Neoliberal Economics Destroyed the Economy and
the Middle Class
By Paul
Craig Roberts
December 18, 2019 "Information
Clearing House"
- According to official US
government economic data, the US economy has
been growing for 10.5 years since June of 2009.
The reason that the US government can produce
this false conclusion is that costs that are
subtrahends from GDP are not included in the
measure. Instead, many costs are counted not as
subtractions from growth but as additions to
growth. For example, the penalty interest on a
person’s credit card balance that results when a
person falls behind his payments is counted as
an increase in “financial services” and as an
increase in Gross Domestic Product. The economic
world is stood on its head.
It is
aggregate demand that drives the economy.
Payments made on a rise in interest rates on
credit card balances from 19% to a 29% penalty
rate reduce consumers’ ability to contribute to
aggregate demand by purchasing goods and the
services of doctors, lawyers, plumbers,
electricians, and carpenters. Contrary to logic,
the fee is magically counted in the “financial
services” category as a contributor to GDP
growth. The extortion of a fee that reduces
aggregate demand lowers GDP, but builds paper
wealth in the financial services sector.
GDP
growth is also artificially inflated by counting
as GDP abstract concepts that do not produce
income streams. For example, for homeowners the
US Department of Commerce estimates the rental
values of owner-occupied housing, that is, the
amount owners would be paying if they rented
instead of owned their homes, and counts this
imputed rent as GDP.
These
and other absurdities have caused economist
Michael Hudson to conclude correctly that the
“financial reality of how the U.S. economy works
is no longer captured in GDP statistics.”
https://michael-hudson.com/2019/10/asset-price-inflation-and-rent-seeking/
Today
we have two economies. One is the real economy
of production and consumption. The other is the
financialized economy of paper wealth. The
former is doing poorly, and the latter is doing
well. The financialized economy is growing much
faster than the real economy. Indeed, the real
economy might not be growing at all.
Michael
Hudson describes the difference. The stock
market is at all time highs that have created
massive wealth in financial assets for stock and
bond owners. In the real economy the situation
is totally different: “The Federal Reserve’s
Report on the Economic Well-Being of U.S.
Households in 2018 reports that 39% of Americans
do not have $400 cash available for a medical or
other emergency, and that a quarter of adults
skipped medical care in 2018 because they could
not afford it (
https://www.federalreserve.gov/publications/files/2018-report-economic-well-being-us-households-201905.pdf
). The latest estimates by the U.S. Government
Accountability Office (GAO) report that nearly
half (48 percent) of households headed by
someone 55 and older lack any retirement savings
or pension benefits (
https://www.aarp.org/retirement/retirement-savings/info-2019/no-retirement-money-saved.html
). Even in what the press calls an economic
boom, most Americans feel stressed and many are
chronically angry and worried. According to a
2015 survey by the American Psychological
Association, financial worry is the “number one
cause of stress in America today” (
https://www.apa.org/news/press/releases/2015/02/money-stress
).
The
data is completely clear. The rich are becoming
much richer, and the rest are becoming poorer.
Michael Hudson explains:
“The
creation and trading of property and financial
assets at rising prices has been fueled by
rising debt levels owed to the financial sector.
This sector’s returns therefore are best seen
not as real wealth on the asset side of the
balance sheet, but as overhead on the
liabilities side. And the process is
multi-layered: income accruing to the financial
wealth owned by the top 10 Percent is paid
mainly by the bottom 90 percent in the form of
rising debt service and other returns to
financial and other property.
“In the
textbook models of industrial capitalism’s mass
production and consumption, an asset’s price is
determined by its cost of production. If the
price rises above this level, competitors will
offer it cheaper. But in the financialized
economy an asset’s price is determined by how
much credit buyers can borrow to buy it, not by
its cost of production. A home is worth as much
as a bank will lend to a bidder.
“The
engine of industrial capitalism and its consumer
society is a positive feedback loop in which
widely shared income growth, expanding
consumption and markets generated yet more
investment and growth. By contrast, the feedback
loop of financial capitalism is an exponential
growth of credit-driven debt, driving up asset
prices and hence requiring yet more borrowing to
buy homes, retirement income and other assets.
Corporate management and investment today is
mainly about obtaining capital gains for real
estate, stocks and bonds than about earning
income.
“We
illustrate this by charting the flow of income
and capital gains in the real estate sector to
show the dominance of asset-price gains over net
rental income – and how rental income is used up
paying interest in our financialized economy.
Likewise, corporate income is spent (and new
debt taken on) largely for stock buybacks to
raise share prices. The resulting dynamic is
exponential and destabilizing.”
This
dynamic is destabilizing, because as more of
consumers’ discretionary income is drawn off to
service mortgage, credit card, automobile and
student debt and for compulsory health
insurance, less is left to purchase the goods
and services in the real economy. Consequently,
credit-driven debt grows faster than the income
that services it, and this impoverishes the 90%.
However, for the 10%, money creation by the
Federal Reserve in order to protect the balance
sheets of the “banks too big to fail or jail”
drives up the values of financial assets. As a
result the distribution of income and wealth
becomes hightly polarized.
Think
about the many Americans who meet their living
expenses by making only the minimum payment on
their credit card balance. At 19% interest their
debt grows monthly. Eventually they hit a credit
card debt cap and can no longer use the card to
cover their living expenses. But they have the
burden of a large debt balance to service
without an income stream capable of servicing
it.
Think
about the corporation that decapitalizes itself
in order to produce short to intermediate term
capital gains for shareholders and executives by
indebting the firm in order to buy back the
firm’s shares. The end result is that all income
goes for debt service.
In a
financialized economy, the only possible
outcomes are debt forgiveness or collapse.
As
Michael Hudson makes clear, the combination of
nonsensical categories in the National Income
and Product Accounts and a financialized economy
means we have no accurate picture of the
economy’s condition. Michael Hudson has a
proposal for correcting these problems and
making GDP accounting more accurate, but as
ecological economists such as Herman Daly have
made clear, GDP measurement also omits the
external costs of production. This means that we
do not know whether GDP is growing or declining.
It is entirely possible that the ecological and
social costs of an increase in GDP (as currently
measured) are greater than the value of the
increased output. (See Paul Craig Roberts, The
Failure of Laissez-Faire Capitalism,
https://www.amazon.com/Failure-Laissez-Faire-Capitalism/dp/0986036250/ref=sr_1_2?crid=16NHZEQ9G3JRW&keywords=paul+craig+roberts+books&qid=1576440032&s=books&sprefix=Paul+Craig%2Caps%2C173&sr=1-2
)
Perhaps
the major way in which GDP is overstated is the
exclusion of external or social costs. External
or social costs are costs of producing a product
that the producer does not incur but imposes on
third parties or on the environment. For
example, untreated sewage dumped into a stream
imposes costs on people downstream. Runoff of
chemical fertilizers from commercial farming
produces dead zones in the Gulf of Mexico and
toxic algal blooms such as Red Tide that result
in massive fish kills, make seafood unsafe,
cause human ailments and adversely impact the
tourist trade of beach areas. The result is lost
incomes, ruined vacations, health expenses, and
none of these costs are born by the commercial
farmers.
Real
estate development produces massive external
costs. Scenic views from existing properties are
blocked, thus reducing their values.
Construction noise and congestion impose costs
on existing residents and reduces the quality of
their lives. Water runoff problems are often
created. Infrastructure has to be provided, such
as larger highways to provide evacuation from
hurricane-impacted areas, usually financed by
taxpayers. If the global warming case is
correct, the external cost of human economic
activity can be the life of the planet.
Lakshmi
Sarah in the May/June, 2019, issue of the Sierra
Club magazine provides an excellent detailed
account of the external costs of coal-fired
power plants being built in India by the Indian
conglomerate Tata with a loan from the
International Finance Corporation, a branch of
the World Bank. The ground water in the area has
been ruined and is no longer drinkable. Farmers
are no longer able to grow crops on half of the
area farmland. Heated wastewater that is dumped
into the Gulf of Kutch is destroying fishing.
The ecology and the livelihoods of the
population are essentially destroyed. None of
these costs are born by the private power
companies.
Tired
of being doormats for capitalists and the World
Bank, the residents of the affected provinces
rebelled. They have succeeded in getting their
case before the US Supreme Court. It seems that
the International Finance Corporation is so
accustomed to financing projects that produce
large external costs that it overlooked its
obligation to examine the environmental impact
of the projects it finances. This oversight
resulted in Indian farmers and fishermen getting
their case before the US Supreme Court. The
International Finance Corporation’s lawyers
argued that the World Bank lending agency had
“absolute immunity.” The Supreme Court said no
and remanded the case to the circuit court to
rule on the damages.
Perhaps
the most surprising thing about this apparent
victory for ordinary faraway little people in an
American court against the World Bank, a
principle instrument of American imperialism, is
that the Trump administration appeared in
court as a friend of the Indian farmers and
fishermen. The US Solicitor General,
represented by Jonathan Ellis, rejected the
notion that international orgnizations have
absolute immunity. The Establishment exists
on its immunity. Here we see the ultimate reason
that the ruling Establishment wants rid of
Trump.
Already
the senior staff of the International Finance
Corporation have come to the realization that
they have other responsibilities than just to
shuffle money out the lending shute. If the
Indian farmers and fishermen succeed in
protecting themselves from ruination by external
costs, perhaps Americans who suffer external
costs will follow their lead.
Perhaps
economists will also come to the realization
that they owe us accurate GDP accounting and not
fanciful accounts that serve elite wealth in the
financialized economy.
Dr. Paul Craig Roberts was Assistant Secretary of
the Treasury for Economic Policy and associate
editor of the Wall Street Journal. He was
columnist for Business Week, Scripps Howard News
Service, and Creators Syndicate. He has had many
university appointments. His internet columns
have attracted a worldwide following. Roberts'
latest books are
The Failure of Laissez Faire
Capitalism and Economic Dissolution of the West,
How America Was Lost,
and
The Neoconservative Threat to
World Order.
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views expressed in this article are solely those
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