U.S. Middle East Policy: Another View of the Compass

Feb 25, 2011Daniel Berger

egypt-flag-wall-150A real understanding of the Administration's strategy to bring democracy and stability to the Middle East.

egypt-flag-wall-150A real understanding of the Administration's strategy to bring democracy and stability to the Middle East.

This responds to Naill Ferguson's misconceived diatribe against the Obama Administration's reaction to the overthrow of Hosni Mubarak in Newsweek. In it, Ferguson presents three critiques of the Administration's actions: that it was misinformed and unprepared, that it acted in a contradictory manner, and -- most damming -- that it has no overall geo-strategic plan either for the Middle East or elsewhere.

Ferguson's overall critique concerning the Middle East is fundamentally misdirected and, to the extent that it has any validity, really relates to the effects of 40 years of dubious U.S. foreign policy decisions, for which Obama can hardly be held responsible. During this period (including during the entire Cold War), the U.S. actively supported a long line of Middle East autocrats, almost always to the detriment of the Arab populaces and societies over which they ruled. Many have said recently that in this approach the U.S. favored "stability" over other considerations. It, of course, did not. What it favored was the ability to make deals with existing governing elites in the Middle East region to promote U.S. interests including fighting our enemies, securing our principal energy supply, and protecting Israel.

In retrospect, the U.S. roughly achieved these aims -- but for what now appears to be only on a temporary basis. And it did so seemingly at the expense of both long-term stability and the protection of its interest in (so far) the two largest and geo-significant countries in the region: Iran and Egypt. Ferguson assumes the prospects of future cooperation with these countries will be bleak.

It should be left to historians to decide whether this was a reasonable trade-off. Suffice to say, at least for the Cold War period, the U.S. had a real geo-strategic adversary, the Soviet Union, whose existence could arguably justify our unconditional support of the various Middle East dictators on our payroll. Since the fall of communism, however, no comparable excuse has existed.

That the U.S., in retrospect, should at some point have pursued other policies rather than helping to entrench the Middle East governing status quo long before Obama appeared on the scene is, of course, not Obama's fault. Indeed, the U.S. had many years -- decades -- and many, many opportunities to solve the basic policy challenges in the region in the post-World War II era. The fact that it was able to accomplish lasting success in only one of its core missions represents a profound judgment against U.S. policy making and execution in this region -- particularly over the last 20 years.

Nor is the Obama Administration's decision to support democratization in Egypt and hope it will produce a regime that will cooperate with us indicative of faulty policy formation, indecision, or lack of planning. It is a necessity. Indeed, in light of the history of U.S. involvement in the Middle East, what realistic alternative do we have? What grand design does Ferguson have in mind?

Furthermore, Ferguson's suggestion either that different rhetoric or more resolve from Obama could have saved Mubarak represents a fundamental misunderstanding -- bordering on delusion -- of the reality of power in Egypt and the Middle East. The issue is not about U.S. resolve, but rather about the lack of legitimacy of Mubarak and other corrupt, stagnant regimes in the region.

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Instead of trying to shift responsibility from others with whom it really resides, we might want to reflect on policies that would enhance, rather than detract from, the possibilities for successful democratization -- and which should have been followed earlier. First and foremost is to reject Ferguson's conclusion that the principal danger now in Egypt is an Islamic fundamentalist takeover. This outcome would represent the end result of what is referred to as the "Iranian" model of Middle East political change and is the outcome forecast to occur by Ferguson's recent host, the Israeli government. To the contrary, the biggest danger both to and of democratization in the region and Egypt in particular is a continuation of economic conditions that consign 40% of Egypt's population to unemployment and permanent poverty. Without some meaningful improvement in economic conditions for the Arab masses, democratization is doomed and will lead to what Ferguson fears -- or worse.

So in addition to supporting a transition to democratic process in Egypt (and since when is an interim government to be followed by elections sound policy in Iraq but not in Egypt?), the U.S. needs to support policies that permit renewed rapid economic growth in Egypt and the region, improved work place conditions, and (God forbid) a fairer distribution of wealth. Supporting some type of social justice agenda like this would be the single most important step that the U.S. could take to ensure the successful emergence of secular, representative democracy in Egypt and in the region and to blunt religious autocracy and extremism. It goes without saying that strong secular democracies would also represent desirable geo-political counter-weights to Iran. (That, and finally presiding over a fair and just settlement of the Arab-Israeli conflict by persuading Israel to trade land for peace, would be the most needed steps the U.S. could now take to achieve its objectives and protect its interests.) In his Cairo speech (indeed, in the very language cited by Ferguson), Obama explicitly recognized these social justice concerns as a bulwark against extremism. Thus, contrary to Ferguson's contention, Obama arguably has accurately analyzed a number of the fundamental dilemmas in the region.

Markets, the world economic system, shared economic growth: Duh, sounds like a no-brainer. It is mystifying why a commentator of Ferguson's stature and one of the most public proselytizers of globalization would not give Obama some credit -- instead of dismissing his remarks as hopelessly naive.

Finally, Ferguson completely omits another fundamental U.S. policy blunder in the Middle East and one which it also had decades to solve: energy dependence on an unstable area. Thirty-five years ago, Jimmy Carter (for whom Ferguson exhibits contempt) proposed and got enacted by the Congress a comprehensive energy policy, including the development of alternative fuels and increased energy efficiency and conservation. If we had followed through on even a portion of it, it would have made the U.S. completely independent of foreign oil production today. Leaving aside the economic benefits that would have accrued in terms of innovation and first-mover advantage in the energy industry (which would have positioned us to dominate long before the emergence of China as an economic competitor) and the advantages which we would have realized from energy independence in dealing with the problem of global climate change, ending Middle East oil dependency would have dramatically altered for the better the geo-political equation there. Now that would have been a real grand stratagem of the type Ferguson called for (and still could be). Again, Obama was not to blame for dismantling Carter's credible and sound plan to end dependence on Middle Eastern oil. Rather, Reagan and the Republican "revolution" of the last 30 years were responsible for that disaster. Nor is he standing in the way of alternative energy development, even if belated but still necessary, to end dependence on foreign oil.

Ferguson would have done a greater service to readers of Newsweek by discussing these and other fundamental flaws in U.S. foreign policy in the Middle East, rather than assailing Obama with the usual litany of neo-conservative fixations: radical Islam, Iran, revanchist Russia and the Chinese "threat." Only if we come to terms with the history of our Middle East policymaking and its effects can we understand Obama's reaction to Mubarak's fall, what needs to be done now, and the sufficiency of his response -- all matters on which Ferguson was silent.

Daniel Berger is an attorney in the field of complex litigation, including securities and anti-trust litigation, and has a broad-based knowledge concerning the structure and functioning of the US economy and US financial markets. He practices in Philadelphia.

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Germany's Economic Fortress Could Come Toppling Down

Feb 24, 2011Marshall Auerback

If the fiscal austerity fad continues across Europe, Germany's economy -- already feeling the impact -- may tank.

If the fiscal austerity fad continues across Europe, Germany's economy -- already feeling the impact -- may tank.

It's very courageous to write something contrary to the prevailing mainstream "conventional wisdom" (which is actually hysteria), but thankfully some people are beginning to recognize basic facts. One such voice is David Leonhardt of the NY Times, who has dared to challenge the prevailing narrative that "reckless government spending" is now endangering growth. Quite the contrary, as Leonhart points out in the context of "fiscally responsible" Germany:

Well, it turns out the German boom didn't last long. With its modest stimulus winding down, Germany's growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States -- where the stimulus program has been bigger and longer lasting -- has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany's.

Of course, let's not crack open too many bottles of champagne for the US, where unemployment is still a big deal and the current focus of economic policy is to eviscerate what is left of our social safety net. There is still a crying need for direct job creation schemes in the US to address our growth without jobs, and we're moving in the opposite direction.

And, as Leonhardt's article illustrates, it now appears that Germany's comparative ability to insulate its unemployment from the output collapse (a product of the recent strong export sector and modest fiscal stimulus) is starting to erode. In fact, European economic data has begun to sour all across the continent, and not just in the periphery countries, such as Ireland, Portugal, Spain and Greece.

European fourth quarter GDP growth came in up 0.3%, non-annualized, a little less than expected. German growth, up .4%, and French growth up, .3%, were also a little less than expected. In Germany, all things building-related were very weak, suggesting the adverse weather contributed to the weakness. However, some signs of strength in Northern Europe, such as surprisingly positive Dutch and Finnish economic growth and strong French household spending, all despite unusually bad weather, make one wonder if something else was contributing to the weakness. Specifically, Germany's industrial production fell by a very large 1.5% in December after a .6% decline in November. Maybe that is more than is warranted by adverse weather. December factory orders fell 3.4% in December.

Now, perhaps part of this is just a "give back" from the huge 5.2% rise in November. But how, then, does one explain the appalling retail data, which has failed to rise in response to last year's very considerable surge in production? The signs of flagging consumer spending are quite widespread -- in the core countries of Germany and France, no less. Although fourth quarter French household spending was apparently strong, the French consumer confidence index in January fell to 85 from 86 in December and 89 in November. In Germany, where the consumer confidence index had been soaring, it has now fallen in both December and January. More striking has been the German retail sales data, which has been very weak despite considerable strength in the indices for German consumer confidence and German retail business sentiment in the second half of last year.

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My guess is that fiscal restriction to varying degrees across Europe is probably slowing the pace of European economic growth, which may be surfacing in some of the recent data. Fiscal austerity is the price the ECB is demanding in exchange for continuing to backstop the bond markets of the periphery countries, which are suffering from ongoing solvency crises. It will almost certainly continue, as the recent German election results (where the ruling party did very poorly) suggest that Chancellor Angela Merkel feels she will be forced to adopt a harsher stance on fiscal austerity to placate the voters at home, which may well make things worse.

I don't think Germany will leave the euro zone (as many Germans are now demanding). But the weakness of its prevailing position is that they continue to see the structural problems inherent in the euro zone as symptomatic of lax fiscal policy or poor economic management on the part of the periphery countries. That's NOT the problem. The EMU structures themselves are.

The current weakness in Europe suggests that even Germany is subject to these economic pressures, as fiscal austerity is beginning to destabilize the financial systems of the GIIPS countries and weaken overall European aggregate demand. Germany's vulnerability has hitherto been masked somewhat by the comparatively strong position of its national finances to this point (although its banking system is still very vulnerable to additional shocks in other parts of the euro zone, due to the high holdings of euro-denominated national debt). The perception of Germany as an impregnable economic fortress could well change if the conditions of fiscal austerity intensify and the pressures move from the periphery to the core, as it appears they now are. Sharply rising oil prices are another new depressant, which could well affect consumer discretionary spending power as well.

For understandable historic reasons, Germany today has an irrationally high fear of Weimar-style inflation. This has precluded them from accepting more of a quasi-supra national fiscal entity of the sort that is required to fix this problem via more stimulatory fiscal policies.

At present, private spending in the euro zone and the UK is being cut back and pressures are building to do the same in the US as we approach D-Day with the debt ceiling. Politicians who fail to understand basic accounting 101 realities fail to understand that there is a huge private debt overhang to eliminate as a result of the out of control credit binge. (This was urged along by the very same people and ideas that are now posturing for austerity, as Bill Mitchell has repeatedly pointed out.)

There is a long way to go before the private sector will have adequately restructured their balance sheets so that they will be prepared to spend freely again. Unless some other sector is willing to reduce its net saving (such as the external sector via trade) or increase its deficit spending (as with the federal budget balance of late), then the mere attempt by the domestic private sector to net save out of income flows, given the existing private debt overhang, can prove very disruptive.

Would that our officials recognized this. Instead, we have the spectacle of governments across the world engaged in significant fiscal retrenchment at a time when the private sector is demonstrating a strong predisposition to save. That's understandable. Given prevailing high levels of unemployment, low capacity utilization ratios, and relatively sluggish aggregate demand, a greater predisposition by the private sector to save makes greater sense.

Who, then, can fill that gap? If it doesn't come from exports (and it's impossible for all nations to run current surpluses), then only the government can fill that gap. A lack of jobs is the result of a lack of spending. The government has the capacity to provide that extra aggregate demand, and could do so easily by directly creating the necessary work. Instead, we appear more focused on union-busting and rewarding the figures most responsible for creating this crisis in the first place.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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The Liquidation of Society versus the Global Labor Revival

Feb 24, 2011Matt Stoller

raised-fist-150We face two paths: reviving labor and with it the American middle class or the decimation of our economy. **This post originally appeared on Naked Capitalism.

Yesterday, the city of Providence, Rhode Island sent out layoff notices to every single teacher in the city. Every single one of them. If you want to understand why this is happening, why wages in the US keep getting cut, this chart tells the story.

raised-fist-150We face two paths: reviving labor and with it the American middle class or the decimation of our economy. **This post originally appeared on Naked Capitalism.

Yesterday, the city of Providence, Rhode Island sent out layoff notices to every single teacher in the city. Every single one of them. If you want to understand why this is happening, why wages in the US keep getting cut, this chart tells the story.

That’s the number of strikes since 1947. What you’ll notice is that people in America just don’t strike anymore. Why? Well, their jobs have been shipped off to factory countries, their unions have been broken, and their salaries until recently have been supplemented by credit. It’s part of a giant labor arbitrage game that the Federal Reserve and elites in both parties are happy to play. Strike, and you’re fired. Don’t strike, and your pay is probably going to be cut. Don’t like it? Sorry, we can open a plant abroad. And we have institutions, like the IMF, to make sure that we get goods from those factory countries, and get them cheap.

But it’s not cheaper, or better, or more efficient. Firing your teachers isn’t exactly “winning the future”. And outsourcing manufacturing, as Boeing found out, is often a good way to increase coordination costs, create more operational risk, and destroy value. However, the system is good at maintaining the power of oligarch-style control of cultural institutions. If no one but the kids of rich people can read, only the kids of rich people will be able to organize society’s resources. Outsourcing work to China means that workers are scared and have no leverage, so they do what management wants. Again, this isn’t efficient; the UAW sought to make small cars in the 1940s, but was rebuffed by management. Workers are closest to production; treating them terribly is a good way to degrade product quality. Silicon Valley companies give their engineers free snacks and frisbees because happy employees that take ownership over their work create good quality products. Treating people terribly scares them and makes them more pliable. Again, it’s about control.

The problem for the elites is that the system of control is breaking down. I noted a week and a half ago that the Egyptian revolution was a labor uprising against Rubinites. So to the extent that global labor arbitrage relies on sweatshops and environmental degradation in poor countries for cheap goods, successful strikes in poor countries undercuts the whole system. The reason to outsource work in the first place is to prevent workers in rich countries from gaining pricing and political power. Now workers in poor countries are getting pricing and political power? It’s actually a fragile system of control, and can be broken through either crackdowns on tax havens and oligarchs in wealthy countries or protests/strikes where the goods are made.

The Egyptian revolution was really a series of protests and highly politicized strikes, which is why people in Madison are taking inspiration from Cairo. In fact, the actions in Egypt may be creating a wave of labor actions worldwide, rippling to Wisconsin, Indiana, and Ohio. All of these strikes are aimed at a collusive set of tight relationships. Here’s new Republican Florida Governor Rick Scott in a back and forth with public employees explaining how this system works. One worker asked him about proposed benefit cuts in the face of a multi-year freeze in salaries and layoffs.

“Do you fully realize the gross unfairness of that proposal?” one worker asked Scott.

Scott said a change was needed and that, “You never know exactly what’s fair.”

“Right now your plan in underfunded, whether anyone wants to acknowledge it or not,” Scott said. “So whoever the youngest is, everyone else should thank them because there might not be a pension plan, just like we’re worried about Social Security.”

Scott didn’t mention the pension fund is about 88 percent funded – among the best in the country – while Social Security is scheduled to start paying out more than it takes in as soon as 2014.

Instead, Scott said both government and the private sector have less money to spend “and you guys all cause it.”

“As an example, you all shop at WalMart, right?” Scott said. “You don’t say, ‘Golly, I’m going to buy the product because they have a better pension plan or better health care plan or pay more taxes. You say, ‘I’m going to buy based on price.’

“That’s what taxpayers are doing now,” he said. “They’re moving around the country to pick states where they can keep more and more of their dollars. So what we’ve got to do … we’ve got to figure out how to get more efficient every day.”

A female worker was cheered when she asked this follow-up: “How do you expect employees to pay for these increases when we ourselves have not had an increase?”

“I would never defend that any compensation is ever fair for anybody, especially the hardest working people,” Scott said. “It’s never fair and it never will be fair.”

There’s a reason Scott is incoherent. Florida’s pension fund has lots of money in it, and Scott wants to make sure that workers don’t get very much of it. “You never know exactly what’s fair” and “It’s never fair and never will be fair” are cynical Rumsfeldian post-modern excuses for wealth transfers upward.

In this 5 minute long answer to another question of why workers are taking cuts while the wealthy do not have to share in the sacrifice, Scott spends time talking about luring companies to Florida, to compete with countries like China.

“There’s a reason [the jobs are overseas]. The labor’s less expensive, the regulation’s less expensive. Everything we do to make it harder on businesspeople means fewer jobs in Florida and less money to do the things we want to do."

This is absurd in one sense, because Florida’s problems have nothing to do with regulation. The whole state is underwater from a housing crash, and there’s just not enough aggregate demand to bring down unemployment. But these economic theories aren’t about efficiency, they are about a value system. Scott is arguing for a low trust low cost world, with no education, no regulatory standards, and low quality output. This is the dominant strain of thinking among American elites. It’s not just Rhode Island, where the teachers are literally all under threat of being fired (and where in 2010 Obama apparently sought to win the future by applauding this firing of teachers). In New York, Democratic Governor and prospective 2016 presidential candidate Andrew Cuomo is gleefully slashing huge chunks of education and health care rather than retain a mild tax on the wealthy. This is a great way to increase crime, disease rates, and social disorder resulting from inequality.

Cuomo is just acting like a standard neoliberal Democrat. Obama has put forward a proposed pay freeze on non-security state Federal government workers, and Senate Democrats want to extent that for at least five years. That’s their starting position negotiating against the GOP. You can’t have a good regulatory state when you don’t pay regulators good wages. Instead, what you have when government is expansive and poorly run is big government corruption.

The GOP likes to foster corruption through privatization of public services, a shadow large government in the form of security contractors, corporations, and banks that are supported with taxpayer money but consider themselves part of the “private sector”. The elite Democratic model of governance is more subtle; it is embodied in high expertise-driven regulatory programs like the health care bill, cap and trade, GSE reform and Dodd-Frank. Low pay for regulators means corruption in the form of the revolving door. Whether it’s Scott Walker demanding the right to give state power plants and Medicaid money to oligarchs, or revolving door corruption through low pay to regulators, the real agenda of the elites seems to be: cuts for you, corruption for me. Whether the state Senate Democrats in Wisconsin represent an anomaly or a trend is an open question. Efficient this is not, but again, it’s not about efficiency, it’s about control.

Egyptians are trying to throw off the IMF-imposed austerity measures that created such a system for their country. The new government there is proposing raising taxes on oligarchs, increasing food subsidies, and reducing inequality. Their new cabinet is letting more people apply for “monthly portions of sugar, cooking oil, and rice.” The previous cabinet, “which was comprised of businessmen and former corporate executives”, had refused this.

And look at how Egypt is treating public employees: “Temporary workers who have spent at least three years working for the government will now be given permanent contracts that carry higher salaries, and benefits such as pension plans, and health and social insurance.”

Pension plans, health, and social insurance, oh my! How are they planning to pay for this? One member of a left-of-center party made it quite clear:

Confiscating wealth looted by cronies of the former regime, more egalitarian distribution of wealth, gradual taxation, better government oversight, and placing “a reasonable ceiling” on profitability of goods and services sold to the public are among the measures that should restore an economic balance to society, he said.

It is too early to pretend like this is a done deal, but it is certainly the case that the mass exercise of people-power in Egypt made this far more possible than it had been before. Even after Mubarak resigned, and even when the army tried to ban labor gatherings, the Egyptian labor movement continued to strike, gather, and make demands.

As Daniel Ellsberg once said, “Courage is contagious.” And what happened in Wisconsin came from the inspiration of seeing millions of powerless people join together and overthrow a regime in Egypt. It didn’t come from union leaders, who have been perpetually unprepared for the onslaught against them. Just look at the webpage of the AFL-CIO of Wisconsin. It looks like it was designed by Geocities in 1997. Yet, #wiunion has been trending on and off for a week on Twitter and has inspired actions all over the country (check out the Cheesehead protest in NYC).

This upsurge certainly didn’t come from the Democratic Party leadership. I mean, Rhode Island is a pretty reliable blue state and the last Mayor of Providence was just elected to Congress as a Democrat. Meanwhile, Former Democratic Michigan Governor Jennifer Granholm is saying the Wisconsin state Senators need to get back to work. And what is striking about Obama’s posture on the greatest uprising in American labor history of this century is how he is really nowhere, meekly tut-tutting about union busting while gravely acknowledging fiscal realities and tough choices. But the Wisconsin protests happen every day without formal authority structures. This quote from the Huffington Post Hill newsletter shows that there is something new going on.

Tom O’Grady, a union sheet metal worker from Sun Prairie, Wis., said the sight of youngsters protesting against Gov. Scott Walker’s efforts to gut collective bargaining rights is bittersweet. “It’s humbling,” said O’Grady, 60. “We see all these kids, they may never have a union job, and they’re here every night for us? It’s very humbling.”

Striking just isn’t in the collective memory of the American public anymore. This kind of highly politicized hybrid political protest/strike walks like an Egyptian these days, which is why Egyptians were sending Wisconsinites pizza and Madison protesters were holding signs lauding teachers, workers, and the new Egyptian flag. In fact, Madison may represent a new kind of American labor model, the melding of old school unions, Howard Dean-style internet-based organizing, Anonymous-style serious pranking, and social media reporting on protests and policy. There’s an anti-bailout class-based fervor here as well, with a simmering anger at Wall Street as subtext. It’s headless and global, though there is leadership. The most powerful moment so far in the Wisconsin conflict didn’t come from the actions of a labor leader, but from a prank call by alt-weekly “Buffalo Beast” editor Ian Murphy, who pretended to be billionaire American oligarch David Koch and had a frank 20 minute conversation with Governor Scott Walker. Murphy originally wanted to pose as Hosni Mubarak, but couldn’t pull off the accent.

Perversely, people may be so beaten down that they only want to side with institutions that are visibly and aggressively advocating for them. This might lead them to recognize that middle class interests are aligned with those of labor, which was the widespread view in the first generation after World War II. However, that also means that the de facto business unionism of the 1970s onward isn’t appealing. People might only like unions when they see strikes, otherwise all they hear about is backroom negotiations. Perhaps effectively striking is actually the way to force people to ask questions about what kind of country they want to live in. I haven’t seen this much labor coverage since, well, ever in my lifetime. There seems to be multiple feedback loops at work: political, global, and economic.

As commodity prices shoot up, and become more volatile, the pressure to liquidate America will only increase. These increases take the form of gifting public assets to oligarchs, taxing the middle class and poor, slashing social service budgets, and cutting wages through inflation and outright demotions (like the NYC sanitation workers that were demoted right before a giant blizzard). But civil unrest is intensifying it its most basic forms, protests and strikes, and in advanced forms, like the blowback at the national security state embodied in the HB Gary and Wikileaks fiasco.

What we are seeing is two political and economic systems, increasingly at odds – high trust and cooperative, or dominance-based and lowest common denominator. This is not, fundamentally, a debate about economics. It is true that neoclassical economics doesn’t work, leads to corruption, and is intellectually dishonest. But that’s why this isn’t a question of economics, because the dishonesty is part of a system of corrupted values.

It is Andrew Mellon morality, the kind that led to the Great Depression (and will lead again to catastrophe):

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Or it is the morality of Martin Luther King:

“True compassion is more than flinging a coin to a beggar. It comes to see that an edifice which produces beggars needs restructuring.”

Sometimes it really is that simple.

Matt Stoller is a Fellow at the Roosevelt Institute and the former Senior Policy Advisor to Congressman Alan Grayson.

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Even With a New Boss, Ireland's Prospects are as Bleak as the Potato Famine

Feb 16, 2011Marshall Auerback

Marshall Auerback sees little hope for Ireland as it remains confined by its devil's pact with the eurozone.

Anybody who had hopes that an election in Ireland would provide at least the beginning of change from the current ruinous set of policies has to be disappointed with the Opposition Party Fine Gael's proposals for "reform." The objectives sound absolutely marvelous, but one wonders how the new government will achieve them (as reported by the Irish Times):

Marshall Auerback sees little hope for Ireland as it remains confined by its devil's pact with the eurozone.

Anybody who had hopes that an election in Ireland would provide at least the beginning of change from the current ruinous set of policies has to be disappointed with the Opposition Party Fine Gael's proposals for "reform." The objectives sound absolutely marvelous, but one wonders how the new government will achieve them (as reported by the Irish Times):

Fine Gael today published its election manifesto, which party leader Enda Kenny claimed would help transform Ireland.

Among the proposals contained in the document is a promise to create thousands of new jobs, an overhaul of the health service, a reduction in the number of national politicians, protection of State pensions and payments to the most vulnerable members of society and public sector reform.

"Every section of the manifesto has been prepared with a view to maximising job creation, growth, and the transformation and modernisation of our public services," said Mr. Kenny this morning.

Sounds wonderful, doesn't it? So how does Fine Gael hope to achieve this economic nirvana? According to the Guardian:

A government led by Fine Gael would be committed to driving down Ireland's budget deficit to 3% of gross domestic product by 2014, its leader, Enda Kenny, has pledged.

Referring to slashing the budget deficit, he said: "Irish people don't like to think there is an interminable night in front of them in terms of this economic burden."

Kenny said he believed the public wanted the national debt dealt with sooner rather than later.

"The next government must pick up the pieces," he said. "It must steer the country away from bankruptcy by solving the debt crisis in a way that protects the most vulnerable and distributes the burden fairly."

In other words, more of the same neo-liberal nonsense that has driven the country to the precipice.

With unemployment now standing at 15% of GDP, one of the largest cumulative contractions ever recorded in Irish history, the EU/IMF "rescue package" has surely hammered the final nail into the coffin of the Republic of Ireland. The country is being saddled with a punitive 5.8% interest rate on a multi-billion euro loan, which will largely be used to repay German, French, and British bondholders. Irish taxpayers, by contrast, receive nothing.

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As Argentina demonstrated in 2001, sovereign governments are not necessarily hostage to global financial markets. They can steer a strong recovery path based on domestically orientated policies -- such as the introduction of a Job Guarantee program -- which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings.

But a necessary precondition for Argentina's salvation was the abandonment of its currency peg regime, which effectively had limited the country's room to maneuver fiscally.

Ireland must do the same. Let's be clear: there is no public debt crisis without the euro. As Bill Mitchell has highlighted, Greece has a public debt ratio of about 144 percent of GDP with Italy at about 118 percent, Belgium at 102 percent, Ireland at 98 percent, France at 83 percent, etc. Japan is now over 204 percent, the UK is at about 75 percent, the US is at about 59 percent, etc.

But in the latter three countries, in spite of ridiculous statements to the contrary, there is no public debt crisis. Why not? Answer: because, as Mitchell notes, "those nations have all retained currency sovereignty and have little or zero foreign debt exposure. This means they can always find the wherewithal to honor all outstanding public debt commitments."

By contrast, none of the EMU nations have the capacity to honor their public debt commitments under all circumstances because their debt is effectively in a "foreign currency" -- they ceded their individual currency issuing monopolies when they entered the eurozone. First, they have given up their monetary sovereignty by giving up their national currencies and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector's capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues, and this applies perfectly well to Ireland, Portugal and even countries like Germany and France.

Additionally, by entering the eurozone, these countries have also agreed to abide by the Maastricht treaty, which restricts their budget deficit to only 3% and debt to 60% of GDP. Therefore, even if they are able to borrow and finance their deficit spending like Germany and France, they are not supposed to use fiscal policy above those limits. Of course many did, including Germany and France. But if we are correct that domestic income deflation will be the end result of fiscal retrenchment colliding with private sector attempts to net save, then surely more desperate citizens will turn to even more desperate acts.

The bottom line is that growth is needed for the deficit to fall. Growth comes with spending. If the private sector doesn't want to spend in sufficient volumes to promote growth, then the public sector has to. Otherwise you get stagnation and large deficits. But to engage in spending, a government needs full fiscal sovereignty. Only then can the state push-start a very recessed economy and restore private confidence.

But having given up its fiscal sovereignty, there is little hope for Ireland. The only way out of the current mess is not through more of the same tired neo-liberal nostrums being offered up by Fine Gael, but the imposition of a loss on bondholders. These are the same who engaged in speculative financial activity yet continue to demand unlimited compensation off the backs of the Irish people for their gambling losses. Until this step is taken, Ireland hasn't a hope of stabilizing its finances, and its prospects are as bleak as they were during the potato famine.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Deficit Hawks Down: The Misconstrued "Facts" Behind Their Hype

Feb 11, 2011James K. Galbraith

deficit-150Economist James K. Galbraith attends a Pete Peterson-funded road show.

deficit-150Economist James K. Galbraith attends a Pete Peterson-funded road show.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt -- and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as "the defining issue of our time." It is, he said, a question of "how big a debt we can have and what can we afford?" He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

A notable feature of Bixby's presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. But Mr. Bixby seemed not to have noticed either event. Flashing this chart, he merely commented that "Congress took care" of the budget surplus. Still, the charts did show the facts -- and in this respect they were the intellectual highpoint of the occasion.

A David Walker speech is always worth listening to with care, for Mr. Walker is a reliable and thorough enumerator of popular deficit-scare themes. Three of these in particular caught my attention on Wednesday.

To my surprise, Walker began on a disarming note: he acknowledged that the level of our national debt is not actually high. In relation to GDP, it is only a bit over half of what it was in 1946. And to give more credit, the number Walker used, 63 percent, refers to debt held by the public, which is the correct construct -- not the 90+ percent figure for gross debt, commonly seen in press reports and in comparisons with other countries. The relevant number is today below where it was in the mid-1950s, and comparable to the early 1990s.

But Mr. Walker countered that fact with another, which I'd never heard mentioned before: in real terms he said -- that is, after adjusting for inflation -- per capita national debt is now twice what it was back then.

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The problem is that real per capita national debt is a concept with no economic meaning or importance. (No government agency reports it, either.) Even in the private sector, debt levels matter only in relation to income and wealth: richer people can (and do) take on more debt. Real per capita national income is well over three times higher today than it was in 1946 -- so how could it possibly matter that the "real per capita national debt" is twice as high?

Next, Mr. Walker made a comparison between the United States and Greece, with the implication being that this country might, some day soon, face that country's interest costs. But of course this is nonsense. Greece is a small nation that has to borrow in a currency it cannot control. The United States is a large nation that pays up in a money it can print. There is no chance the markets will mistake the US for Greece, and of course they have not done so.

Finally, Mr. Walker warned that "foreign lenders... can't dump their debt but can curb their appetite" for new US Treasury bonds. This was an oblique reference to the yellow peril. The idea, when you think about it, is that the Chinese central bank will acquire dollars -- which it does when China runs an export surplus -- and then fail to convert them into Treasury bonds, thereby choosing, voluntarily, to hold dollars in cash, which earns no interest, instead of as Treasury bills, which do. Mr. Walker did not try to explain why this would appeal to the Chinese.

Walker closed by calling for action tied to an increase in the debt ceiling; specifically for a hard cap on the debt-to-GDP ratio with "enforcement mechanisms," which could include pro rata cuts in Social Security and Medicare benefits and tax surcharges. He did not specify whether the cap should apply to gross federal debt or only to that part of the debt held by the public (a number which the Federal Reserve can change, any time it wants, by buying or selling public debt). When pressed, in the question period, he would not even say what he thought the cap should be.

I waited for Ms. Rivlin to add something sensible. But she did not. Apart from some platitudes -- she favors "serious tax reform" and "restructuring Medicare" -- her interesting contribution was to restate Mr. Walker's comment about "foreign lenders," who might say "we're not going to lend you any more money." That this would amount to saying "we're not going to sell you any more goods" seems -- from a question-and-answer and brief exchange afterward -- genuinely not to have crossed her mind.

The Fiscal Solutions Tour comes with a nice brochure, and even (in my case) with a flash drive containing Mr. Bixby's powerpoints. But does Mr. Peterson think he's getting his money's worth? The President, in his State of the Union, mostly ignored him. The Bowles-Simpson effort (which he paid for in part) and the closely allied Rivlin-Domenici plan are fading from view. And as the House Republicans forge their own course, demanding radical spending cuts right now -- for political rather than economic reasons, which they don't even bother to explain -- the tired and shabby arguments of these old deficit-worriers hardly seem connected, any more, to the battles at hand.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

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The Egyptian Revolt Goes Back to its Roots -- in the Soil

Feb 8, 2011Jon Rynn

egypt-flag-wall-150A change in agriculture, industry and employment must accompany a change in government.

egypt-flag-wall-150A change in agriculture, industry and employment must accompany a change in government.

Egypt, which was once the breadbasket for the Roman Empire, is now one of a growing number of food basket cases. A thriving center of trade and industry centuries ago, it is now marked by unemployment and dependence on tourism. Instead of dealing with these mounting problems, the Mubarak regime has swept everything under the rug and skimmed billions from the country. No wonder the population is in revolt.

Egypt has always been dependent on the Nile river, which was the foundation of what may have been humanity’s most ecologically sustainable agricultural system. In dry regions like Egypt and the Middle East, and even in areas with inadequate rainfall like much of the American West and northern China, irrigation is required to produce a large crop, normally of grains like wheat or rice. The problem, which is becoming more and more ominous, is that irrigation can destroy the soil and water on which agriculture depends. Too much water for too long a period in the wrong kind of soil, and the soil becomes salty, which doomed another ancient center of Middle Eastern civilization: the Sumerians. Or the water for irrigation might use up ancient reservoirs of water called fossil aquifers. This depletion is threatening food production from the American plains to India to China.

The Nile, on the other hand, always flooded the Nile valley annually, thus depositing nutrients and water at just the right time to grow plants but receding at just the right time to prevent too much salt from accumulating. It did this, that is, until the Aswan Dam was built in the 1960s, which prevents the Nile from flooding. The benefit is that the flow of water is dependable, because the Nile would often over-flood or under-irrigate, and the Dam can be used for electrical generation. The problem is that many areas are now becoming salty, the nutrients, or silt, are building up behind the Dam, and now Egypt is dependent on fossil fuel-based fertilizers for its agriculture.

Even with the Dam, Egypt has become the world’s biggest importer of grain, requiring foreign grain for 40% of its needs. Since it doesn’t have much industry, it has to trade tourism and some fossil fuels for this grain, and as a result, even university graduates have a 30 percent unemployment rate and only 3 percent of the population consumes 50 percent of goods. Meanwhile, instead of creating an industrial base that could be used to produce the goods to trade for food, the current regime either takes the money itself or spends it on useless military equipment (although much of that money comes from the US, but that’s another story). Egypt therefore has become dependent on the global economic system for its survival; it needs the food, industrial goods and fossil fuels from the global system, but it has very little to give back. This is one reason that 3 million Egyptians work outside the country, sending back badly needed money to families at home.

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It is quite possible that if the Aswan Dam was actually torn down and a different water storage and drainage system was constructed, and if Egypt took advantage of the massive amount of sunlight that falls on the deserts near the Nile to generate its electricity from solar power, it could create a sustainable economy. It would have to do all of this, just to add another wrinkle, while it created a sustainable plan for the use of the Nile’s waters.

At least 80 percent of the water that reaches Egypt actually comes from Ethiopia, where most of the Nile originates, and most of the rest comes from Sudan. There has been a long and varied history of tension among these nations concerning the use of the Nile’s rivers, as told by Steven Solomon in his book “Water: The Epic Struggle for Wealth, Power, and Civilization”. So an ecological solution to Egypt’s problems requires coordination with its neighbors to the south. On the other hand, if it is to industrialize it would probably be greatly aided if it partnered with Israel and with other Middle Eastern nations, all of which have similar problems. Together, they could all create a Middle Eastern common market, to use a term from the European Union’s past. This idea of an integrated, industrializing Middle East was the vision of Yitzhak Rabin, the Prime Minister of Israel who was cut down by a fundamentalist Israeli.

I don’t think that the current regime can pull off this balancing act. Mubarak’s choice for vice president, Omar Suleiman, has been directing the notorious “rendition” program whereby people that the United States wants to torture are “taken care of." This policy led to the false information that provided the “proof” of an Al Qaeda-Iraq connection; as James Ridgeway explains, “our loyal ally Egypt provided the fake information used by the United States to justify going to war in Iraq." The regime is so accustomed to using force and violence as a means of governing that it hatched the plot that fizzled to have “pro-Mubarak supporters” literally beat the protesters out of Tahrir square. As the New York Times explained, “Hosni Mubarak’s Egypt has long functioned as a state where wealth bought political power and political power bought great wealth." A regime based on corruption and violence cannot pull off the feats of industrializing, spreading the wealth, working with its neighbors, and most importantly, insuring that its unique ecosystems survive. It will require a regime that has real legitimacy, one that is elected democratically.

Egypt is not the only country facing the problem of an ecologically unsustainable path, the need for industrialization, the replacing of fossil fuels, and in many cases, the need for democratization. As Lester Brown has pointed out recently, there is a global food crisis emerging. It is being driven by the abuse of agricultural ecosystems and water; by using grain for ethanol and for livestock; by the inefficient use of water; and oh yes, by climate change. Let us hope that Egypt's example will not only spur change in the Middle East but create change around the entire planet.

Jon Rynn is the author of Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science from the City University of New York.

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Memo to Obama: Anything but Democracy Now for Egypt is Building on Sand

Feb 7, 2011Tom Ferguson

Food and oil prices are rising as tension in Cairo is soaring -- time to get on board with the people's demands.

Food and oil prices are rising as tension in Cairo is soaring -- time to get on board with the people's demands.

Add Barack Obama to the long list of statesmen who couldn't solve the Riddle of the Sphinx. For a while last week it looked like a miracle was happening: The United States was on the verge of doing right and doing well at the same time. After stumbling initially, the administration openly warned the Egyptian army and government not to slaughter the protesters. It also started lining up behind the Egyptian people's demands for a swift transition to a new, more democratic regime. Neo-con lions like Robert Kagan and Elliott Abrams bedded down with liberal internationalist lambs in a "Working Group on Egypt" that called for reforms and Mubarak's exit, while John McCain and other Republicans offered bipartisan cover for Real Change in the world's oldest civilization.

But by Saturday, February 5, the wheels started coming off. With oil prices threatening the anemic global recovery and commodity prices soaring, the President dialed up leaders of the Persian Gulf states for whom the aging Egyptian leader is Mummy Dearest. As the world watched in astonishment, Frank Wisner, a veteran US diplomat who now works with a major Washington law firm that represents major Egyptian business and government interests, calmly advised the Munich Security Conference that Mubarak should stay on for a while. The hapless State Department responded by being against it before the White House and other NATO leaders all came out for it.

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Now with the whole world watching, Mubarak's American (and Soviet -- the Cold War is truly over) trained intelligence chief now presides over the "democratic transition" as Mubarak holds on.

It's always dangerous if you lose your compass amid the desert sands. But for the White House to lose its moral compass now is potentially catastrophic. The President is already bent on one Mission Impossible in Afghanistan, a land that Alexander the Great couldn't conquer. Now he's trying again in a place that Napoleon couldn't hold.

A foreign exchange crisis lies immediately ahead, as food prices keep rising. If the security police or the army turns Cairo's streets and squares into the Valley of the Dead, the harm to both Egypt and U.S. interests will be incalculable. In the longer run, the confidence the US reposes in the army as a force for stability may also be misplaced. Vertical and horizontal tensions run deep within a fighting force that is now big business. Better supplement it while you can with a free press, an independent judiciary, a real parliament and an end to repression. In a word: democracy.

Thomas Ferguson is Senior Fellow at the Roosevelt Institute and Professor of Political Science at the University of Massachusetts, Boston. He is the author of many books and articles, including Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems.

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Investment is a Win-Win for the Global Economy and Climate Change

Jan 28, 2011Jon Rynn

earth-150Following Keynes, Joseph Stiglitz proposes solutions that would heal the economy and the environment in one fell swoop.

earth-150Following Keynes, Joseph Stiglitz proposes solutions that would heal the economy and the environment in one fell swoop.

Recently Joseph Stiglitz, the Nobel-prize-winning economist and Senior Fellow and Chief Economist at the Roosevelt Institute, gave a very interesting speech in South Africa concerning climate change and the global economy. He argued that by implementing policies that help to reverse global warming, we can also reverse the global economic downturn. Although he also pointed out many barriers to doing so, he outlined some interesting policy proposals.

For me, the most interesting part of his speech concerned the use of a Keynesian approach, not just for a single country, as is usually done, but for the entire world economy. Keynes pointed out that when the private sector is unable to generate enough demand in the economy, that is, it is unable generate enough spending from consumption and investment, then the government must step in to kickstart spending. Thus in recessions and depressions many now acknowledge that at some point it may be necessary for the government to spend more than it takes in to get the economy moving again. (See numerous articles from Marshall Auerback on this basic idea.)

There are a couple of fine points to what Keynes was saying, however, that are either often glossed over or challenged. First, he asserted that when demand is low, saving can get in the way of recovery. So -- and this is the part that is ignored -- since the rich save more than the poor, their excess income gets in the way of recovery. The horrendous implication, from the rich person’s point of view, is that they should be taxed more. The less direct way to put this, which is the way it is discussed even in much of the progressive media, is that an “unequal distribution of wealth” leads to negative economic outcomes. The important statistic for the US is that while in 1970 the top 1% of households pulled in about 10% of total income, now they receive close to 25%. Not good, from a purely Keynesian perspective.

So what does this have to do with climate change? Since he was speaking in South Africa, it was easy for him to point out that the world distribution of wealth is very unequal. Because of this inequality, it will be much harder for developing countries to create less carbon-intensive economies through large-scale investment than for developed countries. In addition, the poorer countries consume more and the richer countries save more. So an obvious policy approach is to tax financial transactions, which moves money from something that (to be charitable) involves savings into consumption and investment by developing countries. The richer countries could also simply give grants to the poorer countries. Stiglitz claimed that about $200 billion per year would be required to help developing countries make the transition to a less carbon-intensive future, which could be financed from a financial tax.

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The second implication of Keynes’ ideas is that the economy needs more investment when it is in a downturn. We certainly need a good deal of investment to create less carbon-intensive economies, and it so happens that, according to Keynes, investment, particularly in factories, is the best way to pull economies out of slumps. While he famously suggested that digging holes and filling them up again would also do the trick, he clearly preferred doing something useful with investments on the grounds that investment is generally good for a society and that it is a surer way to speed recovery than consumption.

Stiglitz argued that what we have now is an inadequate level of global aggregate demand, which is to say, there isn’t enough consumption and investment for the entire global economy to pull out of the recession. Thus, he stressed, reversing climate change is an opportunity for the economy, not a drag. We need investment for the good of the climate and we need investment for the good of the economy -- therefore what we have is a win-win situation.

But how do we encourage investment? Stiglitz’s answer is to put a price on the emission of carbon, thus stimulating investment into less carbon-intensive technologies. He thinks that eventually carbon will be priced at 80 dollars per ton, which means that it will probably be cheaper to build a wind farm than to build a coal plant. In fact, it might become more economically rational, with a price on carbon, to shut down an existing coal plant and build a new wind farm to replace it. And new wind farms mean new investment, which means increasing global aggregate demand, which means pulling out of the global recession.

Of course, there are roadblocks in the way of this process. For one thing, there is the power of the greatest emitters of carbon, the oil and coal industries, among others. Then there is the expense that a price on carbon would mean for poorer countries -- thus the need for the richer part of the world to subsidize the poorer part. Even rich countries, of course, would not take easily to a price for carbon, as we saw in last year's defeat of lukewarm cap-and-trade legislation. Stiglitz argues that for an international treaty to be effective, it needs to have enforceable sanctions, such as hitting the offending nation's exports with a price increase. But as the managing editor of South Africa’s largest newspaper argued in a generally favorable response to Stiglitz’s lecture, trade sanctions would mean that developing countries would be hurt, thus requiring some more subsidies in order to equalize the playing field.

In all, I think Stiglitz laid out the foundation of a very workable global economic strategy. I would propose another element: encouraging direct investment and construction of infrastructure on the part of governments. While Stiglitz mentioned the idea of regulation and praised mass transit as an adjunct to the general policy of pricing carbon, it was not a focus of his approach. But here is another possibility for a win-win -- if developed countries sold or gave factories to the developing countries to create the wind turbines, electric rail and cars, and solar plants that would allow them to reduce carbon emissions, it would give the developed countries a huge boost economically and the developing countries the capability to become much wealthier in a sustainable way. Think of it as a global Marshall Plan or Works Progress Administration. The developed countries could promise, say, one trillion dollars per year in machinery to the developing countries, which would be a strategic, targeted, Keynesian method for pulling the entire world economy out of its slump. And it would go far to meet what Stiglitz called the greatest challenge we have ever faced: the threat of global climate change.

Jon Rynn is the author of Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science from the City University of New York.

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SOTU: The Dollar Gap between Rhetoric and Reality

Jan 26, 2011Marshall Auerback

The good, the bad, and the paradoxical in the President's speech.

In his State of the Union address Obama offered a corporate tax cut, a retooling of the tax code and an end to pet spending projects. All good. The tax code has long been used as a political plaything by Washington's mounting corps of lobbyists and special interests, so it will be interesting to see how much resistance the President will encounter if he is serious about ending this insidious form of corporate welfare.

The good, the bad, and the paradoxical in the President's speech.

In his State of the Union address Obama offered a corporate tax cut, a retooling of the tax code and an end to pet spending projects. All good. The tax code has long been used as a political plaything by Washington's mounting corps of lobbyists and special interests, so it will be interesting to see how much resistance the President will encounter if he is serious about ending this insidious form of corporate welfare.

Mr. Obama displayed his usual rhetorical flourishes, outlining what he called "a Sputnik moment" -- a blueprint for spending in critical areas like education, high-speed rail, clean-energy technology and high-speed Internet to help the United States weather the impact of globalization and the challenge from emerging powers like China and India. "We need to out-innovate, outeducate and outbuild the rest of the world," he said.

All true, but these types of things cost money, which at one level the President seems to recognize: "Countries in Europe and Russia invest more in their roads and railways than we do. China is building faster trains and newer airports." He noted at another point that the world's biggest private solar research facility and fastest supercomputer were now in China.

Which suggests that a token $50 billion allocation here and there won't do the trick: Consider the solar industry, which represents a perfect microcosm of the challenges the US now faces in regard to China. Beijing's command economy policy makers are piling subsidy on top of subsidy to make China's domestic market and domestic production the largest in the world. Its state-controlled banking system under government directive is financing capacity equal to a multiple of world demand on lending terms that make no sense for an industry with this much competition and flux.

The Chinese solar industry has been able to drive down solar product prices to levels that are too competitive for the most automated U.S. producers using the most advanced technology. As a result, the U.S. solar industry, including Evergreen, upon which President Obama has placed such high hopes, is departing the U.S. for facilities elsewhere, including facilities joint ventured with favored Chinese companies.

This encroachment by the Chinese into the global market for solar products is not occurring because China has especially low labor costs. It is not occurring because China has more advanced technology. It is occurring because China's command economy can force fixed investment in priority industries through a broad array of non-market means.

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Owing to depletion of China's well of underutilized rural labor, wage costs in China are now soaring. Firms like Foxconn are looking to move their production platforms to lower wage economies. As a result, China is shifting its mega fixed investment more and more into higher tech industries, including capital goods industries.

Armed with massive arrays of subsidies and a willingness to build unprofitable companies in order to reach the technological frontier and global market dominance, China is now entering a new phase in which its mercantilism threatens the last bastion of U.S. manufacturing expertise.

Chinese objectives are as much geopolitical as they are economic.

For the U.S., today's casualty is Evergreen Solar; tomorrow's may well be Boeing. That's the scale of the challenge we now face. Yet the impressive SOTU rhetoric was undercut by the proposed 5 year freeze in non-security discretionary spending which the President said would save the economy, $400 billion from budget deficits over a decade.

It's useful to take any promise of government "saving" with a huge grain of salt. After all, most fiscal expenditures these days are largely non-discretionary and one can hardly predict with any degree of accuracy the "savings" that will accrue. This is because the ultimate government deficit after the spending freeze will reflect the interaction within the economy of the three major sectors: the domestic private sector (including households and businesses), the government sector, and the foreign sector. So unless some other sector is willing to reduce its net or increase its deficit spending (which means the private sector reducing its cash balances and taking on more private debt), then the mere attempt by the government to net save could well reduce overall levels of economic activity and offset the attempted savings brought about via the freeze proposed by Mr. Obama.

Fortunately, the President has decided not to embrace the British government's vicious assault on entitlements thus far. The SOTU gave no indication that the any future spending cuts would apply to the programs such as Social Security and Medicare. In fact, Mr. Obama appeared to reject further cuts, saying, "Let's make sure what we're cutting is really excess weight."

The best way to remove "government excess weight" is to have a growing economy. Full employment means we can enjoy the benefits of globalization; unemployment gives us another reason to fear overseas competition. "Bloated government" is not a significant problem when you have full employment. Just as surpluses precede recessions, large deficits can almost always be expected to result from recessions because of the automatic stabilizers that are in place. That is, budget deficits in the U.S. are largely automatic and non-discretionary: when the economy slides into a recession, tax revenues start falling as economic activity declines. Social transfer payments, particularly unemployment benefits, on the other hand, increase, again automatically, as more people lose their jobs. So recessions create budget deficits. Despite all the conservative uproar against Obama's stimulus plan, the largest portion of the increase in the deficit has come from automatic stabilizers and not from discretionary spending, which also means that his grand trumpeting of a freeze on the non-discretionary parts of the budget is more show than dough.

Finally, I to say something about the President's aspiration to turn the U.S. into "an export superpower." It is becoming clear that not all countries can rely on exports to boost growth and employment; more than ever, they need to give greater attention to strengthening domestic demand. Competition in export markets often leads to domestic policy to keep wages and other costs low -- both to fight the domestic inflation pressures (fueled in part by the processes just outlined) but, more importantly, to compete with other low wage developing nations.

The typical outcome of these dynamics is that the domestic population does not share in the economic growth that is generated by exports. Poverty and social unrest often worsens even as the economy grows. Is this really what the President wants? How has being an "export superpower" worked out for Japan the last 20 years?

The ultimate paradox facing the President -- and the country as a whole -- is that while innovation, education and infrastructure are necessary ingredients for global competitive success, they offer no guarantee. But it is certainly the case that absent the fiscal resources deployed to confront the challenges outlined by the President (rather than continuing to shovel subsidies to zombie financial institutions), failure is certainly guaranteed.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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