US Growing Unemployed: A Case of Benign Neglect

Photo: REUTERS/Shannon Stapleton

The political power of the working class has diminished in recent decades, and that helps to explain why US politicians have not paid enough attention to the unemployment problem.

The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs. The lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes. Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.

Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment?

Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions?

There was, of course, a stimulus program at the beginning of Obama’s presidency, but it was much too small and relied far more on tax cuts than most people realize. The need to shape the package in a way that satisfied the politically powerful, especially the interests that have captured the Republican Party, made it far less effective than it might have been. In the end, it had no chance of fully meeting the challenge posed by such a severe recession, and when it became clear that additional help was needed, those same interests stood in the way of doing more.

Republican policymakers give us all sorts of excuses for blocking further action to help the unemployed. We are told the problem is structural – there is a geographical or talent mismatch between labor availability and labor needs – and nothing can be done to help. But something can be done. We can help workers move to where the jobs are, encourage firms to locate in areas where workers are readily available, and help with job retraining. If mismatches are really the problem, why aren’t Republicans leading the charge on these policies? If they care about the unemployed rather than the tax burden of the wealthy, then why are they allowing community colleges – one of the best ways we have of providing job training for new and displaced workers – to be gutted with budget cuts?

We are also told that the deficit is too large already, but there’s still plenty of room to do more for the unemployed, as long as we have a plan to address the long-run debt problem. But even if the deficit is a problem, why won’t Republicans support one of the many balanced budget approaches to stimulating the economy? Could it be that these policies invariably require higher income households to give something up so that we can help the less fortunate? Tax cuts for the wealthy are always welcome among Republicans no matter how it impacts the debt, but creating job opportunities through, say, investing in infrastructure?

Forget it. Even though the costs of many highly beneficial infrastructure projects are as low as they get, and even though investing in infrastructure now would save us from much larger costs down the road – it’s a budget saver, not a budget buster – Republicans leaders in the House are balking at even modest attempts to provide needed job opportunities for the unemployed.

The imbalance in political power, obstructionism from Republicans designed to improve their election chances, and attempts by Republicans to implement a small government ideology are a large part of the explanation for why the unemployed aren’t getting the help they deserve.

But Democrats aren’t completely off the hook either. Centrist Democrats beholden to big money interests are definitely a problem, and Democrats in general have utterly failed to bring enough attention to the unemployment problem. Would these things happen if workers had more political power?

When we talk about leveling the playing field, it is generally in terms of economic opportunity. However, leveling the political playing field is just as important, and in the past unions provided workers with a powerful voice in the political arena. But unions have largely faded from the scene, leaving workers with very little organized power. Correcting the political imbalance this has created through the renewed political empowerment of the working class must be part of any attempt to improve our response to serious recessions.

It also suggests a solution — renewed political empowerment of the working class — but that’s easier said than done.

By MARK THOMA, The Fiscal Times
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Occupy Wall Street/DC: Change-mongering U.S. needs change too, backed Democrats!

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The group included protesters affiliated with Occupy DC, to make a point about the massive military spending and the use of deadly drones - AP

"Occupy DC" protesters comprise various groups and have split up to protest and meet later in the square [Reuters

Change-mongering U.S. needs change too

(Xinhua)

BEIJING, Oct. 9 (Xinhua) -- The Occupy Wall Street protests have grown over the past three weeks into a coast-to-coast movement targeting corporate greed and money influence in the United States.

Popular protests are not uncommon these days. From the Arab world to debt-ridden European countries, people are taking to the streets to make their voices heard for different reasons.

For Washington, the irony is that the United States, which has long branded itself as a staunch defender of human rights and a force for change across the world, is suddenly confronted by its people defending their own rights from the greedy Wall Street and demanding to change the status quo.

Young people, many unemployed or under-employed, compose the bulk of the protesters. Their frustration has exposed some fundamental problems with the economic and political system of the world's sole superpower.

Unbiased eyes can see through these anti-Wall Street protests a clear need for Washington, which habitually rushes to demand other governments to change when there are popular protests in their countries, to put its own house in order.

First of all, Washington should rein in its runaway financial sector. The Wall Street, as the global financial center, has its role to play in allocating resources more efficiently not only for the United States but also for the world economy.


But when more and more people on the Wall Street are trying to make quick money by pure speculation or by creating complex derivatives that no one really understands, there are legitimate reasons for concern.

Simon Johnson, former chief economist with the International Monetary Fund, once blasted the "overgrown" financial service industry in the United States for creating the global financial crisis.

In a speech at Peking University of China in June 2010, he said the U.S. financial industry, which was getting bigger each day, not only was the cause of the latest financial wipeout, but also could bring about other crises in the future.

Besides bringing the Wall Street back to its original purpose of better allocating resources, Washington should also face up to its own problem of income gap.

Over the years, the gap between the rich and the poor in the United States has kept widening.

According to Nobel economist Joseph Stiglitz, the protesters' "We are the 99 percent" slogan refers to the fact that the top 1 percent of Americans own more than 40 percent of the nation's wealth, while the bottom 80 percent only have 7 percent of the wealth.

Meanwhile, the top 1 percent "is taking in more of the nation's income than at any other time since the 1920s," said the Center on Budget and Policy Priorities, a U.S. premier policy organization working on fiscal policy and public programs.

Moreover, such an inequality in social wealth distribution has been exacerbated by the global financial crisis.

Equally painful to the protesters is the fact that these days politicians in Washington appear more interested in political wrangling for personal and partisan gains rather than working together to solve the fundamental problems facing their country.

The U.S. officials have urged their European counterparts to work together to solve the sovereign debt crisis, but the country itself has chronic fiscal shortfalls and trade deficits that are just as grave.

And there is another somber fact: In the run-up to the 2012 presidential election, the chance of the Democrats and Republicans working together to bring the U.S. fiscal house into order is rather slim.

While the protests have garnered support from more and more students, unions, small business owners, celebrities and elected officials, no one wants to see the Occupy Wall Street movement evolve into violent demonstrations or spin out of control.

The rationale is clear: Political chaos in the world's largest economy is the last thing investors need at this time of renewed tensions in the global markets.

But if Washington fails to heed the calls of the protesters and address its fundamental problems, its messy house could become a headache for others in the world as well.

by Liu Qu, Ming Jinwei
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Democrats back 'Occupy' protesters

Eric Lichtblau, Washington,October 12, 2011

LEADING Democratic figures, including party fundraisers and a top ally of US President Barack Obama, are embracing the spread of the anti-Wall Street protests in a clear sign that members of the Democratic establishment see the movement as a way to align disenchanted Americans with their party.

The Democratic Congressional Campaign Committee, the party's House fundraising arm, is circulating a petition seeking 100,000 party supporters to declare: ''I stand with the Occupy Wall Street protests.''

The Centre for American Progress, a liberal body run by John Podesta, who helped lead Mr Obama's 2008 transition, credits the protests with tapping into pent-up anger over a political system that it says rewards the rich over the working class - a populist theme now being emphasised by the White House and the party.

Leading Democratic figures are embracing the spread of the anti-Wall Street protests. Photo: Getty Images

Judd Legum, a spokesman for the centre, said that its direct contacts with the protests have been limited, but that ''we've definitely been publicising it and supporting it''.

He said Democrats are already looking for ways to mobilise protesters in get-out-the-vote drives for 2012.
But while some Democrats see the movement as providing a political boost, the party's alignment with the eclectic mix of protesters makes others nervous.

They see the prospect of the protesters pushing the party dangerously to the left - just as the Tea Party has often pushed Republicans further to the right and made for intra-party conflict.

Mr Obama has spoken sympathetically of the Wall Street protests, saying they reflect ''the frustration'' that many struggling Americans are feeling. Vice-President Joe Biden and Nancy Pelosi, the House Democratic leader, have sounded similar themes.

The role of groups like the Democratic campaign committee and Mr Podesta's group, sometimes working with labour unions, moves support from just talk to the realm of organisational guidance.

It is not clear whether the leaders of the amorphous movement actually want the support of the Democratic establishment, given that some of the protesters' complaints are directed at the Obama administration.

Among their grievances, the protesters say they want to see steps taken to ensure that the rich pay what they see as a fairer share of their income in taxes, that banks are held accountable for reckless practices, and that more attention is paid to finding jobs for the unemployed.

The protests also provide yet another dividing line between Democrats and Republicans in Washington - one that seems likely to help shape the competing themes of the 2012 presidential election.

Leading Republicans have grown increasingly critical of the protests.

Eric Cantor, the House majority leader, called the protesters ''a growing mob'', and Herman Cain, a Republican presidential candidate, said the protests are the work of ''jealous'' anti-capitalists.

Robert Reich, the former labour secretary under president Bill Clinton, wrote in a blog post last week that the protesters' demands on taxes dovetail with Democrats' themes, but that the protests should still make the party wary - not least because the Democratic Party relies on Wall Street for significant campaign contributions.

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US debt impasse a global issue

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GLOBAL TRENDS By MARTIN KHOR

The political deadlock in Washington on whether and how to increase the United States’ debt limit is causing anxiety over a possible default and the consequent global economic downturn.

 

A Chinese 100 yuan banknote is placed under a $100 banknote. (Petar Kujundzic/Courtesy Reuters

THE deepening of the Eurozone debt crisis last week through contagion, spreading to Italy, was more than matched by the growing chance that the US government would not be able to pay its bills or service its debts starting Aug 2.

Week-long negotiations took place between US President Barack Obama, and the Democrat and Republican party leaders to avert a partial closing down of the federal government.

The US currently has a limit to its federal debt of US$14.29tril. This limit will be reached by Aug 2.

Congress has to approve raising this limit before then, or else the Administration will have to postpone meeting some of its financial commitments.

Federal Reserve chairman Ben Bernanke warned that default would send shockwaves throughout the global economy.

The alarm bells rang even louder when two rating agencies, Moody’s and Standard and Poor, warned they might downgrade US debt from its AAA status if the political impasse continues.

There are several reasons why the world, and especially the developing countries, should be alarmed at this situation.

First, many developing countries hold many billions of dollars of US Treasury bills as part of their foreign reserves.

An actual default raises the unthinkable prospect of the countries having to take a haircut, being only paid back a part of their bonds. This is unlikely to happen.

But even the prospect of default and a credit status downgrade would reduce the value of their bonds. Moreover the recent decline of the dollar’s value will likely accelerate, causing further losses.

Last week, China (which holds US$1.15tril in Treasury bonds) called on the United States to adopt responsible policies and measures to protect investors of US bonds.

Second, economic growth in the developing economies will be hit if the standoff or the eventual solution causes the US economy to move to a standstill or a new recession.

Whatever the final deal between the President and the two Parties, its centrepiece is certain to be deep cuts in government spending. This will reduce effective demand in the economy.

The effect will be opposite to the Obama administration’s recession-busting fiscal stimulus that enabled the economy to bounce back after the 2008-09 recession.

Third, the uncertainties in Washington emphasise the present unhealthy dependence on the US dollar as the international reserve currency.

The need for reform to reduce this dependence on a single currency, for example, by greater use of the special drawing rights (a basket of major currencies) as a global reserve currency, has been advocated by several prominent economists such as Joseph Stiglitz, Jose Antonio Ocampo and Yilmaz Akyuz as well as policy makers such as the Governor of the Chinese Central Bank.

A default in servicing US debt has moved from the unthinkable to the possible, though still in the realm of most unlikely. It may reignite the debate on reform of the global reserve system.

The facts of the impasse in Washington are as follows.

The current debt limit of US$14.29tril is forecast to be reached on Aug 2, so no new loans are allowed after that.

The administration estimates that the debt limit has to be increased by US$2.4tril so that the govern­ment can meet its commitments up to November 2012, after the Presidential elections.

Many Republicans in Congress, especially those under the influence of the Tea Party group, want the government to achieve budget balance through slashing spending without any increase in taxes, and to achieve budget balance.

A few Republican leaders, however, are willing to consider a small increase in taxes, or rather in closing tax loopholes, but they are finding difficulty in convincing their colleagues. They also want spending cuts to exceed the rise in the debt limit.

The President and Democrats are willing to cut spending significantly, but want also to raise taxes of the rich, so that both can contribute to the deficit reduction.

Democrat leaders are adamant that social and medical security should not be affected by the cuts, though Obama is willing to allow some cuts there as well.

If the extreme stance of the Tea Party faction becomes the overall Republican line as well, a deal would be extremely difficult.

To meet it, the Democrats and President would have to move their compromise position to the degree of total capitulation.

If the deadlock continues, a possible solution may be the proposal of Senate Minority Leader Mitch McConnell: the president submits his plan to increase the debt limit and to cut the budget, the Congress rejects it, the President vetoes the rejection, and his proposal is adopted unless two-thirds of Congress rejects it again.

This will allows all sides to claim that they stuck to their positions, while avoiding a crisis.
If there is still no agreement by Aug 2, then the administration will have to choose which items not to pay and when.

These include interest on Treasury bills, social security, medicare, defence vendors, unemployment benefits, food stamps, military pay, federal salaries.

Priority will be given to debt servicing, so a default on Treasuries is very unlikely unless the impasse lasts a long time.

The other services and salaries will be hit, and increasingly so as long as there is no deal.

As almost everyone will agree, this is no way to run a government, and the US governance system is becoming dysfunctional.

This has serious effects on the rest of the world. So the universal hope is that some solution will be found before Aug 2.

Global Unease on U.S. Debt Impasse

By Jonathan Masters, Associate Staff Writer

With the deadline for a U.S. credit default less than three weeks away, President Barack Obama and top Republican lawmakers remain at odds over a deficit reduction plan that both sides view as a prerequisite to any hike in the debt limit. The impasse continues to fuel apprehension within the global financial system, with two of the "Big Three" credit rating agencies--Moody's and Standard and Poor's--considering downgrading the United States (WSJ) from its AAA status. Moody's cited the "rising possibility" the U.S. debt limit will not be raised in time to avoid default. Economists warn that a significant loss of confidence in the U.S. debt market could prompt foreign creditors to unload large portions of their holdings, sparking a sharp increase in U.S. borrowing costs and calling into question the dollar's role as the world's reserve currency.


Most economists agree that the impact of an outright government default would be severe. Federal Reserve Chairman Benjamin Bernanke has warned a default would usher in a new financial crisis. While some suggest the market still assumes the issue will be resolved, they say a default would do unprecedented injury to the full faith and credit of the United States and roil international markets (DowJones) in a sea of uncertainty.

China, the largest U.S. creditor, has reiterated its call for a swift compromise in the debt talks. Beijing would be particularly exposed to any acute shock to the bond market, with about 70 percent of its $3.2 trillion foreign exchange reserves invested in U.S. Treasuries (Reuters). Historically, the U.S. debt market has been driven by huge investments from surplus countries like China, which have viewed the United States as the safest place to store their savings.

The Economist notes that while a default may not precipitate an immediate sell-off by foreign banks due to a lack of immediate alternatives, the event would discourage future holdings of such magnitude. As the largest economy and home to the world's reserve currency, the United States has traditionally attracted investors looking for a financial safe haven. But some analysts suggest the current fiscal crisis, including the threat of default, could accelerate a shift in the way global capital is allocated (TIME)--away from developed nations like the United States and Japan and into emerging markets such as China and India. The Wall Street Journal reports that in addition to China, investors in Japan, Russia, and a number of Persian Gulf states will increasingly look for alternative investments to diversify their sovereign holdings.


Bill Gross of the investment management firm Pimco writes that global investment managers are keen to punish defaulting countries (WashPost) severely, adding that alternatives like Canada and Germany are only a wire transfer away. He says a default may prompt foreign banks to rethink their currency preferences, jeopardizing the reserve status of the dollar. A 2010 survey by the McKinsey Global Institute found fewer than 20 percent of business executives surveyed expected the dollar to be the dominant global reserve currency by 2025. However, with a systemic debt crisis racking Europe, some analysts claim there is still no viable alternative to the dollar (DowJones) in the short to medium term.


But an impression of eroding U.S. power is already gaining traction. The latest Pew Global Attitudes poll finds: "In fifteen of twenty-two nations, the balance of opinion is that China either will replace or already has replaced the United States as the world's leading superpower." The poll says the "United States is increasingly seen as trailing China economically."

Selected Analysis:

The United States has entered its "own age of austerity," with the solution to country's fiscal woes coming only through long-term spending reductions, particularly in entitlement programs, writes Mort Zuckerman in the Financial Times.

A period of austerity brought on by debt mistakes will have "profound consequences, not just for Americans' standard of living but also for U.S. foreign policy and the coming era of international relations," write CFR President Richard N. Haass and former Deputy Treasury Secretary Roger C. Altman in Foreign Affairs.

This report from the Brookings Institution addresses the nature and quality of U.S. political leadership, the sources of the nation's governance problems, and some strategies to work around them.

The New America Foundation's Maya MacGuineas recommends an immediate increase in the debt ceiling and the negotiation of big budget deal ($4 trillion) that will keep the nation's debt from outpacing the economy.

Weigh in on this issue by emailing CFR.org.