Friday, July 31, 2009

Big Banks Paid Billions in Bonuses Amid Wall St. Crisis


Thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages last year, even as their employers were battered by the financial crisis.

Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.

At Goldman Sachs, for example, bonuses of more than $1 million went to 953 traders and bankers, and Morgan Stanley awarded seven-figure bonuses to 428 employees. Even at weaker banks like Citigroup and Bank of America, million-dollar awards were distributed to hundreds of workers.

The report is certain to intensify the growing debate over how, and how much, Wall Street bankers should be paid.In January, President Obama called financial institutions “shameful” for giving themselves nearly $20 billion in bonuses as the economy was faltering and the government was spending billions to bail out financial institutions.

On Friday, the House of Representatives may vote on a bill that would order bank regulators to restrict “inappropriate or imprudently risky” pay packages at larger banks.

Mr. Cuomo, who for months has criticized the companies over pay, said the bonuses were particularly galling because the banks survived the crisis with the government’s support.

“If the bank lost money, where do you get the money to pay the bonus?” he said.

All the banks named in the report declined to comment.

Mr. Cuomo’s stance — that compensation for every employee in a financial firm should rise and fall in line with the company’s overall results — is not shared on Wall Street, which tends to reward employees based more on their individual performance. Otherwise, the thinking goes, top workers could easily leave for another firm that would reward them more directly for their personal contribution.

Many banks partly base their bonuses on overall results, but Mr. Cuomo has said they should do so to a greater degree.

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.

Robert A. Profusek, a lawyer with the law firm Jones Day, which works with many of the large banks, said bank executives and boards spent considerable time deciding bonuses based on the value of workers to their companies.

“There’s this assumption that everyone was like drunken sailors passing out money without regard to the consequences or without giving it any thought,” Mr. Profusek said. “That wasn’t the case.”

Mr. Cuomo’s office did not study the correlation between all of the individual bonuses and the performance of the people who received them.

Congressional leaders have introduced several other bills aimed at reining in the bank bonus culture. Federal regulators and a new government pay czar, Kenneth Feinberg, are also scrutinizing bank bonuses, which have fueled populist outrage. Incentives that led to large bonuses on Wall Street are often cited as a cause of the financial crisis.

Though it has been known for months that billions of dollars were spent on bonuses last year, it was unclear whether that money was spread widely or concentrated among a few workers.

The report suggests that those roughly 5,000 people — a small subset of the industry — accounted for more than $5 billion in bonuses. At Goldman, just 200 people collectively were paid nearly $1 billion in total, and at Morgan Stanley, $577 million was shared by 101 people.

All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.

Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.

“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”

The report does not include certain other highly paid employees, like brokers who are paid on commission. The report also does not include some bank subsidiaries, like the Phibro commodities trading unit at Citigroup, where one trader stands to collect $100 million for his work last year.

Now that most banks are making money again, hefty bonuses will probably be even more common this year. And many banks have increased salaries among highly paid workers so that they will not depend as heavily on bonuses.

Banks typically do not disclose compensation figures beyond their total compensation expenses and the amounts paid to top five highly paid executives, but they turned over information on their bonus pools to a House committee and to Mr. Cuomo after the bailout last year.

The last few years provide a “virtual laboratory” to test whether bankers’ pay moved in line with bank performance, Mr. Cuomo said. If it did, he said, the pay levels would have dropped off in 2007 and 2008 as bank profits fell.

So far this year, Morgan Stanley has set aside about $7 billion for compensation — which includes salaries, bonuses and expenses like health care — even though it has reported quarterly losses.

At some banks last year, revenue fell to levels not seen in more than five years, but pay did not. At Citigroup, revenue was the lowest since 2002. But the amount the bank spent on compensation was higher than in any other year between 2003 and 2006.

At Bank of America, revenue last year was at the same level as in 2006, and the bank kept the amount it paid to employees in line with 2006. Profit at the bank last year, however, was one-fifth of the level in 2006.

source : New York Times

'$10 trillion' credit crunch cost

By Steve Schifferes
Economics reporter, BBC News

Government bank bail-outs have been controversial in the US
The global credit crunch has cost governments more than $10 trillion, the International Monetary Fund (IMF) says.

The IMF says that rich countries have provided $9.2tn in government support for the financial sector, while emerging economies spent $1.6 tn.

About $1.9tn represents up-front expenditure, while the rest is made up of guarantees and loans.

Governments are likely to recover most of these sums when the world economy recovers, but big deficits will stay.

The financial bail-out costs include:

Capital injections: $1.1tn
Purchase of assets: $1.9tn
Guarantees: $4.6tn
Liquidity provision: $2.5tn
Budget gaps

The IMF has also been revising its estimates of the cost of the global downturn on government budgets.

It now says that overall, the rich countries of the G20 group will suffer a budget deficit of 10.2% of economic output or gross domestic product (GDP) in 2009, the largest for most countries since World War II.

The largest projected budget deficits are in the US, with 13.5% of GDP, the UK, with 11.6%, and Japan 10.3%.

However, the UK will have the largest projected budget deficit of all G20 countries by 2010, at 13.3% of GDP, compared to 9.7% for the US.

Fiscal boost

The rising budget deficits have been caused by a combination of the severe global economic downturn, which has slashed government revenues, and the stimulus measures introduced by some governments to try and kick-start the recovery.

The IMF estimates that the G20 countries will implement stimulus plans worth 2% of their GDP in 2009, and 1.6% in 2010 - but it says it is difficult to measure how effectively these have actually been implemented.

However, it says that such plans have had a big effect on limiting the severity of the recession.

It estimates that such spending has boosted growth in G20 countries by between 1.2% and 4.7% this year.

The IMF says increased spending is more effective than cutting taxes in boosting demand, and works best when implemented in conjunction with looser monetary policy and in a coordinated fashion around the world.

Long-term damage

The IMF estimates - prepared ahead of the G20 summit of world leaders in Pittsburgh in September - also show how much long-term damage the crisis is doing to public finances.

It estimates that by 2014, government debt will reach 239% of GDP in Japan, 132% in Italy, 112% in the US, and 99.7% in the UK.

Proportionately, however, the rise in the UK is the biggest - with debt more than doubling from 44% in 2007.

Rating agencies have recently warned that a UK debt of 100% of GDP would force them to consider downgrading the credit rating of UK government bonds.

This could make it more costly for the government to raise money.

The IMF says that it is important for governments to show a credible path for reducing deficits in the long-run, although it urges them to continue the fiscal stimulus in the short-term.

A "lack of policy credibility (either real or perceived)" makes fiscal expansion less effective by raising risk and raising real interest rates.

G20 leaders are set to discuss the state of the world economy at their next summit in September, and look at the effectiveness of measures to revive the economy and regulate the banking sector

Thursday, July 23, 2009

Top Banks Set Aside $74B for Bonuses

And new figures show some of the top beneficiaries of the Wall Street bailout are increasing their employee bonuses over a year ago. According to the Washington Post, the top six US banks have allotted $74 billion to pay their employees, up from $60 billion at the same point last year.

Wednesday, July 22, 2009

The Celtic Tiger savages the Irish

Fred Harrison lectures to five hundred people at Trinity College Dublin and explains where to go from here for Ireland and her people

Tuesday, July 21, 2009

US 'exposure to crisis $23.7tn'

President Obama has stressed the importance of government spending
The total exposure of the US government to the financial crisis could hit $23.7 trillion (£14.3tn), according to a watchdog report.

Neil Barofsky, overseeing the Troubled Asset Relief Program (Tarp), made the estimate in prepared remarks to a House of Representatives committee.

The worst-case estimate represents the maximum exposure if all parties offered support requested maximum assistance.

The figure includes all government and Federal Reserve initiatives.

'Repeated failure'

"From programmes involving large capital infusions into hundreds of financial institutions, to a mortgage modification programme, to public-private partnerships using tens of billions of taxpayer dollars to purchase 'toxic' assets from banks, Tarp has evolved into a programme of unprecedented scope, scale and complexity," said Mr Barofsky, special inspector general of Tarp.

However, he said the programme was only part of the wider effort to rescue the US economy.

"As massive and important as Tarp is on its own, it is just one part of a much broader federal government effort to stabilise and support the financial system.

"The total potential federal government support could reach $23.7tn," he added.

Mr Barofsky said any judgement on the effectiveness of Tarp should be made in the context of the government's overall efforts to revive the economy.

He also criticised the government for "repeatedly" failing to adopt recommendations from his office regarding transparency.

Sunday, July 19, 2009

Stefan Engel on on some additions to Marxist Leninist Crisis Theory

Economic recovery in UK 'on hold'

The UK economy is set to shrink by 4.5% in this year, the biggest fall in a single year since 1945, according to an influential think-tank.

The downbeat forecast is more pessimistic than the consensus view, and considerably worse than the 3.5% fall predicted by the government.

The Ernst & Young Item Club also warned that hopes of economic recovery are "running ahead of reality".

It does, however, predict a return to modest growth of 0.5% in 2010.

'Chance of relapse'

"Unfortunately, it is hard to see any very solid grounds for sustained optimism at the moment," said Professor Peter Spencer, chief economic adviser to Item.

It remains unclear how quick and complete recovery will be, and there is still a serious chance of relapse

Professor Peter Spencer, Ernst & Young Item Club
"The economic patient has been in trauma, but thanks to the paramedics at the Treasury and the Bank of England who pumped billions of pounds worth of medicine into the economy, the patient has stabilised for now," he added.

But any recovery could be short lived, he warned.

"It remains unclear how quick and complete recovery will be, and there is still a serious chance of relapse."

Indeed some analysts believe that, despite hopes the worst of the downturn may be behind us, there could be a so-called "double dip" recession, where the economy stabilises before contracting again.

The only "ray of hope", said the Item Club, is a recovery in world trade, which UK exporters would be able to exploit due to the weak pound.

Lack of lending

The main reason for the gloomy outlook, the club said, was the fact that banks are still not lending enough to boost the economy.

"There is currently little sign of any extra lending to either companies or consumers. Banks are saying that they will expand lending more aggressively over the next three months, but it seems unlikely that they will be able to meet the demand for credit," argued Professor Spencer.

The Item Club also warned of the threat posed to the economy from swine flu.

If doomsday predictions do materialise, it forecast a further 3% contraction in GDP this year, on top of the 4.5%.

The flu could also wipe out any growth next year, with a worst case scenario of a further 1.2% contraction.

The Item Club also predicts that UK interest rates will be kept at their current level of 0.5% well into next year.

Last week, the International Monetary Fund published its latest report on the UK economy, in which it forecast economic activity to shrink by 3.75% this year.

The Ernst & Young Item Club publishes its full summer forecast on Monday 20 July.

Source: BBC News

Tuesday, July 7, 2009

China launches yuan trade scheme

China's currency is not freely convertible but its use is spreading
China has begun a trial scheme that allows trade with its neighbours to be settled with its own currency, the yuan, also known as the renminbi.

Six Shanghai companies have signed contracts with counterparts in Hong Kong and Indonesia to settle deals in the currency.

It means if the two parties to a trade have yuan available, they need not enter world exchange markets to pay.

Executives said the move would save costs and avert exchange rate risks.

Most of China's foreign trade is settled in US dollars or the euro, leaving exporters vulnerable to exchange rate fluctuations.


The yuan is not yet a freely convertible currency.

But observers say that, when expanded, the scheme could lead to the strengthening of the Chinese currency.

"The scheme should have limited impact on the yuan's value in the initial stage, due to official restrictions and because firms need time to get familiar with the procedures," said Liu Dongliang, currency analyst at China Merchants Bank in Shenzhen.

"But with its expansion in the long run, it will increase pressure for the yuan to appreciate as the yuan's international status strengthens."

The trial is expected to be limited to Hong Kong and Macau outside of mainland China, and to Shanghai and Guandong province.

However it is expected to be extended so that the yuan could be used to settle trade between parts of eastern China (Guangdong and the Yangtze River delta) and the Asean group of countries (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam).

Last month, China's central bank reiterated its call for a new reserve currency to replace the US dollar.

The report from the People's Bank of China (PBOC) said a "super-sovereign" currency should take its place.

Central bank chief Zhou Xiaochuan has loudly led calls during the financial crisis for the dollar to be replaced.

The bank report called for more regulation of the countries that issue currencies underpinning the global financial system.

"An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis," the Chinese central bank said.

Source: BBC NEWS

Sunday, July 5, 2009

The Political Economy of the Current Crisis and the rebirth of Socialism in the 21st Century

The Political Economy of the Current Crisis
and the rebirth of Socialism in the 21st Century by Nickglais

Capitalist crisis is not new and has been around since the first general crisis of the capitalist system in Britain in 1825. This first general crisis of capitalism in Britain was a source of study by Marx and Engels and their study of capitalist crisis contributed to the creation of Marxism and a new political economy.

Already Engels wrote in 1877

"We have now since the year 1825, gone through this five times and at the present moment (1877) we are going throught it gain for the sixth time. (Crisies ocurred in 1825, 1836, 1847,1857, and 1866)

Engels - Socialism Utopian and Scientific

There have been numerous capitalist crisis ever since, some severe like the 1929/1930's and some milder, but our task today is to locate the origin of the current crisis to make some an estimate of its depth and impending severity and try to bring forth appropriate responses from working people that will lead to revolutionary transformation of the existing economic system of capitalism to socialism because the continuation of capitalism as a world system into the middle decades of the 21st Century has the very high probability of jepardizing human life on this planet has the economic crisis and the ecological merge into the same problem if they have not already sychronised and become the same.

Background to Current Crisis

At one level a capitalist crisis is a contradiction between the forces and relations of production but we need to go beyond the general level to explain the crisis of capitalist accumulation in a specific case like the current crisis and how the crisis of over accumulation has come about.

There is a debate about the rate of profit and its role in the real economy with many Marxist Economists stating that it has risen due to the neo liberal changes of last forty years, this is the position of Fred Moseley writing in International Socialism who sees this crisis as a Minsky ( neo Keynesian ) crisis or financial crisis rather than a Marxist crisis of the system as a whole.

I would like to draw your attention to the innovative work of Andrew Kliman (1) who demonstrates that those who have claimed a rise in profits have measured it in the wrong way and if Marx's method is followed there has been a long term decline in the rate of profit in the real economy which is why all the speculation of the last decades. Andrew Kliman see's the current crisis as systemic starting in the real economy and not localised to the financial sector.

One of the questions underlying this paper is it possible to postpone a crisis in profitability through credit and neoliberal trade policies ?

The immediate background to this crisis is that of the last major crisis of capitalism in the 1970's when the Post War Keynesian solution to capitalism's problems broke down.

The failure of Keynesian policies to deal with the simultaneous inflation and stagnation of the 1970s-stagflation- basically put an end to Keynesianism as theory, except among ideologues desperate for a progressive alternative to socialism.

Whilst many of us in the 1970's put forward socialism has an alternative to failed Keynesianism we did so in an environment where a crisis in Socialism was emerging consequent upon the rise of modern revisionism which started to use markets in a so called"technical manner" which undermined socialist planning via the route of so called market socialist economy and wrongly -applied the capitalist law of value to Socialist economies.

It was at this strategic moment of confusion in Socialism , that the well funded neo liberal think tanks swung into action to win over the political elites for their alternative to Keynesian and Socialist solutions to the capitalist crisis.

The post coup Chilean economy proved their laboratory read David Harvey and Naomi Klein for all the details in "Brief History of Neoliberalism" and "Disaster Capitalism" respectively..

Reaganism and Thatcherism combined the old Hayekian, Von Mises anti socialist political economy updated by the mathematics of Milton Friedman into mainstream politics from its oddball status of the 1950's and 1960's so that by the end of the 1970's and during the 1980' was the dominant economic ideology.

The new neo liberal solution allowed for the reconstitution of capitalist class power that had become eroded due to working class organisational strength and what followed was a massive expansion of the financial sector which was promoted by the state with industry migrating to developing countries in pursuit of higher profit in to what Immanuel Wallerstein calls the semi - periphery and periphery of the world capitalist economy. The new financialsation was to provide a credit underpining to a low wage or restrained wage policy in USA and UK and other countries soon emulated this so called free market model has if it did not depend on the capitalist state for its functioning - the invisible hand has always been the state fist.

Significant de-industrialisation occured in the core countries of the West but principally in the USA and UK

Financial services were seen has wealth creation in themselves according to revised neo liberal economic theory and not charges on productive economy has they has been seen by Ricardo and Marx in Classical Economics.

In fact one could read the whole of neo classical economics what Marx called vulgar apologetics as defence of rent, interest and profit has contributions to and not charges on the real economy has Ricardo and Marx vigourously argued they were..

Milton Friedmann is famous for saying that there were no free lunches in a market economy but his pseudo mathematical economics gave cover for more free lunches of the capitalist class in its entire history and continued neo classical Economics into the late 20th Century..

These financial markets spawned new financial instruments and products and a whole new futures and options industry was born ostensibily to hedge contracts and buy future contracts in commodities and theoretically the neo liberals said a little bit of speculation would provide liquidity for these markets.

Professors of Economics from Chicago to Shanghai and London signed up to this project for a nice fat fee to present papers jusifying the unreal world economics of paper wealth creation.

I can remember reading an article in the late 1980s in Fortune magazine which described these new financial instruments as the nuclear weapons of the capitalist system and Fortune magazine was proved right by Nick Leeson in Singapore who took out options on futures contracts and brought down the centuries old House of Baring Brothers overnight..

By the late 1990's another implosion came this time with Long Term Capital Management with its illustrious economics team including two Noble prize winners for economics - the best and brightest of capitalist economics discovered they were on another economic planet when the real world took its revenge on them and their speculative political economy failed and the US Government afraid of systemic failure came the rescue of LTCM.

However lessons were not learned and this new financial industry at the core of the new dynamic reconfigured capitalism of the 1970's went merrily on from minor to major disasters as regulations like those of Glass Steagal in the USA which separated commercial banking from investment banking were scrapped London of course followed suit or led with its relaxed regulatory regime of the Financial Services Authority and its own Big Bang earlier in the decade...

Now we arrive at the current crisis brought on by the famous credit default swap financial instrument or CDS where we discover a whole host of new derivatives in the credit industry married to the property and insurance markets enabling a fast tracking of crisis across the whole financial system.

The unravelling of the bubble in the property market exposed this link directly into the credit markets and in turn the insurance market making a systemic problem for capitalism in the financial sector of the economy.

There have been property crashes and bubbles before - some economsts foecast an 18 year property cycle but this time was different it was not a property crash alone but the whole financial sector came tumbling down because of the growth of the derivatives market and the new cross links in the financial sector between property,credit and insurance.

The World Bank was trying to understand what was gong on, the neo liberal IMF with its best and brightest were confounded but the Central Bankers Bank the Bank of International Settlements knew exactly what was going on and actually issued warning to banks about derivatives exposure - but to no avail - after all they were all making money !

Then finally they published the liabilities of the derivatives industry has a result of the mushrooming of financial instruments and they were staggering 600 trillion dollars by end 2007 and by 2009 they were a thousand trillion dollars. These claims were only backed by between 15 -25 trillion dollars of real assets, nobody knows for sure..

For the first time we source and discover the depth of the crisis

Against what can we measure this figure to get some perspective on these astronomical figures.

The size of the world economy annually is appoximately worth 60 trillion dollars.

By October 2008, the amount of losses in this international speculative, mortgage, banking and stock market crisis was already four hundred times higher than in the deepest world economic crisis up to now in 1929. according to Stephan Engel(2) of the MLPD in Germany.

This overproduction of capital by a capitalist system should come as no surprise to us and Marx himself noted it and saw the periodic crisis as a means of the purging of this fictitious capital - but what Marx nor Lenin forsee was the extreme to which it could go under late capitalism..

A comrade of mine Mike of Serve (3) The People Blog in Australia in an article which he recently wrote on the on the Bank of International Settlements derivatives figures published on my Political Economy Research Blog makes the following observations .

Lenin wrote, “It is characteristic of capitalism in general that the ownership of capital is separated from the application of capital to production, that money capital is separated from industrial or productive capital, and that the rentier who lives entirely on income obtained from money capital, is separated from the entrepreneur and from all who are directly concerned in the management of capital.

Imperialism, or the domination of finance capital, is that highest stage of capitalism in which this separation reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means that a small number of financially “powerful” states stand out among all the rest. The extent to which this process is going on may be judged from the statistics on emissions, i.e., the issue of all kinds of securities.”

In fact Lenin was only touching the surface of what would emerge from the creativity of the “best and brightest” of this financial oligarchy. He might never have guessed how limited and infantile his phrase “all kinds of securities” might appear from the vantage point of the 1970s and onwards.

To quote Stefan Engel of the MLPD again " The dimension of the present international speculative, financial, stock market and banking crisis is a new phenomenon unprecedented in the history of capitalism".

Solutions to rescue capitalism ?

Neo Keynesian Solutions : already we have people like Eric Hobsbawn heralding the reurn of Keynes and the left social democrats wants to resurrect this dead and discredited school of zombie political economy.

Here is what Andrew Kliman (4) writes about this school of capitalist thought

There’s an ideological return to Keynesianism, there has been for some time, among some on the left. They’ve given up on the possibility of socialism, so they desperately cling to the quasi-Keynesian notion of a “rising tide that lifts all boats” as something that can make people’s lives better within capitalism. I think the historical record speaks clearly here. Welfare-state capitalism failed miserably. Its supposed gains were unsustainable once the postwar boom ended. The failure of Keynesian policies to deal with the simultaneous inflation and stagnation of the 1970s-stagflation-basically put an end to Keynesianism as theory, except among ideologues desperate for a progressive alternative to socialism.

The quasi-Keynesian notion that, by raising wages, governments can stimulate spending and create such prosperity that even the capitalists will be pleased with the results-rather than triggering a flight of capital to the Third World and other low-wage regions-has been disproved in practice. It’s also far-fetched theoretically. Capitalists make more profit when they pay lower wages, not when they pay higher wages. To the extent that Keynesian policies were ever able to work at all, if they did indeed ever work, it is because, as Keynes himself recognized, we had “closed economies” shielded from international competition and international financial markets. But we live in different times.

Or mabe for a more succint statement about Keynesianism here is from our Indian comrades in the CPI Maoist in Peoples Truth .

But this Keynesian alternative is no real solution; it is a mere palliative to give immediate relief. The social democrats and the CPI/CPM type socialists may harp on these alternatives but they will have to explain the earlier failures of the Keynesian model of the 1960s resulting in the crisis which began in the 1970s, and still continues. Also they will have to explain the collapse of the Soviet Union (after capitalist restoration) and those of the then East European countries — all of which were built on a powerful state sector.

This Keynesian solution to the crisis has the greatest influence in the Labour and Liberal parties in the United Kingdom.

The New Right Solutions : These are the characters which encompass anarcho capitalists and the new right politics in USA exemplified by ex Presidential candidate Ron Paul they are sometimes called economic Populists and just like in the 1970's when we underestimated the Hayeks and Friedmanites because they were oddballs we are in danger of underestimating the right wing fight back of so called free market populists today.

These characters paint the corporate welfare system of Neo Liberalism has Socialism !

Here is David Morris(5) in Counterpunch ridiculing their ideology.

"The contradiction between the stated aims of deregulation and its real consequences couldn't be clearer. Deregulation leads to wild speculation in which financiers make big bucks and industries get destroyed, and then the public gets stuck with the bill.

Conservative Republicans have effectively cultivated and based their power on the mass delusion that every man is an island, reaping the rewards of his own hard labor.

But in reality, most of their primary constituents are corporate welfare kings, grown fat, lazy, and corrupt on risky bets, riding around in Cadillacs secure in the knowledge that a big-government safety net is there if anything goes wrong."

Why Joe the Pumber is a Socialist by David Morris in Counterpunch

Here is Ralph Nader (6) punching holes in the new right :

Indeed, the right-wing pundits and the revisionists in Congress are spending an inordinate amount of time falsely claiming that our nation’s current financial disaster stems from the Community Reinvestment Act, a law passed by Congress and signed into law by President Jimmy Carter in 1977. The primary purpose of this modest law is to require banks to report on where and to whom they are making loans.

Community organizations have used the data produced as a result of this law to determine if banks were meeting their lending obligations in the minority and lower-income communities in which they do business. Congress passed this law because too many lenders were discriminating against minority borrowers. “Redlining” was the name given to the practice by banks of literally drawing a red line around minority areas and then proceeding to deny people within the red border home loans – even if they were otherwise qualified.

The law has been in place for 30 years, but the right-wing fringe claims it somehow is responsible for predatory lending practices that date back just to the beginning of this decade.

Notice what these revisionists are not mentioning.

No “thank you” to former Senator Phil Gramm for pushing the repeal of the Glass-Steagall Act. This law was passed in the wake of the stock market crash of 1929 - and designed to separate banking from securities activities. In 1999, when Congress passed the Gramm-Leach-Bliley Act and in so doing repealed Glass-Steagall the banks strayed into rough waters by looking for fast money from risky investments in securities and derivatives.

As predatory lending mushroomed out of control, the regulators -- key among them, the Federal Reserve and the Office of Comptroller of Currency -- sat on their hands. The Federal Reserve took exactly three formal actions against subprime lenders from 2002 to 2007.

Bloomberg news service found that the Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

No “tip of the hat” to the Bush Administration for preempting state regulators and Attorneys General from using state consumer laws to crack down on predatory and sub-prime lending by national banks.

I think Brendan M Cooney of Kapitalism101 on the Internet has the best summation of this right wing line of thought as follows :

"Surely, this is what was most fascinating about the Ron Paul phenomenon: how Ron Paul fused the libertarian and conspiracy causes.

If we take libertarianism to be the basic ideological distillation of modern economics isn’t it revealing how close the bourgeois theories of crisis coincide with the conspiratorial notion of an evil, outside force destroying the fabric of society- governments, the FED, jews, aliens.

Neither can see that capitalist crisis is indistinguishable from capitalism itself".

Has I have already stated because their right wing ideology may strike us as stupid it does not mean we should dismiss it. We have to take time out to systematically expose it has it has already found its way into Conservative Party ideology in the UK as well as informs some of the populist economics of the fascist British National Party.

Whatever eclectic mix Capitalism finds it can reconfigure itself again out of this crisis in the absence of a socialist alternative - at a political and social cost we may find has terrifying has they find the derivatives black hole at the centre of the capitalist financial universe.

The only Systemic solution to the problems of Capitalism is Socialism.

An economic system that periodically lays waste vast human and material resouces through devaluation of real and ficticious capital is no answer to the probems of the resource hungary 21st Century and we again reminded once again that real human labour value in the real economy is important and that the value theory prized by Ricardo and eliminated of its contradictions by Marx is a useful tool when examining the anatomy of capitalist crisis.Measuring the real wealth of production and the unreal paper wealth is the capitalist problem of the hour and we have the conceptual tools to do it

The fictional capital of today is the offspring of Neo Classical Economics which concerned itself primarily with prices ignoring or denying the validity of the underlying law of value as a deteminant in the economic process.Neo Classical Economics is as mechanistic as the grandfather clock in a world of dialectical contradiction.

The new political economy of socialism in the 21st century must go beyond the law of value of capitalism and accumulation for accumulations sake and never agan take the road of revisionist political economy as in the 20th century..

It should draw on the work of the Professor of Political,Economy at University of Utah the Marxist Leninist Maoist Minqi Li who outlines the necessity of the transformation of the world economy to Socialism in the 21st Century.Here he is addressing the the dematerialisation arguement for a sustainable capitalism based on service sector..

Minqi li (7) writes

"In the core states of the capitalist world economy so called services account for some two thirds of GDP. Some argue that has the economy moves towards services capitalism becomes increasingly dematerialised which would allow capital accumulation to take place without rising consumption of material resources.

In fact some services such as transportation and telecommunications are extentions of material production sectors and are highly capital intensive, some services like such as wholesale and retail , trade finance and real estate are non productive sectors in the sense that their income arise from the redistribution of surplus value from other sectors and cannot produce surplus value independently"

Thus the operation of these sectors require material inputs such as buildingss office equipment and office supplies and energy for business operations as well as material consumption for their work force.

The expansion of the service sectors cannot take place without the expansion of material production sectors moreover the dematerialisation in the core states reflects to a large extent the relocation of industry to the perifery and semi perifery and the redistribution of surplus value from the semi perifery and perifery to the core.

Therefore the drive for capitalist accumulation inevitably leads to rising consumption of energy and other material resources.

The Global capitalist economy currently depends heavily on non renewable resources for energy and raw materials and is clearly unsustainable

Our task is to make a popular proof that socialism is the only possible societal alternative by both criticising the alternatives and laying out a positive vision of socialism

I recommend you all read Minqi Li's Between the Realm of Necessity and the Realm of Freedom - Historical possibilties of the 21st Century for that positive vision of Socialism.

The British Economy in the World Capitalist System

The British Economy is currently in free fall and it shrank 1.9% in the first three months of 2009 and forecasts show a continuation of the contraction of the British Economy - with uncertainty as to when it will end.

What does the British Economy look like sector wise at this time :

6.3% agriculture
13% manufacturing
2.7% mining
1.6% electricity
31% financial and business services
18.2% Public administration and Education
14.4% Distribution
6.9% Transport
5.2% Other

Has a result of the neo Liberal policies of Thatcher and New Labour the manufacturing base of the United Kingdom underwent a massive decline and the financial sector rapid growth and this leaves Britain amongst the countries most exposed by the collapse in the financial markets and the current world economic crisis.What is particularly worrying is that the small UK industrial sector is also declining once again in this crisis has finance capital sucks industrial capital dry..

It is disingenious for Conservatives to blame New Labour for the dominant neo Liberal economics as they are its authors under Thatcher and if Thatcher was the mother then Brown was the father of this vulgar economics of the late 20th century.

The reconstituion of a socialist and communist movement in Britain and seizure of State power by working people would bring forth the possibility of an economic programme for a new Green Industrial Revolution with a National Recovery Authority to help plan and design ecologically sound industries for the new mid 21st Century world economic system of socialism.

If we fail this time capitalism will reconfigure itself out of the crisis by a massive concentration of financial and industrial corporations all reciepients of tax payer largess or corporate welfare while whole swathes of the population just like following the Thatcher years will never find full time employment again except this time because the crisis is bigger the pain inflicted on working people will be proportionately greater than we have yet experienced in our lifetimes..

Fightback - Lessons of the Past innovations of the Future.

We should have no illusions about the depth of this crisis and our current weakness to fight back

We are not in the 1930's with the Soviet Union and the Comintern and mass communist parties in some capitalist countries or even small communist parties as in Britain which managed to have considerable postive impact on the fight back during the Depression with the National Union of the Unemployed Workers under Wal Hannington's brilliant leadership.

Resistance in the 1930's took the form of tenants organisations which fought evictions today we need to address evictions of tenants and homeowners and need to identify which Banks or Building societies or Property companies are evicting the most people and target them for direct action.

With the Government attack on benefits and Welfare Reform we have a direct link to the attack on National Assistance that took place in the 1930's with the dreaded visit from the National Assitance officer to assess what benefit you could get or loose..

There must be a national campaign and direct action against Welfare Reform - Labour in the 1930's pushed more people off National Assistance than did the Tory Government - feeding people will also become part of the battle against Welfare Reform with exposure of Supermarket Price rip offs and Supermarket eat ins as recently started in France.

Of course these are only defensive economic measures but we need to revive culture so people can have a vision of socialism - the anarchists with their street theatre can teach us something here - cinema provided the capitalist vision in the 1930's we must provide an alternative media via the Internet or on the Street with DVD's.

Communists in the 1930's spend considerable effort in the Trade Union Movement fighting wage cuts and lay offs and with innovations like stay down strikes in Pits and Plant sit ins - we need to be just as innovative today to resist plant closures and loss of jobs.

We should also wary of merely being the hunting dogs in the Unions for Trade Union bureaucrats just providing bigger reformist Trade Unions we need to organise to end capitalism inside Trade Unions not be its labour lieutenants.

The process of building mass movements would be enormously aided by the creation of initially an organisation or as soon as practical a party based upon Marxism Leninism Maoism the summation of 20th century communist experience has the absence of such a party from the British scene which can organise and connect up mass struggles and initiate the struggle for State power is a weakness that cannot be tolerated any longer..


(a) Engels : Socialism Utopian and Scientific

(1) On the Roots of the Current Economic Crisis and Some Proposed Solutions
by Andrew Kliman, Author of Reclaiming Marx’s “Capital“: A refutation of the myth of inconsistency
(2) "A new tactical starting situation" Interview given by Stefan Engel, chairman of the MLPD, to the "Red Flag" of the MLPD December 29, 2008

(3) Mike of Serve the People Blog - Derivatives and the Over Production of Capital

(4) Andrew Kliman on Keynes on Political Economy Research

(5) David Morris in Counterpunch Joe the Plumber was a Socialist
(6) Ralph Nader leads the counter attack on new freemarket fundamentalists on Political Economy Research
(7) Minqi Li - The Rise of China and the Demise of the World Capitalist Economy - Pluto Books

Friday, July 3, 2009

Overproduction not Financial Collapse is the Heart of the Crisis: the US, East Asia, and the World


Marxist economic historian Robert P. Brenner. Brenner offers a critique of the capitalist system, and describes the source of today’s economic crisis as an overcapacity in global manufacturing that is being replicated in Asian countries, thereby perpetuating the crisis. The downward slide toward an asset-price Keynesianism, or “bubblenomics,” has also contributed to the current state of the global economy and proposes that the only way out of the crisis is crisis itself. Turning to Korea, Brenner predicts that the Lee Myung-bak administration’s reliance on a mixture of state-led method of development and contemporary neoliberalism will not be successful in the long term and encourages Korea’s progressive community to strengthen the labor movement to restore the balance of power between the classes.
Jeong Seong-jin: Most media and analysts label the current crisis as a “financial crisis.” Do you agree with this characterization?

Robert Brenner: It’s understandable that analysts of the crisis have made the meltdown in banking and the securities markets their point of departure. But the difficulty is that they have not gone any deeper. From Treasury Secretary (Henry) Paulson and Fed Chair (Ben) Bernanke on down, they argue that the crisis can be explained simply in terms of problems in the financial sector. At the same time, they assert that the underlying real economy is strong, the so-called fundamentals in good shape. This could not be more misleading. The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., western Europe, and Japan has steadily deteriorated, business cycle by business cycle, in terms of every standard macroeconomic indicator — GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was — by far — the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in U.S. peacetime history.

Jeong: How would you explain the long-term weakening of the real economy since 1973, what you call in your work “the long downturn”?

Brenner: What mainly accounts for it is a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s. The failure of the rate of profit to recover is all the more remarkable, in view of the huge drop-off in the growth of real wages over the period. The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries. What happened was that, one-after-another, new manufacturing power entered the world market — Germany and Japan, the Northeast Asian NICs (Newly Industrializing Countries), the southeast Asian Tigers, and, finally, the Chinese Leviathan. These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and, in that way, profits. The corporations that experienced the squeeze on their profits did not, moreover, meekly leave their industries. They tried to hold their place by falling back on their capacity for innovation, speeding up investment in new technologies. But, of course, this only made overcapacity worse. Due to the fall in their rate of return, capitalists were getting smaller surpluses from their investments. They, therefore, had no choice but to slow down the growth of plants and equipment and employment. At the same time, in order to restore profitability, they held down employees’ compensation, while governments reduced the growth of social expenditures. But the consequence of all these cutbacks in spending has been a long-term problem of aggregate demand. The persistent weakness of aggregate demand has been the immediate source of the economy’s long-term weakness.

Jeong: The crisis was actually triggered by the bursting of the historic housing bubble, which had been expanding for a full decade. What is your view of its significance?

Brenner: The housing bubble needs to be understood in relation to the succession of asset price bubbles that the economy has experienced since the middle 1990s, and especially the role of the U.S. Federal Reserve in nurturing those bubbles. Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing. In effect, in order to stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation. During the early 1990s, governments in the U.S. and Europe, led by the Clinton administration, famously tried to break their addictions to debt by moving together toward balanced budgets. The idea was to let the free market govern the economy. But, because profitability had still not recovered, the reduction in deficits delivered a big shock to demand, and helped bring about the worst recessions and slowest growth of the postwar era between 1991 and 1995. To get the economy expanding again, U.S. authorities ended up adopting an approach that had been pioneered by Japan during the later 1980s. By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy. So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalized by state policy makers — and regulators — first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s.

Jeong: You were prophetic in forecasting the current crisis as well as the 2001 recession. What is your outlook for the global economy? Will it worsen, or will it recover before the end of 2009? Do you expect that the current crisis will be as severe as the Great Depression?

Brenner: The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration’s huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge.

Jeong: Many assert that the current crisis is a typical “Minsky crisis” not a Marxian one, arguing that the financial speculation-bubble-bust has played the central role in this crisis. How would you respond?

Brenner: I don’t think it’s helpful to counter-pose in that way the real and financial aspects of the crisis. As I emphasized, it is a Marxian crisis, in that it finds its roots in a long term fall and failure to recover the rate of profit, which is the fundamental source of the extended slowdown of capital accumulation right into the present. In 2001, the rate of profit for U.S. non-financial corporations was the lowest of the postwar period, except for 1980. Corporations, therefore, had no choice but to hold back on investment and employment, but this made the problem of aggregate demand worse, further darkening the business climate. This is what accounts for the ultra-slow growth during the business cycle that just ended. Nevertheless, to understand the current collapse, you have to demonstrate the connection between the weakness of the real economy and the financial meltdown. The main link is the economy’s ever increasing dependence on borrowing to keep it turning over and the government’s ever greater reliance on asset-price run-ups to allow that borrowing to continue. The basic condition for the housing and credit market bubbles was the perpetuation of low costs of borrowing. The weakness of the world economy, especially after the crises of 1997-1998 and 2001-2002, plus East Asian governments’ huge purchases of dollars to keep their currencies down and U.S.consumption growing, made for unusually low, long-term interest rates.

At the same time, the U.S.Fed kept short-term interest rates lower than at any time since the 1950s. Because they could borrow so cheaply, banks were willing to extend loans to speculators, whose investments drove the price of assets of every type ever higher and the return on lending (interest rates on bonds) ever lower. Symptomatically, housing prices soared and the yield in real terms on U.S. Treasury bonds plunged. But because yields fell ever lower, institutions the world over that depended on returns from lending had an ever more difficult time making sufficient profits. Pension funds and insurance companies were particularly hard hit, but hedge funds and investment banks were also affected. These institutions were, therefore, all too ready to make massive investments in securities backed by highly dubious sub-prime mortgages because of the unusually high returns they offered, ignoring their unusually high risk. In fact, they could not get enough of them. Their purchases of mortgage-backed securities allowed mortgage originators to keep lending to ever less qualified borrowers. The housing bubble reached historic proportions, and the economic expansion was allowed to continue. But, of course, this could not go on for very long. When housing prices fell, the real economy went into recession and the financial sector experienced a meltdown, because both had depended for their dynamism on the housing bubble. Today, the recession is making the meltdown worse because it is exacerbating the housing crisis. The meltdown is intensifying the recession because it is making access to credit so difficult. It is the mutually reinforcing interaction between the crisis in the real economy and financial sector that has made the downward slide so intractable for policy makers and the potential for catastrophe so evident.

Jeong: Even if one grants that postwar capitalism entered a period of a long downturn in the 1970s, it seems undeniable that the neoliberal capitalist offensive has prevented the worsening of the downswing since the 1980s.

Brenner: If you mean by neoliberalism the turn to finance and deregulation, I do not see that it helped the economy. But, if you mean by it, the stepped-up assault by employers and governments on workers’ wages, working conditions, and the welfare state, there can be little doubt that it prevented the fall in the rate of profit from getting worse. Even so, the employers’ offensive did not wait until the so-called neoliberal era of the 1980s. It began in the wake of the fall of profitability, starting in the early 1970s, along with Keynesianism. It did not, moreover, result in recovery of the rate of profit, and only further exacerbated the problem of aggregate demand. The weakening of aggregate demand ultimately impelled economic authorities to turn to more powerful and dangerous forms of economic stimulus, the “asset price Keynesianism” that led to the current disaster.

Jeong: Some have argued that a new paradigm of “financialization” or “finance-led capitalism” has sustained a so-called “Capital Resurgent” (Gerard Dumenil) between the 1980s and the present. What do you think of the thesis of “financialization” or “finance-led capitalism”?

Brenner: The idea of a finance led-capitalism is a contradiction in terms, beca‘use, speaking generally, there are significant exceptions, like consumer lending — sustained financial profit-making depends on sustained profit-making in the real economy. To respond to the fall in the rate of profit in the real economy, some governments, led by the U.S., encouraged a turn to finance by deregulating the financial sector. But because the real economy continued to languish, the main result of deregulation was to intensify competition in the financial sector, which made profit-making more difficult and encouraged ever greater speculation and taking of risks. Leading executives in investment banks and hedge funds were able to make fabulous fortunes, because their salaries depended on short-run profits. They were able to secure temporarily high returns by expanding their firms’ assets/lending and increasing risk. But this way of doing business, sooner or later, came at the expense of the executives own corporations’ long-term financial health, leading, most spectacularly, the fall of Wall Street’s leading investment banks. Every so-called financial expansion since the 1970s very quickly ended in a disastrous financial crisis and required a massive bailout by the state. This was true of the third-world lending boom of the 1970s and early 1980s; the savings and loan run-up, the leveraged buyout mania, and the commercial real estate bubble of the 1980s; the stock market bubble of the second half of the 1990s; and, of course, the housing and credit market bubbles of the 2000s. The financial sector appeared dynamic only because governments were prepared to go to any lengths to support it.

Jeong: Keynesianism or statism seems poised to return as the new Zeitgeist. What is your general assessment of resurgent Keynesianism or statism? Can it help to resolve, or at least, alleviate the current crisis?

Brenner: Governments today really have no choice but to turn to Keynesianism and the state to try to save the economy. After all, the free market has shown itself totally incapable of preventing or coping with economic catastrophe, let alone securing stability and growth. That’s why the world’s political elites, who only yesterday were celebrating deregulated financial markets, are suddenly now all Keynesians. But there is reason to doubt that Keynesianism, in the sense of huge government deficits and easy credit to pump up demand, can have the impact that many expect. After all, during the past seven years, thanks to the borrowing and spending encouraged by the Federal Reserve’s housing bubble and the Bush administration’s budget deficits, we witnessed what was, in effect, probably the greatest Keynesian economic stimulus in peacetime history. Yet we got the weakest business cycle in the postwar epoch.

Today, the challenge is much greater. As the housing bubble collapses and credit becomes harder to come by, households are cutting back on consumption and residential investment. As a consequence, corporations are experiencing falling profits. They are, therefore, cutting back on wages and laying off workers at a rapid pace, detonating a downward spiral of declining demand and declining profitability. Households had long counted on rising house prices to enable them to borrow more and to do their saving for them. But now, because of the build-up of debt, they will have to reduce borrowing and increase saving at the very time that the economy most needs them to consume. We can expect that much of the money that the government places in the hands of households will be saved, not spent. Since Keynesianism could barely move the economy during the expansion, what can we expect from it in the worst recession since the 1930s?
To have a significant effect on the economy, the Obama administration will likely have to contemplate a huge wave of direct or indirect government investment, in effect a form of state capitalism. To actually accomplish this, however, would require overcoming enormous political and economic obstacles. The U.S. political culture is enormously hostile to state enterprise. At the same time, the level of expenditure and state indebtedness that would be required could threaten the dollar. Until now, East Asian governments have been happy to fund U.S. external and government deficits, in order to sustain U.S. consumption and their own exports. But, with the crisis overtaking even China, these governments may lose the capacity to finance U.S. deficits, especially as they grow to unprecedented size. The truly terrifying prospect of a run on the dollar looms in the background.

Jeong: What is your general assessment of the victory of Obama in the last presidential election? Do you think Obama is a “lesser evil,” compared to the Bush administration? Many regard Obama as a F.D.R of the 21st century. Indeed, Obama promises a “new New Deal.” Do you think the anti-capitalist progressives can give critical support to some of his “new New Deal”?

Brenner: The triumph of Obama in the election is to be welcomed. A victory for McCain would have been a victory for the Republican Party and given an enormous boost to the most reactionary forces on the U.S. political scene. It would have been seen as an endorsement of the Bush administration’s hyper-militarism and imperialism, as well as its explicit agenda of eliminating what is left of unions, the welfare state, and environmental protection. That said, Obama is, like Roosevelt, a centrist Democrat, who cannot be expected, on his own, to do much to defend the interests of the vast majority of working people, who will be subjected to an accelerating assault from corporations trying to make up for their collapsing profits by reducing employment, compensation, and so forth. Obama has backed the titanic bailout of the financial sector, which represents perhaps the greatest robbery of the U.S. taxpayer in American history, especially as it came with no strings attached for the banks. He also supported the bailout of the auto industry, even though it is conditional on massive cuts in the compensation of auto workers. The bottom line is that, like Roosevelt, Obama can be expected to take decisive action in defense of working people only if he is pushed by way of organized direct action from below. The Roosevelt administration passed the main progressive legislation of the New Deal, including the Wagner Act and Social Security, only after it was pressured to do so by a great wave of mass strikes. We can expect the same from Obama.

Jeong: According to Rosa Luxemburg and, recently, David Harvey, capitalism overcomes its tendency to crisis by way of geographical expansion. According to Harvey, this is often facilitated by massive state investments in infrastructure, to back up private capital investment, often foreign direct investment. Do you think that capitalism can find an exit from the current crisis, in Harvey’s terminology, by way of a “spatial-temporal fix”?

Brenner: This is a complex issue. I think, first of all, it’s true and critically important to say that geographical expansion has been essential to every great wave of capital accumulation. You might say that growth of the size of the labor force and growth of the system’s geographical space are the sine qua non, the essentials, for capitalist growth. The postwar boom is a good example, as it featured spectacular expansions of capital into the U.S. south and southwest and into war-torn western Europe and Japan. Investment by U.S. corporations played a critical role, not only in the U.S. but in western Europe in this epoch. Without question, this expansion of the labor force and the capitalist geographical arena was indispensable for the high profit rates that made the postwar boom so dynamic. From a Marxist standpoint, this was a classical wave of capital accumulation and, necessarily, entailed both the sucking in of huge masses of labor from outside the system, especially from the pre-capitalist countryside in Germany and Japan, and the incorporation or re-incorporation of additional geographical space on a huge scale. Nevertheless, I think that, by and large, the pattern of the long downturn since the late 1960s and early 1970s has been different. It is true that capital responded to falling profitability by further expansion outward, seeking to combine advanced techniques with cheap labor.
East Asia is of course the fundamental case, and unquestionably represents a world-historical moment, a fundamental transformation, for capitalism. But, though expansion into East Asia represented a response to falling profitability, it has not, I think, constituted a satisfactory solution. This is because, at the end of the day, the new manufacturing production that has emerged so spectacularly in East Asia is to too great an extent duplicating the manufacturing production already taking place elsewhere, though taking place more cheaply. The problem is that, on a system-wide scale, it’s more exacerbating than resolving the problem of overcapacity. In other words, globalization has been a response to falling profitability, but because its new industries are not, basically, complementary for the world division of labor, but redundant , you have had a continuation of the problem of profitability. The bottom line, I think, is that to actually resolve the problem of profitability that has so long plagued the system — slowing capital accumulation and calling forth ever greater levels of borrowing to sustain stability — the system requires the crisis that has so long been postponed. Because the problem is overcapacity, massively exacerbated by the buildup of debt, what is still required is, as in the classical vision, a shakeout from the system of high-cost, low-profit firms, the subsequent cheapening of means of production, and the reduction of the price of labor. It’s by way of crisis that, historically, capitalism has restored the rate of profit and established the necessary conditions for more dynamic capital accumulation. During the postwar period, crisis has been warded off, but the cost has been a failure to revive profitability leading to worsening stagnation. The current crisis is about that shakeout that never happened.

Jeong: So you think that only the crisis can resolve the crisis? That’s a classical Marxian answer.

Brenner: I think that that is probably the case. The analogy would be this: At first, in the early 1930s, the New Deal and Keynesianism were ineffective. In fact, though the length of the 1930s, there was a failure to establish the conditions for a new boom, as was demonstrated when the economy fell back into the deep recession of 1937-1938. But, eventually, as a result of the long crisis in the 30s, you shook out the high-cost, low-profit means of production, creating the basic conditions for high rates of profit. So, by the end of the 1930s, you could say that the potential rate of profit was high and all that was missing was a shock to demand. That demand was provided, of course, by the massive spending on armaments for World War II. So, during the war, you got high rates of profit, and those high rates of profit provided the necessary condition for the postwar boom. But I don’t think that Keynesian deficits could have worked even if they had been tried in 1933, because you needed, in Marxian terms, a system-cleansing crisis first.

Jeong: Do you think that the current crisis will lead to a challenge to U.S. hegemony? World-system theorists, like Immanuel Wallerstein , who was also interviewed for this newspaper, The Hankyoreh, are arguing that the hegemony of U.S. imperialism is declining.

Brenner: This is, again, a very complex question. Perhaps I am mistaken, but I think that many of those who believe that there has been a decline in U.S. hegemony basically view U.S. hegemony as mainly an expression of U.S. geopolitical power, and, in the end, U.S. force. From this standpoint, it’s mainly U.S. dominance that makes for U.S. leadership, it’s U.S. power over and against other countries that keeps the U.S. on top. I don’t see U.S. hegemony that way. I see the elites of the world, especially the elites of the capitalist core, broadly conceived as being very happy with U.S. hegemony, because what it means for them is that the U.S. assumes the role and the cost of world policeman. This is true, I think, of the elites even of most poor countries today.

What is the goal of the U.S. world policeman? It’s not to attack other countries. Mainly, it’s to keep social order on a world scale, to create stable conditions for global capital accumulation. Its main purpose is to wipe out any popular challenges to capitalism, to support the existing structures of class relations. For most of the postwar period, there were nationalist-statist challenges, especially from below, the free rein of capital. They unquestionably were met by the most brutal U.S. force, the most naked expressions of U.S. domination. Although within the core there was U.S. hegemony, outside of it there was dominance. But, with the fall of the Soviet Union, China and Vietnam taking the capitalist road, and the defeat of national liberation movements in places like southern Africa and Central America, resistance to capitalism in the developing world was very much weakened, at least for the time being. So, today, the governments and elites not only of western and eastern Europe, Japan, and Korea, but also Brazil, India, and China — most any place you can name — would prefer the continuation of U.S. hegemony. U.S. hegemony will fall not because of the rise of another power capable of contending for world domination. Above all, China prefers U.S. hegemony. The U.S. is not planning to attack China and, until now, the U.S. has kept its market wide open to Chinese exports. With the U.S. providing the role of world policeman and insuring ever freer trade and capital movements, China has been allowed to compete in terms of cost of production, on an equal playing field, and this has been incredibly beneficial to China — it couldn’t be better.
Can the U.S. continue its hegemony in the current crisis? This is a much harder question. But, I think that, in the first instance, the answer is yes. The world’s elites want more than anything to sustain the current globalizing order, and the U.S. is key to that. None of the world’s elites are trying to exploit the crisis, and the U.S.’s enormous economic problems, to challenge U.S. hegemony. China keeps saying, “we’re not going to continue to pay for the U.S. to continue its profligate ways,” referring to the manner China covered record-breaking U.S. current account deficits during the past decade and to the titanic U.S. budget deficits now being created. But, do you think China has now cut the U.S. off? Not at all. China is still pouring as much money as it can into the U.S. to try to keep the U.S. economy going, so that China can keep developing the way it did. But, of course, what is desired is not always possible. The depth of the Chinese crisis may be so great that it can no longer afford to finance U.S. deficits. Or, the assumption of ever greater U.S. deficits and printing of money by the Federal Reserve could lead to the collapse of the dollar, detonating true catastrophe. In either case, all bets are off. If those things happened, there would have to be a construction of a new order. But under conditions of deep crisis, that would be extremely difficult. Indeed, under such conditions, the U.S., as well as other states, could easily turn to protection, nationalism, and even war.

I think, as of this moment, the elites of the world still are trying to avoid this — they are not ready for it. What they want to is to keep markets open, keep trade open. This is because they understand that the last time states resorted to protection to solve the problem was at the time of the Great Depression, and this made the depression way worse, because in effect, when some states started to protect, everybody moved to protection, and the world market closed down. Next, of course, came militarism and war. The closing of world markets would obviously be disastrous today, so elites and governments are doing their very best to prevent a protectionist, statist, nationalist, militarist outcome. But politics is not just an expression of what the elites want, and what elites want changes over time. Elites are, moreover, generally divided, and politics has autonomy. So, for example, it can hardly be ruled out that, if the crisis gets very bad, which would not at this point be a big surprise, you would see a return of far-right politics — a politics of protectionism, militarism, anti-immigration, nationalism. This sort of politics not only could have broad popular appeal, growing sections of business might find it the only way out as they see their markets collapse, the system in depression, see a need for protection from competition and state subsidies of demand by way of military spending. This was, of course, the response that prevailed in much of Europe and Japan during the crisis of the interwar period. Today, the right is on its heels, because of the failures of the Bush administration and because of the crisis. But, if the Obama administration is unable to counter the economic collapse, the right could easily come back… especially because the Democrats are really offering no ideological alternative.
Jeong: You spoke about a potential crisis in China. What do you think of the current state of the Chinese economy?
Brenner: I think the Chinese crisis is going to be a lot worse than people expect, and this is for two main reasons. The first is that the American crisis, and the global crisis more generally, is much more serious than people expected, and in the last analysis, the fate of the Chinese economy is inextricably dependent on the fate of the U.S. economy, the global economy. This is not only because China has depended to such a great extent on exports to the U.S. market. It is also because most of the rest of the world is also so dependent on the U.S., and that especially includes Europe. If I’m not mistaken, Europe recently became China’s biggest export market. But, as the crisis originating in the U.S. brings down Europe, Europe’s market for Chinese goods will also contract. So the situation for China is much worse than what people expected, because the economic crisis is much worse than people expected. Secondly, in people’s enthusiasm for what has been China’s truly spectacular economic growth, they have ignored the role of bubbles in driving the Chinese economy. China has grown, basically by way of exports and, particularly, a growing trade surplus with the U.S. Because of this surplus, the Chinese government has had to take political steps to keep the Chinese currency down and Chinese manufacturing competitive.
Specifically, it has bought up U.S. dollar-denominated assets on a titanic scale by printing titanic amounts of the renminbi, the Chinese currency. But the result has been to inject huge amounts of money into the Chinese economy, making for ever easier credit over a long period. On the one hand, enterprises and local governments have used this easy credit to finance massive investment. But this has made for ever greater overcapacity. On the other hand, they have used the easy credit to buy land, houses, shares, and other sorts of financial assets. But this has made for massive asset price bubbles, which have played a part, as in the U.S., in allowing for more borrowing and spending. As the Chinese bubbles bust, the depth of the overcapacity will be made clear. As the Chinese bubbles bust, you will also have, as across much of the rest of the world, a huge hit to consumer demand and disruptive financial crisis So, the bottom line is that the Chinese crisis is very serious, and could make the global crisis much more severe.

Jeong: So you think the capitalist logic of overproduction is also applied to China.

Brenner: Yes, just like in Korea and much of East Asia in the later 90s. It’s not that dissimilar. The only thing that hasn’t happened yet is the kind of revaluation of the currency that really killed the Korean manufacturing expansion. The Chinese government is doing everything to avoid that.

Jeong: So, then you do not agree with the characterization of Chinese society as a kind of “non-capitalist market economy”.
Brenner: Not at all.

Jeong: So you think China is currently capitalist?

Brenner: I think it’s fully capitalist. You might say that China had a market non-capitalist economy maybe through the 80s, when they had very impressive growth by means of the town and village enterprises. The TVE’s were publicly owned, owned by local governments, but operated on a market basis. That economic form, you might say, initiated the transition to capitalism. So perhaps up to maybe the early 90s, it was still a kind of non-capitalist market society, especially because there was still such a big industrial sector owned and planned by the central state. But, from that point on, there was a transition to capitalism, which has certainly by now been completed.

Jeong: What do you think of the severity of the coming Korean economic crisis? Do you think it could be more severe than the IMF crisis of 1997-1998? In order to cope with the coming crisis, the Lee Myung-bak government is now reviving Park Chung-Hee-style state-led investment for the construction of huge social infrastructure, especially the Korean Peninsula’s “Grand Canal,” while copying Obama’s “green growth” policies. However, Lee Myung-bak’s government still tries to stick to the neoliberal deregulation policies of the post-1997 crisis period, especially by turning to the U.S.-Korea Free Trade Agreement. You might call this a hybrid approach, combining what seems to be an anachronistic return to a Park Chung-Hee-style state-led method of development with contemporary neoliberalism. Will it be effective in combating or alleviating the coming crisis?

Brenner: I’m doubtful that it will be effective. This is not necessarily either because it represents a throwback to Park’s state-led organized capitalism or because it embraces neoliberalism. It is because, whatever its internal form, it continues to depend on globalization at a time when the global crisis is bringing about an extraordinary contraction of the world market. We were just talking about China, and I was arguing that China is likely to be in serious trouble. But China has low wages, potentially a huge domestic market, so, over time, it could conceivably have a better shot than Korea of confronting the crisis, though I’m far from sure about this. Korea, I think will be hard hit. It was hard hit in 1997-1998, but was saved by the U.S. stock market bubble and the resulting growth of U.S. borrowing, spending, and imports. But when the U.S. stock market bubble burst in 2000-2002, Korea went into what promised to be an ever more serious crisis than 1997-1998. Nevertheless, the U.S. housing bubble came to the rescue of Korea during the recent period. But now, the U.S. bubble, the second U.S. bubble, has collapsed, and there’s no third bubble to get Korea out of the current crisis. It’s not necessarily because Korea is doing the wrong thing. It’s because I don’t think there’s going to be an easy way out for any part of what has become a truly global, interdependent capitalist system.

Jeong: So what you are saying is that the external environment is far worse than ever before.

Brenner: That’s the main point.

Jeong: What, then, are the urgent tasks of progressives in Korea? Korean progressives are very critical of Lee Myung-bak. They usually support the growth of the welfare state and redistribution of income as an alternative to Lee’s project of investing in canal construction, of big social overhead capital. This is the hot issue in Korean society today. Korean progressives point out that although Lee Myung-bak talks about “green growth,” his construction project would destroy whole environments. Do you agree with them?

Brenner: Of course we should oppose such ecologically-disastrous projects.

Jeong: Do you think that building a Swedish-type welfare state would be the reasonable strategy for Korean progressives in the midst of the economic crisis?

Brenner: I think the most important thing Korean progressives could do would be to re-strengthen the organizations of Korean labor. Only by rebuilding the Korean working class movement could the left build the power that it needs to win, whatever demands it’s advocating. The only way that working people can really develop their power is through building new organizations in the course of struggle, and it’s only in the course of struggle that they are likely to come to a progressive politics, or indeed decide what a progressive politics actually should be at this moment.
I think the best way to forge a left political response today is to help the people most affected to gain the organization and power to decide what’s collectively in their interest. So, rather than try to figure out now, from above in a technocratic way, what’s the best answer, the key for the left is to catalyze the reconstitution of the power of working people. The Korean labor movement has obviously been weakened a great deal since the crisis of 1997-1998. At minimum, the priority for progressives is to do what they can to improve the environment for labor organizing, for re-strengthening the unions right now. That goes not only for Korea, but everywhere around the world. That’s the key objective. Without the revival of working class power, the left will quickly find that most issues of government policy are truly academic. I mean if the left is to affect state policy, there must be a change, a big change, in the balance of class power.

Jeong: Do you expect that there will be an opening for progressives in a world with recent failures of neoliberalism?

Brenner: The defeat of neoliberalism is definitely creating major opportunities that the left did not have before. Neoliberalism never much appealed to large parts of the population. Working people never identified with free markets, free finance, and all that. But I think that large sections of the population were convinced that this was the only alternative, they were convinced of TINA (there is no alternative). But now, the crisis has revealed the total bankruptcy of the neoliberal mode of economic organization, and you can already see the change. It has been very powerfully manifested in the opposition by American working people to the bailouts for the banks and financial sector. What they are saying today is that “We are told that saving the financial institutions, the financial markets, is the key to restoring the economy, prosperity. But we don’t believe it. We don’t want any more money going to these people who are just robbing us.” So there is a big vacuum ideologically. Thus there is a big opening for leftist ideas. The problem is that there is very little organization of working people, let alone any political expression. So, one can say there is this very big opportunity created by the change in the political environment, or the ideological climate, but that by itself is not going to provide a progressive outcome.

So, again, the top priority for progressives — for any left activists — where they should be active is in trying to revive the organizations of working people. Without the re-creation of working class power, little progress will be possible, and the only way to recreate that power is by way of mobilization for direct action. Only through working people taking action, collectively and en masse, will they be able to create the organization and amass the power necessary to provide the social basis, so to speak, for a transformation of their own consciousness, for political radicalization.

Jeong Seong-jin, 53, received his Ph.D. in Economics from Seoul National University in 1990. He has served as a professor in the Department of Economics at Gyeongsang National University in Chinju, South Gyeongsang Province, since 1996. Jeong is a renowned Marxist scholar in economics and has developed theories about the crisis in contemporary capitalism that are based on Marxian theories of economic crises. Jeong is the author of several works, including: Marxist Perspectives on South Korea in the Global Economy (2007); Neoliberal Restructuring and Labor Problems in Korea (2003); and Issues in Modern Marxist Economics (2002). His work has also appeared in international journals such as the Review of Radical Political Economics and Rethinking Marxism.

Robert P. Brenner, 63, is a renowned Marxist economic historian and a professor of history at the University of California, Los Angeles, where he is also the director of the Center for Social Theory and Comparative History. Brenner incited a debate over his ideas about the transition from feudalism to capitalism in western Europe as published in the historical journal Past and Present in the 1970s and 1980s. He is a leading contributor to the book documenting that debate, The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-industrial Europe (1987). An article he wrote for the New Left Review (November-December 2000) led to another intellectual controversy and became the basis for his book, The Boom and The Bubble: The US in the World Economy (2003).

Thursday, July 2, 2009

True or False: U.S. Economic Stats Lie

By Jack Hough

June 30, 2009 "Smart Money" -- How’s the economy treating you? Chances are, your answer is colored largely by three things: whether you’re working (if you want to), how much you’re making and how quickly your expenses are rising. Economists rely heavily on the same factors to judge the nation’s health. At last count, 9.4% of the workforce is jobless. Compared with a year ago, the goods and services we produce are worth 5.7% less while the ones we buy are 0.7% cheaper.

Two bright people might see sharply different things in those numbers. To one, the shrinking economy is a healthy unwinding of past excess, for example, while to another it’s a dangerous downturn that calls for bold government action. But what if the numbers themselves are something we should be debating? In the alarming view of a vocal few, America’s economic measures are misstated -- rigged, really.

The accusation goes like this: Surveyors collect the nation’s data and statisticians compile and report it. Politicians naturally want the numbers to show improvement. Not being able to change the facts, they focus on the handling of facts, pressuring statisticians to change their measurements. It’s not quite one grand conspiracy but decades of minor ones compiled. Today’s reports are so perverted, the theory holds, that the numbers have detached from common experience.

Pollyanna Creep

If the theory has a chief architect, it is John Williams, a semi-retired grandfather of five living in Oakland, Calif. The son of a chainsaw importer, Williams sold the family business in the 1970s and began consulting for corporations, recalculating government economic data to arrive at what he says were more reliable measures, and with them, truer forecasts. Today Williams runs Shadow Government Statistics ( from his home. For $175 a year subscribers get economic data and analysis adjusted to back out the accumulated effects of what Williams has dubbed the Pollyanna Creep -- Pollyanna being the orphan protagonist of the 1913 children’s book who learns to play the “glad game” to find cheery perspectives on life’s sorrows. In other words, he provides figures he feels are properly miserable, to offset government ones he says are too prettied-up.

If Williams is right, unemployment is over 20%, gross domestic product is shrinking by 8% and consumer prices are jumping by nearly 7%. His forecasts border on apocalyptic. The government is creating so much new money, he says, that the all but inevitable result is hyperinflation, where “your highest denomination, the $100 bill, becomes worth more as toilet paper than money.” Buy physical gold, he advises.

Whether we believe the forecasts or not, the possibility of a Pollyanna Creep has serious implications. Social Security payments are just one benefit adjusted each year for increases in the cost of living. If the figures hadn’t been corrupted, says Williams, checks might be close to double what they are.

Williams has managed to attract plenty of press. A year ago, Harper’s magazine featured a cover drawing of a grinning Uncle Sam fondling numeral-shaped party balloons, with the headline, “Numbers Racket: Why the Economy is Worse Than We Know.” The story centered on Williams’ data. The San Francisco Chronicle followed with “Government Economic Data Misleading, He Says.” Last fall in the London Times: “Forget Short-Sellers and Manipulators, Pollyanna Creep Could Be the Culprit.”

Government statisticians are frustrated. “Economic Data Seems Accurate” doesn’t make for a catchy headline, so the press, they say, are too quick to give credence to conspiracy theories. “We go out of our way to be transparent,” says Thomas Nardone, who during 32 years at the Bureau of Labor Statistics helped implement many of the changes in calculating the unemployment rate. “We’d be remiss if we didn’t make changes,” he says. “I’ve never seen measurement changes that were politically motivated.”

Katherine Abraham served as commissioner of BLS during the Clinton administration. Commissioners, unlike the statisticians who work for them, are political appointees. Now a professor at University of Maryland, Abraham says she did see political pressure, but rarely, and never with results. Once, she says, a prominent lawmaker told her the BLS might get more funding if it would agree to propose changes that reduce the appearance of inflation. Abraham says she rebuffed the offer.

Decide for yourself. Here’s a roundup of measurement changes at the heart of Williams’ claims, along with responses from people who work closely with the measurements. I’ll focus on unemployment and inflation, but not GDP, since the chief flaw with it, according to Williams, is how problems with the inflation measure overstate real, or after-inflation, growth. (There’s a different case to be made -- that GDP measures some fairly undesirable things, like the cost of war and divorce lawyers, and so isn’t a great proxy for economic well-being -- but I’ll save that subject for another day.)

Disappearing Jobless?

About 13 million people were unemployed during the Great Depression, or around 25% of the work force, but those are fairly recent estimates. At the time, the government simply didn’t track data like it does today, which made it difficult to judge whether things were getting better or worse. Two main developments in the 1930s made tracking unemployment feasible. The first was an improvement in the way statistics are used to turn a relatively small sample into a faithful representation of the larger population. That allowed for the use of surveys. The second was the notion of basing one’s status as part of the unemployed work force on actions. Whether someone wants to work, after all, is a subjective thing. Whether they’re looking for work is not.

Today the BLS reports six measures of unemployment, called U-1 through U-6, for which the definition of unemployment gradually broadens. For example, 4.5% of the work force has been unemployed for 15 weeks or longer and is actively looking for work (U-1), while 15.8% is unemployed if we count those who say they want work but aren’t looking, and those who work part-time for lack of full-time options (U-6).

Williams takes issue with a 1994 change that coincided with a shift to computerized data collection from pencil and paper. Until then, a discouraged worker was someone who wanted to work but had given up looking because there were no jobs. The BLS tightened the restrictions with additional questions, which reduced the ranks of discouraged workers by half. As Williams puts it, “The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers.” Add those in, he says, and unemployment approaches Great Depression levels.

Nardone, the longtime BLS economist who today serves as assistant commissioner for current employment analysis, says the 25% unemployment rate often cited for the Great Depression is based on research that corresponds with today’s U-3, the unemployment rate most commonly reported by the media. It stands at 9.4%, recall -- not close to Depression-era levels. The 1994 changes did reduce the ranks of discouraged workers, but also introduced a new category: the marginally attached, who want jobs but aren’t looking for reasons like transportation problems and child-care requirements. The most commonly watched measure (now U-3, before the change U-5) is mostly unaffected, since it doesn’t include discouraged workers. The benefit of the changes, explains Steven Haugen, a BLS economist, is a less subjective measure of discouragement, and some additional ways to judge whether the nation is not only working, but working up to its ability. Williams says the change reduced the broadest measure of unemployment in a way that “doesn’t match with public perception, and for good reason.”

Rent, Geometry and Hedonism

The same agency that reports unemployment, the BLS, also reports the consumer price index. It tracks changes in the prices of more than 8,000 goods and services, from apples in New York to gasoline in San Francisco. There are several variants of the CPI index. For example, CPI-W weights things like fuel more heavily to better reflect the commutes of workers, and is the basis for Social Security adjustments. CPI-U, the measure most often reported in the media, includes items a typical urban consumer might buy, and determines adjustments to inflation-indexed Treasury bonds. Note that “core” inflation, which excludes food and fuel, isn’t used as the basis for any federal spending program (and isn’t called “core” by the BLS, which reports but doesn’t seem to especially prize the measure).

Most CPI criticism is based on three changes that affect all indexes. In 1983 the BLS replaced house prices with something called owners’ equivalent rent to measure the cost of shelter. Williams and other critics say it understates the cost, since house prices, until recently, had outpaced rents. John Greenlees, a BLS economist, says the new method is the most widely used among developed nations and is meant to fix a flaw in the old one. The CPI is supposed to measure things people buy to use, not things they invest in. For many people, houses are a little of both. The new measure attempts to isolate the portion of housing expenditures that best reflects the cost of living. Williams says the purchase price of housing is an important factor in determining a constant standard of living, and he doubts the ability of “the government to accurately calculate how much a person would pay to rent his own house.”

Another change: In 1999 the BLS adopted a geometric mean formula to replace its arithmetic mean one. The new method weights goods less as their prices rise, and is supposed to reflect patterns of consumer substitution. Critics say that treats consumers as if they’re no worse off when they switch to hamburger from steak. Greenlees says the analogy is flawed; the methodology allows substitution only between similar goods in the same region -- from steak in Chicago to a different type of steak in Chicago, and not to hamburger. The old measure was really an overstatement of price increases, one that assumed consumers don’t react at all to higher prices, he says. Also, the impact is relatively small. The BLS has continued to calculate prices under both methodologies and says over five years ended 2004 the new measure reduced CPI growth by 0.28 percentage points a year. Williams says geometric weighting has moved the CPI away from measuring a constant standard of living. He says that when the effects are combined with those of other changes, like increased price surveying among discount stores (which he contends offer poorer service and thus a lower standard of living than the shops they replaced) the overall impact is larger than the BLS states.

Finally, in 1999 the BLS began using what it calls hedonic adjustments. Williams explains the approach with a dash of sarcasm: “That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial.” He calls the impact on CPI “substantial.” Greenlees says the name “hedonic” was an unfortunate choice, since the technique has little to do with making judgments about pleasure. It’s designed to measure the quality difference between goods when one is discontinued and must be replaced in the index with another that’s not quite the same. Adjustments can push the index in either direction, but Greenlees says the overall impact since the change has been a tiny increase in the CPI -- about 0.005% a year. Williams says some hedonic adjustments are indeed necessary, like when the size of a box of crackers changes from 12 ounces to 10 ounces. But more theoretical adjustments, he says, “overstate the quality of what the public is buying."

The BLS has published a 17-page paper countering what it calls misconceptions about the CPI. Find it here.

Williams suspects his charges motivated the paper, and has issued a response — rebuttal to the rebuttal, if you like — here