.  (Applause.)  Two hundred thousand work in construction and clean energy; 300,000 are teachers and other education workers.  Tens of thousands are cops, firefighters, correctional officers, first responders.  (Applause.)  And we're on track to add another one and a half million jobs to this total by the end of the year.

The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act.  (Applause.)  That's right -– the Recovery Act, also known as the stimulus bill.  (Applause.)  Economists on the left and the right say this bill has helped save jobs and avert disaster.

Obama then admitted that recent U.S. expansions had been based on bubbles and scams.

We can't afford another so-called economic "expansion" like the one from the last decade –- what some call the "lost decade" -– where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was built on a housing bubble and financial speculation.

The politics of how Obama phrased this point are clear – he only wanted to talk about the last decade during which President Bush held power.  But Obama’s logic actually covered the last two decades and included both of President Clinton’s terms in which the supposed economic expansion “was built on a housing [and high tech] bubble and financial speculation.”  “Speculation” is Obama’s euphemism for elite financial fraud such as the Enron-era frauds (which grew large under Clinton but collapsed under Bush) and the three great epidemics of mortgage fraud by elite bankers that hyper-inflated the bubble and drove the financial crisis and the Great Recession.  Obama’s address repeated two of the New Democrats’ most destructive financial memes.

We need to make sure consumers and middle-class families have the information they need to make financial decisions.  (Applause.)  We can't allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

No, financial education of the 320 million of Americans up to the level of the Wall Street predators that prey on them is a preposterous answer that echoes the dishonesty of Milton Friedman’s “Freedom to Choose” nostrums.  We can never provide a Wall Street level of financial expertise to 320 million Americans, indeed, we cannot do so for one million Americans.  “Financial education” is the excuse New Democrats give for not regulating and prosecuting the Wall Street elites who run the frauds that devastate the global economy.  It puts the blame on the consumer and the small investor – if only you had educated yourself properly your pension fund would not have been defrauded by the cartel that rigged LIBOR.  Education has never worked and will never work against elite financial fraud – or VW or Takata’s frauds in the automobile industry.  Education about fish will not protect you from being defrauded by the common practice of selling filets of cheap fish that purport to be filets of expensive fish.

The crisis had nothing to do with “financial institutions” deciding “to take risks that threaten the whole economy.”  Humans take risks, not “institutions.”  Humans are, overwhelmingly risk averse.  The critical person who makes decisions about what financial institutions will do is the CEO.  CEOs frequently prefer what George Akerlof and Paul Romer aptly described in their 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit” as a “sure thing” rather than a “risk.”  Fraud, particularly accounting frauds that loot the bank they control, is a “sure thing.”  The behavior of bank CEOs who caused the massive losses that drove the crisis is not consistent with them being honest, rational gamblers.  It is consistent with the “recipe” for accounting control fraud.  Indeed, the bank CEOs used the same recipe in largely the same manner that their savings and loan predecessors had made infamous in the 1980s.  Akerlof and Romer said the fraud option would become highly preferable when the risk of prosecution appeared low.  Under Obama, the risk of elite bankers being prosecuted for leading the three epidemics of mortgage fraud that drove the crisis became nil.

The supposed economic successes of the Clinton years (and austerity) have been exposed as fictional.  The Clinton expansion was driven by the two largest bubbles in world history and the four greatest epidemics of elite financial fraud in history.  The first of these epidemics was the Enron-era frauds.  The other three epidemics of mortgage fraud began under Clinton, but blew up on Bush’s watch.  Bush’s “wrecking crew” was even worse than Clinton’s assault on effective regulation, so you should not feel sympathy for Bush.  The lost two decades have extended during Obama two terms of office.  Significant wage gains only began in the U.S. in 2016.  In particular, blacks and Latinos have suffered catastrophic wealth losses due to the fraud-driven financial crisis and the predatory for-profit schools.  Black and Latino households’ wealth losses have not been regained under the Obama recovery.  The top one-ten- thousandth of one-percent have been the massive winners in income and wealth under Obama.

Obama next flaunted his New Democrat colors, saying we needed to create trade deals to increase the number of U.S. jobs.  He portrayed the deals as unambiguously good for workers and jobs – with no losers.  He proposed nothing to help the millions of U.S. workers that could lose their existing jobs under the trade deals.

The 2010 presidential address was already a nightmare at that point, but it was at this juncture that Obama decided to channel his inner New Democrat dogmas and become a champion for the glories of austerity.  He went on at length, so I will reproduce the relevant passages to provide the context.  His signature metaphor and simile were not simply economically illiterate; they were knowingly false and exceptionally harmful to the American people, particularly the working class.  That means they Obama’s austerity plans were also a betrayal of the working class by the New Democrats, who had radically changed a party that once defined itself as the champion of the working class.  The consequences for the Democratic Party would soon prove horrific.  I’ll comment after each paragraph of Obama’s address on the joys of austerity.

Now, even as health care reform would reduce our deficit, it's not enough to dig us out of a massive fiscal hole in which we find ourselves.  It's a challenge that makes all others that much harder to solve, and one that's been subject to a lot of political posturing.  So let me start the discussion of government spending by setting the record straight.

Obama had just asked everyone for ideas about how to contain health costs, claiming he knew of no better way to do so.  Obama, of course, in his deal with the health insurers, had agreed not to adopt the most effective means of cost containment.  Here, he was disingenuous.

At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion.  (Applause.)  By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade.  Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program.  On top of that, the effects of the recession put a $3 trillion hole in our budget.  All this was before I walked in the door.  (Laughter and applause.)

Yes, good point – recessions produce large federal budget deficits.  Now explain that this is good – it is an “automatic stabilizer” that occurs without any need for new legislation or rules, so it acts far more quickly and reduces the length and severity of recessions.  Obama, of course, takes the opposite tack – a tack he knows to be a lie – and presents the growth in the deficit as a bad thing.  Note that he ignores the fact that President Bush inherited a recession that officially began in March 2001 at the start of his term so important parts of Bush’s earlier deficits were also the product of automatic stabilizers acting desirably.

But we should start with the budget surplus in 2000.  Obama portrays this as unambiguously wonderful, but he presents no basis for his implicit claim.  Every time the U.S. has run a substantial budget surplus it has been followed by a depression or the Great Recession.  That does not prove the surpluses caused the depressions and the Great Recession, but it certainly puts the burden on anyone trying to tout the desirability of running a budget surplus in the United States, particularly given the balance of trade.  Obama presents it as if it were axiomatic that any deficit under Bush was harmful, but presents no evidence that it was.

Now -- just stating the facts.  Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit.  But we took office amid a crisis.  And our efforts to prevent a second depression have added another $1 trillion to our national debt.  That, too, is a fact.

No, it is not a “fact” that “our efforts to prevent a second depression have added another $1 trillion to our national debt.”  It is a falsehood.  Had Obama immediately inflicted austerity rather than his modest and deeply inadequate stimulus our recovery would have been vastly worse.  The eurozone’s recovery was crippled by austerity.  If our recovery had been far worse, then the national debt would have risen by even larger amounts.  Why would Obama have “liked nothing more than to start bringing down the deficit” had he “taken office in normal times”?  We all know that is true because he is a self-proclaimed believer in the New Democrats’ failed dogmas, but what is his rationale?  The phrase “like nothing better” is meant to indicate that deficit reduction would be one of his highest priorities and that he would do so with great enthusiasm.  Why?  Would the U.S. have been better off in 2010 with austerity?  It would have been worse off.  As Obama moved toward austerity he slowed the economic recovery.  Had the Tea Party coalition not blocked his “Grand Bargain” with the GOP leadership the even greater austerity would have choked off the recovery and made Obama a one-term president.

I'm absolutely convinced that was the right thing to do.  But families across the country are tightening their belts and making tough decisions.  The federal government should do the same.  (Applause.)  So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

This is the metaphor from Hell.  It is a favorite metaphor of Jack Lew, who Obama would soon name his budget director and eventually his Treasury Secretary.  In January 2010, when Obama made this address, Lew and Treasury Secretary Geithner were Rubinites who were extreme deficit hawks even from the perspective of the New Democrats.  Geithner denounced stimulus as providing only a harmful “sugar” rush.  The “tightening their belts” metaphor violates the most fundamental macroeconomic truth in dealing with a severe recession or depression.  Lew is a lawyer.  Geithner has boasted that he took only one class in economics – and couldn’t understand it.  Rubin was not an economist.  Their austerity dogmas were the product of ignorance of economics, but what Rubin, Obama, Geithner, and Lew have in common is a devotion to the interests of Wall Street CEOs.

In a serious contraction, particularly one following a credit-driven bubble, consumers are worried about losing their jobs.  They begin to repay their debts and reducing consumption.  This is perfectly rational from their perspective.  CEOs react to the fall in consumer demand in an equally rational manner – they reduce output and spending on investments.  Banks are likely to constrain credit and try to build capital.  This too is rational.  The result is that there is inadequate demand and unemployment and business failures rise.  At the very time that demand is most inadequate and the need for spending on consumption and investment would be most helpful to the economic recovery, consumers and CEOs are likely to do the opposite.  Economists call this “the paradox of thrift.”

There is one entity that is an ideal position to do the opposite – to increase demand in response to a recession or depression.  This entity is not credit-constrained by bankers.  The entity is a government with a sovereign currency that borrows only in that currency and allows that currency to freely float.  The U.S. is such a nation.  It is critical that our federal government provide fiscal stimulus, in addition to the automatic stabilizers, to counter the recession or depression.

Obama’s metaphor is exactly the opposite of economic literacy.  If “families across the country are tightening their belts” then it is particularly essential that the federal government do the opposite – not “the same” – to counter the effects of the sharp fall in effective demand.

No, the federal government need not and should not “pay for the trillion dollars” you spent on stimulus (and, the federal government did not spend a $1 trillion on stimulus).  If you “pay for” the stimulus by austerity you will harm the recovery and the people of America and likely increase the ultimate debt.  Economic growth is the key to deficits and debt of a sovereign nation.

Starting in 2011, we are prepared to freeze government spending for three years.  (Applause.)  Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected.  But all other discretionary government programs will.  Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't.  And if I have to enforce this discipline by veto, I will.  (Applause.)

Count the number of times New Democratic dogmas drew applause.  First, particularly given Obama’s increasing embrace of austerity, but also given the terrible scale of the Great Recession, 2011 was far too soon to even be thinking of inflicting austerity on the Nation.  The results were sure to slow the recovery and harm Americans.  That is what happened.

Second, this is the paragraph that presents Obama’s simile from hell about austerity.  “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.”  The simile is a variant on the economic illiteracy of Obama’s metaphor from hell.  Yes, families are “cash-strapped” when a credit expansion leads to a Great Recession.  Families’ incomes and wealth drop as the stock market tanks and their homes lose market value.  Families react to seeing neighbors losing their jobs and their homes by decreasing consumption.  Families see credit being constrained by banks’ tighter credit policies.  Families see interest rates fall sharply on their savings accounts, further reducing their income.  It is precisely because families are “cash-strapped” and fearful of further losses that they reduce their consumption – exacerbating the already inadequate demand and deepening the Great Recession.

The United States government is not – and cannot be except through self-inflicted insanity such as austerity and debt limits – “cash-strapped.”  The U.S. creates cash.  The U.S. can be resource constrained, but not cash or credit constrained.  The U.S., with debt levels that Obama is about to describe in his address in histrionic terms, was able to borrow essentially unlimited amounts of money at interest rates near zero.  (More to the point, the U.S. does not have to borrow its sovereign currency because it makes its sovereign currency.)  These facts explain why Obama’s logic is reversed – it is essential that the U.S. not act as if it were “cash-strapped” in response to a Great Recession.

Third, Obama adds to his inanity by promising to be more of an austerity hawk than Republican legislators and “veto” any bill that would address a growing problem, such as the Zika virus becoming epidemic through increased government spending.  This is mind-numbingly stupid as a policy, and the rationale Obama offers for the stupidity rests solely on an economically illiterate simile.

We will continue to go through the budget, line by line, page by page, to eliminate programs that we can't afford and don't work.  We've already identified $20 billion in savings for next year.  To help working families, we'll extend our middle-class tax cuts.  But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year.  We just can't afford it.  (Applause.)

Getting rid of programs that do not work and cannot be fixed is a good thing.  But we can “afford” anything that does not produce a serious constraint on real resources needed elsewhere in more critical applications.

Now, even after paying for what we spent on my watch, we'll still face the massive deficit we had when I took office.  More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket.  That's why I've called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad.  (Applause.)  This can't be one of those Washington gimmicks that lets us pretend we solved a problem.  The commission will have to provide a specific set of solutions by a certain deadline.

What is the point of Obama calling the federal budget deficit “massive”?  Yes, it is a huge number.  The Great Recession officially began in the fourth quarter of 2007.  The automatic stabilizers began to kick in almost immediately and greatly reduced the length and severity of the Great Recession.  Indeed, it officially ended in the second quarter of 2009 shortly after Obama took office – and well before his stimulus program could take effect.  The dates on which recessions begin and end is a technical matter that is inherently decided after the fact.  It does not mean that the economy was doing well before the official onset of the recession or after the official end of the recession.  Indeed, it is typical that the economy was doing very badly before and after the official start and end dates of the recession.

The point is that a huge portion of the Bush deficit that Obama inherited was the product of the automatic stabilizers working well to limit the depth and length of the Great Recession.  That was a good thing.

Obama’s “fiscal commission” was an obscenity.  It was a creature of Pete Peterson, the Wall Street billionaire whose greatest dream is privatizing Social Security.  Obama stacked it with pro-austerity officials.  Despite this fact, the commission failed to reach the super-majority required under its own governing documents to make recommendations.  The co-chairs, two infamous deficit fanatics, ignored the commission’s own governing documents to present their recommendations.  In this article I do not address the supposed crises in the safety net.  Again, the short answer is that the meaningful constraint is real resources, and the safety net does pose any serious risk of causing a constraint in real resources.

Now, yesterday, the Senate blocked a bill that would have created this commission.  So I'll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans.  (Applause.)  And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s.  (Applause.)

In the last sentence Obama shows he is among the most extreme of the New Democrats in his embrace of austerity.  First, the “record surpluses in the 1990s were built on the non-foundation of the two largest bubbles in history – the dot.com and housing bubbles.  Second, the record surpluses set the stage for the Great Recession.  As I noted, prior federal budget surpluses were followed closely by depressions.  Third, “pay-as-you-go” is an example of mindless austerity.

Now, I know that some in my own party will argue that we can't address the deficit or freeze government spending when so many are still hurting.  And I agree -- which is why this freeze won't take effect until next year -- (laughter) -- when the economy is stronger.  That's how budgeting works.  (Laughter and applause.)  But understand –- understand if we don't take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

Ah, a completely unfunny attempt at a joke.  I’d like to start austerity now, but the legislative process takes time so I won’t be able to inflict austerity on the American people until next year.  It’s a dumb, not funny line for multiple reasons.  Tens of millions of Americans were guaranteed to be “still hurting” in 2011, when Obama threatened to begin inflicting austerity.  Austerity in 2011 was guaranteed to be a self-inflicted wound.  The Democratic Party should be a party in which every congressional member (not “some”) reject inflicting austerity when tens of millions of Americans are in agony as a result of the Great Recession and unemployment rates and rates of leaving the work force are high.

The last sentence of the paragraph is even worse for every argument it makes is a lie.  Stimulus was a huge gain to our “economy.”  Stimulus did not “increase the cost of borrowing.”  Austerity did “jeopardize our recovery” – reducing job growth and family income.

From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years.  (Applause.)  That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again.

Obama proposed to “make fewer investments in our people” – that is precisely what austerity did.  It is not true that Bush’s elimination of “more regulations … helped us into this crisis.”  It was Clinton that eliminated key financial regulations.  More importantly, it was the combination of Clinton and Bush that desupervised finance – desupervision proved to be far more destructive than Clinton’s deregulation.  Bush’s earlier deficits had nothing to do causing the crisis.  His deficits once the economy slowed and then went into the Great Recession were the product of the automatic stabilizers and they “helped us” out not “into this crisis.”

Rather than fight the same tired battles that have dominated Washington for decades, it's time to try something new.  Let's invest in our people without leaving them a mountain of debt.  Let's meet our responsibility to the citizens who sent us here.  Let's try common sense.  (Laughter.)  A novel concept.

“Common sense” is not common.  People extrapolate to the federal government what they know best – the nature of the household and its budget constraints.  They desperately need the President of the United States, the Treasury Secretary (Geithner), and the soon-to-be-appointed head of the Office of Management and Budget (Jack Lew) explain why the federal government is not remotely similar to a household when it comes to constraints and why that means the federal government has the unique ability and moral duty to use fiscal stimulus and serve as the employer-of-last-resort to reduce the severity and length of recessions and provide full employment to all those willing and able to work.

The NYT Resurrects Its Love for Austerity

On January 9, 2017, the NYT’s op ed guy who spent his summer attacking Bernie Sanders and praising Hillary Clinton turned his sights on Donald Trump and congressional Republicans in a piece entitled “The Betrayal of Fiscal Conservatism.”  That is his euphemism for austerity.  He began his ode to austerity with this assertion.

The label of “fiscal conservative” used to mean something.

It referred to people — mostly Republicans — whose top priority was the health of the federal government’s balance sheet. They favored a small deficit, or no deficit at all.

He is writing in 2017, when even the IMF admits that stimulus was a success and austerity a failure.  We can observe the difference in growth between the eurozone, which mandates austerity, and the U.S. where even a grossly inadequate stimulus program produced far superior growth.  But none of this penetrates this writer who so loves the New Democrats’ ever present desire to inflict self-destructive austerity on Americans, particularly the working class.  What could go wrong?

A federal budget is not “health[y]” when it is in surplus and sick when it is in deficit.  A federal budget deficit due to the automatic stabilizers’ powerful response to the Great Recession is a sign of health.  An even larger (short-run) budget deficit through a stimulus program is an even greater sign of economic health that should be celebrated.  People who seek to inflict austerity on the people in such circumstances are not “fiscal conservative[s].”  They may be well meaning, but ignorant of economics.  However, as I explained in response to Dr. Meeropol’s chastisement of my failure to note who wins under austerity, they may want to enrich their wealthy donors and themselves.

Why would a NYT op ed celebrate Republicans “whose top priority” was austerity?  The “top priority” of members of Congress should be the welfare of Americans, particularly the non-wealthy.  Austerity is not a logical goal of a nation with a sovereign currency, much less its “top priority.”

The NYT op ed ends with this obscenity.

The original meaning of “fiscal conservative” may be gone. In fact, Democrats have had a better claim on the label in recent years than Republicans. But it’s important to remember that the concept is as legitimate as ever. The United States does indeed face a long-term budget deficit that eventually will require a solution, and cuts to government spending almost certainly need to be part of that solution.

So the next time that you hear a politician describe himself or herself as a “fiscal conservative,” I recommend deep skepticism. But I also hope that Washington one day has more real fiscal conservatives than it does today.

Yes, New Democrats are far more consistent proponents of inflicting austerity on Americans, particularly the working class, than are Republicans – and that is a travesty.  The NYT op ed was written after Trump’s election driven by the wholesale rejection of the New Democrats’ agenda by the white working class.  The New Democrats have learned nothing from that defeat.  They continue to push the message of Wall Street and the wealth – the infliction of self-destructive austerity – as their defining mantra.  They continue down the disastrous path that Tom Frank has been warning them about for over a decade.  (Yes, I know that Trump will continue to betray the white working class.)  We desperately need a “Washington” and a political party in which no official buys the Wall Street dogmas favoring austerity.  Austerity is to economics as bleeding a patient is to medicine.  Among the last things that “Washington” needs is to have “more” Wall Street sycophants pushing austerity “than it does today.”

And no, “cuts to government spending” are not “almost certainly” essential in the “long-term.”  Growth is what is essential, and austerity is the great enemy of American growth.  Clinton’s “growth” was not the product of austerity and it was not real.  It was the product of the two largest bubbles in history.  The U.S. had far higher deficits relative to GDP in and after World War II.  Does anyone think austerity was the proper answer to Hitler, the attack on Pearl Harbor, or the Great Depression?

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