We're Doing It Wrong

Chapter 9 Mile

Detroit is bankrupt. Or not. Or it is. Regardless, the city that provided the American Dream's 20th century engine has fallen victim to the 21st century version. By now you've likely heard most of the stats: it was the 5th most populous city in America in 1950 with over 1.8 million (and only a couple hundred thousand short of 3rd), today only about 700,000 remain, nearly a quarter million have left in the past decade alone; half the parks have closed since 2008; 78,000 vacant structures and 60,000 vacant land parcels; 40% of the streetlights are out and the city has just 36 ambulances, of which generally no more than 14 are in operation at any given time, and there about 12,000 fires a year to go along with the highest violent crime rate in the US (why not bust a cap in someone's ass for a few bucks when you can get a pizza delivered faster than it takes the cops to respond, about 58 minutes compared to the 11 minute national average and only 8.7% of the cases are solved compared to 30.5% nationwide); tax collections are down 20% over the past five years and the official unemployment rate stands at 18% which is misleadingly low as less than half of those over 16 are actually working. Oh, and there's $18 billion in debt growing by a few hundred million a year. You know the script by now, cue the neoliberal-agenda-advancing blame game chorus of big government, corrupt politicians, greedy unions and gold-plated pension plans because, as we know, this is an isolated incident that the free market will clean up with its invisible hand, just another black swan, nothing that even an awful Hollywood movie could've predicted:

Er, you mean..., no, it can't be so simp..., seriously? ROBOCOP 2! It couldn't have at least copied the script from the original? Is it really just a transparent attempt to sell off what remains of the commonweal and maybe establish an Ayn Randian tax-free "commonwealth" for our modern day John Galts on Belle Isle selling citizenship at $300,000 a head in hopes of becoming a 'Midwest Tiger' to compete with the Asian Tiger of Singapore? Wait, no, this just seems like a thinly veiled attempt to impose an anarcho-capitalistic future on all of us, after all, $37 million, that's just monopoly money, Omni Consumer Products (OCP) doesn't really exist and we all know there's no such thing as robocops to come and save the day! Alas, that's the point, science fiction isn't meant to read as an instructional manual but a warning. The dream has become a nightmare we must wake from and realize that Detroit is but a microcosm of the defunct American model that celebrates profitability rather than society, individuality over solidarity and conformity but not equality. Otherwise, they'll keep turning up the heat by adding zeroes to the bill, turn OCP into an acronym for Oligarch Controlled Polity while their semi-autonomous drones circle the skies keeping us in line.
 
What's Going On? First off, there is a lot of blame to spread around and it's easy to get lost in detail and fail to separate cause from effect, especially as so many of the latter are easily packaged and sold as the former. Corrupt politicians such as Kwame Kilpatrick taking kickbacks or a city run by a one-party government sure look like causes, but they're not. Even the more obvious culprits such as the '67 race riots and the resultant white-flight or the cities susceptibility to disaster due to the lack of economic diversity that comes with being a one-industry town were nothing but manifestations of the root of the problem. Ditto the city's 60% poverty rate for children and the 50% of the population reported to be functionally illiterate. No, we've gotta go way back, maybe not as far as Adam Smith or David Ricardo as it isn't capitalism itself we need to castigate nor even to Henry Ford's first assembly line to find the cause of Detroit's decline. It might seem a bit unfair and facile but let's simplify things and point the finger at poor old Simon Kuznets and his work developing the first comprehensive set of measures of national income, what we know today as GNP and GDP.

Wait, bear with me a moment as not only will it take at least that long to explain how something as mundane and seemingly practical could be the cause of Motown's meltdown but the reality is Simon saw the great danger of his work from the get go and therefore seems a very good place to start the explanation. In his first report to the US Congress in a section titled "Uses and Abuses of National Income Measurements" he warned:

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

Pretty prescient stuff for an economist. Unsurprisingly, we failed to heed his warnings and this one number (well, two, GNP and GDP are different) and more specifically making sure it's constantly climbing has become the primary purpose of public policy. In fact, as economics and finance have come to completely rule our lives it's become an unhealthy obsession, the disease of our civilization.

Again, we need to pause and explain ourselves. Growth is good up to a point; there is no denying that life has been improved for billions thanks to the benefits accrued by advancements owed to growth. However,  we need to ask ourselves what is the point of growth if not to improve our quality of life? Now, there's a tricky term, "quality of life", how to measure growth against something so seemingly subjective? Living standards quickly devolves to "material living standards" and how many iPads everyone has. Happiness? Sounds good, but tough to quantify. Satisfaction? Ditto. All equally slippery. So let's start simple and graph the relationship of life expectancy versus per capita GDP in various countries. (More complete country chart can be found here.)

The first thing that jumps out is the near vertical rise on the left side as life expectancy quickly rises along with GDP. However, it's hard to miss the diminishing 'bang for the buck' we get from raising GDP, to the point that it seems to not have much effect after as little as $10,000 per head, hello Costa Rica. Interesting but so what, right? Well, we were originally trying to find the cause for Detroit's demise, but this is our first peek into the likely cause of not only the troubles there plus in Greece, Stockton, CA, Portugal, Jefferson County, Al, , Cyprus and those to come from Baltimore to California to Italy but also into what ails much of the west as efforts around the world for the past 75 years have focused on one thing: increasing GDP.

Superstition

Us humans are amazing in so many ways but one of our biggest failings is the inability to let go of strongly held beliefs, especially when they've explained so much, and worked so well, for so long. GDP and economics is no exception as cognitive dissonance and groupthink combine to create blind spots. Especially in America where after first beginning to recover from the Great Depression and then emerging virtually unscathed from World War II to find itself the only running engine to power the world's economy, GDP continued marching upwards. A key to remember at this point is that much of this period of strong growth coincided with a huge reduction in income (and wealth) inequality as much of the fruits of growth was spread from the penthouse executive board room to the basement boiler room. Also worth noting are the words of the foremost economist of the era, John Maynard Keynes, who upon seeing the tremendous opportunities made possible by growth, predicted that the working week would be cut to perhaps 15 hours a week, with people choosing to have far more leisure time as their material needs were satisfied. Incredibly, his optimistic prediction that (material) living standards in "progressive countries" would be between four and eight times higher was made in 1930, a year into the Great Depression! Sadly, this latter prediction has proved true (living standard in developed western economies will have risen about eightfold by 2030) while the former has fallen flat on its face.

You're probably wondering what all this has to do with Detroit, right? One word, hyphenated or not, like Jay Z: neoliberalism. It has not only robbed us of real progress but also ensures there will be many more Detroits and Greeces to come. See, growth, like so much that tastes good at first but eventually turns poisonous, became addictive. All was good up to the 1970s when the United States' unchallenged position as the colossus of the capitalist world came under assault. Rising international competition (read: Japan) as other nations had finally recovered their industrial base after the war coupled with multiple oil shocks as the Arab world awoke to the rape of their resources in return for peanuts led to declining productivity and profitability along with rampant inflation and unemployment, stagflation. Oh, there was a little war they lost too. The corresponding loss in confidence in the dollar also forced Nixon to end its convertibility to gold and take the world into the little understood world of fiat currencies. About the same time as growth seemed to be stalling, the Club of Rome's The Limits of Growth was making Malthusian claims on the unsustainability of infinite growth. The US was ripe for a revolution and they got it in neoliberalism.

The popular myth is that Ronald Reagan and Margaret Thatcher rode in to save the day. Of course they were nothing but marionettes and we all know that a marionette's puppeteer is called a manipulator and so it should come as no surprise that they also manipulated us. From neoliberal prophet Friedrich Hayek and his Mount Pelerin Society the poison oozed through Milton Friedman into the University of Chicago to spill out into the world via thinktanks spewing propaganda to be transmitted by their media lackeys and forced onto the rest of the world by the IMF, World Bank and WTO. America has the Heritage Foundation, the Cato Institute and the American Enterprise Institute while the UK's versions include the Adam Smith Institute, the Institute of Economic Affairs and the Centre for Policy Studies founded in 1974 by Thatcher's mentor, Keith Joseph. Despite their benign sounding names, these are radical organizations with almost nothing to do with the likes of Adam Smith who understood something about Moral Sentiments and the dangers of private monopolies and everything to do with Hayek, Friedman and Rand and their belief in extreme individualism or social Darwinism. Freedom could only be achieved through economic liberalization meaning free trade, privatization, deregulation and relying on markets to provide public services.

No party on either side of the Atlantic has a monopoly on this evil. Democrat Jimmy Carter began the deregulation of the banking and transportation sectors. His party's Bill Clinton tag teamed with Labour's Tony Blair in devising the "third way" in a failed attempt to reconcile neoliberal economics with a commitment to social justice. This was always just smoke and mirrors to fool the unwashed masses as neoliberalism is inimical to the public good as it is always secondary to the market, an ideology wedded to the belief that the market should be the organizing principle for all political, social and economic considerations. As the benefits of citizenship are allocated on the basis of perceived economic utility to the state, corporations are considered the primary citizens while individuals are seen as consumers first and citizens second, peripheral ones at that. Corporations and those in the 1% are portrayed as job creators while the bottom 20% are framed as economic leeches siphoning off financial benefits they don't deserve when it is the opposite that is true as economic policy is designed to distribute wealth upward. Tax breaks and subsidies for corporations and the wealthy are called market incentives while benefits to the poor, aged or disabled are framed as entitlements. However, rather than withering away, as neoliberal theory would have it, the state has instead grown as it plays an active role in the introduction, implementation and reproduction of neoliberalism.

The Tracks Of My Tears
Yeah, yeah, you're still wondering what all this has to do with Detroit going from being the city with the highest median income to bankruptcy in half a century and what it means to America and the rest of us. History has already been rewritten to tell us high wages and benefits were Henry Ford's idea when in fact they were fought for and won through struggle and solidarity. World War II had cemented Detroit's industrial importance as the Arsenal of Democracy and it seemed a place which was proof of capitalism's ability to generate and maintain a large middle class. The illusion was short-lived as jobs were already flowing out of the city to the suburbs in the 1950s just as the migration of African Americans to the city was increasing, lured by the promise of freedom and opportunity denied to them in Jim Crow's last, desperate days. Instead they were welcomed by white flight, residential segregation and deindustrialization; rising racial tension, ghettoization and joblessness was a recipe for disaster which erupted in the 1967 rebellion. In addition to dollar loss this of course kicked white flight into high gear resulting in the loss of much of the city's tax base. Throw in the oil shocks of the early 70s and their influence on changing consumer requirement and the failure of the auto industry to adapt and you had a city that needed a saviour but instead got no succour.

It's no coincidence that Detroit's decline coincides with that of America as the US had the most wealth for the parasite of neoliberalism to feed off and Detroit was its richest and most vulnerable city. Back in 1960, GM was not only the city's but the nation's largest employer and paid an average hourly wage of $50 in today's dollars, including health and pension benefits; today Walmart has assumed the mantle and pays $8.81 and a third of the workers work less than 28 hours a week and don't qualify for benefits. The ratio of CEO-to-worker pay has ballooned more than 1000% since 1950, from around 20 to 1 to over 200 to 1 (1,795 to 1 at JC Penney). Not only that but the highest tax rate faced by those CEOs was 91%; today it's under 40%. It was those CEOs at the big 3 who made the decisions that sped the demise of Detroit (GM’s Geo Metro 40 miles/gallon for $9,740 in 1991; today GM offers the Volt for $39,145 that requires you to plug it in AND put gas in it to only get 37 miles/gallon) aided and abetted by the neoliberal policies of maintaining short term growth at the cost of long term prosperity. Specifically, it was the financialization of the economy, the pursuit of 'free trade' policies and the war on drugs which sealed the fate of the city.

Neoliberalism is predicated on decreasing the individual's reliance on the state thus increasing their initiative to pull themselves up by the bootstraps. The problem is it is impossible for those mired in poverty to do this when they don't even have any shoes - ie. education, healthcare, adequate nutrition, employment opportunities. Meanwhile, those with closets already overflowing with footwear have their shoes shod whenever they need it. Er, let's try to explain that a bit better starting with the election of Ronald Reagan and the belief that income inequality was a prerequisite to growth. Not only was it seen to provide incentive to work harder but it raised the savings rate at the top and as the rich have a lower marginal propensity to consume than the poor it would therefore accelerate investment. Additionally, demand for new products almost always emerged from among the rich and it was them alone who could afford the cost involved in research and development thus enriching them should augment innovation. In 1981, the Budget Reconciliation Act along with the Recovery Tax Act introduced across the board tax cuts favoring the redistribution of income to the rich, deregulated monopolistic industries and began the war on the poor by reversing many of the social gains made over the previous 50 years. The shooting war, however, came with his war on drugs.

War (What's it Good for?)
Sometimes numbers are staggering enough on their own and require no explanation. When the explanation is every bit as distressing, well, then you've got the American prison industrial complex. Only China comes close to the US in prison population and only Russia approaches them in percentage of the population incarcerated. Though only comprising 5% of the world's population, the US has 25% of the world's prisoners, about 1% of the population is trapped in the system and the total number has increased 700% since 1970. Yes, it's been a booming industry that's seen $300 billion spent since 1980 to expand the prison system. Not only does it provide employment for the gatekeepers, it reduces the eligible workers counted in the unemployment rate. The poor, worth almost nothing to our corporate masters on the streets, can generate revenues of $30-$40 thousand a year behind bars. Unsurprisingly, almost half of federal prisoners are in for drug related offenses. The bipartisan love of war is illustrated by Clinton's signing of the crack cocaine sentencing guideline bill which targeted the poor black community by making crack cocaine convictions exponentially longer than those for powder cocaine. It gets even worse when you realize it was the CIA who introduced crack into inner-cities to fund waging war in Central America. Prison privatization has brought the market into play with the law while prison labour is a pretty attractive alternative for those looking for a, um, captive work force.

We shouldn't ignore that more traditional method of sacrificing the money and lives of the poor for the glorification and enrichment of the wealthy. Much like neoliberalism, the idea that war is good for the economy and therefore beneficial is a societal sickness that has been perpetuated by myth makers who mysteriously profit from this delusion. Here we should pause once again to consider the suicidal tendency involved in believing that GDP growth is a good thing. Did you know for example that the Gulf of Mexico oil spill added about $300 to the average Americans income? The bloated prison system adds about $125. The US medical system isn't the most expensive in the world (while getting worse results than most of the 'advanced' economies) because they like having millions die for lack of basic care (we hope), but because it adds more zeroes to the bottom line and GDP. Add in a bit of conspicuous consumption, insanely priced education and the trillions wasted on war and suddenly it's pretty easy to understand why even though the size of the US economy has doubled since 1970, overall well-being has declined. Reagan pumped up the gravy train flowing from the public to the private purse, Bush the elder began the family tradition of bombing Iraq, Clinton, though he oversaw a reduction in military spending still indulged in some explosions, Dubya, yeah, he almost doubled the amount spent to kill people and Obama has put a smiley face on murder by remote control.

Signed, Sealed, Delivered
It was Bush the elder who got the NAFTA ball rolling and kept the Uruguay Round of trade talks alive but it was Clinton's signature that brought NAFTA and the WTO to life and sealed Detroit's doom. The agreement turned North America into a 'free' trade continent which Clinton promised would promote "more growth, more equality, better preservation of the environment, and a greater possibility of world peace". Oh, and it would create 200,000 jobs. Well, he was only a little over a million off as a report by the Economic Policy Institute documented that 879,280 jobs were "displaced" due to the deal. Thanks to it and other free trade deals pushed on the public to promote growth, the exciting game of labor arbitrage has been played for the past few decades, a game always won by big business as profits are padded at the expense of labor as salaries are slashed and jobs outsourced. While employment protections are rarely included in these deals, NAFTA provided a template for investor protections which effectively remove sovereignty from signing states.When you wonder why neither the public nor your government can ban Monsanto crops to prevent the loss of agricultural diversity or Bayer from killing the bees we depend on for pollination or Chevron from poisoning the water table by fracking you'll be sure to find a clause in one of the corporate written free trade deals one of your governments sold to you as necessary for economic growth.

As mentioned a few hundred paragraphs above, it's rarely those on the throne making the decisions; therefore, its the stories of those who do that make for the grist in this modern day cautionary tale. Clinton's Secretary of the Treasury Robert Rubin was one such Grima Wormtongue. Time Magazine would have us believe he was part of the Committee to Save the World (that's him on the left) when his face should have instead been pasted on a wanted poster. See, the crowning blow in this whole story was the financialization of the economy, a process that has allowed the illusion of economic growth to continue by simply feeding off existing wealth and borrowing from the future. For his service in the creation of the TBTF, TBTJ (too big to fail, too big to jail) bank, he was paid $126 million by the same financial institution whose very existence his policies made possible, Citigroup. Clinton's signing of both the Rubin championed Gramm-Leach-Bliley Act which repealed Glass-Steagall which had kept gambling separate from banking, and the Commodity Futures Modernization Act which prevented the regulation of financial derivatives delivered the coup de grace for Detroit and the rest of us leading us as they did directly to the 2008 financial crisis.

A spike in prices at the pump killing demand for the SUVs that had temporarily saved them combined with the financial crisis bankrupted two of the three Detroit automakers, GM and Chrysler. The same crisis collapsed the Ponzi scheme run by banks that relied on a constant stream of new mortgages to be bundled and securitized and left millions homeless. As this predatory lending targeted African Americans, both Detroit and its residents were among the hardest hit. With an ever-shrinking tax base to support an immutable city infrastructure, budgetary problems have plagued Detroit for the last 20 years. Besides a brief respite in the mid-90s when it was falsely believed that new casinos and stadiums could reverse the city's fiscal problems, the city has been burdened with a junk debt rating. In an attempt to balance the budget, the combination of rising taxes and cuts in services drives out residents and businesses while the erosion to basic social services leads to a drop in home values and rising crime. Desperate politicians become an easy mark for the wizards of Wall Street who seem to offer a way out, and besides, when the bills come due they'll most likely be out of office. While the sheer audacity of the fleecing of Detroit is dwarfed by that of Alabama's Jefferson County bankruptcy tale courtesy of JP Morgan, Detroit could have done without a $2.7 billion bill for borrowing $1.4 billion in 2005 thanks to bankster interest rate swaps and derivatives.

Here's where the morality tale gets good. This financing deal was needed to fill a gap in the city's defined benefit pension funding, the kind that provide a guaranteed annual income after retirement. Public employees paid for those pensions with lower wages while working; n other words they accepted less then to get some later. But get this: governments consistently underfund their pension plans. In Detroit, the gap's about $3.5 billion, but nationwide all levels of government are about $1 trillion short. Not so bad, as Paul Krugman would have us believe, until you consider to come up with this figure necessitates an 8% average return on invested pension assets. D'oh! Not that whole growth thing again. It gets worse. Listening or reading to much of the MSM hype (always stating the $9.2 billion shortfall which includes unfunded health care obligations) one could easily get the impression that there is a movement afoot to convince the public these pensioners are greedy bastards who don't deserve a dime. The bankruptcy process will determine which creditors get paid back and in what order, pension plans justifiably fear they may fall to the bottom of the pile, because you know, society thinks giving $19,000 a year to someone who picked up garbage his whole life isn't as important as paying off banks and hedge funds.

There's the rub. It's true. Go read the comment thread on any article about the Detroit bankruptcy and you'll soon see that Joe Sixpack has been convinced that bailing out banks is/was good as they add to the economy while pensioners are bad as they subtract. They wouldn't consider the continuing bank bailout, as in the quantitative easing program that sees the Fed give banks $85 billion a month in interest free green pieces of paper in exchange for other pieces of paper, could pay off Detroit's debt four times over each month. Nor do they see anything bizarre about a city entering bankruptcy subsidizing a billionaire's hockey team's arena that will see the city pick up almost half of the $650 million tab because corporate welfare is called market incentives and I'm sure that the money sucked out of schools, parks and you know, quality of life things to build Ford Field for the Lions and Comerica Park for the Tigers in the past dozen years has worked out great; a bunch of spanking new stadiums for those who fled to the suburbs and therefore not paying for them  to come in to the city and enjoy while the only chance to see the inside for those paying for them will be if they're selling foam fingers and foamy beers.

Money (That's What I Want)

The press reports unemployment is falling, which is true, but the warped measurement is meaningless as employment isn't rising enough to even keep up with population growth. It's not just an insufficient number of jobs, it's the kind of jobs being created; the low-paying, menial, dead end sort without any benefits. In fact, 60% of the jobs lost during the recession were classified as mid-wage while 58% of the job gains since are low-wage. This wage suppression is great for companies like WalMart who get to have their workforce subsidized by the government as most of their worker earn so little they often qualify for government assistance; tax payers pay on average almost $1 million per store. All this means wealth is flowing up at an ever-increasing rate; 121% of the income gains since 2009 have gone to the 1% (yes it's possible as they've scooped a portion of the rest of the population's pie) while corporate profits are at all-time record levels and wages are at all-time lows. Zooming out from America, the wealth gap between countries is also widening, globally the richest 300 people own more wealth than the poorest 3 billion; the richest 1% have accumulated some 43% of the world's wealth, while the bottom 80% of the planet's inhabitants have just 6% between them. Guess which group is stashing up to $32 trillion in tax havens, effectively removing wealth from circulation.

Cognitive dissonance seems to be hiding the realization that the American Dream is dead, at least in the old idea of each successive generation living better than the previous. This is because neoliberalism is great at pumping up bubbles upon which the rich float while the rest sink with the pop; it's no longer true that a rising tide lifts all boats. Privatization, deregulation, globalization, robotization, computerization and financialization have transformed western capitalism from industrial to financial. In other words we've moved from a system which produced nothing in itself but derived profit from the value created by the exploitation of labour to a system that simply squeezes profit out of existing assets. The former system was able to thrive using the old panem et circenses gambit but with the latter, present system, eventually they'll be no more crumbs to toss to the masses. Suicide rates are already skyrocketing among baby boomers as economic insecurity pushes people over the edge and now their pensions are being circled by the sharks. Meanwhile the young face the choice of fighting for a job at McDonald's or going to university so they can add to the $1.2 trillion in student loan debt and cross their fingers they can get an unpaid apprenticeship position when they're done.

Instead of realizing we're all in this together though, those manipulating puppetmasters will pull our strings using the old techniques of, among many others, media manipulation (I'll scratch your back if you scratch mine), fear (terrorists!), divide and conquer (it's those greedy unions and pensioners!), patriotism ('Murica, F#ck Yeah!) and of course debt servitude to maintain control of the flock. Lockeed was bailed out because they build stuff to blow people up, Chrysler's been bailed out a couple of times, GM once, they build Godcars don't you know, the airlines had to be because of, you know, terrorism and the banks, well, without the banks, we know the whole world as we know it would have ended. What about New York City's bailout in 1975? Well, that's different than Detroit, because, well, it would create moral hazard this time, or something. What's that? What about Mexico? No, they didn't bailout Mexico in order to save face after NAFTA was signed, did they? Yep. But not Detroit.

ABC
Solutions? Well, there's a few out there. The first step, however, is the realization that we're doing it wrong. An economy based on debt (issued by bankers, not government) inevitably collapses on itself. Henry Ford himself said "[i]t is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning". New money is continually lent into existence at the push of a button so that existing debt can be repaid, but by necessity there is always more debt than money to pay it back. The dog chasing his tail leads to the need for infinite growth, an impossibility on a finite planet thanks to our enemy of diminishing returns, entropy. We've got to realize we already have enough known oil and gas reserves to kill ourselves and stop exploiting tar sands, shale gas and the Arctic. We need to refuse to pay a 280,000% markup for our most important resource, water. The purpose of economic policy shouldn't be to stimulate growth but to facilitate life. A transition to a steady state, non growth economy must eventually occur, the question is do we want to move that way gradually of our own choice or have it (or far worse) foisted upon us by the inevitable collapse of the system.

Alternatives to the constant drum beat of growth have been proposed such as Bhutan's Gross National Happiness, the New Economics Foundation's Happy Planet Index, and the Social Progressive Imperative's Social Progress Index. No growth or steady state economic policies need to be explored if we want to get off our suicidal treadmill. Perhaps once the US has been knocked off its perch atop the global GNP rankings by China sometime in the next decade we'll finally de-emphasize its importance. The chant of 'We're #2!" just doesn't have the same allure. America will still lead in such prestigious areas as anxiety disorders, obesity (well, Mexico might have passed them), incarceration rates, small arms ownership, health care cost, and energy use. Huh, taken together with the other effects of Detroit's problems mistaken for its cause, such as that 50% literacy rate and other societal diseases prevalent in America, one can make a case for simply finding a way to better spread the wealth than grow it. It seems we should take a lesson from the extreme wealth of Bloomfield Hills and Grosse Pointe and extreme poverty of most of Detroit co-existing in an urban metropolitan area. Yes, in fact if I remember right there's a chart that shows the relationship between income inequality and an index of health and societal problems constructed by a couple of epidemiologists. Yeah, perhaps we should look at this a little closer, or maybe we'll save that for next time.

P is for...

Protectionism. And Poland and Poznan, where I call home these days. While waiting for the tram the other day I noticed an ad for a popular magazine in these parts, Wprost, kind of a Polish version of Time if you will. My rudimentary Polish allowed me to decipher the gist of the cover story, which basically boiled down to "Buy Polish". A subtle sign, but, in case you missed it, protectionism is back and ready to reek havoc on the globalization dream of the neo-liberal economic movement. P is also for patriotism, a bullet proof cloak that protectionists love to drape around themselves, especially in times of crisis. It may sound strange for me to admit it, but one thing the neolibs have right in theory is that the free flow of goods and services around the globe can benefit the world. Without open markets each country wastes resources producing goods in which it has a comparative disadvantage, and consumes too little of imported goods. Of course we've never actually got to the point of true free trade, all trade is managed, but the pendulum is about to start swinging toward protectionism again.

When the Group of 20 countries met in mid-November, everyone agreed to "refrain from raising new barriers" to trade or investment over the following 12 months. Showing how much the agreement meant, India increased tariffs on steel, iron and soybeans a few days later. The APEC leaders made a similar pledge that same month. However, promises quickly lose their authority when the world seems to be collapsing and workers are being thrown out of work en masse. Recent economic downturns have had global trade as a major engine of growth to help pull the world's economies out of recession, Japan in the 80's, China after 9/11, however, this time is different. The similarities to 1931 keep popping up, this time it's trade barriers.

While it's a stretch to compare the current US stimulus package with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on over 20,000 imported goods, there is a clause that raises alarm bells. The stimulus package contains a "Buy American" rider, the American Steel First Act, which would ensure that only US-made steel will be used in $64 billion of federally funded infrastructure projects. The as-yet-unpassed senate bill is even worse as it stipulates that all stimulus-funded projects use only American-made equipment and goods. Trade war anyone? Combine this with the anti-NAFTA rhetoric thrown around during the election campaign and we've got a recipe for disaster. There's already rumblings up north about the clause as Canadians feel they're being unfairly left out of the bidding extravaganza. Along with the rest of the world, they see the move as another example of the US trying to force the world to follow one set of rules while creating another rulebook for themselves. The tipping point will come and the resulting domino effect of retaliatory trade barriers will prove disastrous for world trade and the global economy.

Back in December the World Bank released a forecast that world trade would fall for the first time since 1982, 2.1%, compared to growth of almost 10% in 2006 and the estimated 6.2% for 2008. Smoot-Harley wreaked havoc on trade, with US imports from Europe declining from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. Need an effect to match with the cause? US unemployment in 1930, before the passage of the bill was at 7.8% in 1930, jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933. The latest US unemployment number, 7.2%. Add to that the importance of international trade to the economy today compared to then. In 1930 global trade as a percentage of GDP was in the single digits, it hit $16 trillion in 2007, equal to 31 percent of world GDP. Another factor was brought up in Davos on Satuday by British PM Gordon Brown. The Institute of International Finance predicted capital flows to emerging markets would slow to $165 billion in 2009 from a record $929 billion two years ago. “What you’re seeing is a form of financial protectionism where banks retreat to their home base,” Brown said. French finance minister Christine Lagarde said at a Jan. 31 press conference in Davos that bank bailouts and fiscal stimulus plans are “implicit protectionism.” Additionally, the binge of new borrowing by the US and other central governments will surely put a squeeze on on other borrowers, in terms of a shortage of available financing and higher long term interest rates.

Much of the world is focusing their attention on China as countries look for ways to boost national economies. With America and the world already pointing fingers at what is perceived to be currency manipulation to maintain an exporting edge, Chinese officials announced a series of measures to boost domestic production last month. State banks are being directed to lend more to exporters, government research funds are being set up and a measure to provide $12 billion worth of letters of credit to Hong Kong exporters. This comes at a time when American quotas on many Chinese garments have just expired on the heels of a WTO challenge in which the US accuses China of providing illegal subsidies. Meanwhile Indonesia has imposed a series of measures that will make it harder to import Chinese goods. Train producers are crying foul, claiming the Chinese market is closed to importers while at the same time Chinese manufacturers are using technology acquired from western companies on the condition it not be used in production meant for export for just that purpose.

There are many other signs sprouting up of the growing tide of protectionist policies. Ecuador announced it was lifting tariffs across the board, with the levy on imported meat jumping from 25% to 85.5%. India raised steel tariffs and Russia has boosted levies on imported cars. France has pledged $7.6 billion to shield home industry from "foreign predators". "British jobs for British workers", a slip of the tongue by British PM Gordon Brown a couple of years back is coming back to haunt him as strikes rage across Britain, with much of the fury aimed at foreigners. France was paralyzed on Thursday by a nationwide strike, Greece has seen mass riots along with a few other EU members. You may be asking yourself where is the WTO in all this? I thought we had agreements in place to stop just such a thing from happening. Nope. The rules have too many loopholes such as not requiring government stimulus plans to be open to all bidders.

The next meeting of the so-called Group of 20 comes in April. By then the world should have erected enough barriers of trade to make the Great Wall look like child's play. True free trade with an even playing field creates certain economic advantages. Unfortunately, what has been created over the past 60 years courtesy of GATT through the WTO, along with the World Bank and the IMF, is a playing field so tilted that it finally fell over. Sadly, instead of ending a system where an EU cow receives more in government subsidies than half of the world's population earns in daily wages, about $2, the focus will continue to be on throwing money at the banking system. Of course the WTO is trying to maintain calm, releasing a 14-page report last week claiming "there has been only limited evidence so far of increases in tariffs or non-tariff barriers, or increased resort to trade remedy actions"; the EU and China are pretending to play nice, while doing exactly what the WTO claims isn't happening, placing new duties and lodging anti-dumping complaints, the Doha dream suddenly seems beyond reach.

Some idea of the vicious circle of these protectionist measures can be illustrated by the increase in tariffs being imposed by the EU on Chinese fasteners. Duties will rise from 63% to 87% on 200 different kinds of screws and bolts. So not only could China consider retaliatory measures, but the cost of producing everything using those fasteners in Europe will go up, from cars to DIY projects. This increases the price to the ultimate consumer, leaving them poorer than they would have been without the duties, thus reducing their spending on other goods. While the Obama administration is seen by the world as a breath of fresh air, there is a waft of the musty, protectionist policies of the past. Anti-NAFTA talk, and Chinese currency manipulation were themes of his campaign while Treasury Secretary-designate Timothy Geithner is an outspoken critic of China's yuan policy. Aid to US auto-makers and now the stimulus package with it's "buy American" clause, a flag waving, trade war instigating, global economy killer. Could it be that the Democrats really don't know how economics works? Well, I suppose that would make them just like the rest of us.

As passed by the House, Section 1110 of the American Recovery and Reinvestment Act of 2009 says, "None of the funds appropriated or otherwise made available by this act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States."

Crisis! Oh, you mean that crisis

“Failure is simply the opportunity to begin again, this time more intelligently”

-Henry Ford

It must have felt pretty cool being one of the selected few to be among the delegates representing 44 different countries at the Bretton Woods conference in the summer of 1944. Everything about it was planned to ensure that the talks would result in a world economic order that would foster cooperation and prosperity for future generations. The rural location, New Hampshire’s plush Mount Washington Hotel, was chosen so that the delegates would have no distractions, and no pressure from lobbyists or other politicians. While the focus was to establish a stable system of exchange rates, and how to pay for rebuilding the war-damaged economies of Europe, the meetings also led to the creation of the IMF, World Bank and to a lesser extent, the United Nations, the Marshall plan and the International Trade Organization (later GATT and the WTO). A lot has changed since those days when John Maynard Keynes, representing the UK, along with the other delegates hammered out the foundations for the American financial order.

Fast forward to the dying days of 2008 and the world is again in crisis. This time instead of worrying how to rebuild a world in the aftermath of a World War, we’re faced with the aftermath that 65 years of greed has wrought on the world’s economy and the planet. The stock market crash of 1929 and the decade of protectionism that followed was one of the main causes of WWII and the financial aftermath; this time it’s the devastation that has been brought about by the oil based economic model. If only Keynes had got his way back in ‘44 and a world central bank (to be known as bancor) would have been created to reflate the world’s money supply. Instead, it was left to America, who by the mid-70’s gave up the gold standard and switched 100% to the oil standard.

Last week and next, representatives from 190 nations are meeting in my adopted hometown of Poznan, Poland to try to map out a plan to Copenhagen next year, where it is hoped that a new emission protocol to replace Kyoto will be reached. Unfortunately, instead of being a headline event, it’s playing 2nd fiddle to the financial crisis. In the perfect world, the two would be sharing top billing, hand in hand giving policy makers the opportunity to kill two birds with one stone. This won’t be the case though as special interests ensure that no compromise will be reached. As one government after another announces trillions of dollars in shock therapies for national economies, the only market that matters, the planet, will be left out in the cold.

Imagine, if you will, a world where greedy bankers actually pay for their lending mistakes. Or car makers are forced to be competitive. Yeah, I know that’s how it’s supposed to work, but it no longer does. I can hear the cries of “the banks need to survive to provide financing for investment”, but who can make rational investment decisions when governments are handing money out for failure? Imagine what could be done with the money if it was spent with the view of improving the world. Instead of delivering a better world, our desperate battle for growth at all costs has put us on a crash course with ecological disaster. The average person works more hours and has less to show for it than 30 years ago. Add to that the crumbling safety nets, such as pension plans and health care coverage and it makes one wonder why we’d want to fix the system at all. Let it crash, we have to start fresh.

What I can’t wrap my head around is the typical response that people have to the proposal of carbon taxes or the likes to try to reduce CO2 emissions. “Don’t spend MY tax dollars on something that might not even exist!” Yet they don’t seem to have any problems with having their tax dollars go to banks, or worse yet, car companies. Whether or not the theory that human activity is causing climate change is eventually proven or disproven should be irrelevant. Dependence on fossil fuels is ridiculous and all our efforts should be focused on lessening this reliance. It’s not a coincidence that oil prices have fallen drastically over the past few months. The world is hostage to the oil supplying nations, yet even those nations know that there is a line that when crossed, will force us to actually change the way the world works and end the reign of oil. Yes, I do realize that forecasts for demand have fallen due to the failing world economy, thus pushing down the price, but it’s more than that as anyone without fossil fuel blinders can see.

There’s a few reasons why the Poznan conference or the meeting to be held next year in Copenhagen won’t come up with an agreement to save the planet. The price of oil dropping to $20 a barrel is the easiest scapegoat, but it’s the public’s perception of the climate change debate that is the most troubling. One of my student’s referral to “that conference, or whatever you call it” causing traffic difficulties is the perfect illustration of how many people have been misinformed and feel there are more important issues to deal with. The developed world won’t tell Asia and Africa to choose poverty, disease, hunger and illiteracy over electricity. Kyoto was a failure, I don’t know of a single region or country that will reach their targets. Dubya made sure the people knew what he thought of it, and while he is Dubya, there are people whose opinions are formed by their president. These CC deniers will fight tooth and nail to defend their right to pay foreign nations huge amounts of money to import fuel in support of big oil companies.

The biggest problem though lies in the complexity of the issue and the way the media has presented it to the people. While the evidence pointing to human activity as the cause for climate change has been slowly solidifying, the media has been bombarding us with other discordant findings. In effect, the media is to blame for obfuscating the issue, creating a breeding ground for apathy. The arctic ice sheets melting, the Brazilian tree frogs disappearance and the hurricane season all might have something to do with climate change, but by hitting the people with these stories in rapid succession and linking them to CC, it’s easy to see why there are still so many skeptics out there. Another brilliant example comes from a Republican presidential debate in Iowa in which the candidates were asked, “How many of you believe global climate change is a serious threat and caused by human activity?”. Here, the mistake of conflating two distinct questions into one only serves to confuse the issue: whether climate change is a ’serious threat’ and whether humans contribute to it. Furthermore, by wording the question in this way, the candidates were given the chance give general responses, without dealing with the issue, such as “I believe that global climate change is serious” (Rudy Giuliani), and “I think that climate change is real” (John McCain).

Poznan ain’t gonna be Bretton Woods. I wonder if the UN was trying to say something by choosing ths city to host the event. Poland burns so much coal that the air is often thick and yellowish while at the same time the government is doing all it can to stymie the implementation of an EU emission standard. The word homogeneous was invented for Poland, where 95% of the population is white and catholic. Real debate is impossible in an environment such as this, where just having a car is considered to be a status symbol. It seems natural to want to live in a cleaner world, so instead of scaring people, we need to focus on showing the benefits that a new way of thinking can achieve. Until the people can be convinced that we’re faced with an opportunity rather than a threat, events such as the Poznan conference will be nothing more than a blip on the media radar.

Lies - Part 3

Push play and read...


Farmers protest in Argentina, truckers block the roads of Spain, South Koreans flood the streets of Seoul, riots break out in more than 15 countries. What are they so angry about? While the reasons may vary from taxes to fuel costs to imported US beef or simply the cost of rice, they all have their roots in globalization. No, globalization itself isn't a bad thing. It makes perfect sense that lower trade barriers help make the flow of goods move smoother and thereby reduces costs for the benefit of people. What is a bad thing is the system that is in place today, ruled over by the financial powers through the World Bank, International Monetary Fund (IMF) and the World Trade Organization (WTO), formerly GATT (General Agreement on Trade and Tariffs). However, the past few months have seen some dramatic events in the world markets that may point to the end of the imperialist system that the rich need us all to believe in so badly.

As Jose Louis Jamarillo, the former Columbian Ambassador to GATT and President of the Group of 77, declared after the birth of the WTO, what we have created is "an institutional trinity which will dominate all economic relations across the world in the interests of the strongest". The World Bank lends money to poor nations to develop their resources, the IMF ensures they budget correctly to pay back the loans, and the WTO ensures they keep their markets open to imports. The rule of the market, cutting public expenditure for social services, deregulation, privatization are the mantras of neo-liberalism. Structural adjustment demanded by the IMF can best be summed up with the idea of earn more and spend less, thus ensuring that debtor nations will scramble to sell what resources they can, driving down the price, while paying workers the minimum, in wages and benefits. This combination of low wages, low commodity prices and debt is the perfect system to guarantee the world's resources flow to the rich nations.

Meanwhile, the wealthy world prescribes exactly the opposite medicine for their own economies. The European community agreed that West Germany had to put $1.5-trillion into the former East Germany to simultaneously build industry, social infrastructure, and buying power. When Greece, Portugal, and Spain, relatively poorer than the rest of Europe, wanted to join the Common Market, massive transfers of direct aid flowed into these "poorer" nations to accelerate development, raise wages, regularize safety and environmental standards and improve living conditions. All wealthy nations provide enormous subsidies to their industries and agriculture, they all placed, and some still place, high tariffs on manufactured imports and low or no tariffs on raw material imports. They all provided, and still provide, subsidies to exports. There are also land donations, tax breaks, and below cost services in bidding wars to gain or retain industry as well as wage subsidies, and outright cash incentives. Between 1995 and 2005, $165bn of American taxpayers' money was used to support US agricultural commodities. Soya, corn, rice, wheat and cotton accounted for 90% of that money. Sugar was also heavily subsidised. The real beneficiaries of this system of government support have not been US farmers, who have gone out of business in their thousands, but the mainly US-based trading giants. For subsidies have allowed them to export grains at less than the cost of production, making it impossible for other countries to compete, while bringing the money from added-value markets back home. In this they mirror the patterns of trade established between previous empires and their colonies. The European Union gives out about $41 billion a year in agricultural subsidies, about $8.2 billion to France alone.

If people don't have enough food to put in their mouths, what's the use of an economic boom in exports. Countries are scrambling to come to terms with the new economics of food. India scrapped all import duties on cooking oils and banned exports of non-basmati rice. Japan is importing genetically modified grains for the first time. China has tried to calm its people by announcing reserve grain holdings, once a state secret. Meanwhile, the truly poor, the billion living on less than a dollar a day are trying to survive by cutting out bread and switching to different grains such as sorghum, eliminating meals and drinking tea for lunch. What can you do when wheat prices have leapt 80% from 2005 to early 2008? Much of the root of this problem can be linked to "free trade" and agricultural subsidies. Annual subsidies paid to farmers in "rich" countries total about $280 billion while total annual development assistance to the "poor" nations totals about $60 billion. The aforementioned agricultural subsidies flow mainly to a few commodity crops, wheat, cotton, corn, soybeans and rice (about 90% of US subsidies). This not only makes it more difficult for farmers in the "poor" nations to compete, but also makes other fresh fruit and veggies relatively more expensive. A Japanese cow gets a $3000 subsidy, one in the EU $1000 while the average income in sub-Saharan Africa is $500. So, what happens to the farmers in poor nations? They stop farming as they can't compete with the cheaper imports. World food prices spike and now you have a crisis of unimaginable proportions.

An interesting case in point is the effect that the price bubbles in oil and food are having on the have and have-not nations of the Middle East. While Egypt has banned exports and raised taxes to pay for the 88% in food subsidies it has been forced to give it's people following rioting, Saudi Arabia simply lowers tariffs and the UAE buys farms abroad. The rich and the poor, within and among nations behave in different ways towards crisis. The end result of neo-liberalism, or globalization has been an ever intensifying concentration of wealth. The rich get richer and the poor get poorer, a global game of winners and losers. Perhaps if the winners weren't faceless corporations or greedy money managers the looming food crisis wouldn't now be upon us. The ease with which capital flows has contributed to the recent price surge. As investors fleeing Wall Street's mortgage strife noticed the price spike early last summer as reports of weak wheat harvest in the US and Europe along with a prolonged drought in Australia, they poured money into grain futures. Of course their actions can't be seen in isolation, as many other factors such as government subsidized biofuel programs and national governments reactions from the barring of exports in producing nations, to increased purchasing by importing nations such as China also came into play. Food became the new gold for hedge fund investors last year and they're looking for the next disaster play. “every debt crisis in history since Solon of Athens has ended in inflation, bankruptcy or war” - George, Fate Worse Than Debt, p. 196

So, what happens when someone doesn't want to play by the rules set by the world's elite? That's easy, embargo, destabilization, attack or an engineered change of government. Most of the world's resources are found in the developing world, this is why we see the race for free trade agreements and feel the ever growing threats implied towards other nations who don't toe the line. If these less developed nations were to form alliances and barter for a better deal for their natural resources, they would be able to develop. Unfortunately, what we have is a true vicious circle: the world economy is dependent on growth in the U.S. economy but the U.S. domestic economy is [now] skewed more towards consumption than production and investment, and this consumption is in turn sustained by borrowing—at home and abroad.... The deal with surplus countries essentially has been as follows: you can run a big trade surplus with us provided that you put the money back into our capital markets. One of the major points free traders point to for the reason that poor nations are poor is corruption. While it's hard to argue against the fact that corruption is a huge drain on wealth, how can the World Bank and IMF criticise recipient governments for their lack of transparency, widespread corruption and undemocratic regimes, insisting on the reform of these aspects as a pre-condition to granting loans and debt relief? These same issues haunt the World Bank and IMF which are widely regarded as not transparent, undemocratic and unaccountable. Corruption within these organisations is rife, and millions of dollars unaccounted. Remember Paul Wolfowitz?

Finally, labour from two angles, one lie for the poor, another for the rich. If the "rich" nations of the world want free trade with free movement of capital and resources, the third component in the wealth creation equation should also be able to move freely; labour and people should be allowed to move across borders as easily as goods, services and money. In today's Guardian, Evo Morales, president of Bolivia, wrote an open letter to the leaders of the EU in which he pleas for them not to punish illegal immigrants too harshly. The US fights with it's own immigration policies, while millions around the world seek to escape poverty and war only to find the door closed. Meanwhile, in developed countries, labour faces it's own challenges. Corporations are able to combine labour and equipment from anywhere in the world, making it easier for them to use lower priced labour overseas. Businesses can use the threat of relocating as a lever to get what they want in the form of tax policy, regulations and subsidies, with the costs being borne by labour itself. South Korea will be losing jobs to cheap labor in Thailand and even China may someday lose factories to Bangladesh. Industries can be built quickly. But the markets of an efficiently functioning economic infrastructure (roads, schools, universities, businesses, homes, postal system, trucking companies, and airlines) can be built only slowly.

Over my last three posts I've tried to point out some of the most common lies that the public are fed daily. I understand that it is part of a politician's job to portray a state of calm in the face of growing turbulence. It may seem a little paradoxical to claim in a blog that part of the problem lies in the narrow range of views the public is fed daily. You might be reading this, we all may have access to different sources of information, but the fact is that the majority of people get their news from one of six sources: GE, Time Warner, Walt Disney, News Corp, CBS or Viacom. Forget the WTO or even the G8, the power of who gets traded with in in fact in the hands of only 4, the Quadrilateral Group of trade ministers. While there's no denying that the global economy has grown, the real questions are who benefits and what are the costs. The growth model that everything is built on seems inherently flawed, especially of late with the surge in oil prices. And what of the effects on the environment, a subject not even touched upon here.

If you like the film at the beginning, you can download it in it's entirety and legally, here.