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The Economy

The Economy Is Worse Than You Think!

By Nat Weinstein

Amy Goodman recently conducted a very interesting interview with Kevin Phillips on her show, Democracy Now.1 The interview was focused on Phillips’s new book, Bad Money: Reckless Finance, Failed Politics and the Global Crisis of Capitalism. Goodman describes him as an “American writer and commentator on politics, economics, history and a former Republican Party strategist, who has become disaffected with his former party over the last two decades, and is now one of its harshest critics.” (He had also served as an advisor with the Reagan administration.)

The interview was preceded by the publication of an article by Phillips in the May 2008 issue of Harpers, titled, “Hard numbers: The Economy Is Worse Than You Know.” After reading what Phillips had to say in both reports, I concluded that this political representative of the capitalist establishment, who had played at least a small part in the making of its economic policies, now believes that those policies have brought the country to the brink of economic “catastrophe.”

Let’s take a look at what he has to say.

The Harpers article

Phillips begins by describing what he calls, “Pollyanna Creep.” Here’s how he describes it:

“The story starts after the inauguration of John F. Kennedy in 1961, when high jobless numbers marred the image of Camelot-on-the-Potomac and the new administration appointed a committee to weigh changes. The result, implemented a few years later, was that out-of-work Americans who had stopped looking for jobs—even if this was because none could be found—were labeled “discouraged workers” and excluded from the ranks of the unemployed, where many, if not most, of them had been previously classified.”

He goes on to point out that every resident of the White House after Kennedy also contributed to the falsification of the Labor Department’s economic statistics. Thus, he writes: President Lyndon Johnson “orchestrated a ‘unified budget’ that combined Social Security with the rest of the Federal outlays. This innovation allowed the surplus receipts in the former to mask the emerging deficit in the latter.”

What this means is that, whereas the payroll tax income had formerly been deposited in a separate Social Security fund, and the surplus S.S. tax income had grown from year to year allowing interest on the fund to pay most if not all the cost of retiree benefits, Johnson’s decision ordered all future S.S. tax surpluses to be deposited, instead, directly into the U.S. Treasury. Thus, the Johnson administration magically transformed the growing Social Security Fund into a growing deficit that has been falsely blamed for contributing in a major way to the untenable U.S. national debt.

As the 19th century British Conservative statesman and literary figure, Benjamin Disraeli, so famously said, “figures don’t lie but liars can figure.” In this case, carefully “managed” statistics serve lying capitalist politicians in two ways. First, as Phillips says, by allowing “the surplus receipts in the former to mask the emerging deficit.” But it also allowed scheming capitalist politicians the opportunity to blame the skyrocketing national debt on what they called “overly generous” Social Security benefits.

Shifting the blame, however, was only the bridge to the bigger crime: using the alleged “overly generous” benefits as the rationalization for steadily cutting Social Security benefits—and extending the 65-year-age of retirement with full benefits to 70—a policy that was routinely executed by every president and bipartisan Congress since the Johnson administration set it all into motion.

But, there’s nothing “generous” about giving monthly Social Security checks to workers who had paid and continue paying throughout their working lives for the diminishing benefits they now receive. It’s like insurance companies promising policy-holders’ compensation for losses from fire, storm, theft, etc., but then rejecting the latter’s claims as “too high” on one pretext or another—as they certainly do.

In fact, leaving aside the matter of cutting benefits—even if they had been left as they were before the cutting began—the understated rate of inflation had already drastically reduced Social Security recipients’ benefits. Either way, it’s “legally” executed highway robbery by the rich against the poor.

Phillips cites Richard Nixon as the next president to contribute to the swindling of wage earners by “reducing” the reported rate of inflation simply and effectively by excluding food, energy and other “volatile” commodities from the so-called “basket of commodities”—a method used to measure the rise in prices by the Bureau of Labor Statistics (BLS). How? By inventing a new category called “core inflation,” which understates the real rate of inflation by half, or more.

The author ends this part of his story by quoting another economic expert, Barry Ritholtz, who joked, “core inflation is inflation after the inflation has been excluded.”

Phillips goes on to point out how in 1983, the “Reagan administration further finagled inflation down a notch or two when the BLS decided that the cost of housing had been rising over the cost of living. Thus, the BLS substituted an entirely different, so-called ‘Owner Equivalent Rent’ measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs.”

Then came George H.W. Bush, who added to capitalism’s anti-worker statistical trickery in 1990, when the chairman of his Council of Economic Advisers proposed a further reduction in the rate of inflation by altering the way it is measured.

The trick devised by his economic advisors was to craftily “modernize” the “old industrial-era methodologies toward the emerging services economy and the expanding retail and financial sectors.” This had the effect of further reducing “the inflation rate in order to reduce federal payments—from interest on the national debt to cost-of-living outlays for government employees, retirees, and Social Security recipients.”

Thus, Bush the First killed two birds with one stone; diminishing the real rate of inflation and lowering government workers’ and retirees’ paychecks.

Phillips goes on to say: “It was left to the Clinton administration to implement these convoluted CPI [Consumer Price Index] measurements, which were reiterated in 1996 through a commission headed by Boskin2 and promoted by Federal Reserve Chairman Alan Greenspan.”

Then it became Clinton’s turn to add to Pollyanna Creep in regard to the nation’s employment figures. “In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of ‘discouraged workers’ who had been seeking work for less than a year. The longer-term discouraged—some 4-million U.S. adults—fell out of the main monthly tally. Some now call them the ‘hidden unemployed.’”

The American people have been systematically lied to about such basic facts of life as the real rates of unemployment and inflation. Those most adversely affected by these two basic measures of the quality of life are the great majority of workers with jobs who spend the lion’s share of their combined family incomes on food, housing and energy.

That’s bad enough, but when we consider its effect on workers without jobs and those demonized by racist, sexist and other forms of capitalist-sponsored bigotry; the worse is their suffering, the greater their misery, and the more outrageous is the system’s subordination of human rights to property rights.

In a tank with sharks

Phillips, in his Democracy Now interview, generalizes the desperate state of the capitalist economy today through an apt metaphor. He likens it to being in a tank with sharks. And though America has been in such a tank before, he says, there had only been “one or two, sometimes three, factors” to worry about in previous crises. But now, the American economy is in a tank with “six or seven sharks.”

The three main “sharks,” of course, are featured in the title of his book (“bad money, reckless finance and failed politics).” But he breaks those down into their constituent parts as he develops his argument.

These include among other things the exponential expansion of housing and credit-card debt and the seeming paradox of skyrocketing commodity prices accompanied by the collapsing price of homes, and last but not least, the ballooning of both public and private debt.

But, it’s less paradoxical when we take into account the impact of the various factors acting on prices:

On the one hand, there is the impact of labor-saving machinery on the value and price of commodities. This, of course, plays a major role in the competition between capitalists. Those who are able to produce a greater quantity of goods of equal or higher quality with no increase in the costs of production can sell most or all of their product at a higher rate of profit in any given cycle of production and distribution. That, in turn, serves to drive a portion of their less efficient competitors out of the market place.

However, its not simply a matter of which of them has the most efficient machines allowing them to produce more quality goods at a lower cost than their competition. Another factor in the profit-making equation is how much more surplus value they can squeeze out of their workforce at the same or lower cost in wages, thus gaining a higher rate of profit.

In any case, it can be seen how this mechanism affects prices according to one of the most important objective laws governing capitalist production and distribution—the law of value—i.e., supply and demand.

The second important factor in the profit-making equation is the universal means of exchange—money (and the many other functions required for a smoothly operating capitalist economy).

Just as the exchange value of all commodities can be reduced by the replacement of human labor with machines, the value of legal tender can also be honestly reduced the same way—by replacing less efficient with more productive machines in the production of money. But that was when money was gold, and gold was money.

Gold, silver and other precious metals had served for thousands of years as the money commodity of all nations. Any attempt to counterfeit gold and silver coins by diluting them with base metals was immediately detected by professional money-changers, who must learn to determine the purity and weight of this or that gold or silver coin offered in exchange for another nation’s currency.

In other words, in those days there was an objective measure of the value of money because it was also a commodity. And like all commodities, its value relative to all other commodities was proven by a long social process of countless exchanges of the money commodity with all others. Thus when less valuable money is discovered by the experts, the news tends to spread like a forest fire throughout the given economy.

Fiat or purely paper money

Ever since the end of the Second World War, when the decision was made by representatives of most of the world’s leading nations to gradually separate the paper dollar from gold, (and the process was completed, for all practical purposes at the end of the 1970s), it became far easier to hide the watering down of the extent to which the dollar and other currencies have been and continue to be devalued by just turning the printing presses of the mint faster.

In fact, the devaluation of purely paper money has been so effectively hidden from the public that it takes considerably more time before anyone can know its full extent. In fact, even the decision makers authorizing the spending of more money than their nations’ receive in taxes and other revenue are unable to determine the full extent of the depreciation of their nation’s currency, much less that of the currencies of other nations.

This is because of the introduction of highly complicated and volatile new financial “instruments” like packaged mortgages which bundle risky sub-prime loans together with mortgages of higher quality. That’s why one after another investment bank claiming tens and hundreds of billions of dollars in capital reserves have been going belly up.

And finally, it also means that if the value of a major currency, such as the dollar, were to suddenly fall significantly in value relative to all others, the global monetary system can collapse like the proverbial house of cards.

To be sure, this story has been filling the pages of the mass media since last July. What is new and most interesting about Kevin Phillips’s line of argumentation, however, is his warning that the decades of lying propaganda designed to hide the true extent of the deteriorating economy—primarily its impact on workers’ and other of capitalism’s victims—promises to boomerang as forcefully on the liars’ hold on state power.

It comes through most clearly in his Harpers article. He writes:

“Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range)….

“Let me stipulate: The deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms.

“The political blame for the slow, piecemeal distortion is bipartisan—both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt and a casino-like financial sector. To see how, we must revisit 40 years of economic and statistical dissembling.”

Thus, in the first of these three paragraphs, he implies that understating the real rates of unemployment and inflation cannot be kept secret forever and will cause the great majority—who are its victims—to be a whole lot angrier when capitalism’s poison-fed chickens come home to roost.

However, Philips, unlike most critical bourgeois economists, who tend to blame one or the other of the two main capitalist parties for purely factional reasons, takes the position that both Democrat and Republican politicians share equal responsibility for the deepening economic crisis.

His point about deception however, is only half true. The deception did grow gradually. But it didn’t just come from nowhere. Deception is an intrinsic part of any socioeconomic system that robs the many for the benefit of the few. Any social order that rewards the members of the ruling minority with incomes the equivalent of hundreds and thousands of times an average worker’s wages or salary can endure only if the quality of life for the masses of exploited and oppressed doesn’t fall below an acceptable level.

Thus, any social system based on a system that results in a tiny minority reaping all the wealth cannot continue to prevail over the majority without deception. Nor could it be maintained without force and violence. But with or without force, deception is always needed to keep mass resistance from becoming unmanageable. And the wider the gulf in living standards between rich and poor, the more ineffective the deception becomes and the greater must be the use of naked force.

There is, however, something else that could be said to be missing in Phillips’s analysis. Though he gives example after example of political dishonesty, reckless debt and the casino-like capitalism that has resulted, he doesn’t say what could or should have been done to prevent the current crisis from following its logic through to the bitter end.

I believe he would if he could, but he can’t. An honest man that he is, he doesn’t.



1 See the Democracy Now interview elsewhere in these pages.

2 The Boskin Commission, formally called the “Advisory Commission to Study the Consumer Price Index,” was appointed by the United States Senate in 1995.